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2016 J~.- ~^ Ai"i > !

IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON

In the Matter of the Marriage of

KENNETH S. MORELLI,

Respondent,

and

LILY MORELLI,

Appellant.

No. 73746-5-1

DIVISION ONE

UNPUBLISHED OPINION

FILED: June 6, 2016

Leach, J. — Lily Morelli appeals a decree of dissolution dissolving the

marriage between her and Kenneth Morelli. She challenges the trial court's

characterization and valuation of Ken's Tree Service. Also, for the first time on

appeal, she claims that the trial court should have included some amount for

goodwill in this valuation. Substantial evidence supports the trial court's

characterization and valuation. We decline to consider Lily's1 goodwill argument

because she did not raise it in the trial court. Finally, we deny Ken's attorney fee

request because his financial declaration does not establish need. We affirm.

Background

Ken and Lily began a committed intimate relationship in July 2005 and

married in August 2007. Ken is a professional logger. In 1994, he started a tree

1 For clarity, we refer to the parties by their first names.
No. 73746-5-1 / 2

service business. He initially operated this business as a sole proprietorship and

converted it to a limited liability company in 2006.

The business prunes and removes trees. Ken performs much of the

physical labor himself. He also prepares estimates and trains his few

employees. Lily started helping with the business in 2003. She advised Ken on

his business, ran errands, and provided other services. These services

increased over time and during their relationship.

Ken purchased some of the business's equipment after they began their

relationship and purchased additional equipment during their marriage. Lily

understood that they had an oral agreement to be partners in the business. They

separated on June 14, 2013.

Lily hired Michael E. Guerrero, a certified public accountant, to value

Ken's Tree Service. Guerrero used one method, an income approach, relying on

financial information from 1999 through 2014. This included individual and

business tax returns plus profit and loss statements. He calculated the

business's annual net cash flow and applied a capitalization rate. This produced

a single amount for the business, with no amount segregated for tangible or

intangible assets.

Guerrero testified about his expert opinion at trial and described his

methodology. He explained that he started with pretax income. He then

calculated an income adjustment that included a number for replacement

compensation for an individual providing Ken's labor. His report, admitted for
No. 73746-5-1 / 3

illustrative purposes, shows that he subtracted the replacement compensation

from the compensation the business reported that it paid Ken (or from zero

where none was reported) to arrive at his compensation adjustment and then

added owner benefits to arrive at an adjusted operating income. He then

subtracted taxes, added depreciation, and subtracted capital expenditures to

produce the number to which he applied a capitalization rate to calculate the

value of the business.

Guerrero also used an asset approach to determine the fair market value

of the business's equipment purchased between July 2005 and the time of trial.

The trial court found that Ken's Tree Service was Ken's separate property

but that the depreciated value of the vehicles and equipment acquired during the

committed intimate relationship and marriage was a community asset. It also

found that Ken's personal services provided the primary source of income earned

by Ken's Tree Service. As a result, it concluded that the business would not

have value without Ken's work and was "not a divisible community asset."

The trial court valued the vehicles and equipment acquired during the

marriage at $78,000 and that acquired during the period of the committed

intimate relationship at $50,000. The trial court divided other community property

assets and debts, including those related to rental properties.

The trial court denied Lily's request for reconsideration, and she appeals.

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No. 73746-5-1/4

Analysis

Lily claims that the trial court improperly characterized and valued Ken's

Tree Service. She argues that the trial court should have found the business to

be community property, improperly used book value to value the business, and

failed to include goodwill in its valuation. She asks this court to reverse and

remand for revaluation of the business and redistribution of community assets.

But Ken argues that Lily never raised the issue of goodwill at trial and that RAP

2.5(a) prevents her from doing so on appeal. He further argues that regardless,

the trial court's valuation was reasonable.

This court recognizes that in a marriage dissolution case the trial court is

in the best position to assess property and determine a fair division of assets and

liabilities.2 We review de novo a trial court's characterization of property as

separate or community.3 We review the trial court's valuation of property in a

marriage dissolution case as a fact issue4 using an abuse of discretion standard.5

Lily challenges the trial court's decision that Ken's Tree Service is Ken's

separate property. RCW 26.16.010 defines property acquired by a spouse

before marriage as that spouse's separate property. When a trial court

determines the parties had a committed intimate relationship, a court evaluates

2 In re Marriage of Brewer, 137 Wn.2d 756, 769, 976 P.2d 102 (1999)

(quoting In re Marriage of Hadlev, 88Wn.2d 649, 656, 565 P.2d 790 (1977)).

3 In re Marriage of Mueller, 140 Wn. App. 498, 503-04, 167 P.3d 568

(2007).

4 In re Marriage of Lukens, 16 Wn. App. 481, 486, 558 P.2d 279 (1976).

s In re Marriage of Campbell, 22 Wn. App. 560, 562, 589 P.2d 1244

(1978).

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No. 73746-5-1 / 5

the interest of each party in property acquired during the relationship and makes

a just distribution of that property as if itwere community property.6

Lily does not challenge the trial court's finding that Ken established Ken's

Tree Service in 1994, over a decade before her relationship with Ken began.

Because Ken acquired this asset before his relationship with Lily began, the trial

court correctly found it to be Ken's separate property.

Lily claims that In re Marriage of Fleege7 supports her position that the trial

court should have valued the business as a community asset. In Fleege, the

Washington Supreme Court decided that the goodwill of a dental practice

acquired during marriage was an asset subject to division as community property

of the parties. The court rejected the husband's argument that any goodwill in

the dental practice was nominal and should not be included in community asset

distribution.8 Because the dental practice was acquired during the parties'

marriage, Fleege does not support Lily's characterization argument.

Lily also asserts that the trial court improperly valued Ken's Tree Service

at its book value, accounted for only six of the eight years the community

acquired assets for the business, and improperly adjusted downward the values

her expert assigned to some of these assets. Lily correctly notes that courts

have rejected book value, the "value of the corporation as shown on the books of

6 Soltero v. Wimer, 159 Wn.2d 428, 433, 150 P.3d 552 (2007) (quoting ]n

re Pennington, 142 Wn.2d 592, 602, 14 P.3d 764 (2000)).

7 91 Wn.2d 324, 588 P.2d 1136 (1979).

8 Fleege, 91 Wn.2d at 325.

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No. 73746-5-1 / 6

account after subtracting liabilities," as an accurate measure of a corporation's

actual value.9 This court has decided that when a trial court has accepted a book

value as a business's value after acknowledging that it also has a market value,

the court erred because its valuation did not include the intangible value of the

business.10

But, here, the trial court did not value Ken's Tree Service at book value.

After rejecting Lily's argument that the entire business was a community asset, it

concluded that certain business equipment and vehicles should be treated as

community assets. It assigned values to those assets based on Guerrero's

testimony with adjustments. It took the value of these business assets into

account when it divided the community property. The trial court thus did not use

a book valuation method to assign value to the business.11

Lily also claims that the trial court accounted for only six rather than eight

years of equipment purchased. The trial court found that equipment and vehicles

accumulated during the parties' committed intimate relationship and their

marriage constituted community property but used Guerrero's values only for

assets purchased between 2006 and 2011. It did not include any assets for 2012

9 In re Marriage of Berg, 47 Wn. App. 754, 755 n.1, 737 P.2d 680 (1987)

(citing Jones v. Harris, 63 Wn.2d 559, 562, 388 P.2d 539 (1964)).

10 Berg, 47 Wn. App. at 757-58.

11 In its oral ruling, the trial court had added additional value to the

business, $50,000, to reflect "other value in the business" that is "difficult to

quantify." This suggests it attributed an intangible value to the business. But

later it ordered $50,000 to be paid for assets acquired by the business during the

period of the intimate relationship from 2005 to 2007 and did not reference any

intangible value. It later stated that the identical figure was just a coincidence.
No. 73746-5-1 / 7

because no purchases were made in that year. Lily apparently contends that the

trial court should have valued equipment from July 1, 2005, when the trial court

found Lily and Ken's intimate relationship began, to the time they separated in

June 2013. Ken testified that Lily participated in the company beginning only in

2006 and that equipment was not purchased in 2013 until after the parties'

separation. Thus, the trial court did not abuse its discretion.

Lily asserts that the trial court arbitrarily reduced the depreciated value of

certain equipment by $4,000 without justification, aside from that it "felt that Mr.

Guerrero's depreciated value figure was simply too high." But Ken also testified

to certain equipment's depreciated value. Because substantial evidence

supports these adjustments, Lily's challenge to them fails.

Finally, Lily argues that Fleege12 and In re Marriage of Hall13 require that

the trial court include an amount for goodwill in its valuation of Ken's Tree

Service. We agree with Ken's argument that Lily's failure to raise this issue in

the trial court or present evidence of goodwill value at trial defeats her argument

on appeal.14

12 Fleege, 91 Wn.2d at 325.

13 103 Wn.2d 236, 692 P.2d 175 (1984).

14 RAP 2.5(a) states,

The appellate court may refuse to review any claim of error

which was not raised in the trial court. However, a party may

raise the following claimed errors for the first time in the appellate

court: (1) lack of trial court jurisdiction, (2) failure to establish

facts upon which relief can be granted, and (3) manifest error

affecting a constitutional right. A party or the court may raise at

any time the question of appellate court jurisdiction. A party may

present a ground for affirming a trial court decision which was not

presented to the trial court if the record has been sufficiently
No. 73746-5-1 / 8

In her reply brief, Lily asserts that because her expert used an income

approach to value the business, which applied a capitalization rate to adjusted

net cash flow figures, she asked the court to value intangible assets, including

goodwill, and did not waive the issue. She argues that the income approach

Guerrero used is the same as the straight capitalization approach the Hall court

authorized as a method to value goodwill.15 That case explains that once a trial

court determines average net profits and those are capitalized at a definite rate,

"[tjhis result is considered to be the total value of the business including both

tangible and intangible assets. To determine the value of goodwill the book

value of the business' assets are subtracted from the total value figure."16 But in

this case, Guerrero did not testify to a book value that could be subtracted from

his total value to produce a value for goodwill. And Hall does not support the

argument that a party provides evidence of goodwill value merely by employing a

certain valuation approach without allocating a specific amount for goodwill.

Because Lily did not raise the issue of goodwill until this appeal or present

evidence that would permit the trial court to value it, Lily's claim about goodwill

fails.

developed to fairly consider the ground. A party may raise a

claim of error which was not raised by the party in the trial court if

another party on the same side of the case has raised the claim

of error in the trial court.

15 See Hall, 103 Wn.2d at 243-44.

16 Hall, 103Wn.2dat244.
No. 73746-5-1 / 9

Ken asks for attorney fees on appeal. RCW 26.09.14017 provides this

court with discretion to award fees after considering the arguable merit of the

issues raised and the parties' financial resources after their timely filing of a

financial declaration.18 Ken has filed a financial declaration, and Lily has not.

Because Ken appears to have sufficient resources to pay the $5,000 he has

incurred for attorney fees on appeal, we deny his request.

Conclusion

The trial court properly concluded that Ken's Tree Service was Ken's

separate property. Substantial evidence supports the trial court's valuation of the

business assets acquired during the parties' relationship. Lily failed to preserve

her goodwill argument for appeal. Additionally, she presented no evidence from

which the trial court could have valued any business goodwill. We exercise our

discretion under RCW 26.09.140 and decline to award Ken requested attorney

fees. We affirm.

WE CONCUR:

Vrer sf*r\s~. \l K !

17 RCW 26.09.140 states in pertinent part,

Upon any appeal, the appellate court may, in its discretion,

order a party to pay for the cost to the other party of maintaining

the appeal and attorneys' fees in addition to statutory costs.

18 In re Marriage of Raskob, 183 Wn. App. 503, 520, 334 P.3d 30 (2014).

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