Source: https://louisvilledivorce.typepad.com/info/business_valuation/
Timestamp: 2019-04-19 14:45:53+00:00

Document:
The Supreme Court reaffirms the American Rule against shifting fees, recognizing CR 37.03 and KRS 403.220 as exceptions to the rule. In this case, $50,000 of attorney fees were awarded to the Wife under CR 37.03 and KRS 403.220. The Supreme Court held that the Trial Court misapplied CR 37.03 by imposing discovery sanctions on Husband for denial of a request for admission. The Trial Court should have considered Husband’s grounds for denial. As in this case, when a party reasonably believes he might prevail on a matter, or has a legitimate reason for denial of a request for admission, the denial is justified and sanctions are improper. CR 37.03 is to be narrowly construed. Husband should not have been sanctioned under CR 37.03.
Unlike 37.03 which provides for narrow sanctions, KRS 403.220 provides for attorney fees when there is financial disparity between parties to a divorce. The Trial Court has broad discretion in awarding attorney fees under KRS 403.220. The rule is not punitive, but Kentucky case law holds Trial Courts can appropriately consider the litigation conduct of the parties. Allowing Trial Courts this discretion prevents an “unreasonable or an unfair burden on the party with fewer financial resources.” In this case, the Supreme Court notes facts which may support an award of attorney fees under KRS 403.200. The Supreme Court remands the matter to the Trial Court to determine the amount of Wife’s attorney fees Husband should pay under KRS 403.200.
Finally, The Supreme Court looks to Husband’s argument that wife improperly applied CR 59.05. The Wife challenged the business-valuation amount after trial and entry of the initial judgment. CR 59.05 is not available to Wife because she could have raised the business-valuation issues during the trial. Wife’s use of CR 59.05 and the Trial Court’s subsequent modification of the property settlement award are improper. The Supreme Court agrees with the Husband that Wife should have raised any business-valuation issues pre-judgment, as she has the information available to her at that time.
Wife appealed FC’s Findings of Fact, Conclusions of Law, and Judgment regarding valuation and distribution of her oral surgery practice in dissolution proceedings, on remand from appellate court.
Wife established oral maxillofacial surgery practice during marriage, which was parties’ largest asset at time of divorce. At trial, Wife’s expert presented two separate reports regarding practice’s value, both comparing assets and liabilities. The first report reflected that the practice had a value of $237,000 as of 12/31/03. Wife’s expert also applied a 10% discount for lack of marketability, though he initially had discounted the value by 23%. He testified that this discount represented the ability to quickly convert property to cash at a minimal cost. His second report valued the business as of December 2004 at $114,000, which he testified reflected a significant drop in cash from the prior report. Husband’s expert valued the business using data from Wife’s expert, but averaging the values resulting from four different valuation calculations, and determined the business’ value at $669,075. FC agreed with this value and Husband correspondingly received a large sum of cash. Wife appealed and, ultimately, SC determined that FC erred by failing to recognize the presence of both business and personal goodwill and by using an arbitrary average of numbers to determine the business’ value. On remand and the basis for this appeal, FC determined that the business’ value subject to division was $237,000. On appeal, Wife argues that FC should have adopted valuation performed closest to date of decree; that FC failed to apply a 23% discount rate to 2004 value; and that FC should have awarded her post-judgment interest on the money she overpaid Husband pursuant to FC’s first judgment.
CA noted that there is no presumption that assets should be valued within close proximity to the date of decree and that Kentucky has not adopted one particular method of valuation. CA noted that Wife’s expert testified that 2004 was an unusual year for the practice due to the significant drop in cash; that Wife had dissipated $199,000 by transferring the funds to her mother and FC had considered this as a credibility factor in the valuation; that Wife had made frequent fund transfers from the business without a proper accounting; and that Wife had sole control of the business during 2004. Given these facts, CA found FC had ample evidence to support its decision to base the valuation on the 2003 report. CA also found Wife’s argument that FC should have applied 23% discount for lack of marketability given the lack of cash in 2004 to be moot given the appropriate use of the 2003 valuation. Lastly, CA held that Wife was not entitled to post-judgment interest on amounts over-paid to Husband; given that the original judgment was vacated, there was no judgment from which interest would accrue; and awards of pre-judgment interest on unliquidated claims are within the trial court’s discretion, and FC did not abuse its discretion in refusing to make such an award.
Cabinet for Health and Family Services, el al v. Ivy, extent of child support and arrearages to be paid by non-custodial parent receiving only SSI benefits.
Keifer v. Keifer, oral findings are insufficient to support order modifying parenting time, written findings of fact are required.
For those who have been advocating the absence of discounts in divorce cases using the rationale of Brooks v. Brooks Furniture Mfgrs., Inc, 325 S.W. 3d 904 (Ky. App. 2010), take a look at Shawnee Telecom v. Brown, where the Ky Supreme Court today addresses the method to value dissenting shareholder's stock.
Finally, another non-family law case, University Medical Center, Inc. v. Beglin, et al, adresses the evidentiary issues of spoiliation and adverse inference.
Here is the final opinion, which was not modified.
The landmark goodwill case in divorce business valuations, Gaskill v. Robbins, rendered February 19, 2009 is not yet final. A petition for rehearing is pending.
SC considered whether the goodwill of a closely held or sole proprietorship business can have both personal and enterprise values, and whether TC improperly assumed that it must make a 50-50 division of the marital assets.
FACTS: During the marriage, Wife worked as owner and sole practitioner of an oral and maxillofacial surgery practice, while Husband worked as a salaried employee with several businesses. At the time of trial, the parties had amassed a marital estate of over $4 million, including the value of the practice at about $670,000. Wife earned about 90% of the income during the marriage, and testimony indicated that she was very hard-working and responsible both for management of the office and patient acquisition, although Husband did provide minor assistance with the business. At trial, Wife’s expert testified that, on an asset-based analysis, the practice was worth about $221,000, which included a value of $0 for goodwill of the business because Wife’s role in the business amounted to a “non-marketable controlling interest.” Husband’s expert used the average of the values derived from four different methodologies, assuming the existence of Wife’s non-compete agreement and goodwill, and arrived at a value of $670,000. TC accepted Husband’s expert’s valuation, relying on the premise that there was no authority for the distinction between personal and enterprise goodwill in Kentucky law. CA reversed on TC’s goodwill ruling because it believed TC was under incorrect impression that goodwill must be assigned a value greater than $0, and it recognized that not all businesses have goodwill. TC determined that marital property should be divided 50-50, relying on the parties’ equal contribution to the marital estate, including duties at home and raising their child, as well as Wife’s greater ability to rebuild her estate.
ANALYSIS: Valuation of Goodwill: If the reputation of a business will draw customers and get them to return, the business has goodwill. Previous KY cases recognize that everything of value in a business, including transferable goodwill, must be counted. None of those cases recognized a distinction between personal and enterprise goodwill, but they did not prohibit the distinction. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers, and suppliers. On the other hand, much like professional degrees, personal goodwill is nontransferable, belonging primarily or only to the individual. If the value of a business is to be decided on a fair and reasonable basis, and property divided equitably, this must be considered. SC found that the skill, personality, work ethic, reputation, and relationships developed by Wife are hers alone and cannot be sold to a subsequent practitioner. This personal goodwill is nonmarital property that will continue with her regardless of the presence of any spouse. SC held that to consider this personal goodwill as marital property would effectively attach her future earnings, to which Husband has no claim. Further, if Husband were then awarded maintenance, this would amount to double-dipping and cause a dual inequity to Wife. Lastly, SC recognized that the distinction between enterprise and personal goodwill is as susceptible to expert valuation as goodwill on the whole is.
Valuation Methods: SC held that using an average of values to obtain a value of a business, without some basis other than an inability to choose between conflicting and competing valuation methods, is nothing more than making up a number, for there is no evidentiary basis to support that specific number. The trial court must fix a value, and there should be an evidence-based articulation for why that is the value used. Further, the business must be valued in its existing state, and a non-existing non-compete clause cannot be considered.
Equitable Division of Marital Property: TC recognized that there is no presumption of a 50-50 division without regard to the evidence. However, SC held that because a court must divide the property in “just proportions,” starting the parties off in an even position in order to determine how to apportion is not unreasonable, provided that TC considers all the relevant factors of KRS 403.190. This statute requires consideration of each spouse’s contribution to acquiring the marital estate, and here, Wife clearly contributed more monetarily than Husband did. However, the ability to work with the support of a spouse/co-parent is an intangible that goes beyond dollars. Within the marital arrangement, abilities are often unequal, the use of one’s time varies according to present need, and each spouse does things to accommodate the other. How the parties earn money and build wealth is affected by these variables, but is done for common purpose. Thus, SC held, the term “contribution” has tangible and intangible components that must be weighed by TC. Furthermore, in its division of property, TC should also consider parties’ ability to earn after divorce, and Wife clearly has the advantage here.
CA’s decision re goodwill and TC’s valuation and division of practice affirmed on other grounds, and TC’s 50-50 division of property affirmed. Remanded to TC to determine value of practice and divide marital estate.
DISSENT IN PART BY ABRAMSON: If expert testimony establishes that covenants not to compete are an integral part of a sale of a profession practice, as they typically are, the expert should be able to take them into account in assessing the value of the practice.
Kentucky finally joins the majority in distinguishing between personal and enterprise goodwill in business valuations. Court also cannot factor in a non-existent non-compete agreement to enhance a professional practice valuation. It's about time! Gaskill v. Robbins, online here. Digest to follow.
Chase College of Law has now posted the briefs in Gaskill v. Robbins, to be argued before the Kentucky Supreme Court June 11, 2008.
Having access to case status throughout the pipeline is enabling lawyers to be better advocates. How? Well, if you represent a physician, do you think you want to try that case before Gaskill v. Robbins is decided? And, if you must mediate or try your case before then, perhaps the oral arguments may help you get a feel for where the law is headed.
On June 8, 2008 at 10am the Kentucky Supreme Court will hear oral arguments in Gaskill v. Robbins. We have posted about this case involving business valuations many times. The issue is whether the capitalization of excess earnings method of professional practice valuation measures personal goodwill rather than enterprise goodwill. You can watch the oral arguments live at the link here. We'll post the briefs as soon as we learn they are available.
Husband appealed TC’s Order resulting from distribution of property in dissolution action, alleging that TC erred when it valued his interest in businesses partially owned by him and when it denied his CR 60.02 motion. Wife cross-appealed, alleging that TC erred when it determined Husband's income and that the amount of her maintenance award was an abuse of discretion.
Husband and Wife were married for sixteen years and have 2 minor children. Throughout the marriage, Husband was involved in several business ventures with his father and brother. Husband alleged that TC erred when it determined that he would not have to repay draws and advances made against the capital account of the family-owned businesses and, thus, were not properly characterized as debts owed by Husband nor debts that decreased the value of his business interests. In addition to his salary, there was evidence that Husband had taken draws from the partnership and had decreased its capital account in the amount of $324,508.
Wife’s CPA utilized the asset approach to value Husband's interest in the family businesses, but did not deduct draws and advances by either brother as there were no promissory notes or evidence that debts were owed to a third party as a result of the draws and advances. He concluded that the businesses were worth $13,500 and $183,150. One of Husband’s financial experts deducted the value of the draws and advances and a negative capital account from one business’ value and concluded that it had a negative value of $656,846, and he testified that if that business was dissolved or sold, the partners could require Husband to repay his portion of the money, which totaled $324,508. Husband’s other expert testified that real estate owned by the other business was worth less than the amount it appraised for a few years prior, even though Husband received his full portion of the appraised amount when the property was sold. TC concluded that the values of Husband's interests in the businesses were $162,800 and $13,500, as there was no credible evidence that upon dissolution of the partnership or its sale, Husband would be required to pay back the approximately $324,508 he received in draws and advances against the capital account as suggested by Husband's expert. The court then awarded $80,000 to Wife as her marital interest in the businesses and Husband $96,300.
CA found significant the absence of promissory notes signed by Husband, any specific evidence in the record that Husband was obligated to repay the money, or evidence that Husband had made any past payments toward the amount and agreed with Wife that there was no abuse of discretion in TC’s refusal to deduct that amount from the value of Husband's interest in the family businesses.
After receiving TC’s original ruling and rulings on CR 59.05 motions filed by both parties, Husband filed a CR 60.02 motion alleging that Wife had made a substantial down payment on a residence and possibly failed to disclose marital assets or had additional income, and that he had a non-marital interest in property included in the marital estate. He cited health issues as the reason for his failure to raise the issue earlier. Prior to the ruling on the motion, Husband filed this appeal. Husband contends that TC denied his CR 60.02 motion based on its erroneous interpretation of the law that since he had filed a notice of appeal prior to TC’s ruling on the motion, the court lost jurisdiction. However, he failed to cite to the record where TC expressed the basis for its denial of his motion. CA found that that the grounds alleged in Husband's motion and affidavit were insufficient to warrant the relief requested and, therefore, it was properly denied.
Wife challenged TC’s calculation of Husband’s income, asserting that TC should have calculated the businesses’ projected future earnings based on the past few years’ performance, rather than setting a lower amount based on predicted downturns in profitability. TC found, in agreement with Husband’s testimony, that Husband’s gross monthly income was $4,847.17. Wife argued that Husband's income should have been based on the years immediately preceding the dissolution hearing during which Husband's income was higher than $4,847.17. CA disagreed, finding that there was persuasive evidence that the profits from the family businesses had steadily declined over the past five years, and the fact that real estate owned by the businesses was listed for sale indicated that Husband’s future income was speculative.
Wife also challenged the amount of maintenance awarded on the basis that her reasonable living expenses exceed her income and the maintenance awarded. Wife is a 40 year-old high school graduate who receives Social Security Disability benefits of $804 per month. TC awarded permanent maintenance of only $250 per month, though her reasonable needs total $2,201 per month. CA disagreed with Wife, noting that Wife received $107,130.20 in marital property and that Wife was assigned a comparatively small amount of the marital debt. Thus, when it determined the amount of maintenance to award, TC properly considered the factors set forth in KRS 403.200(2). Affirmed.
Shannon Pratt must be clicking his heals. We published some of the business valuation guru's comments at Kentucky Has Opportunity To Join The Majority, reported on the case at The Child Custody Issue Needs To Be Remanded For A New Trial But it Would Be A Great Case For Discretionary Review On The Goodwill Issue: What Will Retired Justice James E. Keller Do? and digested it here. The Kentucky Supreme Court has already accepted discretionary review in a case that is not nearly so well briefed and factually ripe. This case would make a nice duo.
Although retired Justice James Keller told us he would be filing a motion for discretionary review, the March 16, 2007 filing did not appear on the Kentucky Court of Justice website until Friday. If you are counting on that site to know if a case is final so the "to be published" case can be cited, know that it is a little slow and you'll have to continue to do it the old fashioned way by picking up the telephone and calling the clerk.
Gaskill v. Robbins digested here and discussed here was the subject of an article in the February 2007 edition of Business Valuation Update by Shannon Pratt: Kentucky Has Opportunity to Join Majority In Distinguishing Personal Versus Enterprise Goodwill (subscription only, not available online).
On appeal, the wife contended the family court “operated under the misconception that it was compelled to assign a goodwill value” to her practice, and the Court of Appeals agreed. While Kentucky law requires considering goodwill in the valuation of a medical practice-it does not compel it, and the case merited remand.
At the wife’s urging, the Appeals Court also considered whether Kentucky law should join the majority of US jurisdictions in distinguishing enterprise and personal goodwill in divorce actions….
As in the May case, which went through an appeals process to the highest state level, the Kentucky Court of Appeals may simply have deferred the ultimate question to the Kentucky Supreme Court. In a dissent, a senior judge on the appellate panel indicated he believed “personal goodwill should not be considered marital property to be divided between the parties.” However, he added, “This is a matter to be addressed to our Supreme Court,” as both the trial and appellate courts had not erred in their rulings under Kentucky law.
The case is not yet final. A motion for reconsideration is pending in the Kentucky Court of Appeals. As we previously grieved, however, it will be very difficult for the wife to move for discretionary review since she won a new child custody trial, and probably is more eager to have the case remanded for a new trial. These may not be the best facts for the Kentucky Supreme Court to revisit this issue, anyway, as the non-business owner spouse in Gaskill did contribute marital efforts working in his wife’s oral surgery practice. That complicates the issue of contribution of a spouse with the more precise issue of segregating personal goodwill from enterprise goodwill. However, the legal issue was well presented and perhaps if discretionary review is taken, the spousal contribution anomaly could be parsed from the precise issue.
Gaskill v. Robbins, __ S.W.3d __ (Ky. App. 2006), 2006 WL 3524380 (Ky. App.) Not final, motion for reconsideration pending.
1)	Whether the trial court abused its discretion when it failed to allow wife to introduce a prior inconsistent statement from psychologist. The Court held yes, the lower court abused its discretion.
2)	Whether the trial court’s error in making a finding of fact that relied on unsworn statements from a hearing dealing with the guardian ad litem’s motion to review temporary custody prejudiced the wife. The Court held yes, the error did prejudice the wife.
3)	Whether the trial court exercised its discretion when it assigned the goodwill value to the wife’s medical practice. The Court held no, the court did not exercise discretion.
4)	Whether the trial court was required to make a distinction between “personal” goodwill and “enterprise” goodwill when valuing the wife’s business. The Court held no, the lower court was not required to do so.
The parties were married in May 1992, with one child born in the marriage. Gaskill, the wife, is an oral and maxillofacial surgeon who already had a successful practice in Russellville at the time of the marriage. After the marriage, she opened up an additional office in Bowling Green. Robbins, the husband, was employed outside Gaskill’s practices, but also assisted her in opening the second office by interviewing and training staff, setting up the physical structure of the office, and assisting in clerical matters. Robbins also helped with the tax, payroll, and accounting matters of Gaskill’s business, prepared profit and loss statements, negotiated leases for the office space, and terminated employees when needed. Both parties maintained the household and cared for their child.
The parties separated in August 2003, and Gaskill filed for divorce in October 2003. The main issues in the divorce proceedings were the valuation of Gaskill’s business, how the marital property should be divided, and the custody of their child. The trial court granted sole custody to Robbins and awarded each party approximately 50 per cent of the marital property. Gaskill appealed.
On appeal, Gaskill argued that the lower court erred in refusing to allow her to introduce a prior inconsistent statement made by Dr. Fane, a psychologist, and ruling that said statement was inadmissible hearsay. At trial, Dr. Fane testified that he did not believe that either parent could be considered better than the other regarding custody. Gaskill’s counsel asked him about a statement he had made to Dr. Buchanan indicating that Gaskill was the better parent, but Dr. Fane testified that he did not recall making such a statement. Gaskill’s counsel then attempted to call Dr. Buchanan to impeach Dr. Fane, but Robbins’ counsel objected and the trial court sustained the objection to inadmissible hearsay. The evidence was then introduced by avowal. The Court held that the lower court erred in failing to allow the impeachment testimony. The statement satisfied KRE 801A (a) (1) and counsel laid the proper foundation for the testimony to be heard. In addition, the court’s findings of fact show that the court relied on Dr. Fane’s testimony in its custody determination. Therefore, omission of the impeachment testimony was error. The Court did not consider whether the error was reversible, as the Court found other reversible error.
The Court also found that the trial court erred in making findings of fact that relied on unsworn statements made at a hearing concerning the Guardian Ad Litem’s motion to review temporary custody. At the hearing Robbins’ counsel and the GAL repeated numerous hearsay statements about Gaskill’s alleged interference with the child’s schooling, including statements supposedly made by the child and the child’s school principal. The court’s findings of fact clearly show that these statements were relied upon by the court. Therefore, the court’s consideration of the statements was prejudicial, and the court’s custody determination must be reversed.
Gaskill also argued that the lower court erred in its valuation of the marital property by failing to exercise its discretion in assigning goodwill value to Gaskill’s business and by failing to distinguish between personal and enterprise goodwill. Gaskill’s expert testified that her business had no goodwill value, since any goodwill attributable to the practice was personal goodwill. He testified that the practice had a fair market value of $114,000.00. Robbins’ expert testified that the practice had a value of $669,075.00, which included its goodwill value. The Court held that the lower court erred in failing to exercise its discretion in assigning a goodwill value to the business. The lower court felt required to assign a goodwill value to the business, but was not required to do so. Thus, the Court remanded the issue for further consideration.
Regarding whether a distinction should be drawn between personal and enterprise goodwill, the Court held that the case law in Kentucky does not support such a distinction. The Court stated that it was not inclined to deviate from the precedent by creating a “wholesale change of law” holding that a distinction should be made, even given the fact that Gaskill’s business is a sole proprietorship. Such a distinction would ignore the nonprofessional spouse’s contribution to the success of the professional spouse’s business. Because Robbins made numerous contributions to Gaskill’s business, the Court stated that the goodwill of the practice should be considered in valuing the marital property on remand.
The Court reversed and remanded for further proceedings consistent with the opinion.
Judge Paisley concurred in part and dissented in part.
The April ABA e-news has a general posting about business valuations. I had no idea how "young" this sub-specialty is. If you are new to this area of divorce law, this article will untangle the alphabet soup. This is an area of family law that is near and dear to my heart. Stay tuned for much more posting about this field, including some discussion of "can bad accounting be good law?"

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