Opinion ID: 1155557
Heading Depth: 1
Heading Rank: 3

Heading: division of assets of the professional corporation

Text: The trial court set a value on the husband's interest in Tulsa Radiology Associates at $203,550.00. This amount included the husband's stock value, a contractual 1/15th share of accounts receivable, the value of sums owed the corporation under a noncompetition agreement and the goodwill of the professional corporation. At trial, Wife's expert submitted three different methods by which the value of the goodwill of the professional corporation could be valued. [3] One of the methods used as a key figure that amount earned by Husband over and above the average salary of a radiologist. This figure was then capitalized to determine the dollar value of the goodwill of the company. Capitalizing is a method of converting a periodic payment, in this particular case the excess earnings per year of $46,000, into an equivalent capital sum or sum in hand. [4] The expert stated that these figures were only for the purpose of marital dissolution and that a different value would be used for selling the practice. The trial court used capitalized excess earnings to place a value upon Husband's share of the goodwill in the corporation. It appears he valued the Husband's share of goodwill at $115,000.00. Husband's expert witness testified that the Stock Purchase Agreement set the value of his share of corporate stock at $9,652.53. The agreement stated that in the event of Husband's termination of employment he would be entitled to that amount, plus a proportionate share of the discounted accounts receivable. In determining the Husband's share of the value of TRA, the court added stock value ($9,653.00), Husband's portion of the discounted accounts receivable ($63,898.00), his portion of the non-competition agreement ($15,000.00) and his portion of the goodwill of the corporation ($115,000.00) to reach a total of $203,550.00. The court then awarded one-half of this amount plus $9,313.00 (apparently a discretionary amount to somewhat equalize the in kind property division). The total alimony in lieu of property awarded to Wife amounted to $111,088.00. In Travis v. Travis, supra , we addressed the question of whether the goodwill of the sole practitioner's law practice was a marital asset. Goodwill has been defined as the favor or prestige that a business has acquired beyond the mere value of what it sells. Webster's New Collegiate Dictionary 496 (1973); The Oklahoma Statutes define it as, the expectation of continued public patronage... . 60 O.S. 1991 § 315. According to Travis the goodwill value of a business is the value that results from the probability that old customers will continue to trade with an established concern. Id. at 96 quoting Freeling v. Wood, 361 P.2d 1061, 1063 (Okla. 1961). We held in Travis that the law practice of a sole practitioner had no goodwill value because the reputation of the lawyer cannot be purchased by another seeking to acquire an established practice. Id. at 100. This is especially true when the professional is a sole practitioner. Although the trend seems to favor the recognition of goodwill as a divisible asset, we pointed out that courts are divided on this issue. Id. at 97 n. 1. Relying on the reasoning of our sister jurisdictions, we noted that goodwill value, if considered an asset divisible in divorce, is particularly difficult to quantify especially in light of the probability that the practitioner could not realize in dollars that goodwill value. There is a disturbing inequity in compelling a professional practitioner to pay a spouse a share of intangible assets at a judicially determined value that could not be realized by a sale of another method of liquidating value. Hertz v. Hertz, 99 N.M. 320, 657 P.2d 1169 (1983). Consistent with our holding in Travis, the Pennsylvania Supreme Court in McCabe v. McCabe, 525 Pa. 25, 575 A.2d 87 (1990) held that for all practical purposes, the goodwill of a partnership could not be considered marital property. It pointed out there is no market by which the value of that particular practice may be compared. The court relied on the partnership agreement, and held that the rights of the partners and values of their interests were fixed by that agreement. See also Moebus v. Moebus, 529 So.2d 1163 (Fla. Dist. Ct. App. 1988); In re Marriage of Hogeland, 448 N.W.2d 678 (Iowa Ct. App. 1989); Sweeney v. Sweeney, 534 A.2d 1290 (Maine 1987); Hertz, supra ; Saint-Pierre v. Saint-Pierre, 357 N.W.2d 250 (S.D. 1984); Smith v. Smith, 709 S.W.2d 588 (Tenn. Ct. App. 1985); Finn v. Finn, 658 S.W.2d 735 (Tex. Ct. App. 1983); Johnson v. Johnson, 771 P.2d 696 (Utah Ct.App. 1989); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (Ct.App. 1981). We agree with the reasoning of the McCabe case. Here, there is no way for Husband to realize his share of the goodwill of the corporation. The agreement between the stockholders, including Husband, states unambiguously what value may be recovered in the event a stockholder seeks to withdraw from the practice. Furthermore, Husband is required by the agreement to sell his stock back to the corporation for a price equivalent to the book value of the stock. As for market value, practical considerations  aside from his contractual obligation to sell his stock to the corporation  dictate that only a very select market exists for this stock. In other words, Husband cannot recoup this goodwill value in any other manner than continued professional services with TRA. He has no right to sell, separate and apart from the stock, his share of goodwill. This concept was well articulated in Holbrook, 309 N.W.2d at 354: The concept of professional goodwill evanesce when one attempts to distinguish it from future earning capacity. Although a professional business's good reputation, which is essentially what its goodwill consists of, is certainly a thing of value, we do not believe that it bestows on those who have an ownership interest in the business, an actual separate property interest. The reputation of a law firm or some other professional business is valuable to its individual owners to the extent that it assures continued substantial earning in the future. It cannot be separately sold or pledged by the individual owners. The goodwill or reputation of such a business accrues to the benefit of the owners only through increased salary. While the value of a going concern (including the goodwill) may reflect what the Husband may earn sometime in the future, future earnings are not marital property. Granted, a going concern value would better reflect the future income that Mr. McCabe might earn as a result of holding a partnership interest. However, future income is not marital property because it has not been acquired during the marriage. It is not, therefore, subject to equitable distribution. McCabe, 575 A.2d at 89. Wife's expert present three different ways of valuing the husband's share of goodwill. However, all of these disregard the express language of the stockholder's agreement. As our sister jurisdictions have held, the agreement is controlling under these circumstances. Sweeney, supra; Hanson v. Hanson, 738 S.W.2d 429 (Mo. 1987); Saint-Pierre, supra . In Hanson, supra, the Missouri Supreme Court addressed the question of goodwill value in a medical practice. Observing that goodwill can be considered a marital asset, the court then addressed the question of how to set a value on this asset. Although favoring the fair market value approach, the court agreed that valuation according to a buy-sell agreement is also a recognized and viable alternative in certain instances. The Missouri court specifically rejected the straight capitalization formula, the capitalization of excess earnings formula and the Internal Revenue Service valuation of capitalized earnings. The reason for the disapproval of these accounting formulas was because [t]he very purpose of capitalization formulae is to place a present value on the future earnings of the business entity being valued. Hanson, 738 S.W.2d at 436. Because future earnings are not marital property, the court decided that if goodwill is to be divided its value must be determined either by a buy-sell agreement or the fair market value. We agree with this reasoning. Not only is the capitalization method speculative, it is simply a method of valuing future earnings. Future earnings are not marital property. If goodwill is to be divided as an asset, its value should be determined either by an agreement or by its fair market value. Both of these methods are widely accepted for valuing goodwill. See annotation, 78 A.L.R.4th 853, 860-71 (1987). TRA and Husband entered into an agreement by which Husband was limited to the terms of the agreement as to the value of his portion of TRA. We therefore hold that on the evidence before it the trial court erred in valuing and including as divisible marital property any goodwill of TRA. According to the agreement, Husband's share of the professional corporation is the value of his stock, his share of the receivables, and his share of the noncompetition agreement, totaling $88,551.00.