Opinion ID: 1159233
Heading Depth: 2
Heading Rank: 1

Heading: community interest in law firm

Text: The district court found that the parties owned a $49,357.95 community interest in the business (law firm). Each party was awarded one-half. The district court specifically found: 13. The value of the business, including good will, and including the deferred compensation plan, but not including the profit sharing plan, is $23.81 per share. To be deducted from that is the deferred compensation plan ($3,666) and the $4.28 per share, which the corporation and the shareholders have fixed by agreement as to the value of the shares. The balance is $49,357.95, which is the remainder of the community interest in the business after deducting the [$4.28 per share] of stock and after deducting $3,666 for the deferred compensation plan. To put it another way, the [total] community interest in the business is worth $64,644.15. That is what it is worth to the husband to be where he is and have the relationship and opportunities that he has with the law firm. This is something that is the result of community labor of 8 years. However, the only way that the husband can realize these benefits is to stay with the firm. That restricts his right to practice and makes it less valuable so some adjustments should be made. It would not be fair to require the husband to pay the wife 1/2 of the $49,357.95 in a lump sum. He should pay her over a period of eight (8) years at 1/8 per year, at the rate of $250 per month with no interest. These payments are to continue only so long as the husband remains with the firm. If he quits, or is discharged, or dies, the obligation is terminated and nothing further is due the wife in connection with this portion of the community property. She will have received her portion in such event. [Emphasis added.] Husband claims that the $49,357.95 which is the remainder of the community interest in the business, in fact represents the district court's determination of community goodwill and nothing else, because no other asset or property right exists which was not already considered by the court in valuing and dividing the shares of stock, profit sharing plan, and deferred compensation plan. Husband argues, therefore, that the district court erred in determining that the parties had a $49,357.95 community interest in the law firm, and erred in awarding wife one-half of that amount because the district court disregarded a controlling stock restriction agreement that binds husband as to the valuation of goodwill, and because the district court's finding that the community owned goodwill in the law firm is not supported by substantial evidence. On the other hand, wife claims that the district court did not determine that the parties had a $49,357.95 goodwill interest in the law firm. Wife claims that the district court recognized that the tangible assets of the business cannot rationally be measured by the cash basis book value ($4.28 per share) because that measurement omits more than one million dollars of tangible assets, including accounts receivable and work in progress, which was owned by the law firm as a professional corporation on the date of the divorce. The dispute over the value of the stock results in the method used by the experts in calculating the value. Husband's expert valued the stock on a cash basis pursuant to the stock transfer agreement requiring that it be done in that manner. The cash basis excludes work in progress and intangible assets such as accounts receivable. Those items are accounted for by the law firm in their deferred compensation fund. Furthermore, goodwill is accounted for in this cash basis valuation. The testimony is uncontradicted that all previous sales and purchases of the law firm's stock have been on a cash basis and that no value is ever attributed to goodwill other than the $1.00 amount provided for in the stock subscription agreement. Wife's expert, on the other hand, valued the stock on an accrual basis, including work in progress and accounts receivable, and determined that on an accrual basis, the stock is valued at $17.32 per share. Based upon a capitalization of excess earnings, wife's expert then determined that there was a value of $6.49 per share in goodwill. The district court did not specify the components of its valuation of the parties' $49,357.95 interest in the law firm, nor did the district court explain why the husband's payments to wife on the $49,357.95 amount were to continue only so long as the husband remains with the law firm. However, in arriving at this total, the district court apparently accepted the testimony of wife's expert. Wife's expert testified that the value of the law firm's stock was $17.32 per share, plus $6.49 for goodwill per share for a total of $23.81 per share, on an accrual valuation basis. The district court then valued the community interest in the law firm as $64,644.15, by multiplying $23.81 per share by the 2,175 shares owned by husband. This $64,644.15 included goodwill and the husband's interest in the deferred compensation plan but did not include the profit sharing plan. The district court then deducted husband's $3,666.00 interest in the deferred compensation plan and $11,620.20 (the fixed value of the 2,175 shares as per the Stock Restriction Agreement). Consequently, the district court arrived at its $49,357.95 total. This finding, however, conflicts with Finding # 8 in which the district court determined that the fair value of the stock on the divorce date was $4.28 per share, or a total of $11,620.20. Finding # 8 was apparently based upon the testimony of husband's expert who valued the stock on a cash basis. Professional goodwill is basically defined as the difference between the total value of the professional association or corporation and the aggregate value of its separable resources and property rights, less liabilities. Levy v. Levy, 164 N.J. Super. 542, 397 A.2d 374 (1978); G. Catlett & N. Olson, Accounting for Goodwill (Accounting Research Study No. 10, 1968); Financial Accounting Standards, Opinions 16 and 17 (Financial Accounting Standards Board 1981); compare Hurley v. Hurley, 94 N.M. 641, 615 P.2d 256 (1980) with Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (Ct.App. 1981). In Hurley v. Hurley, supra , we first addressed the issue of professional goodwill and recognized that in some circumstances it may exist. However, the facts in the Hurley case were significantly different from those presented in this case. Hurley was a physician in a professional corporation with one other physician. There was no stock subscription agreement which valued goodwill. The Hurley case held that the trial court erred in finding that there was no goodwill in the two-person professional medical association that was initially founded by Dr. Hurley. In this case, we consider whether the district court erroneously disregarded the stock restriction agreement which included the employer's goodwill among the assets represented by the stock valuation. Furthermore, this case deals with a legal professional association of over fifty persons that had been in existence for thirteen years before husband became employed with the firm, and for 17 years before husband became a shareholder in the firm. In Hurley, we approved the capitalization of excess earnings method to determine a value for professional goodwill when it existed. However, we clearly stated that this method was not exclusive. We listed as factors to be considered when determining professional goodwill: [T]he length of time the professional has been practicing, his comparative success, his age and health, and any past profits of the practice. Attention should also be given to the physical and fixed resources of the practice. Id. at 644, 615 P.2d at 259. However, this list of factors is similarly not exclusive because each case must be determined on its own particular facts and circumstances. Id. While we recognized the difficulty in ascertaining the existence and specific amount of professional goodwill, we clearly held that, [o]nce its existence and value are established, it should be included in and divided along with other community property. Id. The record in the present case clearly indicates that throughout the existence of the law firm, each of the over 150 purchases and sales of its stock was consummated by a valuation on cash accrual basis with no amount paid or reduced for goodwill as provided by the law firm's stock restriction agreement, to which all of the law firm's shareholders were parties. The stock restriction agreement specifically states: Goodwill, leases, contract rights and the like will be valued in the aggregate at $1.00, unless a different figure has been consistently shown on the Corporation books. [Emphasis added.] Therefore, there is no doubt that the law firm not only recognized the existence of goodwill but also clearly established by contract that the value of goodwill and other intangible assets would be $1.00. There is no reason to suspect that the law firm was attempting to frustrate the purpose of any community property principle by establishing an intangible asset's amount at $1.00 because every purchase and sale of its stock was subject to this agreement regardless of the circumstances surrounding the purchase or sale. Therefore, this $1.00 amount alone should have been used by the district court in determining the community's interest in the goodwill of the law firm. We hold that a non-shareholder spouse is bound to the same terms of a shareholder valuation agreement which affects the shareholder spouse. This insures that the nonshareholder spouse does not receive a greater value than that of the shareholder. Each spouse has an undivided interest in their community property, which the trial court has a duty to divide equitably. See § 40-3-8, N.M.S.A. 1978; see also Lucas v. Lucas, 95 N.M. 283, 621 P.2d 500 (1981). This principle was ignored when wife was awarded an interest including goodwill greatly in excess of husband's contractual withdrawal rights. If, for example in this case, husband terminated his employment with the law firm, he could never realize the value of the goodwill that was awarded to wife. Value of goodwill must be determined without dependence upon the professional spouse's potential or continuing income. Hurley v. Hurley, supra . In deciding this issue of professional goodwill, we find ourselves in agreement with the following statement made by the Wisconsin Court of Appeals: 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 or another method of liquidating value. Holbrook v. Holbrook, supra, 309 N.W.2d at 355 (footnote omitted). To the extent that the district court was attempting to award an interest in the law firm beyond that enjoyed by the husband, it erred. We know of no other interest the parties could own that was not divided. We therefore find that the district court erred, and we hold that if the professional spouse's stock in the corporation is subject to restrictive stock agreements and if the value of goodwill is fixed by those shareholder agreements, then absent evidence that the stockholders have disregarded this amount, the district court cannot determine a goodwill value above that amount. See Holbrook v. Holbrook, supra ; cf. Lucas v. Lucas, supra .