Court Opinion

ID: 9693240
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:32:03.454555+00
Date Added: 2024-06-11T12:04:31.107327
License: Public Domain

OPINION OF THE COURT
FLAHERTY, Justice.
This is an appeal from an order of the Superior Court which affirmed in part and vacated in part orders of the Court of Common Pleas of Montgomery County in a divorce case involving the appellant, Nelle Vastine McCabe, and the appellee, J. Grant McCabe, III. McCabe v. McCabe, 374 Pa.Super. 451, 543 A.2d 558 (1988). The Superior Court affirmed the lower court’s award of alimony, alimony pendente lite, counsel fees, and expenses to Mrs. McCabe, but vacated the court’s scheme for equitable distribution of marital property. It remanded for a redetermination of equitable distribution on the ground that the lower court erred in determining a value for Mr. McCabe’s partnership interest in a law firm. Both parties petitioned this Court for allowance of appeal. We denied the petition of Mr. McCabe seeking review of the award of alimony, alimony pendente lite, counsel fees, and expenses. The petition of Mrs. McCabe, however, raising the issue of equitable distribution, was granted.
The parties to this case were married in 1948, and, in 1980, they separated. At the time of separation, Mr. and Mrs. McCabe were, respectively, 56 and 54 years of age. Mr. McCabe, an attorney, has been a partner in the Phila*27delphia law firm of Rawle & Henderson since 1963. He was earning approximately $150,000 per year from his law practice when marital separation occurred. He contributed substantially to the maintenance of his wife’s lifestyle during the marriage. Mrs. McCabe has never been employed, but nevertheless contributed to the marriage by being supportive of her husband’s work, taking care of their household, and devoting considerable time to raising their five children. Mrs. McCabe has several hundred thousand dollars worth of non-marital property, obtained through inheritance, and receives approximately $30,000 per year in income from this property and from trusts established by her father and grandfather.
The parties obtained a no-fault divorce in August of 1981 in a bifurcated proceeding, leaving economic issues pending. Hearings were held on economic issues in 1983, and in 1985 the Court of Common Pleas ordered that Mr. McCabe pay alimony in the amount of $2,500 per month for an indefinite term, as well as counsel fees and expenses totalling approximately $33,000. At the same time, equitable distribution of marital property, under 23 P.S. § 401, was ordered as follows:
To Mrs. McCabe:
Personalty $ 8,231.00
Stock (including net increase) 60,207.55
Pension Plan (Mr. McCabe’s) 60,638.63
Home 140,000.00
Loan 4,500.00
Boat 12,000.00
Cash 15,500.00
$301,077.18
To Mr. McCabe:
Law Firm Partnership Interest $286,276.00
Stamp Collection 5,430.00
Life Insurance 1,951.00
$293,657.00
Both parties agree that Mr. McCabe’s partnership interest in the firm of Rawle & Henderson is marital property *28subject to equitable distribution, and the issue presented by this appeal is limited to whether, for purposes of such distribution, the interest was properly assigned a value of $286,276 in the foregoing distribution scheme, or whether, as the Superior Court ordered in its remand for redetermination of equitable distribution, the interest should have been valued at $18,900. The answer is dependent upon which of two alternative valuation methods is employed.
The method employed by the Superior Court utilized a formula that the Rawle & Henderson partnership agreement set forth for the purpose of computing the sum that is subject to withdrawal when a partner terminates his association with the firm. The agreement has not been significantly changed since 1963, and provides that a withdrawing partner is entitled only to his share of the capital account (minus the amount of any indebtedness to the firm) and, if 90 days notice is given, his share of undistributed profits to date.1 At the time of marital separation Mr. McCabe had already received distributions of profits in the form of monthly draws. Hence, the value of his partnership interest was regarded by the Superior Court as the sum in his capital account, $18,900.
In contrast, the valuation method employed by the Court of Common Pleas disregarded the terms of the partnership agreement entirely and instead appraised the firm as a “going concern,” attributing to Mr. McCabe his percentage ownership therein (6.3%), valued at $286,276. This method was the one advanced by an expert witness for Mrs. McCabe. Included in the “going concern” value were all of the firm’s assets (equipment, books, cash, etc.), accounts receivable (minus accounts payable and an allowance for bad debts), and work-in-progress (services rendered but not yet billed). Goodwill was not included in the appraisal.2
*29We believe that the appraisal adopted by the Court of Common Pleas overstated the value that should be recognized for purposes of equitable distribution, and that the Superior Court properly remanded this case for a redetermination of the distribution award based upon a reduced value for the partnership interest, to wit, $18,900. Accordingly, we affirm.
If Mr. McCabe were able to sell, liquidate, or otherwise realize the “going concern” value assigned to his partnership interest, it would be evident that the approach followed by the Court of Common Pleas should prevail. However, it has been clearly established in this case that the “going concern” value cannot be realized in any manner. It would be unrealistic, therefore, to assign this value to the partnership interest for purposes of equitable distribution.
The partnership agreement governing the firm of Rawle & Henderson contains a number of provisions which, as is the case with many professional partnerships, renders the firm unlike many common types of business enterprises. Furthermore, Rawle & Henderson is not an entity with shares that can be traded publicly or privately. There is no market to which a partner can refer to ascertain the value of his partnership interest. Nor can the firm be sold or liquidated at the behest of a partner.3
The partnership agreement contains provisions which clearly and narrowly define the rights of the partners. These provisions do not allow a partner to remove from the firm a proportionate share of the accounts receivable, work-in-progress accounts, or other accounts included in the “going concern” value. Under no circumstances can a partner liquidate his share of the partnership and receive a proportionate share of the firm’s total value, including its *30equipment, accounts receivable, etc. Rather, as discussed supra, a partner is strictly limited to receiving his capital account, and his share of undistributed profits, in the event he wishes to liquidate his share in the firm. Further, a partner is not permitted to sell his partnership interest to another individual. Nor does a partner have a right to retire from the firm and continue to receive a share of the firm’s profits. Under these circumstances, it would be inequitable to apply a “going concern” value to the partner’s share.
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. Hodge v. Hodge, 513 Pa. 264, 269, 520 A.2d 15, 17 (1986).
The substantive rights of a partner consist only of those specified in the partnership agreement, and, in appraising this bundle of rights, the agreement cannot be disregarded. Indeed, the agreement must be viewed as the preeminent factor in valuing a partner’s rights. The present agreement sets forth a method for determining the realizable value of a partner’s share, and the value determined in accordance with that method, $18,900, must be regarded as controlling.
It is to be recognized that partners in certain other law firms may possess greater rights upon withdrawal from their firms than do the partners at Rawle & Henderson. Some may be governed by partnership agreements that allow them to realize values corresponding to some or all of the elements that enter into the computation of a firm’s value as a “going concern.” Such is not, however, the case here. Certainly, where an agreement imposes strict limits on the value that can be realized by a partner, the agreement places the continuing welfare of the partnership as a whole above the interests of any particular member of the *31firm.4 This results in a true diminution in the distinguishable value of any given partner’s individual interest, and it would be a fiction to appraise such an interest as though the limitations were not in effect. We conclude, therefore, that the Superior Court properly gave effect to the provisions of the Rawle & Henderson partnership agreement in appraising Mr. McCabe’s interest in the firm.
Order affirmed.
LARSEN, J., files a dissenting opinion joined by McDermott and papadakos, jj.
McDERMOTT files a dissenting opinion joined by LARSEN and PAPADAKOS, JJ.

. In the event of the death of a partner the same sum is payable, though the 90 day notice requirement is waived, and a death benefit of $20,000 is also payable by the partnership.

. The valuation of a partner's interest in a professional partnership for purposes of equitable distribution has been litigated in a number of other jurisdictions, and a variety of approaches have been followed. *29Some have focused upon the value of a partner’s interest as defined in the partnership agreement, while others have incorporated elements of "going concern’’ value. See generally Annot., Evaluation of Interest in Law Firm or Medical Partnership for Purposes of Division of Property in Divorce Proceedings, 74 A.L.R.3d 621 (1976) (survey of case law).

. Under the governing agreement, approval by three-quarters of the partners is required in order to liquidate the firm.

. It should be noted that, inasmuch as the lifestyles of Mr. and Mrs. McCabe have been financed largely from Mr. McCabe’s earnings at Rawle & Henderson, both parties have prospered from the continuing welfare of the firm. Both have therefore derived benefits from provisions in the partnership agreement which have functioned to promote the ongoing welfare of the firm.