Butler v. Butler

• Decision Date: 24 July 1995
• Citation: 541 Pa. 364,663 A.2d 148
• Parties: Carol BUTLER, Appellee, v. Leon BUTLER, Appellant.
• Court: Pennsylvania Supreme Court

Page 148

663 A.2d 148

541 Pa. 364

Carol BUTLER, Appellee, v. Leon BUTLER, Appellant.

Supreme Court of Pennsylvania.

Argued Dec. 6, 1994.

Decided July 24, 1995.

[541 Pa. 367] Kenneth J. Sparler, Andrew B. Brown, York, for L.I. Butler.

Rebecca N. Tortorici, York, for C.E. Butler.

Before NIX, C.J., and FLAHERTY, ZAPPALA, PAPADAKOS, CAPPY and CASTILLE, JJ.

OPINION

CAPPY, Justice.

This appeal involves the issue of valuation, for purposes of equitable distribution, of a spouse's business interest in an accounting firm. For the reasons that follow, we reverse, in part, the decision of the Superior Court, but affirm its order vacating the trial court's order of equitable distribution and remanding the matter to the trial court. ¹

A review of the relevant facts and procedural history reveals the following. Carol Butler and Leon Butler were married on May 10, 1964. During the initial few years of their marriage, Mrs. Butler was employed as a school teacher. However, beginning in or about 1967, she remained at home to care for the parties' three children. She re-entered the work force in 1979 as a retail sales clerk and later owned, although only for a brief time, a gift shop. Husband is a certified public accountant and has been employed as an accountant since the parties first married. He is currently a partner in the CPA firm of Einhorn, Butler, Gingerich & Co. ²

The parties first separated in May, 1983, but then reconciled in May, 1984. They finally separated in December, 1984. Following the separation, Wife remained in the marital home with the parties' children. From the time of final separation until October, 1988, Husband maintained the marital residence insofar as he paid the mortgage, utilities, insurance, repair bills and other incidental costs associated with the maintenance thereof. He also paid child support. In addition Husband has paid, and apparently continues to pay, college tuition for two of the children. A final decree in divorce was entered on April 12, 1988. A master was then appointed to hear evidence and render a recommendation as to the economic issues relating to the divorce.

Pertinent to the issue of the value of Husband's business interest, the record evinces that beginning in October, 1984, and continuing to the present, Husband's employment was subject to a shareholder agreement. That agreement in essence provides that in the event a shareholder voluntarily decides to terminate his employment, loses his or her CPA license, or becomes permanently disabled, the shareholder must sell, and the Company must purchase, that shareholder's shares of stock at the agreed upon price of $10 per share or a total of $2450. The agreement further provides that upon the death of a shareholder, the Company is obligated to purchase and the shareholder's personal representative obligated to sell, the shareholder's stock for the sum of $100,000. In connection therewith, the agreement provides that the Company shall purchase a term life insurance policy on the life of each stockholder, the proceeds of which shall be used to satisfy this $100,000 obligation. By its terms, the shareholder agreement is to terminate upon either the bankruptcy, receivership or dissolution of the Company; the death of all stockholders within a ninety day period of one another; or where there remains only one shareholder to this agreement. ³

With respect to the issue of valuation of Husband's business interest, Wife presented the testimony of John A. Plesic, CPA. Mr. Plesic determined the value of Husband's accounting firm as of December 31, 1987, to be $546,889, which Mr. Plesic referred to as the "net equity value" of the partnership. He thus determined Husband's one-third interest therein to be $182,000. According to Mr. Plesic's testimony, this "net equity value" included an intangible value of $497,395 which he described as the going concern value and/or goodwill value which included a value attributable to the reputation and client base of the accounting firm as a whole. ⁴

Husband testified as his own expert with respect to the valuation of Einhorn, Butler, Gingerich & Co. He testified regarding five distinct methods of valuation concluding that the most appropriate method under the circumstances would be the fixed price method. According to Husband, this method would yield a value of $2450 which represents the amount fixed by the shareholder agreement.

The master's report and recommendation is somewhat cryptic. Initially the master acknowledged the Wife's expert's valuation as being $576,889. The master then notes that he would value this accounting firm at $497,395, which represents the intangible value assigned by Mr. Plesic, and Husband's interest therein as 1/3 of that figure or $165,798.33. The master also determined that the shareholders themselves valued the partnership with its client base at $300,000. In reaching this determination, the Master apparently relied upon the buy/sell provision contained in the shareholder agreement which relates to the death of a shareholder. In other words, since there were then three shareholders for whom life insurance policies of $100,000 each were in effect, the Master believed the shareholders themselves had assigned a value to the firm, including its client base, of $300,000. In his final analysis, however, the Master concluded that an average of this $300,000 figure and that assigned by Mr. Plesic would be "closest to the fact and most fair to both parties." Master's Report and Recommendation, p. 15. In so doing, however, the master employed the value of $546,889 rather than $576,889 as he had initially noted. Thus, he assigned a value of $423,444.50 to the entire firm and a value of $141,148.16 as representing Husband's one-third interest.

The trial court affirmed the master's recommendations. With respect to the issues pertinent to this appeal, the trial court found that value representing goodwill was properly includable for purposes of equitable distribution. Specifically, the trial court found that "husband's interest ( 1/3 of $497,395.00, or $165,798.33) is an asset of the business includable as marital property for equitable distribution purposes." In its order, however, the trial court adopted the value assigned by the Master of $141,148.16 as representing Husband's one-third interest in the firm.

The Superior Court vacated the trial court order and remanded the case for further proceedings. With respect to the issue of valuation of Husband's business interest, the Superior Court concluded that the trial court erred in finding that the relevant date for purposes of determining Husband's percentage share of the business interest was that of the hearing rather than the date of final separation. According to the Superior Court, Husband's share of the firm should be valued at one-half, representing Husband's one-half interest as of the date of separation as opposed to one-third, which would represent his percentage share as of the date of the master's hearing. The Superior Court did, however, apparently agree with the value of the accounting firm as assigned by the Master and specifically agreed that goodwill was properly included therein. Accordingly, the Superior Court ordered that on remand, the equitable distribution scheme be based on Husband's fifty percent ownership of the accounting firm rather than a one-third interest. ⁵ , ⁶

In this appeal, Husband argues that the Superior Court erred in not valuing his business interest at $2450 as set forth in the shareholder agreement. In the alternative, Husband argues that even assuming the shareholder agreement does not control, the Superior Court erred in including the intangible value of goodwill in its valuation of his interest in the accounting firm. ⁷ , ⁸

In support of his position that the shareholder agreement controls, Husband relies upon this Court's decision in McCabe v. McCabe, 525 Pa. 25, 575 A.2d 87 (1990). In McCabe, this Court held that for purposes of equitable distribution, the husband's partnership interest in a law firm was properly valued according to the method set forth in the governing partnership agreement relating to termination of a partnership interest rather than a "going concern" value since the facts presented there established that a value attributable to the going concern could not be realized by the husband. ⁹ In other words, because the husband himself could not, under the terms of the partnership agreement, realize a value attributable to the partnership as a continuing business such as his proportionate share of the accounts receivable or work-in-progress accounts should he wish to liquidate his share in the firm, this Court held that it would be inequitable to assign such a value for purposes of equitable distribution. In relevant part, we stated the following:

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 equipment, 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. 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.

Id. at 29-30, 575 A.2d at 89.

Husband here argues that similar to the attorney in McCabe, because of the existence of the shareholder agreement, he too would be unable to realize any value attributable to the going...