Clark v. Clark

• Decision Date: 05 January 1990
• Docket Number: No. 88-CA-1961-MR,88-CA-1961-MR
• Parties: Thomas Hayden CLARK, Appellant, v. Lorene McIntire CLARK, Appellee.
• Court: Kentucky Court of Appeals

Page 56

782 S.W.2d 56

Thomas Hayden CLARK, Appellant, v. Lorene McIntire CLARK, Appellee.

No. 88-CA-1961-MR.

Court of Appeals of Kentucky.

Jan. 5, 1990.

Karen Scent, William E. Scent, Paducah, for appellant.

W. Pelham McMurry, Paducah, for appellee.

Before GUDGEL, HOWARD and WEST, JJ.

HOWARD, Judge.

Dr. Thomas H. Clark appeals from a decision of the McCracken Circuit Court finalizing the divorce of appellant and Lorene M. Clark, the appellee. Appellant appeals specific findings concerning division of marital property and awarding maintenance to the appellee.

Appellant and appellee were married on June 4, 1966. Their marriage was dissolved on March 27, 1986. Appellant had completed medical school at the time of the couple's marriage. From 1966 to 1975, he served as a resident and intern with the United States Army. He was stationed in different locations in this country and abroad. His wife travelled with him. She worked either as a teacher or a secretary until 1971 in order to help supplement the family's income.

In May, 1975, the appellant was discharged from the Army and the couple moved to Paducah, Kentucky, the appellee's hometown. Appellant joined the established OB-GYN practice of Doctors Bohle and Franks. He was made a full partner and remained with this office until 1983. In 1983, Dr. Clark became associated with another OB-GYN practice which is now known as Chaney, Clark and Hayden, PSC. He presently owns a one-third interest in this medical corporation and a one-third interest in the medical partnership building.

Mrs. Clark has been primarily a homemaker for the last sixteen years. She has achieved a degree and additional course hours and is certified to teach. Appellant at the time of dissolution was and still is a physician board certified in obstetrics and gynecology, earning approximately $6,850 per month after taxes. His yearly income from the medical practice exceeds $100,000. The couple has one daughter, Catherine, who was born in 1980. Appellee has devoted much of her time to rearing Catherine. Appellant has agreed that appellee should have custody. The court agreed and granted appellant liberal visitation rights.

The couple stopped living together in 1984. Appellant remarried in 1987. The decree of dissolution was entered on March 27, 1986, and the final judgment concerning property, maintenance and child support was entered on August 15, 1987.

The trial court specifically found that appellant should pay maintenance of $2,500 per month to appellee for twenty years and that he should pay child support of $800 a month until Catherine reaches 18 years. The court found that the marital property should be divided equally between the parties, and that appellant should pay $19,118.29 toward appellee's attorneys' fees and expenses. The trial court also specifically found that appellant's stock in the medical professional corporation valued $183,040, which included value for goodwill, and it ruled that an automobile given by appellant to the appellee was nonmarital property. Finally, the court entered a qualified domestic relations order awarding one-half of appellant's pension and profit-sharing balances as of August 15, 1988, to appellee. Appellant has appealed several of these findings.

Appellant first objects to the methods the trial court used to value the medical professional corporation. Appellant specifically asks this Court to solely use the corporate bylaws to value the corporation's assets as he claims some other states have done. He specifically claims that the trial court erred by accepting the values obtained through the fair market value approach offered by the appellee's expert.

First, it has been the general principle in both Kentucky and other jurisdictions that the trial court's judgment and valuations in an action for divorce will not be disturbed on appeal unless it was clearly contrary to the weight of evidence. Heller v. Heller, Ky.App., 672 S.W.2d 945 (1984); Carpenter v. Carpenter, 657 P.2d 646 (Okl.1983); Poore v. Poore, 75 N.C.App. 414, 331 S.E.2d 266 (1985). Thus, it is the duty of this Court to examine the methods utilized by the trial court to see if it clearly erred in valuing the corporation's assets.

Kentucky courts have not specifically adopted an approach in valuing such assets. Other states have applied a "book value" approach or a fair market value approach. In no case cited by appellant however would a court solely use a book value approach when this method would not correctly value a corporation's assets. "When the terms of a partnership agreement are used, however, the value of the interest calculated is only a presumptive value, which can be attacked by either plaintiff or defendant as not reflective of the true value." Weaver v. Weaver, 72 N.C.App. 409, 324 S.E.2d 915 (1985). See also Stern v. Stern, 66 N.J. 340, 331 A.2d 257 (1975). There is no single best method. Weaver, supra. The task of the appellate court is to determine whether the trial court's approach reasonably approximated the net value of the partnership interest. Weaver, supra.

In the case before this Court, the trial court heard testimony from two experts--one who strictly followed the corporation's agreement and applied book value, and the other who applied the fair market value approach. The court in this case adopted the latter approach. This approach more closely valued the corporation's assets. Specifically, Dr. Mackin, the appellee's expert, considered the collectibility of the corporation's past accounts receivable and, based on those values and records, calculated the value of the corporation's current accounts receivable. He also considered the current value of the corporation's inventory, equipment, and insurance short-term value. This method was more reflective of the true value of the corporation's assets. The trial court certainly did not err in adopting this valuation approach.

As part of his first argument, appellant specifically contends that the trial court erred in including the value of the corporation's goodwill for dividing the marital assets and awarding maintenance. We disagree.

This Court, in Heller, supra, specifically ruled that the goodwill contained in a business or professional organization is a factor to be considered in arriving at the value of the practice. This Court explained goodwill in Heller. Specifically, professional practices that can be sold for more than the value of their fixtures and accounts receivable have goodwill. Heller, supra, at 948. Goodwill in essence is the expectation that patrons or patients will return because of the reputation of the business or firm. This goodwill has specific pecuniary value. Goodwill has also been defined as the excess of return in a given business over the average or norm that could be expected for that business. Hanson v. Hanson, 738 S.W.2d 429 (Mo.1987). The age, health and professional reputation of the practitioner, the nature of the practice, the length of time the practice has been in existence, past profits, comparative professional success, and the value of its other assets, are all factors of goodwill. Poore, supra. It is the growing trend of courts in this country to consider goodwill in valuing a corporation. Graham and Keller, Kentucky Domestic Relations Law (Cleveland, Banks-Baldwin, 1988), page 292; Weaver, supra; Levy v. Levy, 164 N.J.Super. 542, 397 A.2d 374 (1978); Rupley v. Rupley, Ky.App., 776 S.W.2d 849 (1989). Thus, the trial court was correct in considering goodwill.

The trial court in the case at bar adopted a capitalization of excess earnings method for evaluating the goodwill of this professional corporation. Under this method, the goodwill value is based in part on the amount that the earnings of the professional spouse exceed those which would have been earned by a professional with similar education, experience, and skill as an employee in the same general area. Poore, supra, 331 S.E.2d at 271. Specifically, four steps are involved in the capitalization of excess earnings method. First, the court must ascertain what a professional of comparable experience, expertise, education and age would be earning as an employee in the same general locale, determine and average the professional's net income before federal and states income taxes for a period of approximately five years, compare the actual average with the employee norm, and multiply the excess by a capitalization factor. Taylor v. Taylor, 222 Neb. 721, 386 N.W.2d 851 (1986). Dr. Mackin, the appellee's expert who calculated the value of the goodwill, used these same steps outlined above. He specifically concentrated on a three-year period of Dr. Clark's earnings. He used a survey of doctors in appellant's OB-GYN specialty who had been surveyed by the American Medical Association. Dr. Mackin used a weighted multiplication factor to gain results that closely correlated with the methods used in the survey. Contrary to appellant's assertion, the method involves calculating the professional's past earnings, not future earnings. There is no indication from the evidence in the case at bar that the trial court incorrectly applied the capitalization of excess earnings method. The findings correctly show the true value of the corporation's goodwill.

The capitalization of excess earnings method is a widely accepted method and the most often used. Taylor, supra, 386 N.W.2d at 857; Poore, supra, 331 S.E.2d at 271; Levy, supra, 397 A.2d at 380. There are a number of acceptable methods which courts may adopt. There is no definitive rule or best method for valuing goodwill. Poore, supra; Hurley v. Hurley, 94 N.M. 641, 615 P.2d 256, 259 (1980). The determination of goodwill is a question of fact rather than law, and each case must be determined on its own facts and circumstances. Poore, supra, Hurley, supra. Thus, the trial court was correct in adopting and applying the capitalization of excess earnings method. As stated...