In re Marriage of Herlitzke v. Herlitzke, No. 2005AP997 (Wis. App. 10/19/2006), 2005AP997.

• Decision Date: 19 October 2006
• Docket Number: No. 2005AP997.,2005AP997.
• Parties: In re the Marriage of: Keith P. Herlitzke, Petitioner-Respondent-Cross-Appellant, v. Jolene M. Herlitzke, Respondent-Appellant-Cross-Respondent.
• Court: Wisconsin Court of Appeals

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In re the Marriage of: Keith P. Herlitzke, Petitioner-Respondent-Cross-Appellant, v. Jolene M. Herlitzke, Respondent-Appellant-Cross-Respondent.

Court of Appeals of Wisconsin, District IV.

No. 2005AP997.

Opinion Filed: October 19, 2006.

APPEAL and CROSS-APPEAL from an order of the circuit court for La Crosse County: JOHN J. PERLICH, Judge. Reversed and cause remanded with directions.

Before Lundsten, P.J., Dykman and Higginbotham, JJ.

¶1 DYKMAN, J

Jolene Herlitzke appeals and Keith Herlitzke¹ cross-appeals from a postdivorce order addressing the valuation of Keith's business, a maintenance award, and attorney fees. Jolene claims that: (1) the trial court's valuation of Keith's business was clearly erroneous because it did not use, as a basis, a Stock Purchase Agreement; (2) the trial court erroneously exercised its discretion by not addressing why the step-down maintenance plan provided adequate support and was fair; and (3) the trial court erroneously exercised its discretion by awarding her only $15,000 in attorney fees without adequately considering her ability to pay or Keith's actions leading to overlitigation. Keith argues that the trial court: (1) incorrectly concluded that it was precluded as a matter of law from considering supplemental evidence regarding his income; (2) had a duty to determine his actual income and ability to pay when setting maintenance and contribution to attorney fees; and (3) erred in setting maintenance at $3,500 per month without considering his actual ability to pay. We conclude that the trial court properly exercised its discretion in valuing Keith's business. However, we remand the maintenance award because the trial court did not sufficiently explain its reasons for deviating from a starting fifty-fifty division. We also remand the issue of attorney fees because the court did not address Jolene's need for contribution, Keith's ability to pay, or the reasonableness of the total fees. Finally, we affirm all issues on Keith's cross-appeal.

FACTS

¶2 The record is long and complex. Unfortunately, the parties' briefs are artfully nuanced and take different views of relevant facts, making it difficult to ascertain the correct facts. On remand, the parties might find it less costly to stipulate to the facts they do not dispute and identify more clearly the contested issues.

¶3 Keith and Jolene Herlitzke were married in November 1982. Keith has worked for the family business, Potato King, Inc., since he graduated from high school. In the beginning of the marriage, Jolene worked as a part-time store clerk. After the birth of their two children, Jolene left her job and remained at home with the children throughout most of the marriage.

¶4 Keith's parents started the Potato King business in their home in 1958. By 1984, their three sons were running the company and doing approximately $1 to $3 million in annual sales. In 1989, Keith's parents began to gift Potato King stock to their sons, Scott, Keith, and Rodney, by annually transferring two shares of stock to each son. When the transfer was complete, each son owned 16 2/3 shares. According to the company accountant, at the time of the final transfer in May 1990, each share was worth $7,508.70. Thus, the total value of Keith's gift from his parents was $125,145. The parties do not seem to directly dispute this value.

¶5 In the mid-1990s, the Herlitzke brothers started Potato King Transportation, Inc. (Transportation), which provides transportation services for Potato King's business. A few years later, the brothers started RSK of Wisconsin, LLC (RSK), which owns tractors that are leased to Transportation. Potato King and Transportation were originally IRS Subchapter C corporations. In 2000, the shareholders elected Subchapter S corporation status under Internal Revenue Code, 26 U.S.C. § 1361-1379. Since then, Keith, Scott, and Rodney have been required to claim all business profits on their individual income taxes. See 26 U.S.C. § 1366(a)(1)(A).

¶6 Since the brothers added Transportation and RSK, there has been a dramatic growth in revenues. The trial court found Keith's one-third interest to be worth $554,855. Keith and Jolene enjoyed a "very good" lifestyle during their marriage. They had a large home, took many luxurious trips, and frequented the most expensive restaurants. As the companies continued to grow, so did Keith's income. According to tax returns, in 2002 Keith's income was over $450,000, and he paid over $160,000 in federal and state income taxes.

¶7 In April 2003, Keith and Jolene were divorced. The parties agreed to joint legal custody and shared physical placement of their two minor daughters. They stipulated that Keith's income was $348,000 per year. Keith agreed to pay $7,275 per month in child support. At the conclusion of the trial, the circuit court found that Keith's business interest was individual property because the appreciation was due to the efforts of Keith's parents, his brother Scott, and general economic conditions. The circuit court awarded Jolene limited-term maintenance of $3,500 per month for the first three years, $2,500 per month for the following three years, and $1,500 per month for an additional six years. The court also ordered each party to pay their own attorney fees.

¶8 Jolene appealed the property division, maintenance award, and contribution to her attorney fees. Herlitzke v. Herlitzke, No. 2003AP2115, unpublished slip op. at ¶1 (WI App Aug. 12, 2004). We reversed and remanded for new rulings on all three issues. Id., ¶16. We ordered the circuit court to (1) include the appreciated value of Keith's business in the marital estate; (2) base maintenance on Keith's income of $348,000 per year and explain how the award meets the support and fairness objectives of maintenance; and (3) reconsider the attorney fee contribution in light of the maintenance award and new property division. Id., ¶¶11, 14, 16. On remand, the trial court evaluated Keith's interest in the business and awarded Jolene $277,428, left its maintenance award unchanged and ordered Keith to pay a $15,000 contribution toward Jolene's attorney fees.

DISCUSSION

A. Valuation of the Business

¶9 When valuing marital assets, courts are not required to accept one valuation method over another, but must ensure that a fair market value is placed on the property. Schorer v. Schorer, 177 Wis. 2d 387, 399, 501 N.W.2d 916 (Ct. App. 1993). "Fair market value is the price that property will bring when offered for sale by one who desires but is not obligated to sell and bought by one who is willing but not obligated to buy." Liddle v. Liddle, 140 Wis. 2d 132, 138, 410 N.W.2d 196 (Ct. App. 1987). The valuation of a closely held business in a divorce action is a finding of fact. Schorer, 177 Wis. 2d at 396. We will not overturn the trial court's decision on the business valuation unless it is clearly erroneous. Siker v. Siker, 225 Wis. 2d 522, 532, 593 N.W.2d 830 (Ct. App. 1999).

¶10 Shortly after the stock transfers were complete, the Herlitzke brothers entered into a Stock Purchase Agreement, which governed the transfer of Potato King stock. Jolene maintains that the Stock Purchase Agreement provides the best indication of the fair market value. The valuation method under the Stock Purchase Agreement uses business assets less business debt to determine value. Keith and Jolene's experts initially concluded that the Stock Purchase Agreement did not control the valuation of Keith's business. In his January 2003 report, Jolene's expert, Reginald Emshoff, used a discounted cash flow method under an income approach to value the business. Emshoff's report stated that because Potato King was an ongoing business with no plans to liquidate and Keith was a minority shareholder who could not unilaterally force liquidation, "we did not consider an asset approach to value appropriate for determining the fair market value of a minority interest." Likewise, Keith's expert, Kevin Janke, used a capitalized earnings or discounted cash approach, and found that the Stock Purchase Agreement method was not applicable for similar reasons.

¶11 Jolene asserts that the trial court should have used Emshoff's second or amended report, which used an asset approach as outlined by the Stock Purchase Agreement. Emshoff calculated the value of each business under the Stock Purchase Agreement as follows: Potato King, Inc.—$1,339,008; Transportation—$1,488,058; and RSK—$620,105, for a total value of $3,447,171. When divided by three, Keith's share was $1,149,057. To account for the original gift Keith received from his parents, Jolene subtracted $125,145.² Thus, her value of the total marital asset was $1,023,912.

¶12 In rejecting Jolene's proposed value, the circuit court found Janke's opinion more credible and accepted his calculations. One reason the court relied on Janke's conclusion was that it took into account Keith's tax consequences as a minority shareholder in a Subchapter S corporation and Emshoff did not.³ According to Janke, the fair market value of Keith's share in his business was $320,000 in Potato King Inc.; $240,000 in Potato King Transportation Inc.; and $120,000 in RSK, for a total value of $680,000.⁴ After subtracting the value of the gifted stock, Keith's interest was $554,855.

¶13 Establishing the fair market value of Keith's business was a battle of the experts. The circuit court acted within its discretion in rejecting Jolene's valuation based on the Stock Purchase Agreement. A trial court is free to assess expert opinion and determine fair market value after considering "the nature of the business, the corporation's fixed and liquid assets at the actual or book value, the corporation's net worth, the marketability of the shares, past earnings or losses and future earning potential." Dean v. Dean, 87 Wis. 2d 854, 876, 275 N.W.2d 902 (1979). In Estate of Gooding v. Krueger, 269 Wis. 496, 517, 69 N.W.2d 586 (1955), the court...