In re the Marriage of Tracy J. Mcreath

• Citation: 800 N.W.2d 399,2011 WI 66
• Decision Date: 12 July 2011
• Docket Number: No. 2009AP639.,2009AP639.
• Parties: In re the marriage of Tracy J. McREATH, Petitioner–Respondent,v.Timothy J. McREATH, Respondent–Appellant–Petitioner.
• Court: Wisconsin Supreme Court

800 N.W.2d 399

2011 WI 66

In re the marriage of Tracy J. McREATH, Petitioner–Respondent,

v.Timothy J. McREATH, Respondent–Appellant–Petitioner.

No. 2009AP639.

Supreme Court of Wisconsin.

Argued April 13, 2011.Decided July 12, 2011.

For the respondent-appellant-petitioner there were briefs by Andrew W. Erlandson and Hurley, Burish & Stanton, S.C., Madison, and oral argument by Andrew W. Erlandson.For the petitioner-respondent there was a brief by Richard J. Auerbach and Auerbach & Porter, S.C., Madison, and oral argument by Richard J. Auerbach.PATIENCE DRAKE ROGGENSACK, J.

¶ 1 We review a published opinion of the court of appeals ¹ affirming the circuit court's order ² that Timothy McReath (Tim) pay Tracy McReath (Tracy) $796,720 to equalize the property division upon the couple's divorce, as well as $16,000 per month for 20 years in maintenance. The questions presented are: (1) whether the entire value of the salable professional goodwill ³ of Tim's interest in Orthodontic Specialists, S.C. can be counted as divisible property in a marital estate, and (2) if the answer to the first question is yes, did the circuit court double count the value of the professional goodwill in Orthodontic Specialists when it based Tracy's maintenance award on Tim's expected future earnings from Orthodontic Specialists.

¶ 2 We conclude the entire value of the salable professional goodwill was properly counted as divisible property in the marital estate. Moreover, we conclude that the circuit court did not double count the professional goodwill from Orthodontic Specialists in the maintenance award. Accordingly, we affirm the decision of the court of appeals.

I. BACKGROUND

A. Facts

¶ 3 This case requires us to review the circuit court's order dividing marital property and awarding maintenance in a divorce proceeding.⁴ Tracy and Tim were married on August 27, 1988. Three children, all of whom were minors at the time the divorce proceedings were initiated, were born of their marriage.⁵

¶ 4 In 1991, Tim received his dental degree, and in 1993, he received a master's degree in orthodontia. Accordingly, most of Tim's dental education was pursued during the marriage. Tim took out student loans to fund his education, all of which were repaid with marital funds.

¶ 5 Upon receiving his masters in orthodontia, Tim worked as an associate at Orthodontic Specialists for two years. Tim then purchased the Baraboo and Portage locations of Orthodontic Specialists from Dr. Grady.

¶ 6 Tim paid approximately $930,000 for the two locations of Orthodontic Specialists. A portion of this purchase price was attributed to a noncompete agreement that Dr. Grady signed and to transitional services that Dr. Grady provided Tim. Specifically, Tim testified that $100,000 was for the physical assets, corporate name, and corporate goodwill. The remaining $830,000 was for, as Tim described, “Dr. Grady's name, the noncompete clause, and the employment agreement that Dr. Grady would stay on to introduce me to his existing patients, [and] to counsel me through the process of learning how to do business.”

¶ 7 With regard to the noncompete agreement, Tim testified that he would not have purchased Orthodontic Specialists for as high of a price as he did without a noncompete agreement because, “[Dr. Grady] could have just opened up a business just down the street and I'm assuming that he would have taken not only the majority of patients with him but the majority of the future patients in the area.” Tim also testified that he was not aware of any transaction in the field of orthodontics, for any substantial value, that took place without a noncompete agreement. According to Tim, “the name of the practitioner is always weighted very heavily as opposed to the goodwill or the value of the name of the practice or corporation.”

¶ 8 Tim has worked as the sole owner of Orthodontic Specialists since he purchased it from Dr. Grady. Tim has historically averaged a 60–hour work week. This is significantly more than the average orthodontist who works only 35 hours per week. Recently, Tim has reduced the number of hours he works to approximately 45 hours per week. Tim has no plans to sell or dispose of his practice.

¶ 9 Tim has been very successful in operating Orthodontic Specialists. His annual gross business revenues in the five years leading up to the divorce ranged from $1.6 million to in excess of $1.8 million. In the same five years, Tim received an average yearly net cash flow from Orthodontic Specialists of $697,522.⁶ Notably, Orthodontic Specialists maintains the only orthodontic offices in Baraboo and Portage.

¶ 10 The success of Orthodontic Specialists has resulted in a relatively high standard of living for the McReath family. They have significant assets and little, if any, personal debt.

¶ 11 Unlike Tim, Tracy does not have a professional degree. She is a high school graduate with some college credits, but no college degree. Tracy worked outside the home while Tim was attending dental school. Throughout much of their marriage, however, Tracy worked as a homemaker and the primary caretaker for the couple's children. Specifically, she was completely out of the workforce from 1993 to 2000. From 2000 to 2008, she performed some financial and clerical duties for Orthodontic Specialists. In this position, she was paid $15,000 to $16,000 per year. The circuit court found Tracy has a current earning capacity of $14.50 per hour, or $30,160 annually.

B. Procedural History

¶ 12 On May 16, 2007, Tracy filed a petition for divorce in Sauk County Circuit Court. Upon entering the order of divorce, the circuit court, among other things, divided the marital property and awarded maintenance to Tracy. ⁷

¶ 13 Regarding the marital property division, with the exception of the value of Orthodontic Specialists, the parties stipulated to the value of their marital assets. They also stipulated to a division of assets with a balancing payment. Hearings were held on the appropriate fair market valuation of Orthodontic Specialists, and resulted in a valuation of $1,058,000. This was the value given by Tracy's expert, Craig Billings (Billings). The court rejected the $415,000 valuation of Tim's expert, Dennis Ksicinski (Ksicinski). ⁸

¶ 14 Having valued Orthodontic Specialists at $1,058,000, the court turned to dividing the assets. The court found that there was no reason to deviate from the presumption of equal property division in Wis. Stat. § 767.61(3) (2009–10).⁹ It then combined the $1,058,000 valuation of Orthodontic Specialists with the other, stipulated-to, assets in the marital estate. Because, among other assets, Tim was the stipulated owner of Orthodontic Specialists, Tim's total assets exceeded Tracy's by $1,593,440. As such, to equalize the property division, the court awarded Tracy $796,720, to be paid at the rate of no less than $80,000 per year plus accrued interest.

¶ 15 Next, to set maintenance, the court used Tim's average annual earnings from Orthodontic Specialists over the preceding five years, i.e., $697,522. However, because the $697,522 salary was based on Tim working 50–70 hours per week, the court adjusted the figure to reflect a 40–hour work week. Consequently, the court set Tim's expected annual income from Orthodontic Specialists at $465,000 (rounded). Next, the court took its finding that Tracy had a current earning capacity of $14.50 per hour, or $30,160 annually. The court then added these income calculations to the other sources of income available to the parties, specifically rental and investment income, and found that Tim's total annual income was $535,806 (or $44,650/month) and Tracy's total annual income was $75,944 (or $6,328/month).

¶ 16 With these figures in hand, the court considered the statutory factors set forth in Wis. Stat. § 767.56 in deciding whether to award maintenance. ¹⁰ In considering these factors, the court found that it was unlikely that Tracy would ever have Tim's earning capacity or an income that would allow for a standard of living comparable to that enjoyed during the marriage. The court also underscored that Tracy had contributed to the dental education and increased earning capacity of Tim. Based on these findings, the court awarded Tracy maintenance in the amount of $16,000 per month for a period of 20 years.

¶ 17 Tim appealed and the court of appeals affirmed. McReath v. McReath, 2010 WI App 101, 329 Wis.2d 155, 789 N.W.2d 89. Tim argued that the circuit court erred as a matter of law when it treated his personal ¹¹ goodwill in Orthodontic Specialists as divisible property. Id., ¶ 1. The court of appeals affirmed on the basis that the personal goodwill was salable, as evidenced by the fact that Tim himself had paid for the personal goodwill of Dr. Grady when he bought the orthodontic practice and the reality that any hypothetical buyer would demand a noncompete agreement. Id., ¶¶ 17–18. Because there is no rule excluding salable goodwill from divisible property, the court of appeals concluded that the circuit court did not err when it included personal goodwill in the marital estate. Id., ¶ 19.

¶ 18 Additionally, Tim argued that the circuit court improperly double counted his personal goodwill in Orthodontic Specialists. The goodwill, he averred, was counted first when it was considered a divisible asset. It was then counted a second time when maintenance was awarded based on his earning capacity that was calculated, in part, using his personal goodwill. Id., ¶ 32. The court considered three alternatives to address Tim's double counting concerns. First, as suggested by Tim, circuit courts could exclude all personal goodwill, regardless of whether it is salable, from property division. Id., ¶¶ 35–46. The court rejected this alternative. Id., ¶ 46. Second, also suggested by Tim, circuit courts could include salable personal goodwill in divisible property, and then compensate by making a downward adjustment when...