Marriage of Molloy, In re

• Decision Date: 09 June 1994
• Docket Number: No. 2,CA-CV,2
• Citation: 181 Ariz. 146,888 P.2d 1333
• Parties: In re the MARRIAGE OF John F. MOLLOY, Respondent-Appellant, Cross Appellee. John F. MOLLOY, Petitioner-Appellee, Cross Appellant, v. E. Josephine MOLLOY, Respondent-Appellant, Cross-Appellee. Adela Allen Molloy, Intervenor, Cross-Appellant. 91-0053.
• Court: Arizona Court of Appeals

Page 1333

888 P.2d 1333

181 Ariz. 146

In re the MARRIAGE OF John F. MOLLOY, Respondent-Appellant, Cross Appellee John F. MOLLOY, Petitioner-Appellee, Cross Appellant, v. E. Josephine MOLLOY, Respondent-Appellant, Cross-Appellee Adela Allen Molloy, Intervenor, Cross-Appellant.

No. 2 CA-CV 91-0053.

Court of Appeals of Arizona Division 1, Department C.

June 9, 1994.

Reconsideration Denied July 21, 1994.

Review and Cross-Petition, for

Review Denied Feb. 22, 1995. ^*

Sandra S. Froman, Snell & Wilmer, Phoenix, for petitioner/appellee, cross-appellant, John F. Molloy.

Philip Gerard, O'Connor Cavanagh, Phoenix, for respondent-appellant, cross-appellee.

Paul G. Rees, Paul G. Rees, P.C., Tucson, for intervenor, cross-appellant.

OPINION

LANKFORD, Presiding Judge.

This action arises from the valuation of a marital asset upon dissolution. The parties appeal and cross-appeal from an order valuing the marital community's interest in the goodwill of the husband's law practice.

This is the second appeal in this dissolution action. See Molloy v. Molloy, 158 Ariz. 64, 761 P.2d 138 (App.1988). The wife now appeals, arguing that the superior court misapplied our holding in the prior appeal. We agree with the wife: the superior court erred by failing to consider the value of the husband's entire interest rather than just the "goodwill" component. However, this error was harmless: The wife's valuation of the husband's interest, which was based on the husband's share of the firm's net assets, was deficient as a matter of law because the wife's evidence fails to show that the husband will realize a real economic benefit from the assets. Thus, we reject the wife's appeal.

The husband cross-appeals, arguing that the evidence does not support the superior court's award of goodwill. We hold that sufficient evidence exists to support an inference that goodwill exists and to support the amount awarded. Therefore, we also deny the cross-appeal. ¹

The husband petitioned for divorce in 1984. The husband, who was near retirement age, practiced law in the firm of Molloy, Jones, Trachta, Childress and Mallamo, P.C. The law firm was a professional corporation, in which the husband owned four percent of the outstanding stock. Although the parties agree that the husband's interest in the law firm is a community asset subject to equitable distribution, they dispute the value of the interest.

The case was originally tried in 1985. The wife moved for permission to use community funds to hire an expert to value the husband's interest. The superior court denied the motion. The superior court then ruled that the value of the husband's interest could be shown only through the husband's agreements with the firm. ² After this ruling, the parties stipulated to the value of the agreements.

The wife appealed that judgment. ³ We reversed and remanded, holding that the superior court had improperly restricted the wife from presenting expert testimony valuing the community's interest in the law firm and holding that goodwill is an asset subject to inclusion in the marital community. Id. at 65, 68, 761 P.2d at 139, 142.

On remand, the husband sought to exclude proof of all value except a goodwill value. The husband's motion in limine asserted that the parties' stipulations from the first trial were still in effect and prevented the wife from revaluing the husband's interest. ⁴ The husband contended that the previous decision on appeal held only that the wife was entitled to show a goodwill value.

The superior court initially denied this motion. The court permitted the wife to introduce expert testimony valuing the husband's entire interest. Her expert valued the husband's interest by calculating the husband's share of the firm's net assets and then adding a goodwill value. To arrive at the husband's share of the firm's net assets, the expert calculated the actual value of all of the firm's assets, subtracted its liabilities, and then multiplied this net figure by the husband's ownership percentage. To show the value of the husband's goodwill, the expert relied on payments the husband would receive under the deferred compensation agreement.

After the wife presented all of her evidence, however, the court reversed itself and ruled that it would only consider evidence of the goodwill. The court then awarded the wife $30,000 as her share of the husband's goodwill. This appeal and cross-appeal ensued.

We first consider the wife's appeal. She argues that the superior court erred because it did not follow the holding of our prior decision on appeal. She asserts that our decision entitled her to show the value of the husband's entire interest.

On remand, a superior court must "strictly follow" the mandate of an appellate decision. Vargas v. Superior Court, 60 Ariz. 395, 397, 138 P.2d 287, 288 (1943). We review whether the superior court followed the appellate court's mandate de novo.

The superior court did not fully explain the basis of its decision not to consider the wife's evidence except for goodwill. Its minute entry order stated:

The court having examined the pretrial statement of the parties, and the Court of Appeals decision, and regardless of the previous ruling of this court permitting respondent wife to reexamine the basis of the evaluation of the law firm in all its particulars ... this court is satisfied this examination should be only into ascertaining the existence of goodwill....

We first consider our prior decision on appeal. We determined that the superior court had erred by "denying [the wife] the opportunity to present a valuation exceeding that derived from the agreements among the shareholders." Molloy, 158 Ariz. at 68, 761 P.2d at 142. We consequently held that the wife was denied "a fair trial on the question of the value of the [h]usband's practice." Id.

This broad language was a mandate to allow the wife to hire an expert to present a valuation of the husband's entire interest. Therefore, on remand, the superior court was required to consider the wife's evidence of the value of the husband's entire interest. It erred when it failed to do so.

The husband argues, however, that the superior court properly precluded the wife from introducing a valuation of the husband's entire interest because of her stipulation from the first trial that the only contested valuation issue was the value of the husband's goodwill in excess of the firm agreements, if any. ⁵

We conclude that the wife is not bound by her stipulations on the value of the husband's interest in the law firm. The record shows that the wife intended to retain an expert to value the husband's entire interest. The court's mistaken ruling denying her an expert left the wife incapable of contesting the husband's valuation. Indeed, in the first appeal we stated that the superior court's rulings "denied her the opportunity to present a valuation." Id. It was after this ruling that the parties executed these stipulations. It is clear from these circumstances and from the wife's subsequent appeal ⁶ that she never intended to abandon her opportunity to present an alternative valuation in a later proceeding. Thus, the parties stipulated to the value of the husband's interest only for purposes of the first trial. See Harsh Bldg. Co. v. Bialac, 22 Ariz.App. 591, 593, 529 P.2d 1185, 1187 (App.1975) (primary rule in giving effect to stipulations is to determine the parties' intent in the circumstances); 7 AM.JUR.2D Stipulations §§ 7, 10 (1974) (stipulations should be construed "consistent with the apparent intention of parties, the spirit of justice, and the furtherance of trials upon the merits").

Thus, despite the stipulations from the first trial, the wife was entitled to introduce independent evidence valuing the husband's entire interest on remand. The superior court failed to follow the appellate mandate when it did not consider the wife's valuation of that interest.

Not all errors in the superior court warrant reversal, however. We will reverse only if the complaining party suffers prejudice as a result of the error. See Walters v. First Fed. Sav. & Loan Ass'n, 131 Ariz. 321, 326, 641 P.2d 235, 240 (1982). Prejudice must appear affirmatively from the record. Id.

In this case, the superior court permitted the wife to introduce her evidence. Consequently, we have a complete record of her valuation and supporting evidence. The wife has suffered prejudice only if her evidence could support a finding of value in excess of the judgment. We therefore review the wife's evidence to determine whether she has suffered prejudice from the superior court's error.

The wife valued the husband's interest by determining the firm's actual net assets and multiplying them by the husband's percentage ownership. The wife asserts that this is the proper method, as a matter of law, to value the husband's interest. She contends that any valuation method that ignores the value of the firm's assets, such as accounts receivable and work in process, undervalues the husband's interest and cannot constitute an equitable recognition of the community interest. In support of her method of valuation she cites In re Marriage of Goldstein, 120 Ariz. 23, 583 P.2d 1343 (1978), and In re Marriage of Lopez, 38 Cal.App.3d 93, 113 Cal.Rptr. 58 (1974).

A superior court may use a variety of methods to value a professional practice. See Dag E. Ytreberg, Annotation, Evaluation of Interest in Law Firm or Medical Partnership for Purposes of Dividing Property in Divorce Proceedings, 74 A.L.R.3d 621 (1976); In re Marriage of Huff, 834 P.2d 244, 257 n. 17 (Colo.1992); In re Marriage of Fonstein, 17 Cal.3d 738, 131 Cal.Rptr. 873, 877, 552 P.2d 1169, 1173 (1976) (contractual withdrawal rights used to value interest); cf. In re Marriage of Hall, 103 Wash.2d 236, 692 P.2d 175, 179-80 (1984) (listing five methods of valuing goodwill). The selection of a valuation method is a factual determination. Huff, 834 P.2d at...