May v. May

• Citation: 214 W.Va. 394,589 S.E.2d 536
• Decision Date: 10 November 2003
• Docket Number: No. 31123.,31123.
• Court: Supreme Court of West Virginia
• Parties: Hillman H. MAY, Appellant, v. Carol S. MAY, Appellee.

589 S.E.2d 536

214 W.Va. 394

Hillman H. MAY, Appellant, v. Carol S. MAY, Appellee.

No. 31123.

Supreme Court of Appeals of West Virginia.

Submitted September 9, 2003.

Decided November 10, 2003.

Concurring Opinion of Justice Albright December 4, 2003.

Lawrence L. Manypenny, Esq., New Cumberland, West Virginia, Attorney for Appellant.

Thomas J. DeCapio, Esq., Frankovitch, Anetakis, Colantonio & Simon, Weirton, West Virginia, Attorney for Appellee.

Justice ALBRIGHT concurs and reserves the right to file a concurring opinion. DAVIS, Justice:

This matter arises from a final order of the Family Court of Hancock County resolving the equitable distribution of marital property between Hillman H. May (hereinafter referred to as "Dr. May"), appellant/defendant below, and Carol S. May (hereinafter referred to as "Mrs. May"), appellee/plaintiff below. In this appeal, Dr. May contends that the family court judge erred in adopting a report by Mrs. May's expert that assigned a value for goodwill to his dental practice, and erred in the distribution of real property. After considering the briefs and oral arguments of the parties, we affirm in part, reverse in part, and remand.

I. FACTUAL AND PROCEDURAL BACKGROUND

The parties were married on June 23, 1979. In 1980, the couple built a home on property adjacent to Dr. May's dental office.¹ From about 1980 to 1993, Mrs. May "worked at least 20 hours per week" at Dr. May's dental office.² During the marriage the parties had three children.

On May 22, 2000, Mrs. May filed for divorce. On September 24, 2001, the Circuit Court of Hancock County granted the parties a divorce on the grounds of irreconcilable differences. The decree granting the divorce left unresolved the issue of the distribution of marital property.³ That issue was subsequently litigated in front of the family court judge.

During the proceeding before the family court judge, the parties presented expert testimony on the valuation of Dr. May's solo dental practice. Dr. May's expert valued the dental practice at $55,000.00, which included a 20% discount for lack of marketability. Mrs. May's expert placed a fair market value on the dental practice at $120,000.00. The fair market value included a value for goodwill.

By order entered on February 26, 2002, the familycourt judge adopted the dental practice valuation proffered by Mrs. May's expert. Mrs. May's equitable distribution payment for her interest in the dental practice was payable to her in the amount of $889.00 per month from June 1, 2004, to May 31, 2012. Additionally, the family court judge found that the real estate involved in the case was marital property that had a net value of $125,324.44. Mrs. May was awarded a one-half interest in the value of the real estate. From these rulings, Dr. May filed an appeal directly to this Court.

II. STANDARD OF REVIEW

This case presents the first opportunity for this Court to address the issue of the standard of review of a direct appeal from a final order of a family court judge. The family law master system ceased to operate on January 1, 2002. It was replaced by a family court system. See W. Va.Code § 51-2A-1 et seq. (Supp.2003). In creating the family court system, the Legislature provided that an appeal of a family court judge's decision may be taken to a circuit court. See W. Va.Code § 51-2A-14 (Supp.2003). The decision of the circuit court then may be appealed to this Court. See W. Va.Code § 51-2A-15(b) (Supp.2003). Additionally, the Legislature has provided that a litigant may waive the right to appeal to the circuit court and prosecute an appeal directly to this Court. See W. Va.Code § 51-2A-15(a) (Supp.2003). But see Syl. pt. 5, State ex rel. Silver v. Wilkes, 213 W.Va. 692, 584 S.E.2d 548 (2003) ("Where circuit courts have concurrent original jurisdiction with the West Virginia Supreme Court of Appeals over matters arising in family court, the preferred court of first resort is the circuit court.").

The standard of review by this Court, either from an appeal of a decision by a circuit court or an appeal directly from a ruling by a family court judge, is set forth in W. Va.Code § 51-2A-14(b).⁴ Pursuant to this statute, in reviewing a final order of a family court judge that is appealed directly to this Court, we review findings of fact by a family court judge under the clearly erroneous standard, and the application of law to the facts under an abuse of discretion standard. We review questions of law de novo.

III. DISCUSSION

The main issue presented in this appeal⁵ is whether the family court judge erred by adopting a fair market value of Dr. May's dental practice provided by Mrs. May's expert which fair market value included a valuation for goodwill. The evidence established that Dr. May operated a dental office that should be characterized as a professional practice.⁶ In this regard, courts have developed a specific body of law to address the issue of goodwill in a professional practice in the context of divorce litigation.⁷ Because Dr. May was a sole practitioner⁸ in his dental office, we will examine the case law applicable to goodwill in a professional practice,⁹ and thereby determine whether goodwill may be assigned to Dr. May's dental practice for the purpose of equitable distribution.

A. General Definition of Goodwill

Goodwill may be defined generally as

[T]he advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital stock, funds, or property employed therein, in consequence of general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.

McDiarmid v. McDiarmid, 649 A.2d 810, 813 (D.C.App.1994) (citations omitted). See also Yoon v. Yoon, 711 N.E.2d 1265, 1268 (Ind. 1999)

(defining goodwill "as the value of a business or practice that exceeds the combined value of the net assets used in the business"). Essentially, goodwill is "`the favor which the management of a business has won from the public, and probability that old customers will continue their patronage.'" Gaydos v. Gaydos, 693 A.2d 1368, 1372 (Pa.Super.1997) (quoting Ullom v. Ullom, 384 Pa.Super. 514, 559 A.2d 555, 558-59 (1989)). Further, marketable "[g]oodwill associated with a business is an asset distributable upon dissolution of a marriage." Seiler v. Seiler, 308 N.J.Super. 474, 706 A.2d 249, 251 (1998) (citation omitted). However, "[w]here no market exists for goodwill, it should be considered to have no value." Manelick v. Manelick, 59 P.3d 259, 265 (Alaska 2002).

B. Goodwill in Divorce Litigation: Enterprise and Professional

Essentially, there are two types of goodwill recognized by courts in divorce litigation: enterprise goodwill (also called commercial or professional goodwill) and personal goodwill (also called professional goodwill).¹⁰ A good working definition of enterprise goodwill is:

Enterprise goodwill attaches to a business entity and is associated separately from the reputation of the owners. Product names, business locations, and skilled labor forces are common examples of enterprise goodwill. The asset has a determinable value because the enterprise goodwill of an ongoing business will transfer upon sale of the business to a willing buyer.

Courtney E. Beebe, "The Object of My Appraisal: Idaho's Approach to Valuing Goodwill as Community Property in Chandler v. Chandler," 39 Idaho L.Rev. 77, 83-84 (2002). See also Frazier v. Frazier, 737 N.E.2d 1220, 1225 (Ind.App.2000)

("Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers and suppliers, and may include a business location, its name recognition and its business reputation."). Personal goodwill has been described as follows:

[P]ersonal goodwill is associated with individuals. It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people. Accordingly, the goodwill of a service business, such as a professional practice, consists largely of personal goodwill.

Diane Green Smith, "`Til Success Do Us Part: How Illinois Promotes Inequities in Property Distribution Pursuant to Divorce by Excluding Professional Goodwill," 26 J. Marshall L.Rev. 147, 164-65 (1992). As discussed later in this opinion, the goodwill calculated by Mrs. May's expert was personal goodwill.

C. Jurisdictional Consideration of Goodwill as Marital Property

There is a split of authority on whether enterprise goodwill and/or personal goodwill in a professional practice may be characterized as marital property and thus equitably distributed. Three different approaches have developed.¹¹ We will review each approach before determining the rule of law we now adopt in West Virginia.¹² 1. No Distinction. A large number of courts (13) make no distinction between personal and enterprise goodwill. These jurisdictions have taken the position that both personal and enterprise goodwill in a professional practice constitute marital property.¹³ A case which best illustrates this position is Poore v. Poore, 75 N.C.App. 414, 331 S.E.2d 266 (1985).

In Poore, the wife sued for divorce from her husband. The husband was a dentist and the sole owner and operator of an incorporated dental practice. At the trial level, the husband produced expert evidence as to the value of his dental practice. The husband's expert opined that the practice had a net value of $7,549.00 and had no goodwill. The wife's expert contended that the dental practice had a value of $232,000.00, which included a value for personal goodwill.¹⁴ The trial court rejected the evidence by both experts and found that the dental practice had a value of $73,561.00. The trial court also found that the...