Schickner v. Schickner

• Decision Date: 16 April 2015
• Docket Number: No. 1 CA–CV 13–0513 FC.,1 CA–CV 13–0513 FC.
• Citation: 348 P.3d 890,237 Ariz. 194
• Parties: In re the Marriage of Daniel C. SCHICKNER, Petitioner/Appellee, v. Renna M. SCHICKNER, Respondent/Appellant.
• Court: Arizona Court of Appeals

237 Ariz. 194

348 P.3d 890

In re the Marriage of Daniel C. SCHICKNER, Petitioner/Appellee

v.Renna M. SCHICKNER, Respondent/Appellant.

No. 1 CA–CV 13–0513 FC.

Court of Appeals of Arizona, Division 1.

April 16, 2015.

Rowley Chapman & Barney, Ltd., By Paul S. Rowley and Nathaniel H. Wadsworth, Mesa, Counsel for Petitioner/Appellee.

The Wilkins Law Firm, PLLC, By Amy M. Wilkins, Phoenix, Counsel for Respondent/Appellant.

Judge MICHAEL J. BROWN delivered the opinion of the Court, in which Presiding Judge SAMUEL A. THUMMA and Judge PATRICIA A. OROZCO joined.

OPINION

BROWN, Judge:

¶ 1 Renna M. Schickner (“Wife”) appeals from two provisions of the trial court's decree dissolving her marriage to Daniel Schickner (“Husband”). Wife argues the court (1) undervalued two jointly-owned business interests, Western Medical Eye Center, LLC (“WME”) and Physicians Surgery Center, LLC (“PSC”), and (2) erroneously found she was not entitled to one-half of the monies distributed to Husband from those business interests during the three-year period between the filing of the petition for dissolution and entry of the decree. We conclude that sufficient evidence exists in the record supporting the court's valuation as to PSC, but not WME, and therefore vacate and remand the court's ruling for a redetermination of the value of WME. Regarding the post-petition distributions Husband received, we vacate the court's ruling and remand for further proceedings.

BACKGROUND

¶ 2 The parties married in 1998 and have two minor children. During the marriage, the parties acquired a 50% community interest in WME, located in Kingman, where Husband practices as an ophthalmologist. The parties also acquired a 20% community interest in PSC, also located in Kingman, where Husband performs surgeries.

¶ 3 In June 2010, Husband filed a petition for dissolution of marriage. Early in the case, Wife filed a motion for temporary orders seeking a declaration that pending a final decree, she was entitled to receive a one-half share of all distributions made from WME and PSC. The trial court held a hearing on the motion and received testimony from Husband and Wife as well as Husband's certified public accountant, Brandon Bull. The court then determined that “no matter how the distributions are characterized, the parties must report the same as taxable income. There were no reductions in capital accounts.... [T]he distributions are appropriately characterized as salary or earned income.” The court therefore denied Wife's request for one-half of the distributions made to Husband. As to other issues raised in the motion for temporary orders, the court ordered that Husband reimburse Wife for one-half of the mortgage payments on the family residence occupied by Wife and pay $7,000 per month as spousal maintenance.

¶ 4 As the matter progressed to trial, the case was re-assigned to a different judge. The primary contested issues were the valuations of WME and PSC for the purpose of determining the amounts Husband owed to Wife for acquiring her share of the marital community's interests in the two businesses.

¶ 5 Through his experts, John Pinto and Stephen Koons, Husband presented multiple valuations for the parties' jointly held 50% business interest in WME: (1) $475,000 (Pinto—applying minority share and marketability discounts), (2) $620,000 (Koons—applying minority share and marketability discounts), and (3) $830,000 (Koons—not applying minority share or marketability discounts). As to the parties' jointly held 20% interest in PSC, Husband's experts provided the following values: (1) $580,000 (Pinto—applying minority share and marketability discounts), (2) $490,000 (Koons—applying minority share and marketability discounts), and (3) $540,000 (Koons—not applying minority share or marketability discounts). Through her expert, Calvin Swartley, Wife presented a valuation of WME at $3,233,000 with the community's 50% interest in WME being $1,617,000 and a valuation of PSC at $5,261,000 with the community's 20% interest in PSC being $1,052,000.

¶ 6 In general, the three experts testified to the complexity of the valuations, explaining that factors such as assets, liabilities, taxes, liquidity, depreciation, interest expenses, revenue, cash flow, rents, goodwill, operating expenses, management agreements, operating agreements, market size and share, capitalization rates, marketability, and control were considered in reaching the final calculations. Each of the experts also prepared written reports documenting their respective valuations of the two businesses.

¶ 7 Husband disputed Swartley's valuation, arguing, among other things, that Swartley applied a capitalization rate that was too high and did not include a discount for lack of marketability and lack of control as to both businesses. Wife countered that Husband's experts incorrectly approached the valuation question by assessing the marketable value of Husband's interests in WME and PSC as if he were selling to a third party. Wife asserted that discounts for lack of marketability and lack of control are only considerations if an outside buyer is buying into a practice, and are not appropriate factors when evaluating the value of a present owner “buying out” the interest of another present owner. Wife also raised claims regarding “inflated rents” and excessive salaries paid to family members.

¶ 8 The parties also disputed the character of the distributions from the businesses following Husband's filing of the petition for dissolution. Husband argued Wife was not entitled to any of the monies paid to him because they were in the nature of salary and earned income and thus constituted his separate property. Wife countered that Husband's salary from WME was limited by contract to $250,000 per year and therefore all monies he received above this salary amount were community property. Wife further argued that all distributions from PSC were community property.

¶ 9 Brandon Bull, C.P.A., testified that Husband receives a base salary of $250,000 from WME, but, as a tax-saving measure implemented in early 2010, Husband receives the rest of his compensation for his “toil and labor” as distributions. By way of illustration, Bull explained that Husband received “exactly the same” compensation in 2010 as in 2009 ($500,000), but elected to change the form of payment from entirely salary to one-half as salary and one-half as distributions to avoid paying Medicare tax on the “non-salary” portion.

¶ 10 After a five-day trial, the court issued a minute entry setting forth its findings and conclusions. The court found Pinto's “zen master” approach to valuations “disconcerting,” but noted his credibility was bolstered in that he and Koons reached similar valuation calculations. The court specifically disagreed with certain “foundations” underlying Swartley's analysis:

First, [Swartley] used an eleven percent (11%) capitalization rate which is normally attributable to that of a large publicly traded company. This rate resulted in a greater appraised fair market value. The court finds it would be improper to take a capitalization rate that might be attributed to a large company such as Eye Masters or Nationwide Vision and apply it to a small company like WME or PSC.

...

The second concern is that [Swartley] did not evaluate the specific community interest of WME and PSC. Instead, [Swartley] determined the total value of PSC then divided that amount by five (5) and came up with a value. It evaluated WME as a whole and then divided it in half to come up with a community property interest. The court finds this led to an inflated value.

The court also noted “that a minority interest has less value than the total interest of a company on a per—share basis,” finding “[t]his distinction [ ] significant because the community does not own a controlling interest in either business venture.” The court then found that the “fair market value” of the community's 20% interest in PSC is $536,000 and the community's 50% interest in WME is $602,000 and ordered Husband to pay Wife $569,000 for her one-half share of the community interest in the two business interests.

¶ 11 As to the issue of distributions, the trial court rejected Wife's claim that she was entitled to her one-half share of the payments Husband received that exceeded his $250,000 salary, which according to Wife was an appropriate amount for an ophthalmologist. Agreeing with temporary orders analysis of the issue, the court found that with regard to WME, it is a small business that relies on Husband's toil and labor to remain profitable and therefore all the post-filing distributions are his separate property. The court did not specifically address distributions Husband received from PSC. After the court entered a signed decree of dissolution, Wife filed a motion to amend and a motion for reconsideration, which the trial court denied. Wife then timely appealed.

DISCUSSION

A. Valuation of WME and PSC

¶ 12 Wife contends the trial court undervalued the community's interest in WME and PSC. Specifically, she asserts the court improperly applied a minority share discount in contravention of Arizona law.

¶ 13 We review a court's determination of the value of a business in a divorce proceeding for an abuse of discretion. See Roden v. Roden, 190 Ariz. 407, 411, 949 P.2d 67, 71 (App.1997) (holding that trial court did not abuse its discretion by accepting the opinion of husband's expert when determining the value of a community business interest). A trial court abuses its discretion when it commits an error of law or “reaches a conclusion without considering the evidence ... or the record fails to provide substantial evidence to support the trial court's finding.” Flying Diamond Airpark, LLC v. Meienberg, 215 Ariz. 44, 50, ¶ 27, 156 P.3d 1149, 1155 (App.2007) (internal quotation omitted). “We defer to the trial court's factual findings unless clearly erroneous.” City of Tucson v. Clear Channel Outdoor, Inc., 218 Ariz. 172, 189, ¶...