Skrabak v. Skrabak

• Decision Date: 01 September 1995
• Docket Number: No. 674,674
• Citation: 673 A.2d 732,108 Md.App. 633
• Parties: James A. SKRABAK v. Gwendolyn M. SKRABAK. ,
• Court: Court of Special Appeals of Maryland

Page 633

108 Md.App. 633

673 A.2d 732

James A. SKRABAK v.Gwendolyn M. SKRABAK.

No. 674, Sept. Term, 1995.

Court of Special Appeals of Maryland.

March 28, 1996.

Arnold M. Weiner(Bruce L. Mann and Weiner, Astrachan, Hillman, Gunst & Allen, P.C., on the brief), Baltimore, for Appellant.

Donald E. Beachley(Miller, Oliver, Beachley & Stone, on the brief), Hagerstown, for Appellee.

Argued before HARRELL and SALMON, JJ., and PAUL E. ALPERT, Judge(retired), Specially Assigned.

SALMON, Judge.

On November 30, 1994, the Circuit Court for Washington County granted Gwendolyn Skrabak, appellee, an absolute divorce from James Skrabak, appellant.The divorce judgment provided her with a monetary award of $210,000, an award from an individual retirement account of $82,000, and indefinite alimony in the amount of $3,250 per month.Dr. Skrabak, appellant, filed a Motion to Alter or Amend Judgment on December 12, 1994, which the trial court denied.This timely appeal followed, in which appellant presents six questions for our resolution.We have rephrased those questions as follows:

I.Did the trial court err in allowing appellee's expert to utilize the "excess earnings" method to determine the value of appellant's business?

II.Did the trial court err in its determination of the value of institutional goodwill in appellant's business?

III.Did the trial court err by including appellant's business accounts receivable in both valuing marital property and determining amount of alimony?

IV.Did the trial court err in its application of Md.Code(1984, 1991 Repl.Vol.), § 8-205(b) of the Family Law Article("FL")?

V.Did the trial court err by awarding post-judgment interest on amounts of the property settlement that were not presently due and payable?

VI.Should the trial court's alimony award be vacated?

For the reasons set forth below, we shall vacate the monetary and alimony awards.

FACTS

Appellant and appellee married on May 22, 1976 in Morgantown, West Virginia.At that time, appellant was a graduate student studying biology at West Virginia University; appellee was a waitress.Appellant decided to go to medical school instead of finishing his graduate program.He began in January 1979 in Grenada, transferring to the West Virginia School of Osteopathic Medicine in August 1979.Internships took appellant to Pennsylvania, Georgia, and Michigan.In 1983, Mrs. Skrabak enrolled in and later completed a nursing program in Michigan, becoming a certified licensed practical nurse.

Dr. Skrabak graduated from medical school in 1986 with a specialization in anesthesiology and took a position in Hagerstown, Maryland, with Joseph Wilson, M.D.In 1989, Dr. Wilson offered Dr. Skrabak a partnership, which he accepted.In July 1991, however, Dr. Skrabak went into practice for himself.

During the family's summer vacation in 1991, Dr. Skrabak talked with his wife about separating.The marriage had suffered from a variety of problems from its inception, none of which are relevant here.Dr. Skrabak left the family home on October 7, 1991.Mrs. Skrabak filed for divorce in October 1992 on the grounds of adultery and voluntary separation.

Appellee had a child from a prior relationship, Heath, who was adopted by appellant at some point during the marriage.Dr. and Mrs. Skrabak had three children together: James Nathan, born January 16, 1979; Rebecca Ann, born July 1, 1980; and Jonathan Paul, born August 28, 1981.

Dr. Skrabak began a relationship with a 20-year-old in August of 1991, which developed into a sexual relationship in September or October of that year.After that ended, he began a relationship with a 19-year-old and, about a year later, broke that off and entered a relationship with another 19-year-old, Amy Newcomer.At the time of the trial, he was living with Ms. Newcomer and his son, James Nathan.

In December 1992, Dr. Skrabak was approached by three certified registered nurse anesthetists ("CRNAs"), who asked whether he was interested in retaining their services as full-time employees.Dr. Skrabak agreed to hire them and entered into oral contracts with each.He later hired a fourth fulltime CRNA.He incorporated his sole proprietorship and began practicing as James A. Skrabak, D.O., P.A., on January 1, 1993.

Trial testimony focused on Dr. Skrabak's anesthesiology practice.A parade of witnesses testified that the surgeons at Washington County Hospital viewed appellant with high professional regard.There was testimony that cases are referred to anesthesiologists by the surgeons, most of whom prefer one or another based on personal rapport or professional reputation.Three of the surgeons at the hospital referred all or most of their cases to Dr. Skrabak.There was also testimony that several surgeons preferred to refer their cases at random to the various anesthesiologists in the area.Two witnesses testified that appellant was called upon to perform the anesthesia in many of the most difficult cases at the hospital.Finally, there was testimony that hospital staff frequently recommended him to their own families.

Each party called a certified public accountant to testify as an expert in valuing Dr. Skrabak's practice.Appellee's expert, Michael Flurie, testified that the corporation was worth $745,000, with tangible assets valued at $480,354 and institutional goodwill valued at $264,646.Mr. Flurie testified that Dr. Skrabak had said in his deposition and in a personal interview that cases were all assigned on a rotating basis and this fact contributed significantly to his opinion that the goodwill in the corporation was institutional.

Appellant's expert, D. Scott Beck, testified that Dr. Skrabak's practice was valued at $416,149, all of which was tangible assets (shareholder's equity plus accounts receivable).He then deducted the state and federal income taxes Dr. Skrabak would have to pay were he to sell his practice, yielding a net tangible asset value of $306,214.Mr. Beck testified that there was no goodwill value in the corporation, stating, "when any doctor can walk into the hospital and set up their practice, why would someone pay a premium for Dr. Skrabak's practice?"

Appellee's expert, Mr. Flurie, testified on rebuttal that, because cases were not assigned on a rotational basis as he had previously been told, the percentage of institutional goodwill as he had previously calculated it was incorrect.He testified that, because there were five professionals in the practice, Dr. Skrabak and four CRNAs, 20 percent of the goodwill in the corporation, or $50,000, ¹ was personal to Dr. Skrabak.He testified that, therefore, the corporation should be valued at $695,000.

The trial judge granted Mrs. Skrabak an absolute divorce based on Dr. Skrabak's adultery.In a carefully written Memorandum Opinion, he discussed the monetary award.The trial court determined that the total value of the parties' marital property was $987,825.Mrs. Skrabak was awarded $82,000 from Dr. Skrabak's individual retirement account, in addition to a monetary award of $210,000.Dr. Skrabak was directed to pay Mrs. Skrabak $50,000 from the proceeds of the sale of the family home.The balance of $160,000 was to be paid in yearly installments of $20,000, "until the entire monetary award, plus any accumulated interest, is paid in full."Mrs. Skrabak also received a car valued at $8,375; half of the couple's federal and state income tax refund, a value of $5,105.50; and the funds in her checking account, $830.

The trial judge also determined that the parties' respective incomes would be unconscionably disparate and awarded Mrs. Skrabak indefinite alimony in the amount of $3,250 per month.Finally, Dr. Skrabak was directed to pay child support for the two children who remained living with Mrs. Skrabak.

DISCUSSION

I.Did the trial court err in allowing appellee's expert to utilize the "excess earnings" method to determine the value of appellant's business?

Appellant contends that this Court has criticized the use of the "excess earnings" method to value goodwill in a professional practice for purposes of determining a monetary award in a divorce case and that, therefore, that method may not be used in Maryland courts.

The traditional definition of goodwill is " 'the probability that the old customers will resort to the old place.' "Brown v. Benzinger, 118 Md. 29, 35, 84 A. 79(1912)(quotingCrutwell v. Lye, 34 Eng.Rep. 129, 134(ch. 1810)).It is an intangible asset that adds value to a business entity.²This Court has held that goodwill is a legally protected property right and that "the goodwill of a spouse's business is to be valued and equitably divided pursuant to the three step marital property analysis."³Strauss v. Strauss, 101 Md.App. 490, 502, 647 A.2d 818(1994), cert. denied,337 Md. 90, 651 A.2d 855(1995).

The excess earnings method is "[p]erhaps the most common method for valuing goodwill."BRETT R. TURNER, EQUITABLE DISTRIBUTION OF PROPERTY§ 7.07, at 533 (2d ed. 1994)."Under this method, the court first computes the difference between the actual earnings of the business and the earnings of the 'average' or 'reasonable' business.This difference is then 'capitalized,' or multiplied by some number (the factor ) between one and five."Id.The goodwill value is then added to the value of the sum total of the tangible assets to reach the total value of a particular business.Id.

Three decisions by this Court have discussed the excess earnings method as a way to value goodwill.In Prahinski v. Prahinski, 75 Md.App. 113, 540 A.2d 833(1988), aff'd, 321 Md. 227, 582 A.2d 784(1990), we stated in dicta:

When only a capitalization of excess earnings method of evaluation is applied to a professional practice, the value determined, characterized as "professional goodwill," represents nothing more than an entity's future earning capacity; it is not necessarily an asset that may be sold, transferred, or assigned.... ...