Slater and Slater

• Citation: 240 Or.App. 30,245 P.3d 676
• Decision Date: 29 December 2010
• Docket Number: 06DS0016; A137465.
• Parties: In the Matter of the Marriage of Shelly A. SLATER, Petitioner-Respondent, and Paul J. SLATER, Respondent-Appellant.
• Court: Court of Appeals of Oregon

245 P.3d 676

240 Or.App. 30

In the Matter of the Marriage of Shelly A. SLATER, Petitioner-Respondent,

and

Paul J. SLATER, Respondent-Appellant.

06DS0016; A137465.

Court of Appeals of Oregon.

Argued and Submitted Oct. 12, 2009.

Decided Dec. 29, 2010.

Mark Johnson, Portland, argued the cause for appellant. With him on the briefs was Johnson & Lechman-Su PC.

Kristin M. Larson argued the cause for respondent. With her on the brief was Stahancyk, Kent, Johnson & Hook, P.C.

Before HASELTON, Presiding Judge, and BREWER, Chief Judge, and ARMSTRONG, Judge.^*

HASELTON, P.J.

Husband appeals from a dissolution judgment, raising three assignments of error. Specifically, husband challenges: (1) the amount and duration of the award of spousal support to wife; (2) the trial court's valuation of husband's chiropractic business; and (3) the court's allocation of a tax liability to husband. We reject husband's first and third assignments of error without discussion and write only to address the second assignment, pertaining to the valuation of husband's business. As amplified below, we conclude that the trial court erred in adopting a valuation of husband's chiropractic business that was predicated on the assumption that husband would execute a noncompetition covenant. Accordingly, we remand with instructions for the trial court to modify the judgmentwith respect to the property division but otherwise affirm.

Although we review de novo,¹ many of the facts material to our review are undisputed. The parties were married in 1990, and, at the time of the dissolution, in 2007, husband was 38 and wife was 40. The couple had four children, ages 15, 13, 5, and 3. Wife has not worked outside the home since graduating from college in 1993.

Husband is the owner of a very successful chiropractic business in Prineville, Paul J. Slater, DC, PC, dba Slater Chiropractic, which is organized as an S corporation. Husband purchased the business in 1996 for $157,500, which included payments of $37,000 for goodwill and the previous owner's patient list and another $75,000 for the previous owner's execution of a noncompetition covenant.

In 2001, Slater Chiropractic generated $446,367 in revenue, which thereafter increased every year to $633,536 in revenue in 2006. The revenues from Slater Chiropractic are substantially above the national average for chiropractic offices, which is less than $250,000 annually. In 2006,husband's gross income from Slater Chiropractic was approximately $25,000 a month. However, a short time before trial, husband underwent back surgery and was expected to be in recovery and unable to work for three to six months. Husband had written a letter to his patients encouraging them to seek treatment from an employee associate chiropractor, Dr. Miller, in his absence.

About 60 percent of Slater Chiropractic's business comes through insurance, including husband's contract as a "preferred provider" with a health insurance company that covers local government employees. Slater Chiropractic also attracts business through word-of-mouth, referrals, and by advertising in the Yellow Pages. Husband, through Slater Chiropractic, is also actively engaged in the Prineville community, and wife contributed to that involvement during their marriage.

Slater Chiropractic employs a receptionist, three chiropractic assistants, and, since 2006, the associate chiropractor, Miller. As part of his employment agreement, Miller executed a noncompetition covenant with Slater Chiropractic for five years. Husband, in contrast, does not work under an employment contract with Slater Chiropractic and has not entered into a noncompetition covenant with the business. Husband testified that he "plan[s] to work in the chiropractic profession in Prineville until I retire" and that, were he to sell his practice "at [his] current stage of life," he would "[a]bsolutely" refuse to enter into such a covenant.

At trial, two experts testified as to the value of Slater Chiropractic. Wife's expert, Svendsen, used two methods to estimate the fair market value of Slater Chiropractic—the capitalization of earnings approach and the capitalization of excess earnings approach—both of which valued the tangible (such as equipment) and intangible (such as client files and goodwill) assets of the business. He then averaged the resulting values from those two methods to reach a final, estimated fair market value of $610,000.²

Husband's expert, Holmer, used four methods to value Slater Chiropractic. The first, the adjusted book value approach, valued the net tangible assets of Slater Chiropractic but not its intangible assets, including goodwill value. Pursuant to that method, husband's expert concluded that the fair market value of Slater Chiropractic's net tangible assets was $200,422. Husband's expert relied on three other valuation methods, viz., the capitalization of earnings approach and capitalization of excess earnings approach—which both take into account thetangible and intangible assets of a business—and the comparable transaction approach, which relied in part on a separate expert's appraisal of the intangible asset value of Slater Chiropractic, to reach a composite, total fair market value for Slater Chiropractic of $504,152.

Both experts agreed that Slater Chiropractic has goodwill, i.e., some value above the value of its net tangible assets, but disagreed as to whether, or to what extent, that added value should be characterized as "entity goodwill," i.e., goodwill attributable to the business, or "personal goodwill," i.e., goodwill attributable to husband individually.³ Wife's expert did not explicitly identify in his appraisal what part of Slater Chiropractic's total value was attributable to goodwill. However, he did testify that that amount could be calculated simply by deducting the net tangible assets of Slater Chiropractic (which he valued at $160,902) from his estimated fair market value of $610,000, yielding a total goodwill value of $449,098.⁴ Wife's expert further testified that he believed that all of Slater Chiropractic's goodwill was attributable to the business—and that none of that goodwill was "personal goodwill on behalf of Dr. Slater[.]" Given that testimony, wife argued that "Slater Chiropractic is a business that is independent of Husband's efforts" and, as such, that its goodwill value should be characterized as "entity goodwill."

Conversely, husband presented evidence that the value of Slater Chiropractic's goodwill was $303,730.⁵ Husband's expert further determined that 10 percent of that goodwill value ($30,373), based on the percentage of collected revenues, was attributable to Miller's practice and that the balance of the goodwill, $273,357, was attributable to the "ongoing personal services of husband." Because Miller was an employee and had entered into a noncompetition covenant, husband's expert determined that the value of Miller's goodwill was properly included as an asset of the business. However, in the expert's view, the goodwill attributable to husband individually was not properly considered a business asset. Accordingly, in husband's view, for purposes of dissolution, the total value of the chiropractic business was $230,795, i.e., $504,152 minus $273,357.

Related to their disagreement as to whether goodwill was predominately or entirely a business asset of Slater Chiropractic or was personal to husband, husband and wife also disagreed about whether it was proper when valuing the business to assume that husband would execute a noncompetition covenant. Both experts agreed that, if husband were to sell his practice, it would be necessary for him to enter into such an agreement. Wife's expert testified that, because a noncompetition covenant would be required at the time of sale, it was proper to include the value of such a covenant in calculating the fair market value of the business. Consistently with that premise, wife did not present evidence specifying how much of the intangible asset value in Slater Chiropractic would be assignable to a hypothetical noncompetition covenant. However, wife's expert did testify that, if Slater Chiropractic were sold without a noncompetition covenant binding husband, the business would be valued at less than $610,000 because of the risk that the new owner would receive the net tangible asset value of the business but (with husband as a viable competitor) "would lose the revenue stream that should go along with it"—and, in that event, itsnet asset value ($160,902) "would be a floor" for that valuation.

Husband countered that it was not proper, when valuing a business for purposes of calculating a property distribution at divorce, to include the value of a putative noncompetition covenant because he had no intention to retire, change careers, or sell his business. In husband's view, the assumption that hewould execute a noncompetition covenant "constitutes [a] taking of his post-divorce income," which is separate nonmarital property, in order to enhance the value of the property divided at the time of the divorce.⁶ Further, according to husband, the value of such a hypothetical covenant corresponds to the value of the goodwill "personal" to husband, i.e., $273,357. Accordingly, husband contended that the proper value of Slater Chiropractic was $230,795— viz., the total value of the business (including the goodwill related to Miller's practice), $504,152, minus the value of the putative noncompetition covenant binding husband.

During closing arguments before the trial court, wife and husband defended the methodologies their respective experts employed in valuing Slater Chiropractic—and, especially, as relevant here, took issue with the other's treatment of goodwill value, particularly with respect to the value of the putative noncompetition covenant.

The trial court ultimately valued Slater Chiropractic at $500,000, which included the value of the business's net tangible assets and its goodwill value,...