Stewart v. Stewart

• Decision Date: 26 January 2007
• Docket Number: No. 31905.,31905.
• Citation: 152 P.3d 544,143 Idaho 673
• Parties: James H. STEWART, Plaintiff-Appellant, v. Sarah P. STEWART, Defendant-Respondent.
• Court: Idaho Supreme Court

152 P.3d 544

143 Idaho 673

James H. STEWART, Plaintiff-Appellant, v. Sarah P. STEWART, Defendant-Respondent.

No. 31905.

Supreme Court of Idaho, Boise, October 2006 Term.

January 26, 2007.

Cosho Humphrey, LLP, Boise, for appellant. Stanley W. Welsh argued.

Bevis, Johnson & Thiry, PA, Boise, for respondent. James A. Bevis argued.

TROUT, Justice.

Dr. James Stewart (James) appeals from a magistrate court's division of community property and award of spousal support to his wife, Sarah Stewart (Sally). The case addresses the characterization of goodwill in a professional services corporation as community property in a divorce proceeding, together with an award of maintenance.

I. FACTUAL AND PROCEDURAL BACKGROUND

James and Sally Stewart married in 1981. Two children were born into the marriage, both of whom are now of majority age. Sally helped put James through medical school and throughout the marriage cared for the children and worked as a teacher. The family moved several times before settling in Boise in 1995, where James joined Dr. Gerald Overly in a dermatology practice. In 1996, James and Dr. Overly formed the Dermatology Clinic of Idaho, P.A. (DCI). James is a forty-five percent shareholder in DCI and his practice includes general dermatological services and surgical procedures as well as a subspecialty in "MOHS" micrographic surgery, a method of removing certain skin cancers. Sally has continued to work as an elementary school teacher but, at the time of the divorce, reduced her schedule due her degenerative illness, post-polio syndrome.¹ The Stewarts own a residence with a stipulated value of $360,000. The personal property accumulated during the marriage includes the interest in DCI, retirement accounts, stock, automobiles, and furniture.

On April 23, 2003, James filed a complaint for divorce, and the matter proceeded to trial before a magistrate judge. The judge found James' dermatology practice to be valued at $130,554.00 in tangible assets. In addition, he found there to be $210,747.00 in professional goodwill associated with DCI separate and apart from James' skill. To the extent that this goodwill exceeded James' personal skill and knowledge, the magistrate judge concluded, this goodwill constituted community property subject to distribution.

The trial court awarded Sally an unequal division of the community property valued at $788,372.11, including the Stewart residence and various bank and retirement accounts. In light of the community property award, the magistrate judge calculated the level of spousal support necessary to support Sally to be $5,166 per month for twelve years. The judge noted that Sally would not be eligible to receive Social Security until approximately twelve years from the date of the order, the same time she would become eligible to draw on her retirement accounts without penalty. The magistrate judge also considered Sally's post-polio condition, which at the time of the divorce had caused Sally to reduce her work schedule to 80% of full time.

James appealed the award, challenging the community property characterization of his businesses' professional goodwill; the amount of interest found in his medical practice; and the amount and duration of spousal support. The district court affirmed the valuation of the community interest in the medical practice, but vacated and remanded for further proceedings the award of spousal support because of a mathematical error in calculating the length of time maintenance should be paid. James appealed the district court's ruling to this Court; meanwhile, the magistrate court continued to hold proceedings on remand. The magistrate judge issued an order on remand noting the mathematical error in the spousal support calculation but concluding that the error made no difference in his determination of the overall spousal support award. After James appealed the magistrate judge's order on remand to the district court, this Court stayed all district court proceedings pending resolution of this appeal.

II. STANDARD OF REVIEW

On appeal from a district court's appellate decision, this Court reviews the magistrate judge's decision independently from, but with due regard for, the district court's decision. Antill v. Antill, 127 Idaho 954, 957, 908 P.2d 1261, 1264 (1996). The trial court's findings of fact will not be set aside on appeal unless they are clearly erroneous such that they are not based upon substantial and competent evidence. Reed v. Reed, 137 Idaho 53, 56, 44 P.3d 1108, 1111 (2002); Hunt v. Hunt, 137 Idaho 18, 20, 43 P.3d 777, 779 (2002). When reviewing the court's conclusions of law, however, this Court exercises free review of the trial court's decision. Id.

Disposition of property—including valuation and division—is a question of discretion, guided by statutory and case law. Chandler v. Chandler, 136 Idaho 246, 249, 32 P.3d 140, 143 (2001). "The disposition of community property is left to the discretion of the trial court, and unless there is evidence in the record to show an abuse of that discretion, the award of the trial court will not be disturbed." Maslen v. Maslen, 121 Idaho 85, 88, 822 P.2d 982, 985 (1991) (citing Koontz v. Koontz, 101 Idaho 51, 52, 607 P.2d 1325, 1326 (1980)). In "divorce proceedings the determination of the value of community property is within the discretion of the trial court and will not be disturbed on appeal if it is supported by substantial competent evidence." Chandler, 136 Idaho at 249, 32 P.3d at 143 (citing Maslen, 121 Idaho at 90, 822 P.2d at 987; Shumway v. Shumway, 106 Idaho 415, 679 P.2d 1133 (1984)); Martsch v. Martsch, 103 Idaho 142, 645 P.2d 882 (1982).

Review of a lower court's exercise of discretion is conducted under a three-tiered inquiry: "(1) whether the lower court rightly perceived the issue as one of discretion; (2) whether the court acted within the outer boundaries of such discretion and consistently with any legal standards applicable to specific choices; and (3) whether the court reached its decision by an exercise of reason." Chandler, 136 Idaho at 249, 32 P.3d at 143 (citing State v. Hedger, 115 Idaho 598, 600, 768 P.2d 1331, 1333 (1989)); Sun Valley Shopping Center, Inc. v. Idaho Power Co., 119 Idaho 87, 94, 803 P.2d 993, 1000 (1991).

Regarding spousal maintenance, this Court reviews the trial court's findings "that are the basis for the court's decision as to the duration and the amount of spousal maintenance to determine whether there exists substantial and competent evidence in support of these findings." Chandler, 136 Idaho at 249, 32 P.3d at 143 (citing Wilson v. Wilson, 131 Idaho 533, 535, 960 P.2d 1262, 1264 (1998); Mulch v. Mulch, 125 Idaho 93, 98, 867 P.2d 967, 972 (1994)). "The allowance of alimony and the amount thereof, are in the first instance committed to the trial court's discretion." Nielsen v. Nielsen, 87 Idaho 578, 585, 394 P.2d 625, 629 (1964).

III. DISCUSSION

A. Professional Goodwill

1. Characterization of professional goodwill

James disputes the magistrate judge's characterization of his portion of the professional goodwill in DCI as community property to be divided in a divorce. This Court has held that good will is an appropriate factor in determining the value of a business. Olsen v. Olsen, 125 Idaho 603, 606, 873 P.2d 857, 860 (1994). The goodwill of a business is "the custom which it attracts, and the benefits or advantage it receives from constant or habitual customers, and the probability that the old customers will continue to come to the place." Harshbarger v. Eby, 28 Idaho 753, 761, 156 P. 619, 621 (1916); see also McAffee v. McAffee, 132 Idaho 281, 286, 971 P.2d 734, 739 (1999).

The question presented by this case is whether goodwill is an appropriate factor to consider in determining the community property value of a professional services corporation, an issue of first impression. Any division of property in a divorce proceeding begins with the presumption that all property acquired after marriage is community property. Reed, 137 Idaho at 58, 44 P.3d at 1113. The trial court reasoned that James acquired all of his interest in DCI during marriage and that the value of his interest in DCI, including goodwill, was community property.

There seems to be no principled reason to treat the goodwill of a business differently when it is a professional services corporation. The property rights of individuals with professional educations and licenses do not differ from the rights of people engaged in other types of business. Determining the value of goodwill in small professional services corporations may indeed be difficult, since Idaho law treats personal skill and reputation as separate assets rather than community property. See Wolford v. Wolford, 117 Idaho 61 67, 785 P.2d 625, 631 (1990) (holding that personal attributes, including knowledge, skill, and reputation, were not property, either separate or community); Olsen, 125 Idaho at 606, 873 P.2d at 860 (stating that knowledge, background, and talent are personal assets rather than community property). Where a professional business is an independent entity, however, goodwill is calculable and divisible in divorce just as goodwill in any other business. DCI was such an independent entity, and it was possible for the magistrate judge to distinguish between James' identity and the separate identity of DCI. A practitioner's knowledge, skill, and background are personal attributes. To the extent a professional services corporation has goodwill value beyond these personal assets, however, that goodwill is community property.

2. Valuation of professional goodwill

Applying a capitalized excess earnings analysis, the trial court found the net value of DCI's assets to be $290,120.00, of which $130,554.00 was community property, commensurate with James' 45% ownership in the practice. James alleges error in the magistrate judge's reliance on the capitalized excess earnings method to...