Walsh v. Walsh

• Decision Date: 02 October 2012
• Docket Number: No. 1 CA–CV 11–0269.,1 CA–CV 11–0269.
• Parties: In re the Marriage of Cheryl WALSH, Petitioner/Appellant, v. E. Jeffrey WALSH, Respondent/Appellee.
• Court: Arizona Court of Appeals

230 Ariz. 486

286 P.3d 1095

644 Ariz. Adv. Rep. 20

In re the Marriage of Cheryl WALSH, Petitioner/Appellant,

v.E. Jeffrey WALSH, Respondent/Appellee.

No. 1 CA–CV 11–0269.

Court of Appeals of Arizona,

Division 1, Department C.

Oct. 2, 2012.

Burch & Cracchiolo, P.A. By Daniel Cracchiolo and Daryl Manhart and Jessica Conaway, Phoenix, Attorneys for Appellant.

Mariscal, Weeks, McIntyre & Friedlander, P.A. By Michael J. Plati and Marlene A. Pontrelli, Phoenix, Attorneys for Appellee.

OPINION

KESSLER, Judge.

¶ 1 Cheryl Walsh (“Wife”) appeals from the family court's valuation of E. Jeffrey Walsh's (“Husband's”) professional goodwill and its award of child support. For the following reasons, we reverse the goodwill valuation and award of child support and remand for further proceedings consistent with this decision. Specifically, Husband's goodwill and the community's interest in that goodwill was not limited to Husband's stock redemption value in the national law firm of which he was a shareholder.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 Husband and Wife, both licensed attorneys, were married in December 1986. In January 2010, Wife filed a Petition for Dissolution of Marriage. The parties have three children, including one who is still a minor. Husband and Wife have agreed to joint legal custody of that child with Wife serving as the primary residential parent.

¶ 3 Financial success by each spouse allowed the parties to have an extremely high standard of living during their marriage. With the national economic collapse, however, Wife's income from her marketing and public relations company fell dramatically. Despite that collapse, Husband, an attorney and shareholder at the Phoenix branch of a national law firm (the “firm”), continued to earn substantial compensation between 2006 and 2009.

¶ 4 During the dissolution proceeding, the parties disagreed over the community's interest in Husband's intangible professional goodwill. Husband took the position that his interest in the firm should be $140,000—his stock redemption value pursuant to the firm's Amended and Restated Stockholder's Agreement (“the Agreement”).¹ Husband's expert witness testified that while Husband had personal goodwill, as of the date of divorce, the only realizable benefit from Husband's employment was the $140,000 redemption value. ² Thus, Husband's position was that any personal goodwill he had in his legal practice was limited to the $140,000 stock redemption agreement with his firm. Wife's expert applied a capitalization-of-earnings approach ³ and examined Husband's tax returns, historical income performance, earning sustainability, reputation, and client loyalty.⁴ Based on those factors, and giving little weight to the Agreement, Wife's expert valued Husband's professional practice at $1,269,000.

¶ 5 In November 2010, the family court found that Husband's interest in the firm and the value of Husband's law practice were limited to the $140,000 stock redemption value contained in the Agreement:

[T]he Court finds that under a “realizable benefits” standard, Husband's interest in [the firm], goodwill or otherwise, is limited to the $140,000 contained in the Agreement.... It would be mere speculation to find that Husband could leave [the firm] and continue to earn the income he has received for the past three years. Wife's contention that Husband could move from [the firm] with his book of business, does not take into account a number of difficulties with such a move including conflicts that may occur at another law firm and the assistance of [the firm's] “platform” in assisting Husband to bring in clients.

Accordingly, the Court finds that the community interest in Husband's law practice and membership interest in [the firm] is limited to the redemption value of the stock as contained in the Agreement which equals $140,000 .... To find otherwise would necessitate that the Court create a fiction.

(Emphasis added.)

¶ 6 In addition, although Wife requested $2000 in monthly child support, the family court declined to deviate from the Arizona Child Support Guidelines. SeeAriz.Rev.Stat. (“A.R.S.”) section 25–320 app. (Supp.2012) ( “Guidelines”).⁵ Accordingly, the court ordered Husband's monthly child support obligation to be $1270 effective December 1, 2010, and $1277.02 effective December 1, 2011.

¶ 7 Husband moved to alter or amend the family court's findings of fact and conclusions of law, and Wife filed an application for attorneys' fees and costs. The family court granted both motions,⁶ and Wife timely appealed. SeeARCAP 9; Ariz. R. Fam. Law P. 82. We have jurisdiction pursuant to A.R.S. § 12–2101(A)(1) (Supp.2011).

ISSUES AND STANDARD OF REVIEW

¶ 8 Wife argues that the family court erred by: (1) measuring the value of Husband's professional practice by Husband's stock redemption value; and (2) failing to deviate from the Guidelines in calculating child support.

¶ 9 “The valuation of assets is a factual determination that must be based on the facts and circumstances of each case.” Kelsey v. Kelsey, 186 Ariz. 49, 51, 918 P.2d 1067, 1069 (App.1996). We view the evidence in the light most favorable to upholding the decision, Mitchell v. Mitchell, 152 Ariz. 317, 323, 732 P.2d 208, 214 (1987) ( “Mitchell II ”), and “will not disturb [the] trial court's factual findings unless clearly erroneous,” Hrudka v. Hrudka, 186 Ariz. 84, 92, 919 P.2d 179, 187 (App.1995). “A court abuses its discretion if it commits an error of law in reaching a discretionary conclusion, it reaches a conclusion without considering the evidence, it commits some other substantial error of law, or ‘the record fails to provide substantial evidence to support the trial court's finding.’ ” Flying Diamond Airpark, L.L.C. v. Meienberg, 215 Ariz. 44, 50, ¶ 27, 156 P.3d 1149, 1155 (App.2007) (quoting Grant v. Ariz. Pub. Serv. Co., 133 Ariz. 434, 456, 652 P.2d 507, 529 (1982)). Moreover, we review legal issues and the application of law de novo. See City of Tucson v. Clear Channel Outdoor, Inc., 218 Ariz. 172, 180, ¶ 16, 181 P.3d 219, 227 (App.2008). “Although we will not disturb a court's award of child support absent an abuse of its discretion, we will review its interpretation of the Guidelines de novo as a question of law.” Hetherington v. Hetherington, 220 Ariz. 16, 21, ¶ 21, 202 P.3d 481, 486 (App.2008) (citations and internal quotation marks omitted).

DISCUSSION

A. VALUATION OF HUSBAND'S PROFESSIONAL GOODWILL

¶ 10 Wife argues that the family court erred in valuing the community's interest in Husband's goodwill at $140,000. Husband, on the other hand, argues that the court correctly applied a “realizable benefits” standard when making its determination. To the extent the family court held that Husband's professional goodwill as an attorney was limited to his stock redemption interest in his law firm, we agree with Wife.

¶ 11 “[R]eferred to as the most intangible of intangibles, goodwill is essentially reputation that will probably generate future business.” Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 3 (1983) (citation and internal quotation marks omitted); see also Mitchell II, 152 Ariz. at 319, 732 P.2d at 210 (“[I]t has been defined as ‘that asset, intangible in form, which is an element responsible for profits in a business.’ ” (citation omitted)); Wisner v. Wisner, 129 Ariz. 333, 337, 631 P.2d 115, 119 (App.1981) (“It has also been defined as, in its broadest sense, reputation.”); In re Brown, 242 N.Y. 1, 150 N.E. 581, 582 (1926) (“Men will pay for any privilege that gives a reasonable expectancy of preference in the race of competition. Such expectancy may come from succession in place or name or otherwise to a business that has won the favor of its customers. It is then known as good will.” (citation omitted)). As we held in Molloy v. Molloy, “[f]uture earning capacity per se is not goodwill. However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.” 158 Ariz. 64, 67, 761 P.2d 138, 141 (App.1988) (“Molloy I ”) (citation omitted). “[L]awyers, like other professionals, face evaluation of their professional goodwill as a community asset upon marital dissolution.” Id.

¶ 12 “It is a difficult task at best to arrive at a value for the intangible component of a professional practice attributable to goodwill.” Mitchell II, 152 Ariz. at 323, 732 P.2d at 214. “No rigid and unvarying rule for the determination of the value of goodwill has been laid down by prior case law and each case must be determined on its own facts and circumstances.” Wisner, 129 Ariz. at 338, 631 P.2d at 120. In a professional practice, the court may look to the following determinative factors in examining the existence of goodwill: “the practitioner's age, health, past earning power, reputation in the community for judgment, skill and knowledge, and his or her comparative professional success.” Id. at 337–38, 631 P.2d at 119–20;see also Martin J. MacMahon, Annotation, Valuation of Goodwill in Law Practice for Purposes of Divorce Court's Property Distribution, 77 A.L.R.4th 683 (1989) (“[F]actors for consideration in arriving at a value for professional goodwill in a law practice include personal characteristics of the practitioner, such as age, comparative professional success, health, length of time in practice, past earning power, and reputation.” (footnotes omitted)).

¶ 13 In addition, we “consider the terms of the partnership agreement as one factor in the determination of the value of the community interest in goodwill.... [P]artnership agreements are designed to deal with particular aspects of the business, and simply do not address the considerations involved in valuation for a marital dissolution.” Mitchell II, 152 Ariz. at 321–22, 732 P.2d at 212–13. As the court held in In re Marriage of Fenton, 134 Cal.App.3d 451, 184 Cal.Rptr. 597, 602 (1982),

It appears that the trial...