Weaver v. Weaver

• Citation: 72 N.C.App. 409,324 S.E.2d 915
• Decision Date: 05 February 1985
• Docket Number: No. 8410DC99,8410DC99
• Parties: Barbara G. WEAVER v. Robert E. WEAVER.
• Court: Court of Appeal of North Carolina (US)

Page 915

324 S.E.2d 915

72 N.C.App. 409

Barbara G. WEAVER v. Robert E. WEAVER.

No. 8410DC99.

Court of Appeals of North Carolina.

Feb. 5, 1985.

Jack P. Gulley, Raleigh, for plaintiff-appellee.

Hunter, Wharton & Howell by John V. Hunter III, Raleigh, for defendant-appellant.

ARNOLD, Judge.

I

The defendant first contends that the trial court failed to calculate correctly the present value of defendant's interest in his accounting partnership.

A spouse's interest in a professional partnership is a marital asset subject to equitable distribution. See Stern v. Stern, 66 N.J. 340, 331 A.2d 257 (1975); In re Marriage of Fonstein, 17 Cal.3d 738, 131 Cal.Rptr. 873, 552 P.2d 1169 (1976). Placing a precise or even approximately accurate value on such a partnership interest, especially when the partner whose interest is in question continues as a member of the firm, is not easy. There is no real market value for this asset. Yet, partnership interests can and have been successfully valued, with the aid of expert testimony and using various appraisal methods. See Stern v. Stern, 66 N.J. 340, 331 A.2d 257 (1975); Johnson v. Johnson, 277 N.W.2d 208, 213 (Minn.1979) (joint venturer's interest valued under same principles as partnership interest); In re Marriage of Fonstein, 17 Cal.3d 738, 131 Cal.Rptr. 873, 552 P.2d 1169 (1976); Ytreberg, Evaluation of Interest in Law Firm or Medical Partnership for Purposes of Division of Property in Divorce Proceedings, 74 A.L.R.3d 621, 624; cf. L. Schwechter & R. Quintero, Valuing the Professional Service Corporation, 3 Equitable Distribution Rep. 142 (1983).

Partnership agreements often furnish a useful method for calculating the partnership interest's value, see Stern v. Stern, supra; In re Marriage of Fonstein, supra, particularly when they do not penalize, or place a premium on the holdings, of a particular partner, see In re Marriage of Morris, 588 S.W.2d 39, 43-44 (Mo.App.1979) (redemption agreement terms for death of stockholder not appropriate in equitable distribution because they placed a premium value on stocks). When the terms of a partnership agreement are used, however, the value of the interest calculated is only a presumptive value, which can be attacked by either plaintiff or defendant as not reflective of the true value. Stern, 331 A.2d at 261.

There is no single best approach to valuing a partnership interest. Our task on appeal, therefore, is to determine whether the approach used by the trial judge reasonably approximated the "net value" of the partnership interest.

In the present case, the trial judge, in his Judgment of Equitable Distribution, made a finding of fact that the marital assets of the parties included "[d]efendant's interest in the Partnership which had a present value on December 31, 1982 of One Hundred Thousand, Eight Hundred and Ninety-Six Dollars ($100,896.00)." The trial court apparently based this finding of ultimate fact on the testimony of Mr. Jack Wilson, Chairman of the Management Committee of defendant's accounting partnership. Mr. Wilson testified as to how defendant's interest in the capital account and share of the profits would be distributed to him under the terms of the partnership agreement in the event of defendant's withdrawal from the firm. The trial court summarized the pertinent parts of this testimony in another finding of fact:

[T]hat Mr. Wilson testified that computing the Defendant's capital account as of April 1, 1982, at the close of the preceding fiscal year was Forty-Three Thousand, One Hundred and Ten Dollars ($43,110.00); that Mr. Wilson further testified that as of December 31, 1982, it was at Thirty-Two Thousand Dollars ($32,000.00); that the capital account was generally lower in December than at the end of March, and that he would anticipate that it would increase back by March 31, 1983; Mr. Wilson testified that if on February 4, 1983, the Defendant had left the firm as of that date based upon the capital account of Thirty-Two Thousand Dollars ($32,000.00) on December 31, 1982, he would have received the capital account of Thirty-Two Thousand Dollars plus Eighty Thousand, Nine Hundred and Eighty-Six Dollars ($80,986.00) for a total of One Hundred and Twelve Thousand, Nine Hundred and Eighty-Six Dollars ($112,986.00); that the capital account would be paid for a five (5) year period in quarterly installments with no interest and the balance of Eighty Thousand, Nine Hundred and Eighty-Six Dollars ($80,986.00) would be paid over a five (5) year period at no interest, the latter sum representing one-half ( 1/2) of Defendant's partnership interest in the firm for a period of five (5) years.

The trial court thus calculated the present value of defendant's interest in the partnership as the Management Committee would have done had defendant withdrawn in February, 1983 (the trial court backdating to 31 December 1982). The trial court added the value of the defendant's capital account, $32,000, to the remainder of his partnership interest, which was valued at $80,986. The total of these two amounts was $112,986.00. Under the terms of the partnership agreement, this sum would not be paid on the date of withdrawal, but would be paid out over five years, with no interest, in quarterly installments. Thus, the real value of defendant's entire interest in the partnership in early 1983 would be somewhat less than the sum of the payments he would receive over the five year period. The trial court correctly recognized that he must find the present value of the partnership interest, by discounting future payments at an appropriate rate of interest. The trial court found that the $112,986 spread out over five years would be worth $100,896 in early 1983. Our calculations show that the trial court used a discount rate of 4 1/2%.

While we believe the discount rate somewhat unrealistic (as will be discussed below), we find that the trial court's method of calculating the present value of defendant's partnership interest was basically sound. The trial court used the partnership agreement's payment plan for a withdrawing partner. The plan first separates out the partner's capital account, which is the partner's equity in the firm, i.e., it is his share of the retained earnings, or undrawn profits, including cash accounts, receivables and equipment. The plan then derives a percentage, based on the partner's prior contribution to fees, and applies it to the profits earned over a five year span dating from the withdrawal date. Half of that amount is paid out to the partner in installments over the five years. This latter amount reflects the net value of defendant's interest in a going concern, that is, his share of the goodwill of the firm, as well as his share of the net value of work in progress. We agree with courts in other jurisdictions that goodwill is an asset that must be valued in equitable distribution of an interest in a going concern. See Stern v. Stern, 331 A.2d at 261; In re Marriage of Nichols, 43 Col.App. 383, 606 P.2d 1314 (1979); In re Marriage of Fleege, 91 Wash.2d 324, 588 P.2d 1136 (1979).

Since the firm operates on a cash basis, the formula for distribution of profits and the capital account over the successive five year period is a reasonable method of paying out the net value of the withdrawing partner's interest. Discounting these projected payments to find a present value was proper since the valuation for equitable distribution must be a fixed amount made as of a particular statutory valuation date.

The defendant has presented no proof that the figures for defendant's capital account and share of projected profits are inaccurate, or that the partnership agreement's formula incorrectly represents his share of the firm's true monetary worth. In general, the method used by the trial court to value the partnership interest was fair and reasonable, involving no "clear abuse of discretion," see White v. White, 312 N.C. ----, ----, 324 S.E.2d 829, 883 (N.C.1985).

While the method used was not unreasonable, the interest rate used to discount the payments to defendant of his interest in the partnership was relatively low. The trial judge did not explain why he used that particular rate. The plaintiff notes in her brief that this is the rate used under G.S. 8-47 to calculate the present worth of annuities payable annually to a person during his life. We do not believe that the purpose of that statute was to cover cases such as the present, where the trial judge sought to find the actual or true net value of the partnership interest to defendant in 1983. We take notice that the rate of 4 1/2% was far below the going or market rate in 1983, and that the use of it produced a present value thousands of dollars in excess of the actual or market value of the money. We therefore remand for a recalculation of the partnership interest, using a rate reasonably in keeping with the fair market value of the money. Reasonable rates of comparison, for example, might include the rate used by the Internal Revenue Service in determining assessments and refunds, Treasury bill rates, or the prime rate charged by banks.

The defendant claims that the trial judge erred in not valuing the partnership interest as of the date of separation of the parties, 4 September 1981. Section 50-21(b) of the North Carolina General Statutes was added by legislation effective 1 August 1983. It provided that if divorce is granted on the ground of one-year separation that the marital property shall be valued as of the date of separation. Session Laws 1983, c. 671, s. 2, makes the act applicable to all civil actions brought under G.S. 50-20, including actions pending in district court on the effective date of the act. This case was filed on 7 September 1982, and was tried in May 1983. The judgment of equitable distribution was signed 30 September 1983 and entered 5 October 1983. This case was pending at the time the amendment to G.S. 50-21 was...