In a dissolution of marriage proceeding with complex assets, Husband appealed on a variety of asset classification, valuation, and division issues.

COBANE V. COBANE

In a dissolution of marriage proceeding with complex assets, Husband appealed on a variety of asset classification, valuation, and division issues.

Husband first argues that “the trial court improperly classified as marital the encumbered funds in his employee incentive program.” Husband’s Employee Transition Program (“ETP”) work incentive consisted of forgivable promissory notes. The loans matured over nine years and were forgiven at intervals as long as Husband stayed with the business. The forgiven ETP debt appeared on Husband’s paycheck as income. The trial court found that the ETP funds were marital and the total bonus amount should be treated as marital to the extent that it vested during the marriage.

The Court of Appeals disagreed holding that the trial court erred because the ETP fund value was “offset by the outstanding balance of the loans against them.” Thus, “the ETP funds are merely loan proceeds and subject to repayment…akin to unearned future income rather than an unvested benefit.” The Court differentiates this case from its ruling in Dotson because unlike the RPU stocks in Dotson, Husband’s “unrestricted right to the

ETP funds does not accrue until the loans are forgiven.”

Husband next argues that the trial court erred when it declined to recognize a discount in the value of his interest in Cobane Farms, LLC, based upon his minority ownership in the LLC. The Court of Appeals affirms the trial court holding that the trial court properly gave specific reasons for its decision excluding the discount in this case, including transactions that may have been an attempt to diminish the value of the marital estate. Notably, Husband voluntarily reduced the marital interest by transferring shares to his siblings and transferred the marital property to a LLC on the day after Wife filed the petition for dissolution.

Husband then argues that the trial court failed to recognize his non-marital interest in Cobane Farms, LLC. The Court of Appeals affirms the trial court holding that the trial court did not err as it found Husband’s tracing was incomplete noting Husband’s conveyance diluted and co-mingled any non-marital interest. The Court notes the trial court’s finding that Husband was a sophisticated financial advisor and gave no compelling reason for being unable to provide complete tracing.

Husband next argues that the trial court erred in calculating his nonmarital interest in a 401k, Roth IRA, and whole life insurance policy, by failing to find that the increase in the value was attributable to his non-marital contributions. The Court of Appeals affirmed the trial court holding it did not err as Husband “failed to rebut the presumption that the increase in the value of Marc’s non-marital contributions are marital property.” Simply presenting the beginning and ending balances and testifying to average growth was not enough.

The Court of Appeals ultimately remands the portion of the judgment dividing the marital assets for the trial court to equalize the division of assets due to the error in classifying the encumbered ETP funds as marital.

Digested by Elizabeth M. Howell

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Rumpel v. Rumpel

The Supreme Court reaffirms the American Rule against shifting fees, recognizing CR 37.03 and KRS 403.220 as exceptions to the rule. In this case, $50,000 of attorney fees were awarded to the Wife under CR 37.03 and KRS 403.220. The Supreme Court held that the Trial Court misapplied CR 37.03 by imposing discovery sanctions on Husband for denial of a request for admission. The Trial Court should have considered Husband’s grounds for denial. As in this case, when a party reasonably believes he might prevail on a matter, or has a legitimate reason for denial of a request for admission, the denial is justified and sanctions are improper. CR 37.03 is to be narrowly construed. Husband should not have been sanctioned under CR 37.03.

Unlike 37.03 which provides for narrow sanctions, KRS 403.220 provides for attorney fees when there is financial disparity between parties to a divorce. The Trial Court has broad discretion in awarding attorney fees under KRS 403.220. The rule is not punitive, but Kentucky case law holds Trial Courts can appropriately consider the litigation conduct of the parties. Allowing Trial Courts this discretion prevents an “unreasonable or an unfair burden on the party with fewer financial resources.” In this case, the Supreme Court notes facts which may support an award of attorney fees under KRS 403.200. The Supreme Court remands the matter to the Trial Court to determine the amount of Wife’s attorney fees Husband should pay under KRS 403.200.

Finally, The Supreme Court looks to Husband’s argument that wife improperly applied CR 59.05. The Wife challenged the business-valuation amount after trial and entry of the initial judgment. CR 59.05 is not available to Wife because she could have raised the business-valuation issues during the trial. Wife’s use of CR 59.05 and the Trial Court’s subsequent modification of the property settlement award are improper. The Supreme Court agrees with the Husband that Wife should have raised any business-valuation issues pre-judgment, as she has the information available to her at that time.

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2010-CA-001814-MR

http://opinions.kycourts.net/coa/2010-CA-001814.pdf

Published:  Affirming

County: Warren

Wife appealed FC’s Findings of Fact, Conclusions of Law, and Judgment regarding valuation and distribution of her oral surgery practice in dissolution proceedings, on remand from appellate court.

FACTUAL AND PROCEDURAL BACKGROUND:

Gaskill v. Robbins

2010-CA-001814-MR

http://opinions.kycourts.net/coa/2010-CA-001814.pdf

Published:  Affirming

County: Warren

Wife appealed FC’s Findings of Fact, Conclusions of Law, and Judgment regarding valuation and distribution of her oral surgery practice in dissolution proceedings, on remand from appellate court.

FACTUAL AND PROCEDURAL BACKGROUND:

Wife established oral maxillofacial surgery practice during marriage, which was parties’ largest asset at time of divorce.  At trial, Wife’s expert presented two separate reports regarding practice’s value, both comparing assets and liabilities.  The first report reflected that the practice had a value of $237,000 as of 12/31/03.  Wife’s expert also applied a 10% discount for lack of marketability, though he initially had discounted the value by 23%. He testified that this discount represented the ability to quickly convert property to cash at a minimal cost.  His second report valued the business as of December 2004 at $114,000, which he testified reflected a significant drop in cash from the prior report.  Husband’s expert valued the business using data from Wife’s expert, but averaging the values resulting from four different valuation calculations, and determined the business’ value at $669,075.  FC agreed with this value and Husband correspondingly received a large sum of cash.  Wife appealed and, ultimately, SC determined that FC erred by failing to recognize the presence of both business and personal goodwill and by using an arbitrary average of numbers to determine the business’ value.  On remand and the basis for this appeal, FC determined that the business’ value subject to division was $237,000.  On appeal, Wife argues that FC should have adopted valuation performed closest to date of decree; that FC failed to apply a 23% discount rate to 2004 value; and that FC should have awarded her post-judgment interest on the money she overpaid Husband pursuant to FC’s first judgment. 

ANALYSIS:

CA noted that there is no presumption that assets should be valued within close proximity to the date of decree and that Kentucky has not adopted one particular method of valuation.  CA noted that Wife’s expert testified that 2004 was an unusual year for the practice due to the significant drop in cash; that Wife had dissipated $199,000 by transferring the funds to her mother and FC had considered this as a credibility factor in the valuation; that Wife had made frequent fund transfers from the business without a proper accounting; and that Wife had sole control of the business during 2004.  Given these facts, CA found FC had ample evidence to support its decision to base the valuation on the 2003 report.  CA also found Wife’s argument that FC should have applied 23% discount for lack of marketability given the lack of cash in 2004 to be moot given the appropriate use of the 2003 valuation.  Lastly, CA held that Wife was not entitled to post-judgment interest on amounts over-paid to Husband; given that the original judgment was vacated, there was no judgment from which interest would accrue; and awards of pre-judgment interest on unliquidated claims are within the trial court’s discretion, and FC did not abuse its discretion in refusing to make such an award. 

CA’s order affirmed.

Digested by Michelle Eisenmenger Mapes, Diana L. Skaggs + Associates  

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Keifer v. Keifer, oral findings are insufficient to support order modifying parenting time, written findings of fact are required.

Digests to folow.

Cabinet for Health and Family Services, el al v. Ivy, extent of child support and arrearages to be paid by non-custodial parent receiving only SSI benefits.

Keifer v. Keifer, oral findings are insufficient to support order modifying parenting time, written findings of fact are required.

Digests to folow.

For those who have been advocating the absence of discounts in divorce cases using the rationale of Brooks v. Brooks Furniture Mfgrs., Inc, 325 S.W. 3d 904 (Ky. App. 2010), take a look at Shawnee Telecom v. Brown, where the Ky Supreme Court today addresses the method to value dissenting shareholder's stock.

Finally, another non-family law case, University Medical Center, Inc. v. Beglin, et al, adresses the evidentiary issues of spoiliation and adverse inference.

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Here is the final opinion, which was not modified.

The post Gaskill v. Robbins Now Final appeared first on Goldberg Simpson - Family Law Group.

The landmark goodwill case in divorce business valuations, Gaskill v. Robbins, rendered February 19, 2009 is not yet final. A petition for rehearing is pending.

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SC considered whether the goodwill of a closely held or sole proprietorship business can have both personal and enterprise values, and whether TC improperly assumed that it must make a 50-50 division of the marital assets.

GASKILL V. ROBBINS
DIVISION OF MARITAL PROPERTY, GOODWILL
2007-SC-000190-DGE
PUBLISHED: AFFIRMED
PANEL: NOBLE PRESIDING; CUNNINGHAM, SCHRODER, VENTERS AND SCOTT CONCUR; ABRAMSON CONCURS IN PART AND DISSENTS IN PART
COUNTY: WARREN
DATE RENDERED: 2/13/2009

SC considered whether the goodwill of a closely held or sole proprietorship business can have both personal and enterprise values, and whether TC improperly assumed that it must make a 50-50 division of the marital assets.

FACTS:
During the marriage, Wife worked as owner and sole practitioner of an oral and maxillofacial surgery practice, while Husband worked as a salaried employee with several businesses. At the time of trial, the parties had amassed a marital estate of over $4 million, including the value of the practice at about $670,000. Wife earned about 90% of the income during the marriage, and testimony indicated that she was very hard-working and responsible both for management of the office and patient acquisition, although Husband did provide minor assistance with the business. At trial, Wife’s expert testified that, on an asset-based analysis, the practice was worth about $221,000, which included a value of $0 for goodwill of the business because Wife’s role in the business amounted to a “non-marketable controlling interest.” Husband’s expert used the average of the values derived from four different methodologies, assuming the existence of Wife’s non-compete agreement and goodwill, and arrived at a value of $670,000. TC accepted Husband’s expert’s valuation, relying on the premise that there was no authority for the distinction between personal and enterprise goodwill in Kentucky law. CA reversed on TC’s goodwill ruling because it believed TC was under incorrect impression that goodwill must be assigned a value greater than $0, and it recognized that not all businesses have goodwill.
TC determined that marital property should be divided 50-50, relying on the parties’ equal contribution to the marital estate, including duties at home and raising their child, as well as Wife’s greater ability to rebuild her estate.

ANALYSIS:
Valuation of Goodwill:
If the reputation of a business will draw customers and get them to return, the business has goodwill. Previous KY cases recognize that everything of value in a business, including transferable goodwill, must be counted. None of those cases recognized a distinction between personal and enterprise goodwill, but they did not prohibit the distinction. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers, and suppliers. On the other hand, much like professional degrees, personal goodwill is nontransferable, belonging primarily or only to the individual. If the value of a business is to be decided on a fair and reasonable basis, and property divided equitably, this must be considered. SC found that the skill, personality, work ethic, reputation, and relationships developed by Wife are hers alone and cannot be sold to a subsequent practitioner. This personal goodwill is nonmarital property that will continue with her regardless of the presence of any spouse. SC held that to consider this personal goodwill as marital property would effectively attach her future earnings, to which Husband has no claim. Further, if Husband were then awarded maintenance, this would amount to double-dipping and cause a dual inequity to Wife. Lastly, SC recognized that the distinction between enterprise and personal goodwill is as susceptible to expert valuation as goodwill on the whole is.
Valuation Methods:
SC held that using an average of values to obtain a value of a business, without some basis other than an inability to choose between conflicting and competing valuation methods, is nothing more than making up a number, for there is no evidentiary basis to support that specific number. The trial court must fix a value, and there should be an evidence-based articulation for why that is the value used. Further, the business must be valued in its existing state, and a non-existing non-compete clause cannot be considered.
Equitable Division of Marital Property:
TC recognized that there is no presumption of a 50-50 division without regard to the evidence. However, SC held that because a court must divide the property in “just proportions,” starting the parties off in an even position in order to determine how to apportion is not unreasonable, provided that TC considers all the relevant factors of KRS 403.190. This statute requires consideration of each spouse’s contribution to acquiring the marital estate, and here, Wife clearly contributed more monetarily than Husband did. However, the ability to work with the support of a spouse/co-parent is an intangible that goes beyond dollars. Within the marital arrangement, abilities are often unequal, the use of one’s time varies according to present need, and each spouse does things to accommodate the other. How the parties earn money and build wealth is affected by these variables, but is done for common purpose. Thus, SC held, the term “contribution” has tangible and intangible components that must be weighed by TC. Furthermore, in its division of property, TC should also consider parties’ ability to earn after divorce, and Wife clearly has the advantage here.

CA’s decision re goodwill and TC’s valuation and division of practice affirmed on other grounds, and TC’s 50-50 division of property affirmed. Remanded to TC to determine value of practice and divide marital estate.

DISSENT IN PART BY ABRAMSON:
If expert testimony establishes that covenants not to compete are an integral part of a sale of a profession practice, as they typically are, the expert should be able to take them into account in assessing the value of the practice.

Digested by Michelle Eisenmenger Mapes, Diana L. Skaggs + Associates

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Kentucky finally joins the majority in distinguishing between personal and enterprise goodwill in business valuations. Court also cannot factor in a non-existent non-compete agreement to enhance a professional practice valuation. It’s about time! Gaskill v. Robbins, online here. Digest to follow.

The post Ky S. Ct. Decides Buisness Valuation Goodwill Case Today appeared first on Goldberg Simpson - Family Law Group.

Chase College of Law has now posted the briefs in Gaskill v. Robbins, to be argued before the Kentucky Supreme Court June 11, 2008.
Appellant’s Brief
Appellee’s Brief
Appellant’s Reply Brief
Appellee’s Reply Brief

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Having access to case status throughout the pipeline is enabling lawyers to be better advocates. How? Well, if you represent a physician, do you think you want to try that case before Gaskill v. Robbins is decided? And, if you must mediate or try your case before then, perhaps the oral arguments may help you get a feel for where the law is headed.

On June 8, 2008 at 10am the Kentucky Supreme Court will hear oral arguments in Gaskill v. Robbins. We have posted about this case involving business valuations many times. The issue is whether the capitalization of excess earnings method of professional practice valuation measures personal goodwill rather than enterprise goodwill. You can watch the oral arguments live at the link here. We’ll post the briefs as soon as we learn they are available.

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