Cela v. Cela - TN Divorce Case Regarding Personal Goodwill and Pension Coverture Fractions
August 27th, 2021
ANGELA MICHELLE CELA v. SOKOL CELA
In the Court of Appeals of TN at Nashville
January 28, 2021 Session
This divorce case that was tried in 2019 in Montgomery County has two major points of interest for those of us in domestic practice: Personal v. Enterprise Goodwill in the Value of Wife’s Speech Therapy Practice - Mark Their Words (“MTW”) and a Discount to the Coverture Fraction Calculation of the Marital Portion of Husband’s Military Retirement.
Personal v. Enterprise Goodwill in the Value of Wife’s Speech Therapy Practice - Mark Their Words (“MTW”)
This is the age-old question in Tennessee divorce cases about whether a single-owner business contains personal goodwill (which is not a divisible marital asset) and/or enterprise goodwill (which is divisible) and how to value and separate each. The interesting twist in this case is the simple method used to allocate the personal goodwill.
Wife’s business valuation expert explained that Wife is considered a sole proprietor for tax purposes because MTW is a sole-member LLC and all services provided by MTW staff are billed to insurance companies through Wife’s social security number. He determined the “income approach” would not be a proper valuation method for MTW because it considers “overall enterprise value,” and “[e]nterprise value and personal goodwill is not to be considered in a divorce in Tennessee for a sole proprietor and professional services.” He asserted that MTW’s business is made up of Wife’s personal goodwill but stated that he was “not saying it’s 100 percent personal goodwill.” According to the expert, Tennessee courts have held that personal professional goodwill is not a marital asset. Consequently, he used the “net asset approach” to value MTW at $82,000 as of May 31, 2019. The net asset approach usually provides the minimum value of a business.
Husband’s business valuation expert selected the income approach as the most appropriate after concluding that MTW is a “true business.” The income approach usually provides a value that contains goodwill be it personal and/or enterprise. He determined that the company is not a “classic sole proprietorship” because it “is marketed under MTW and performs work as a collection and a team of folks, not as [Wife].” Referring to MTW’s legal dispute over its former name (More Than Words), he asserted that “from an economic perspective, you are not going to spend money fighting over a worthless thing.” A branded name like Mark Their Words and a trained and assembled workforce are attributes that lean toward enterprise goodwill. Using the income approach, he valued MTW at $790,000.
Husband’s expert stated “[A]t the end of the day, this is a business that has been built into something greater than one person sitting in an office providing services. You can hire a manager very easily. I fully disagree with the idea that you can’t hire someone to come in and manage.” As to personal goodwill, he noted that between January 2018 and May 2019, Wife accounted for only 14.3 percent of MTW’s total revenue; that is, 85.7 percent of MTW revenue was generated by other providers.
Somewhat surprisingly, Wife’s expert opined that “the reason why [customers come to MTW] is in the business itself, the enterprise, the name of the business, the assembled workforce, the systems that have been put into place” all attributes that lean heavily to enterprise goodwill and not personal.
Wife acknowledged that MTW employs a clinical supervisor, a back office supervisor, and an administrator. MTW receives referrals from the school systems in Clarksville, Nashville, and Kentucky, as well as from Vanderbilt physicians and that MTW has a second location with three therapists, but Wife does not see patients there. Outside referrals to a business and not an individual and multiple locations are all attributes of enterprise goodwill. In terms of alimony, Wife stated that she does not have the income to make the payments to Husband because MTW has lost half of its staff and “if people aren’t there making me money, I can’t make money.” Apparently Wife did not realize that people making money for her is a prime attribute of enterprise goodwill, not personal.
As to the value of MTW, the trial court found that there was no dispute MTW is a marital asset and that personal goodwill is not a marital asset to be considered “in making an equitable distribution of the marital estate.” The trial court stated, that on the other hand, “inclusion of enterprise goodwill in the valuation of a business in a Tennessee divorce is not strictly forbidden.” Based on these findings, the trial court accepted the value of $790,000 provided by Husband’s expert but determined that a 14.3 percent reduction was appropriate to account for Wife’s personal goodwill (the percentage of therapy services she provided). Simple but effective in this particular case with the given facts. The trial court ruled that the resulting value was $677,030.
On appeal, Wife argued that her case is similar to Ogles v. Ogles, No. M2013-02215-COA-R3-CV, 2015 WL 113336 (Tenn. Ct. App. Jan. 7, 2015). The Ogles court affirmed the trial court’s decision to accept the value provided by the husband’s expert witness under the asset value approach, concluding that “the weight of the evidence demonstrated that the goodwill [of the business] was more attributable to [the husband] personally than to [the business].” The Cela appellate court stated that the trial court’s pertinent findings are almost diametrically opposed to the evidence referenced by the Ogles court by giving this list of attributes that supports the inclusion of enterprise goodwill in the marital value:
- Wife handed off her patients to other providers at MTW during a leave of absence in 2016;
- The company’s business carried on successfully during Wife’s absence;
- Business continued uninterrupted during a subsequent 8 week leave of absence by Wife in 2018;
- Wife does not go to MTW’s second location;
- The therapy services Wife provides to patients account only for 14.3% of the MTW’s production;
- Wife repeatedly testified that people are making money for her;
- MTW is a successful enterprise;
- Wife has established a business model that leverages others’ skills and services to generate income; and
- MTW is not reliant on any single specific provider.
The trial court expressly considered Tennessee law concerning personal goodwill and found that “MTW has a value over and above the net asset value” and that “the Income Approach is the more appropriate valuation method.” The appellate court considered the entire record and the evidence did not preponderate against the opinion of value expressed by the Husband’s expert witness; therefore, declined to overturn the trial court’s decision as to MTW’s value. Cela confirmed as have many other Tennessee cases that enterprise goodwill does exist and it should be divisible even for a single-owner business and especially when attributes like those listed above are present.
Discount to the Coverture Fraction Calculation of the Marital Portion of Husband’s Military Retirement
Wife argued that the trial court miscalculated the portion of Husband’s military retirement to which she was entitled. Specifically, she asserted that the trial court erred in determining the number of months Husband was married to Wife while in service, including the trial court’s application of a 48-month reduction.
In determining Wife’s award, the trial court relied on the method accepted by the United States Department of Defense’s Defense Finance and Accounting Service (DFAS) which is a classic coverture fraction which is computed by multiplying 50% times a fraction, the numerator of which is the number of months of marriage during the member’s creditable military service, divided by the member’s total number of months of creditable military service. The DFAS states that this fraction shall be used to determine the non-military spouse’s division of the military retirement and many other Tennessee cases state that the fraction can be used as a method of division.
To arrive at the applicable fraction, the trial court used a denominator equal to 249 months of Husband’s total creditable military service and a numerator equal to 119 months after purportedly reducing by 48 months the total number of months of marriage during Husband’s creditable military service. The final order states that the trial court considered it “appropriate to reduce the time in which [Wife] has an interest in the retirement of [Husband]” because Wife had been conferred a “lifetime benefit” in being able to earn her academic degrees in part due to Husband’s military employment; Wife did not travel to facilitate Husband’s career when he had to train in Maryland and live in Huntsville to support the family; Husband lived in a camper for a period of time to help the family’s finances and get MTW off the ground; and the parties had separated in May 2016. Using the DFAS computation, the trial court awarded Wife a 23.89% (119 ÷ 249 x 50% = 23.89%) interest in Husband’s military retirement.
The Cela appellate court had no issue with the trial court’s decision to reduce or discount the number of includible marriage months in the numerator by 48 months. Over half of that figure corresponds to the months elapsed between the parties’ separation in May 2016 and trial court’s declaring them divorced in August 2018. Additionally, given its consideration of the Wife’s unwillingness to move with Husband and Husband’s contributions to her career as a speech pathologist, the appellate court had no willingness to disturb the trial court’s decision to discount the marriage months. The appellate court however could not reconcile where the trial court had derived the applicable number of months to be used as the numerator of 119. Their review of the record indicated that the parties were married for a total of 195 months while Husband served in the military; therefore, 195 total months of marriage minus the 48 months discounted by the trial court equaled 147 months. The appellate court vacated the trial court’s ruling as to the numerator under the DFAS coverture fraction method and remanded for a correct calculation.