DEBORAH R. CHASE v. CHRISTOPHER W. CHASE
DEBORAH R. CHASE v. CHRISTOPHER W. CHASE
Awarding spousal support when Wife allegedly failed to demonstrate a need for alimony; Valuation of Husband’s medical practice (Enterprise & Personal Goodwill revisited); among other issues.
In the Court of Appeals of TN at Knoxville
Appeal from the Circuit Court for Hamilton County
No. 19-D-1205
Judge L. Marie Williams
Filed December 9, 2022
This Tennessee divorce case followed a 24 year marriage. Husband was a plastic surgeon and earned a significant income, Wife was a stay-at-home mother. The trial court awarded rehabilitative alimony and alimony in futuro to the wife based on its determinations that the wife had demonstrated a need for alimony and that the husband had the ability to pay. The husband appealed. Discerning no reversible error, the appellate court affirmed the trial court’s spousal support award in its entirety along with the trial court’s value placed on the husband’s medical practice which included Enterprise Goodwill.
Alimony
Husband posited that the trial court erred by awarding alimony to Wife, who allegedly failed to demonstrate a need for spousal support because she was awarded $1.98m in marital property and enjoyed sufficient earning capacity as a pharmacist although she had not worked in this profession for years and did not enjoy it and much preferred to subordinate her career for the benefit of the family. Husband advanced the idea that Wife’s desire to pursue a different and potentially less lucrative career outside of pharmacy would render her “voluntarily underemployed.” The court noted the testimony of Husband’s vocational expert witness who opined that Wife could earn an annual salary of $110,000 to $140,000 based solely on her credentials and the expert’s internet research regarding prevailing pharmacist salaries in the area. He acknowledged that he had neither interviewed Wife nor considered her physical limitations. The trial court found the earning capacity of the Wife currently was about $30,000 per year, and $50,000 after continuing education. The court noted that Pharmacists may earn substantially more, but Wife’s absence from the work force diminished her earning capacity and her election not to practice pharmacy was reasonable in light of her physical condition.
Husband presented the testimony of a forensic CPA concerning Wife’s potential income stream from assets in the proposed marital property distribution. The expert opined that Wife could obtain a 5% rate of return on these assets which would yield to Wife potential income of $8,000 to $10,000 per month, thereby obviating any need for alimony. Wife presented a competing expert, also a forensic CPA, who opined that Wife would not receive a significant income stream from the distributed assets and that a 5% rate of return could not be achieved in the current market as demonstrated by the fact that such a rate of return had not been achieved by the parties in the past, according to the parties’ income tax returns. Wife’s expert related that the parties had, in the past few years, reported interest and dividends totaling approximately $5,000 per year at most. The trial court sided with Wife’s expert on this matter. The appellate court found no abuse of discretion in the trial court’s decision to credit Wife’s expert’s opinion that Wife would not have a significant income stream from the assets that she received in the divorce. Additionally, a portion of the assets were retirement accounts that Wife would not be able to access before she reached the appropriate age.
We at FVS, PLC agree with the premise that although the assets had not been actually distributed and apparently not invested in the manner with which Husband’s expert opined, it is common practice for forensic CPAs to project a new and different income stream from existing assets for a spouse post-divorce. Simply because the assets were not historically invested in the projected manner does not make the potential income projection invalid. The impact of retirement assets on alimony need is difficult to gauge unless the analyst uses a lifetime cash flow projection for alimony need as we do at FVS, PLC. For more on this, see Robert Vance’s 2009 Tennessee Bar Journal article, Breakin’ Up is Hard to Do at https://www.forensicval.com/re....
The trial court found the Wife’s reasonable monthly need to be $11,461 in accordance with the standard of living that the parties enjoyed during the marriage and the evidence did not preponderate against such finding per the appellate court. Wife did have a need for alimony to meet the standard of living post-divorce anticipated by the statute and Husband had an ability to pay. Accordingly, the trial court awarded $1,600 per month for 3 years in rehabilitative alimony plus $7,000 per month alimony in futuro. The appellate court accordingly concluded that Wife’s need for alimony was supported by the evidence.
Value of Husband’s Medical Practice
Husband contended that the trial court erred in its valuation of Husband’s medical practice when equitably distributing the marital assets. The trial court awarded Associates in Plastic & Reconstructive Surgery, P.C. (“APRS”) to Husband valuing it at $255,000. Husband specifically asserts that the evidence preponderated against that value because that value necessarily includes some element of personal goodwill. The appellate court disagreed with Husband’s claim.
Husband’s expert valued the practice at $110,000 utilizing a 90% weight given to the adjusted net asset value method and 10% weight to the capitalization of cash flow method. Wife’s expert valued the practice at $350,000 utilizing a 100% weight to the capitalization of cash flow method. It was argued that the business possessed features of both enterprise and personal goodwill and this argument was found to be valid. However, the trial court found that the factors establishing the enterprise goodwill are less prevalent than those of personal goodwill. While APRS employed 12 employees, including a nurse practitioner and an aesthetician who billed separately for their services, Husband was still the primary generator of income. The trial court found that it must consider the extent to which Husband’s work ethics and his personal goodwill increase the income stream of the business and not consider personal goodwill in valuing the business.
Husband contended that the trial court erred in adopting a greater value than that found by his expert, proffering the theory that the court’s value must contain some element of goodwill. Although Husband acknowledged that enterprise goodwill is an appropriate component of business value in certain circumstances for the purposes of marital property distribution, he argued that personal goodwill should not be included when valuing and dividing marital property upon divorce. We at FVS, PLC agree with this premise. According to Husband, the trial court improperly included some measure of personal goodwill in its valuation of APRS.
Husband’s expert conceded that it was possible that any goodwill associated with APRS did not fall “neatly” into the box of either enterprise or personal goodwill, acknowledging that APRS could maintain a mixture of both. Wife’s expert opined that Husband’s expert should not have relied primarily upon the adjusted net asset value method because APRS was a corporation and was more than simply the sum of its assets. According to Wife’s expert, it was proper to also consider the income stream and value of earnings made possible by APRS’s standing in the local community and its customer base. Wife’s expert concluded that the capitalized cash flow method was a more appropriate valuation method because it included the value of tangible and intangible assets and opined that it was probable that if Husband left the practice, another qualified doctor would be able to continue its success. When asked about enterprise versus personal goodwill, Wife’s expert stated that he did not prepare a report specifically concerning those items; however, he did implicitly acknowledge that utilizing the capitalization of cash flow method could include considerations that were typically associated with enterprise and personal goodwill. We at FVS, PLC agree with this premise.
The appellate court cited Witt v. Witt, No. 01-A-019110-CH-00360, 1992 WL 52746 (Tenn. Ct. App. Mar. 20, 1992), in which the Court addressed the question of whether a medical business could only be valued in accordance with the net asset method. The husband in Witt was a medical practitioner who operated a diagnostic clinic that employed eight non-physician technicians providing various radiological services including CT and MRI scans. The trial court set a value for the clinic that was higher than the net asset value. The appellate court also cited York v. York, No. 01-A-01-9104-CV-00131, 1992 WL 181710 (Tenn. Ct. App. July 31, 1992) concluding that the trial court did not abuse its discretion in assigning a value to the husband’s professional corporation, which employed other medical practitioners, that was substantially greater than the net asset value.
The appellate court concluded that the trial court did not err in setting a value for the business that was greater than its net asset value. The appellate court’s review of the trial court’s opinion reveals that the court considered all of the evidence presented and determined value specifically based upon such factors as (1) the business’s income stream in recent years; (2) APRS’s status as a corporation; (3) differing asset values, including the value of inventory; (4) APRS’s employment of other revenue-generating employees; and (5) the increase in cash on hand in APRS by the time of trial. The appellate court noted the trial court clearly considered “all relevant evidence regarding value” and placed a value on APRS that was “within the range of the evidence submitted.” The appellate court noted that APRS is a corporation employing several employees other than Husband. At least two of those employees generate income separate and apart from Husband’s services, including but not limited to the sale of various products. APRS is separately branded and generates income over and beyond Husband’s services.
We at FVS, PLC agree with the premise that medical, dental and other professional practices can and do have elements of personal and enterprise goodwill depending on its unique characteristics. In our opinion, a practice owned by a single, licensed professional (i.e., physician, dentist, CPA, optometrist, financial planner, etc.) should not automatically default the valuation technique to one that renders no goodwill at all or personal goodwill only. This is especially the case when the practice employs other income-generating employees and/or features a patient or client base that can be sold or transferred to another practitioner.