Divorce Law Journal

Gaskill v. Robbins Ky Supreme Court Oral Arguments Set June 11, 2008

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.

Brenzel v. Brenzel (Ky) Valuation Of Buisness/Draws From Buisness Not Supported By Note

Brenzel v. Brenzel, ___ S.W. 3d____ (Ky. App. 2008)

Husband appealed TC’s Order resulting from distribution of property in dissolution action, alleging that TC erred when it valued his interest in businesses partially owned by him and when it denied his CR 60.02 motion. Wife cross-appealed, alleging that TC erred when it determined Husband's income and that the amount of her maintenance award was an abuse of discretion.

Husband and Wife were married for sixteen years and have 2 minor children. Throughout the marriage, Husband was involved in several business ventures with his father and brother. Husband alleged that TC erred when it determined that he would not have to repay draws and advances made against the capital account of the family-owned businesses and, thus, were not properly characterized as debts owed by Husband nor debts that decreased the value of his business interests. In addition to his salary, there was evidence that Husband had taken draws from the partnership and had decreased its capital account in the amount of $324,508.

Wife’s CPA utilized the asset approach to value Husband's interest in the family businesses, but did not deduct draws and advances by either brother as there were no promissory notes or evidence that debts were owed to a third party as a result of the draws and advances. He concluded that the businesses were worth $13,500 and $183,150. One of Husband’s financial experts deducted the value of the draws and advances and a negative capital account from one business’ value and concluded that it had a negative value of $656,846, and he testified that if that business was dissolved or sold, the partners could require Husband to repay his portion of the money, which totaled $324,508. Husband’s other expert testified that real estate owned by the other business was worth less than the amount it appraised for a few years prior, even though Husband received his full portion of the appraised amount when the property was sold. TC concluded that the values of Husband's interests in the businesses were $162,800 and $13,500, as there was no credible evidence that upon dissolution of the partnership or its sale, Husband would be required to pay back the approximately $324,508 he received in draws and advances against the capital account as suggested by Husband's expert. The court then awarded $80,000 to Wife as her marital interest in the businesses and Husband $96,300.

CA found significant the absence of promissory notes signed by Husband, any specific evidence in the record that Husband was obligated to repay the money, or evidence that Husband had made any past payments toward the amount and agreed with Wife that there was no abuse of discretion in TC’s refusal to deduct that amount from the value of Husband's interest in the family businesses.

After receiving TC’s original ruling and rulings on CR 59.05 motions filed by both parties, Husband filed a CR 60.02 motion alleging that Wife had made a substantial down payment on a residence and possibly failed to disclose marital assets or had additional income, and that he had a non-marital interest in property included in the marital estate. He cited health issues as the reason for his failure to raise the issue earlier. Prior to the ruling on the motion, Husband filed this appeal. Husband contends that TC denied his CR 60.02 motion based on its erroneous interpretation of the law that since he had filed a notice of appeal prior to TC’s ruling on the motion, the court lost jurisdiction. However, he failed to cite to the record where TC expressed the basis for its denial of his motion. CA found that that the grounds alleged in Husband's motion and affidavit were insufficient to warrant the relief requested and, therefore, it was properly denied.

Wife challenged TC’s calculation of Husband’s income, asserting that TC should have calculated the businesses’ projected future earnings based on the past few years’ performance, rather than setting a lower amount based on predicted downturns in profitability. TC found, in agreement with Husband’s testimony, that Husband’s gross monthly income was $4,847.17. Wife argued that Husband's income should have been based on the years immediately preceding the dissolution hearing during which Husband's income was higher than $4,847.17. CA disagreed, finding that there was persuasive evidence that the profits from the family businesses had steadily declined over the past five years, and the fact that real estate owned by the businesses was listed for sale indicated that Husband’s future income was speculative.

Wife also challenged the amount of maintenance awarded on the basis that her reasonable living expenses exceed her income and the maintenance awarded. Wife is a 40 year-old high school graduate who receives Social Security Disability benefits of $804 per month. TC awarded permanent maintenance of only $250 per month, though her reasonable needs total $2,201 per month. CA disagreed with Wife, noting that Wife received $107,130.20 in marital property and that Wife was assigned a comparatively small amount of the marital debt. Thus, when it determined the amount of maintenance to award, TC properly considered the factors set forth in KRS 403.200(2). Affirmed.

As digested by Michelle Eisenmenger Mapes, Diana L. Skaggs + Associates

Kentucky Supreme Court Accepts Discretionary Review In Personal v. Enterprise Goodwill Case

The Kentucky Supreme Court accepted discretionary review of Gaskill v. Robbins, digested here, and about which we reported here and here. It was announced at the UK Biennial Family Law Institute in Lexington today that the briefing schedule is expedited. (And, Justice Keller, Professor Graham did communicate your views, as ordered.)

Gaskill v. Robbins: Discretionary Review Sought

Shannon Pratt must be clicking his heals. We published some of the business valuation guru's comments at Kentucky Has Opportunity To Join The Majority, reported on the case at The Child Custody Issue Needs To Be Remanded For A New Trial But it Would Be A Great Case For Discretionary Review On The Goodwill Issue: What Will Retired Justice James E. Keller Do? and digested it here. The Kentucky Supreme Court has already accepted discretionary review in a case that is not nearly so well briefed and factually ripe. This case would make a nice duo.

Although retired Justice James Keller told us he would be filing a motion for discretionary review, the March 16, 2007 filing did not appear on the Kentucky Court of Justice website until Friday. If you are counting on that site to know if a case is final so the "to be published" case can be cited, know that it is a little slow and you'll have to continue to do it the old fashioned way by picking up the telephone and calling the clerk.

Kentucky Has Opportunity to Join Majority In Distinguishing Personal v. Enterprise Goodwill Per Shannon Pratt

Personal Versus Enterprise Goodwill
Gaskill v. Robbins digested here and discussed here was the subject of an article in the February 2007 edition of Business Valuation Update by Shannon Pratt: Kentucky Has Opportunity to Join Majority In Distinguishing Personal Versus Enterprise Goodwill (subscription only, not available online).
On appeal, the wife contended the family court “operated under the misconception that it was compelled to assign a goodwill value” to her practice, and the Court of Appeals agreed. While Kentucky law requires considering goodwill in the valuation of a medical practice-it does not compel it, and the case merited remand.
At the wife’s urging, the Appeals Court also considered whether Kentucky law should join the majority of US jurisdictions in distinguishing enterprise and personal goodwill in divorce actions….
As in the May case, which went through an appeals process to the highest state level, the Kentucky Court of Appeals may simply have deferred the ultimate question to the Kentucky Supreme Court. In a dissent, a senior judge on the appellate panel indicated he believed “personal goodwill should not be considered marital property to be divided between the parties.” However, he added, “This is a matter to be addressed to our Supreme Court,” as both the trial and appellate courts had not erred in their rulings under Kentucky law.

The case is not yet final. A motion for reconsideration is pending in the Kentucky Court of Appeals. As we previously grieved, however, it will be very difficult for the wife to move for discretionary review since she won a new child custody trial, and probably is more eager to have the case remanded for a new trial. These may not be the best facts for the Kentucky Supreme Court to revisit this issue, anyway, as the non-business owner spouse in Gaskill did contribute marital efforts working in his wife’s oral surgery practice. That complicates the issue of contribution of a spouse with the more precise issue of segregating personal goodwill from enterprise goodwill. However, the legal issue was well presented and perhaps if discretionary review is taken, the spousal contribution anomaly could be parsed from the precise issue.

Gaskill v. Robbins

Gaskill v. Robbins, __ S.W.3d __ (Ky. App. 2006), 2006 WL 3524380 (Ky. App.) Not final, motion for reconsideration pending.
Issues and Holdings:

1) Whether the trial court abused its discretion when it failed to allow wife to introduce a prior inconsistent statement from psychologist. The Court held yes, the lower court abused its discretion.
2) Whether the trial court’s error in making a finding of fact that relied on unsworn statements from a hearing dealing with the guardian ad litem’s motion to review temporary custody prejudiced the wife. The Court held yes, the error did prejudice the wife.
3) Whether the trial court exercised its discretion when it assigned the goodwill value to the wife’s medical practice. The Court held no, the court did not exercise discretion.
4) Whether the trial court was required to make a distinction between “personal” goodwill and “enterprise” goodwill when valuing the wife’s business. The Court held no, the lower court was not required to do so.

Facts:

The parties were married in May 1992, with one child born in the marriage. Gaskill, the wife, is an oral and maxillofacial surgeon who already had a successful practice in Russellville at the time of the marriage. After the marriage, she opened up an additional office in Bowling Green. Robbins, the husband, was employed outside Gaskill’s practices, but also assisted her in opening the second office by interviewing and training staff, setting up the physical structure of the office, and assisting in clerical matters. Robbins also helped with the tax, payroll, and accounting matters of Gaskill’s business, prepared profit and loss statements, negotiated leases for the office space, and terminated employees when needed. Both parties maintained the household and cared for their child.
The parties separated in August 2003, and Gaskill filed for divorce in October 2003. The main issues in the divorce proceedings were the valuation of Gaskill’s business, how the marital property should be divided, and the custody of their child. The trial court granted sole custody to Robbins and awarded each party approximately 50 per cent of the marital property. Gaskill appealed.

Analysis:

On appeal, Gaskill argued that the lower court erred in refusing to allow her to introduce a prior inconsistent statement made by Dr. Fane, a psychologist, and ruling that said statement was inadmissible hearsay. At trial, Dr. Fane testified that he did not believe that either parent could be considered better than the other regarding custody. Gaskill’s counsel asked him about a statement he had made to Dr. Buchanan indicating that Gaskill was the better parent, but Dr. Fane testified that he did not recall making such a statement. Gaskill’s counsel then attempted to call Dr. Buchanan to impeach Dr. Fane, but Robbins’ counsel objected and the trial court sustained the objection to inadmissible hearsay. The evidence was then introduced by avowal. The Court held that the lower court erred in failing to allow the impeachment testimony. The statement satisfied KRE 801A (a) (1) and counsel laid the proper foundation for the testimony to be heard. In addition, the court’s findings of fact show that the court relied on Dr. Fane’s testimony in its custody determination. Therefore, omission of the impeachment testimony was error. The Court did not consider whether the error was reversible, as the Court found other reversible error.
The Court also found that the trial court erred in making findings of fact that relied on unsworn statements made at a hearing concerning the Guardian Ad Litem’s motion to review temporary custody. At the hearing Robbins’ counsel and the GAL repeated numerous hearsay statements about Gaskill’s alleged interference with the child’s schooling, including statements supposedly made by the child and the child’s school principal. The court’s findings of fact clearly show that these statements were relied upon by the court. Therefore, the court’s consideration of the statements was prejudicial, and the court’s custody determination must be reversed.
Gaskill also argued that the lower court erred in its valuation of the marital property by failing to exercise its discretion in assigning goodwill value to Gaskill’s business and by failing to distinguish between personal and enterprise goodwill. Gaskill’s expert testified that her business had no goodwill value, since any goodwill attributable to the practice was personal goodwill. He testified that the practice had a fair market value of $114,000.00. Robbins’ expert testified that the practice had a value of $669,075.00, which included its goodwill value. The Court held that the lower court erred in failing to exercise its discretion in assigning a goodwill value to the business. The lower court felt required to assign a goodwill value to the business, but was not required to do so. Thus, the Court remanded the issue for further consideration.
Regarding whether a distinction should be drawn between personal and enterprise goodwill, the Court held that the case law in Kentucky does not support such a distinction. The Court stated that it was not inclined to deviate from the precedent by creating a “wholesale change of law” holding that a distinction should be made, even given the fact that Gaskill’s business is a sole proprietorship. Such a distinction would ignore the nonprofessional spouse’s contribution to the success of the professional spouse’s business. Because Robbins made numerous contributions to Gaskill’s business, the Court stated that the goodwill of the practice should be considered in valuing the marital property on remand.
The Court reversed and remanded for further proceedings consistent with the opinion.

Judge Paisley concurred in part and dissented in part.

He would affirm the trial court’s award of sole custody to Robbins. He also stated that Gaskill made a good argument why there should be a distinction between personal and enterprise goodwill, but asserted that this was an issue that the Kentucky Supreme Court should address. He therefore agreed with the majority on this issue

The Child Custody Issue Needs To Be Remanded For A New Trial But it Would Be A Great Case For Discretionary Review On The Goodwill Issue: What Will Retired Justice James E. Keller Do?

Gaskill v. Robbins, NO. 2005-CA-002088-MR, http://opinions.kycourts.net/coa/2005-ca-002088.pdf, was decided December 8, 2006 in an Opinion Reversing and Remanding which is designated to be published. The custody determination and business value determined by Warren Family Court Judge Margaret Ryan Huddleston were reversed and remanded for a new trial.
The trial court rejected any valuation which excluded any goodwill stating that “there is no reported legal authority for the distinction in goodwill” (personal v. enterprise). “To the contrary, it is generally accepted in Kentucky that the goodwill of a closely held corporation should be assigned value in a dissolution proceeding,” citing to Drake v. Drake, 809 S.W.2d 710 (Ky.App. 1991), Clark v. Clark, 782 S.W.2d 56 (Ky.App. 1990), and Heller v. Heller , 672 S.W.2d 945 (Ky.App. 1984), in support of this proposition.”
The Court of Appeals noted “While we acknowledged that ‘the goodwill contained in a business should be considered when arriving at the value of a practice,’ Id. at 55, citing Heller, 672 S.W.2d at 947 (Emphasis added), we rejected the argument that Heller held that all businesses have goodwill. Id. Consequently, we upheld the trial court’s decision to not include an amount for goodwill in valuing the appellee’s medical practice, concluding that the trial court’s decision was supported by substantial evidence, Id. at 56.”… The question therefore arises as to whether the court gave appropriate consideration to the issue and properly exercised the discretion afforded to it in matters of valuation. See Clark, 782 S.W.2d at 60, citing Platt v. Platt, 728 S.W.2d 542 (Ky.App. 1987). We believe that it did not. As the court was laboring under the misconception that providing a value for goodwill was compulsory in reaching its decision, we believe that it cannot be said that the court exercised its discretion appropriately.”
Here is the meat of the decision on this issue:
“After considering the issue and the facts of this case, we are not inclined to deviate from long-standing precedent by creating a wholesale change of law holding that “personal” and “enterprise” goodwill should be distinguished for purposes of property evaluation in a divorce proceeding – even given that Gaskill’s practice is a sole proprietorship. Issues of stare decisis aside, we believe that “[i]t would be inequitable to hold that the form of the business enterprise can defeat the community’s interest in the professional goodwill. Such a result ignores the contribution made by the nonprofessional spouse to the success of the profession ….” Mitchell v. Mitchell, 732 P.2d 208, 211 (Ariz. 1987).”
The problem in the facts before the Court of Appeals in this case was that the non-professional spouse was actively involved in the business. So, while the contributions of the non-professional spouse may be quite relevant to the facts of this case, they usually are not. I agree with Senior Judge Lewis G. Paisley, sitting as Special Judge, who stated in his Concurring Opinion “I believe she makes a compelling case that ‘personal’ goodwill should not be considered marital property to be divided between the parties. I believe, however, that this is a matter to be addressed to our Supreme Court.”
So now what will retired Justice James E. Keller, counsel for appellant on appeal, do next? He won a reversal and new trial for his client on the child custody issue because the trial court relied on hearsay, and he won on the ruling that the court should have considered introduction of a prior inconsistent statement made by a psychologist to another psychologist. I cannot ever recall seeing a party asking an appellate court to bifurcate issues, but it sure would be nice if he could take the Court of Appeals ruling back to the trial court for the new trial on the custody issue, yet file a motion for discretionary review in the Kentucky Supreme Court on the goodwill issue. The timing would be pure gold in that the Kentucky Supreme Court recently accepted discretionary review in another divorce case involving goodwill.

Intro to Business Valuation

The April ABA e-news has a general posting about business valuations. I had no idea how "young" this sub-specialty is. If you are new to this area of divorce law, this article will untangle the alphabet soup. This is an area of family law that is near and dear to my heart. Stay tuned for much more posting about this field, including some discussion of "can bad accounting be good law?"

Gomez v. Gomez, 168 SW3d 51 (KY. App., 2005)

Gomez v. Gomez, 168 SW3d 51 (KY. App., 2005)
Hospital based medical practice valuation which included
no goodwill value was reluctantly affirmed because, while
capitalization of excess earnings method is an acceptable
approach, the trial court is not required to use this method
and trial court ruling as to valuation will not be disturbed
unless clearly contrary to the evidence submitted. The
Court of Appeals reversed the maintenance award ($5,000
per month for three years + $2,424 per month for first and
second mortgages where husband grossed $600,000) to
$800,000 per year. Assignment of $52,000 credit card debt to
wife was also reversed because at least $18,000 of the debt
was for two rugs, of which the husband received one and the
debt was in the husband's name. The Court of Appeals also
reversed the attorney fee award of only 22% of wife's attorney
fees as the trial court did not enumerate any of the factors set
out in Sexton v. Sexton.