Trial Court Properly Valued Business In Divorce Proceedings
The trial court in this divorce action used the appropriate method to determine the value of the plaintiff’s law practice when dividing the marital estate, the Michigan Court of Appeals has ruled.
The parties in Pecher v Habscheid (Docket No. 361496) divorced after more than 20 years of marriage. The Midland County Circuit Court valued and divided the parties’ marital property, which included the plaintiff’s law practice. In determining the value of the law practice, the trial court used the method identified in McNamara v McNamara, 178 Mich App 382 (1989), mod on other grounds 436 Mich 862 (1990)] and applied the three-year average gross profit as the value of the law practice. As a result, the trial court ruled that the plaintiff’s law firm had a value of $287,512.81.
On appeal, the plaintiff argued the trial court did not use the method set forth in McNamara because McNamara did not identify a three-year average gross profit as a specific way to value a law practice.
The Court of Appeals disagreed.
“Given that there was no indication that [the plaintiff] intended to discontinue her law practice, and her position that the business had no sale value to a third party, the court’s finding that it should be valued at a going concern was not erroneous, nor was its reliance on McNamara,” the Court of Appeals said.
Judges Michael J. Kelly, Douglas B. Shapiro and James Robert Redford joined the 21-page unpublished opinion.
Background
During the marriage, the plaintiff and the defendant had acquired two parcels of real property: 1) the marital home and 2) an office building. The parties entered into a partial property settlement that awarded the house to the plaintiff and the office building to the defendant. However, they could not agree on the value of either parcel. The parties also each had brokerage accounts, personal bank accounts in the United States and Germany, business bank accounts in the United States and Germany, and retirement accounts in the United States and Germany. Other marital assets included the plaintiff’s law practice and the defendant’s Internet-based businesses.
The trial court held that a 50-50 split of the marital assets was fair and equitable. The trial court:
Assigned a value to the marital home and the parties’ businesses.
Held that the valuation date for the brokerage accounts would be the date of the divorce.
Ruled that the proofs regarding the parties’ tax refunds and accounts receivable were speculative and, therefore, did not include them in the property division.
Ordered that the parties were to keep their retirement accounts, including the plaintiff’s statutory pension account in Germany, free and clear of any claim by the other but were to equalize the marital value of the accounts.
Denied the defendant’s request for attorney fees.
Regarding personal property, ordered each party to retain the property in their possession and to exchange certain items, and held that they could bring future disputes to the court for resolution.
Both parties disputed the property award. The trial court then entered a post-judgment order further dividing the marital property and ordering that no money be exchanged between the parties related to the personal property. After the trial court entered the judgment of divorce, it held that it would be appropriate to use the “numbers from the judgement of divorce” to calculate child support. The trial court also denied the defendant’s second motion for attorney fees under MCR 3.206(D)(1)(a).
Both parties appealed, presenting numerous arguments to the Court of Appeals.
Law Practice Valuation
In analyzing the value of the plaintiff’s law practice, the Court of Appeals noted that, during the divorce proceedings, the plaintiff had asserted she operated a “niche practice” that no one would purchase and suggested that its only value was its cash assets.
“She testified that, as of May 31, 2019, the date she filed her complaint for divorce, the business bank accounts (located in Michigan and Germany) had a total balance of $134,760,” the Court of Appeals wrote. “She opined that $67,380 of the cash should be kept from the property settlement for future operating costs.”
Meanwhile, the defendant “testified that a proper way to value the law practice would be to use its three-year average gross profits,” the Court of Appeals said. “He calculated the business’s gross profits for the years 2017, 2018, and 2019 by looking at its tax returns and the revenue flow depicted in its bank statements. When necessary, he used the average exchange rate for each year to convert sums stated in euros to U.S. dollars. Overall, based upon his calculations, the three-year average gross profit for the law practice was $287,512.81.”
According to the Court of Appeals, after the trial court set forth the parties’ positions regarding the value of the law practice, it held: “It is reversible error for a court to fail to value a business interest. Valuing a professional practice involves the same considerations as most other closely held businesses. A professional practice should be valued at its going-concern value that assumes the owner will continue to run the business unless evidence indicates that the owner intends to discontinue the business. The Court will use the method identified in McNamara … and take the three-year average gross profit as the value of [the plaintiff’s law practice]. … [The plaintiff’s] law firm therefore has a value of $287,512.81.”
On appeal, the plaintiff argued the trial court did not use the valuation method identified in McNamara because that decision did not identify a three-year average gross profit as a specific way to value a law practice.
McNamara “neither identified a particular method that a court must use when valuing a law practice, nor did it state that valuing a law practice using a three-year-average gross profit was improper,” the Court of Appeals observed. “Indeed, it is well-established that there are many ways for a trial court to determine the value of disputed property. … Relevant to a professional practice, this Court has explained if the owner is not going to discontinue the practice, then ‘the valuation of the practice should be the value of the practice to [the owner] as a going concern.’ Kowalesky v Kowalesky, 148 Mich App 151 … (1986). Likewise, in McNamara, the Court held that, regardless of the valuation method used, ‘a valuation of [a professional] practice should amount to its value to [the business owner] as a going concern.’ … The value of a practice as a going concern ap pears to be similar to a holder’s interest. As explained in Cunningham, Equitable Distribution and Professional Practices: Case Specific Approach to Valuation, 73 Mich B J 666, 667 (1994):
Applying the holder’s interest measure of value to a personal service business such as a professional practice is simply an extension of the principles of case specific valuation commonly used by trial courts in dividing marital assets under equitable distribution principles. Stripped to its core, the holder’s interest value means that:
If an interest in a personal service business is worth considerably more to the owner (a) under the assumption that he or she will continue to operate the business - and accordingly, continue to reap the financial benefits it provides, than (b) assuming the owner will sell the business to a third party (i.e., [Fair Market Value] FMV,
then the appropriate value for divorce settlement purposes, that is, for determining the offsetting amount of cash or value of other property for the nonowners spouse, is the value to the owner, not the lower FMV.
This is not a radical departure from the case specific methods of valuation for divorce settlement purposes that have evolved and become generally accepted. … Rather, adoption of the holder’s interest measure of value simply brings into conformity the valuation of personal service businesses with the way most other marital assets have been valued for years.”
In this case, the trial court’s statement that it was using the method in McNamara “appears to be a reference to the fact that the value should be determined based upon its value to [the plaintiff as a going concern, rather than on its value to a hypothetical third-party buyer,” the Court of Appeals explained. “Given that there was no indication that [the plaintiff] intended to discontinue her law practice, and her position that the business had no sale value to a third party, the court’s finding that it should be valued at a going concern was not erroneous, nor was its reliance on McNamara.”
When determining the law practice’s value to the plaintiff, the trial court found it was “appropriate to rely on the defendant’s testimony that the business’s three-year average gross profit was $287,512.81,” the Court of Appeals observed. “The court’s decision to use the method suggested by [the defendant] was within the range of proofs. ‘[W]here a trial court’s valuation of a marital asset is within the range established by the proofs, no clear error is present.’ Jansen v Jansen, 205 Mich App 169 … (1994).”
Next, the Court of Appeals addressed the plaintiff’s claim that the defendant “improperly inflated the gross profits for her business.” However, the plaintiff “has not directed this Court to any evidence admitted during the trial indicating that those numbers were erroneous. In contrast, [the defendant] submitted documentation, such as bank statements and partial tax returns for the law practice, in support of his analysis. Further, he testified at length that the net profits were inaccurate. He explained that, based upon his familiarity with the law practice, the business had ‘very, very small, fixed costs.’ He also presented evidence suggesting that Pecher was improperly claiming personal expenses as business expenses. Overall, he opined that approximately $61,000 in expenses were ‘a private flow back.’”
Therefore, while the plaintiff alleged the defendant’s numbers were inflated, “the documentation submitted by [the defendant] supports that the gross profits are accurate, and [his] testimony supports a finding that the net profits were likely inaccurate,” the Court of Appeals said. “The court, therefore, did not clearly err by relying upon [the defendant’s] documentary evidence.”
The plaintiff further maintained that she makes approximately $54,000 in wages and she earns in the “low to mid $100,000s each year in income,” along with her net business profits, the Court of Appeals observed. “At trial, [the defendant] testified that [the plaintiff] paid herself approximately $54,000 in wages. Therefore, evidentiary support exists for this portion of [the plaintiff’s] argument. However, [the defendant] did not agree that [the plaintiff’s] net profits were accurately calculated. In any event, in support of her argument that she makes in the low to mid $100,000s per year, [the plaintiff] directs this Court to [expert] testimony regarding how much she made between her income and net profits in 2017, 2018, and 2019. That testimony, however, was excluded by the trial court under MRE 703. [The plaintiff] has not pointed to any admitted evidence in support of her claim that her income plus net profits was in the low to mid $100,000s each year. ‘It is not enough for an appellant in his brief simply to announce a position or assert an error and then leave it up to this Court to discover and rationalize the basis for his claims, or unravel and elaborate for him his arguments, and then search for authority either to sustain or reject his position.’ … This portion of her argument, therefore, is abandoned.”
The Court of Appeals continued by rejecting the plaintiff’s argument that the trial court improperly allowed [the defendant] to “double dip” by awarding him half of the money in the business accounts and half of the business’s value as a going concern. “She presents no legal authority in support of her position. As a result, this Court should consider her argument abandoned. … Even if this Court were to consider her argument, it does not appear that relief is warranted. Her argument in the trial court was that the business should be valued by reference only to the money in the accounts (minus approximately $67,000 that she wanted to retain for operating expenses). The court did not adopt that approach to value. Instead, it valued the business as a going concern, using its three-year average gross profits. Thus, the award of 50% of the business value was not linked to the money that was in the business bank accounts. On this record, therefore, [the defendant] was not twice compensated for the value of the law practice. Rather, he was compensated once for the money earned during the marriage and once for the future value of the law practice, which [the plaintiff intended to continue operating.”
Other Rulings
In addition to ruling on the value of the plaintiff’s law practice, the Court of Appeals addressed numerous other challenges to the trial court’s findings. The appeals court held:
Because the trial court erred by not including tax refunds actually received as part of the marital estate, this issue must be remanded so it can calculate the value of the tax refunds received and enter an order awarding half of the value to the defendant.
The trial court correctly ruled as speculative the defendant’s testimony that there was approximately thousands of dollars in delayed accounts receivable.
The trial court properly valued the parties’ brokerage accounts using the date of trial because there was credible evidence indicating its value as of that date.
The trial court did not err by requiring the plaintiff to equalize the marital value of her German statutory pension.
The distribution of the marital home in accordance with the parties’ settlement agreement was fair and equitable.
The defendant’s arguments regarding personal property were moot.
The trial court properly rejected the defendant’s request for attorney fees.
Because the trial court did not make findings on the imputation of income to the defendant that could be reviewed, this issue must be remanded for further review.
