Howell v. Howell

COURT OF APPEALS OF VIRGINIA

Present: Judges Coleman, Willis and Bumgardner
Argued at Richmond, Virginia

GEORGE C. HOWELL, III
OPINION BY
v. Record No. 2800-98-2 JUDGE RUDOLPH BUMGARDNER, III
JANUARY 27, 2000
MARGARET H. HOWELL

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge

Ronald S. Evans (Lawrence D. Diehl; Brenner,
Dohnal, Evans & Yoffy, P.C., on briefs), for
appellant.

James C. Roberts (Dawn B. DeBoer; Mays &
Valentine, L.L.P., on brief), for appellee.

George C. Howell, III appeals from the final decree

divorcing Margaret H. Howell and him and distributing their

marital estate. He complains primarily that the trial court

erred in valuing his interest in his law firm, but he also

asserts it erred in classifying a money market account, in

allocating marital debt, and in setting spousal support. The

trial court referred all issues to a commissioner in chancery

and adopted nearly all of the commissioner's findings in its

final decree. Concluding that the trial court did not err, we

affirm.

The parties married in 1982 after the husband graduated

from law school but before he began practicing law with Hunton &
Williams, a large firm based in Richmond. The husband

specialized in tax law, established a successful practice with

the firm, became a partner in 1989, and earned an income of more

than $400,000 by 1998. After the first of their two children

was born in 1984, the wife no longer worked outside the home.

She took care of their two children and maintained the

household. When the parties separated November 17, 1995, she

maintained custody of the children, and when they divorced

November 4, 1998, she received sole physical custody of the

children with the husband's consent.

The husband conceded that his partnership interest was

marital property because he acquired it during the marriage.

The partnership agreement at Hunton & Williams defined the value

of the partnership interest upon termination or death. It

entitled the partner to receive only the balance of his capital

account and his share of the net income. As applied to this

case, those two items amounted to $85,614. The husband

maintains that the agreement fixed the value of his partnership

interest for equitable distribution purposes and that it

precluded consideration of whether his interest had goodwill.

He argues that Kaufman v. Kaufman, 7 Va. App. 488, 375 S.E.2d

374 (1988), ruled that restrictive agreements control the

valuation of business interests and limit the value to that

established by the agreement. The husband argues that the trial

court erred in finding that his partnership interest had

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goodwill because the Hunton & Williams agreement made no

provision for goodwill.

Code § 20-107.3(A) directs that the trial court value all

property of the parties, but it does not define the term,

"value," for equitable distribution purposes. The statute does

not set the standard of value, that is, the measure of

property's worth for equitable distribution. "Value" is a

mercurial term; the term has numerous, distinct meanings. The

various meanings are not interchangeable. The meaning of the

term, "value," depends on what is being valued, who is

interested, and why it is being valued. A piece of property may

have different values for different purposes. The purpose for

which it is being valued determines which definition, which

standard of value, is proper. Purpose determines the standard

of value; that, in turn, determines the appropriate methods of

valuation.

Bosserman v. Bosserman, 9 Va. App. 1, 384 S.E.2d 104

(1989), defined "value" for equitable distribution purposes; it

set intrinsic value as the standard of value. "Trial courts

valuing marital property for the purpose of making a monetary

award must determine from the evidence that value which

represents the property's intrinsic worth to the parties

. . . ." Id. at 6, 384 S.E.2d at 107. The value of an item of

marital property is its intrinsic worth to the parties: the

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worth to the husband and wife, the parties; the value to the

marital partnership that the court is dissolving.

Intrinsic value is a very subjective concept that looks to

the worth of the property to the parties. The methods of

valuation must take into consideration the parties themselves

and the different situations in which they exist. The item may

have no established market value, and neither party may

contemplate selling the item; indeed, sale may be restricted or

forbidden. Commonly, one party will continue to enjoy the

benefits of the property while the other must relinquish all

future benefits. Still, its intrinsic value must be translated

into a monetary amount. The parties must rely on accepted

methods of valuation, but the particular method of valuing and

the precise application of that method to the singular facts of

the case must vary with the myriad situations that exist among

married couples.

Because intrinsic value must depend on the facts of the

case, we give great weight to the findings of the trial court.

We affirm if the evidence supports the findings and if the trial

court finds a reasonable evaluation based on proven methodology

and on the application of it to the particular facts of the

case. See Russell v. Russell, 11 Va. App. 411, 415-16, 399

S.E.2d 166, 168 (1990). "[T]he trial court's valuation of

goodwill will not be disturbed if it appears that the court made

a reasonable approximation of the goodwill value, if any, of the

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professional practice based on competent evidence and the use of

a sound method supported by that evidence." Id. at 417, 399

S.E.2d at 169 (citation omitted).

In Kaufman, the husband purchased a one-third interest in a

medical practice six months after the parties separated. The

purchase contract required stockholders to resell their interest

to the corporation at a value excluding any provision for

accounts receivable or work in progress. The trial court held

that the value set by the contract controlled because the terms

were made at arm's length and were devoid of fraud. This Court

affirmed that valuation and ruled it was bound by the finding

because there was evidence to support it. See 7 Va. App. at

502, 375 S.E.2d at 381 (citing Code § 8.01-680).

In Bosserman, the wife asked the court to value the

husband's interest in a family-owned, closely-held corporation.

A restrictive agreement required a shareholder to offer the

stock first to the corporation at "true book value." The

husband argued that the restriction defined the value. See 9

Va. App. at 3, 384 S.E.2d at 106. This Court recognized that

the value set by such agreements "is often artificial and does

not always reflect true value," even though the agreements may

be binding on business partners. Id. at 6, 384 S.E.2d at 108.

"[T]he sale price set by restrictive provisions on transfer is

not conclusive as to the value of the stock." Id. at 7, 384

S.E.2d at 108. A restriction on transfer does not control its

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value, "but the restriction on transfer is a factor which

affects the value of the stock for purposes of equitable

distribution." Id. (citations omitted). Interestingly,

Bosserman relied upon an article discussing goodwill valuation

in law firms to conclude restrictive provisions are not

conclusive of value.

Russell established that a psychiatric practice could have

goodwill that had value. "[I]f the trial court determines from

the greater weight of the evidence that a professional practice

has goodwill value, that amount must be subject to valuation as

part of the marital property. To hold otherwise would result in

a windfall to the professional spouse." 11 Va. App. at 416, 399

S.E.2d 168. Goodwill may be an asset of a professional

practice, and if it is, it is subject to valuation for equitable

distribution purposes.

All three decisions turned upon the particular findings

made from the precise evidence presented to the trial court.

The holdings establish that the value of property is an issue of

fact, not of law. Goodwill may exist, or may not; an agreement

may restrict its value, or may not. The existence of goodwill

must be proven, and if it exists, its value must be proven. The

evidence presented at trial determines the result, and the

result may vary from case to case as the evidence differs. If

conflicting, competent evidence is presented, that found more

credible will determine whether goodwill exists and its value if

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it does exist. The existence is not fixed as a matter of law,

nor is the method of valuation; both are functions of the fact

finding process.

In this case, the commissioner found that the husband's

partnership interest had intangible value, goodwill, and that

the partnership agreement did not reflect its true worth to the

parties, its intrinsic value. After hearing extensive expert

testimony, the commissioner accepted the opinion of the wife's

expert and valued the partnership interest at $319,569. The

trial court accepted the commissioner's findings.

The wife's certified public accountant testified that the

husband's interest in his law firm had value in the nature of

goodwill. The husband's expert witness, also a certified public

accountant, disagreed and testified that the partnership

agreement controlled. Both opinions were made by qualified and

experienced experts, were reasoned and based on accepted

principles, and either might have been found credible by the

trial court. In resolving the conflicting opinions, the

commissioner gave greater weight to the wife's expert, and the

trial court accepted that finding.

The trial court has discretion to resolve conflicting

expert testimony to determine an asset's value. See Rowe v.

Rowe, 24 Va. App. 123, 140, 480 S.E.2d 760, 768 (1997); McDavid

v. McDavid, 19 Va. App. 406, 413, 451 S.E.2d 713, 718 (1994).

Where the court accepts the commissioner's findings of fact,

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"the findings are presumed to be correct when reviewed on appeal

and are to be given 'great weight' by this Court." Rowe, 24 Va.

App. at 140, 480 S.E.2d at 768 (citation omitted). The court's

decision will not be disturbed on appeal unless plainly wrong or

without evidence to support it. See Blank v. Blank, 10 Va. App.

1, 9, 389 S.E.2d 723, 727 (1990).

The standard of value has a critical impact on the effect

of a restrictive agreement. The standard in equitable

distribution, intrinsic value, looks to the value to the parties

to the divorce action. When the parties do not contemplate sale

and one of the two is going to enjoy the benefits of the

property with no likelihood of leaving the business, a

restrictive agreement may have less bearing on the value to the

parties. The agreement should be considered but it is not

conclusive. "The reason for rejecting the value set by buyout

provisions is that they do not necessarily represent the

intrinsic worth of the stock to the parties." Bosserman, 9 Va.

App. at 6, 384 S.E.2d at 107.

The commissioner considered the restrictive agreement as

one factor in determining whether goodwill existed, but he did

not find it to be the sole, controlling factor. Credible

evidence supported the finding that the partnership agreement

was but one factor to consider in determining the intrinsic

value of the husband's partnership interest. The trial court

did not err in finding that the Hunton & Williams partnership

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agreement did not control the existence of goodwill in the

husband's interest in the firm.

The husband contends that even if the trial court did not

err in rejecting the partnership agreement valuation, it did err

in the method and application used to value the interest. Both

sides presented expert testimony valuing the goodwill of the

partnership interest. The commissioner found that the wife's

expert was persuasive and accepted his evaluation. The trial

court affirmed those findings fixing the value at $319,569.

The wife's expert used the excess earnings method to value

the practice goodwill, a method acknowledged by the husband's

expert as the most popular method for evaluating professional

goodwill. The wife's expert began by comparing the husband's

average income for three years to that of a peer group. The

difference between the two was the excess earnings due to the

husband's association with the firm, but not the earnings due to

his personal efforts. It was the additional income he received

from being associated with his law firm. The wife's expert

projected those excess earnings over the husband's expected

career with Hunton & Williams. Using the discounted future

earnings method, he then calculated the present value of the

husband's total future excess earnings.

The wife's expert began by comparing the husband's earnings

to those of a peer group. The husband argues that this method,

described as working from the "bottom up," is incorrect. He

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contends that the peer group selected by the wife's expert

compared him to merely average attorneys, did not reflect his

special reputation and expertise, and failed to distinguish his

personal credentials from those of Hunton & Williams. He also

contends that the discounted future earnings method is an

improper method of valuation because it is based on future

earnings projections. Finally, he argues he can have no excess

earnings due to his association with Hunton & Williams because

he had received offers from other firms for 150-175% more

income.

The wife's expert carefully explained why he selected the

methodology that he used. A major reason was the unavailability

of partnership financial data. Before getting the appraisal,

the wife attempted to discover the partnership's financial

records. Hunton & Williams successfully had the request quashed

and did not make any partnership financial data available. The

wife's expert felt the "bottom up" method was more accurate

under those circumstances. The trial court accepted that

opinion and analysis. We cannot say that the opinion was

unworthy of belief as a matter of law.

The wife's expert selected the husband's peer group based

on factors that included comparable geographic location,

population, firm size, specialization, and years of practice.

The husband argued that the group did not reflect his special

talents and that the appropriate peer group was the one selected

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by his expert. The trial court carefully examined these

conflicting opinions and rejected the one offered by the

husband. The trial court found the peer group suggested by the

husband's expert was flawed because the group only included

firms located in very large cities, such as New York or San

Francisco, and it was a selection provided by the husband.

The wife's expert valued the husband's excess earnings due

solely to his association with his firm at $38,269. He then

projected this figure to the husband's expected retirement year,

2021. After adding the terminal value of the husband's capital

account, he applied a discount rate of 6.9%. The result was the

present value of the husband's partnership interest, $319,569.

The court accepted the wife's expert's use of a discount rate of

only 6.9%. The expert justified that rate, one applicable to

nearly risk-free investments, and the record does not suggest

that it was incredible. As presented, the proper discount rate

was an expert opinion that could be accepted if the trier of

fact found it persuasive and believable.

Discounting future earnings is not an inherently flawed

method of valuation because it is based on projected future

earnings. The value of goodwill can have two components.

Professional goodwill (also designated as individual, personal,

or separate goodwill) is attributable to the individual and is

categorized as separate property in a divorce action. Practice

goodwill (also designated as business or commercial goodwill) is

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attributable to the business entity, the professional firm, and

may be marital property. The commissioner and the trial court

carefully distinguished between these two components and

selected a value that was solely attributable to the husband

being a partner in Hunton & Williams. It represented the

premium due to the husband's association with Hunton & Williams,

the economic advantage he enjoyed because he was a partner in

that firm. It included no value attributable to him personally,

and it did not rely upon any earnings due to the husband's own

expertise, reputation, experience, skill, knowledge, or

personality. As applied, the discounted future earnings method

was not a flawed method of valuation.

In valuing the goodwill of the partnership interest, courts

must take special care not to confuse the owner spouse's

personal future earning capacity with practice goodwill

attributable to the law firm in order to avoid double counting.

"Further, particular care must be given that future earnings

capacity and reputation not be confused with professional

goodwill." Russell, 11 Va. App. at 417, 399 S.E.2d at 168.

Though the husband's expert first stated that in his

opinion the partnership interest could have no goodwill value,

he offered an alternative opinion that recognized the husband's

interest did have goodwill value. The trial court found that

the alternative opinions offered by the husband, that his

interest did and did not have goodwill value, were contradictory

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and confusing. The husband's expert used the capitalized

historic earning method. His method required comparison of

earnings to those of a peer group. The trial court found the

husband's peer group inherently flawed, and it noted the group

data was for the wrong year and compared group data to a single

year of the husband's income.

The husband's expert calculated the value of a theoretical,

marketable, controlling partnership interest in Hunton &

Williams. To that figure, the expert applied a discount of 40%

for lack of marketability and 30% for minority status. That

reduced the market value of the husband's interest to $105,177.

The trial court rejected the husband's reasoning for discounting

for minority status and marketability. It found the discounts

inappropriate because no transfer of the partnership interest

was foreseeable and no one in the firm, nor any group within it,

exercised majority control. See Bosserman, 9 Va. App. at 7-9,

384 S.E.2d at 108-09 (discussing restriction on marketability

and minority shareholder status as affecting value to owning

spouse). The trial court also rejected the argument that offers

of employment at substantially higher compensation meant all

goodwill was personal. The trial court would not accept the

conclusion, suggested by that argument, that Hunton & Williams

had no practice goodwill.

The experts disagreed on which of two accepted methods of

valuation to use and on the application of those methods. They

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differed on the following: whether to value the individual

interest first; whether to capitalize historic earnings or to

discount future earnings; the proper peer group; the proper

income data; and the application of discounts. The opinions of

the experts conflicted, but neither was erroneous as a matter of

law. "Depending on the circumstance of each case, different

methods of valuation may reflect more accurately the actual

value of the stock to the shareholder." Id. at 7, 384 S.E.2d at

108. No single method for determining the value of professional

goodwill is preferred. See Russell, 11 Va. App. at 417, 399

S.E.2d at 169. We conclude that the trial court did not err in

selecting the method of valuation or in the application of it to

the facts presented in this case. The wife's valuation of the

husband's interest in his law firm was supported by substantial

and competent evidence.

The husband argues that the trial court erred in

classifying a portion of a $203,288.46 money market account as

marital property. The trial court designated $38,355 of the

fund as marital property and $164,933 as the husband's separate

property. The husband established the account in his name alone

after the parties separated. He made the first deposit in March

1996 when he received his annual partnership earnings

distribution.

Hunton & Williams operated on a fiscal year that ended in

March, and it paid the partners the balance of their earnings in

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March of each year. The husband had to report his entire

partnership income on his individual tax return for the calendar

year in which the fiscal year ended. For example, he had to

report all income earned from April 1, 1995 to March 31, 1996 on

his individual income tax return for the calendar year 1996.

That would throw nine months' worth of earnings, the portion

earned in 1995, into the next individual income tax year, 1996.

The receipt of annual earnings in a lump at the end of the

partnership's fiscal year created an irregular cash flow. The

couple's income trailed their expenditure of it. To balance

expenditures with receipts of income, the parties borrowed

temporarily. They established an equity line of credit when

they first purchased the marital home. Throughout the marriage,

they had used that as a source of funds to pay expenses that

came due before the partnership distributed its earnings. When

they received the distribution at the end of the fiscal year,

they would pay the credit line down. They used the distribution

to repay the temporary financing incurred over the preceding

twelve months.

At the time the parties separated, the balance due on the

equity line was $126,801. The husband borrowed an additional

$70,000 after the separation, but the wife froze the account

when she learned of these draws. He then borrowed on two

additional accounts and used the proceeds to pay taxes and

tuition. The husband claimed that the funds borrowed after

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separation were used for marital purposes. From July 1995 the

husband only paid interest on the equity line account, and after

separation, he did not curtail the account except to apply

$71,652.71 from the portion of the March 1996 distribution that

he considered to be marital property.

The fiscal year-end distribution that husband received in

March 1996 was for work done both before and after the date of

separation, November 1995. The husband calculated that $72,795

was marital property. He applied $71,652.71 of that to the

balance due on the equity line of credit. The remaining portion

of the March 1996 distribution became the initial deposit to his

new separate money market account. In June 1996, he received a

$50,000 bonus that also represented work done before and after

the separation. The husband calculated that $31,350 of that

bonus was earned before separation and thus was marital

property. He applied $27,000 of the marital portion toward

payment of his 1996 estimated income tax and the balance to what

he claimed were joint expenses. He deposited the portion that

he considered separate property, $18,470, to his separate money

market account.

The trial court classified $38,355 of the money market fund

as marital property because it disallowed as marital expenses

the estimated tax payment of $27,000 and $11,355 claimed as

expenses for maintaining the marital residence. The husband

argues that the use of his separate money market fund to make

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the wife whole is inappropriate. The husband contends these

funds paid taxes, tuition, and household expenses of the marital

residence. He argues that the marital share of the June 1996

bonus paid the joint 1996 tax liability and not simply the taxes

due on the bonus.

The trial court disallowed $38,355 of his claimed marital

expenditures finding that the payment of $27,000 toward

estimated 1996 taxes was not reasonable and that $11,355 of

household expenses were not adequately proven. The court held

that the use of a substantial portion of the marital share of

the June 1996 bonus to pay taxes under the guise of a joint

obligation was not a valid marital purpose. The court also held

the husband's evidence was insufficient to satisfy his burden to

prove that the expenditures of $11,355 were for valid marital

purposes. The husband did not provide a detailed explanation of

these expenses, but the trial court still found that $54,955 was

expended for marital purposes.

The husband had the burden to establish by a preponderance

of the evidence that post-separation withdrawals of marital

funds were used for a legitimate marital purpose. See Alphin v.

Alphin, 15 Va. App. 395, 402, 424 S.E.2d 572, 576 (1992) (court

satisfied that husband's expenses, for which detailed accounting

was provided, were for valid marital purpose); Amburn v. Amburn,

13 Va. App. 661, 666-67, 414 S.E.2d 847, 850-51 (1992) (wife did

not squander away marital funds by paying for living expenses

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husband failed to pay). We conclude that the decision to

classify a portion of the money market account to make up for

the husband's non-legitimate marital expenditures was supported

by the evidence and not plainly wrong when considering the way

the parties normally managed their finances and used the credit

line in tandem with their income.

The trial court ordered the husband to pay the balance due

on the equity line loan, on two additional bank loans, and on a

credit card account used by the wife. The equity line balance

was $122,129.50. The husband incurred the two loans of

$54,344.75 and $22,461 after the separation to pay tuition and

estimated taxes. The wife possessed only one major credit card

after the separation, but the husband stopped paying the

balance, began paying only the required minimum, and reduced the

limit to $2,500. The balance on the account was $2,191. The

husband contends that the trial court erred in allocating the

entire marital debt to him.

Throughout the marriage the parties used the equity credit

line as a source of available funds until they received the

partnership income distribution. After the separation, the

husband stopped using his income to pay recurring family

expenses. He prorated receipts, and he segregated the portion

he designated as separate property into the money market account

where it accumulated as a separate asset. He paid marital

expenses or debts incurred to pay such expenses with the portion

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he designated as marital property. The husband used the date of

separation to divert arbitrarily his income from its established

allocation to reducing debt incurred over the previous year for

ordinary living expenses. The husband's action of not reducing

the equity line permitted the joint debt to rise while he

diverted the offsetting income to accumulate as his separate

asset. This turned marital expenses into marital liabilities of

the couple and reduced the marital wealth available for

distribution. At the same time, any income earned after

separation was diverted and not available for continuing family

obligations. The combined effect permitted the husband to

decrease the marital estate while increasing his personal

estate, to distort their financial condition to his advantage.

The trial court recognized the distorting effect upon

obtaining a correct understanding of the marital debts of the

parties. The trial court found that the equity line and credit

card account were marital debts and found the other two debts,

while incurred for marital expenses, would not have been

incurred under normal circumstances. It allocated payment of

all the debts, with the exception of the first deed of trust, to

the husband. The court carefully noted that wife could not

receive a double benefit from the equity in the home increasing

if the husband paid that debt because it excluded the equity

line debt from the calculation of the value of the marital

residence. The trial court allocated the marital debt to the

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husband because the debt would never have been incurred if the

cycle of incurring and discharging debt, established during the

marriage, had been allowed to complete its final circuit.

Code § 20-107.3(E) empowers trial courts to distribute

marital debt. Because making an equitable distribution award is

often a difficult task, "'we rely heavily on the discretion of

the trial judge in weighing the many considerations and

circumstances that are presented in each case.'" Moran v.

Moran, 29 Va. App. 408, 417, 512 S.E.2d 834, 838 (1999)

(distribution of marital debt) (quoting Klein v. Klein, 11 Va.

App. 155, 161, 396 S.E.2d 866, 870 (1990)). Absent an abuse of

discretion, "the trial judge's determination will not be

reversed on appeal." Id.

The allocation of the debt to the husband is proper given

the manner in which this couple managed their finances. To

prevent an inequity, the trial court properly ordered the

husband to pay the debt, and it considered all the statutory

factors of Code § 20-107.3. We find no abuse of discretion.

Finally, we consider the court's award of spousal support

to the wife. The court ordered the husband to pay $7,500 per

month in spousal support and awarded child support of $2,181

based on the statutory guidelines. On appeal, he claims the

wife's expenses include some non-recurring expenses; the wife's

award should be reduced by the payment on the first deed of

trust; and that some expenses, such as mortgage payment,

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automobile, utilities, and household expenses, should be reduced

by two-thirds because they include expenses factored into the

child support guidelines.

The wife had no independent source of income. She

submitted two exhibits to substantiate her claim for spousal

support. One listed her average monthly expenses during the

marriage ($8,746.92), and the other listed post-separation

expenses ($8,013.76). She also presented two exhibits showing

the corresponding child expenses of $3,017.23 and of $3,116.07.

The wife's post-separation expenses included non-recurring

expenses for legal bills and car rental which the court excluded

from the support award. The court declined to reduce the

support award by the amount of the mortgage payment because it

found that the wife was entitled to a reasonable housing

allowance and, when taxes on the support award were considered,

she would not have sufficient funds to cover her monthly

expenses. The court also found the husband's request to reduce

the wife's living expenses by two-thirds unreasonable in view of

her demonstrable needs. If so reduced, the wife would not be

able to meet her demonstrated financial needs, and the support

award would leave her below the standard of living to which she

was accustomed during the marriage.

The husband cites Rein v. Rein, Record No. 1120-93-1

(unpublished, Va. Ct. App. Nov. 29, 1994), as authority for

reducing these items. However, that case did not mandate such a

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reduction. At most it directed that the trial court consider

whether there might have been double consideration of items such

as housing and utilities.

The husband is obligated to maintain the wife, within the

limits of his ability to pay, "according to the station in life

in which [she] was accustomed during the marriage." Gamble v.

Gamble, 14 Va. App. 558, 574, 421 S.E.2d 635, 644 (1992). A

spousal support award is subject to the trial court's discretion

and will not be disturbed on appeal unless plainly wrong or

without evidence to support it. See Moreno v. Moreno, 24 Va.

App. 190, 194-95, 480 S.E.2d 792, 794 (1997). Based on all the

evidence and appropriate factors, we conclude that the record

supports the spousal support award of $7,500 per month.

For the foregoing reasons, we affirm the trial court's

ruling.

Affirmed.

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