No. 85-275
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986
IN RE THE MARRIAGE OF
RONALD KEITH HULL,
Petitioner and Appellant,
and
JANE ANN HANKS HULL,
Respondent and Respondent.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Joseph B. Gary, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Harrison, Loendorf & Poston; John P. Poston, Helena,
Montana
For Respondent:
Morrow, Sedivy & Bennett; Edmund P. Sedivy, Jr.,
Bozeman, Montana
Submitted on Briefs: Oct. 31, 1985
Decided: January 21, 1986
Filed:
Mr. Justice Fred J. Weber delivered the Opinion of the Court.
In November 1983, the Gallatin County District Court
entered a decree of dissolution of the marriage of Ronald K.
Hull (husband) and Jane Ann Hanks Hull (wife). In February,
1985, the findings of fact, conclusions of law and judgment
were entered with regard to property distribution,
maintenance and support. The husband appeals. We affirm in
part and reverse and remand in part.
The issues for review are:
I. Did the District Court erred in determining that
goodwill of husband's sole professional anesthesiology
practice is a marital asset subject to property division in a
dissolution of marriage?
2. Did the District Court err in setting the value of
the goodwill attributable to the husband's anesthesiology
practice?
3. Did the District Court abuse its discretion in
distributing the marital property without regard to a portion
of the debt payable by husband?
The parties were married in 1971. At that time the
husband had completed medical school at the University of
Kansas and the wife had completed her training as an
el-ementary teacher. During the next few years the husband
was completing his residency training in several specialties,
ending with anesthesiology. During the same time, the wife
did some teaching but was unable to find full time teaching
iobs in most places. In 1-976, the parties moved to Alaska
where the husband practiced private anesthesiology for one
year. At that time the parties adopted the first of two
children. The wife then became a full time mother. In 1977,
the family moved to Bozeman so that the husband could begin
the practice of anesthesiology. Since that date the husband
has been doing business as a professional corporation,
working in a co-operative arrangement with two other
anesthesiologists in sharing an office. These three doctors
perform anesthesiology in Bozeman Deaconess Hospital on a
basis whereby they set up their own schedules and rotate the
patients as they require services. Essentially these three
have a monopoly on the anesthesiology practice in Bozeman, as
the only other person giving anesthetics is a general
practitioner who does not work nights. The husband's
practice is based in the hospital and he does not follow-up
or see patients in an office. The anesthesiologist is
normally assigned to a patient by room number and neither the
surgeon nor the patient normally select the anesthesiologist.
During 1982, and immediately prior to the parties'
divorce, the three anesthesiologists each earned
approximately the same annual net income, being something
over $130,000. This net income figure includes their
respective contributions to their own pension plans. In 1982
the husband received $104,085 net salary and contributed 25%
of his gross salary, $26,021.29 to his pension plan. During
each of the past five years, the husband's salary has
increased.
At the time of the divorce, the husband was 39 and the
wife was 37 years of age. Since residing in Montana the wife
has pursued a master's degree in counseling and is seeking to
obtain certification as a drug and alcohol counselor. She
testified that she was interested in obtaining a Ph.D. in
clinical psychology and counseling.
During the marriage the parties acquired a substantial
amount of property. Because of the nature of the issues, we
will set forth the description of the assets and the values
fixed by the District Court:
NET ASSETS TO WIFE
Cash value - N.W. Mutual
Life Insurance
Pension profits sharing plan
Cash on hand
House
Silver
Dodge car
Furniture
Sapphire ring
Trailer
Alaska land
Pay mortgage on house
Tnterest in profit sharing plan
Gun
TOTAL
NET ASSETS TO HUSBAND
Ranch
Heifers
Farm equipment
Tools
Furniture
1977 Subaru
Corporation book value
Pension profit sharing plan
Cash on hand
Equitable policies - cash value
SUBTOTAL $272,205.00
Less mortgage indebtedness to
be paid by Petitioner [mortgage
debt on house distributed to
wife]
TOTAL
As pointed out by the District Court, the real bone of
contention was the assignment of goodwill to the individually
owned corporate practice of the husband. The wife called as
her expert witness a CPA who valued husband's professional
corporation. He valued the net physical assets at $33,000,
which was the figure furnished by the accountant for the
husband, so there is no dispute as to that amount. In
addition, the wife's CPA assigned a going concern or qoodwill
value to the professional corporation of $103,410. These two
figures together make the $136,410 listed as corporation book
value on the District Court list of net assets distributed.
Husband contends that no goodwill or going concern value
should have been assigned.
Did the District Court err in determining that goodwill
of husband's sole professional anesthesiology practice is a
marital asset subject to property division in a dissolution
of marriage?
No Montana cases have specifically addressed the issue
of goodwill in a professional. medical practice. The District
Court set forth a memorandum of authorities upon which it
based its conclusion. We substantially agree with the
holdings on the part of the District Court. The District
Court pointed out that in Cromwell v. Cromwell (1977), 174
Mont. 356, 570 P.2d 1129, this Court held that there must be
recognition given to the most valuable asset of the marriage,
that being the job, education and training of Mr. Cromwell.
At most this could be interpreted as an implication of the
recognition of goodwill of a professional practice.
In the 1973 annotation entitled Accountability -
for
Goodwill - Professional Practice - Actions Arising from
of in
Divorce - Separation, 52 A.L.R.3d
or 1344, we find limited
authority. Starting in 1956 a few California cases recognized
the accountability for goodwill of a professional practice in
actions arising from a divorce. On the other hand, Texas
refused to recognize goodwill. of a medical practice for
divorce purposes. However, the annotations subsequent to the
original. article suggest that a majority of the courts are
assigning goodwill to professional practices. The District
Court found Platter of Marriage of Fleege (Wash. 1979) , 588
P.2d 1136, to be well-reasoned authority which was adopted by
the District Court. In Fleege, the husband was a dentist
whose expert testified that he had never known of a dentist
selling his practice and including a factor of goodwill. In
opposition, the wife produced testimony of two certified
public accountants who served clients in medical and dental
professions and who testified that the value of a dental
practice' ineluded a goodwill- factor, which had a present
value. These CPA's testified that the dentists' net profits
exceeded the average practitioner by $50,000 and gave an
opinion that the value of the goodwill would be equal to
gross receipts over a two or three month period. Additional
testimony was given to suggest a total valuation of the
practice, counting tangible property and goodwill, of
$200,000. In reversing the lower court and remanding the
cause for a determination of the value of the goodwill of the
dental practice as it existed on the date of dissolution,
taking into account the testimony of experts and other
factors, the Fleege court made the following statements:
Goodwill is property of an intangible nature and is
commonly defined as the expectation of continued
public patronage. [cases cited] Among the
elements which engender goodwill are continuity of
name, location, reputation for honest and fair
dealing, and individual talent and ability. [case
cited]
... while the goodwill of a professional practice
may not be readily marketable and the determination
of its exact value may be difficul.t, that element
may nevertheless be found to exist in a given
professional practice. The d.etermination of its
value can be reached with the aid of expert
testimony and by consideration of such factors as
the practitioner's age, health, past earning power,
reputation in the community for judgment, skill,
and knowledge, and his compa.rative professional
success.
. .
. In sustaining a judgment adopting that value,
the California appellate court said:
The value of community goodwill is not
necessarily the specified amount of money
that a willing buyer would pay for such
goodwill. In view of exigencies that are
ordinarily attendant [upon] a marriage
dissolution the amount obtainable in the
marketplace might well be less than the true
value of the goodwill. Community goodwill is
a portion of the community value of the
professional practice as a going concern on
the date of the dissolution of the marriase.
As observed in Golden - Golden, 2 7 0
[v.
Cal.App.2d 401, 7 5 Cal.Rptr. 7 3 5 (1969)],
". . . in a matrimonial matter, the practice
of the sole practitioner .husbanb. will
continue, with the same intangible value as
it had during the marriage. Under the
principles of community property law, the
wife, by virtue of her position of wife, made
to that value the same contribution as does a
wife to any of the husband's earnings and
accumulations during marriage. She is as
much entitled to be recompensed for that
contribution as if it were represented by the
increased value of stock in a family
business." (270 Cal.App.2d 401, 405, 75
Cal.Rptr. 735.)
(Footnote omitted. ) In re Marriage of Foster,
supra, 42 Cal.App.3d at-584, 117 c~~.RP=. at 53.
. .
. While there have been a number of courts
which have refused to assign a value to the
goodwill of a professional practice in a divorce
proceeding, the modern tendency is to acknowledge
the economic facts and take such goodwill into
account. [cases omitted]
.
. . The value of goodwill to the professional
spouse, enabling him to continue to enjoy the
patronage engendered by that goodwill, constitutes
a community asset and should be considered by the
court in distributing the community property. That
value is real, and the mere fact that it cannot be
precisely determined should not deter the court
from assigning it a reasonable value within the
evidence.
While Montana is not a community property state as are the
states of Washington and California, the principles are
applicable under the provision of S 40-4-202, MCA, which
requires a consideration of a multitude of factors, including
the opportunity of each of the parties for future acquisition
of capital assets and income.
We adopt the aria-lysis of the Washington court in Fleege.
We hold that the goodwill of a professional anesthesiology
practice may be a marital asset subject to property division
in a marriage dissolution.
Did the District Court err in setting the value of the
goodwill attributable to the husband's anesthesiology
practice?
The husband contends that it was improper to assign any
dollar value to the goodwill of his anesthesiology practice.
He presented testimony by his own accountant and by the two
anesthesiologists with whom he is associated in ord-er to
substantiate the absence of value in a goodwill sense.
In opposition, the wife presented the testimony of a CPA
residing in Bozeman who specializes in valuing businesses.
Because of the strong insistence that goodwill has no value,
and in order to afford some guidance in other cases, we will
analyze the testimony of the wife's CPA at some length.
Mr. Ness, the wife's CPA, submitted a written report
showing the basis for his valuation, pointing out that he had
no interest, present or contemplated, in the corporation, and
that he made the valuation for use in arriving at a property
settlement in the pending divorce. The pertinent portion of
the testimony and report of Mr. Ness may be summarized as
follows:
Mr. Ness in his practice as a CPA does not do a great
deal of tax work but does business evaluation type work,
including extensive work with colleges and universities in
regard to financing. In making his evaluation he first
sought authoritative sources from professional organizations
such as the Institute of Business Appraisers. He quoted the
following from a work published by the American Medical
Association in 1981 entitled Valuing - Medical Practice
A - -
A
Short Guide For Buyers - Sellers:
and
For the last 25 years medical practices were rarely
bought or sold. The reason was simple: physician
demand had exceeded physician supply. A new doctor
merely opened a practice and patients soon arrived.
Now there is a growing market for medical
practices, spurred by the rapid increase in the
number of physicians, which is far outpacing the
growth in U.S. population. Because it sometimes is
harder and takes longer to build a new practice
today, buying an existing one again is becoming
attractive to some new doctors.
He quoted from other authorities, including a Texas dental
journal which pointed out that in the dental area, the
advantage of buying an existing practice, even including a
payment for goodwill, was becoming greater. Mr. Ness reached
the conclusion that the desirability of living in Bozeman,
coupled with the limited market available, logically imply
that the anesthesiol-ogy practice in Bozeman could have
significant value in excess of physical assets.
Mr. Ness found in various resource works that the
general approach was that a goodwill value does attach to a
medical practice. However, he did not find any widely
accepted formula for valuing a medical practice. He did
point out that during the past 10 years, an organization had
been started which specializes exclusively in the sale of
medical practices and that such organization advertises
extensively in the American Medical Association Journal. In
addition, the journal and other American Medical Association
publications contain numerous ads for sale and purchase of
medical practices across the country. In discussing the
nature of the valuation, Mr. Ness considered the adverse
effect of the limited population in the Rozeman area, and
also considered the positive effect of living in the Gallatin
Valley, which generally is a desirable place to live.
In order to demonstrate the presence or absence of
goodwill, he then analyzed the earning powers of the husband
as compared to other medical doctors in the same profession.
He used a publication entitled Profile - Medical Practice
of
published in 1981 by the American Medical Association. That
publication showed that the 1979 average net income including
retirement benefits, for anesthesiologists in the area of
Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and
New Mexico was $62,000. It also contained a table which
showed the percentages of that $62,000 figure which were
earned. by anesthesiologists in different age brackets from
under age 35 up to age 61 and over. Using that $62,000
figure, and applying an age factor for an anesthesiologist
under 35 years of age, Mr. Ness concluded that the 1979
income to be expected was $58,336. Then using the July 1983
consumer price index factor for medical care as published by
the Council of Economic Advisors, he concluded that income
for 1983 would have increased to $87,224. He compared that
$87,224 to the $130,106 earned by the husband and concluded
that the $42,882 difference was a going concern value above
the normal expected income. He concluded that the goodwill
value for one year therefore was $42,882. He adjusted this
for the projected normal increase in the next five years so
that the remaining excess net income attributable to goodwill
was $41,364. He then considered a capitalization rate to be
applied. He testified tha.t the Internal Revenue Service
regulations contained the current authoritative rulings on
capitalization rates for determination of goodwill. Those
regulations show between 15 and 20 percent as a proper
capitalization rate. He concluded that under all of the
circumstances he would be more conservative and use a 40%
rate. He then divided $41,364 by the 40% capitalization rate
to arrive at the going concern or goodwill value of $103,410.
He testified that in his opinion the value of the husband's
professional practice was a total of $136,410, which included
the $103,410 for going concern or goodwill value. In
explaining his setting of the capitalization rate at a much
more conservative rate than the IRS regulations, Mr. Ness
pointed out that this was a different type of practice in
which repeat business was not present as would be true with
an ordinary medical practice. As a result he thought a very
con.servative capitalization was appropriate and testified
that 40% was such a rate.
The husband argues that we should pay more attention to
the testimony of the two anesthesiologists who practice with
the husband and to his own accountant rather than adopting
the viewpoint of the CPA who was hired for analysis purposes
by the wife. That is not our function on appeal. We
conclude that the Ness analysis is understandable and
reasonable and has considered the various fa-ctors which we
have approved in our adoption of the Fleege analysis. We
conclude that the evidence submitted by the wife through CPA
Ness is understandable, substantial in nature, and
reasonable.
We hold that the District Court did not commit error in
assigning the value it did to the goodwill attributable to
husband's anesthesiology practice.
Did the District Court abuse its discretion in
distributing the marital property without regard to a portion
of the debt payable by husband?
The District Court in its finding of fact valued the
pension and profit sharing plan of the husband at a total of
$117,550. As appea.rs from the list of net assets distributed
to wife and husband, a one-half interest or $58,775 in the
pension profit sharing plan was distributed to the wife and a
similar amount to the husba.nd. In its findings of fact the
District Court recognized that $55,000 had been borrowed from
the pension and profit sharing fund by the husband and
applied toward the purchase of the ranch, which was
distributed to the husband at a net asset value of $57,339.
The wife argues that either the ranch net asset value or the
pension profit sharing plan net asset value must be reduced
by the $55,000 which petitioner has to pay. That contention
appears reasonable under the facts of the case.
As appears from the net asset value list for
distribution to the wife and to the husband, the court
apparently considered these as "net" value figures to each
because it deducted the residence mortgage indebtedness which
was to be paid by the husband in the amount of $52,216 from
his net asset valuation to result in a total valuation for
net asset distribution to him of $219,989.
We are unable to determine from the record if the
District Court made a mistake of $55,000 in the amount of net
assets distributed to the husband. We recognize that the
District Court had the discretion to award $219,989 in value
less the $55,000 debt owing, to the husband if it chose to do
so. However, the record does not clearly show that to have
been the intent of the District Court.
We therefore remand the cause to the District Court for
its redetermination of the portion of the net assets to go to
the husband as compared to the wife, taking into
consideration the $55,000 obligation owing by the husband to
the pension and profit sharing plan.
J/
We concur: /