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Goodwill of Medical Practice Considered Marital Property
© 2004 National Legal Research Group, Inc.
VIRGINIA: Hoebelheinrich v. Hoebelheinrich, 43 Va. App. 543, 600 S.E.2d 152 (2004).
The trial court did not err in classifying as marital property the institutional goodwill of the husband's medical practice. The amount treated as marital property did not improperly include the personal goodwill of the husband. The trial court properly refused to apply a minority discount in valuing the practice, as there was no evidence that a sale of the practice was imminent. The trial court properly rejected the husband's proposed valuations for personal property, as those valuations were based upon replacement cost and not fair market value.
Following the entry of a final decree of divorce, the husband filed an appeal contesting numerous portions of the decree relating to economic matters centering primarily on the valuation and distribution of marital assets. The court of appeals affirmed.
First, the husband complained that the trial court had erred as a matter of law in valuing his medical practice at approximately $655,000, which was the lowest figure submitted by the wife's expert. The husband asserted that the court's error was in assigning a value to the medical practice beyond its fixed, tangible assets because all other value can, and must, be attributable to his personal goodwill, which is regarded as his separate property. The court found no error as a matter of law. It noted that, in Virginia, the courts look to the intrinsic value of the property to the parties to measure the value for equitable distribution purposes. But it also recognized that intrinsic value is a very subjective concept. As a consequence of the subjective nature of intrinsic value, the particular method of valuation 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.
Intrinsic value may include goodwill, which is defined as the increased value of the business, over and above the value of its assets, that results from the expectation of continued public patronage. Although it has been held that, as a matter of law, goodwill attributable to personal characteristics is considered separate property and goodwill attributable to the business entity is considered marital property, an appellate court will not disturb a reasonable approximation of the goodwill value, if any, of the professional practice based on competent evidence and the use of a sound method supported by the evidence. If conflicting evidence is present, competent evidence which is found more credible will determine whether goodwill exists and its value if it does exist. The existence of goodwill is not fixed as a matter of law, nor is the method of its valuation; both are a function of the factfinding process.
Here, there was conflicting evidence shown in the expert testimony of the respective experts of the parties. Contrary to the assertions of the husband, the wife's expert did not fail to consider the husband's personal goodwill in valuing his medical practice, since he specifically concluded that, without the husband, the business had only the value of its assets. Neither was there a clear error of law in the trial court's rejecting the valuation of the husband's expert, who applied a discount for the lack of marketability. That court stated only that a marketability discount was not appropriate because there was no evidence that a sale of the practice was necessary or foreseeable. The court below was presented with a classic battle of experts and was entitled to judge the weight and credibility to be given their testimony.
Next, the husband contended that the trial court had erred in awarding the wife one-half of the value of the practice. He claimed that the figure was arrived at arbitrarily, without regard to the statutory factors. The appellate court found no reversible error. Although a fifty-fifty distribution is not required, there is nothing in the statute or case law suggesting that such a distribution is inappropriate or disfavored. Moreover, while the trial court did not elaborate on its reasoning in this regard, the evidence in the record, when considered in a light most favorable to the wife, supported the trial court's award. The parties were married for 22 years. When the husband graduated from medical school, the parties agreed that the wife would stay at home and raise their children and care for the home. The couple lived a very comfortable lifestyle. The fifty-fifty distribution, therefore, was adequately supported by the evidence.
As to the trial court's rejection of the husband's valuation of the household property, it was argued by the husband that error was demonstrated because his valuation was unrebutted by the wife. However, the husband offered only a list of the items and an estimate as to the replacement value of each item. A trial court is not bound to accept a valuation placed on personal property, even if unrebutted, where in its discretion it concludes that a different value is more appropriate. The trial court's valuation cannot be the product of mere guesswork, but the burden is on the parties to provide the trial court sufficient evidence from which it can value the property. Although the cost to replace an asset under present conditions is some evidence of an asset's present fair market value, replacement cost is not the legally controlling definition of value. The trial court's determination that the value of the household items was not established is supported by the law and credible evidence.
Editor's Note: In Russell v. Russell, 11 Va. App. 411, 399 S.E.2d 166 (1990), the Virginia Court of Appeals divided the goodwill of a solo psychology practice that had no institutional goodwill. On the facts, the goodwill had to be almost entirely personal to the husband. In Howell v. Howell, 31 Va. App. 332, 523 S.E.2d 514 (2000), and again in Hoebelheinrich, the same court stated that personal goodwill is not marital property.
The stated reasoning in Howell and Hoebelheinrich is in conflict with the actual result reached in Russell. To avoid confusion, if the court of appeals is serious about not dividing personal goodwill, it should overrule or at least significantly limit Russell. The court clearly divided goodwill in that case, and, given the facts stated in the opinion, it is hard to see how the goodwill could not have been personal.
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