Evaluating “Goodwill” during Asset Division

In a contested divorce proceeding, valuation of community assets is often the most complicated and controversial issue.  Couples who seek a divorce often spend a lot of time (and money) posturing for the most favorable division of assets.

Particularly when businesses are involved, navigating the contours of asset division can become a hard and tricky task.  Although valuing tangible assets – like equipment – is usually a straightforward procedure, there can also be numerous “intangibles” which play a significant role (like professional goodwill).

Goodwill is essentially the value placed on someone’s reputation that will probably generate future income.  To complicate matters, there is no set formula for how to value this.  Instead, courts look at a number of factors such as the practitioner’s age, health, past earning power, reputation, skill and knowledge, and comparative future success.

In a recent Arizona Court of Appeals Decision (Walsh v. Walsh, http://azcourts.gov/Portals/0/OpinionFiles/Div1/2012/1%20CA-CV%2011-0269.pdf), the court addressed a dispute about the value of professional “goodwill” generated over the course of the marriage.

In Walsh, the husband was a partner in a large law firm.  He proposed that the value of his “goodwill” should be limited to tangible, “realizable benefits” he had, such as his stock options pursuant to a stockholder agreement.

The wife – also an attorney – disputed that evaluation, claiming that her husband could withdraw from the firm and retain his reputation and the business which comes from client loyalty, and that this goodwill had a significant value to be divided.

The Court of Appeals agreed that goodwill should not have been limited to the “realizable benefits” of the stock options and that the lower court must examine whether there is a value to the intangible asset.

The court limited its holding by declaring that goodwill is not the same as future earning capacity – “We underscore, however, that our holding does not equate goodwill with future earning capacity.  While future earning capacity may be evidence of goodwill, the earning capacity is not itself a divisible community asset.” – but distinguishing between the two is “not itself” a precise science.

Decisions like the one in Walsh highlight the complexities involved in dissolution actions involving community businesses and business interests.  An attorney who is aware of these issues can make favorably settling a contested divorce much easier (and far less costly).  Furthermore, because evaluation of assets like goodwill is largely at the discretion of the court, an attorney with a great deal of knowledge and courtroom experience is better equipped to protect your interests if a pre-trial resolution cannot be reached.

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Special Divorce Considerations for Physicians

After representing numerous doctors (and the spouses of doctors) in Arizona, we realized that physician divorces are different.  It is not that the law treats doctors uniquely.  It is that there are a host of considerations that are not present in many other divorce scenarios.  Sure, there are the usual issues, but there are complicating factors unique to physicians, such as valuation of medical practices, high asset divisions, as well as spousal maintenance claims.

There are no clear studies on physician divorce rates, but a recent article (sources not confirmed) did not glamorize success rate of doctor’s marriages.  See http://voices.yahoo.com/the-top-7-professions-high-divorce-rates-7627712.html.  While the statistics are undetermined, it is indisputable that these dissolutions necessitate a different level of attention due to the issues involved.  Physicians generally have complex financial issues that begin with oppressive student loans, but are also typified by numerous investments including homes, vacation homes, timeshares, retirement accounts, financial accounts, non-traditional investments and the medical practice itself.

While not meant to be comprehensive, we put together a list of special considerations that are generally critical to physician divorces.  We use this list when initially consulting with physicians (or their spouses) to gather information necessary to form a deliberate legal strategy:

1.  Spousal maintenance:  In Arizona our statute details factors for the Court to consider in awarding maintenance (elsewhere known as alimony).  These factors include, but are not limited to, length of marriage, standard of living during the marriage, and the disparity of income.  While we have seen a number of physician/physician divorces, we also frequently see cases where the physician’s income is significantly higher than the spouse.  Usually the non-physician spouse can also argue that they supported the physician through medical school and residency and gave up their own opportunities in the process.

2.  Practice valuation: Some medical practices have an actual value, much like if the family owned a restaurant.  In Arizona, the spouse would have a claim to their community share of the practice value.  However, this does not apply to all physicians.  For example, an Emergency Room doctor who is employed by an ER practice may simply be paid a rate for his work, much like the hospitalist trend that has taken root here in Arizona.  In those situations there would not be a value to the practice.  However, if that ER doctor were a partner and had an ownership interest in his practice, the analysis would be significantly different.  Similarly, some medical offices have assets to value.  Task for example a radiology practice that may own MRI machines.  Some of these machines have used market values in excess of $1,000,000.  If the physician spouse purchased the machine and paid it off during the marriage, then non-physician spouse would be presumably be entitled one-half the value of the equipment.

3. Debts:  It is not uncommon for physicians to have large student debts that still need to be paid off.  Furthermore, while some physicians may be very conscientious of the state of their marital financial affairs, others may be simply too busy and stressed with work to know the intimate details.  For example, they may have no clue that their spouse has racked up significant credit card debt, which is presumably community debt to divide in a divorce.  Knowing what debts you have and your options for ensuring that they get paid, including offsets from other property or even reduced maintenance, are key to a comprehensive settlement. 

4. Parenting Time:  Some physicians have routine and well-established schedules.  Others do not and may work off a rotating schedule, or work off-hours.  Still other divorcees may be in med school and looking at internships, residencies, and other job-relocating issues.  These all play an important role in determining parenting time for the children.  For physicians, or soon-to-be physicians facing divorce, it is important to maximize the quality parenting time with your children.  Your parenting plan may need built in flexibility or other creative ways to deal with potential scheduling issues that may arise. 

5. Child Support:  In Arizona, child support is calculated pursuant to the Arizona Child Support Guidelines.  The guidelines provide the amount of support based upon the respective incomes of the parties.  The guidelines, however, do not compute additional support for combined parental incomes of over $20,000 per month (i.e. your child support is essentially capped once it is calculated at any combined monthly income of the parents at $20,000).  But for physicians it is not uncommon for incomes to be in excess of this per month, and by extension it is not uncommon for children to be accustomed to life styles that require higher than normally calculated child support.  Whether or not an upward deviation of the child support should apply is something that a skilled attorney can assist with. 

6.  Time and Disclosures:  Often, physicians are not used to having to fully disclose all information regarding their finances to attorneys.  They are also very busy with their practices and may even have schedules that are incompatible with normal working hours.  This makes obtaining information that is required to be disclosed more complicated than usual.  On top of this, perhaps the only exposure physicians have to attorneys before entering into a divorce proceeding is in malpractice suits.  Consequently, it is not uncommon for physicians to be too busy/skeptical/jaded when asked to provide years’ worth of financial records.  Despite this, the best policy is to be forthcoming with all required disclosures.

 

The Secondary Trauma of Divorce: Attorney’s Fees

Getting divorced is traumatic for many and unpleasant for most.  It often is the first time my clients have a relationship with an attorney.   Sure, everyone has seen divorce attorneys portrayed on television and some do fit the stereotypes of Arnie Becker from L.A. Law or Gavin d’Amato from The War of the Roses. While there are some lawyers who are over the top, most are just doing their job trying to help their client thorough an emotional process with the goals of securing favorable custody and financial results.

Yes, divorce lawyers make their livings by billing their time at hundreds of dollars an hour.  This creates and interesting (and often unspoken) fact that the attorney may not be as motivated as the client to settle the case expeditiously.  Most attorneys set a retainer and have money deposited (in Arizona) in their IOLTA accounts and take the money as their time warrants.  This payment process is explained to the client when they first sit down in the office and they sign an ‘Engagement Agreement’.  In Arizona, there is also a statute that allows you to claim that the other side should pay your legal fees (ARS § 25-324).  While courts frequently order attorneys fees, for a client to count on receiving those funds is NOT a good idea (if it can be avoided) and may limit your ability to settle a case.

 

Here are a few examples:

Situation #1:

Parties have each spent about $30,000 (to date) on legal fees and professional costs for custody evaluations.  Husband is current with his attorney’s bill, but wife owes her lawyer over $15,000, as she has been unable to make payments and trial is still 3 months away.  They eventually meet with a private mediator who is tasked primarily with brokering a division of a minority interest in a small chain of frozen yogurt stores.   Wife would like to keep her share of the interest in the business, but she also knows that she will not have cash to pay her attorney if she settles for more business interest and less cash.  Wife did request attorney fees when she filed but is now pushing, thorough the mediation, to get husband to pay her fees that she otherwise will not be able to pay.

While it is not a technical “conflict of interest” wife’s attorney deserves to have her fees paid promptly and may subconsciously (or consciously) try to structure the deal so that attorneys fees are paid promptly.  This may mean that wife is nudged to sell her interest in the business, which she would like to keep, or to go to trial and take a chance with the Court awarding fees and dividing assets in an undesirable way. 

Situation #2:

Parties have been amicably negotiating a divorce and custody terms for 2 months, and despite coming close to agreements, still have a trial date set. Husband’s attorney required a $20,000 retainer anticipating contentious litigation over the division of wife’s dental practice.  While they are close to a global agreement, the attorney suggests that they proceed with depositions and to push the other dentist in the practice, by subpoena, to disclose his finances too.  However, Husband is confident that the matter will resolve through an informal settlement meeting and wants to keep the acrimony to a minimum, as they are committed to peacefully co-parenting going forward. 

Some thoughts to consider as you interview attorneys and consider the ‘cost’ of legal fees:

1.  A consultation is actually a dual-interview. You should be determining your comfort level with the attorney and the attorney should be determining if you are a client that they want to represent.  While clients have the choice of many attorneys to represent them, often they seek out counsel based on their reputation or expertise in a specific practice area (e.g. community business divisions or defending an abuse allegation.) Similarly, an attorney who never declines clients, even those with deepest pockets, is not vetting their clients right.

2.  Just because the lawyer you interview is less expensive hourly than another, does not mean it will be less expensive to litigate.  Some firms charge minimums for certain tasks (e.g. 2 hours for pleadings and .3 for phone calls.)   Other times the attorney who is less expensive takes much longer to complete the task. E.g. If you are filing a Motion for an Independent Medical/Psychological Evaluation, it may take a less experienced attorney three (3) hours to draft the motion and proposed order, where someone with more experience can produce a quality motion in an hour.

3.  A good legal strategy often means cost savings.  For example, when it comes to custody issues, Courts do not like to make decisions based on trial presentations.  Courts in Arizona prefer that an expert be engaged for an evaluation.  Whether it is a Comprehensive Custody Evaluation with a psychologist or an abridged evaluation, such as a Parenting Conference, you need to discuss with your attorney agreeing to a process early in the litigation. Paying attorneys to write letters back and forth about marginal parenting decisions or the propriety of involvement of dad’s ‘new girlfriend’ does not advance the cause. You can save thousands in legal fees by just agreeing to a custody parenting dispute process early in the process.  Remember, you can settle portions of the case.  (E.g. agree that joint custody is appropriate and where child will live with mom primarily and have alternating long weekends with dad.)  Then you can then wrestle about the income to attribute for child support and spousal maintenance etc.

4. Do not discount the use of early meditations and settlement meetings. When things are contentious, have your attorney hire a mediator for an early conference. You would be surprised what can be resolved in the early mediation process.  Often this will save thousands of dollars on temporary orders issues.  Courts may give you an hour or two to present temporary orders issues.  You will save thousands if you can broker a deal without the unpleasantness of this early evidentiary hearing.

5.  This is YOUR life.  If you think your attorney is not pursuing cost effective ways to get your matter resolved, call them out on it.  Sometimes even the best and most cost-efficient attorneys are stymied by opposing counsel or the opposing party who is not willing to constructively work towards a resolution.

Before I respond to gripes from my colleagues who may read this and admonish me for suggesting that some attorneys bill too much, let me say that there are many attorneys who understand the limitations of finance and go above and beyond for their clients, knowing they will not be paid accordingly.  A divorce does not have to cost your life savings.  As my old friend Lloyd used to say to clients who were at the precipice of settlement…”You can put my kids through college or yours.”  You have the control over what is spent and controlling the acrimony is often the key to reining it in.