Dentist Must Pay Alimony | Wins Lower Dental Practice Value

Tennessee law case summary on dental practice valuation and alimony in divorce and family law from the Court of Appeals.

LeAnn Barnes v. David Ellett Barnes – Tennessee divorce business valuation dental practice, alimony.

LeAnn and David Barnes were married in 1984, after the wife had graduated from nursing school and while the husband continued dental school.  During dental school, he also became a reserve officer in the U.S. Navy.  He was on active duty in Mississippi for three years from 1986 to 1989.  They moved to Tennessee and the husband joined a practice in Shelbyville while the wife got a job as a registered nurse at a hospital.  In 1992, they had a daughter.

In 1994, they decided that the husband would open his own dental practice, which became known as Shelbyville Family Dentistry.  The wife quit her job in the hospital and worked in the office of the new practice.  She worked there for three years until returning to the hospital in 1997, but she continued to do the bookkeeping for the dental office at home.

In 2003, they separated and began divorce proceedings, but the case was dismissed after they reconciled in 2005.  In 2009, the wife filed for divorce and the husband filed a counter-complaint for divorce.  By this time, they had considerable assets, which included their home, several rental properties, the dental practice, investment and retirement accounts, a twin-engine airplane, several vehicles, a motorcycle, a boat, and antiques.  After a five day trial, the trial court of Bedford County granted both parties a divorce on the grounds of adultery.  The marital property was divided essentially equally.

The trial court noted that the husband made about $400,000 per year and that the wife made about $50,000 per year.  Therefore, the trial court concluded that she could not be rehabilitated in that her earnings could not increase to match those of the husband.  Therefore, the court awarded the wife alimony in the amount of $6,000 per month.

Various post-trial motions followed, and the trial court adjusted the property division somewhat.  After reviewing a Tennessee Supreme Court decision, the trial court also modified the alimony award, reducing it to $4,300 per month in rehabilitative alimony, to run for a period of four years.  In making this modification, the trial court noted that the wife was capable of earning at least $75,000 if she worked full time.

After one more post-trial motion was denied, the wife then appealed to the Tennessee Court of Appeals.   On appeal, she argued that the original alimony award was correct and should not have been reduced.  She also argued that the property division was incorrect, based upon the valuation of the dental practice.

The appeals court first grappled with the issue of whether the appeal had been filed in a timely manner.  It concluded that it had, since it was filed only after her final post-trial motion was denied.

After resolving this preliminary issue, the appeals court examined the property settlement, and devoted considerable attention to the value of the dental practice, which was originally set up as a professional corporation owned 100% by the husband.  In addition to the husband, it employed one other dentist and nine other employees.  The husband had been offered $913,000 to sell the practice in 2003.  He had signed a statement indicating that its net worth was $1 million, and he had it listed for sale at $1.2 million.  The annual net revenue between 2005 and 2009 had been between $1.48 and $1.74 million.  The wife’s expert witness, who was not named, ultimately valued the practice at $678,179.  He had used three methods:  the summation of assets method, the gross revenue multiplier method, and the capitalization of earnings method.  The expert noted, however, that his valuation did not include debts owed by the practice, nor did it include cash or accounts receivable.

The husband’s expert came to a more pessimistic conclusion as to the value of the business.  He ultimately valued it at $50,000 using the capitalized cash flow method.  The expert noted that the business actually had a deficit net worth, since its obligations exceeded its assets.  He also noted that the business had no goodwill value, since neither of the dentists had a non-compete agreement.

The trial court reached a conclusion that the dental practice was worth $328,392.  It found that the husband’s expert was more credible, since it took into consideration the debts and accounts receivable of the business.  The court found that this expert had more industry data and that the opinion was benchmarked better than the wife’s expert.  The trial court also applied a 15% discount due to the lack of marketability of the practice.

The wife first argued that applying this marketability discount was error.  The court noted that there was no indication that the husband planned to sell his interest.  For that reason, the non-marketability was of limited relevance.

The wife also argued that the general valuation was low, given the income of the business.  But the appeals court carefully examined the evidence relied upon by the trial court, and concluded that the trial judge properly made the credibility determination between the two experts.  Therefore, other than the marketability discount, the court affirmed the trial court’s valuation.

The appeals court then considered a number of other property issues before turning to the question of alimony.  In particular, it looked at the question of whether the wife could be “rehabilitated” within the meaning of the alimony laws.  In making that determination, it first looked at the respective earning capacities of the parties.  The husband argued that the wife actually had a much greater earning capacity, since she was certified as an operating room supervising nurse.  But since there was no testimony as to her earnings when she had worked full time in the past, the appeals court was reluctant to make an increase.  If anything, the Court of Appeals concluded that the earning disparity was greater than what was found by the trial court.

The appeals court also noted that the long duration of the marriage and the age of the parties were factors that favored permanent alimony rather than rehabilitative alimony.  The court also noted that the parties lived a lavish lifestyle during the marriage, and that there was little reason to believe that the husband’s lifestyle would decline.  The wife, however, was not able to continue the same lifestyle without an award of alimony.

After weighing all of these factors, the Court of Appeals agreed with the trial court’s original decision that the wife was not capable of being rehabilitated, and that her earning capacity would never keep pace with the husband’s.  Since it concluded that the court had it right the first time, it vacated the later order reducing the alimony, and reinstated the award of $6,000 per month in futuro.

For these reasons, the Court of Appeals affirmed the lower court’s decision in part, reversed it in part, and remanded the case.

No. M2012-02085-COA-R3-CV (Tenn. Ct. App. Apr. 10, 2014).

See original opinion for exact language.  Legal citations omitted.

To learn more about valuation of dental practices, see When Professionals Divorce in Tennessee: Valuing Professional Practices.