Buy-Sell Agreement Not Signed By Spouse Can’t Set Value
Tennessee business valuation law case summary – Surgeon and Medical Practice. Tennesee divorce and family law from the Tennessee Court of Appeals.
Harmon v. Harmon – Tennessee Business Valuation Case
Is the value of a closely-held corporation established in a buy-sell agreement not signed by a non-shareholder spouse binding on that spouse in a divorce? Not according to the Tennessee Appeals Court decision in Harmon v. Harmon. This divorce case involved a physician husband employed by a professional association. The trial court awarded his wife fifty percent of the value of his interest in his medical practice. However, the wife appealed the trial court’s decision, since the court limited her interest in her husband’s practice according to buy-sell agreements he entered into, rather than the net asset value in a stipulation agreement signed by both parties.
Harvey and Dorothy Harmon were married in 1977 and had a daughter together. At the time the parties married, Dorothy Harmon was a registered nurse at Baptist Hospital in Memphis and had a seven-year old child from her previous marriage. By then, Mr. Harmon had completed medical school and residency, and was a surgeon on the teaching staff of the University of Tennessee Medical School in Memphis and also had private patients. Mrs. Harmon continued to work full-time for about a year after getting married, but quit work in June of 1978 once her daughter was born. Mrs. Harmon worked a full-time job for a brief period of time after she and her husband moved to Blytheville, Arkansas in 1981, but became a full-time homemaker again after that. The family relocated to Jackson, Tennessee in 1984, and in August of 1985, Mr. Harmon joined the practice of the Jackson Clinic, P.A., a professional medical association, as a general surgeon. Mrs. Harmon began working part-time in 1990. However, the Harmon marriage was rocky and the parties separated at least twice before their final separation on December 29, 1995. Finally, Mrs. Harmon filed for divorce on February 13, 1996.
At the time of the divorce trial, Mr. Harmon was still employed as a general surgeon at the Jackson Clinic, and he also owned 10 shares of clinic stock, which amounted to 1.17% of the clinic’s outstanding shares. In 1986, Mr. Harmon also invested in the Jackson Clinic Building, Limited, a limited partnership with the clinic. Mr. Harvey was one of 92 limited partners and owned approximately 1.09% of the units of ownership of the building. The bylaws of the clinic and of the building partnership each contained buy-sell clauses which stated that the value of each share of stock is to be set annually by the clinic’s directors, and physician members would be bound to that price should they want to sell.
Mrs. Harmon’s efforts to get a value for her husband’s medical practice became the subject of many disputes during the divorce. Mrs. Harmon hired an appraiser who eventually obtained enough information to determine a ballpark figure for the net asset value of Mr. Harmon’s interest in the medical clinic and in the building. Based on this information, prior to trial the parties entered into a stipulation on the net asset value of Mr. Harmon’s interests in the two business entities. The stipulation agreement set the current net asset value of Mr. Harmon’s interest in Jackson Clinic at $250,000, and that the current net asset value of his interest in the building partnership at $180,000.
At trial, Mrs. Harmon argued that the court should use the parties’ stipulated net asset values, since her husband’s buy-sell agreements with the medical clinic and building partnership were designed to discourage physicians from leaving and therefore set an artificially low price per share. She contended that the share price set by the clinic did not reflect the actual value of Mr. Harmon’s interest because it did not include the accounts receivable or the inventory. However, Mr. Harmon argued that the buy-sell agreements should control valuation because he would be bound to that price if he sold his shares.
The court decided that the parties’ stipulation on the value of the medical clinic and building partnership was the value upon liquidation. Because there was no plan to liquidate either business, the trial court held that Mrs. Harmon was bound by the values set by her husband’s buy-sell agreements in spite of the fact that she was not a party to the agreements. Under the terms of Mr. Harmon’s buy-sell agreements with the clinic and building partnership, he would receive $22,570.55 for his stock in the clinic, and $120,690 for his stock in the building partnership, with Mrs. Harmon being awarded half of that amount. The Appellate Court, however, disagreed with the trial court and decided to follow the majority opinion of most jurisdictions, holding that the value established in a buy-sell agreement of a closely-held corporation which is not signed by the non-shareholder spouse, is not binding on that spouse, but should be considered along with other factors in valuing the interest of the shareholder spouse.
Harmon v. Harmon, No. W1998-00841-COA-R3-CV, 2000 WL 286718 (Tenn. Ct. App. Mar. 2, 2000).
See original opinion for exact language. Legal citations omitted.
To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.
Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting and seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville.
