Value of Dentist’s Patient Files May Be Excluded in Tennessee Divorce
Tennessee business valuation law case summary – Dental Practice. Tennessee divorce and family law from the Tennessee Court of Appeals.
Joy Henly McKee v. Jeffrey Elson McKee – Tennessee Divorce Business Valuation Case – Dentist’s Goodwill
It is well established that under Tennessee law, personal goodwill is not considered a marital asset when evaluating a business for purposes of equitable distribution upon divorce. But what exactly constitutes personal goodwill? The Tennessee Court of Appeals in McKee v. McKee shed new light on the issue of good will and business valuations for purposes of divorce.
Jeffrey and Joy McKee were married on December 18, 1982. The couple met in Memphis while Ms. McKee was finishing her graduate program in pediatric dentistry, but the couple eventually moved to Murfreesboro where Ms. McKee opened a dental practice in August of 1983.
After the couple relocated, Mr. McKee worked for Ms. McKee’s father for three years until he found employment in the banking industry. Ms. McKee made significantly more money than her husband, earning approximately $524,280 from 2001 to 2006 as compared to Mr. McKee’s average yearly income of $81,362 over the same time period.
Both parties continued working after their children were born in 1987 and 1989, and although Mr. McKee contributed much less financially to the marriage than his wife, he testified at trial that he made significant contributions to the family as a homemaker and caregiver to the children.
On December 27, 2006, after twenty-five years of marriage, Ms. McKee filed for divorce, citing irreconcilable differences and inappropriate marital conduct. On June 15, 2009, the Trial Court granted the divorce. Mr. McKee appealed the Trial Court’s decision of property distribution alleging that the court erred in the valuation of his wife’s dental practice.
At trial, much of the focus concerned the valuation of Ms. McKee’s one-third interest in her dental partnership. Ms. McKee started her dental practice as a sole proprietorship in 1983, then added Dr. Curry as a partner in 2000, and Dr. Stanley in 2005. Ms. McKee relied on the services of Cain, Watters & Associates, P.L.L.C., a consulting and accounting firm specializing in dental practices, in determining the price of the buy-ins during these two transactions.
Ms. McKee’s expert Tom Price testified that her practice had a value of $97,220, while Mr. McKee’s expert Mike Hallum valued the practice at $460,000. While Mr. Hallum conceded to Mr. Price’s higher valuation of the practice’s dental equipment, the more significant difference between the two values was due to the valuation of goodwill in the form of patient files, which Mr. Hallum considered as a factor in the partnership valuation, but Mr. Price disregarded.
While both experts agreed that considering personal goodwill in valuing a business for divorce purposes was inappropriate, the men differed in their categorization of patient files. Mr. Price believed the patient files fell under the category of personal goodwill, and therefore should not have been considered for valuation purposes. While Mr. Hallum, on the other hand, believed that the patient files were a separate asset from goodwill. Mr. Hallum claimed that his view was consistent with Cain Watters’s earlier valuation of the practice for buy/sell purposes, since Cain Watters made separate allocations for personal goodwill and patient files.
Mr. Hallum testified that he relied heavily on Cain Watters’s 2005 valuation of the dental practice because valuation literature dictated that transactions occurring within five years of the valuation be considered. In that 2005 transaction, Dr. Stanley purchased a one-third interest in the practice for $749,000, with 45% of the total purchase price allocated to the personal goodwill of Ms. McKee and Dr. Curry, and approximately 34% of the total purchase price allocated to patient files and records.
Mr. Price testified that he did not consider either the 2000 or 2005 transaction in his valuation because they were sales transactions, and as such, both valuations included personal goodwill, which is not included as a marital asset in a divorce proceeding.
The Trial Court sided with Ms. McKee, noting that if her business interest was sold, the only marketable assets would have been the equipment and accounts receivable. Because personal goodwill is not a marital asset under Tennessee law, the Tennessee Court of Appeals found Mr. Price’s valuation report reasonable and properly considered by the Trial Court. The Court of Appeals held that the value the Trial Court placed on Ms. McKee’s dental practice was within the range of the valuation evidence presented by the parties.
M2009- 01502-COA-R3-CV (Tenn. Ct. App. Apr. 2010).
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 How to Divide Dental Practices When Tennessee Dentists Divorce and 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. Contact Us today at (901) 683-1850.
