Enterprise Goodwill of Dental Practice is Separate When Intertwined with Professional Goodwill

Lunn v. Lunn, No. E2014-00865-COA-R3-CV (Tenn. Ct. App. June 29, 2015).

Enterprise Goodwill of Professional Practice is Separate Property When Intertwined with Professional Goodwill

The professional goodwill of a one-person professional practice is the professional’s separate property,  and this rule was discussed in the Lunn case.   Andrew Lunn, DDS, brought a divorce action against his wife Carole in 2011.  They were married in 1995 and had three children, who were ages 11, 13, and 15 at the time of trial.  The husband was a dentist in Chattanooga, Tennessee, and started the practice during the marriage.  The parties had married shortly after the husband graduated from dental school, and their first child was born 18 months later.

The wife was a registered nurse, but worked mostly as a homemaker since the birth of the couple’s first child.  She was also employed part time as office manager of the dental practice.  Prior to the birth of their first child, the wife had worked as a staff development instructor for the University of Mississippi.  After she became a homemaker, she did not maintain her nursing credentials.

The divorce was precipitated in 2009 when the husband became involved in an affair with his dental assistant.  After the wife discovered this relationship, many months of counseling followed, but they separated in 2011.  When they separated, the husband rented an apartment, and the wife continued to live in the marital home.  During this interim period, the husband maintained the house, and provided a weekly allowance of $600.

The trial of the case lasted several days, and one of the key issues was the valuation of the dental practice.  The trial court had held that this was a marital asset, so the valuation was a critical issue in the case.  The equity in the real estate on which the practice was located was valued at about $180,000, and there was little dispute as to this figure.

The value of the business itself, however, was very disputed.  Ultimately, the court accepted the wife’s arguments and expert witness, which valued the business and subtracted a certain amount representing the husband’s personal goodwill.  The lower court declined to adopt the husband’s valuation, since it found that the husband’s expert had “grossly undervalued” the practice.

The lower court was also influenced by a 2005 financial statement in which the husband had placed a similar high value on the business.  After final judgment, the husband appealed to the Tennessee Court of Appeals, raising these and other issues.

The appeals court turned first to the issue of the value of the dental practice.  Both parties had presented expert witnesses at trial.  The husband’s expert was Brent A. McDade, who valued the practice at $52,000.  He stated that he based his valuation on the value of the net tangible assets.

The wife’s expert was Robert Vance, who placed a much higher value on the business, over $430,000.  The trial court had noted that this figure was close to the $450,000 claimed by the husband in the 2005 financial statement.

The appeals court first noted that the trial court had properly excluded that a professional’s personal goodwill is not a marital asset, and that it was correct to exclude this element of value.  In some cases, as the wife argued, the “enterprise goodwill” of the business might be a proper element of value.  But the appeals court noted that Tennessee courts have traditionally been reluctant to include this in the value of a professional practice, since it is so closely intertwined with personal goodwill of the professional.

Based on the facts of this case, the appeals court held that it was error to accept a business valuation that included “enterprise goodwill.”

The court also noted that the 2005 financial statement had disclosed that there were outstanding debts by the dental practice, which would have reduced the value considerably.

After scouring the record, the appeals court noted that the only evidence in support of the high valuation was the expert’s testimony which had included the enterprise goodwill.  For that reason, it reversed the valuation, and remanded the case for a reconsideration, at which time the enterprise goodwill could not be considered.

For additional discussion of this case, see Value of Dental Practice Can’t Include Enterprise Goodwill in Tennessee Divorce.

This post is part of a series, Appreciation of Separate Property: The Forensic Accountant’s Full Employment Act.