Multi-specialty Medical Group Valued at $680,000 in TN Divorce

Tennessee business valuation law case summary – medical practice – multi-specialty medical group. Divorce and family law from the Court of Appeals.

Vivian Wynell Pate York v. Douglas Clifton York – Valuation of medical practice disputed. Doctor unable to cure court’s view of the value of his medical practice

Vivian York (“wife”) and Douglas York (“husband”) met while she was still in college.  Once married 1969, wife joined husband in Memphis where he was in medical school. While husband completed his schooling, wife worked as a school teacher, and he worked as a pharmacist.  Wife stopped teaching after their first son was born in December 1975. They moved to Franklin in 1977, and husband began his surgical practice as a sole practitioner. Their second son was born in 1979, and their daughter in 1980. Wife remained at home and became active in the medical auxiliary and numerous other civic activities.

The couple purchased a large house and roughly 100 acres of land in Franklin and made extensive and costly renovations that took almost two years to complete.  Husband suggested that wife return to work to help defray the renovation costs, but she was reluctant to do anything that would conflict with her duties as a wife and mother or with her civic activities.

Upon arriving in Franklin, husband combined his practice with another surgeon and set up a professional corporation named Franklin Surgical Associates.  In 1987, he formed a multi-specialty medical group for the purpose of networking and controlling costs.  Husband and two other physicians formed MedCore Medical Group, P.C. (“MedCore”) in January 1988, of which he owned 85%.  In late 1988, MedCore began constructing a $3.1 million office building adjacent to the new hospital in Williamson County.  Husband placed a second mortgage on the marital home to raise money for the project.

The time husband devoted to his practice became a source of conflict after the couple  moved to Franklin. They tried marriage counseling in 1985 and early 1986 but without success.  Husband began an affair with an assistant in the spring of 1986. When wife confronted him with her suspicions, husband denied any wrongdoing but complained that their marriage was in trouble.  He moved out of the family home in October 1986 and never returned.  Wife filed for divorce in January 1988.

At the six-day trial in May and June 1990, husband conceded that he had committed adultery, and so the trial court awarded wife the divorce on the grounds of cruel and inhuman treatment and adultery.  The trial court awarded wife sole custody of the parties’ three children and directed husband to pay $1,250 per month per child for child support.  The trial court also ordered husband to pay $1,250 per month in spousal support for 72 months and later directed him to pay wife an additional $90,000 to defray her legal expenses.

The trial court valued the Yorks’ marital estate at approximately $2.7 million, including husband’s 85% interest in MedCore which it valued at $680,000. It directed that the marital home be sold and that the proceeds be divided equally between the parties.  It also awarded MedCore and related assets to husband and awarded wife a $415,000 “marital estate judgment” to off-set the value of the property husband received. As a result of the trial court’s division of the marital property, wife received approximately 38% of the marital estate, and husband, approximately 62%.

On appeal, husband took issue with (1) the valuation of his interest in MedCore, (2) the valuation of his MedCore profit-sharing plan, and (3) the size of the portion of the marital estate awarded to wife.  The court of appeals found that the trial court properly identified and valued the marital property and that the net effect of its division of the marital estate was equitable.  Husband’s primary issue concerned the trial court’s determination that his 85% interest in MedCore was worth $680,000.  He asserted that his value was high because it included the MedCore’s goodwill, and because the trial court relied too heavily on the testimony of wife’s valuation experts.

MedCore was substantially different from husband’s original solo surgical practice. By the time of trial, it was an incorporated multi-specialty medical group employing 11 physicians, 10 nurses, one psychologist, and one optometrist with total annual billings in 1989 of $2,495,000.  Its total collections for the same period were $2,055,000, and its accounts receivable exceeded $900,000.  MedCore also owned a 48,000 square-foot office building which was worth over $3,000,000 and also had space that it leased to others.

Husband claimed that any valuation of MedCore should, as a matter of law, not include business goodwill.  He argued that professional goodwill was not a marital asset and that the valuation of MedCore should have included only its physical assets and accounts receivable.  The court of appeals found that the trial court did not abuse its discretion when it did not limit its consideration of the value of husband’s interest in MedCore to its net asset value.  The evidence of value of husband’s interest in MedCore came from husband himself, husband’s accountant, and two opposing expert witnesses retained by the parties.  Husband prepared a financial statement in December 1988 showing the value of his interest in MedCore to be $606,000, and two months before trial, he testified in a deposition in an unrelated lawsuit that MedCore was worth from $750,000 and $800,000.  Husband’s accountant testified that the book value (net asset value) of MedCore was $206,436 and that the value of husband’s interest was $175,470.  His expert witness, Gerald LeCroy testified that MedCore should be valued at $300,000 and that husband’s interest was worth $255,000.   Van Sant, Wife’s expert, using the “Delaware Rule” recognized in Tennessee by the Blasingame case, valued MedCore at $1,980,000 and husband’s interest in MedCore at $1,683,000.

The court of appeals found that the trial court did not abuse its discretion with regard to its consideration of the evidence concerning MedCore’s value, and the appellate court’s review of the evidence led it to conclude that it had no basis to overturn the trial court’s determination that the value of husband’s interest in MedCore was $680,000.

Husband also had a self-directed profit-sharing plan at MedCore.  Beginning in 1987, he began to purchase unimproved lots in a Williamson County subdivision, and eventually purchased 31 lots for a total investment of $897,500.  At the time of the trial, husband’s plan owned 28 lots which were being offered for sale for $32,500 per lot.  Wife’s appraiser determined that each lot was worth $29,500 for a total value of $826,000.  Husband’s appraiser agreed that the standard lots should be valued at $29,500 but discounted the value of approximately eight lots because of their size, location, and topography.  He also discounted the value of all the lots by 12% because of the time it would take to sell them.  As a result, husband’s appraiser valued all the lots at $687,000.  Faced with this difference of opinion, the trial court set the value of husband’s interest in the plan at $807,000.

The court of appeals believed that the trial court placed a value on husband’s profit-sharing plan that was within the range of the evidence, and it had no basis to set the trial court’s determination aside.

Husband also asserted that the trial court’s division of the marital property was inequitable because wife received 38% of the marital estate—he insisted that she should have received no more than 30%.  Distributions of marital property need not be equal in order to be equitable, the court of appeals explained.  It reviewed the manner in which the trial court divided the marital property in light of the statutory factors and saw no reason to change the trial court’s decision.  The judgment of the trial court was affirmed.

No. 01-A-01-9104-CV00131, 1992 WL 181710 (Tenn. Ct. App. Jul. 31, 1992).

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. Contact Us today at (901) 683-1850.