Lawyer vs Travel Agency Owner Wife in TN Divorce Business Valuation Case
Tennessee business valuation law case summary – travel agency and law practice. Divorce and family law from the Court of Appeals.
Pamela J. Wright v. Dale M. Quillen – the extent, the valuation, and the division of the marital estate; the awards of alimony, and child support.
In a case described by the Tennessee Court of Appeals as one of “uncommon hostility and violence,” it did, nonetheless, bring forward some uncommon issues on appeal.
In 1980 Dale Quillen (“husband”), a Nashville lawyer, age 55, three times divorced with three grown children, met Pamela Wright (“wife”), a 28-year-old college graduate. She was the manager of a Group Home in Lebanon and part owner of a travel agency. In 1981 wife sold her interest in the travel agency and with legal assistance from husband’s law firm, chartered her own travel agency. At the time of the divorce Wright Travel had become a multi-million dollar corporation with offices in thirty cities. The value, ownership, and division of that business is the most significant question on appeal.
The parties married in 1982 and a son was born in 1984. During the marriage the parties acquired a large amount of property, sold some of their separate property, and co-mingled their funds to some extent. Husband continued his successful legal practice. In 1991 wife bought another home, moved out of the marital residence, and filed for divorce. Husband filed a counter-complaint and the record contains “an avalanche of amendments, petitions, and motions.” The tension between the parties grew and ultimately culminated in a physical encounter between husband and wife’s counsel (in which one was seriously injured) after her counsel abruptly terminated wife’s discovery deposition. The chancellor held husband in contempt and ruled that he could no longer represent himself.
The case came to trial in July 1993 before the chancellor and a jury. After many days of testimony the jury answered 77 special interrogatories submitted by the court and the parties. The chancellor worked through a multitude of post-hearing motions and entered a final decree in February 1994 which divorced the parties, awarded custody of the child to wife, and divided the marital property. Husband was ordered to pay $1,950 per month in child support, and wife was ordered to pay $3,000 per month as alimony to husband until his death or remarriage. As to Wright Travel, the decree awarded it to wife as her separate property but awarded husband $500,000 as his share of the increase in value during the marriage. Husband was awarded his law practice as his separate property.
Partnership Claim
Husband asserted that Wright Travel was a partnership and that he and wife owned it as equal partners. Under Tennessee law a partnership is an association of two or more persons to carry on as co-owners a business for profit. The court of appeals said that although the existence of a partnership may be implied from the circumstances, the circumstances must show that the parties intended to share the profits from their joint enterprise. The controlling intention is that ascertainable from the acts of the parties.
There was no partnership agreement and the court of appeals failed to see how it could find an implied partnership, as the business was incorporated a year before the marriage with wife as the sole shareholder. She has made all the business decisions, and until the divorce was filed, husband disclaimed any interest in the company. He was not an officer, director, or employee. When he advocated selling the business, wife vetoed the idea.
Although an employee in husband’s office prepared the charter for Wright Travel, Inc., and husband paid the filing fee, all the other cash transactions between husband and the corporation were characterized as loans and not as capital contributions or profit withdrawals. Husband did give wife some office furniture and he purchased an ad for the agency when it first started doing business, but it appears that he did these things in consideration for a release of any liability for malpractice based on some advice he had given in connection with wife’s separation from the previous travel agency.
Value of Wife’s Travel Agency
The jury valued Wright Travel at $1,750,000. The estimates of value in the record ranged from $1,000,000 to $5,000,000, so the verdict was within the extremes in the record. Husband did not attack the verdict directly, but rather he argued for a new trial on three grounds: (1) the trial judge’s error in allowing wife’s valuation expert to testify, (2) newly discovered evidence impeaching wife’s expert, and (3) newly discovered evidence of value.
Wife presented Jeffery Miller, an attorney, a consultant to travel agencies, and the owner of a publishing company, as an expert witness on the value of Wright Travel. Husband objected to his testimony on the ground that Miller had previously represented Wright Travel which made him counsel for husband as well. The court of appeals explained that testimony by an attorney against his former client gives the appearance of impropriety—it may involve confidential information gained in the prior representation or it may result in a classic conflict of interest. Here, the appellate court thought that these objections disappeared in the wake of its decision that Wright Travel was not a partnership. Miller never represented husband personally, and there was no indication that he ever obtained from Wright Travel any information personal to husband. Husband also argues that Miller’s testimony should have been excluded because his opinion was based on out-of-date information, and because it was derived from a methodology not approved by the Tennessee courts. Husband did not, however, directly attack Miller’s qualifications as an expert.
As to a claim of staleness, the court of appeals stated that Tennessee statutes required that marital property be valued as of a date as near as reasonably possible to the final divorce hearing date. The divorce hearing took place in July and August of 1993 and the latest yearly information Miller possessed covered the 1991 calendar year. The expert offered an opinion, however, about the value of the business (between 1.6 million and 1.7 million) at the time of the trial. He testified that he received updated financial and marketing information and reviewed all the factors that went into forming an opinion about value. Miller said he did not know the amount of the current receivables and payables, but that it did not affect the value of the business in a significant manner. In his opinion the value of businesses like Wright Travel had remained level or had actually declined over the six months to a year prior to the trial. The court of appeals believed that the expert’s testimony related to the value of Wright Travel as of the date of the trial. The objections to the reliability of the data on which he based his opinion go to the weight to be given his testimony and not to its admissibility, the court said. Admissibility, relevancy, and competency questions address themselves to the discretion of the trial judge, and the appellate court found no abuse of discretion here.
As to Miller’s methodology, the court of appeals previously explained that determining the value of a closely held corporation is not an exact science, and the courts have not articulated a consistent approach to the problem. Two recognized approaches are the “Delaware Block Method”, and the method described in Revenue Ruling 59-60. Miller did not follow either of these methods, and in fact, did not know of either approach. He used a method he developed specifically for the travel agency business, which he called the marketing approach. This method looked at the type of sales, the client base, the average cost of issuing a ticket, the major airlines in the area, and the firm’s major clients. Based on these factors and his knowledge of the sales price of other travel agencies, Miller formed an opinion as to the value of the company under consideration. Historical data concerning income, or profitability, played a small part in his scheme because of the rapidly changing climate in the deregulated airline industry. Miller has appraised dozens of travel agencies using this methodology .
While Miller disclaimed any knowledge of Revenue Rule 59-60, some of the factors he considers important also appear in that publication. In Tennessee where the choice of the proper method or combination of methods to determine value was based on the unique circumstances of each corporation, the court of appeals thought that Miller’s methods formed a basis reliable enough to assist the jury to reach an accurate result.
Miller testified at trial that he did not attribute any value to the renewal of Wright Travel’s computer reservations system contract. In an article that appeared in an industry periodical, Miller was quoted as saying that: (1) a good negotiator can negotiate a deal that can help control automation costs; and (2) he has seen bonuses and soft dollar awards for travel agents that exceed contractually-set productivity goals. Another person was quoted in the article as saying that the contract value may be as much as $10,000 per terminal. Husband argued that a new trial should have been granted based on this evidence. The court of appeals failed to grasp how this newly discovered evidence required a new trial. It was arguable, they said, that Miller’s statements in the article implied that computer terminals had some value, and these contradictory statements could be used for impeachment purposes. But the appellate court has held that newly discovered opinion testimony or newly discovered evidence for contradicting or impeaching purposes alone are not grounds for granting a new trial. Husband also argued that on the basis of the newly discovered evidence, Miller’s testimony should have been disregarded altogether. The court of appeals thought this was simply a restatement of the previous issue.
Husband also argued that the chancellor should have reopened the proof to consider evidence of a comparable sale of another travel agency in Nashville, which the court of appeals assumed meant that “the chancellor should have granted a new trial on the question of value because of newly discovered evidence.” The motion, however, was not supported by anything showing what the newly discovered evidence would be. There was only a bare allegation that another travel agency had been sold and that the value it sold for might have some bearing on the value of Wright Travel. Since a new trial can be granted because of newly discovered evidence only when it is clear that the introduction of such evidence at a subsequent trial would most probably produce a different result, the chancellor could not be faulted for not granting a new trial on the basis of this motion.
The chancellor held that Wright Travel was wife’s separate property but that the increase in value during the marriage–from $50,000 to $1,750,000, according to the jury’s verdict–was marital property. The court of appeals previously rejected the contention that the business was a partnership. It was also convinced that the business should have been considered as wife’s separate property. The chancellor’s finding that the increase in value was subject to division as marital property was in accordance with the Tennessee Code. The chancellor awarded husband $500,000 or 29.4% of the increase in value during the marriage. In addition husband was not required to repay approximately $145,000 he had borrowed from the corporation. The chancellor held that the proceeds of these loans were used for family purposes and were to be treated as withdrawals, not as debts to be repaid.
The court of appeals explained that while this asset was not be viewed in isolation but as part of the total award to each party, it believed the chancellor’s award to husband represented an equitable division of Wright Travel’s increase in value. Wife was the driving force of the business—it was her idea and she devoted herself to it full-time. Husband devoted his time to his law practice. Undoubtedly he contributed something to the success of Wright Travel, but not nearly to the extent wife did.
Value of Law Practice
The chancellor awarded the law practice to husband as his separate property, and wife argued that some part of the law practice should have been considered marital property; however, the court of appeals believed that there was no evidence that the firm increased in value during the marriage. The income generated by the firm went to pay taxes, debts, mortgages on marital property, and other items from which both parties benefitted. The appellate said that it was nearly impossible to say that husband should account for some of that income as marital property. As a result, the court of appeals was satisfied that the chancellor properly dealt with husband’s law practice and the income generated by it during the marriage.
Wife also asserted that husband should be responsible for the payment of all taxes, interest, and penalties for tax debts that accrued before the marriage, and that she should have been awarded $141,000 in a Bradford account. Viewed in isolation these arguments had some appeal, the court of appeals reasoned. However, the separate items in the marital estate are not isolated—the court will look at the total award and apply the factors listed in state statute in judging whether the division was equitable. In this case the chancellor awarded wife property having a net value of approximately $1,543,000. Husband was awarded property having a net value of roughly $1,162,000, including the $500,000 payment for his share of Wright Travel. In addition the court refused to order husband to repay Wright Travel approximately $145,000 in loans. Even if the court of appeals concluded that the taxes paid were paid with marital property and that wife has a stronger claim to the Bradford account, it could not say that the ultimate division of the marital estate was inequitable.
Alimony
The combined purpose of the division of the marital property and the award of periodic alimony, the appellate court explained, was to avoid placing one spouse in a financial position worse than the one existing prior to the divorce. Taking all these factors into account, it thought that the chancellor was justified in making the alimony award to husband. Considering the standard of living the parties enjoyed during the marriage, husband’s age, the fact that his earning capacity will inevitably decline much sooner than wife’s, the fact that he will no longer enjoy the $25,000 worth of free travel he previously enjoyed, and wife’s superior earning capacity, the court of appeals held the amount and the duration of the award was proper.
Other Real Property
During the marriage husband transferred three separate parcels of property to wife. The value of the three properties amounted to $72,000. The chancellor found that these parcels remained husband’s separate property. The largest of the three was titled in the name of husband’s second wife, until 1986 when she conveyed it to wife. Husband quitclaimed any interest he had in the property to wife in 1983. The jury did not believe husband’s contention that he conveyed the property to wife to allow her to obtain a bond. Instead, the jury found the property was conveyed to wife to keep it out of husband’s name.
The court of appeals said that the backgrounds of the other two parcels were not quite as clear in the record and the chancellor’s written memorandum only refers to the first. The final decree, nevertheless, awarded all three parcels to husband as his separate property. Wife insisted that the three parcels were her separate property. The chancellor found that with respect to the first, husband originally owned it and conveyed it away but did not intend for the ownership interest to pass to the grantee. This conclusion was supported by the jury finding that the property was conveyed to wife to keep it out of husband’s name.
Courts have not looked favorably on transfers to hinder or defraud creditors or to avoid the payment of taxes, the court of appeals opined. The appellate court in an earlier case applied the clean hands doctrine to defeat an attempt by an ex-husband to recover the title to property he had placed in his ex-wife’s name at the time of the divorce. The purpose of the conveyance to the wife was to protect the property from the husband’s creditors and the IRS. The court of appeals held that the chancellor’s ruling should not be disturbed, and reiterated that the analysis was of the overall settlement in the divorce action. One of the items to be considered in arriving at an equitable distribution of the marital property is the separate property of each party. After its review, the court of appeals said that the chancellor’s decision on how to divide the marital property was made with the knowledge that the $72,000 represented by the three parcels of property was on husband’s side, and it could not conclude that he would have made the same disposition of the marital property if the $72,000 has been on wife’s side. That would be a net shift of $144,000.
The court of appeals thought any error was harmless because the chancellor balanced the accounts in his division of the marital property.
909 S.W.2d 804 (Tenn. Ct. App. 1995).
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 Germantwon, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.
