Valuing a Lawyer’s Legal Practice & Law Firm in Tennessee Divorce

Valuation of a Lawyer’s Legal Practice & Law Firm in Tennessee Divorce Law

Valuing a Lawyer’s Legal Practice & Law Firm in Tennessee Divorce Law

In Tennessee divorce, the value of a lawyer’s legal practice and law firm can be determined and divided.

Note: Since this article was originally written, the Tennessee Legislature has enacted new laws impacting valuation.  For details, see NEW TN LAW in 2017: Discounts in Business Valuations Allowed.  For additional reference, see our Tennessee Family Law Blog’s Business Valuation category for legal updates, analysis, and case law summaries.

A lawyer’s spouse must prove that the lawyer’s legal practice fits within Tennessee’s statutory definition of marital property if the spouse wants compensation for the value of the practice during a divorce.  If the legal practice is found by a Tennessee court to be marital property instead of separate property, the practice will be valued by the court and the lawyer’s spouse will receive part of the value.  To value and split marital property, Tennessee courts will weigh relevant factors in light of the unique facts of each case.  This article uses three cases from the previous article to explore the factors Tennessee courts consider when valuing a legal practice.

Mr. Quillen, a successful lawyer with an interest in a legal practice, spent his fourth marriage with a woman twenty-seven years his junior.  Wright v. Quillen, 909 S.W.2d 804 (Tenn. Ct. App. 1995).  During the marriage, Mr. Quillen’s wife became independently wealthy when her travel agency became a multi-million dollar corporation with offices in thirty cities.  After nine years of marriage, the two parties initiated an uncommonly hostile and violent divorce.  The trial court awarded Mr. Quillen $500,000 as his share of the increase in the value of his wife’s travel agency during the marriage.  The court also held that Mr. Quillen’s legal practice was his separate property.  Both Mr. Quillen and his wife appealed the trial court’s decision.

With respect to Mr. Quillen’s legal practice, the Tennessee Court of Appeals affirmed the trial court’s ruling.  Mr. Quillen’s wife argued that some of the legal practice should have been considered marital property, which would make the value divisible between the two parties.  The Court of Appeals noted that Mr. Quillen’s legal practice benefitted from its ability to borrow money from his wife’s travel agency.  However, the value of the firm did not increase during the nine years the parties were married.  All of the funds coming from the firm were used by Mr. Quillen to pay for items that both parties benefitted from, such as mortgages on marital property, taxes, and debts.  Therefore, the Court of Appeals held that the value of Mr. Quillen’s law practice should remain his separate property in the divorce.

Mr. Brown owned a profitable legal practice that represented one corporate client almost exclusively.  Brown v. Brown, 1990 WL 140912 (Tenn. Ct. App. 1990).  Mr. Brown’s wife supported him through law school, but became a homemaker after the husband began his practice.  After twenty-four years of marriage, the parties filed for divorce.  The trial court held that the net worth of the husband’s law practice was $125,000.  This value included cash, fixed assets, accounts receivables, and unbilled work.  The value did not include the goodwill of the practice.  The court held that the legal practice was a marital asset and applied the value of the practice to the total division of property between the parties.  However, the assets of the legal practice were left as the sole property of Mr. Brown.  Mr. Brown appealed the trial court’s ruling, claiming that the trial court erred in declaring his legal practice as a marital asset.  Mr.  Brown also claimed that if the court was correct in finding the practice was a marital asset, the valuation of the practice was incorrect.

The Tennessee Court of Appeals affirmed the trial court’s holding that the law practice was a marital asset.  Mr. Brown argued that the trial court incorrectly based its decision on another Tennessee case where the lawyer’s wife worked for her husband’s firm.  The Court of Appeals recognized the indirect contributions of Mr. Brown’s wife when she supported him through law school, and later as homemaker.  These contributions to the marriage were sufficient for the Court to find the law practice was marital property.  The Court of Appeals also affirmed the trial court’s valuation of the practice.  Mr. Brown claimed that the trial court erred when it failed to value the practice as near to the divorce final hearing date as possible.  At trial, an expert hired by Mr. Brown’s wife testified that the value of the practice was $138,604, which included the practice’s cash and accounts receivable one month prior to the first divorce hearing.  Mr. Brown’s expert testified that the value of the firm was $100,302, which represented the bank account balance of the firm and accounts receivable on the last day of the divorce hearing.   Looking to a Tennessee statute, the Court of Appeals held that the statute did not require the trial court to value the property according to the exact date of the final divorce hearing.  Rather, a valuation should be determined by “considering all relevant evidence regarding the value and the trial court [may] . . . place a value on a marital asset that is within the range of the evidence admitted.”  The Court of Appeals held that the trial court was within its discretion when it concluded the value of the practice was $125,000.

Mr. Day was an attorney with an interest in a legal practice.  Day v. Day, 2002 WL 13036 (Tenn. Ct. App. 2002).  Mr. Day and his wife chose to divorce by signing a Marital Dissolution Agreement (“MDA”) instead of litigating in court.  On April 20, 1999, a Chancellor divorced the parties by a judgment of absolute divorce that incorporated the provisions of the MDA.  Mr. Day’s wife alleged that on April 24, 1999, four days after the final judgment was entered, Mr. Day’s law firm received a fee and expense award of $950,000 from a class action lawsuit.  On April 17, 2000, Mr. Day’s wife filed a motion with the court, claiming that the provisions of the MDA were based on the mistake of the parties or the neglect of her attorney.  Among other allegations, the motion claimed that the MDA did not take into account the $950,000 award and Mr. Day’s interest in his law firm was incorrectly valued because it did not include the value of the firm’s assets.  Mr. Day was denied summary judgment because the trial court found that the issue of division of marital property was “inextricably intertwined” with the MDA agreements concerning child support.

The Tennessee Court of Appeals reversed the trial court’s order and granted summary judgment in favor of Mr. Day.  Noting that the wife’s attorney was responsible for the oversight, the Court held that the “mistakes” in the MDA were not due to Mr. Day’s fraudulent or inappropriate conduct.  Rather, the pending $950,000 award could have easily been discovered by Mr. Day’s wife and her attorney before the MDA was signed.  Although the wife’s reliance on her attorney was detrimental to her interests, she chose an inappropriate method of recovery.  Because the increased value of Mr. Day’s practice after the judgment could have easily been discovered before the MDA was signed, the Court of Appeals held that his wife was not entitled to any part of the increase in the value of the practice.

If a Tennessee court holds that a legal practice is marital property, its valuation will depend on a number of factors. A practice may be considered separate property if the value of the practice does not increase during the marriage.  However, increases in the value of a practice and the spouse’s contributions as a homemaker serve as persuasive evidence that the practice should be considered marital property.  When Tennessee courts are determining the value of the practice, they will look to the tangible and financial assets of the firm, as well as the accounts receivables of the practice.  Good will is not included in any valuation.  If the value of the practice dramatically increases after the divorce is finalized by the trial court, an opposing spouse cannot change the valuation of a practice retroactively if the spouse had sufficient opportunity to discover the pending increase.

Read more about Memphis divorce attorney Miles Mason, Sr. JD, CPA. He practices family law exclusively with the Miles Mason Family Law Group, PLC in Memphis, Tennessee. He has taught seminars across the nation on divorce trial practice, professional practice valuation, and forensic accounting to judges, lawyers, CPAs, and business appraisal expert witnesses. Miles authored The Forensic Accounting Deskbook, published by the American Bar Association Family Law Section, which addressed many aspects of valuing professional practices in divorce. For more information, see When Professionals Divorce in Tennessee: Valuing Professional Practices.