Value of Dental Practice Can’t Include Enterprise Goodwill in Tennessee Divorce

Value of Dental Practice Can’t Include Enterprise Goodwill in Tennessee Divorce

Tennessee case summary on dental practice valuation in divorce.

Andrew R. Lunn, DDS, v. Carole Michelle Lunn

Andrew Lunn, DDS, brought this 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.

Another hotly contested issue at trial was the amount of spousal support.  The lower court found that the statutory factors weighed in favor of an award, since the wife needed time to re-establish her career.  Therefore, it awarded her rehabilitative alimony for three years.  The lower court also found that the wife would not be able to earn an income comparable to the husband’s, and awarded her transitional alimony in decreasing amounts over the next sixteen years.  It also awarded her alimony to pay her attorney fees.

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.

Having dealt with the business valuation, the appeals court then turned to the issue of spousal support.  The husband first argued that the “transitional” alimony award was flawed, since transitional alimony had been defined a short-term support, and in this case, it was awarded for sixteen years.  After a thorough review of the Tennessee statutes and precedents, the appeals court agreed with the husband.  It found that the proper type of alimony in a case such as this would be alimony in futuro or in solido, which are based upon different factors.  After reviewing the appropriate factors, it adjusted the award of alimony.  It held that the award of rehabilitative alimony was proper while the wife returned to her profession.  But after that three year period, it held that the proper amount of alimony would be $2288 per month until the wife’s death or remarriage.

The trial court had also awarded the wife $207,000 alimony in solido to cover her attorney’s fees.  After examining the record, the appeals court held that this award was proper.

After addressing a number of other procedural and fee issues, the Court of Appeals sent the case back to the trial court for redetermination of the issues that had been reversed.

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

See original opinion for exact language.  Legal citations omitted.

To learn more, see Valuing a Dentist’s Dental Practice Under Tennessee Divorce Law.