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TORTORICH v. TORTORICH

June 28, 1995

TONY TORTORICH
V.
PAM TORTORICH



Appeal from Pulaski Chancery Court; Robin Mays, Chancellor; affirmed in part; reversed and remanded in part.

SYLLABUS BY THE COURT

1. DIVORCE — GOODWILL — DISTINCTION BETWEEN MARKETABLE BUSINESS ASSET AND PERSONAL REPUTATION OF PARTICULAR INDIVIDUAL — VALUE ATTACHED. — Where goodwill is a marketable business asset distinct from the personal reputation of a particular individual, it has an immediately discernible value as an asset of the business and may be reflected in a sale or transfer of the business; on the other hand, if goodwill depends on the continued presence of a particular individual, it is not a marketable asset distinct from the individual; any value that attaches to the entity solely as a result of personal goodwill represents nothing more than probable future earning capacity, which is not a proper consideration in dividing marital property.

2. DIVORCE — GOODWILL — CRITERIA FOR GOODWILL TO BE CONSIDERED MARITAL PROPERTY — QUESTION OF FACT — PARTY MUST PRODUCE EVIDENCE ESTABLISHING SALABILITY OR MARKETABILITY OF GOODWILL AS BUSINESS ASSET OF PROFESSIONAL PRACTICE. — For goodwill to be considered marital property, it must be a business asset with value independent of the presence or reputation of a particular individual — an asset that may be sold, transferred, conveyed, or pledged; whether goodwill is marital property is a fact question, and to establish goodwill as marital property and divisible as such, a party must produce evidence proving the salability or marketability of that goodwill as a business asset of a professional practice.

3. DIVORCE — GOODWILL — PROFESSIONAL ASSOCIATION HAD NO GOODWILL VALUE INDEPENDENT OF DENTIST'S PRESENCE AND REPUTATION — APPELLEE FAILED TO PROVE PROFESSIONAL ASSOCIATION HAD INDEPENDENT BUSINESS GOODWILL. — Where the evidence showed that appellant was a sole practitioner whose oral surgery practice was almost wholly dependent on referrals from other dentists who referred patients to him on the basis of his reputation alone, the professional association had no goodwill value independent of appellant's presence and reputation; appellee failed to sustain the burden of establishing that appellant's business goodwill was marital property by proving that appellant's professional association had business goodwill independent of appellant's personal goodwill. The opinion of the court was delivered by: John B. Robbins, Judge.

This is an appeal from a decree of divorce from bed and board entered by the Pulaski County Chancery Court on December 15, 1993. The case arose in December 1992 when appellee Pam Tortorich filed her complaint seeking separate maintenance from appellant Tony Tortorich, who counterclaimed for divorce. In September 1993, Pam Tortorich amended her complaint to request a divorce from bed and board which was eventually granted by the court on December 15, 1993. Tony Tortorich's counterclaim for absolute divorce was denied and dismissed. Although on May 24, 1995, we affirmed a later order of contempt entered by the trial court in this matter, it is not part of the present appeal. [50 ArkApp Page 117]

After Pam graduated from Arkansas State University in the spring of 1978 with a degree in Business Education, the parties married in January 1979. Tony, who also graduated from Arkansas State University, began his four years of dental school at the University of Tennessee in Memphis shortly after the parties married. The parties eventually had three children during their marriage: Joseph, age twelve; Jordan, age nine; and Andrew, age five. In 1986, Tony opened his oral surgery practice which he incorporated in 1987 under the name "Anthony L. Tortorich, D.D.S., P.A." The value of this professional association is the primary focus of the present appeal.

Appellant Tony Tortorich raises the following issues on appeal: (1) the trial court erred in its valuation of Anthony L. Tortorich, D.D.S, P.A.; (2) the trial court erred in ordering him to pay all of Mrs. Tortorich's expert witness fees in excess of six thousand ($6,000) dollars; (3) the trial court erred in setting alimony and child support; (4) the trial court erred in failing to limit the duration of its order to the time the decree is in effect; (5) the trial court erred in ordering him to pay one-half of Mrs. Tortorich's attorney's fees; and (6) the trial court erred in awarding Mrs. Tortorich one-half of his 1993 bonus. We reverse and remand in part and affirm in part.

Dr. Tortorich first contends that the trial court erred in its valuation of his professional association. He specifically contends that the trial court erred in finding there was approximately $180,000 of business goodwill in Anthony L. Tortorich, D.D.S., P.A. He argued before the trial court, and now argues on appeal, that Wilson v. Wilson, 294 Ark. 194, 741 S.W.2d 640 (1987), is applicable and controlling, and required the trial court to find that his oral surgery practice had no business goodwill. We agree and reverse on this point.

Richard Schwartz, a certified public accountant, testified as Mrs. Tortorich's expert witness on the value of Dr. Tortorich's professional association. Mr. Schwartz testified at length concerning his basis for arriving at a figure of approximately $180,000 for business goodwill. Mr. Schwartz testified on cross-examination that he considers goodwill to be "the capability of that business to generate, through patronage of those customers or patients, that excess earnings which develops the value of goodwill." He [50 ArkApp Page 118]

went on to testify that "goodwill is earned as a relationship of continuation of that practice which generates above average earnings." Mr. Schwartz admitted on cross-examination that Dr. Tortorich obtains "most of his patients through referrals" from other dentists. Testimony indicated that because Dr. Tortorich is an oral surgeon whose primary practice is tooth extraction he has very few repeat patient visits compared to those of a regular dentist.

Mr. Schwartz based his opinion of the value of the professional association primarily on the adjusted book value of the association's tangible assets, and goodwill ascertained by a capitalization of "excess earnings." The capitalization of "excess earnings" method of evaluation was explained by Mr. Schwartz to involve computing a weighted average of Dr. Tortorich's net operating income in excess of the net operating income of an average oral surgeon over the preceding three-year period. The resulting difference, capitalized at 40%, would represent the value of Dr. Tortorich's goodwill.

Mr. Schwartz said that he referred to comparable sales as a reality check on his evaluation amount. Of the comparable sales, however, Mr. Schwartz acknowledged that none were in Arkansas; some were combination general dentist/oral surgeon practices; he could not testify that the comparables did not include office buildings; and he did not know whether the practices sold had one, two or three dentists. Mr. Schwartz further acknowledged that if he were an oral surgeon who was purchasing Dr. Tortorich's practice, he would want Dr. Tortorich to continue working for the professional association for six months after the purchase, and to have a "no compete" agreement from Dr. Tortorich.

Keith Crass, also a certified public accountant, testified that he found Dr. Tortorich's professional association had no goodwill because his practice is highly personalized and its revenues are generated from Dr. Tortorich's personal skills. Testimony showed that 80% of Dr. Tortorich's revenues were derived from the extraction of wisdom teeth; consequently most of his patients do not have repeat visits. Mr. Crass corroborated Mr. Schwartz's testimony and stated that 90% of appellant's patients are new patients who are generally referred from other dentists. Mr. Crass went on to testify that the primary reason he considered this particular practice to have no goodwill is because Dr. Tortorich has [50 ArkApp Page 119]

no continuing patient base, or continuing customers so to speak, that an interested buyer would be willing to purchase. Mr. Crass distinguished Dr. Tortorich's oral surgery practice from a pediatrician's practice. Mr. Crass testified there was goodwill in a pediatrician's practice because children tend to return to the same doctor for care throughout their childhood years; thus, the pediatrician has a continuing relationship with his client base.

The chancellor observed that Mr. Schwartz had much more expertise in the valuation of professional associations and closely held corporations than Mr. Crass. The chancellor found that because this valuation was not based on Dr. Tortorich actually selling his practice and going "to Havana," that the valuation was reasonable. The chancellor concluded that the professional association had a value of $240,000.00 and ordered Dr. Tortorich to pay half of that amount to Mrs. Tortorich. Of the $240,000.00 value placed on the oral surgery practice, approximately $180,000.00 was goodwill.

In Wilson v. Wilson, id, the supreme court defined the type of goodwill which would be considered marital property. Wilson involved facts very similar to those in the present case. In Wilson, the parties were married during the husband's attendance at medical school. Their marriage lasted for approximately eighteen years during which time Dr. Wilson began his practice as an orthopedic surgeon and eventually was hired by Orthopedic Associates, Inc.

[1] In the course of setting a value for Dr. Wilson's interest in Orthopedic Associates, Inc., the supreme court held that, although the prevailing view was that goodwill of a professional association or business is marital property subject to division, certain factors must be considered in determining whether the goodwill is actually a business asset. The supreme court adopted the Nebraska Supreme Court's position regarding goodwill as set forth in Taylor v. Taylor, 222 Neb. 721, 386 N.W.2d 851 (1986), and quoted from that opinion:

[W]here goodwill is a marketable business asset distinct from the personal reputation of a particular individual, as is usually the case with many commercial enterprises, that goodwill has an immediately discernible value as an asset of the business and may be identified as an amount reflected [50 ArkApp Page 120]

in a sale or transfer of such business. On the other hand, if goodwill depends on the continued presence of a particular individual, such goodwill, by definition, is not a marketable asset distinct from the individual. Any value which attaches to the entity solely as a result of personal goodwill represents nothing more than probable future earning capacity, which although relevant in determining alimony, is not a proper consideration in dividing marital property in a dissolution proceeding.

Wilson v. Wilson, 294 Ark. at 205, 741 S.W.2d at 647 (quoting from Taylor v. Taylor, 222 Neb. ...


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