Law Firm Valuation Case Summaries
Selected law firm valuation in Tennessee divorce appellate cases summarized.
Julie C.W. v. Frank Mitchell W., Jr.
No. M2019-01243-COA-R3-CV (Tenn. Ct. App. Feb. 26, 2021).
Tennessee Divorce: Law Firm Valuation Case Summaries
Husband was partner at Bass, Berry & Sims law firm, and wife was a staff attorney at the same firm. Wife’s expert witness, Vic Alexander, CPA, testified that husband’s interest in the firm was 2.0432%, the firm’s equity was over $24 million, and that husband’s interest had a value of $503,567. He also testified as to the value at the beginning of the marriage, $236,820. He used a “fair value” analysis without applying discounts. He stated that if discounts were applied, a 32% reduction would be appropriate, but that discounts weren’t appropriate because the value represented earned but undistributed income. Most of the value was receivables that would be converted to cash, and the firm had a high collection rate.
The husband made a motion to dismiss the wife’s claim for a share in the increase of his interest in the firm, on the ground that the wife had not made a substantial contribution to that increase. The trial court granted the motion. Even though the value of his interest in the firm increased, the husband’s percentage had decreased during the marriage.
The trial court held that the husband’s “equity interest in Bass Berry & Sims has no monetary value … he will receive nothing if he retires or otherwise withdraws his membership in the firm … he would receive a cash payout in accordance with his capital account only when Bass Berry & Sims is sold or dissolved. Presently, his capital account has a negative value, and there is no evidence that Bass Berry & Sims will be sold or otherwise dissolved in the foreseeable future.”
The Court of Appeals agreed with this finding.
Odom v. Odom,
No. M2018-00405-COA-R3-CV, 2019 WL 3546437 (Tenn. Ct. App. Aug. 5, 2019).
The wife was an attorney who obtained her law degree during the marriage, the husband having paid for her to attend law school. While the appellate opinion did not deal directly with valuation issues, the proceeding was “characterized by ongoing discovery issues. Obtaining even the most basic information from Wife proved difficult, if not impossible.” The wife was ultimately found in criminal contempt, and the Court of Appeals affirmed in a first appeal.
At a later hearing, the wife was ordered to “provide additional documentation about her law practice.” The discovery issue seems to have been lost in the wife’s motion to have the judge recused, and her attorney’s motion to withdraw. In any event, the case went to trial, despite the wife’s claim that her attorney had abandoned her on the eve of trial. The husband received a disproportionately larger share of the estate, based upon the short duration of the marriage.
On appeal, the wife argued “a generalized violation of [her] Due Process rights.” The wife’s behavior during discovery was relevant when the court turned to the lower court’s award of attorney fees to the husband. The court found that the lower court’s general award of attorney’s fees to the husband as alimony in solido was not warranted. Nonetheless, the appeals court held that attorney’s fees as a sanction for discovery abuse was appropriate. Therefore, award of attorney’s fees for the discovery violations (presumably including the documentation about her law practice) was appropriate, and the appeals court affirmed.
Wheeler v. Wheeler,
No. M2012-02154-COA-R3-CV (Tenn. Ct. App. Arp. 15, 2014)
Tennessee Divorce: Law Firm Valuation Case Summaries
The trial court valued the husband’s equity in his law firm at $37,192, based upon the expert testimony of the wife’s expert, one Mr. Alexander. The husband argued on appeal that the trial court had made a mistake in the computation, which should have been set at $31,855. The expert had based his opinion on the firm’s financials, and the partnership agreement, which stated that the husband was entitled to 35% of gross receipts from that partner’s accrued billable time, if and when collected. The expert added the husband’s unpaid invoices and work in progress, and calculated 35% of that amount.
The husband argued that the overall sum included about $15,000 in administrative costs, and that he was not entitled to any compensation for these amounts. The expert agreed that if these amounts were not considered, then the husband’s partnership interest would be reduced to $31,855, and husband argued that the lower valuation should have been applied.
The Court of Appeals affirmed, even though it agreed with the husband as to the value of his equity. But since he was awarded the equity, and the difference in value was “insignificant to the division of the marital estate,” it did not make the division of marital assets inequitable.
Jannerbo v. Jannerbo,
No. E2011-00416-COA-R3-CV (Tenn. Ct. App. Mar. 9, 2012)
Husband was equity partner of law firm, but opinion contains no discussion of valuation of interest.
Flynn v, Flynn,
W2011-01138-COA-R3-CV (Tenn. Ct. App. Jan. 27, 2012)
Husband was an equity partner with Spice, Flynn and Rudstrom law firm at the time of his divorce. After the divorce, he married his current wife, who also practiced at the same firm, but who started a new firm. Husband assisted her on a number of law suits, which resulted in conflict between husband and his partners. He was subsequently expelled from the firm, and executed a departure agreement, under which he received a “considerable sum,” although the amount was not specified.
The husband then went to work for his wife, who remained the sole owner of her firm, a professional corporation. His income with the former firm was $400,000-$500,000 per year, and his income with the new wife’s firm was $130,000. He received 45% of the fees he generated, many of which were from his old clients. The remainder was retained by the wife’s firm. The trial court had held that the husband was voluntarily underemployed, and the husband argued on appeal that the trial court erred in considering the wife’s firm’s resources.
The appeals court held that it would be appropriate for a trial court to consider manipulation of income, but that there had been no specific findings to justify a finding of voluntary underemployment. Therefore, it remanded the case for further proceedings, including further discovery.
Small v. Small
No. M2009-00248-COA-R3-CV (Tenn. Ct. App. Jan. 28, 2010).
One issue in this case was whether the attorney husband was voluntarily underemployed. He had been in private practice with clients in the banking industry, and had an annual income over $1 million. He closed his practice, however, and explained that due to the Sarbanes-Oxley Act, small banks had been consolidating, and new small banks were not forming. For this reason, his business dried up. At the time of trial, he was working for a firm with a salary of about $150,000. The Court of Appeals affirmed a finding of voluntary underemployment, although it conceded the husband’s explanation was plausible. (The trial court had found that the husband was “so untruthful as to not be believed under oath.”
The trial court did need to set a value on the closed law practice, and it found that the husband’s equity was $563,433. This included about $315,000 cash in bank accounts, $250,000 in receivables, $15,000 in hard assets, and about $13,000 in long term debt. On appeal, the husband argued that the only value was $8761. The trial court had used the bank balance as of March, and the husband cited a much lower balance of about $7000 in July. The husband testified that the withdrawn funds had been spent on “taxes, support and marital debts.”
But the trial court had believed that the husband had manipulated his income, and found that the March bank statement had been the most reliable evidence.
The Court of Appeals disagreed, and held that the wife had the burden of proof to show that there had been any improper conduct between March and July. In the absence of this evidence, the appeals court agreed with the husband that the account, and thus the overall value of the practice, should have been valued as of July, the date of trial.
Similarly, there was evidence that there had been $250,000 in receivables at the end of 2007. But the husband testified that these had been collected at the beginning of 2008, and there were no outstanding receivables at the time of trial. Again, the wife had failed to present any contrary evidence. Since assets are to be valued as of the time of trial, the appeals court held that the trial court had erred in including the $250,000.
Watson v. Watson
309 S.W.3d 483 (Tenn. Ct. App. 2009), permission to appeal denied (Tenn. 2010).
Husband was equity partner in law firm, but valuation of law firm was not at issue on this appeal, nor on earlier appeal in same case, Watson v. Watson, No. W2004-01014-COA-R3-CV (Tenn. Ct. App. Aug. 9, 2005).
Carpenter v Carpenter
No. W2007-00992-COA-R3-CV (Tenn. Ct. App. Dec. 31, 2008)
Tennessee Divorce: Law Firm Valuation Case Summaries
The husband valued his law practice at $33,491. He arrived at this value by estimating the assets, including furniture, artwork, and two vehicles valued at $122,991, and subtracting debt of $89,500. He acknowledged that in past financial statements, he had valued it at $100,000, $175,000 and 200,000. He drew a salary from the firm, a professional corporation, of $8000 per month. He had also drawn over $11,000 from the firm in 2006.
The wife, on the other hand, set the value of the firm at about $143,000, relying largely upon the financial statements, and the trial court accepted this value.
The Court of Appeals affirmed, noting that the financial statements were competent evidence of value. It also noted that the husband testified at deposition that he expected to receive fees of about $121,000, although at trial he backed away from this testimony. The appeals court noted that the trial court had relied upon earlier profits, as well as previous bank statements showing a higher value. The appeals court noted that, for these reasons, the trial court might not have credited the husband’s valuation. Since the wife’s value was within the range supported by the evidence (the earlier financial statements), the Court of Appeals affirmed.
Demonbreun v. Demonbreun,
No. M2004-02105-COA-R3-CV, 2005 WL 3555545 (Tenn. Ct. App. Dec. 28, 2005), permission to appeal denied (Tenn. June 26, 2006).
Appeal discusses only visitation issues, but mentions in passing that the father’s personal injury law practice had been “adversely effected, severely so” by limits placed on direct mail solicitation by Tennessee Supreme Court.
Crowe v. Crowe,
W2003-02864-COA-R3-CV, 2005 WL 1651650 (Tenn. Ct. App. Jul. 14, 2005)
Parties stipulated that the attorney husband’s gross income was $20,000 per month. There was little discussion of his firm’s value, and the court did not set a value, but the Court of Appeals affirmed on the following grounds:
The second substantial item of the marital estate was Father’s law practice. The trial court, after noting the testimony of Father’s accountant that the law firm has $25,000.00 in physical assets, determined that the law firm had outstanding debts in the form of a line of credit, income tax liability, and additional debts totaling $49,000.00, $142,055.00, and $37,866.00 respectively. While the trial court noted that the debts exceeded the physical assets, the law practice was capable of generating a large amount of income each year. The trial court awarded Father his law practice, including all tangible and intangible assets.
LaGuardia v. LaGuardia,
No. E2004-00822-COA-R3-CV, 2005 WL 1566492 (Tenn. Ct. App. July 6, 2005)
Court of Appeals affirmed holding that husband’s law practice was not marital property. Evidence showed that parties could not live on husband’s employment income, but relied on separate assets of husband. This evidence rebutted the presumption that law practice, which was formed during marriage, was marital property.
Black v. Black,
No. W2003-01648-COA-R3- CV, 2004 WL 1563233 (Tenn. Ct. App. Jul. 13, 2004), aff’d, 166 S.W.3d 699 (Tenn. 2005).
Wife brought independent action for fraud, alleging that ex-husband withheld information for Marital Dissolution Agreement, including value of his law practice. Trial Court dismissed, and both Court of Appeals and Supreme Court affirmed. Among other reasons for affirming, Court of Appeals noted that there had been extensive discovery in underlying divorce case, which negated claim of extrinsic fraud.
Day v. Day,
No. M2001-01624-COA-R9-CV (Tenn. Ct. App. Jan. 4, 2002)
Alternate link for case.
Tennessee Divorce: Law Firm Valuation Case Summaries
The wife moved to set aside a Marital Dissolution Agreement, and the grounds included an allegation that the husband’s interest in his law firm was incorrectly valued at $22,500, an amount which failed to include the “cash assets” of the firm, and was not “based on any actual appraisal of the assets of the law firm.” She also alleged that the MDA failed to take into account a fee and expense award of $950,000 days after the judgment, and a receivable of $45,000 owed to the parties as a result of a loan the husband made to the firm.
Her complaint was supported by affidavits from two expert witnesses, appraiser R. Paul Cross, and CPA Richard Blount. Since the case also included child support issues, the trial court denied the husband’s motion for summary judgment, since the property and child support issues were inextricably intertwined.
The court of appeals noted that there was no reason to believe why the wife could not have uncovered the alleged mistakes simply by pursuing diligent discovery. Therefore, relief under Rule 60 was improper, and the lower court should have granted the husband’s motion for summary judgment.
Jahn v. Jahn,
932 S.W.2d 939 (Tenn. Ct. App. 1996), appeal after remand, No. 03A01-9903-CH-00097, 2000 WL 134335 (Tenn. Ct. App. Feb. 4, 2000)
In the 1996 appeal, the court held that “[h]usband’s interest in the assets of his law practice is a marital asset.” (Emphasis added.) It so held because they were created or acquired after the marriage. The assets were identified only as “accounts receivable and other assets.”
In the 2002 appeal after remand (not available online—sent via e-mail), the court reiterated its holding regarding the valuation, and held that this was the law of the case. In the second appeal, the court uses somewhat different language, that “the husband’s law practice is a marital asset and was properly valued at $180,065.00.”
In other words, the two cases, taken together, can be authority for the proposition that “assets of the law practice” and “law practice” are equivalent.
Derryberry v. Derryberry,
No. 03A01-9801-CV-00023, 1999 WL 486863 (Tenn. Ct. App. Jul. 13, 1999).
The husband was awarded “his entire law practice including all receivables, work in progress, and assets.” The wife argued on appeal that there were no findings of fact as to value upon which a presumption of correctness would attach. But the court stated: “By adopting [husband’s] proposed disposition and then making its own adjustments, the Trial Court clearly adopted the values … assigned by [husband]; therefore, sufficient findings of fact were made by the Trial court for the presumption of correctness to attach….”
Even though no dollar amounts were assigned, the Court of Appeals affirmed since “[b]oth parties left the marriage with assets reasonably comparable to those with which they entered the union. We find no abuse of discretion in the trial judge’s division of marital property.”
Wright v. Quillen,
909 S.W.2d 804 (Tenn Ct. App.1995)
Court of appeals affirmed award of law practice as separate property when “there is no satisfactory proof that the firm is worth more today than it was when the parties married.”
Brown v. Brown.,
No. 36, 1990 WL 140912 (Tenn. Ct. App. Oct. 1, 1990).
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.
Note: Smith v. Smith, 709 S.W.2d 588 (Tenn. Ct. App. 1985), permission to appeal denied (Tenn. 1986) holds that a law practice is a marital asset, but that professional good will cannot be included as part of value.
Also, in Siegel v. Siegel, No. 02A01-9708-CH-00198, 1999 WL 135090 (Tenn. Ct. App. Mar. 5, 1999), husband was awarded law firm, but no discussion of value.
To learn more, see Valuing a Lawyer’s Legal Practice & Law Firm in Tennessee Divorce Law.
