Court: Appellate Court of Illinois; September 25, 1992; Illinois; State Appellate Court
Donald and Dorothy Brenner's divorce was finalized on August 31, 1990, with the court awarding Dorothy the family home and $1,200 per month in permanent maintenance. Donald received a 50% interest in his company, Brenik, Inc., and the associated real estate. The court mandated Donald to pay Dorothy $300,000 in total, disbursed as ten annual payments of $30,000, representing her share of the company and land. Donald raised three appeal questions: 1) whether the court improperly relied on Dorothy’s expert witness for company stock valuation, leading to an inequitable property division; 2) whether reliance on a one-year-old valuation of Donald's real estate was erroneous; and 3) whether the award for attorney and expert witness fees should be reconsidered. The couple, married in 1969 with an adult daughter, Marcia, had a contested trial after Dorothy filed for dissolution in 1986, followed by Donald's counterpetition in 1989. Paul H. Wieland, a CPA, provided expert testimony, utilizing the American Institute of Certified Public Accountants formula method to value Brenik at $717,000 as of October 31, 1987, with $504,000 in tangible and $213,000 in intangible assets. His valuation considered the company's financial performance over the preceding five years and indicated improvement prior to the trial, despite a corporate debt of $230,000.
Wieland assessed the corporation's total assets at $408,000 in 1990, with liabilities of $230,000. He indicated that while he had not conducted a thorough valuation of Brenik, preliminary calculations suggested a value exceeding $400,000. Wieland proposed that a $150,000 liability owed to shareholders should be treated as equity, raising his estimated value to approximately $580,000. However, he admitted to not investigating the nature of the $150,000 loan or whether it was secured by personal signatures from the officers. He valued tangible assets at $322,455 based on half the replacement cost provided by the company's insurance agent, acknowledging that this figure may not reflect true market value and lacking a detailed inventory of equipment.
Testifying for Donald, Edmund J. Apcel, a lawyer and CPA, employed IRS Ruling 59.60 to evaluate the business, valuing fixed assets at $101,690 as of 1988 through collaboration with M.J. Weiss, a machinery evaluator. Apcel's valuation of the company was $202,632.50 as of July 31, 1988, later updated to $114,000 due to financial losses. By April 1990, his valuation was $200,000, noting the company’s precarious financial situation and $150,000 in loans from officers. Apcel criticized the $2.042 million valuation by Edward G. Siegel, Ltd. for incorrectly including a building that personally belonged to co-shareholders and not the corporation. He also disputed Wieland's machinery valuation, asserting that replacement costs should have been used and that adding back officers’ compensation to earnings was improper, as the IRS considered it a last-resort valuation method. Officers were entitled to salaries as employees of the company.
Apcel, an independent appraiser, acknowledged he had only appraised one other company prior to evaluating Brenik. Donald, a 50% shareholder in Brenik, provided details about the company's history, equipment purchases, loans, and relocation to a new office. He and co-shareholder Reuben Nickels owned the Chicago Avenue property jointly. Nickels testified he would sell his Brenik share to Donald for $50,000 based on an unamended buy-sell agreement they signed during incorporation. He provided a detailed account of the company’s operations since 1977 and financial transactions. CPA James Gervasio evaluated Brenik’s stockholder equity at $42,016 as of April 30, 1990. Real estate appraiser William Farina valued the Chicago Avenue property at $590,000 a year before the trial but could not provide a current opinion without further market investigation, though he believed the previous figure was still reasonable. He also noted a prior valuation of $555,000 six months before his appraisal, attributing the increase to more comparable sales. Aron Kahn valued the property at $395,000 as of January 1989. The trial judge favored Dorothy’s expert witness, accepting the $590,000 property valuation and, consequently, determined Donald's interest in the property at $295,000. The judge found Apcel's testimony unreliable and adopted Dorothy’s valuation of Brenik at $550,000, determining Donald's interest in the company at $275,000. Donald was ordered to pay Dorothy $30,000 annually for ten years, totaling $300,000, to achieve a 60%-40% split of marital assets, along with her attorney and expert witness fees. Donald appealed the payment order and the valuation reliance on Dorothy’s expert. The appellate court reversed and remanded for a reassessment of Brenik’s value, emphasizing that while there is no strict valuation rule for closely held corporations, book value and goodwill should be considered.
Marital asset distribution is at the trial judge's discretion and can only be overturned on appeal for clear abuse of discretion. A reviewing court must reverse the trial court's decision if it acted arbitrarily, ignoring legal principles, resulting in substantial injustice. Concerns arose regarding the expert testimony provided by Wieland in valuing the company Brenik. Notably, Wieland acknowledged that his valuation was preliminary, based on outdated information from October 1987, rather than the dissolution date of July 1990. He failed to account for a $50,000 debt incurred in June 1990 and did not obtain a competent appraisal of the company's equipment, relying instead on outdated insurance replacement costs without establishing this as standard practice.
The trial court correctly excluded a doctor’s testimony based on unreliable evidence and noted that a proper appraisal would typically involve hiring an appraiser. Additionally, including the salaries of the two working owners as corporate assets was erroneous, as regulations dictate deducting reasonable compensation from business earnings. The case is remanded for a correct valuation of the corporation.
Donald claimed there was a buy-sell agreement valued at $100,000 per party, established at the company's incorporation in 1977, but failed to present this agreement in evidence or adequately challenge Wieland during cross-examination. The court did not err in downplaying the agreement's significance. Donald also contested the inclusion of goodwill in the corporation's market value, yet this argument pertained to the valuation of goodwill rather than its inclusion in the assessment.
Goodwill is deemed a tangible asset in corporate valuation and must be factored in when dividing marital assets in divorce cases, as established in relevant case law. However, courts must avoid "double counting" goodwill by considering it both as a corporate asset and as future income for maintenance calculations. In this case, the trial court directed Donald to pay maintenance and a cash offset related to the company's value, leading to a review of how goodwill affected asset division.
The Supreme Court previously addressed similar issues in *In re Marriage of Zells*, where it ruled that goodwill should only be considered once, either in assessing the corporation's value or the spouse's income potential. The court emphasized that including goodwill in both calculations would lead to an erroneous valuation. The current case was remanded for reevaluation of the company’s value while upholding the valuation of a specific real estate property.
Donald argued that the appraisal for the property was outdated and should reflect the dissolution date. However, he waived this argument by failing to challenge the appraisal in court or provide a more recent valuation. The court maintained that parties must present sufficient evidence of property value, and it found no abuse of discretion in the trial court’s decision based on the existing valuations.
Additionally, the potential impact of asset revaluation on the awards of attorney and expert fees was acknowledged, suggesting that these should also be reassessed on remand. Ultimately, the trial court's real estate valuation was affirmed, while the case was reversed and remanded for proper determination of the corporation's value and the distribution of marital assets, including the reconsideration of fee awards.
