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Marriage of McReath v. McReath
Citations: 335 Wis. 2d 643; 2011 WI 66; 800 N.W.2d 399; 2011 Wisc. LEXIS 354Docket: No. 2009AP639
Court: Wisconsin Supreme Court; July 12, 2011; Wisconsin; State Supreme Court
Timothy McReath is ordered to pay Tracy McReath $796,720 for property division in their divorce and $16,000 monthly in maintenance for 20 years. The court addresses two main issues: (1) whether the full value of Tim's professional goodwill in his orthodontic practice, Orthodontic Specialists, is divisible property in the marital estate, and (2) whether the circuit court improperly counted this goodwill in determining maintenance based on Tim's expected future earnings. The court concludes that the entire value of the salable professional goodwill can be included as divisible property and that there was no double counting of this goodwill in the maintenance award. The case background reveals that Tim, who has been the sole owner of Orthodontic Specialists since purchasing it for approximately $930,000 in 1995, has significantly contributed to the couple's assets, which include a high standard of living supported by the practice's revenues, averaging between $1.6 million to $1.8 million annually, with a net cash flow of about $697,522. Tim's education, funded by marital resources, and the importance of a noncompete agreement in his purchase are also highlighted. The couple has three minor children, and the divorce proceedings were initiated while they were still young. Tracy, a high school graduate with some college credits, lacked a professional degree and primarily served as a homemaker and caregiver during her marriage to Tim, who was pursuing a dental education. She was out of the workforce from 1993 to 2000, later working at Orthodontic Specialists from 2000 to 2008 for an annual salary of $15,000 to $16,000. The circuit court assessed her current earning capacity at $14.50 per hour, translating to an annual income of $30,160. On May 16, 2007, Tracy filed for divorce in Sauk County Circuit Court, which led to a division of marital property and an award of maintenance. The parties agreed on the value of most marital assets but contested the valuation of Orthodontic Specialists, which Tracy's expert valued at $1,058,000, while Tim's expert valued it at $415,000. The court accepted Tracy's expert's valuation, resulting in Tim's total assets exceeding Tracy's by $1,593,440. To equalize the division, the court awarded Tracy $796,720, to be paid at a minimum of $80,000 per year plus interest. For maintenance, the court calculated Tim's average annual earnings from Orthodontic Specialists at $697,522, adjusted to reflect a 40-hour work week, resulting in a figure of $465,000. After combining this with other income sources, Tim's total annual income was computed at $535,806, while Tracy's was $75,944. Considering statutory factors under Wis. Stat. 767.56, the court determined that Tracy would likely not reach Tim's earning capacity or standard of living and recognized her contributions to Tim's education. Consequently, Tracy was awarded $16,000 per month in maintenance for 20 years. Tim appealed, arguing that the circuit court incorrectly classified his personal goodwill in Orthodontic Specialists as divisible property. The court of appeals upheld the decision, noting that the personal goodwill was salable, supported by evidence of Tim previously purchasing goodwill from another practitioner and the necessity of a noncompete agreement for potential buyers. Tim contended that the circuit court improperly counted his personal goodwill twice in the division of assets related to Orthodontic Specialists. He argued it was initially counted as a divisible asset and then again when maintenance was awarded based on his earning capacity, which included his personal goodwill. The court evaluated three alternatives to address the potential double counting: 1. Excluding all personal goodwill from property division, which the court rejected. 2. Including salable personal goodwill as divisible property but adjusting maintenance downwards, also rejected by the court. 3. Tracy's approach, which involved including all salable goodwill as a divisible asset without accounting for its intertwining with Tim's earnings, was ultimately accepted by the court. The court of appeals affirmed the property division and maintenance awarded based on the circuit court's decision. The review affirmed that the division of marital property and maintenance calculation rests on the circuit court's discretion, which is not disturbed unless there is a legal error. Legal issues arising during this review are assessed independently, while findings of fact, such as asset valuation, are upheld unless clearly erroneous. Chapter 767 of the Wisconsin Statutes governs the division of marital estates, requiring courts to divide property upon divorce. The statute presumes equal division, reflecting the contributions of both spouses, especially considering the impact of domestic contributions on career opportunities. While equal division is favored, the court retains discretion to adjust distributions based on various factors. Property intended for division in a marital estate must be appraised at its fair market value, defined as the price at which the property would sell between a willing seller and a willing buyer. The primary issue in this case is whether the entire value of the salable professional goodwill from Orthodontic Specialists falls within the marital estate for division under Wis. Stat. 767.61, which does not explicitly exclude professional goodwill. Case law and policy considerations will help determine if this goodwill is divisible. Professional goodwill is defined as the intangible value derived from an established and well-managed business, encompassing the reputation and customer loyalty beyond the tangible assets. Although initially believed that goodwill did not apply to professional businesses due to their reliance on the individual professional's skills and reputation, it is now recognized as 'professional goodwill.' The concept of goodwill has been acknowledged as a divisible marital asset since 1967, with a precedent case involving Mr. Spheeris, where the circuit court included goodwill in the asset calculation for divorce. Mr. Spheeris contested the method of valuing goodwill, arguing it should only be established through an actual sale. The ruling held that goodwill does not require a sale to determine its existence or value, and mathematical formulas for valuation are acceptable. Subsequent cases in Wisconsin have extended the recognition of goodwill to professional practices. In the case of Mr. Holbrook, the court of appeals addressed whether the goodwill from his partnership in a law firm constituted a divisible marital asset, suggesting potential limitations on including professional goodwill in the marital estate. The court determined that professional goodwill, which had been previously viewed as non-salable and benefiting only the owners through increased salaries, can indeed be part of the divisible marital estate, particularly when it is salable. The court compared professional goodwill to an educational degree, asserting that it cannot be exchanged or sold in the open market, leading to the conclusion that its value is realized only through future earnings. Subsequent Wisconsin case law has refined this interpretation, allowing for the inclusion of goodwill in certain circumstances. For example, in Peerenboom, the court found that the goodwill of a dental practice could be divisible marital property, distinguishing it from the Holbrook case where a lawyer's interest in a law firm could not be sold due to ethical constraints. Similarly, in Sommerfield v. Sommerfield, the court ruled that the goodwill of an accounting practice should be considered a marketable asset, emphasizing the validity of expert valuation. The court concluded that when valuing a business interest in a divorce, salable professional goodwill should be included in the marital estate, supported by Wisconsin Statute 767.61, which promotes equal division of assets. The statute does not exclude professional goodwill, and excluding it would undermine the presumption of equality recognizing both spouses' contributions. The court held that salable professional goodwill must be included in the divisible marital estate, and while there is a suggestion to categorize goodwill into 'personal' and 'enterprise' types, this approach has not been adopted in their ruling. Professional goodwill is divided into two categories: enterprise goodwill, which pertains to the business itself and its relationships with stakeholders, and personal goodwill, which is linked to the individual owner's skills and reputation. Courts that recognize this distinction often include enterprise goodwill in the divisible marital estate, while excluding personal goodwill, reasoning that enterprise goodwill is salable and transferable, unlike personal goodwill, which relies on the presence of the individual professional and merely represents future earning capacity. The Indiana Supreme Court case Yoon exemplifies this approach, noting that although enterprise goodwill may not have a ready market, it holds value and is transferable, while personal goodwill is not considered salable. In the current case, the court rejects the necessity to distinguish between personal and enterprise goodwill for marital estate division, arguing that the premise of salability is flawed. Tim's testimony illustrates that a significant portion of the business's sale price was attributed to goodwill, which encompassed elements of both types of goodwill. Regarding maintenance, the court addresses whether Tim's professional goodwill was double counted in Tracy’s maintenance award, as it was considered a divisible asset when determining the marital estate. Tim argues that the court first counted goodwill as part of the marital assets and then again when calculating maintenance based on his expected future earnings from the business, which are influenced by that goodwill. Wisconsin law, under Wis. Stat. 767.56, governs maintenance, allowing courts to grant orders for maintenance payments after evaluating specific factors. The court maintains discretion over the amount and duration of maintenance, emphasizing that the enumerated factors should guide the analysis in setting maintenance awards. Two primary objectives of maintenance awards are to support the payee spouse and to ensure fairness. Support should reflect the pre-divorce standard of living, rather than just a subsistence level. Fairness encompasses compensating the recipient for marital contributions, respecting financial arrangements, and preventing unjust enrichment. Courts should initially consider that the dependent spouse may be entitled to 50% of the total earnings of both parties, adjusting as necessary based on statutory factors. Maintenance is not intended as a permanent payment; it aims to provide an appropriate standard of living until the recipient achieves self-sufficiency. Concerns about double counting can arise in maintenance determinations, as established in *Kronforst v. Kronforst*, where a trust interest was included in the marital estate but not counted as income for maintenance calculation. The court emphasized that assets cannot be counted twice in these contexts. Subsequent cases, like *Hommel v. Hommel*, clarified that investment income from awarded assets can be included when recalculating maintenance, while *Pelot* reaffirmed the *Kronforst* principle, stating that if a pension's present value is included in asset division, its payments should not be counted as income for maintenance calculations. The court examined the relationship between maintenance and property division, emphasizing that under Wis. Stat. 767.26(3), property division is a factor in setting maintenance. It determined that if a pension fund's value is included in property division, it can be considered in maintenance awards, but must be treated differently from immediately accessible property. The court ruled that Mr. Pelot's monthly retirement benefits should be excluded from his income calculation until they total $9,680, the value assigned during the divorce. Once he receives this amount, the pension benefits can be counted as income. The rationale from Pelot was applied in Hommel, establishing that investment income from divided assets can factor into maintenance calculations. In typical cases, the present value of a pension plan is based on future payments, meaning that counting both the pension's present value and its future payments as income would result in double counting. Conversely, when a spouse is assigned an income-generating asset, they receive its full market value at the time of division and can either sell it or earn income without the risk of double counting. In a later case, Cook, the court revisited the double-counting rule in the context of military pensions, suggesting that prohibiting double counting should be adaptable to the diverse circumstances faced by circuit courts in property division and maintenance determinations. The excerpt addresses the application of legal principles regarding the division of marital assets, particularly focusing on the inclusion of professional goodwill in the divisible marital estate. Tim argues that the entire value of Orthodontic Specialists' salable goodwill should not be included, specifically contending that personal goodwill should be excluded. He does not challenge the circuit court's valuation of $1,058,000 or the equal division of property. The court finds that the entire salable goodwill is rightly included in the marital estate, noting Tim's past purchase of the practice, primarily for goodwill, and his acknowledgment of contributions made by Tracy to the business's success. The discussion also engages with the concept of double counting, wherein Tim claims that including goodwill in the marital estate and then considering it in his expected future earnings for maintenance purposes constitutes double counting. The court clarifies that the rule against double counting is advisory and does not prevent the inclusion of investment income from assets in maintenance calculations. It distinguishes between different types of assets and their income-producing capabilities, affirming that the circuit court did not err in its decisions regarding the inclusion of goodwill and the calculation of maintenance. The salable professional goodwill of Orthodontic Specialists is treated as an income-producing asset, with a set value of $1,058,000 at the time of property division. Tim had the option to sell the practice or retain it to generate income, which the circuit court calculated at $465,000 annually if he worked full time. This income is distinct from the value of the goodwill at the time of division, and the court did not double count the goodwill when awarding Tracy $16,000 per month for maintenance over 20 years. The entire value of the salable professional goodwill was deemed divisible property in the marital estate. The circuit court accepted the valuation provided by Billings, who conducted a thorough evaluation, while rejecting Tim’s expert Ksicinski’s valuation due to its reliance on a singular, poor financial year and lack of independent analysis. Tim did not contest the income calculations made by the circuit court, which were based on proper evaluations and supported by comprehensive evidence. The decision of the court of appeals is affirmed. The term "corporate goodwill" is equated with "enterprise goodwill," with the intent to clarify terminology in relation to a court of appeals decision. Property excluded from division includes assets acquired by either party before or during the marriage under specific conditions: 1) as a gift from a third party, 2) through inheritance or similar means (e.g., life insurance, trust distributions), and 3) with funds derived from the aforementioned categories. If excluding certain properties creates hardship for a party or children, the court may still divide assets equitably, as outlined in Wis. Stat. 767.61(2)(b). The court considers multiple factors for property division stated in Wis. Stat. 767.61(3), including the length of the marriage, contributions of each party (including homemaking and childcare), the age and health of the parties, earning capacities, and tax consequences, among others. In the case referenced, the focus was on valuing a business interest in Orthodontic Specialists, not whether it was part of the marital estate. However, there are instances where the inclusion of business interests in the marital estate may be contested, as noted in Steinmann v. Steinmann. The excerpt also references a case, Golden v. Golden, highlighting the context of property division involving a non-professional spouse. Maintenance is defined as financial support provided by one party to another typically following legal separation or divorce. Relevant factors for determining maintenance include: 1. Length of marriage 2. Age and physical/emotional health of both parties 3. Division of property per statutory guidelines 4. Educational level at marriage and at the time of action 5. Earning capacity of the maintenance-seeking party, considering education, training, employment skills, and custodial responsibilities 6. Feasibility of the maintenance-seeking party becoming self-supporting at a living standard comparable to that during the marriage, along with the time required to achieve this 7. Tax implications for both parties 8. Any mutual agreements regarding financial contributions or support expectations made during the marriage 9. Contributions made by one party toward the other's education or earning potential 10. Other factors deemed relevant by the court. In the case of Kronforst v. Kronforst, Ms. Kronforst received 49% of the net estate while Mr. Kronforst received 51%. The court of appeals noted that this decision predated the 1977 Divorce Reform Act, which introduced specific factors for maintenance decisions. The complexity of valuing pension interests is highlighted, as it involves deferred compensation and the potential for termination of rights due to various contingencies. Courts are granted broad discretion in valuing such benefits, which adds to the intricacy of maintenance determinations. Additionally, Tim does not claim that enterprise goodwill is excluded from the marital estate.