Most divorces involve some level of property distribution, including tangible and intangible items like furniture, vehicles, houses, bank accounts, and retirement accounts. Spouses who own businesses may also be required to divide the value of their business as part of an equitable distribution order.
Sneed v. Johnston
Jason Sneed, Plaintiff, was previously married to Charity Johnston, Defendant. Plaintiff appealed an equitable distribution order awarding Defendant a distributive award of $1.5 million, which represented half of Plaintiff’s law firm’s value. The order also required Plaintiff to reimburse Defendant for some of the costs associated with the business appraiser.
During the marriage, Plaintiff established a law firm, and as part of the divorce, the trial court appointed a business appraiser to value the firm as of the date of the parties’ separation. In July 2019, Plaintiff and Defendant entered into a consent order that resolved all equitable distribution issues except for the classification, valuation, and distribution of the law firm and all its assets.
Valuing the Law Firm
Initially, Plaintiff provided the appraiser with financial documents concerning his law firm. A couple of months later, both parties were provided with a draft valuation of the firm, which totaled $3,220,000. The appraiser attempted to contact Plaintiff numerous times after submitting the draft valuation, between September 2019 and January 2020. However, Plaintiff ignored the appraiser’s contact attempts, refused to send the necessary information, and did not pay his portion of the appraiser’s fee. Defendant paid the balance of the fee owed to the appraiser.
In March and April 2020, the appraiser provided both parties with a final calculation of the value of Plaintiff’s law firm and an invoice for his services. For three months, the appraiser sent monthly correspondence to Plaintiff regarding the final invoice payment, but he received no response. In October 2020, Defendant paid the balance.
Plaintiff’s Valuation Differs
At trial in December 2021, Plaintiff testified that the current value of his law firm was negative or zero due to outstanding debts. The appraiser testified as an expert witness for Defendant and valued the firm at $3.1 million as of the separation date. He further testified that 10% of the goodwill value was enterprise goodwill and 90% was personal goodwill attributable to Plaintiff.
In September 2022, the trial court entered an equitable distribution order that accepted the appraiser’s separation value of Plaintiff’s law firm. The trial court stated that Plaintiff failed to provide the court with any credible value of the firm, and Plaintiff was ordered to pay Defendant a distributive award of $1,550,000, payable in monthly installments of $8,611.11 over 15 months. Plaintiff was also ordered to reimburse Defendant for approximately $8,500 for his portion of the appraiser’s fee. Plaintiff appealed.
Business Valuation and Marital Property Classification
The issues raised on appeal included whether the trial court erred by valuing Plaintiff’s law firm at $3.1 million, classifying the firm as marital property, and ordering Plaintiff to pay a distributive award of $1,550,000.
The appellate court noted Plaintiff’s repeated refusal to cooperate with the appraiser or pay his fee, and it stated that Plaintiff was a significant impediment to the appraiser’s timely and accurate valuation of the firm. It concluded that the trial court did not err in accepting the appraiser’s valuation of Plaintiff’s law firm.
The Appellate Court’s Decision on Goodwill
Regarding the issue of classifying the firm as marital property, Plaintiff argued that his personal goodwill should be separate property. Case law has established that goodwill is difficult to value and, at times, controversial, but it does exist and is an asset that must be considered when calculating the value of a professional practice for equitable distribution. The trial court’s decision was supported by evidence, and it acknowledged the goodwill in Plaintiff’s firm constituted marital property that was subject to distribution. The appellate court agreed with the lower court’s classification of the firm and the goodwill as marital property.
Because the appellate court rejected Plaintiff’s arguments about the value of his law firm, his assertion that the trial court erred in calculating the distributive award to Defendant was also rejected.
The appellate court in Sneed v. Johnston affirmed the lower court’s ruling regarding business valuation and equitable distribution. When a separation agreement involves a business, it is a good idea to have a Certified Valuation Analyst on your side of the case. Contact Woodruff Family Law Group for more information.