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In re Marriage of Potter

September 9, 1996


Cox, J.

The opinion of the court was delivered by: Cox

COX, J. -- Dr. Michael W. Potter appeals the trial court's valuation of his neurosurgery practice. A substantial portion of that valuation included goodwill. Marie H. Potter cross-appeals the trial court's denial of her request for attorney fees at trial. We hold that (a) substantial evidence supports the trial court's finding that goodwill exists as part of the medical practice and also supports the court's valuation of that goodwill, (b) the trial court did not abuse its discretion in its maintenance award to Ms. Potter, and (c) the trial court did not abuse its discretion by denying Ms. Potter's request for attorney fees. Accordingly, we affirm.

Dr. and Ms. Potter were married in 1972. At that time, he was an officer in the U.S. Army and was attending medical school. Dr. Potter's schooling was followed by a five-year residency in neurosurgery. After completing his residency, Dr. Potter continued to serve in the Army until he completed 20 years of service and retired. Upon leaving the Army, he opened a neurosurgery practice in Olympia, Washington.

Dr. Potter filed a petition for dissolution in 1991. At the Conclusion of trial, the court awarded Dr. Potter 100 percent of his medical practice. The court valued the practice, including goodwill, at $800,000. But it found that awarding the practice to Dr. Potter would result in him receiving a disproportionate award of the community assets. Thus, after finding that the Potters' marriage was a long-term one, the Judge concluded that it was appropriate to equalize the Potters' economic position through long-term maintenance. This was done by awarding Ms. Potter three years of rehabilitative maintenance at $8,000 per month and an additional 10 years of maintenance at $6,000 per month. The latter 10 years of maintenance is reviewable if Dr. Potter's professional circumstances change. The court denied Ms. Potter's request for attorney fees. Both parties appeal.

I Valuation of the Medical Practice

Dr. Potter first claims that the trial court erred by failing to set forth on the record the factors and methods used in reaching its valuation of the goodwill of his medical practice. We disagree.

Valuation of goodwill is a question of fact. *fn1 We will uphold findings of fact supported by substantial evidence in the record. *fn2 "Substantial evidence is evidence sufficient to persuade a fair-minded person of the truth of the declared premise." *fn3 Our Supreme Court has described a two-step process for determining the value of goodwill. The first step is to determine whether goodwill exists. *fn4 In Hall, the court stated, "Goodwill is a property or asset which usually supplements the earning capacity of another asset, a business or a profession." *fn5 Focusing on professional practices, the court explicitly distinguished between earning capacity, "comprised of skill and education," and goodwill, "comprised of such things as location, referrals, associations, reputation, trade name and office organization." *fn6 We first note that Dr. Potter has abandoned on appeal the position he took at trial. He no longer argues that his practice has no goodwill. Rather, he now takes the position that the trial court "failed to use any formula and failed to set forth on the record any formula or factor used in the computation [of goodwill]." *fn7 The record before us shows that the trial court concluded that goodwill exists in Dr. Potter's practice largely because of the unique circumstances of practicing neurosurgery in Olympia. The court framed the issue during its oral decision: "The question then becomes, when a neurosurgeon opens a practice in an area where demand for services is greater than supply, is the presence of an ascending income curve over a period of time necessary to find goodwill in that practice? I conclude that it is not . . . ." The court thereby distinguished Dr. Potter's earning capacity, which was essentially flat, from the goodwill that attached to his practice from the beginning:

The facts of this case . . . are that the location and the circumstances of competition were such that Dr. Potter began his practice with what can rightfully be considered a significant amount of goodwill from the very beginning and that it was not necessary under those circumstances for him to have illustrated a long increasing income curve in order to determine that goodwill exists.

Dr. Potter testified that he and three other neurosurgeons were responsible for all of the neurosurgery for a large geographical area in Western Washington centered around a regional hospital in Olympia. He also testified that demand for neurosurgery in the area was such that a new neurosurgeon would thrive because one of the four neurosurgeons then in Olympia was retiring. Therefore, the location of the practice and absence of competition were such that Dr. Potter could expect a steady supply of referrals. The court also pointed to his good reputation and greater professional success than any other neurosurgeon who was the subject of testimony at trial to support its Conclusion that goodwill exists. *fn8 Once a court finds that goodwill exists, the next step is to assign a value to it. *fn9 In both steps, the Hall court reiterated its endorsement of the use of guiding principles known as the Fleege factors: "the practitioner's age, health, past demonstrated earning power, professional reputation in the community as to his judgments, skill, knowledge and his comparative professional success." *fn10 The court also set forth several formulas for valuing goodwill. The first, the straight line capitalization method, takes the average net profits of the business and capitalizes them at a definite rate, such as 20 percent. *fn11 The second, capitalization of excess earnings, subtracts the salary of a comparable professional from the average net earnings and capitalizes the remainder. *fn12 Another method, an IRS variation of capitalizing excess earnings, takes the average net income for the past five years and subtracts a reasonable rate of return based on average net tangible assets. *fn13 After subtracting a comparable net salary, the evaluator capitalizes the remainder. *fn14 Hall also discusses two other valuation methods that this trial court did not use.

Finally, the trial court must "set forth on the record which factors and method were used in reaching its finding." *fn15 If it does not, "its finding as to goodwill will be deemed unsupported by sufficient evidence, reversed, and remanded for proper findings." *fn16 This court has stated that a "factfinder is given wide latitude in the weight to give expert opinion." *fn17 In Sedlock, we affirmed the trial court's adoption of a business valuation "within the range of the credible evidence." *fn18 We will uphold such a valuation even though we may disagree with the trial court's reasoning: "Instead, we look to the reasonableness of the trial court's bottom line result, in light of all of the expert testimony." *fn19 Here, the trial court's findings and Conclusions cited Hall and referred to its oral decision regarding goodwill. In its oral decision, the trial court valued the medical practice, including goodwill, as follows:

Mr. Deaton [Ms. Potter's expert witness] suggests that the value of the practice, considering the goodwill, is between $700,000 and $1 million. He used . . . three formulae from the Hall case but discounted one significantly. He also said and I much agree with this statement that the determination of goodwill is as much an art in this case as it is a science, that it cannot simply depend upon number crunching but must be a reasonable determination given all of the factors.

I have considered all of the evidence before me and considered his advice to step back and take a reasonable overview of this practice. I have valued Dr. Potter's practice, all assets including goodwill, at $800,000. In rendering its Conclusion, the court explicitly rejected the testimony of Dr. Potter's expert, Lowell Bassett, who attributed negligible value to the goodwill. Bassett defined goodwill as consisting merely of the difference in earnings of an established professional compared to one who was not yet established. That definition does not comport with Hall. *fn20 Instead, the trial court largely adopted Deaton's valuation of the practice. That valuation used, in part, three of the Hall formulas: the straight line capitalization method, the capitalization of excess earnings method, and the IRS variation of the capitalization of excess earnings method. Deaton testified that calculation of goodwill using these three approaches would produce values ranging from $810,000 to $1,960,000. He further testified that these values were unreasonably high.

Deaton then adjusted downward the range of values he estimated as a result of using three of the Hall formulas. He then expressed his professional opinion that the value of ...

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