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Experts Differ on Law Firm Valuation

A divorce court did not err in rejecting husband’s assertion that his law firm interest was only $20,000, the amount of his payout if he left the firm, and accepting wife’s valuation of husband’s interest at $308,439, and the Court of Appeals upholds an award to wife of $144,966.33, or 47 percent of husband’s interest in the firm

The trial court did not award wife 50 percent of the law firm interest, due to “slight waste of marital assets by wife.”

Husband’s expert, Stuart A. Rosenberg, used the market or contract approach to valuing husband’s law firm interests, and set the interest at $20,000. Rosenberg noted the law firm’s Shareholder Agreement provided that, if husband left the law firm or returned his shares to the law firm, he would receive $20,000 for his interest in the firm.
Wife’s expert, Clifton A. Rutherford, testified that the net-asset approach was the best method to value husband’s interest in the law firm. Using that approach, Rutherford testified that the value of husband’s interest in the law firm was $308,439. He opined that the market approach was not the best approach to use because of the small size of the law firm. He stated husband’s 20 percent share in the law firm represented more than $20,000, noting husband’s 10 percent share earned him a portion of the law firm’s profits in the form of quarterly distributions and/or bonuses. He noted husband received a bonus distribution of $124,000 shortly before trial began.

A trial court may choose among conflicting assessments of value as long as its finding is supported by the evidence. Here, the trial court found the report of wife’s expert was thorough, detailed in analysis, well-reasoned and more credible than the report of husband’s expert.

Husband also asserts the trial court erred in not crediting the testimony of another lawyer and former managing partner of the firm, whose testimony as to firm collections contradicted that of wife’s expert. This witness testified that the collection rates used by wife’s expert for accounts receivable and work in progress were inaccurate. We hold the trial court did not err in valuing husband’s interest in the law firm at $308,439.

Husband also argues the trial court abused its discretion by ordering him to pay wife her equitable distribution award by either a lump sum payment by June 30, 2013, or in three annual installment payments, with interest, by June 30, 2015. He contends the trial court failed to consider the tax consequences to him because the only asset he had to pay the award was his 401(k) account. Husband says he should have been allowed to pay wife’s award through a QDRO which would not take effect until husband’s retirement.

The trial court never directed or suggested that husband withdraw funds from his 401(k) to pay wife the ED award. The trial court noted several times husband had recently received a bonus of $124,000, and that, as a shareholder in the law firm, he would be entitled to future distributions. The trial court did not err in denying husband’s motion for reconsideration, except for the method of payment.

Judgment affirmed.

Dissent

McCullough, J.: I respectfully dissent on one point: whether the court should have credited wife’s expert’s valuation of husband’s interest in the firm. In my view, the record establishes that his conclusions were founded on a mistaken premise. Wife’s expert extrapolated that the firm collected over 98 percent of what it billed. The firm’s former managing partner’s testimony was uncontroverted that the write offs on the exhibit in question represent only client expenses that have been advanced but have gone uncollected: items like court reporter fees, mileage fees or expert witness fees. The discount of the firm’s accounts receivable should have been greater than the one wife’s expert applied.

I would reverse and remand.

Brake v. Brake (Felton) No. 1204-13-4, April 1, 2014; Shenandoah County Cir.Ct. (Peatross) Andrew T. Richmond for appellant; D. Eric Wiseley for appellee. VLW 014-7-106(UP), 10 pp.

VLW 014-7-106

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