Made available by Touch N' Go Systems, Inc.
e-mail: touchngo@touchngo.com, and
Law Offices of James B. Gottstein
406 G Street, Suite 210, Anchorage, AK 99501
(907) 274-7686 fax 333-5869
e-mail: jimgotts@touchngo.com
You can
recent opinions, or the
chronological or
subject indices.
Wright v. Wright (10/13/95), 904 P 2d 403
NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501-2084 or call (907) 264-0607.
THE SUPREME COURT OF THE STATE OF ALASKA
HAROLD E. WRIGHT, ) Supreme Court Nos. S-5865/5866
)
Appellant and ) Superior Court No.
Cross-Appellee, ) 3AN-91-9468 CI
)
v. ) O P I N I O N
)
LORRAINE H. WRIGHT, ) [No. 4271 - October 13, 1995]
)
Appellee and )
Cross-Appellant. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Elaine M. Andrews, Judge.
Appearances: Gregory C. Taylor and Mark
P. Melchert, Jermain, Dunnagan & Owens, P.C.,
Anchorage, for Appellant and Cross-Appellee.
Sharon L. Gleason, Rice, Volland, Gleason &
Taylor, P.C., Anchorage, for Appellee and
Cross-Appellant.
Before: Moore, Chief Justice,
Rabinowitz, Matthews, Compton and Eastaugh,
Justices.
RABINOWITZ, Justice.
I. INTRODUCTION
Tex and Lorraine Wright were separated on November 7,
1991, after 36 years of marriage. At the time of trial, Tex was
75 years old and Lorraine was 60 years old. There are two
children of the marriage, Donna and Bill, who are now adults.
The superior court allocated 60% of the marital estate, valued at
$6,584,063, to Lorraine. This appeal and cross-appeal require us
to determine whether the superior court erred in valuing a solely-
owned corporation, in failing to include a potential malpractice
claim in the marital estate, in holding that a gift to the
parties' son was not part of the marital estate, in its
allocation of the parties' assets in making its property
division, and in awarding Lorraine partial attorney's fees.
II. DISCUSSION
A. Valuation of Wrightway
The major dispute between Tex and Lorraine is the
inclusion of good will by the superior court in its valuation of
Tex's solely-owned corporation, Wrightway Auto Carriers, Inc.
(Wrightway). Wrightway, which was founded over 30 years ago,
transports new and used cars between Alaska and the rest of the
United States. By the time of separation, Tex had little
involvement in Wrightway's day-to-day operations. Bill, the
parties' son, was in the process of taking over the business.
At trial, Lorraine's expert, Ronald Greisen, testified
that Wrightway, including good will, was worth $1,385,781. In
arriving at Wrightway's value Greisen used the capitalization of
excess earnings method. One of Tex's two experts, Gary Johansen,
expressed no opinion on the value of Wrightway but did a "sanity
test" on Greisen's calculations. Tex's other expert, Phil Ramos,
testified that by the time of trial Wrightway had become an
insolvent corporation with a value of -$406,541. Ramos used the
straight capitalization of earnings method in arriving at his
determination of Wrightway's value.1
The superior court concluded that Wrightway possesses
marketable good will, the value of which should be included in
the marital estate, and adopted Greisen's capitalization of
excess earnings method to determine its value. However, the
superior court rejected two facets of Greisen's calculations.
First, Greisen had only allowed Tex a yearly salary of $40,000.
The superior court adjusted the calculations to allow for a
yearly salary of $100,000. Second, Greisen calculated
Wrightway's potential corporate tax liability at $300,000. The
superior court adjusted the calculations to reflect a tax
liability of $500,000. After making these adjustments, the
superior court valued Wrightway, including good will, at
$942,219.
Tex argues that the superior court erred in valuing
Wrightway for the following reasons: (1) Wrightway's good will
is not marketable; (2) use of the capitalization of excess
earnings method was improper; and (3) the superior court
misapplied the capitalization of excess earnings method,
including the calculation of Wrightway's potential corporate tax
liability.
The good will of a corporation is property which may be
included in the marital estate in a divorce proceeding. Hunt v.
Hunt, 698 P.2d 1168, 1170 (Alaska 1985). In Moffitt I, this
court articulated the following methodology for assessing the
divisibility of professional good will:
Preliminarily, the trial court must
decide whether good will exists. If the
trial court finds good will exists, it then
must determine whether the good will could
actually be sold to a prospective buyer. If
the trial court determines either that no
good will exists or that the good will is
unmarketable, then no value for good will
should be considered in dividing the marital
assets. Conversely, the good will should be
considered if the evidence suggests that it
has value and is marketable. In that case,
the trial court should use one or more
principled methods of valuation.
Moffit I, 749 P.2d at 347 (footnotes omitted).
1. The superior court did not err in
concluding that Wrightway's good will is
marketable.
The superior court specifically concluded that
Wrightway's good will is marketable. To this effect, the
superior court stated:
The company is a long-term
established Anchorage business with name
recognition and an established market share.
It has the unique position of having a lease
in the Anchorage port area as well as related
assets in Seattle and Fairbanks which
contribute to the transportation network. It
[is] a long-term financially successful
company which possesses goodwill as defined
by our Supreme Court.
The trial record supports this conclusion. First, the
superior court noted that "there was uncontradicted testimony
that several years prior to separation, Ryder, a corporation in a
similar business, had offered Mr. Wright 1.5 million for the
business. It was comprised of 1 million in cash and the balance
over time." In addition, the superior court noted Tex's specific
intent to pass on the business to his son. Third, Tex testified
that he could sell Wrightway for several hundred thousand
dollars. Finally, Lorraine's expert testified that Wrightway's
good will was marketable based on his extensive review of
Wrightway's financial records, deposition testimony, and study of
industry transactions. Based on the record, we conclude that the
superior court's determination that Wrightway's good will is
marketable is not clearly erroneous.
2. The superior court did not err in
utilizing the capitalization of excess earnings
method.
Capitalization of excess earnings is one of the
recognized methods for appraising business good will and has been
approved by this court on several occasions. Miles v. Miles, 816
P.2d 129, 131 (Alaska 1991); Moffitt II, 813 P.2d at 676 n.3;
Moffitt I, 749 P.2d at 348; Hunt, 698 P.2d at 1170 n.1. Under
the capitalization of excess earnings approach, good will is
calculated by capitalizing excess earnings. Moffitt II, 813 P.2d
at 676 n.3. "Excess earnings are earnings which remain after
earnings on tangible assets and owner's compensation for services
are deducted from total earnings." Id.
In deciding to utilize the capitalization of excess
earnings method, the superior court noted that "[t]his method was
adopted by Lorraine as the appropriate method. It was utilized
by Tex as a 'sanity check' on his valuation approach."2 The
superior court was ultimately "persuaded by the testimony of
Lorraine's expert that goodwill exists in this case as there is
an expectation of earnings in excess of a fair return on the
capital invested in tangibles or other means of production."
Given our prior approval of the capitalization of
excess earnings method, as well as the evidence in the record
which supports the use of this method to value Wrightway, we
conclude that the superior court did not err in adopting the
capitalization of excess earnings methodology for valuing
Wrightway.
3. The superior court did not err in
applying the capitalization of excess earnings
method.
In calculating Wrightway's good will, both Tex and
Lorraine relied on the work of Shannon Pratt, an expert
recognized as an authority on business valuation. Pratt
summarizes the steps in applying the excess earnings methodology
as follows:
1. Determine the value of net
tangible assets.
2. Determine the normalized level
of earnings.
3. Apply an appropriate rate of
return to the net tangible asset value
and subtract the result from the
normalized earnings. The result is the
excess earnings; that is, the amount of
earnings above a fair rate of return.
4. Apply an appropriate
capitalization rate to any excess
earnings.
5. Add the values from steps 1
and 4.
Shannon P. Pratt, Valuing Small Businesses and Professional
Practices, 156-57 (1986). Tex argues that the superior court
erred in applying steps one through four of this method.
First, Tex argues that the superior court erred in
calculating the value of Wrightway's net tangible assets. The
superior court determined that Wrightway's potential corporate
tax liability for 1989 through 1992 is $500,000. Tex argues that
the $500,000 only reflects Wrightway's potential liability for
the years of 1989 and 1990, and does not include the years 1991
and 1992.
However, Lorraine presented evidence at trial that the
estimated potential liability for all four years is between
$294,000 and $499,000. Moreover, at a hearing after trial the
superior court requested the parties to file additional pleadings
as to whether the $500,000 estimate of contingent tax liability
was for all four years or only two years. Thereafter, the
superior court clarified that its initial decision included all
four years. Based on this record, we conclude that the superior
court's valuation of Wrightway's potential corporate tax
liability, and thus of Wrightway's net tangible assets, was not
clearly erroneous.
Second, Tex argues that the superior court erred in
calculating Wrightway's normalized level of earnings3 on a before-
tax rather than after-tax basis. At trial, Greisen, Lorraine's
expert, testified that Wrightway should be valued based on before-
tax earnings. The superior court concluded that Greisen's before-
tax approach was "persuasive to the court as the more
traditionally accepted method of valuation in this area."
Moreover, in Hunt, 698 P.2d at 1170 n.1, we held that it was not
clearly erroneous for the superior court to value a spouse's
interest in a close corporation based on before-tax earnings.
Likewise, here we conclude that it was not clearly erroneous for
the superior court to rely on before-tax earnings in determining
Wrightway's normalized level of earnings.
Third, Tex argues that the superior court erred in
applying a 12% rate of return to Wrightway's net tangible assets.4
Tex's expert, Johansen, testified that he would have applied a
25.2% rate of return which he adopted from the Troy Almanac of
Financial Ratios. Lorraine's expert, Greisen, testified that the
superior court should use a 12% rate of return. Greisen
explained that Johansen's 25.2% rate of return is an average of
all companies which includes both a return on tangible and
intangible assets. Greisen testified that a 12% rate is more
appropriate for a return on only tangible assets. Because
Greisen's testimony provides a reasonable evidentiary basis for
the superior court's selection of the 12% rate of return, we
conclude that this decision was not clearly erroneous.
Fourth, Tex argues that the superior court erred in
applying a 25% capitalization rate to Wrightway's excess
earnings.5 The superior court adopted Greisen's capitalization
rate of 25%, or a multiplier of four. Both Greisen and Johansen,
Tex's expert, testified that a capitalization rate of 25% for
Wrightway's excess earnings was appropriate. Ramos, Tex's other
expert, disagreed and suggested that a capitalization rate as
high as 131% would be appropriate.
In Hunt, we noted that in New York, three is the
capitalization factor least in need of justification. Hunt, 698
P.2d at 1170 n.1 (citing Dugan, 457 A.2d at 11. In Dash v.
State, 491 P.2d 1069, 1072 (Alaska 1971), this court approved a
capitalization rate of 20%, or a multiplier of five, for the
projected income stream of a proposed but yet undeveloped
subdivision. Therefore, based on Greisen and Johansen's
testimony, as well as prior Alaska case law, we conclude that the
superior court's decision to apply a 25% capitalization rate was
not erroneous.
B. Wrightway's Potential Malpractice Claim
During trial, Lorraine attempted to introduce evidence
of Wrightway's potential malpractice claim against its accountant
based on misadvice which allegedly caused Wrightway to underpay
its taxes for the years 1989 through 1992. In rejecting this
offer, the superior court stated, "I am not going to consider a
malpractice claim, I'm not going to quantify a malpractice claim,
I'm not going to make any rulings affecting a potential
malpractice claim at all." The superior court further stated
that "I'm not considering that. That is so tangential, so un-
quantifiable, so unproven . . . ."
On cross-appeal, Lorraine argues that, having
determined Wrightway's potential corporate tax liability for 1989
through 1992 to be $500,000, the superior court erred in refusing
to allow evidence on the value of Wrightway's potential
malpractice claim against its accountant. In support, Lorraine
notes that legal claims, including malpractice claims against a
company's accountant, are an asset of the corporation. National
City Bank v. Cooper & Lybrand, 409 N.W.2d 862, 868 (Minn. App.),
review denied, (Minn. 1987). Moreover, Lorraine cites several
cases in which the courts have held that unliquidated personal
injury actions, including actions in which a complaint has not
yet been filed, constitute assets of the marital estate. Bunt v.
Bunt, 744 S.W.2d 718, 721 (Ark. 1988); Heilman v. Heilman, 291
N.W.2d 183 (Mich. App. 1980).
All of the cases cited by Lorraine are distinguishable
from the present case in that the claims at issue in the other
cases had accrued, while the professional malpractice claim in
the present case has not. Bunt, 744 S.W.2d at 720; Collins v.
Federal Land Bank of Omaha, 421 N.W.2d 136, 139-40 (Iowa 1988);
Heilman, 291 N.W.2d at 184. For example, in Collins, the court
distinguished claims which had accrued prior to the Collinses'
bankruptcy filing from claims which had accrued after the
petition was filed. Collins, 421 N.W.2d at 139. The claims
which had accrued prior to filing were included in the bankruptcy
estate while claims accruing after filing were not. Id. at 139-
40. The court stated that under Iowa law a cause of action does
not accrue until the wrongful act produces injury to the
claimant. Id. at 139.
In Alaska, "a cause of action accrues when all the
essential elements forming the basis for the claim have
occurred." Lamoreux v. Langlotz, 757 P.2d 584, 585 (Alaska
1988). One of the elements of a professional negligence claim is
"actual loss or damage resulting from the professional's
negligence." Linck v. Barokas & Martin, 667 P.2d 171, 173 n.4
(Alaska 1983). In the case at bar, there has not yet been any
actual loss or damage because the IRS has not yet assessed
Wrightway's tax liability. Thus, we hold that the superior court
did not err in refusing to allow evidence of Wrightway's
potential malpractice claim against its accountant.
C. Tex's Gift of $143,000
Tex and Lorraine purchased a condominium in Los Angeles
for their daughter, Donna, in 1985. This purchase cost the
marital estate $213,000. Tex kept title to the property in his
name. Donna was 37 years old at the time of trial, and had
relied on the considerable financial support of her parents
throughout her adult life. At trial, both Tex and Lorraine
agreed that Donna's condo was Donna's exclusive property and not
part of their marital estate.
Tex and Lorraine have also provided financial
assistance to their son, Bill. Bill was 32 years old at the time
of trial. Bill is employed by Wrightway and is being groomed to
take Tex's place as head of the company. Before the parties
separated, Tex provided Bill with $70,000 to use towards the
purchase of a home, although Tex required Bill to sign a deed of
trust on the property for this sum.
Eleven days after Lorraine filed for divorce, Tex
unilaterally withdrew $143,000 out of a marital investment
account. Without Lorraine's knowledge, Tex used this money to
pay off Bill's outstanding mortgage and then had Bill execute a
second deed of trust to Tex for the additional $143,000.
At trial, Lorraine sought to include the $143,000 in
the marital estate. Specifically, Lorraine sought to void the
unilateral transfer of $143,000 to Bill relying upon the
authority of Brooks v. Brooks, 733 P.2d 1044 (Alaska 1987). To
this effect, Lorraine's counsel stated as follows:
The standard is Brooks v. Brooks, if
both spouses do not join in making the gift,
it is voidable at the option of the
nonparticipating spouse. . . . My client's
testimony is she is voiding this gift, if it
was in fact a gift, of the two deeds of trust
to the son.
Tex argued that the $143,000 payment to Bill was intended as a
gift to equalize the amount that Donna had received because he
and Lorraine had agreed that the children should be treated
equally. The superior court concluded that the
$143,000 was a gift and thus not voidable under Brooks. The
superior court found that there was a fundamental understanding
between Tex and Lorraine that their children would be treated
equally. Based on this conclusion, the superior court suggested
that the parties add up all the gifts to Donna and Bill over the
past five years, and that "if things don't work out evenly it
means that someone's given a gift without the consent of the
other party." Thus, any excess "gifts" would be included in the
marital estate. As to the Brooks standard, the superior court
reasoned as follows:
But despite Brooks v. Brooks I
would be very disinclined to say that you can
unilaterally withhold permission to give a
gift to one child if that permission is
unreasonably withheld . . . . I mean, what
I'm concerned about is when we add up these
things that these kids don't come out close
to equal.
On appeal, Lorraine argues that the superior court erred by
applying an incorrect legal standard in its treatment of Tex's
$143,000 gift to the parties' son.
In Brooks, 733 P.2d at 1055, this court held that "any
gift to a third person out of marital property is valid 'when
both spouses act together in making the gift.' However, if both
spouses do not join in making the gift, it is voidable at the
option of the non-participating spouse." (Citations omitted.)
The superior court concluded that there was an agreement between
the parties that Donna and Bill should be treated equally, and
thus that Lorraine did consent to the gift as required by Brooks.
This conclusion is supported by the record. Thus, we hold that
the superior court did not err in not including the $143,000 gift
in the marital estate.
D. Equitable Allocation of the Marital Estate6
Tex argues that the superior court erred in allocating
particular items of marital property because Lorraine received
virtually all of the parties' passive income-producing assets
while Tex received Wrightway, "an insolvent corporation requiring
his active participation, 5th and F, a property with a
substantial negative cash flow, and miscellaneous other assets
which produce almost no passive income."
The superior court took Tex's conduct into
consideration in allocating items of marital property. With
respect to the allocation of certain non-liquid assets to Tex,
the superior court noted that Tex had converted marital cash into
non-liquid assets and thus "caused his own problems." The
superior court also stated that "to the extent he has made a bad
investment by trying to hide marital assets in an unreasonable
manner, he should be left with the consequences of that act."
As to the particular property Tex received, based on
the superior court's valuation of Wrightway, it is clear that the
superior court did not consider Wrightway to be an insolvent
corporation. Also, although Tex was awarded the 5th and F
property, the superior court valued the property as a $255,118
liability. Thus, the marital estate effectively paid him to
assume this property through the award of other assets.7
Finally, the record contains several references to cash outlays
made by Tex following trial in this case suggesting he is not as
illiquid as he claims. For example, just three months after
trial, Tex gave Lorraine $275,000 in cash to acquire the Big Lake
vacation home which was awarded to Lorraine.
Based on the foregoing, we conclude that the superior
court did not abuse its discretion in its allocation of
particular items of marital property.
E. Attorney's Fees
Tex maintained exclusive control of the marital
finances, and managed the family's investments and personal
expenses out of Wrightway's corporate checking account. After
Lorraine filed for divorce, Tex commenced on a course of conduct
in which he concealed marital funds. Lorraine's accountant
estimated that Tex failed to disclose $1,337,136 in marital
assets. The superior court ordered Tex to pay $125,000 of
Lorraine's attorney's fees as a result of this conduct.
1. The superior court did not fail to
follow the standard set out in Kowalski.
Tex argues that in awarding $125,000 worth of
attorney's fees to Lorraine the superior court failed to follow
the two-step process mandated in Kowalski. In Kowalski, we held
that AS 25.24.140, the statute authorizing attorney's fees in
divorce proceedings, requires that such an award be based on the
parties' relative economic circumstances and earning powers.
Kowalski, 806 P.2d at 1372. However, we also stated that
vexatious conduct by one party which leads to increased
attorney's fees will justify a fee award to the burdened spouse,
so long as the court also considers the statutorily mandated
factors. Id. at 1373. To this effect, we articulated the
following two-step process for awarding attorney's fees based on
vexatious conduct:
[I]n making an increased fee award,
the court must first determine what fee award
would be appropriate under the general rule,
and only then increase the award to account
for a party's misconduct. Failure to follow
this two-step process constitutes an abuse of
discretion.
Id.
In its Proposed Decision dated May 20, 1993, the
superior court stated as follows with respect to its award of
attorney's fees:
There has been no serious contest
that the approximate amount expended in both
attorney and accountant time to track down
hidden and dissipated assets is in the
neighborhood of $120,000.[8] It appears that
Mr. Wright concedes that there was financial
misconduct which caused Lorraine to incur
these additional expenses.
Also, in its oral amendments to the Proposed Decision, the
superior court articulated its application of the two-step
process set out in Kowalski as follows:
That $125,000 takes into account the
vexatious conduct, that there are enough
assets here, each getting enough on their own
side that they should pay for their own costs
and fees in the case. However, Mr. Wright's
inexcusable conduct has caused a quantified
$125,000 of extra fees which he is required
to pay her.
And so doing the Kowalski two-step
analysis, I would not award attorney's fees
one to another, I'd require them to bear
their own. I'm going to require Mr. Wright
solely to bear the cost of the vexatious
conduct, which I tag at $125,000.
Thus, contrary to Tex's assertions, the superior court
concluded that, based on the parties' relative economic
situations and earning powers, each party would bear their own
fees under the general rule. The superior court further
determined that, based on Tex's conduct, Tex should pay $125,000
of Lorraine's attorney's fees. The superior court's holdings
that Tex's conduct was vexatious and that such vexatious conduct
caused a $125,000 increase in fees are fully supported by the
evidence.9 We therefore conclude that the superior court
correctly followed the standard set out in Kowalski in awarding
$125,000 in attorney's fees in favor of Lorraine.
2. The award of attorney's fees was not
manifestly unreasonable.
Tex also argues that the superior court erred in
considering Tex's conduct both in determining the award of
attorney's fees and in allocating the marital property based on a
sixty/forty division. However, in its Proposed Decision, the
superior court specifically stated that its decision to divide
the marital property in this manner was not based on Tex's
conduct. Rather, the superior court's decision was based on
several of the Merrill factors, and most significantly upon the
parties' stipulation that the estate should be divided
sixty/forty in Lorraine's favor. The superior court only
considered Tex's conduct in deciding which particular items of
marital property to award to each party. Thus, we conclude that
the $125,000 award of attorney's fees in favor of Lorraine is not
manifestly unreasonable.
III. CONCLUSION
Based on the foregoing, we AFFIRM the superior court's
decision in all respects.
_______________________________
1 The parties also presented evidence relating to
Wrightway's potential corporate tax liability for 1989 through
1992.
2 Tex's expert who reviewed Greisen's calculations, Gary
Johansen, testified that had he done an independent valuation, he
would have utilized the capitalization of excess earnings method
to value Wrightway.
3 Normalization of earnings is the process of adjusting
earnings to reflect the true earning ability of the corporation.
4 The rate of return on net tangible assets is a risk
calculation factor. "Underestimating the appropriate
capitalization rate (expressed as a percentage rate of return)
leads to overvaluing the business or practice, and vice versa."
Pratt, supra, at 138.
5 After deducting for a 12% return on Wrightway's
tangible assets, Wrightway had an average of over $300,000 in
excess earnings per year. These excess earnings represent a
return on the corporation's intangible assets, or good will. In
step four, those excess earnings are then capitalized at an
appropriate rate. "The capitalization factor is generally
perceived as the number of years of excess earnings a purchaser
would be willing to pay for in advance in order to acquire the
goodwill." Hunt, 698 P.2d at 1170 n.1 (quoting Dugan v. Dugan,
457 A.2d 1, 10 (N.J. 1983)).
6 In reviewing an allocation of marital property, this
court applies the abuse of discretion standard and will not
disturb the allocation unless it is clearly unjust. Moffitt I,
749 P.2d at 346.
7 Lorraine correctly observes that "Tex asked Judge
Andrews to award him all of the assets he now claims he does not
want."
8 This figure was subsequently changed to $125,000.
9 At trial, Lorraine offered Exhibit No. 39 which listed
$1,337,136 worth of assets which Tex failed to disclose. These
assets were apparently located through the assistance of counsel
and Greisen. In addition, Lorraine presented the superior court
with affidavits attested to by her counsel and Greisen. Both
counsel and Greisen attested that Tex had intentionally hidden
marital assets and that they would spend approximately $125,000
in locating those assets. Additionally, the superior court
impliedly referred to Tex's conduct as "jailable activity." In
this regard, the Proposed Decision states as follows:
Exhibits 28 through 33 demonstrate, in a
graphic form, just how ruthless Tex Wright
was in "circling the wagons" to make certain
that the only assets that were available to
Lorraine were those which he controlled. His
actions bespeak those of a man who insists on
defining his own terms of fairness. Tex's
definition of fairness apparently does not
include traditional notions of honesty, fair
play and equality.