Opinion
No. 109,331.
2014-11-21
In the Matter of the MARRIAGE OF Deborah A. BEACHNER, Appellee, and Richard F. Beachner, Appellant.
Appeal from Crawford District Court; A.J. Wachter, Jr., Judge.Richard Loffswold, Jr., Jennifer M. Hill, and Erin Sommer Good, of McDonald, Tinker, Skaer, Quinn & Herrington, P.A., of Wichita, for appellant.Terry L. Malone and Matthew A. Spuhn, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., of Wichita, for appellee.
Appeal from Crawford District Court; A.J. Wachter, Jr., Judge.
Richard Loffswold, Jr., Jennifer M. Hill, and Erin Sommer Good, of McDonald, Tinker, Skaer, Quinn & Herrington, P.A., of Wichita, for appellant. Terry L. Malone and Matthew A. Spuhn, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., of Wichita, for appellee.
Before ARNOLD–BURGER, P.J., BUSER, J., and SCHROEDER, JJ.
MEMORANDUM OPINION
PER CURIAM.
This is an appeal of the district court's division of marital property following the divorce of Deborah A. Beachner and Richard F. Beachner. The trial court awarded 100% stock ownership in the Beachners' family business, RFB Construction Company, Inc. (RFB) to Deborah. After determining RFB's fair market value, the court awarded an equalization judgment to Richard.
On appeal, Richard contends the trial court abused its discretion in several aspects when it adopted the valuation methodology employed by Deborah's business appraisal expert, rather than the method provided by his own expert, to calculate his equalization judgment. Richard also asserts the trial court abused its discretion when it denied his requests for a continuance of the trial. Having carefully reviewed the record on appeal and considered the parties' arguments, we find the trial court satisfied its obligation to make a just and reasonable division of the marital property. We also find no error in the trial court's denial of Richard's motions for continuance. Accordingly, we affirm the the trial court.
Factual and Procedural Background
The district court granted Deborah and Richard a divorce after 20 years of marriage. Prior to trial, the parties executed a partial settlement agreement, which disposed of the majority of their marital property and indebtedness. The division and valuation of RFB, however, remained in dispute.
The Beachners owned and operated RFB for more than 20 years. RFB performs landscaping-type services on highways. Richard, the majority shareholder and company president, acquired the company's contracts, while Deborah managed the office. RFB, a participant in the United States Department of Tranportation's Disadvantaged Business Enterprise (DBE) program, derives the majority of its revenues from the Kansas Department of Transportation's bid letting process.
In order to preserve the status quo, the district court entered temporary orders directing both parties to continue devoting “their full time and attention” to RFB and to refrain from pursuing business ventures that would compete, directly or indirectly, with the company. The parties had a difficult time working amicably with one another, however, and accused each other of various wrongdoings. Eventually, the district court placed operative control of RFB with Deborah. The district court also retroactively approved Deborah's decision to hire an estimator to conduct the company's bidding on projects because it found that Richard had aided a competitor of RFB.
In the district court, both parties requested 100% stock ownership of RFB with the other party receiving an equitable share of the business. The parties stipulated to December 31, 2011, as the valuation date, and retained experts to conduct an appraisal of RFB. Deborah designated Jeffrey J. Quirin, Ph.D., a certified management accountant, and Richard designated Mark L. Bolton, a certified public accountant.
The parties' divorce trial began on June 27, 2012, but Richard only appeared by his counsel, Richard D. Loffswold, who informed the court that on June 26, 2012, Richard went to the emergency room at Shawnee Mission Medical Center (medical center) because he had been “experiencing anxiety issues.” The medical center previously had treated Richard for bipolar disorder. Loffswold presented a letter from Anna Kallenbach, RN, dated June 27, 2012, which stated that Dr. Umar Wadood had admitted Richard into the Center's Mental Health Intensive Outpatient Program and he would be attending therapy sessions on Mondays, Wednesdays, and Thursdays from 9 a.m. to 12 p.m. for 3 to 4 weeks. Loffswold requested a trial continuance because Richard had the right to be present and he needed Richard to testify as to the valuation of RFB's equipment since it formed the basis for Bolton's expert testimony.
Deborah's counsel, Terry L. Malone, opposed a continuance noting there was no evidence about the nature of Richard's condition, and he had interacted with his children the previous day and they did not “notice anything out of the ordinary.” Moreover, Malone argued that a delay could force RFB into default or bankruptcy because the business needed to be bonded to complete “significant jobs” and companies were reluctant to issue bonds with the ownership controversy unresolved.
The trial court briefly recessed to allow Loffswold to obtain details about Richard's condition because Kallenbach's letter did not “tell [him] a lot.” The trial court stated, however, that it would entertain Quirin's testimony despite Richard's absence because he did not believe that Richard could “articulate one thing” to assist Loffswold in his cross-examination. After the recess, the trial court reported that he and counsel participated in a conference call with Kallenbach. Because Kallenbach was “a little cautious about what she could say,” the trial court indicated it would contact Richard when his therapy concluded for the day. Loffswold's motion to continue was overruled and Quirin presented his testimony.
Quirin testified that under the standards established by the American Institute of Certified Public Accountants (AICPA) and the Uniform Standards of Professional Appraisal Practice (USPAP), it was appropriate to begin with the net asset value approach, a method which would establish a valuation floor for RFB. Under this approach, Quirin determined which assets and liabilities were necessary to conduct RFB's business operations, and then he adjusted the values of certain assets and liabilities to reflect their estimated market values. Employing this methodology, Quirin concluded that RFB's net asset value was $1,362,419. He emphasized, however, that this valuation depended on the accuracy of an appraisal, conducted by Paul Hancock of Hancock Auction and Appraisals, for the company's fixed assets.
Quirin then performed an income-based valuation to determine whether a hypothetical buyer would be willing to purchase RFB for more than the fair market value of its assets due to the company's potential profitability—the “goodwill” associated with the business. According to Quirin, goodwill is the “intangible asset that arises as a result of name, reputation, customer loyalty, location, products, and other similar factors[,][and][g]oodwill is commonly evidenced by income in excess of an expected return on tangible or operating assets.”
Quirin began his analysis by reviewing RFB's historical income stream via a normalized income analysis. In particular, Quirin reviewed RFB's income for 2007 through 2011, because “[i]t is very typical to look at the most recent five years and look for trends or abnormalities.” Quirin determined that RFB had a pre-tax normalized net income between $204,000 and $370,000 during this 5–year period, which resulted in a 5–year average normalized net income of $294,728.
Quirin opined that this normalized income figure accurately represented a hypothetical buyer's future probable earnings. Quirin concluded the higher income RFB reported in 2011 under a tax basis of accounting represented a profit level that may not be sustainable in the near-term because the accrual basis of accounting actually reflected a substantial decline. In fact, while reviewing RFB's historical balance sheets, Quirin noted the value of the company's assets was “fairly stable” until 2011, when the value declined by about 40%, due to a reduction in contracts. As a result, Quirin opined it was appropriate to only include RFB's 3 lowest income years, 2007, 2009, and 2010, in his final analysis. Employing this approach, Quirin determined that the average normalized net income for the remaining 3–year period equaled $244,054.
After determining RFB's normalized income, Quirin then quantified any goodwill applicable to the company. In his opinion, a reasonable expected return on assets worth $1,358,327 would range between 12% to 14%, before income tax. In other words, RFB needed to generate income of at least $176,583 to warrant adding goodwill to the company's net asset value. Based on RFBs' normalized income of $244,054, Quirin determined the company's excess earnings were sufficient to warrant including goodwill. When quantifying goodwill, Quirin capitalized the projected quantity of excess earnings using an appropriately derived capitalization rate. Utilizing a 25% capitalization rate, Quirin determined that RFB's goodwill value equated to $269,884 ($67,471/25%).
Quirin ultimately determined that RFB's total value as a going concern was $1,632,303. Quirin explained, however, that this value as a going concern would only be appropriate (as opposed to a net asset value), if a non-compete agreement was included as a condition of sale. Quirin explained, “[I]f a non-compete agreement were not signed for this particular business, a potential buyer would not want to pay for good will because then the seller could in theory compete against the buyer.” In other words, if the seller was not willing to sign a noncompete agreement, any sale of RFB would consist solely of its physical assets; the seller would not be selling the business as a whole because their ability to compete with the buyer would negate any potential goodwill that existed within the company.
Quirin further opined that when valuing RFB it was appropriate to consider the income tax consequences associated with a sale of the company because RFB is a C Corporation subject to double taxation. In short, “[t]he sale of the business assets will be a taxable event and any amount received in excess of tax basis will be taxable income to the [c]ompany taxed at the prevailing combined federal and state corporate income tax rates.” Because RFB's shareholders would receive any cash proceeds, personal income tax at prevailing capital gains rates would also apply. Significantly, however, if the trial court decided to divide RFB's stock amongst its stockholders, neither Richard nor Deborah would suffer any tax consequences until a future sale occurred.
As a result, Quirin also placed a net after tax value on RFB. Quirin determined that the corporate combined tax consequences associated with a sale of RFB at its going concern value of $1,632,303 would equal $390,441, and the company's shareholders, Richard and Deborah, would incur a personal combined tax liability of $243,692. After factoring in these tax liabilities, RFB would generate net-after-tax sale proceeds of $998,170 ($1,632,303–$390,441–$243,692). If, a noncompete clause was not a condition of the sale, however, the tax liability would be premised upon RFB's net asset value of $1,362,419. Using this valuation, the company's sale would generate a corporate combined tax liability of $282,488 and its shareholders would incur a personal combined tax liability of $208,958, resulting in net after-tax sale proceeds of $870,973 ($1,362,419–$282,488–$208,958).
Upon completion of Quirin's direct examination, the trial judge took a brief recess so he could speak to Richard by telephone in counsel's presence. Richard indicated that while he could be physically present at the trial, he was having “bad anxiety and depression.” At a later hearing, the district court recalled that “[Richard] certainly sounded fine to the Court, he sounded as he normally did throughout this case whenever he testified or was in Court.”
Richard's therapist, Kelly Strube also spoke with the trial court explaining that Richard was admitted into the intensive outpatient program after reporting, “severe depression and anxiety and wanting to get those things under control.” She indicated, however, that Richard did not yet have a diagnosis. Strube further explained that Richard had only attended one group session with her and, thus, she had not “gotten too much background at all in regard to what [was] going on” with him.
When asked whether there was any medical reason why Richard could not attend his divorce trial, Strube replied, “I don't know Ric[hard] well enough at this point to say yes or no.” Nevertheless, based upon Richard's statements to her, Strube said it would probably be beneficial to Richard's health if the court could continue the divorce proceedings. The district court concluded the telephone conversation by asking Strube, once Richard was evaluated, to contact the district court and provide a medical opinion regarding whether Richard could attend the trial.
After Quirin's cross and redirect examination was concluded, James Bonafide, the clinical supervisor of Richard's intensive outpatient program called the district court. The district court asked Bonafide if Richard was able to appear at trial and cooperate with his attorney. Bonafide responded:
“At no time did we say you need to be here instead of Court, okay. There was never, as far as I'm aware, until he came in today and started demanding we needed to provide something that said he couldn't, you know, attend Court, that that was even an issue.
“Sometimes when we, you know, when somebody comes through their assessment we usually give them a start date of the program and if they say well, I can't get child care for two more days or whatever, that is not a problem. So there was no kind of—there was no clinical criteria that was emergent where he needed to start on a certain day. As a matter of fact, if it was emergent he would have been admitted to an inpatient facility.
“So he shows up today and, you know, is wanting some kind of documentation. Again, we are not comfortable providing that .... none of us are—here are comfortable making that kind of statement of whether he's capable or not....
“The psychiatrist did see him today and I talked with the psychiatrist afterwards and basically his assessment is that [Richard] is having sufficient anxiety where he's threatening that, you know, if things don't go well or whatever, he's not going to handle it, he may not be able to keep himself safe.
“So does he need to continue to be in our program, absolutely. As far as him not being able to attend Court on a given day, that I'm not comfortable making a judgment one way or the other on.”
Bonafide clarified that Richard's statement regarding his ability to “keep himself safe” was his own personal assessment of his mental state, and he could not address Richard's credibility. According to Bonafide, there was no way to determine whether Richard had “just come in and made the statement because he [did not] want to appear in [c]ourt.” When asked about the psychiatrist's evaluation, diagnosis, and recommendations, Bonafide declined to provide any information because Richard only authorized the Center to release limited information and the contents of his medical records were not within the scope of this authorization.
Prior to calling Bolton as a witness, Loffswold renewed his request for a continuance and also moved for the appointment of a guardian ad litem. After noting that Loffswold would be able to address this issue in the future, the trial court overruled both requests because Loffswold had failed to show Richard's inability to attend the trial.
Next, Bolton testified that he assessed Quirin's valuation report in terms of the methods used and values obtained. Richard did not request a formal valuation, so Bolton did not express an opinion in conformity with the AICPA standards. Bolton stated three major criticisms of Quirin's valuation analysis.
First, Bolton testified that Quirin should have utilized Richard's equipment values, rather than Hancock's appraisal, to calculate RFB's underlying net asset value. Although the parties stipulated to Hancock's appraisal, Richard offered his own adjustments. Hancock appraised RFB's equipment at $1,043,670, while Richard valued the equipment at $1,246,053. Bolton opined: “We are not equipment appraisers but would suggest that [Richard], working in the industry on a daily basis, would have a fairly accurate assessment of equipment values.” Although Bolton did not investigate Richard's qualifications to appraise equipment, he assumed the appraisal was accurate. He recalculated RFB's fair market value by adding the difference between Richard's and Hancock's equipment valuations ($202,383) to Quirin's overall fair market value determination of $1,632,303, which equated to $1,834,686.
Second, Bolton criticized Quirin's calculation of RFB's normalized net income. Bolton determined that Quirin did not accurately assess RFB's normalized net income because he did not include the proper income years in his analysis. Quirin had performed an earlier valuation assessment which determined that on December 31, 2010, the company's going concern value was $1,969,511. Unlike his most recent valuation which relied solely upon RFB's 3 lowest income years to calculate normalized net income, Quirin reached his prior determination by utilizing RFB's 4 prior income years. While the determination of which years to include in such a calculation is “a question of judgment” by an expert, Bolton believed that Quirin should not have “changed courses” because he “did not see any reason to change methods or ... years selected .” According to Bolton, “[i]f average normalized net income was calculated in a similar manner as the first valuation (i.e. the most recent 4 years) average normalized net income would increase by $73,233.” Applying a 25% capitalization rate, Bolton determined that RFB's goodwill value should equate to $292,932.
Finally, Bolton disagreed with Quirin's decision to adjust the valuation of RFB for taxes. While Bolton “under[stood] the reasoning for a discount for taxes at the corporate level” in the event the company was going to be liquidated, he disagreed that such a discount was necessary if the company simply changed management because, according to Bolton, “there would be ways to avoid taxes at the corporate level down the road.” For example, Bolton said RFB's stockholders could elect to convert the company into a subchapter S Corporation, which would eliminate the double taxation imposed upon a C Corporation because the government only taxes S Corporations at the individual rate. Such a conversion, however, would take 10 years to complete, therefore, any projected tax savings would be premised upon the assumption that no changes would occur to the tax code during this transition period. Bolton also disagreed with Quirin's adjustment for the personal income tax consequences associated with a potential sale because Richard and/or Deborah would have to remit those taxes to the government if either of them decided to sell their respective interest in RFB.
After making his adjustments, Bolton concluded that RFB had a total underlying fair market value, including goodwill, of $2,127,168. Bolton reached this figure by adding the difference between Hancock's appraisal of RFB's equipment and the valuation assessment provided by Richard, i.e., $202,383, and Bolton's determination of the “additional value of good will,” i.e., $292,932, to Quirin's fair market value determination of $l,632,303.
In rebuttal, Quirin disagreed with Bolton's suggested alterations. Preliminarily, Quirin challenged the validity of Bolton's report because “Bolton is a certified public accountant and as such he is bound by the ... [AICPA] and ... if you are going to perform work that leads to ... a calculation of value, you have to state such in the report and ... the engagement letter and [Bolton did] neither.” Quirin also disagreed with Bolton's adjustment to the equipment values because he did not have any information to show that Richard's valuation was more accurate than Hancock's appraisal. Quirin also disagreed with Bolton's methodology to incorporate Richard's equipment valuation into RFB's fair market value. Quirin explained, contrary to Bolton's assertion, one could not assume that Richard's increased equipment valuation would go “to the bottom line.” Because RFB's normalized net income would remain the same, Richard's valuation would cause RFB's excess income to decrease, resulting in a reduction in the value of the company's goodwill. In other words, “while [Richard]'s opinion increases the net asset value, ... [the increase] is actually mitigated ... by the fact that the good will value is going down from 269 to 164 or it is going down by [$]105[,000].”
Upon the conclusion of the experts' testimony, the trial court granted Loffswold's request for a continuance and the trial was continued until the First available date on the trial court's calendar. The trial court stated, however, that if Loffswold presented a motion with a medical report indicating that Richard could not be available for trial due to a medical condition, he would reconsider Loffswold's request for a continuance and/or a motion seeking the appointment of a guardian ad litem.
On July 11, 2012, the day prior to the continuation of trial, the trial court held a hearing to discuss a letter Loffswold presented in support of his renewed request for a continuance. The letter from Dr. Wadood, stated, “Richard ... is currently undergoing treatment under my care. Due to medical reasons, he is unable to attend Court proceedings at this time.” The trial court asked Loffswold to describe the efforts he had made to obtain Richard's presence. Loffswold replied that while he had not spoken with Dr. Wadood, Richard had advised him that the medical center was adjusting his medication and he did not believe that he had the mental ability to appear and testify. Richard informed Loffswold that he could not appear for another 2 or 3 weeks.
Deborah's counsel, Kurtis I. Loy, strongly opposed the continuance request. He asserted an immediate resolution of the case was vital to RFB's economic well being. In support, Loy presented a letter indicating the Ohio Casualty Insurance Company had decided to suspend all surety credit for RFB, including bid bonds, performance and payment bonds, and license and permit bonds given the uncertain ownership of RFB. Loy also explained that Kansas and Texas governmental authorities had sent letters to RFB requesting its DBE recertification paperwork but this request was difficult to comply with while the divorce remained pending. According to Loy, RFB was “dying on the vine,” and if the court granted another continuance, the company's value would “continue to plummet.”
The trial court denied Loffswold's request for a continuance due to insufficient evidence in support of the motion. According to the trial court, the doctor's letter “[did not] tell [him] anything whatsoever. It simply [was] a conclusion with no basis.” The trial judge explained its ruling to Loffswold:
“I am going to continue the case until 2:30 tomorrow. That gives your client time to appear. That's two and a half hours after 12:00 .... but he can get here.
“[A]nd if he doesn't get here for whatever reason, I will give him the opportunity to get here that Friday morning because he has no therapy that Friday morning. And then he can testify if he wants to testify, but then we will have closing arguments and we will conclude the case at that time because I'm not at all satisfied that there is any medical reason whatsoever that your client can't—you've given me a medical report. I've known your client has been afflicted with a mental illness which we will call manic depression but I see nothing that has ever diagnosed that.
7F'I've talked on the phone with your client, he seemed to comprehend absolutely what I was talking about. He seemed to comprehend what we were talking about every time he's testified at trial before and I just don't have enough information to justify continuing the case.
“I don't even have enough information to know when your client might be ready to testify. I have no medical presentation on that, though I have given your client, through you, time to produce that. You produced a one and a half line medical report that doesn't justify a continuance on that basis, doesn't give me anything to go on.
“And I am convinced ... [Deborah] ... wants the business.... Whether she gets the business, I don't know that yet.... I know that she can't get any business going now until the divorce is completed, and that's because she can't get bonding, finances are somewhat tied up, and she couldn't even get an estimator until just recently.
“And I know that if I continue this case, it may be late August or early September before we get it to trial. And that means I've got three calendars, plus mine, and you've looked at mine and mine is full.
“So having said that, that is what 1 intend to do.... And if your client doesn't want to—if he's afraid of testifying in front of a Judge, which he hasn't been to date, then I will give you permission to take his deposition and submit me his deposition after Friday, before I decide the case.”
The following day, all of the parties, including Richard, appeared in court and the trial resumed. There was no further mention of Richard's request for continuance.
After taking the matter under advisement, the trial court awarded 100% ownership of RFB's stock to Deborah. In calculating Richard's equalization payment, the trial court relied on Quirin's opinion and found that as of December 31, 2011, RFB had a net after-tax fair market value of $870,973 at current tax rates, if the sale price of RFB were $1,362,491, the net asset value absent a covenant not to compete. After taking into account various offsets and credits requested by the parties, the trial court determined that the monetary value of 100% of RFB's stock was $755,818. As a result, Richard received an equalizing judgment of $377,909.
In its ruling, the trial court did not accept Bolton's suggested alterations to Quirin's analysis. First, the trial court dismissed Bolton's suggestion that Richard's appraisal of RFB's equipment was more accurate than Hancock's appraisal. The trial judge explained,
“Bolton's only basis for suggesting the court should consider adding another $200,000 to the net asset value of RFB is that [Richard] valued the assets higher than the appraiser selected by [Deborah]. Bolton admitted that he is not an appraiser, and had not inspected or attempted to appraise the equipment. It is the court's function to determine the weight to give testimony of witnesses; and, while the court appreciates help in weighing testimony of witnesses, that help usually comes from argument of counsel, not by someone who admits he has no expertise in appraising equipment and had not even attempted to do so in this case.”
Second, the trial court acknowledged it “ma[d]e[ ] sense” that Bolton used 4 years rather than the lowest 3 years of net income to calculate normalized net income for the purpose of calculating goodwill. But the trial court found Bolton's methodology inapplicable because Richard did not sign a covenant not to compete. Because the trial court had no means of restraining Richard from competing with RFB, the court agreed with “Quirin's opinion (not refuted by Bolton) that absent a covenant not to compete, goodwill ought not be valued in determining fair market value.”
Finally, citing K.S.A.2010 Supp. 60–1610(b) and Bohl v. Bohl, 232 Kan. 557, 657 P.2d 1106 (1983), the trial court ruled that a divorce court should take into account the tax impact of any award rendered in a divorce case. The trial court found that, despite Bolton's claim to the contrary, the tax impact in this case included both corporate and personal tax considerations.
Subsequently, Richard filed a motion to alter or amend judgment and for reconsideration, asserting that the trial court improperly valued RFB's stock for purposes of making the equalization award. Following a hearing, the trial judge declined to alter his previous findings of fact and conclusions of law with the exception of a discrepancy in valuing some vehicles. The trial judge explained:
“So I've reconsidered it, studied it, and I'm comfortable that the adjustments I made for the income tax impact and the fact that I chose to agree with the evaluation of Quirin, I still agree with Quirin's evaluation and I still believe that I'm absolutely correct in addressing the income tax because [Deborah] is not going to be able to use any of the value of those items I gave to her when I awarded the business to her unless she does either two things. She uses them to make money and your client, of course, can use his tax free stuff to make money, or unless she sells them and as soon as she sells them there is a tax impact going to be felt, and I've explained what I thought that was, it is a corporate tax impact because it is a C corporation. Why they made a C corporation, I don't know. I assume that they had some advice and felt that was the advantageous way to do things.
“And in addition to that, when she gets money out of that C corporation to buy a new car or something, she's going to have to pay tax on that too, and so that's the basis of that.”
Richard timely appealed.
The Propriety of the Property Division
Richard contends the trial court abused its discretion when it determined the fair market value of RFB. Specifically, Richard asserts the trial court erred by disregarding the goodwill inherent in RFB, adopting Quirin's method for calculating RFB's normalized net income, disregarding Richard's appraisal of RFB's equipment, and employing an after-tax net asset methodology. We will analyze these claimed errors in order.
At the outset, it is necessary to summarize Kansas law regarding the division of property in divorce cases. District courts are vested with broad discretion in adjusting the property rights and financial affairs of divorcing parties. Absent a clear showing of abuse, appellate courts will not disturb the exercise of that discretion, and the party asserting that the district court abused its discretion bears the burden of establishing such abuse. In re Marriage of Wherrell, 274 Kan. 984, 986, 58 P.3d 734 (2002); In re Marriage of Hair, 40 Kan.App.2d 475, 480, 193 P.3d 504 (2008), rev. denied 288 Kan. 831 (2009). A judicial action constitutes an abuse of discretion if the action is (1) arbitrary, fanciful, or unreasonable; (2) based on an error of law; or (3) premised upon an error of fact. State v. Ward, 292 Kan. 541, Syl. ¶ 3, 256 P.3d 801 (2011), cert. denied 132 S.Ct. 1594 (2012).
Moreover, the district court must make “a just and reasonable division of [the marital] property.” K.S.A.2010 Supp. 60–1610(b). However, it is not required to make an equal split of the marital property. In re Marriage of Rodriguez, 266 Kan. 347, 352–53, 969 P.2d 880 (1998); In re Marriage of Vandenberg, 43 Kan.App.2d 697, 715, 229 P.3d 1187 (2010).
Before delving into the specifics of Richard's arguments, we note that substantial competent evidence supports the trial court's decision. Substantial competent evidence is evidence possessing both relevance and substance that a reasonable person could accept as being adequate to support a conclusion. Frick Farm Properties v. Kansas Dept. of Agriculture, 289 Kan. 690, 709, 216 P.3d 170 (2009). “If there is substantial evidence to support the findings, it is of no consequence that there may have been contrary evidence adduced which, if believed, would have supported a different finding. [Citation omitted.]” Clark v. Clark, 236 Kan. 703, 704, 696 P.2d 1386 (1985).
As a general proposition, “[t]he values assigned to marital property must be within the range of evidence before the court. [Citation omitted.]” In Re Marriage of Schwien, 17 Kan.App.2d 498, 509, 839 P.2d 541 (1992). Moreover, a “broad range of facts should be considered in valuing a closely held corporation where an established market value is not readily available.” Bohl, 232 Kan. at 564. In this case, after carefully evaluating the experts' opinions and the testimony of Richard and Deborah, the trial court issued a thorough and articulate ruling which established a value for RFB. Because this value was based on Quirin's expert opinions, it was within the range of evidence presented. Under these circumstances, substantial competent evidence supported the trial court's findings. Next, we will separately consider Richard's arguments that the property division of RFB was improper.
Goodwill
Richard contends the trial court abused its discretion because it premised its decision on an error of law by disregarding the goodwill inherent in RFB. This error was caused by the trial court's erroneous belief that the absence of a covenant not to compete negated the value of this intangible asset. See Ward, 292 Kan. 541, Syl. ¶ 3. According to Richard, “goodwill and a covenant not to compete are two different legal concepts” because “[c]ovenants not to compete are generally part of an employment contract,” whereas, goodwill “represents the fact that an established business has a reputation and customer base that is not immediately present to a new business.” As Deborah points out, however, Richard provides no legal support for this argument, other than offering a definition for the terms “covenants not to compete” and “goodwill .”
As Richard asserts, covenants not to compete and goodwill are distinct legal concepts. A covenant not to compete is a restrictive covenant. Wichita Clinic v. Louis, 39 Kan.App.2d 848, 853, 185 P.3d 946, rev. denied 287 Kan. 769 (2008). When included within an employment contract, such a covenant is valid and enforceable if the restraint is reasonable under the circumstances and not adverse to the public welfare. Idbeis v. Wichita Surgical Specialists, P.A., 279 Kan. 755, Syl. ¶ 1, 112 P.3d 81 (2005). It is well settled, however, that an employer may only utilize a covenant not to compete in order to protect a legitimate business interest, such as ‘ “customer contacts, ... the special training of employees, trade secrets, confidential business information, loss of clients, good will, reputation, seeing that contracts with clients continue, and referral sources.’ [Citation omitted.]” (Emphasis added.) 279 Kan. at 767.
Goodwill, on the other hand, “is that advantage which is acquired by an establishment in consequence of the general public's continued patronage of the place because of its reputation; it is the probability that old customers will resort to the old place.” Powell v. Powell, 231 Kan. 456, Syl. ¶ 2, 648 P.2d 218 (1982). In other words,
“ ‘ “Good will may be properly enough described to be the advantage or benefit which is acquired by an establishment beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.” ‘ [Citation omitted.]” 231 Kan. at 461.
As Deborah points out, covenants not to compete and goodwill may be “intertwined in a business valuation context.” While a covenant not to compete may be incidental to an employment contract, such a covenant may also be ancillary to the sale or other transfer of a business in which goodwill is part of the property sold. See Eastern Distributing Co., Inc. v. Flynn, 222 Kan. 666, 670–71, 567 P.2d 1371 (1977); H & R Block, Inc. v. Lovelace, 208 Kan. 538, 544–45, 493 P.2d 205 (1972). Indeed, in Lovelace, our Supreme Court explicitly recognized the distinction between employer-employee and sale covenants, and in doing so, the court noted that a “ ‘seller is usually paid an increased price for agreeing to a period of abstention. The abstention is a part of the thing sold and is often absolutely necessary in order to secure to the buyer the things he has bought.’ “ 208 Kan. at 545. Moreover, in In re Estate of Hjersted, 285 Kan. 559, 175 P.3d 810 (2008) our Supreme Court intimated that a trial court in a divorce proceeding may discount the value of a closely held corporation when it is appropriate to effectuate an equitable division of marital assets.
We find the trial court did not err, as a matter of law, when it adopted Quirin's expert opinion that it would only be appropriate for the court to assign a going concern value, rather than a net asset value, to RFB if a noncompete agreement was included as a condition of sale. In particular, the evidence during the divorce proceeding validates the trial court's decision to exclude goodwill due to Richard's unique ability to compete with RFB. Richard acted as RFB's president and estimator. As a result, he had the primary responsibility for acquiring RFB's contracts. RFB's goodwill would be undermined if Richard could directly compete with RFB, a circumstance that would reduce the value of the asset assigned to Deborah.
Moreover, by the time of trial, Richard had already associated himself with one of RFB's competitors. As explained earlier, prior to the trial, the district court placed operative control of RFB in Deborah's hands and retroactively approved her decision to hire an estimator because he found that Richard had “aided a competitor [and] neglected to perform in the way one would expect a person to perform if he's president of [RFB].” Indeed, at trial, the trial judge noted that he heard sufficient evidence at a prior hearing to find that Richard had been acting as an agent for another construction company that handled projects similar to those of RFB, and Deborah presented additional evidence suggesting that Richard had been assisting a competitor.
Under these unique circumstances, we conclude the trial court did not abuse its discretion by adopting Quirin's expert analysis establishing a net asset value for RFB because valuing it as a going concern (including the value of goodwill) would be inappropriate without a noncompete agreement included as a condition of sale.
Normalized Net Income
Next, Richard contends the district court abused its discretion because it adopted Quirin's method for calculating RFB's normalized net income, rather than the method proposed by Bolton. Richard asserts this decision was arbitrary, fanciful, or unreasonable, i.e., no reasonable person would have taken this view. See Ward, 292 Kan. 541, Syl. ¶ 3. According to Richard: “Without explanation, [the trial court] presumed that because goodwill should not be factored into the fair market value of the company[,] ... it was proper to use the three lowest [income] years to determine RFB's normalized net income.”
We disagree. The trial court offered a valid explanation for its decision to disregard Bolton's assertion regarding the calculation of the company's normalized net income. Indeed, the trial court explicitly found that while Bolton's opinion “ma[d]e[ ] sense,” his methodology was inapplicable because normalized net income is only relevant if goodwill is a component of value. Substantial competent evidence supports the trial court's conclusion, because Quirin testified that accountants utilize a normalized income analysis to determine whether a hypothetical buyer would be willing to purchase a company for more than the fair market value of its assets due to the company's potential profitability, i.e., the “goodwill” associated with the business. Likewise, Bolton acknowledged that an accountant's calculation of average normalized net income is “the main component” in the determination of a goodwill value.
As Deborah points out, Richard's argument is essentially a disagreement with the trial court's decision to adopt Quirin's expert opinion rather than Bolton's expert opinion. When reviewing factual findings, appellate courts do not reweigh evidence, resolve evidentiary conflicts, or make determinations regarding witness credibility. Frick Farm Properties, 289 Kan. at 709. Because substantial competent evidence supports the trial court's decision, we cannot characterize it as arbitrary, fanciful, or unreasonable. Moreover, it cannot be said that no reasonable person would have taken the view the trial court adopted. Richard has failed to carry his burden of demonstrating an abuse of discretion.
Richards Appraisal of RFB's Equipment
Richard further asserts the trial court abused its discretion by premising its decision on an error of fact because the court disregarded Richard's adjustments to Hancock's appraisal. See Ward, 292 Kan. 541, Syl. ¶ 3. Richard claims the trial court arbitrarily disregarded evidence that he was in the best position to value RFB's equipment because Bolton, who suggested that the court utilize Richard's adjustments, admitted he was not a qualified appraiser. Richard claims the trial court's focus on Bolton's qualifications was improper because the evidentiary value of Richard's adjustments did not depend upon Bolton's testimony, it depended on his own testimony which showed that he is “an industry professional and was intimately familiar with the equipment in question.”
Richard's argument is an impermissible invitation to reweigh the evidence. See Frick Farm Properties, 289 Kan. at 709. At the hearing on Richard's motion to reconsider the trial judge explained that he adopted Hancock's appraisal, rather than Richard's, because he believed Richard's credibility was questionable:
“THE COURT: ... I have an obligation as a Judge then or, as a jury would, on testimony of value, I have to take which T think is the more accurate.
“MR. LOFFSWOLD: Right.
“THE COURT: And to be quite frank with you, your client I didn't think had been accurate throughout some of the hearings .... so he's asking me to accept those figures and they were completely unacceptable to me, and so I felt the more trustworthy figures were the figures of [Hancock] that you had stipulated his report could go in and that's why I chose that.
“I believed that they were better figures than your client's figures. I have to be blunt about that but that is the way it is. I have to make a decision of which evidence I believe and I did that.
....
“THE COURT:.... I made the specific finding of fact in my order that this was the value, and the value was a value that Quirin used and that was the value that their expert used, it is implicit in there and what I've told you here is that I trusted those figures more than I trusted your client's testimony.”
Substantial competent evidence supports the trial court's decision. Richard's knowledge was based on 20 years of purchasing and selling construction equipment. His educational background, however, did not include any training in the area of real estate, construction equipment, or business appraisals, and he did not have any work experience in these fields. Richard also conceded that he had no documentation to support his valuation, and other than consulting the internet, Kelly Blue Book, or equipment dealers for some items, he did not investigate what RFB's equipment was worth on the open market in its current condition.
The evidence shows that Richard grounded his adjustments to Hancock's appraisal upon his subjective estimation of the worth of RFB's equipment, rather than objective standards pertaining to the actual value of the equipment on the open market. By contrast, Hancock testified to his specialized training in the completion of appraisals, membership in the Certified Appraisers Guild of America, and his experience, since 1998, in completing “many construction, ... oilfield, trenching and pipeline, airplanes, railroad building and agricultural equipment fee appraisals.”
We find the trial court did not abuse its discretion when it adopted Hancock's appraisal rather than Richard's testimony. The trial court simply determined that Richard's testimony was of questionable evidentiary value because it was less credible than Hancock's appraisal. Under these circumstances, as supported by the record, Richard has failed to show error.
After–Tax Net Asset Methodology
Richard contends that the trial court premised its decision on an error of law when it adopted Quirin's after-tax net asset methodology because this methodology essentially assigned RFB a liquidation value. See Ward, 292 Kan. 541, Syl. ¶ 3. According to Richard, our Supreme Court's decision in Bohl prohibits district courts from valuing a business at liquidation value due to tax consequences when the business will continue to operate as a going concern. The crux of Richard's argument focuses on the trial court's decision to discount the value of RFB due to the tax consequences associated with the property division.
A district court must make “a just and reasonable division” of marital property, and when undertaking this task the court shall consider numerous factors, including “the tax consequences of the property division upon the respective economic circumstances of the parties.” K.S.A.2010 Supp. 60–1610(b).
In keeping with K.S.A.2010 Supp. 60–1610(b) and Quirin's expert opinion regarding the tax consequences associated with the trial court's award, the court discounted RFB's net asset value by the amount of taxes RFB and its shareholders would owe if a hypothetical sale were to occur on the stipulated valuation date. In reaching this conclusion, the trial court explained,
“Bolton suggests that the court should not discount the value of RFB for personal tax considerations, because [Richard] would have to pay those taxes should he decide to sell his interest in RFB; however, [Richard] did not sell his stock in RFB to [Deborah]—the court awarded (transferred) all RFB stock to [Deborah] which is not a taxable event.
“... In awarding [Deborah] the stock of RFB ... the court has in fact burdened [her] with a future tax liability, both on the RFB corporate level and on a personal level, should [she] ever sell all or part of RFB to monetize the value of the asset awarded her; [Richard], when awarded a sum of money representing an equal share of the value of RFB, will receive that award free of tax liability. [Richard] urges the court to consider that [Deborah] could potentially minimize any tax impact by converting RFB to a subchapter S corporation, a conversion that [Richard]'s expert testifies would take ten years—and that assumes that there are no changes in the tax code. Much can happen in ten years, and it was [Richard] and [Deborah], when they initially incorporated RFB, that opted to make RFB a C corporation instead of a subchapter S corporation, and presumably they did so for advantageous reasons. To now suggest that [Deborah] should or must start a ten year process of converting to a subchapter S corporation is to offer ten years of management guidance by one who has no ownership interest in RFB.”
First, Richard argues this decision was erroneous because “there was no liquidation, and the effect of [the trial] court's decision to discount the value of RFB ... was that it shifted 100% of the tax liabilities to [him].” However, Richard offers no legal support for this assertion, nor does he explain how the discount transferred 100% of the tax liability to him.
We question the legal basis for this argument. Under Section 1041 of the Internal Revenue Code, no gain or loss shall generally be recognized on a transfer of property from an individual to a former spouse if the transfer is incident to a divorce and occurs within 1 year. See 26 U.S.C. § 1041 (2012). Similarly, in Wachholz v. Wachholz, 4 Kan.App.2d 161, 163–64, 603 P.2d 647 (1979), our Supreme Court stated, “the transfer of property that is acquired during the marriage by either or both spouses and transferred to the other by a divorce decree [is] a nontaxable event .” Consequently, while Richard will receive his equalization judgment tax-free, Deborah will have to pay income taxes in the event she desires to monetize the asset she received in the property division. We do not find this aspect of Richard's argument meritorious.
Next, Richard primarily relies on his understanding of our Supreme Court's decision in Bohl to claim that a district court may never reduce the value of a business due to tax implications. This argument necessitates a brief review of the Bohl decision.
Shortly after Nancy Bohl and Robert Bohl were married, Robert began working for Nancy's father, who owned the M.W. Watson Construction Company (Company). Eventually, Robert became president and manager of the company. When Nancy and Robert divorced, the district court awarded Robert total control of the Company and ordered Robert to pay Nancy an equalization judgment. Robert appealed from the property division and, in particular, he claimed the district court erred by failing to consider the tax consequences associated with its division. Robert asserted the district court erred when it valued the stock as a going concern because, in order to satisfy the equalization judgment, he would have to liquidate the Company in whole or in part.
Our Supreme Court concluded:
“Essentially [Robert] is arguing the trial court should have valued the stock of M.W. Watson, Inc., at its liquidation value rather than its ‘going concern’ value because of tax consequences. With this argument we do not agree. Were it followed it would prevent a court from ever valuing property at more than cost because of tax consequences.
“However, we recognize and acknowledge it would be unfair to require Mr. Bohl to liquidate his company and turn the proceeds over to Mrs. Bohl with nothing left for him. If this were the case it would defeat the trial court's goal of dividing the marital property equally.
“We recognize the validity of appellant's argument as it pertains to the method of discharging the judgment to Nancy Bohl. As previously stated, the amount of the judgment is well within the evidence and will not be disturbed. However, alternative methods of payment of the judgment giving consideration to the tax consequences thereof deserve further consideration. We find the case should be remanded to the trial court for the limited purpose of receiving evidence and making findings on alternative methods of payment giving consideration to tax consequences, interest on and security for the unpaid balance.” Bohl v. Bohl, 232 Kan. 557, 565, 657 P.2d 1106 (1983).
While under the unique circumstances in Bohl our Supreme Court rejected Robert's assertion that the Company should have been valued at its liquidation value, rather than its going concern value, its holding does not suggest that a district court may not, under other circumstances, discount a business' value due to tax considerations. On the contrary, our Supreme Court acknowledged that it was appropriate for the district court to consider the tax consequences associated with the property division; the court simply disagreed with Robert's suggested means for doing so.
The trial court carefully considered the tax consequences of the property division upon the economic circumstances of both parties, as mandated by K.S.A.2010 Supp. 60–1610(b). On this record, we find the trial court did not abuse its discretion when it opted to employ an after-tax net asset methodology to value RFB.
Denial of Richard's Motion To Continue Trial
For his final issue, Richard asserts the trial court abused its discretion when it denied his requests for a continuance because it “effectively denied [him] his day in court.” In particular, Richard claims he was “unable to properly prepare and represent himself at trial in light of his mental state and treatment program at the time.”
K.S.A.2013 Supp. 60–240(b) provides a district court with authority to “continue an action at any stage of the proceedings upon just terms” if the motion is supported by good cause. In order to insure that district courts have the ability to manage their dockets, district judges have “broad discretion in matters concerning the assignment of cases for trial and the granting of continuance. [Citations omitted.]” Fouts v. Armstrong Commercial Laundry Distributing Co., 209 Kan. 59, 64, 495 P.2d 1390 (1972). Yet, “[w]hile a [district] court's discretion is necessarily broad in this area, it is not without limitations and is subject to review. [Citation omitted.]” 209 Kan. at 65. Where the denial of a continuance, for all practical purposes, will deprive a party of his or her day in court, a district court must exercise its discretion in “a sound and legal manner and not arbitrarily or capriciously.” 209 Kan. at 65. In such a case, the court must consider all of the circumstances, including the applicant's good faith, showing of due diligence and the lawsuit's timetable. In re J.A.H., 285 Kan. 375. 385, 172 P.3d 1 (2007).
Appellate review of the denial of a continuance turns on whether the district court abused its discretion in determining if the motion was supported by “ ‘good cause.’ “ Miller v. Glacier Development Co., 284 Kan. 476, 494, 161 P.3d 730 (2007), cert. denied 552 U.S. 1258 (2008). Importantly, it is incumbent upon a party seeking a continuance of trial to affirmatively show due diligence with respect to all grounds upon which the continuance is sought Fonts, 209 Kan. 59, Syl. ¶ 3. “[W]here the facts or circumstances are such as ‘to raise a judicial suspicion that the motion was made for mere delay, and to hinder the administration of justice, there is no abuse of discretion in denying the continuance.’ [Citation omitted.]” Collins v. Kansas Milling Co ., 210 Kan. 701, 708, 504 P.2d 586 (1972).
At the outset, we are not persuaded that Richard established good cause to continue the trial. On the first day of trial, June 27, 2012, Richard did not appear but his attorney sought the continuance because his client was suffering from “anxiety issues.” Nurse Kallenbach's letter confirmed that Richard had been admitted to the medical center but only on an outpatient basis which involved half day therapy sessions for 3 days a week for 3 to 4 weeks. Of note, Deborah's counsel objected to a continuance due to the curious timing—Richard had voluntarily reported to the medical center only hours before the first day of trial. Moreover, Deborah's counsel complained that a delay would adversely affect RFB's financial well being.
The trial court took a brief recess to conduct a conference call with Nurse Kallenbach but this conversation did not inform the trial court regarding Richard's condition, diagnosis, or ability to attend the trial. Given this uncertainty, the trial court proceeded with Deborah's expert witness but resolved to contact a physician from the medical center later in the day to determine whether Richard was medically able to appear for trial.
Later in the day, a second call was made to the medical center. In this call, Richard reported he was having “bad anxiety and depression.” The trial court would later note, however, that Richard “sounded fine to the Court,” similar to prior occasions when Richard had testified before the court. Richard's therapist, Strude, confirmed Richard's complaints but acknowledged he had not been diagnosed. Strude was unable to answer the critical question of whether there was a medical reason Richard could not attend trial. Still later in the day, Bonafide, the program's clinical supervisor, spoke by telephone with the trial court but indicated he was “not comfortable making a judgment” regarding whether Richard could attend trial. The trial continued with expert testimony but without Richard in attendance.
As briefly summarized, the record is bereft of evidence that Richard was unable to attend and participate at trial. While Richard reported that he was anxious and depressed, no medical professional provided competent evidence that Richard's condition necessitated his absence from the trial. The outpatient and short term nature of Richard's therapy also tended to show that Richard's condition did not prevent him from participating in the trial. Moreover, the record clearly shows the trial court afforded Loffswold with several opportunities to provide the evidence necessary to obtain a continuance, to no avail.
After presentation of the expert testimony, the district court continued the trial for about 2 weeks, until July 12, 2012. The trial court offered Loffswold the opportunity to renew his motion to continue the trial in the meantime, provided there was evidence presented to support the motion. On July 11, 2012, Loffswold renewed his motion. He informed the trial court that he had spoken with Richard who indicated, “I definitely do not feel able to testify at this time.” In support of his motion, Loffswold presented a letter from Dr. Wadood that confirmed that Richard was being treated at the medical center and that “[d]ue to medical reasons, he is unable to attend Court proceedings at this time.” The trial court observed that the brief letter did not provide any information regarding the basis for Dr. Wadood's conclusion. Once again, Deborah's counsel opposed a continuance due to the adverse consequences that a delay would cause RFB.
The trial court denied the continuance. In doing so, it appropriately noted that, after several attempts, it still did not have sufficient evidence regarding Richard's diagnosis or his ability to attend trial and testify. Moreover, based on the trial court's prior observations of Richard and listening to him on the telephone, the trial court believed he “seemed to comprehend absolutely what I was talking about. He seemed to comprehend what we were talking about every time he's testified at trial.” Once again, we find the trial court properly exercised judicial discretion in handling this matter. The cursory letter presented in support of Richard's motion, especially given the trial court's own estimation of Richard's ability to communicate at trial, was simply insufficient to show an abuse of discretion.
We also note that, even though the trial court denied Richard's renewed motion to continue the trial, the court accommodated Richard's therapy by scheduling the trial to begin at 2:30 pm the following day. Moreover, the trial court also provided Richard with the option to testify on the next day (when he was not scheduled for therapy) or have his deposition taken at a later time prior to the trial court's judgment. In this way, the trial court afforded Richard with accommodations for his therapy while facilitating the timely conclusion of trial.
Finally, Richard has failed to demonstrate that the denial of the motion prejudiced him, and in the absence of such a showing, appellate courts will not disturb a district court's decision to deny a continuance request. See State ex rel. Miller v. Richardson, 229 Kan. 234, 239, 623 P.2d 1317 (1981). Initially, Richard alleges the trial court prejudiced his case because he was unable to represent himself at trial, as he was “forced to appear and offer testimony while he was undergoing treatment for his mental illness.” Yet, Richard offers no support for this conclusory statement, and the record does not indicate that he was unable to present his testimony or legal arguments to the trial court. In fact, after the July 11, 2012, hearing, the trial proceeded with Richard testifying in support of his legal position. Moreover, our review of the record reveals Richard's testimony was clear, responsive, and helpful to his case.
Richard also asserts that he was prejudiced because his absence during the experts' testimony hindered Loffswold's ability to conduct an effective examination. In particular, Loffswold claims he was not able to confer with Richard regarding his adjustments to the equipment appraisals. We find this argument to be conclusory. Richard does not explain what his presence would have added to the experts' testimony. While Bolton opined that Richard's appraisal should be utilized, Bolton testified that he had no information regarding the basis for Richard's appraisal. As a result, it is unclear how Richard could have been of assistance to Loffswold when he is not a business valuation expert and the details surrounding his appraisals were outside the scope of the experts' testimony.
In conclusion, we find the trial court did not abuse its discretion when it denied Richard's motions to continue trial or in the division of property in this divorce case.
Affirmed.