DONNA F. WILSON,
Petitioner Below, Appellant
LEON HUNTER WILSON,
Respondent Below, Appellee
Appeal from the Circuit Court of Berkeley County
Honorable Gina Marie Groh, Judge
Civil Action No. 05-D-486
AFFIRMED, IN PART, REVERSED, IN PART,
AND REMANDED WITH DIRECTIONS
Submitted: September 21, 2010
Filed: November 23, 2010
JUSTICE WORKMAN delivered the opinion of the Court.
CHIEF JUSTICE DAVIS and JUSTICE BENJAMIN dissent and reserve the right to file dissenting opinions.
2. 'Enterprise goodwill' is an asset of the business and may be attributed to a business by virtue of its existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business. Syllabus Point 2, May v. May, 214 W.Va. 394, 589 S.E.2d 536 (2003).
3. 'Personal goodwill' is a personal asset that depends on the continued presence of a particular individual and may be attributed to the individual owner's personal skill, training or reputation. Syllabus Point 3, May v. May, 214 W.Va. 394, 589 S.E.2d 536 (2003).
4. In determining whether goodwill should be valued for purposes of equitable distribution, courts must look to the precise nature of that goodwill. Personal goodwill, which is intrinsically tied to the attributes and/or skills of an individual, is not subject to equitable distribution. On the other hand, enterprise goodwill, which is wholly attributable to the business itself, is subject to equitable distribution. Syllabus Point 4, May v. May, 214 W.Va. 394, 589 S.E.2d 536 (2003).
5. 'The testimony of expert witnesses on an issue is not exclusive and does not necessarily destroy the force or credibility of other testimony. The jury has a right to weigh the testimony of all witnesses, experts and otherwise; and the same rule applies as to weight and credibility of such testimony.' Syllabus Point 2, Webb v. Chesapeake & O. Ry. Co., 105 W.Va. 555, 144 S.E. 100, cert. denied, 278 U.S. 646, 49 S.Ct. 82, 73 L.Ed. 559 (1928). Syllabus Point 6, Frye v. Kanawha Stone Co., Inc., 202 W.Va. 467, 505 S.E.2d 206 (1998).
6. Profits of a business that are based upon a future contingency or obligation are subject to equitable distribution upon the dissolution of a marriage, but only that portion of the profits for work done during the marriage is actually marital property. In determining the amount of profits subject to equitable distribution, sound valuation methods must be used, and it may be necessary for a court to retain continuing jurisdiction over the matter until such profits are determined in order to effectuate an equitable distribution of this property.
7. Equitable distribution . . . is a three-step process. The first step is to
classify the parties' property as marital or nonmarital. The second step is to value the marital
assets. The third step is to divide the marital estate between the parties in accordance with
the principles contained in [former] W.Va.Code, 48-2-32 [now W.Va.Code § 48-7-103]. Syllabus Point 1, in part, Whiting v. Whiting, 183 W.Va. 451, 396 S.E.2d 413 (1990).
8. The burden is on both parties to the litigation to adduce competent
evidence on the values to be assigned in equitable distribution cases. Syllabus Point 8, Mayhew v. Mayhew, 197 W.Va. 290, 475 S.E.2d 382 (1996).
The appellant, Donna F. Wilson, (See footnote 1) ex-wife of appellee, Leon Hunter Wilson, appeals the June 4, 2009, order of the Circuit Court of Berkeley County. In that order, the circuit court denied Ms. Wilson's motion for reconsideration (See footnote 2) of the court's March 25, 2009, order which reversed the November 21, 2008, final divorce order of the Berkeley County Family Court and remanded the case to the family court for further proceedings. In the March 25, 2009, order, the circuit court reversed the family court's finding that set the net value of Mr. and Ms. Wilson's business at $8,927,957.00, which included a valuation for enterprise goodwill. More specifically, the circuit court reversed a finding by the family court which ordered Mr. Wilson to pay Ms. Wilson the sum of $4,914,582.50, and instead, ordered Ms. Wilson to pay Mr. Wilson the sum of $894,286.00 within thirty days of judgment. Based upon the parties' briefs and arguments in this proceeding, a review of the entire record, and the relevant statutory and case law, this Court reverses the circuit court's June 4, 2009, order, and affirms, in part, and reverses, in part, the circuit court's March 25, 2009, order, and remands the case to the family court for further proceedings consistent with this opinion.
Beginning in 1993, Hunter was chosen by National Land Partners (hereinafter, NLP) to manage real estate development projects in West Virginia, which was accomplished through successive Management Agreements. NLP, whose headquarters is in Williamstown, Massachusetts, is involved in large tract real estate development and does business in eleven states. In West Virginia, NLP owns and has financial responsibility for all of its projects. The agreement between Hunter and NLP provides that Hunter is an independent contractor. Hunter does not own any of the real estate involved in any of the projects (See footnote 4) as NLP buys the real estate through one of its wholly-owned subsidiaries. (See footnote 5) NLP also utilizes Inland Management, another one of its wholly-owned subsidiaries, to employ the people who work for NLP, to provide all of the accounting services for the projects, and for other services associated with the financial aspects of completing a project.
Under the Management Agreement, Hunter's duties are to identify property that
would qualify for development, and complete due diligence and feasibility studies to
determine if NLP should purchase the property. If NLP purchases the property, Hunter then
conducts engineering and design work, obtains all permits and subdivision approval, and
oversees the construction of the infrastructure. Upon completion of the road system and
utilities, Hunter then hires a sales force, (See footnote 6) conducts advertising, marketing, and other
promotions, sells all of the building lots, and oversees the closings of properties with the
attorneys. Under the Management Agreement, typically at the end of the project, Hunter is
paid a manager fee which is defined as any net profit remaining after twelve-and-one-half-
percent of the gross sales are paid to NLP and all other expenses are paid. If NLP's
preferential payment of twelve-and-one-half-percent exceeds the total net profit, Hunter
receives no compensation. (See footnote 7)
On June 1, 2005, Ms. Wilson filed for divorce. (See footnote 8) The parties, however, stipulated to May 31, 2005, as their date of separation. At the time of the parties' separation, Hunter was the manager of six real estate development projects for NLP at various stages of completion. (See footnote 9) Ms. Wilson was no longer involved in Hunter's business at that time. By May 2008, the parties had divided their personal property and identified and stipulated to the value and distribution of all of their marital assets and debts, except for the calculation and valuation of Hunter's manager fees. The stipulated net marital estate, absent the valuation of Hunter, was $9,536,682.14, (See footnote 10) and Mr. Wilson had advanced Ms. Wilson $4,317, 737.62 towards her share of the marital estate. Accordingly, the sole issue in contention that was litigated before the family court was the valuation of Hunter's manager fees on the projects that existed at the date of separation for purposes of equitable distribution. The difficulty is that each party and each judicial officer attempted to frame the issue of the fees in the context of whether they constituted enterprise goodwill or personal goodwill. In fact, under our jurisprudence, they are neither. Instead, they are a separate item for division before any consideration to goodwill is even discussed.
During the proceedings before the family court, Ms. Wilson presented expert testimony on the valuation of Hunter's manager fees. Ms. Wilson's expert, Kenneth Apple, a certified public accountant (CPA), projected the manager fees at $8,927,959.00 as of the date of separation and opined that such value was entirely enterprise goodwill, and thus, the entire amount was subject to equitable distribution. While Mr. Wilson did not offer an expert with regard to the manager fees, he did present evidence through NLP financial records and the testimony of Alan Murray, (See footnote 11) NLP's chief financial officer, who is also a CPA, and through Joan Holtz, a CPA for Hunter. Through such evidence, Mr. Wilson argued to the family court that due to project construction spending as well as premature payments and overpayments of manager fees by NLP, that as of the date of separation, Hunter's manager fees had a negative value of $(2,680,672.00), and that two of the five (See footnote 12) real estate development projects had not been completed.
On November 21, 2008, the family court entered a final order and adopted the valuation of the manager fees as opined by Mr. Apple, and concluded that Hunter possessed enterprise goodwill, which was subject to equitable distribution. In doing so, the family court concluded that the evidence supported a finding that the Management Agreement between Hunter and NLP created independent value of Hunter separate and apart from the abilities and skills of Mr. Wilson, and that Hunter would continue to have value beyond its existing accounts and physical assets even if Mr. Wilson were dead. The family court's finding of enterprise goodwill was based primarily on the testimony of Mr. Apple, which the family court interpreted as concluding that Hunter had enterprise goodwill, in part, based upon a highly compensated workforce of approximately twenty employees. The family court then ordered Mr. Wilson to pay Ms. Wilson the additional sum of $4,914,582.50 and awarded judgment in that amount. (See footnote 13)
Mr. Wilson thereafter filed a motion for reconsideration with the family court which was denied on December 23, 2008. Mr. Wilson then filed an appeal with the Circuit Court of Berkeley County. On March 25, 2009, the circuit court reversed the final order of the family court. The circuit court reversed the family court's finding that Hunter's manager fees were valued at $8,927,957.00 at the time of separation and found that such fees were actually a negative $(2,196,915.00). Accordingly, the circuit court found that the net marital estate at the time of separation was $6,886,304.00, an amount lower than a prior stipulated amount by the parties. (See footnote 14) The circuit court then found that Ms. Wilson's prior receipt of an advanced payment towards equitable distribution in the amount of $4,337,438.00 resulted in an overpayment of $894,286.00. The circuit court then ordered Ms. Wilson to pay Mr. Wilson that amount with interest within thirty days. The circuit court also remanded the case to the family court to exercise continuing jurisdiction over the projects known as The Point and WestVaco. In doing so, the circuit court ordered that upon completion of those projects,
the family court shall effect a supplemental equitable distribution in accordance with W.Va. Code § 48-7-104(I), i.e., the marital share of any manager fees earned or loss taken is based upon the percentage of construction spending for each project at the time of separation being 8.2% for WestVaco and 2.3% for The Point.
Subsequently, Ms. Wilson filed a motion pursuant to Rule 59(e) of the West Virginia Rules
of Civil Procedure asking the circuit court to alter or amend its March 25, 2009, order. On
June 4, 2009, the circuit court denied such motion. Thereafter, Ms. Wilson filed an appeal
with this Court.
[T]he 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 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.
[e]nterprise goodwill attaches to a business entity and is associated separately from the reputation of the owners. Product names, business locations, and skilled labor forces are common examples of enterprise goodwill. The asset has a determinable value because the enterprise goodwill of an ongoing business will transfer upon sale of the business to a willing buyer.
[P]ersonal goodwill is associated with individuals. It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people. Accordingly, the goodwill of a service business, such as a professional practice, consists largely of personal goodwill.
Goodwill has been described as the value of a business or practice that exceeds the combined value of the net assets used in the business. Goodwill in a professional practice may be attributable to the business enterprise itself by virtue of its existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business. It may also be attributable to the individual owner's personal skill, training or reputation. This distinction is sometimes reflected in the use of the term enterprise goodwill, as opposed to personal goodwill.
Enterprise goodwill is an asset of the business and accordingly is property that is divisible in a dissolution to the extent that it inheres in the business, independent of any single individual's personal efforts and will outlast any person's involvement in the business. It is not necessarily marketable in the sense that there is a ready and easily priced market for it, but it is in general transferrable to others and has a value to others.
In contrast, the goodwill that depends on the continued presence of a particular individual is a personal asset, and any value that attaches to a business as a result of this personal goodwill represents nothing more than the future earning capacity of the individual and is not divisible. Professional goodwill as a divisible marital asset has received a variety of treatments in different jurisdictions, some distinguishing divisible enterprise goodwill from nondivisible personal goodwill and some not.
Accordingly, we join the states that exclude goodwill based on the personal attributes of the individual from the marital estate.
[B]efore including the goodwill of a self-employed business or professional practice in a marital estate, a court must determine that the goodwill is attributable to the business as opposed to the owner as an individual. If attributable to the individual, it is not a divisible asset and is properly considered only as future earning capacity that may affect the relative property division.
In determining whether goodwill should be valued for purposes of equitable distribution, courts must look to the precise nature of that goodwill. Personal goodwill, which is intrinsically tied to the attributes and/or skills of an individual, is not subject to equitable distribution. On the other hand, enterprise goodwill, which is wholly attributable to the business itself, is subject to equitable distribution.
Well, [Inland Management] appear[s] to have responsibility for some financing of projects, and National Land Partners, in conjunction with Inland Management. Quite frankly, I don't know what the difference is between those companies, but they employee [sic] all the people, apparently own all the land, moving equipment, whatever else would be required of the development company.
Q. And would you agree with me that the Hunter Company of West Virginia and its success or failure, whether it's tied to the management agreement or operating independently outside of this management agreement its success or failures is largely tied to the effort of one person and that's Hunter Wilson?
A. I believe he's compensated for his efforts by Hunter Company of West Virginia. I believe that the value of Hunter Company of West Virginia derives primarily from the management contracts and the projects that are underway.
Q. Well other than Mr. Wilson is the CEO of the company. Is there anyone else who's [sic] efforts either are the major part of the success or the failure of this company other than what he does?
A. I believe I heard testimony yesterday that there were 20 other highly compensated employees as well as the management agreement with very experienced National Land Partners.
. . . we have everyone be an employee of Inland Management, and then the individual operating companies in the different states utilize the Inland employees to get their work done. Anyone who works on a project here in West Virginia, even though they're under Mr. Wilson's supervision, their paycheck is going to come from Inland Management. That way, we can give them a 401(K) that will be there indefinitely, health insurance, the typical employee benefits.
At the back office level which is based in Williamstown, Massachusetts, we pay all the bills once a week, we write the payroll checks, we take care of all of the accounting, we take care of all the marketing, we place classified ads, TV commercials, radio commercials, anything that's needed to market the project. We develop that in Massachusetts and take care of the . . . the placement. We perform financial statement preparation each month, tax return preparation each year, all of the things that aren't necessarily needing to be done locally.
In the event of the death or incapacitation of L. Hunter Wilson, [NLP] will hire a substitute person or entity to manage the project. In the event a substitute is hired, manager shall be entitled to its compensation as determined in Section 6 using Generally Accepted Accounting Principles consistently applied, however, the cost of such substitute manager shall be an expense of the project.
Q. If Mr. Wilson would die or become incapacitated under the . . . the terms of these management agreements, what would . . . what would the costs be to hire a substitute manager to replace him with? Would it be a salary basis, or how would that happen?
A. In our experience, we are unable to find people with all of his qualifications that we can hire for a salary. Those people are very accustomed to making large amounts of money, more than a salary would be worth, and they're . . . they are accustomed to getting a share of the profits. So, in our experience, we would end up paying some other replacement manager some percentage of profits, and it would be whatever we could negotiate.
Q. So, the basis of your conclusion that it would be difficult to find someone to manage this product for $300,000 a year is what again, sir?
A. It's not the amount you pay. It's the person that you find. There . . . it is a very unique job that he performs, and there are not a lot of people out there that can do it well. There are a lot of people in the world who would argue to you that they can perform that job, but we have a long list of people who have come and gone in our organization who proved they couldn't.
Thus, Hunter Co. does not receive any compensation for its services until a project or scheduled property is completed. This is called a management fee and consists of the net profits, if any, of a project or scheduled property as defined in the Management Agreements. If there are no net profits, Hunter Co. must absorb the losses of a project, as set out in the Management Agreements
The development and resale of a property can take many months or years, depending upon the size of the project, market factors, and other intangibles. Hence, there are development projects that were begun by Hunter Co., prior to the parties' separation, that have not matured or been fully realized at this date since the net profits, if any, are contingent upon the sale of the developed lots, completion of construction, or other factors.
Well the concept there would be if you were on the cash basis of accounting, which is what most of us understand, it's income when I got the money in my hand. It's an expense when I pay it out. Okay. But cash-basis accounting is not generally accepted accounting principles. Generally accepted accounting principles require that you match the expenses to the recognition of the income. So when you're talking about a development, a real estate development company like we have here, for instance if you haven't sold any lots yet but you've spent a million dollars building roads and putting in utilities, on a cash basis your financial statement would say I have zero income and a million dollars in expenses. I lost a million dollars. That would be on the cash basis. Under general accepted accounting principles, none of those costs would be expensed until a lot was sold.
Mr. Murray also described the risk of land development business as enormous during the early stages of a project. (See footnote 20) He explained that it is an extremely capital intensive business which starts with putting capital at risk before you even own a piece of property. He stated: It is not unusual for us to spend $50,000 to $100,000 getting a property surveyed, getting property soil tested, preparing drainage, engineering preliminary drawings to determine whether it's even feasible to own it. He added:
If we purchase the property we then have to pay the purchase price, in cash most of the time. Occasionally we find a seller who's willing to finance it, but that's rare. So, you now have spent money to determine if you want to own it. You then spend money to own it, and then you begin spending money to develop it so that you wait, sometimes, years before you see a profit.
The value of the Management Agreement to Hunter necessarily fluctuates year
by year due to the nature of this type of work and such fluctuations can be drastic. (See footnote 21) Moreover, it was agreed by the parties that the most accurate value of a project could be
determined at the completion of a project. This is also reflected by Ms. Wilson's testimony
during the May 8, 2008, hearing regarding her 2004 tax returns which showed significant
income resulting in net profits of nearly $12 million to Hunter. She explained that the large
payment that year resulted from an accumulation of work for the previous, lets's say, year
and a half, two years. It is safe to assume that had a court utilized the construction spending
theory in considering that project during its infancy, that Ms. Wilson would not have received
any of those profits regardless of any efforts from Hunter prior to payment of the net
profits. (See footnote 22)
As discussed, instead of identifying the amount of work that Hunter did as of the time of separation, and thereafter calculating to what extent that work was directly attributable to the final net profits received by Hunter on each individual project, Mr. Wilson's construction spending theory completely ignored the net profits paid at the completion of a project. Such a theory is only valid if the work done by Hunter in preparation for the sale of the lots had absolutely no value or nexus whatsoever to those later sales and/or profits. The very nature of this type of an agreement between Hunter and NLP is that significant amounts of time and effort are invested in the beginning that will, more often than not, result in substantial profits at the completion of a project. The construction spending theory ignores and attaches no value whatsoever to Hunter's efforts prior to the separation of the parties, and ignores the future payments of profits based, in part, upon those early efforts. Such a result is not equitable, and thus, is simply not reasonable. The circuit court's adoption of the construction spending theory was error and must be reversed.
remand by the circuit court clarifies the extent to which the circuit court did not understand May or even the implications of its own findings on reversal. If the Hunter Company did not possess enterprise goodwill its value was related only to its physical assets such as furniture and computers, and its cash on hand, as of the date of separation. There was never a dispute regarding the value of the physical assets and the cash on hand as of the date of separation. Retaining jurisdiction would only be appropriate if the Hunter Company possessed enterprise goodwill based upon the net profits to be paid in the future pursuant to the Management Agreement.
Likewise, Mr. Wilson's counsel seems not to recognize the possibility that any future profits
paid after the date of separation could actually relate back to the pre-separation efforts of
Hunter separate from a finding of enterprise goodwill. This is reflected in Mr. Wilson's
counsel's question to Ms. Wilson that: And today you're asking the Court to award the
sweat _ income from Mr. Wilson's sweat equity after 2005? Following an objection by Ms.
Wilson's counsel, Mr. Wilson's counsel continued: But Your Honor, the testimony is she
did nothing in the business after 2005, she just admitted that, obviously it came from his
work, so if she's asking for income after that date, she would have to be asking for exactly
what I asked her.
Hunter was a business that the parties started together and carried on together for nearly thirteen years prior to Ms. Wilson's filing for divorce. Throughout those years, Ms. Wilson claims to have sold land, arranged closings, run the office, and inspected land with Mr. Wilson. She further claims that as the business grew, she hired and managed the secretarial staff, trained them, and taught them the office procedures. In addition to her efforts directly related to Hunter, Ms. Wilson states that she spent a lot of time managing the
parties' personal affairs such as their 250 acre horse farm. She said this allowed Mr. Wilson to spend more time with Hunter.
As discussed ad nauseam herein, by the date of separation, Hunter had already invested a significant amount of time and preparation to which it is reasonable to assume some value is directly attributable to the final net profits of the projects in existence at the time of the parties' separation. Said another way, Hunter's efforts prior to the parties' separation led to significant profits totaling millions of dollars paid at the completion of the various projects. Given the specific facts of this case, this does not involve enterprise goodwill nor personal goodwill. Instead, it is a value placed on the actual services rendered by Hunter of which payments were delayed until the completion of the project as prescribed by the Management Agreement. While there are distinct differences, it is the type of arrangement that shares some similarity to a contingency fee arrangement between an attorney and client. In fact, Mr. Wilson argues in his brief to this Court:
Similar to a contingent fee contract entered into by an attorney before his/her separation, these development projects may be marital property or have a marital property component. However, their respective values will not be realized, and thus cannot be determined until the projects are completed under the Management Agreements. As such, this Court should retain and continue jurisdiction as to those development projects which are in whole or in part marital property, until the value of the net profits or losses can be properly determined and the value of the marital component ascertained.
In Graham v. Graham, 195 W.Va. 343, 345-346, 465 S.E.2d 614, 616-617 (1995), this Court explained:
Moreover, in a number of cases we have indicated that the existence of an ascertainable present value is not the key determinant of whether the interest should be considered marital property. Instead, we have stated that, given the broad legislative definition of marital property, several types of expectancies, or near expectancies, with little or no present value, are marital property for equitable distribution purposes. For example, a contingent fee contract entered into by an attorney during marriage was held to be marital property under W.Va.Code, 48-2-1(e)(1). Metzner v. Metzner, 191 W.Va. 378, 446 S.E.2d 165 (1994). Somewhat similarly, in Hardy v. Hardy, 186 W.Va. 496, 413 S.E.2d 151 (1991), we held that the economic losses attributable to a personal injury claim during marriage were property for marital distribution purposes. Lastly, and more significantly, in Smith v. Smith, 190 W.Va. 402, 438 S.E.2d 582 (1993), and a number of prior cases, we have held that pension benefits were property for marital distribution purposes. See also, Langdon v. Langdon, 182 W.Va. 714, 391 S.E.2d 627 (1990); and Cross v. Cross, 178 W.Va. 563, 363 S.E.2d 449 (1987).
In Syllabus Point 3 of Metzner v. Metzner, 191 W.Va. 378, 446 S.E.2d 165 (1994), this Court
explained, [w]hen a contingent fee contract is acquired during marriage, it is 'marital
property' within the meaning contemplated by West Virginia Code § 48-2-1(e)(1).
Moreover, [i]n the event that post-separation work on a case in which a contingency fee
award is ultimately obtained can be identified, such work must be accounted for and any
monies attributable to such work should be treated as separate property within the meaning
of West Virginia Code § 48-2-1(f) (1992). Syllabus Point 4, White v. Williamson, 192
W.Va. 683, 453 S.E.2d 666 (1994). In addition, [c]ontingent and other future earned fees
which an attorney might receive as compensation for cases pending at the time of a divorce
should be treated as marital property for purposes of equitable distribution. However, only
that portion of the fee that represents compensation for work done during the marriage is
actually marital property as defined by our statute. Because the ultimate value of a
contingent fee case remains uncertain until the case is resolved, a court must retain
continuing jurisdiction over the matter in order to determine how to effectuate an equitable
distribution of this property. Syllabus Point 5, Metzner.
Mr. Wilson specifically stated during the January 7, 2008, hearing that Ms. Wilson was entitled to half of the efforts of Hunter up to the date of separation. Mr. Wilson even acknowledged during his testimony that the Management Agreement itself had value. This is not in dispute. Mr. Wilson then said, and we agree, that his efforts after the date of separation are not subject to equitable distribution. Mr. Wilson further opined that the value of Hunter was its net profits, cash on hand, minimal furnishings, and any sums due to it from NLP based upon the Management Agreement. To this end, the Management Agreement is the exclusive methodology to earn money for Hunter. Accordingly, we now hold that profits of a business that are based upon a future contingency or obligation are subject to equitable distribution upon the dissolution of a marriage, but only that portion of the profits for work done during the marriage is actually marital property. In determining the amount of profits subject to equitable distribution, sound valuation methods must be used, and it may be necessary for a court to retain continuing jurisdiction over the matter until such profits are determined in order to effectuate an equitable distribution of this property.
In this case, Ms. Wilson, as co-owner of Hunter, was entitled to half of the manager fees for the work that was completed on the existing projects at the date of separation. Having found that the circuit court erred in its adoption of the construction spending theory, this case must be remanded to the family court to determine the value of those manager fees. (See footnote 23) Upon remand, and in light of the inadequacies of the evidence contained in the record below, the family court shall hold a new hearing for the purpose of allowing both parties to present new evidence, consistent with this opinion, with regard to the value of the manager fees.
While Ms. Wilson contends that the manager fees should be determined based upon the testimony of her expert, Mr. Apple, a review of that evidence reveals glaring problems that ultimately make his opinions and projections unreliable in their entirety with regard to an accurate determination of the actual value of Hunter at the time of the parties' separation. Mr. Apple explained during the May 9, 2008, hearing, that he based his valuation upon the individual project projections that were provided to him by Mr. Wilson. He also said that due to the way the documents were prepared, that it was impossible to separate projections from actual figures. Importantly, Mr. Apple declared that his valuation of Hunter for purposes of determining a value of future profits at the time of the parties' separation was limited to a review of only three projects, i.e., The Springs, WestVaco, and WestVaco Greenbriar, which is also known as Overlook at Greenbriar. In response to the questions from Mr. Wilson's counsel, Mr. Apple testified as follows:
Q. ...It's my understanding you looked at three projects. Were you aware that there were other projects that were also at some stage of construction or completion at the time of separation?
A. No. It's my understanding these were the only three that were incomplete at the date of separation.
Q. So you did not look at any documents or financial statements that relate to a subdivision known as [The] Point.
A. I have copies of some of those known as [The] Point. Yes.
Q. You have the documents, but you didn't use them in your analysis?
A. Correct. Q. And were you aware that there were engineering expenses, and work was being done on that project at the time of separation?
Mr. Apple was then questioned regarding another active project of Hunter known as Ashton Woods.
Q. There is also a project known as Ashton Woods. Were you provided documents about Ashton Woods?
A. I have seen documents on Ashton Woods. Yes.
Q. And so your analysis does not address the manager fees that were receivable or urged and any expenses that may have been charged against those manager fees?
A. No. It was my understanding that both of those projects manager fees had been paid prior to separation.
Q. Okay. And who gave you that information?
A. Don't know if I determined that from the documents or whether [Ms. Wilson] told me that. It could have been either one or both.
Q. Okay. So if, if there is evidence that these projects were ongoing; there were manager fees, either payable or receivable at the time of separation and after separation, would you agree that your report is incomplete?
When Mr. Apple was questioned further regarding the three projects he
actually did review, he explained that his projections were based upon information that was
dated as of October 2007, and that those projects were not completed at that time. In
response to questions by Mr. Wilson's counsel, Mr. Apple agreed that if he had used actual
numbers of closed projects as a part of his valuation, where there was a final determination
of the amount of manager fees that had actually been earned, versus projections of what that
number would be, that the actual numbers would have been more accurate. When questioned further regarding his projections for the project known as The Springs, he admitted that he did not know anything regarding whether or not the roads were finished or whether or not the infrastructure was completed. He also stated that he did not know any information as to what stage of completion that project was at the time of his valuation. Moreover, in providing a value on The Springs project, he based his opinion upon projected sales of lots with little to no consideration given to future project debts or payments to NLP even though he recognized during his testimony that no net profits are paid until the debts are paid off. Mr. Apple agreed that his opinions are projections and are not based on the actual final numbers on any of these projects. Mr. Wilson's counsel then asked Mr. Apple:
Q. I guess just to make sure we're all on the same page, are you aware that the final information on these projects that have been closed was provided to Ms. Wilson's attorneys, you just haven't analyzed it; is that right?
A. I don't know.
It is clear that Mr. Apple's opinion failed to consider at least three projects that
were active at the time of the parties' separation. Moreover, with regard to the projects that
he actually did review, Mr. Apple admitted that a better source for valuation would have been
the consideration of the final information on those projects at the time of their completion.
Furthermore, evidence was admitted showing that much of the information, which was not
considered for his expert opinion, was in Mr. Apple's possession and/or in the possession of
Ms. Wilson's counsel prior to his testimony. Moreover, it was agreed upon at a March 20, 2006, hearing, more than two years prior to Mr. Apple's May 9, 2008, testimony, that Mr. Apple was permitted to have direct contact with Mr. Wilson at any point to expedite the delivery of any documents that he needed to prepare his opinion regarding the value of Hunter's manager fees at the time of the parties' separation. (See footnote 24) Mr. Apple's opinion further failed to take into consideration numerous future costs of the various projects that he did review, which necessarily resulted in inaccurate and inflated projected net profits. (See footnote 25) He also failed to consider in his opinion a value of Hunter's manager fees separate and distinct from any goodwill at the time of the parties' separation. (See footnote 26)
Based upon the record below, which includes Mr. Apple's complete testimony before the family court, it is clear that without reviewing all of the projects in process at the time of separation, it is impossible to render an accurate and reliable opinion within a reasonable degree of accounting certainly with regard to the value of Hunter's manager fees at the time the parties separated. Moreover, with regard to the number of projects, the record below demonstrates there has consistently been, and appears to still be, significant confusion among the family court, the circuit court, both parties, and the numerous witnesses regarding even the actual number of active projects which had begun prior to the parties' separation. This is of particular import given the fact that the value of the manager fees can only be determined by considering the work done for each project at the date of separation.
An example of the confusion, with regard to the number of projects, can be found in a May 12, 2008, Joint Trial Order, wherein the family court states: The parties agree there were four (4) said projects as of the date of separation, being Overlook at Greenbriar, The Springs a[t] Shepherdstown, West Vaco I and The Point. Petitioner alleges there may be another West Vaco project. That same language citing the agreement that there were four projects is also included in the family court's May 8, 2008, pretrial order. Neither order referenced two other projects known as Ashton Woods and Crossings on the Potomac. Next, during his opening statement at the May 8, 2008, hearing, Mr. Wilson's counsel states: So there will be testimony about these various construction projects and to be more specific, Your Honor, there were five projects that were in existence and were in some stage of development at the time the parties separated. Mr. Wilson's counsel then listed those five projects as: Ashton Woods, Crossings on the Potomac, Westvaco, Springs at Shepherdstown, and Overlook at Greenbrier. Mr. Wilson's counsel did not mention the project known as The Point. Then, within the family court's November 21, 2008, final divorce order, the family judge references five projects. Nonetheless, without any discussion or explanation, the circuit court, through its March 25, 2009, final order, states as fact numerous times that there were six pending projects at the time of separation. Then, on three occasions during the body of the circuit court's order, wherein the family court's order was reversed, the circuit court stated emphatically that at the time of the parties' separation, Hunter was involved in the management of six real estate projects and listed them as: Ashton Woods, Crossings, Overlook at Greenbrier, The Springs at Shepherdstown, WestVaco, and The Point. Finally, in their briefs before this Court, both parties maintain that there were six projects in existence at the time of the parties' separation. It is difficult to understand how so many individuals could have failed to reconcile this problem given the fact that this case has been ongoing for more than five years (See footnote 27) since the parties' May 31, 2005, separation. (See footnote 28)
This Court has explained that: Equitable distribution . . . is a three-step process. The first step is to classify the parties' property as marital or nonmarital. The second step is to value the marital assets. The third step is to divide the marital estate between the parties in accordance with the principles contained in [former] W.Va.Code, 48-2-32 [now W.Va.Code § 48-7-103]. Syllabus Point 1, in part, Whiting v. Whiting, 183 W.Va. 451, 396 S.E.2d 413 (1990). Unfortunately, as discussed herein, the parties submitted little credible evidence as to the value of Hunter's manager fees. It is the responsibility of the parties, not the court, to propose values to marital property and the parties are bound by the evidence they present. As we said in Syllabus Point 8 of Mayhew v. Mayhew, 197 W.Va. 290, 475 S.E.2d 382 (1996), [t]he burden is on both parties to the litigation to adduce competent evidence on the values to be assigned in equitable distribution cases. Likewise, in Syllabus Point 3 of Roig v. Roig, 178 W.Va. 781, 364 S.E.2d 794 (1987), this Court stated, When the issue in a divorce proceeding is the equitable distribution of marital property, both parties have the burden of presenting competent evidence to the trial court concerning the value of such property.
Based upon all the above, in particular our conclusion that the value of Hunter's manager fees are separate and distinct from a determination of personal or enterprise goodwill, this case will be remanded to the family court for further proceedings consistent herein. To that end, and based on the lack of accurate and/or complete information contained in the record by way of testimony or documentary evidence on this issue, the family court must take additional evidence, solely for the purpose of making appropriate calculations to determine the value of Hunter's manager fees at the time of the parties' separation for a final determination regarding that value for purposes of equitable distribution. The evidence in the record indicates that four of the six projects are completed, while the remaining two projects, WestVaco and The Point, were 95.3 percent and 82.3 percent complete, respectively, as of March of 2008. Given that it is now more than two- and-one-half-years later, it may be that all six of the projects are now completed, which will provide for a determination of the value of Hunter's manager fees at the date of separation. In the event that either or both of the two projects remain unfinished, the family court shall retain jurisdiction and make a final determination upon their completion.
In summary, the circuit court erred in denying Ms. Wilson's motion for reconsideration. The circuit court did not abuse its discretion in determining that Hunter did not have an enterprise goodwill value for purposes of equitable distribution. Therefore, the circuit court properly reversed the family court's November 21, 2008, holding which ordered Mr. Wilson to pay Ms. Wilson the sum of $4,914,582.50 based upon a finding of enterprise goodwill. However, the circuit court did commit reversible error in its order by requiring Ms. Wilson to pay Mr. Wilson the sum of $894,286.00 based upon a construction spending theory. This Court has determined that Hunter's manager fees on the projects at the date of separation are subject to equitable distribution. However, it is impossible to calculate the fees based upon the current evidence of record. Thus, after thoroughly reviewing the record and considering all of the parties' arguments, this Court remands this case to the family court to award the appropriate relief consistent with this opinion. Upon remand, the family court shall hold a hearing for the sole purpose of determining an accurate value of Hunter's manager fees at the time of the parties' May 31, 2005, separation. After the evidence is taken, the trial court should make thorough findings of fact and conclusions of law in reaching its valuation, and should then proceed to the division of any such fees that are ascertained to be marital property.
Affirmed, in part, reversed, in part, and remanded with directions.