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June 30, 1995


Appeal from the Circuit Court of Cook County. Honorable Richard Kelly, Judge Presiding.

The Honorable Justice McCORMICK delivered the opinion of the court: Campbell, P.j., and DiVITO, J., concur.

The opinion of the court was delivered by: Mccormick

JUSTICE McCORMICK delivered the opinion of the court:

Respondent Henry Head appeals from a judgment entered after our remand of this cause. ( Head v. Head (1988), 168 Ill. App. 3d 697, 523 N.E.2d 17, 119 Ill. Dec. 549 (Head I).) The sole issue on retrial was the value of Henry's medical practice for the purpose of the distribution of marital assets. The trial court found that the medical practice was worth $76,920, which consisted of $58,000 in tangible assets and $18,920 in intangible assets. The trial court also awarded petitioner Suzanne Head $47,679 in attorney fees. Henry challenges both of these findings. We modify the trial court's finding relative to the value of Henry's medical practice and affirm the award of attorney fees.

Prior to Head I, the trial court had found, pursuant to a stipulation by the parties, that Henry's interest in the tangible assets of the professional corporation was valued at $58,000. Henry argued that his interest in the tangible assets of the professional corporation constituted the sole value of his medical practice. Suzanne presented expert testimony that the practice was worth $515,000 based upon a "capitalization of earnings" valuation method. The trial court rejected Suzanne's valuation, but ruled that considering Henry's level of skill in the sub-specialty of gastroenterology, as well as the above average earnings of his practice (which he shared with two other doctors), the value of the medical practice was $175,000.

In Head I, we held that the $117,000 in excess of the $58,000 in tangible assets applied by the trial court was based solely upon Henry's ability to acquire income, also called "professional goodwill."* Section 503(d) of the Illinois Marriage and Dissolution of Marriage Act (Dissolution Act) (Ill. Rev. Stat. 1985, ch. 40, pars. 503(d)(7), (10)) requires the court to consider the sources of income and earning power of the spouses in apportioning the total marital assets between the parties. Section 504(b)(1) of the Dissolution Act (Ill. Rev. Stat. 1985, ch. 40, par. 504(b)(1)) provides for awards of maintenance, based, inter alia, on the future earning capacity of the parties. We held that it was improper to value the professional goodwill of the corporation both in the valuation of the medical practice as an asset and again as potential income for the purpose of apportioning the total marital assets and awarding maintenance. We therefore remanded the cause "for further proceedings as to the division of the marital assets consistent with the views expressed" in the opinion. Head I, 168 Ill. App. 3d at 704.

On remand, Suzanne prepared to present expert testimony that a medical practice can have value above that of its tangible assets that is not based upon the professional goodwill of the practitioner. Because this intangible assets value, which Suzanne's expert later identified as "enterprise goodwill," is not premised upon the income potential of the professional, Suzanne argued that it is divisible marital property under section 503(d) of the Dissolution Act. Henry filed a motion in limine seeking to exclude evidence of the intangible assets value, relying on our statement in Head I that "the value of tangible assets is a proper basis for valuation of a medical practice." ( Head I, 168 Ill. App. 3d at 700.) Henry urged the trial court to value his medical practice at $58,000, the value of the tangible assets.

The trial court denied Henry's motion, ruling that Head I only restricted it from considering evidence of goodwill if that evidence included future earning potential. The trial court, without referring to the goodwill either as professional or enterprise goodwill, agreed with Suzanne that to the extent that evidence of goodwill did not include future earning potential, the court was required to consider it as part of the valuation of the practice. According to the trial court, an example of the goodwill it could consider would be "the value of the professional corporation if the Respondent were to sell his interest in the corporation and then leave the corporation without giving a covenant not to compete." The trial court reasoned that this value might "arise from or be based, in part, upon the location of the [medical] office, the transferrable affiliation of the practice, the administrative facilities of the practice, and/or a patient list." The trial court further supported its ruling based on its observation that this court had stated only that tangible assets was "a," as opposed to "the," proper basis for valuing a professional corporation, and ruled that it would permit Suzanne to present expert testimony valuing Henry's practice using a capitalization of earnings method so long as it did "not in any way reflect the future earnings" of Henry. The trial court further ruled that this court's opinion in Head I was not res judicata of any reconsideration of the value of the practice above tangible assets because neither the trial court nor this court had considered the issue of goodwill, excluding Henry's earning capacity.

Subsequent to the trial court's order, but prior to retrial, our supreme court issued In re Marriage of Zells (1991), 143 Ill. 2d 251, 572 N.E.2d 944, 157 Ill. Dec. 480, in which it held, as we did in Head I, that professional goodwill could not be considered in the valuation of a professional business:

"Adequate attention to the relevant factors in the Dissolution Act results in an appropriate consideration of professional goodwill as an aspect of income potential. The goodwill value is then reflected in the maintenance and support awards. Any additional consideration of goodwill value is duplicative and improper." ( Zells, 143 Ill. 2d at 254-56.)

Pursuant to Zells, Henry filed a renewed motion in limine seeking to exclude consideration of any goodwill in the valuation of his practice, again urging the trial court to fix the value of his practice based upon his $58,000 stipulated interest in the tangible assets of the professional corporation. The trial court continued this motion, and the parties went to trial on the issue of the value of the medical practice, which included Suzanne's evidentiary presentation of goodwill.

James J. Unland, an expert in medical practice transactions, testified on behalf of Suzanne. His conclusions were based on an excess net cash flow methodology, which is equal to the return to a dispassionate investor after subtracting overhead and physicians' salaries from revenues. Unland testified that the transferrable value in a medical practice is the goodwill of the practice. According to Unland, all goodwill is enterprise goodwill. He acknowledged that his definition of enterprise goodwill could include, depending on the circumstances, the earning capacity of the professional. The trial court informed Unland that, under Zells, such earning capacity was not to be considered in valuing the enterprise goodwill of Henry's practice. Unland thereupon calculated the enterprise goodwill of Henry's practice by attempting to exclude Henry's earning capacity, and including, among other things, its tangible assets; its size; its affiliation with Northwestern University; and the transferability of its patient base. Unland concluded that the enterprise goodwill in Henry's share of the practice was $510,000.

The trial court ruled that Suzanne had established that a medical practice has a cash value beyond the tangible assets and the earning potential of the professional; however, it also found that Unland's testimony had failed to establish that value without taking into consideration Henry's earning potential. Thus, the trial court rejected Unland's evaluation. Although conceding in its order that there was an "absence of evidence" on the intangible value of Henry's medical practice, the trial court nevertheless ruled that it was not precluded from finding such a value. The trial court stated that its task was "to place a value [on the practice] that is large enough to be at least moderately realistic, yet small enough so that in no way will it conflict with our supreme court's concern regarding double-counting." The trial court concluded that "such a value, to meet the above standards, should be between one-third and two-thirds of Henry's income at the time. Therefore, the value is set at fifty (50%) percent of Henry's 1983 income ***, being $153,840.00 divided by 2 equals$76,920.00." In light of its valuation, the court decided not to change the remaining property division or maintenance provisions, but merely reduced Henry's share of the marital estate.

Henry claims that our mandate in Head I restricted the trial court from considering enterprise goodwill. He asserts that our statement that tangible assets was "a proper basis" upon which to value a medical practice ( Head I, 168 Ill. App. 3d at 702, 704) limited the trial court on remand to finding that the practice was worth $58,000 and calculating any necessary adjustments to the distribution of the marital assets. Suzanne insists that this court's mandate was one which directed the trial court to ...

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