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SUSAN MICHELLE DAY V RICKY ALAN ENGVALL
State: Michigan
Court: Court of Appeals
Docket No: 272478
Case Date: 10/16/2007
Preview:STATE OF MICHIGAN
COURT OF APPEALS


SUSAN MICHELLE DAY, Plaintiff-Appellant, v RICKY ALAN ENGVALL, Defendant-Appellee.

UNPUBLISHED October 16, 2007

No. 272478 Kent Circuit Court LC No. 02-009694-DM

Before: Whitbeck, C.J., and Talbot and Fort Hood, JJ. PER CURIAM. Plaintiff appeals as of right the judgment of divorce asserting the trial court erred in the valuation and distribution of assets. We affirm. I. Marital History and Assets The parties were married on June 26, 1995, and separated in September 2002. At the time of separation, plaintiff was 38 years of age and defendant was 52 years of age. This was plaintiff's third marriage and the second marriage for defendant. Plaintiff and defendant are the parents of one minor child, Olivia, born on March 24, 2000. Prior to entry of the judgment of divorce, plaintiff gave birth to another child who is not a product of the marriage relationship. Plaintiff initiated divorce proceedings on October 1, 2002, but due to the protracted nature of the litigation, which spanned 13 days of trial, and other delays a judgment of divorce was not entered until July 11, 2006. At the time of the marriage, defendant was the sole owner of a manufacturer's representative business, Aidamark, Inc., and plaintiff was completing her medical residency in orthopedic surgery. Upon her residency completion, plaintiff worked for another physician for approximately one year, but in 1998 initiated her own medical practice. In 2001, plaintiff changed the name of her practice to Bone and Joint Care of West Michigan, Inc. and took on another physician as a partner. In 2002, plaintiff undertook extensive remodeling of her office suite, which included movement of walls, addition of an on-site x-ray machine with lead-lined walls and upgraded office and medical equipment. Plaintiff alleged the remodeling was necessary in order to maintain a viable and competitive orthopedic practice. When the parties married, defendant owned the marital home without any indebtedness or mortgage for the property. The appraised value of the home at the onset of the marriage was -1-


$310,000. Defendant originally purchased the home in 1984 for $75,000. In 1986, defendant completely replaced the structure at a cost of $225,000. Following their marriage, in 1995, defendant added plaintiff's name to the deed for the home and the parties obtained an $117,000 mortgage and $100,000 line of credit for the property. The purpose of the mortgage was to consolidate plaintiff's medical school debt, which resulted in a cost savings through an overall reduction in the amount of monthly payments and receipt of a mortgage interest deduction. Part of the line of credit was used to perform remodeling on the home. In 2000, the parties procured another mortgage of $210,000 and undertook additional remodeling, adding approximately 1,000 square feet to the home at a cost of $157,000. Monies from the new mortgage were also used to pay off the outstanding balance of the 1995 mortgage. Overall, the parties estimate that $362,100 was spent on remodeling and improvements to the home during the term of the marriage. At the time of their separation, $200,000 remained owing on the current mortgage. Both parties retained certified public accountants (CPAs) as experts to conduct valuations of plaintiff's business during the divorce proceedings. Defendant's expert, Eric A. Adamy, opined that the total value of plaintiff's medical practice was $343,000, with plaintiff's share being $185,220. Adamy used a fair market value approach to ascertain the value of the assets. Adamy opined that the value of the partners' net capital, adjusted for uncollected receivables, was valued at less than zero. Adamy further believed that many of plaintiff's remodeling and other identified expenses were "discretionary" and that it was necessary to add back $266,830 of the remodeling debt in addition to present retirement benefits payable of $90,961 to obtain the true value of the business. Adamy acknowledged that the $90,961 for retirement benefits payable was a legitimate debt, but opined that the failure of plaintiff's business to pay this debt earlier in their fiscal year resulted in the inflation of business liabilities and the artificial reduction of the value of the practice. Specifically, Adamy stated: Had the partners made the payment during the year, it would not show up as a liability . . . . I think it's misleading to show that that retirement plan contribution is deduction from the value of the practice, when if it had been paid at another time during the year, rather than being shown as a liability, it would not represent a deduction from the value of the practice. So, it's really a timing issue that has nothing to do with the value of the practice itself. Adamy estimated total expenses for the practice of $440,000, including $30,000 for plaintiff's vehicle, $47,000 for furniture, and $169,000 in equipment and remodeling costs of $187,000. In adding back remodeling expenses of $266,830, Adamy explained that he believed this "portion of the expenditures were for cosmetic purposes" and added no positive economic value to the practice and, therefore, should not be used to determine the valuation of the business. Plaintiff's expert, Leslie N. Prangley, used an accrual basis approach along with straightline depreciation, finding the total value of the business assets to be $312,846. Prangley determined the total liabilities of the business amounted to $303,468, resulting in plaintiff's practice having a value of $9,378. Prangley explained that the low value was in part attributable to the fact that the practice was relatively new coupled with plaintiff's lower than average wages as an orthopedic surgeon due to her higher percentage of geriatric patients, which generated lower fees based on Medicare reimbursement rates. Although in agreement on many aspects of their respective valuations, Prangley criticized Adamy's approach stating, in relevant part:

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The major flaw I saw in removing the debt was that the debt was removed to increase the equity, but the assets that the debt related to were not removed. So you took out the debt that was owed on the asset. But, you didn't take the asset out. I didn't think that was at all correct. In sum, Prangley believed that Adamy's methodology of removing the liability while retaining the asset values resulted in "overstating the equity" in the business. II. Trial Court Ruling On May 26, 2006, the trial court issued its bench ruling, resulting in a 105-page transcript detailing testimony during the course of trial. The trial court did attribute fault for the breakdown of the marital relationship to plaintiff based on her participation in extramarital affairs and lack of "regret or remorse" for its impact on the marriage. In reference to the distribution of assets, the trial court awarded defendant the marital home along with responsibility for the outstanding $200,000 mortgage. The trial court noted that three separate appraisals of the home ranging from $427,000 in November 2002, to $460,000 in January 2003 and $450,000 in November 2004 were submitted by stipulation of the parties. The trial court elected to use the appraised value of $450,000 for the property. In making the award, the trial court indicated, "I have to give Mr. Engvall credit for the $310,000 asset that he brought into the marriage here." Despite an increase in equity over the course of the marriage of $140,000, the trial court observed that a debt of $200,000 remained "due and owing" resulting in a "$60,000 shortfall." The trial court indicated, in relevant part: I will not give any credit or back anything out with respect to the $117,000 loan or the $110,000 in student loans, because it was a marital decision for the two of them to pay off the student loans. There was no intent in keeping that separate. The decision was made during the course of the marriage . . . that it was only economically wise to roll this into a mortgage, get the mortgage deduction on it, and pay less then you would pay otherwise. But, this was a marital decision to pay that off. If you want to look at it technically, Mr. Engvall, although he claims he's still paying on it, whether you can still track that money or not, he's getting the house, and he's stuck with the debt. As a result, plaintiff did not receive any proceeds from the marital home. In determining the proper valuation of plaintiff's business, the trial court adopted the methodology of defendant's expert, Adamy. Specifically, the trial court indicated it carefully reviewed the issue pertaining to the $226,000 of debt incurred for the business and testimony that profitability for the business was significantly lower than the national average for similar practices, ruling, in relevant part: I also looked very carefully at the issue regarding the $226,000 in debt. I believe that if you look at the ratios that we were talking about before, that Dr. Day's income is 25 percent of income revenue generated by the business.

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It made a lot of sense that Mr. Adamy was talking about the fact that that number would be higher, more consistent with the national average if the debt load on that business wasn't so high. That did make a lot of sense to me. *** I had a chance to look over the assumptions made by the accountants. I believe that both of them made good points, but with respect to the huge debt to revenue ratio without a benefit to the practice within the next two to three years after the renovation, that Mr. Adamy's valuation of Bone and Joint Care appeared to be more equitable and made more sense to me than Mr. Prangley's. In reference to plaintiff's retirement accounts, the trial court determined that her Schwab account was a marital asset valued at approximately $60,000 at the time the parties separated. The trial court noted that defendant had given plaintiff $20,000 in advance, after she left the marital home. The trial court construed this account as a marital asset and opined that because plaintiff "cashed in" and "used it, I think it has to be dealt with in the same fashion as the $20,000 advance. It's not a gift. It's a marital asset." The trial court also determined that marital assets and funds were placed in plaintiff's "Bone and Joint Care 401-K." Ultimately, the trial court developed a "ledger" for allocation of assets and liabilities to each party. In arriving at the final distribution of assets, the trial court ruled: Her side, Bone and Joint Care of West Michigan, 185,220; marital home, 0; Schwab retirement $49,607.45, Bone and Joint Care of West Michigan 401-K, 141,000; cash advance, 20,000; 2002 tax refund 18,475; IRS repayment, and then I put this in parenthesis, $19,556.32, for a grand total of $394,746.13. On Mr. Engvall's side of the equation, I've got Aidamark, I have Mr. Prangley's value of 13
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