Ruling on goodwill could affect many state businesses

By Jim Wallace | Nov 20, 2009

CHARLESTON -- The West Virginia Supreme Court is expected to decide soon whether it will hear an appeal in a divorce case that could have implications for many businesses in the state.

At issue in the case of Donna F. Wilson v. Leon Hunter Wilson is how to value the Hunter Company of West Virginia Inc., the real estate development business they jointly owned. More particularly, the issue is whether the company possessed "enterprise goodwill" or merely the "personal goodwill" of the husband.

Goodwill is the value of intangible business assets. Enterprise goodwill is based on a business's existing arrangements with customers, suppliers and other entities, as well as its anticipated future customer base because of factors attributable to the business. Therefore, it is marital property subject to equitable distribution. However, personal goodwill depends on an individual's attributes or skills, so it is not an asset that can be divided and distributed equally.

The Berkeley County Family Court determined that the Hunter Company had enterprise goodwill because it existed regardless of Mr. Wilson's skill and reputation and put a value of $9,381,420 on it. That meant that Mrs. Wilson, who now goes by the name of Donna Miller, would get $4,914,582.50 for her share of the company.

But the Circuit Court in Berkeley County reversed the case, accepting the argument of Mr. Wilson that the value of the company should be based on personal goodwill. In other words, if he died, the company also would cease to exist. The circuit court decided not only that the wife should not receive the more than $4.9 million awarded by family court but also that the husband should be awarded $894,286 because of overpaid management fees at the time of the couple's separation.

With a difference of more than $5.8 million between the two rulings, the Wilson case represents one of the biggest West Virginia divorce cases involving business interests since the case of Ted and Margaret Arneault. Ted Arneault is the former chief executive officer of MTR Gaming Group Inc., which operates Mountaineer Race Track & Gaming Resort in Chester and other casinos.

The state Supreme Court received the Arneault case after the family court and circuit court in Hancock County reached opposite decisions on whether Margaret Arneault should receive half of the 13.25 percent of MTR stock Ted Arneault owned. Among Mr. Arneault's arguments was that dividing his stock shares could harm the company and perhaps cost jobs. The Supreme Court ruled in October 2006 in favor of Mrs. Arneault, who ended up selling her 1.65 million shares of MTR a few months later.

The Wilson case is different than the Arneault case. For example, the Arneault case involved a publicly traded company while the Wilson case involves a privately held company. However, both cases arguably demonstrate the political ramifications of seeking a fair result in equitable distribution in a divorce setting when one of the parties involved is a prominent person.

Beyond that, Donna Wilson's lawyers contend that the Wilson case is different than previous cases decided by the Supreme Court. In the May v. May case from 2003, the court ruled that enterprise goodwill is part of a marital estate but personal goodwill is not. The court again dealt with that issue in the Helfer v. Helfer case from 2007. Both cases are distinguishable because they dealt with professional practices – a dental practice in the May case and a chiropractic practice in the Helfer case. The court has not yet dealt with the issue in relation to non-professional practices, so Mrs. Wilson's lawyers contend the Wilson case is one of first impression in West Virginia.

Some of the key arguments in the Wilson case revolve around whether the Hunter Company has many employees or only one employee, Hunter Wilson. The lawyers for the wife contend that the company has 20 or more employees, some of whom earn more than $300,000 a year, and cite Hunter Wilson's testimony to that effect in family court.

The lawyers on the other side contend that the company technically has no employees other than Hunter Wilson, because the others are all employees of Inland Management Co., which is a subsidiary of National Land Partners, LLP. National Land Partners chose Wilson to manage several real estate development projects in West Virginia, and Mr. Wilson's lawyers argue that it is the Hunter Company's only customer.

Likewise, the two sides disagree over whether the Hunter Company operates in several business locations and with several product names or only one location and one name. They also dispute the testimony of an expert, particularly that of a certified public accountant, Kenneth Apple, who determined the value of the company that the family court used in awarding almost $4.9 million to Donna Wilson. At trial in the family court, Mr. Wilson did not object to the testimony of Apple nor did he present a countervailing expert on the subject of enterprise goodwill and value.

As shown by the $5.8 million difference between the family court and circuit court decisions, the Supreme Court could make a big difference in the financial affairs of the Wilsons. More importantly, the court could settle for the future how to handle assets in non-professional, privately held companies like the Hunter Company.

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