The Valuation of a Law Practice in a Divorce in Arizona
Kent Marital Interest in Professional Partnership
Generally, in Arizona, a married couple have a community interest in the partnership interest one spouse holds in a professional partnership, like a law firm. In the case of Kent v. Carter-Kent, 235 Ariz. 309, 332 P.3d 56 (App. 2014), the Arizona Court of Appeals discussed issues about the valuation of the couple’s interest in a law firm. Christine Carter-Kent and Richard Kent were married for 15 years when Richard filed for a divorce. He was an attorney and a 50% shareholder in the law firm of Kent & Wittekind, P.C. The issues of this case involved the valuation of the community interest in the law firm and in a settlement, the law firm had obtained in the amount of $1,447,500 in a settlement in the Turner case. Christine always treated them as two assets in the divorce.
Procedure in the Case: The Decree of Dissolution of Marriage
Both Christine and Richard agreed that the community had an interest in the law firm. That is, they agreed that Richard’s interest in the firm was a community property interest owned by both spouses and that the community interest had to be divided in the divorce. However, they disagreed on how to value that interest. The court held a two-day trial on the issues in which Christine’s expert assessed the value at $920,350, while Richard’s expert placed the value at $701,000. In August 2009, the court entered an order that Christine and Richard were each entitled to 25% of the net proceeds recovered by the law firm in the Turner settlement. Richard contested this but his argument was rejected.
Two months later, the court entered a decree awarding Richard all of the interest in the law firm. The court ordered a $460,000 “equitable offset” for Christine’s share. It reserved jurisdiction to determine the community’s interest in the Turner settlement and the law firm’s value in light of the settlement and the costs incurred.
Procedure in the Case: The Amended Decree
Christine asked the court to amend the decree to make the $460,000 a judgment in her favor. The court did this, and Richard began paying that judgment. Several months after that, Christine asked the court to determine the value of her interest in the settlement. Richard argued that the settlement was a law firm asset and that the couple’s interests in the law firm had been resolved in the earlier decree that Christine had not appealed. Christine moved for a new trial under Rule 83(A)(6) of the Arizona Rules of Family Law Procedure, saying that she had been deprived of her right to “collect her fair share” of the value of the law firm. The court rejected this, saying that Christine could not now claim that the settlement was an element of the law firm value since she had argued the opposite earlier. Christine appealed the denial of the motion for new trial.
The Court of Appeals Affirms
The Court of Appeals explained that the lower court initially intended to revisit the issue of the valuation of the law firm and the settlement and enter another order. That was why it had given Christine an equitable offset, rather than a judgment. When at Christine’s request the court made the equitable offset a judgment, it constituted a final determination of the value of the law firm and her interest in it. Christine argued that the August order (granting her 24% of the settlement) was “res judicata,” which means an earlier, controlling order. However, since the August order did not resolve all issues in the litigation, it was not final and therefore could not be res judicata. Rather it could be altered by the court at any time. When the court granted Christine’s motion to make the equitable offset a judgment in her favor, it amended the August order by entering a final valuation of the law firm, of which Christine’s portion was $460,000. Christine did not appeal that valuation and could not seek reconsideration of it in a motion for new trial.