In a 53-page decision that at times reads like a partnership primer, the New Jersey Appellate Division has tackled the tricky issue of the monetary value of a lawyer’s practice and in the process upended many aspects of a New Jersey Big Law attorney’s divorce judgment.
The court on Tuesday reversed the trial judge’s accepted valuation of the lawyer’s stake in his firm—including “the value of goodwill defendant had as an equity partner in the firm”—in Slutsky v. Slutsky, a published decision.
Defendant Kenneth J. Slutsky has been with his firm since 1978, and an equity partner since 1984, the court said.
The decision doesn’t name the firm, though records, including the firm’s own website, confirm that it is Lowenstein Sandler. Slutsky handles complex tax matters and has billed 2,000 hours per year, according to the decision.
“In this case, the ultimate question that must be resolved is the value of goodwill defendant had as an equity partner in the firm,” Appellate Division Judge Marie Lihotz wrote, joined by Judges Richard Hoffman and Mary Gibbons Whipple. “In concluding goodwill existed as a component of value of this marital asset, the trial judge failed to make specific factual findings to support the value of attendant goodwill.”
According to the opinion, Slutsky’s wife, Nancy G. Slutsky, filed a complaint in 2008 seeking dissolution after a 30-year marriage, and the matter, apparently contentious and slow-moving, was the subject of a 19-day trial.
Both sides appealed elements of the May 2014 final judgment and other orders entered by Morris County Superior Court Judge Philip Maenza—including the calculation of the value of Slutsky’s law practice at Roseland-based Lowenstein Sandler, on which the parties’ experts varied significantly.
The court described at length Slutsky’s compensation model and partnership status at the firm, referencing trial testimony from its chief administrative officer and the parties’ accounting experts: Ilan Hirschfeld, for Nancy, and Thomas Hoberman, for Slutsky.
As of the firm’s 2013 change to a limited liability partnership from a professional corporation, Slutsky was required to make a $300,000 capital contribution. The calculation of an equity partner’s interest in the firm was referred to as the “termination credit account”; that amount was reduced each year by a partner’s draw. Then the compensation committee, at year’s end, evaluated hours billed and other factors to divvy up profit and replenish the termination credit accounts, according to the opinion.
The opinion also noted that the firm allowed partners with the firm for at least 30 years to take senior status, which entitled them to significant bonuses—a milestone that Slutsky reached at the end of 2013.
Slutsky, the court also noted, did not originate business but billed many hours in a highly specialized practice.
Hirschfeld ultimately calculated the value of Slutsky’s termination credit account at $292,908, and assigned a value of $1.185 million to the value of Slutsky’s interest in the “goodwill” of the firm—which he defined as “business reputation, national name recognition, and established relationship with its clients and employees,” according to the opinion.
Hoberman set the value of Slutsky’s termination credit account at $285,000, and opined that Slutsky’s interest in the firm’s goodwill was of no monetary value.
Maenza assigned a valuation of $350,830 to the account and $1.198 million to his interest in the firm’s goodwill, subtracted the $300,000 capital contribution from that sum, and awarded Nancy half the remainder, according to the opinion. The former two sums excluded voluntary adjustments made by Hirschfeld after cross-examination, the court said.
The Appellate Division reversed, holding that Maenza “failed to analyze the differences in these [expert] opinions” and apparently “misunderstood Hoberman’s conclusion, as suggesting goodwill did not exist for the firm.”
Hirschfeld admitted his unadjusted calculations were flawed, and, “inexplicably, the trial judge overlooked this evidence and incorporated the original calculations,” Lihotz wrote, also noting that “no reasons were offered for why Hoberman’s challenges to Hirschfeld’s value apparently was found unpersuasive.”
The opinion goes on to lay out how an equity stake should be valued on remand, and in similar cases in the future.
The panel called it a “settled legal question that intangible goodwill may attach to an attorney’s interest in a professional practice,” pointing to the state Supreme Court’s 1983 decision in Dugan v. Dugan—which defined goodwill as “essentially reputation that will probably generate future business.”
The Slutsky court, noting that future earning capacity itself does not amount to goodwill, further quoted from Dugan: “[W]hen that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value. When that occurs the resulting goodwill is property subject to equitable distribution.”
It would be “inequitable to ignore the contribution of the non-attorney spouse to the development of that economic resource,” the Dugan court added.
Dugan involved a solo practitioner, Lihotz wrote, but in Slutsky’s case, “a nuanced valuation methodology is required because defendant is an equity partner in a larger firm, who generally is not responsible for originations, and who is bound by the firm policies and a shareholder agreement.”
The analysis of goodwill on remand “must evaluate the firm’s shareholder’s agreement to determine whether it is an appropriate measure of the total firm value, including goodwill,” and “must consider defendant’s projected term of future employment,” the panel said.
Once the value of Slutsky’s interest in the firm is determined, the remand court must determine the value of Nancy’s interest in that asset, Lihotz said, also reversing Maenza’s decision to set that interest at 50 percent.
The court directed the case to be reassigned to a different trial judge, to be chosen by the presiding Family Part judge.
Nancy’s lawyer, Ronald Coleman of Winne, Banta, Basralian & Kahn in Hackensack, said he was reviewing the opinion and did not provide a comment by press time.
Neither Slutsky nor his lawyer, Edward Snyder of Snyder, Sarno, D’Aniello, Maceri & DaCosta in Hackensack, returned a call seeking comment.
Also at issue in the appeal was an award of $467,793 in attorney fees and $23,804 in expert costs to Nancy, to be paid by Slutsky. The panel took issue with Maenza’s remarks that Slutsky is “extremely well-off … earning in excess of $1,000,000 per year,” according to the decision.
“This finding failed to account for ordered obligations, which significantly impact defendant’s available income, including alimony and equitable distribution payments along with debts for which defendant was solely responsible,” Lihotz wrote.
The court called Maenza’s finding of bad faith in connection with the fee award “unsupported.”
The panel reversed the fee award but left the expert costs intact.
Slutsky also appealed the denial of a motion to dismiss a petition by Nancy’s trial counsel—Donahue, Hagan, Klein & Weisberg of Morristown—to enforce payment of the fee award. The panel—noting that firm and client had stipulated a lower fee amount—said that issue, too, must be remanded.
Francis Donahue of Donahue Hagan, who represented Nancy at trial and the firm’s interests in the appeal, said the actual fees racked up by his firm in the matter were about $900,000, but he agreed to halve that number and pursue payment of the fees from Slutsky.
“I recognized if I collected all my fees from my client, it would have consumed all her equitable distribution,” he said, noting that he plans to once again seek payment of the fees from Slutsky.
Despite losing on the fees issue, Donahue called the opinion “really a scholarly decision.”
“The analysis of the valuation of a law firm is textbook,” he said. “Lawyers should pay a lot of attention to it.”