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A Texas appellate court rendered a decision that may affect the valuation of contingency fee law firms in divorce cases and would be of interest to matrimonial lawyers in other jurisdictions as well. The court's decision in Von Hohn v. Von Hohn, 260 S.W.3d 631 (Tex. App. 2008) is important because plaintiff contingency fee law firms are generally valued via an income approach which entails projecting future contingency fees from pending litigation and discounting them to present value. One of the key valuation issues discussed in this case was the distinction between the future personal earnings of the attorney spouse and the future earnings of the firm. The court found that the contingency fees were future personal earnings of the attorney spouse and represented personal goodwill which is generally not divisible as community property. The future earnings of the firm represent commercial goodwill which is divisible as part of the community estate. This article will discuss the Von Hohn v. Von Hohn decision and its implications for the valuation of contingency fee law firms.
FACTUAL BACKGROUND
Edward Von Hohn and Susan Von Hohn were married in 1997 and in 2004 Susan filed for divorce. The parties could not agree on the value of Mr. VonHohn ownership interest in the law firm of Nix, Patterson, & Roach. Mr. Von Hohn was a partner in the firm which handled plaintiff contingency fee cases. The partners of the firm had signed a partnership agreement which provided a formula for calculating the value of each partner's interests in the event of death, retirement, withdrawal, or expulsion. Because the partnership agreement did not provide a method of determining the value of an interest in the event of divorce, Ms. Von Hohn retained the services of a business valuation expert to value her husband's interest in the firm.
Mr. Von Hohn filed a motion to exclude the valuation expert's testimony on the basis of qualifications and methodology; however, the court allowed him to testify on the basis that the proper measure of value included methods other than those set forth in the partnership agreement. The trial court did limit the valuation expert to considering only two years of future earnings. Given the nature of the law firm's contingency fee practice, perhaps...