Western Assurance Co. v. Connors (101 F. Supp. 2d 1111, 1999)

ENTRY AFTER BENCH TRIAL ON DAMAGES

BARKER, Chief Judge.

During the eleven-year pendency of this case, we have expended substantial judicial resources in attempting to distill the nature of the inscrutable business relationship between these parties. Despite bene-fitting from multiple summary judgment rulings, two opinions from our circuit regarding appealed matters in this case, and an entry by this court determining liability issues, the parties have failed to resolve the question of damages now before us. In managing this lawsuit, we have observed a partnership in collapse and relationships among former partners completely asunder, where adversarialness touches all aspects of their interactions. The parties operated the partnership at issue without regard to usual business forms or disciplines. To come in eleven years after the fact, as the court has been required to do, to try to make order out of chaos has been an almost insuperable challenge. The business was run as one pot of money — personal and business expenditures being commingled and mislabeled (for reasons never explained to us) and sources of income never being segregated or categorized by business entity or unit at time of receipt. It is upon this convolution that we attempt to fashion a damages award in light of, the evidence (or lack thereof) adduced at trial.

Findings of Fact and Conclusions of Law

Plaintiff Western Assurance Co. (“Western”) is a California corporation formed in 1979. Western has been placed in bankruptcy (in California) after the filing of this action. Martin Nemeth (“Nemeth”) was Western’s CEO and sole shareholder at all times relevant to this lawsuit. Defendant and counterclaimant Connors Consulting Group (“CCG”) is an Indiana corporation, formed in 1981, that has operated under the business names of Midwestern Assurance Company, Inc., and Western Assurance Company of Indiana. Since 1982, defendant J.D. Connors (“Connors”) has been the sole shareholder of CCG. This dispute mainly has involved identifying the nature of the business relationship between Nemeth/Western and Connors/CCG and determining how to apportion profits and losses derived from their collaboration on partnership projects.

We resolved the liability phase of this action by written entry on July 2, 1993, familiarity with which is assumed for purposes of this entry. After a six-day bench trial, we held in that entry that Nem-eth/Western and Connors/CCG interacted within a 50/50 constructive partnership until its dissolution in March 1988: “Connors and CCG are entitled to one-half of the profits from all projects on which they collaborated with Nemeth and Western Assurance by contributing services, funds, or goods .... Connors, CCG, Nemeth, and Western Assurance are jointly and severally liable for all debts and obligations of the business projects on which they collaborated.” Court’s July 2, 1993, Entry ¶¶ 15-17. Specifically, we characterized much of the testimony in that trial as not credible, but we were able to borrow from Indiana law and discern from the evidence that the parties collaborated on two partnership projects by contributing services, funds, or goods, the FICA recovery program and the hospital recovery program. The FICA program involved assisting clients recover overpayments of FICA taxes to the Social Security Administration. The hospital recovery program involved helping hospital clients recover uncollected charges, such as amounts due from insurance companies. As payment for the partnership’s services, it received a portion of the FICA and hospital recoveries. We concluded in our July 2, 1993, entry that a damages trial should go forward “to determine the profits of all projects in which Connors and CCG collaborated with Nem-eth and Western Assurance by contributing services, funds, or goods, together with the amount received by each of the parties and the amount to be paid, if any, by one to another, as well as the distribution of the amount in the Court’s escrow fund.” Id. ¶ 27.

We conducted a bench trial on damages on June 28, 29, 30, and July 1, 1999. Based on the preponderance of the evidence, we enter the following findings of fact and conclusions of law.

I. FICA Recovery Project

Three experts testified at trial concerning revenue generated by the FICA operation. Dennis Faurote, a representative from Deloitte & Touche (“Special Master”), worked on the FICA accounting ordered by this court. He testified that the Special Master’s report compared cash receipts and disbursements relating to FICA activity between July 1, 1982 and March 31, 1989. The Special Master reviewed documentation provided by the parties, which included FICA contracts, bank statements, and canceled checks, and categorized these items (according to bank account) as FICA receipts and expenses, personal advances to and from the parties, and other receipts and disbursements that either did not have sufficient documentation for categorization as FICA related or were disputed as non-FICA related by one of the parties. The Special Master’s determination regarding the FICA cash remaining ($349,573) did not adjust for the personal advances that each party either gave to or received from the partnership, nor did it attempt to carve out those receipts or disbursements that lacked supporting documentation or were disputed as non-FICA. Rather, the report took the total “cash-in” to various bank accounts (which included personal advances from the parties to the FICA project and “other” receipts without sufficient documentation to classify as FICA) minus total “cash out” from those accounts (which included advances from the FICA project to the parties, “other” disbursements without sufficient documentation to classify as FICA, and “other disputed” disbursements that one party claimed were unrelated to FICA) to arrive at the cash remaining.

Not surprisingly, the two subsequent experts who testified, A. Jerald Roman (“Roman”) for Nemeth/Western and Charles Connett (“Connett”) for Connors/CCG, focus on those “other” receipts and disbursements that lacked documentation or were disputed by the parties as unrelated to FICA. Each expert reviewed the receipts and disbursements in these categories and, with the assistance of their (self-interested) clients, exercised his respective judgment to re-classify the items as a FICA receipt/expense or as an advance to or from one of the parties. Because these “other” items had contributed to the pool of receipts and distributions in the Special Master’s overall cash flow, only items reclassified as an advance to or from a party (as opposed to items reclassified as a FICA receipt/disbursement) affected the bottom line regarding the 50/50 distribution of the “cash remaining” in this case. For example, if a $1,000 expense is moved from “other disbursements” to “advances to Nemeth,” Nemeth’s share of the FICA partnership proceeds would decrease by $500 and Connors’ share would increase by that same amount.

Again, as expected, the two experts differed substantially in their opinions as to where the items in the Special Master’s “other” categories should go. Nemeth’s expert, Roman, reclassifies many of these items as “advances from Nemeth” or “advances to Connors,” which significantly increases Nemeth/Western’s share of the pot. Likewise, Connor’s expert, Connett, reclassifies many items as “advances from Connors” or “advances to Nemeth,” which inflates the FICA amount due to Connors/CCG. The experts also reduce the amounts in the “advances to” categories of their respective clients, which also effectively increases their clients’ respective take of the FICA proceeds. Roman reclassified the entire amount of the approximately $1.9 million in the three “other” categories of the Special Master’s report, while Connett reclassified approximately $1.2 million in the “other” categories and approximately $40,000 in the “advances to Connors” category. The basis for each expert’s opinion rests on his personal interpretation of hundreds of canceled checks and bank statement entries, occasionally supported with original documentation (an original invoice or payroll record), and his understanding of each receipt or expense, which often depended on some representation from his client (Connors or Nemeth) as to its nature and purpose.

Aside from our reliance on their judgments, we have little credible, independent evidence to utilize in ascertaining which expenses and receipts legitimately related to FICA and which were personal items beyond the scope of the FICA partnership business. The fact witnesses appearing at trial, i.e. Martin and Carol Nemeth, Linda Connors, Joan Leeb and Richard Bradley, provide us with little reliable testimony. Even putting aside the patent bias of the Nemeths and Connors, their testimony and that of Leeb and Bradley pertains to whether certain individuals were or were not affiliated generally with the FICA business. Such testimony fails to provide any guidance on whether any one specific expense should be considered as FICA-related or as an advance to one party.

When one considers the sheer number of disputed items, the complete absence of accurate and detailed book-keeping, and the contentiousness of this lawsuit, which is characterized by accusations that the other party has squandered partnership funds for personal uses and deliberately altered business records, we are left only with isolated pockets of reliable record evidence upon which to fashion an alloca- . tion of FICA funds. Yet, the parties have chosen this course, relinquishing their ability to fix an exact damages amount through settlement, so we proceed with the unenviable task of assessing each expert’s opinions, even analyzing specific items that the parties dispute if the evidence permits us to do so.

To begin, we afford no weight to A. Jerald Roman’s opinion on behalf of Nemeth/Western concerning the FICA project. First, Roman is far from a disinterested witness in this case. He functioned as a sales representative for Western in the 1980’s, he admitted his bias in favor of Western at trial, he has a financial interest in Western’s success in' this litigation, and he even received a personal loan from Martin Nemeth on a previous occasion. Just as importantly, Roman admitted to a number of improprieties while employed as an accountant by MCRB (MCRB provided computer services for FICA auditing), including defalcation of corporate funds, among other things. These considerations seriously impugn Roman’s credibility and sufficiently deter our reliance on his opinions when re-classifying items in the Special Master’s report.

Our rejection of Roman’s FICA opinions, however, does not equate to an acceptance of the expert report produced by Charles Connett, a CPA who testified on behalf of Connors/CCG. Connett’s opinions do not suffer from the inherent credibility deficiencies in Roman’s testimony, but his re-classifications nonetheless must be reasonable and conform to the preponderance of the evidence. Nemeth/Western dispute his methodology and re-classification of certain items, and while the parties’ development of these issues is marginal at best, we must, of course, consider the evidence presented to us.

As we have mentioned, Connett primarily re-classified expenses that the Special Master originally categorized as “other receipts,” “other disbursements,” or “other disputed disbursements.” Recall that the Special Master placed items in the “other receipts” or “other disbursements” categories when the parties submitted items that they claimed were FICA-related, but the items lacked sufficient supporting documentation for the Special Master to conclude that the item was, in fact, FICA related. See Deloitte & Touche Report ¶¶ 1-6. Items that the Special Master placed in the “other disputed disbursements” category consisted of any expense that either party contended was not FICA related. For instance, if Connors submitted an expense to the Special Master that he contended was FICA related, Nemeth could dispute that item and claim that it actually served as an advance to Connors, thereby moving the item into the “other disputed disbursement” category.

Connett reviewed canceled checks and bank statements submitted to the Special Master. He also reviewed original source documents verifying those canceled checks and bank statements, such as invoices and payroll records (if available), in the possession of his clients, the Connors. Because the Connors controlled CCG’s accounts, all of which were located in Indiana, Connett had access to original source documents that the Connors provided him for those Indiana accounts. On the other hand, Nemeth controlled Western’s accounts, all of which were located in California, and Connett did not review original source documents that may have existed for those California accounts. Based on his review of these records and his assessment of the nature of the expense, Connett re-classified items, providing one of seven general descriptions of the re-classified item, but not offering any justification for the adjustment.

We begin with the “cash receipts” side of the Special Master’s report, which Con-nett adjusts in only one significant respect. He moves $4,420 in an Indiana account from other receipts to advances from Connors, claiming that this revenue resulted from projects occurring prior to the partnership. A comparison of that amount to the Special Master’s report indicates that the amount represents an IRS refund to Connors for overpayment of taxes and interest income. Therefore, these items properly qualify as advances from Connors that are unrelated to the FICA project. An examination of the California accounts, however, reveals an adjustment that Con-nett failed to consider. Nemeth also received a $2,354 tax refund deposited in an E.F. Hutton account, which the Special Master classified under “other receipts.” This amount likewise should be credited as an advance from Nemeth. We have located no other evidence warranting an adjustment to the “receipt” items in Connett’s report.

Matters become substantially more convoluted in assessing Connett’s adjustments to the “cash disbursements” side of the Special Master’s report. It is well established under Indiana law that each partner in a partnership is an agent of the firm that may bind the firm by his/her acts when apparently carrying out the business of the partnership in the usual way. See Monon Corp. v. Townsend, Yosha, Cline & Price, 678 N.E.2d 807, 810 (Ind.Ct.App. 1997) (“[F]or the purpose of carrying on its business in the usual way, [ ] an ordinary partnership is liable in damages for the negligence of any one of its members in conducting the business of the partnership.”); Bay v. Barenie, 421 N.E.2d 6, 9 (Ind.Ct.App.1981) (“[I]t is well established that in a partnership each partner is the agent of the firm and may bind it by his contracts in everything necessary to carry on its business.”); Ind.Code § 23-4-1-9(1) (1999) (“Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member bind the partnership .... ”). The parties fail to mention this legal framework when arguing over which expenses bind the partnership, a telling omission demonstrative of the degree to which the parties lose sight of the final objective when litigating the minutia of this case.

It is undisputed that Martin Nem-eth and J.D. Connors both possessed the authority (whether actual or apparent is beside the point for the moment) to conduct partnership affairs and bind the firm by incurring various expenses. As we have said, the parties’ “usual way” of carrying on business affairs was to allow each partner unfettered discretion in spending partnership funds. Neither party bothered to supervise or control the other, nor did they attempt to impose financial responsibility on themselves. Nemeth and Connors easily could have implemented a regime to ensure that they only disbursed partnership funds for what they mutually deemed were appropriate partnership expenses, such as by requiring both parties to approve any expense above a certain amount, but they chose not to do so. For either party now to contend that any one expense was “unreasonable” requires us to exact artificial standards of discipline that never governed the usual way the parties conducted their business while it operated. This understanding of the parties’ business practices is important; for where, as here, the parties largely have failed to provide sufficient evidence to characterize any one expense as either unrelated to or beyond the scope of the partnership, we consider it appropriate to presume expenses properly chargeable to the partnership unless a preponderance of the evidence proves otherwise.

Connett’s expert report attaches one of seven “codes” to every expense or group of expenses that he re-classifies. The code reflects his independent conclusion on whether a certain expense was FICA-related, but it fails to provide any rationale for his reclassification. Therefore, we must trust his judgment in deciding whether the items falling within any one “code” should be reclassified. As for codes A and D, which pertain to expenses that Connett reclassifies as FICA-related, we are inclined to rely upon his opinions. Specifically, Connett arrived at his conclusions for expenses under Code A by reviewing not just canceled checks and bank statements, but by examining original supporting documentation as well. We afford less weight to Connett’s re-classification of expenses under Code D, as he did not review original documentation to reach those conclusions. However, indulging the presumption that expenses are partnership-related, and in light of the absence of any evidence to the contrary, we credit Connett’s assessment that these items should be re-classified.

As importantly, Connett does not reclassify any items under these two codes as advances to Nemeth, so the opinions he reaches (especially those in the absence of original documentation) are confined to moving expenses from the two “other” categories to FICA expenses (which does not affect the distribution of cash remaining) and reducing approximately $40,000 in advances to Connors. And while shifting amounts from “advances to Connors” to “FICA expenses” definitely increases Connors share of the FICA cash distribution, we are willing to afford Connett the benefit of the doubt when determining whether his clients’ expenses are FICA-related.

Our willingness to rely on Con-nett’s opinion diminishes substantially, however, when he reclassifies items under Code B, defined as “Non-FICA payment — cancelled check/wire transfer and bank statement available, no other documentation available.” Overall, Connett reclassified over $600,000 from the two “other” categories into the “Advances to Nemeth,” category, an adjustment that radically decreases Nemeth’s share of the FICA distribution. A substantial portion of these reclassifications fall within his Code B designation. Connett automatically characterized an item as “non-FICA,” thereby charging Nemeth with an. advance, if Connett reviewed a canceled check, bank statement, or wire transfer and could not locate any original documentation. Because Indiana-based Con-nett did not represent Nemeth, who lived in California, he did not have physical access to supporting documentation nor did he apparently locate such information in materials provided to him. Therefore, even when an individual clearly worked on a FICA-related project, Connett assumed the expense was a personal advance to Nemeth if he could not access original documentation. We find this categorization by omission improper in this case. Furthermore, Connett reviewed a number of Connors’ expenses that lacked original documentation (Code D), yet instead of automatically considering these expenses as advances to Connors (as he did with Nemeth), he reclassified many of these items from “advances to Connors” to “FICA expenses.” We decline to credit Connett’s opinions in any respect regarding items he categorized under Code B. Instead, as we mentioned above, we consider it a better approach to treat these expenses as valid partnership expenses, which, like revenues, the parties divide evenly, unless the evidence demonstrates that the expenses should be considered personal advances to Nemeth.

With that said, Connors/CCG contends, quite apart from Connett’s report, that a number of expenses that otherwise would have fallen into the Code B category should be reclassified as advances to Nem-eth. In short, we conclude by a preponderance of the evidence that the following expenses should be classified as advances to Nemeth: $60,000 to Mike Cullen, $100,000 to Phil Brentwood, $25,000 to Management Effectiveness Corporation (Phil Brentwood’s company), and $10,002 in payments to Nemeth and “K. Gross” from the Crocker National Money Market account. We have reviewed Connors/CCG’s post-trial brief and conclude that the evidence supports the proposition that these expenses (and no others) were more likely Nemeth’s personal advances rather than partnership expenses.

Martin Nemeth had a penchant for giving personal loans to his friends. Nowhere better is this illustrated than with his issuance of two checks to Mike Cullen, totaling $60,000. Connors/CCG cites Carol Nemeth’s testimony in the California litigation (discussed infra) verifying its contention that Martin Nemeth loaned Cullen at least $60,000 to assist Cullen cope with personal problems, such as preventing an apparent foreclosure on his house. This expense constitutes a personal disbursement beyond the scope of the partnership business. It is also clear that even presuming that expenses are partnership-related, the parties never considered or agreed that personal loans would qualify as expenses properly within the partnership’s scope. In any event, Nem-eth/Western fails to dispute the contention that the $60,000 Cullen received qualified as a personal loan.

Likewise, the evidence compels our conclusion that Nemeth is personally responsible for the $125,000 he gave to Phil Brentwood and his company. Nem-eth/Western fails to respond in its post-trial brief to the argument that Nemeth effectively gave partnership funds to Brentwood for personal reasons beyond the partnership business. The parties do not dispute that Brentwood provided consulting and data entry services for the FICA business, and that he properly received some compensation for those services. However, Connors/CCG asserts that Nemeth permitted Brentwood to retain a $100,000 payment for work he never completed and that Nemeth continued to pay Brentwood after Brentwood stopped performing FICA work due to a nervous breakdown. Less than a month after Brentwood received the $100,000 wire from Nemeth (March 1983) he wrote Nem-eth a personal letter noting that he had been under extreme emotional pressure for “some time” and that he was on the verge of a nervous breakdown. Brent-wood confirmed his withdrawal from the business, yet he requested that Nemeth continue sending him money to assist with his personal problems. Brentwood acknowledged a personal component to their relationship and thanked Nemeth for his generosity: “I know you are reluctant to send any more money Marty but believe me if I could help I would I just can’t do it anymore right now. The next three payments will help me to get back on my feet and to get a[] business started which I hope will provide me with a decent income for awhile all of which I owe to you and your generosity.” Defs.’ Ex. C-3000. Approximately three months after this letter, Nemeth sent another $25,000 check to Brentwood, this time naming his company as the payee.

Nemeth/Western fails either to acknowledge this correspondence or to offer any evidence from Brentwood, or from any reliable source for that matter, that he actually performed FICA-related services in exchange for these payments. The evidence adduced at trial rebuts any presumption that these expenses qualified as valid partnership disbursements, and instead demonstrates that it is more likely than not that Nemeth personally loaned or gave these funds to Brentwood.

Finally, the parties and their experts do not dispute that $10,002 received by Nem-eth and K. Gross from the Crocker National Money Market account constituted advances to Nemeth. Accordingly, we find that $195,002, and only this amount, of the Code B expenses identified in Connett’s expert report should be moved from the two “other” categories to the “advances to Nemeth” category.

Next, we find that Connett properly reclassified the expenses he designates under Codes C, F, and G in his expert report. Expenses under Code C pertain to expenses that he primarily re-classified as advances to Connors. Original documentation supported his conclusions, which mainly benefítted Nemeth. Expenses under Code F, totaling almost $140,000, involved Connett’s individual review of phone bills (fiscal years 1983-1988), after which he allocated phone expenses between Nemeth and Connors, which the Special Master did not attempt to do. Expenses reclassified under Code G have no impact on the distribution of FICA revenues, as Connett did not re-classify any items as advances to either party. Rather, in accordance with our presumption that an expense is partnership-related, Connett re-classifies a small number of items as FICA expenses, noting that the particular payee worked on FICA projects for a limited period. Nemeth/Western fails to adduce reliable evidence disputing Connett’s classifications under these three Codes, and we accordingly rely upon his expert conclusions in these respects.

The remaining items in Connett’s report fall under the Code E designation, which describes Connett’s opinion that a disbursement is a “Non-FICA payment, can-celled check, bank statement, and original documentation available.” Connett moves eight items from the “other” categories to either the “advances to Connors” or “advances to Nemeth” categories. Connett rendered his opinions on these items after reviewing original documentation, and we agree with seven of his eight classifications. Specifically, he reviewed documents revealing that Nemeth disbursed two checks to payees with no connection to FICA activity, and that he issued additional checks to Blue Cross that did not pertain to FICA operations. The existence of original documentation upon which Con-nett basis his opinion, coupled with our independent review of the expenses and the lack of any response from Nem-eth/Western indicating their relation to FICA, supports the conclusion that these expenses more likely than not were personal advances to Nemeth. Likewise, we defer to Connett’s opinion regarding re-classifications of three disbursements as advances to Connors.

On the other hand, the preponderance of the evidence does not support Connett’s conclusion that approximately $45,000 paid to Delta Information Systems (“Delta”) should be reclassified as an advance to Nemeth. Connett’s testimony indicates that he possessed no personal knowledge about the services Delta performed, as he simply believed that “Delta performed services, I think computer services in the FICA recovery program.” Trial Tr. at 652. The evidence demonstrates that Delta completed a substantial amount of FICA computer processing on behalf of Western and CCG, with no evidence suggesting either that Delta performed any personal tasks for Nemeth or that Nem-eth had any personal motivations for paying Delta any more than it was due. While Delta may have received payments in excess of 6% of Indiana and Illinois FICA revenue, an amount to which it was entitled pursuant to one contract with the partnership, we have absolutely no basis to conclude that these additional payments were beyond the scope of the partnership or that they were overpayments. Even if such disbursements were overpay-ments, they still would have constituted expenses chargeable to the partnership, for either party could have monitored the partnership’s expenses or implemented any number of controls on the ability of the partners to incur partnership debt beyond certain levels. Moreover, we have not located any evidence suggesting either that Nemeth did not have the authority to disburse checks to Delta or that Delta believed that Nemeth lacked such authority. Ultimately, the parties bear the responsibility for the situation they have created. Their failure to regulate the business’ purse strings has joined their fate, requiring each partner to share equally in the financial implications of the partnership decisions made by the other, for better or worse. Accordingly, we rely upon Con-nett’s expert opinion only in so far as discussed above, with appropriate adjustments reflected in our final tabulation of the FICA cash distribution to the parties.

Aside from the reports of the two experts, Nemeth/Western also claims that J.D. Connors incurred a number of personal expenses that should be considered personal advances. Many of Nemeth/West-ern’s objections in its post-trial brief are both difficult to comprehend and undeveloped, often failing to identify the specific challenged expenses. Like many of Connors/CCG’s objections, Nemeth/Westem’s contentions suffer from a lack of evidence upon which we can conclude that any one expense should be charged to Connors as an advance. For instance, Nemeth/West-ern claims that William Turrene and Travis Stewart both received an unspecified amount of partnership funds for performing work related to Connors’ business, PCX, Inc. In addition to Nemeth’s failure to identify which expenses were unrelated to FICA, the evidence demonstrates that both individuals worked on FICA projects. Both parties recognize William Turrene’s significant FICA involvement, and Martin Nemeth testifies that Travis Stewart was an actual employee who suggested that the partnership contribute to political parties in the hopes of advancing favorable FICA legislation. See Trial Tr. at 473. Even if these individuals had been involved with PCX, Inc. (Stewart apparently flew to some location in August 1987 on a consulting trip), Nemeth/Western only evidences one expense related to PCX, Inc., a $288 airline ticket for Stewart. Therefore, only this one expense is chargeable to Connors as a personal advance in respect to these two individuals, with any other expenses qualifying as partnership disbursements.

Nemeth/Western fares no better regarding its allegation that an approximately $5,000 legal expense should be charged to Connors personally. Linda Connors testified that J.D. Connors incurred personal legal expenses, but that Phil Hilger, a partnership employee, also received legal services properly funded by the partnership. Therefore, we have no method to allocate this expense except to rely upon Connett’s review of the underlying documentation, after which he classified the expense as a FICA disbursement for Hil-ger. Our treatment of the expense in this fashion is consonant with our view that, unless proven otherwise, an expense should be regarded as related to the partnership, as the parties granted each other wide-ranging authority to dispense partnership funds without supervision and never restricted the other’s authority in respect to third parties.

However, Nemeth/Western identifies two other expenses that do qualify as personal advances to J.D. Connors. Connors issued two checks ($1,528.40 and $400) for personal gifts, which involved Superior Video and Jerry Hart. Connors/CCG acknowledges that since Nemeth was charged for a similar type of gift in Con-nett’s report (a $1,161 advance for an Am-fac Hotel bill, Code E), these advances are proper. Hence, we shall increase the advances to Connors by $2,216, the sum of the three items we have identified.

We now have completed what has been an exhaustive (and exhausting) review of the individual items comprising the Special Master’s report on the FICA recovery project. However, additional adjustments must be made for items that the Special Master did not include in its report and for calculations that it was not responsible for computing.

First, and most significantly, we must adjust each party’s share of FICA cash by the advances they gave to or received from the partnership.

Second, Connors should be charged with a $12,422.22 advance after obtaining a FICA receipt and exchanging it for a cashier’s check for home remodeling. The FICA receipt never passed through partnership bank accounts and therefore avoided the Special Master’s review. See Pis.’ Ex. W621; Trial Tr. at 82-84. Connors treated two additional FICA receipts in like fashion ($4,262.31 and $5,386.81), converting them to cashier’s checks for home remodeling in December 1984. Id. Connors/CCG fails to rebut this evidence, or even to address it for that matter, so this amount ($22,071 for the three checks) should be treated as an advance to Connors.

Third, we must account for the FICA receipts retained by the parties after the completion of the Special Master’s report. The partnership apparently received $21,418 in FICA revenue that Nemeth retained, which effectively transforms it into an advance. See Connett Report Ex. 1-1.

Fourth, the escrow fund received four FICA deposits from California schools after the Special Master concluded its report, which totaled $239,511.91. See Con-nett Report Ex. 5-1. Since these funds were deposited into the escrow account and did not constitute an advance to neither party, they increase the amount of cash available for distribution and should be divided equally. We also note that in addition to this $239,511.91, the parties deposited into the escrow account $191,000 in FICA revenues. The Special Master has subsumed this amount into its calculation of the FICA cash remaining ($349,-573), so we need not adjust the Special Master’s report to account for that $191,-000.

Fifth, we must decrease Connors/CCG’s share of the final cash distribution by the amount of FICA cash it retained and did not deposit into escrow. The Special Master concluded that $349,573 in FICA cash remained, an amount that simply represented the difference between total cash-in and total cash-out. However, by pocketing the FICA revenues in both the Indiana accounts ($199,178) and Connors’ personal account ($22,711), instead of depositing those FICA amounts in an escrow fund, Connors/CCG essentially has been paid $221,889 of its share of any FICA revenues. Put another way, this $221,889 represented FICA cash that should have flowed into the FICA pot, the distribution of which would depend on a number of factors, such as the advances to/from the parties. Instead of reserving this amount for an appropriate distribution based on amounts due to/from the parties, as he should have done, J.D. Connors simply retained it. For all we know, Connors has expended the entire sum on personal matters.

The following table reflects our adjustments to the reports of the Special Master and Charles Connett. We have utilized Connett’s report as a baseline simply for convenience, as many of his adjustments to the Special Master’s report remain intact. As we have mentioned, our primary adjustment to Connett’s report involves the approximately $433,000 he reclassified as advances to Nemeth under the designation Code B. We conclude that Nemeth is entitled to $336,304 of any FICA cash remaining, with Connors due $30,892.

We also refrain in the following table from dividing the amount deposited in the escrow account, as such a determination is premature prior to our knowing precisely the final escrow amount available to the parties. (The escrow fund has been affected both by interest accrual and by disbursements for various expenses, such as the Special Master’s partial fee. The final escrow amount also will be affected by future disbursements for the Special Master’s remaining fee, this court’s administrative costs, and other administrative bank fees.)

FICA Recovei-y

Available To/(Due From) Special Master Court Adjust-Connett ments Total Nemeth Connors to Connett

Receipts (Cash In) 3,985,-

Total FICA receipts 3,984,065 3,985,416 0 416

Advances from Nemeth 288,495 288,495 2,364 290,849 145,425 (145,424)

Advances from Connors 15,150 19,570 0 19,570 ( 9,785) 9,785

Other receipts 328,439 227,668 ( 2,354) 225,314

5,853,-

Transfers in 5,758,948 5,853,948 0 948

10,375,-

Total receipts 10,375,097 10,375,097 097

Disbursements (Cash Out)

2,183,-

Total FICA expense 1,791,844 2,187,927 ( 4,000)

Advances to Nemeth 360,935 986,675 (283,271) 70 3,404 (351,702) 351,702

Advances to Connors 553,425 512,780 2,216 514,996 257,498 (257,498)

Other disbursements 951,979 303,736 135,730 439,466

Other disputed disb. 608,393 180,457 149,325 329,783

5,853,-

Transfers out 5,758,948 5,853,948 0 948

10,025,-

Total disbursements 10,025,524 10,025,524 0 524

Total FICA Cash Remaining 349,573 34,9,573 0 349,573 174,786 174,787

Adjustment to FICA cash remaining (Connors exchanged 0 22,071 11,036 11,035

3 FICA receipts for cashier’s checks) ( 22,071)

FICA receipt retained by 21,418 ' 0 10,709 10,709

Nemeth after Special Master ( 21,418)

FICA receipts deposited in escrow after Special Master (four deposits) 239,512 119,756 119,756

Subtotal FICA Cash Available To/ (Due From) Each Party 336,305 252,781

Adjustment for Connors’ retention of FICA funds in Indiana accounts (221,889)

TOTAL FICA Cash Available To/ (Due From) Each Party 336,305 30,892

II. Hospital Recovery Project

The parties diverge significantly in their approaches to valuing the hospital recovery project. Unlike the FICA recovery project, which largely ceased operating before dissolution of the partnership in March 1988, hospital recovery project revenues were increasing steadily when the partnership dissolved. In fact, the hospital project’s revenues nearly doubled the year following dissolution, climbing from $651,715 in 1987-1988 to $1,054,126 in 1988-1989, with Connors/CCG continuing to manage the operation for years following dissolution. (Hospital revenue mainly flowed through CCG’s accounts in Indiana, which Connors controlled.) Connors/CCG never attempted to wind up or terminate the hospital project, nor have they claimed to have done so. Of course, Connors/CCG claims that in dividing any hospital business profits or losses, we should look only to the cash flow of the business between its origination and the March 1988 date of dissolution, thereby ignoring any revenues it retained for the years after dissolution. Connors/CCG claims that the hospital business operated at a net loss of approximately $200,000 between 1984 and 1988 (assuming the accuracy of its expert’s report), which the parties should share equally. Nem-eth/Western rejoins that it is entitled to a valuation of the business as a going concern as of March 1988 since Connors/CCG never engaged in any winding up efforts. Nemeth/Western claim that the hospital recovery project had a positive fair market value of approximately $1 million in March 1988, which the parties should divide evenly. Based upon our review of the facts and the law, we agree with Nemeth/Western that appraising the hospital business as a going concern as of March 1988 is the proper method to calculate the amounts due/from the parties. The accuracy of Nemeth/Western’s valuation is another question, however, and one that we will address in due course.

The hospital recovery project is an auditing business designed to assist hospitals recover uncollected charges for services rendered. Western Assurance of Indiana (a d/b/a of CCG) hired auditors to review hospitals’ medical records and financial billing statements, in return for which it generally received approximately one-third of the uncollected charges actually recovered. Neither Martin Nemeth nor J.D. Connors personally performed the auditing work. It is undisputed that Connors/CCG failed to wind up the hospital recovery project after partnership dissolution in March 1988, but it also is clear that Nem-eth/Western has not attempted to compel liquidation of the business. As neither party is a wrongfully dissolving partner under the facts of this case, we consider Nemeth a retiring partner under Indiana partnership law for purposes of calculating damages. Indiana Code § 23-4-1-42 (1999) provides:

When any partner retires or dies, and the business is continued ..., without settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership ....

Ind.Code § 23-4-1-42 (emphasis added). See Uniform Partnership Act (“UPA”) § 42.

In other words, when a partnership business continues after a nonwrongful dissolution, this provision requires that the outgoing partner be paid the total value of his/her departing interest at the time of dissolution, including partnership goodwill, and not merely book value. See J.W. Cal-lison, Partnership Law and Practice, §§ 15.27-9 (1997 & 1999 Supp.); A. Brom-berg & L. Ribstein, Bromberg & Ribstein on Partnership, Vol. II, § 7.13(b)(1), (c)(1), (f), Release Nos. 4-6 (1998-99 Supps.). In addition to receiving the value of his/her departing interest, a withdrawing partner also is entitled to elect between receiving either interest or profits attributable to the use of his/her interest in the partnership. See Ind.Code § 23-4-1-42; Calli-son, supra, § 15.28.

Nemeth/Western contends, in both its trial and post-trial briefs, that this legal regime controls the calculation of damages in this case. Accordingly, Robert Schlegel (“Schlegel”), an expert in business appraisal, testified on its behalf and rendered an opinion regarding the value of the hospital business as a going concern as of mid-March 1988. Connors/CCG completely ignores the existence of Indiana Code § 23-4-1-42, nor does it acknowledge the legal argument that Nemeth/Western is entitled to a valuation of the hospital business since Connors continued the operation without winding up. Instead, Connors/CCG again relies upon its expert, Charles Connett, a CPA, to confine his analysis to the cash flow of the hospital business between 1982 and March 1988, thereby ignoring, for instance, over $1 million in revenue that the hospital business received the year following partnership dissolution. Connett, who is not an appraisal expert, did not consider the hospital business’ earning capacity and did not perform any of the traditional methods of business valuation, such as fixed price, book value, or appraisal. See Callison, supra, § 15.27, n. 232 (“A business’s earning capacity is ordinarily the most important measure of its value; since book value reflects the original cost and adjusted worth of assets, it has little relationship to earnings.”).

Connors/CCG attempts to avoid accounting for its uninterrupted operation of the hospital business simply by contending that all profits after March 1988 should not be considered partnership business. Connors/CCG reasons that the typical partnership hospital contract contained a one-year term, with the hospital having the right after four months “to evaluate performance of Western Assurance for the purpose of either cancelling” or continuing the agreement. Defs.’ Ex. C-3006. Because a hospital could cancel after four months or not renew after the first year, Connors/CCG claims that hospital contracts obtained after dissolution should not be considered sufficiently related to the partnership so as to constitute “built up” value of the partnership, citing Bopp v. Brames, 713 N.E.2d 866 (Ind.Ct.App.1999). Connors/CCG concludes by attempting to draw an analogy between a law firm and the hospital business, noting that the hospital business only generated income on a contingency basis. Connors/CCG apparently contends (without expressly saying so) that since dissolution of a law firm generally does not entitle a withdrawing partner to any value for goodwill, Nemeth/Western is not entitled to any compensation for goodwill in this case either. We find these contentions unavailing.

Initially, Bopp provides guidance on the proper method to value a dissolved law partnership in the winding-up process, but it proves less relevant where, as here, the business is not a professional partnership (namely, a law or medical practice) and where the partnership continues operating without any attempt to wind up the busi ness. In Bopp, the former partner of a law partnership filed suit for liquidation of the business after the partners voluntarily-dissolved the partnership and formed their own law firms. There was no dispute that winding up and liquidation occurred in that case, as the former partners did not attempt to carry on the partnership business nor did any partner claim that any goodwill attached to the partnership itself. The central issue was simply how the court should determine the value of the partnership’s interest in two contingency fee cases that had been filed, but not resolved, by the date of the partnership’s dissolution. Whether one desires to label the dissolved partnership’s interest in these two cases as “built up” value or “unfinished business” pending completion of winding up makes little difference for purposes of this case.

The evidence adduced at the damages trial demonstrates that Connors/CCG continued to operate a hospital business that had significant goodwill value as of March 1988. Connors/CCG also retained the partnership’s tangible assets since no liquidation occurred. Unlike a law partnership, where some or all of the goodwill may attach to the individual partners rather than to the partnership itself, the hospital business generated income by relying on its reputation, customer base, and institutional expertise in the delivery of an auditing service. We have no evidence suggesting that either J.D. Connors’ or Martin Nemeth’s personal characteristics drove the hospital project revenues. To the contrary, neither J.D. Connors nor Martin Nemeth performed the audits essential to the business’ success. The fact that a client could cancel its contract with the partnership after four months if not satisfied with the “performance of Western Assurance,” or simply decline to renew after one year, demonstrates the importance of the partnership’s reputation and the quality of its service. Surely, if the partnership’s reputation had not developed favorably, it likely would have lost existing clients and failed to secure new ones. The hospital business strikes us as exactly the type of enterprise that depends upon its good name, institutional expertise and customer base to retain its value as an assembled concern. See Pis.’ Ex. W2343 (reflecting Western’s marketing of its “reputation” and “quality of service” as “cornerstones of our success”). Indeed, Nemeth has acknowledged that since 1988 he has been unable to replicate the hospital business that he originally conceived, as he lacks the resources for start-up costs and has no client base, auditors, or means to train auditors. See Pis.’ Ex. W1679 (Nemeth’s original proposal for the hospital recovery program); Trial Tr. at 154-57.

Moreover, the partnership itself was gaining institutional momentum as of the date of dissolution, having just doubled its revenues. Of the twenty-five hospitals with contracts in 1987-1988, seventeen continued as Western Assurance clients in 1988-89, contrary to Connors/CCG’s suggestion that hospitals declined to renew their one-year contracts. See Pis.’ Exs. W1595, W851, W2223; Defs.’ Ex. C-3037; Trial Tr. at 92. For example, the partnership generated $64,315 in revenue from Bloomington Hospital in 1985-86, $76,195 in 1986-87, $92,804 in 1987-88, and $129,680 in 1988-89. We regard as irrelevant that the hospital auditing business generated income based on a percentage of charges recovered, as the growing revenues that the partnership actually received, whether contingency-based or not, provide an accurate measure of the project’s goodwill value when attempting to appraise the partnership. In short, we find that the hospital recovery business potentially possessed positive value as a going concern in March 1988, which must be accounted for in determining damages since Connors/CCG has not wrapped up partnership affairs and instead has retained the business and any profits derived from it since March 1988.

Having determined that an appraisal of the hospital project as of March 1988 is appropriate under the facts of this case, the question remaining is how to value the hospital business accurately. See Zeckel v. Paskins, 625 N.E.2d 1284, 1288 (Ind.Ct.App.1993) (affirming trial court’s order for an appraisal of the partnership to ensure that the breaching partner’s interest was “ascertained”); Ind. Code § 23-4-1-42. Nemeth/Western’s expert, Robert Schlegel of Houlihan Valuation Advisors, specializes in business valuation and testified regarding the fair market value of the hospital project as of March 16, 1988. See Pis.’ Ex. W3000. We found his testimony credible and his credentials well-established. In contrast, Connor/CCG’s expert, Charles Connett, admitted that he is not qualified to appraise the hospital business, nor did he attempt to do so. Instead, he simply estimated the overall cash flow of the hospital project from April 1982 to March 1988, a methodology that, as we have said, ignores the value of the business as a going concern and is not warranted under the facts and law of this case.

Unfortunately, an accounting of the hospital project’s expenses has not been performed, so any calculations dependent upon its expenses are estimates only. However, Schlegel did rely on the following valuable information in appraising the hospital project: (1) the hospital project’s annual revenues through 1989, and (2) CCG’s overall revenues, expenses, assets and liabilities for fiscal year ending March 31, 1988. The hospital project formed one segment of CCG’s overall business and operated out of CCG’s Indiana accounts, so the hospital project’s expenses, assets and liabilities would account for some portion of these totals for CCG.

Schlegel concluded that the fair market value of the hospital business on March 16, 1988, was $1,057,188. The bulk of this amount emanated from the value he placed on fixed assets and intangible goodwill in a hypothetical transaction ($607,900), and on the hospital program’s accounts receivable ($387,956). The remaining value derived from the balance of Schlegel’s estimations regarding non-fixed assets, liabilities and equity. We proceed to assess each of these major categories in turn.

A. Fixed Assets and Intangible Goodwill

Schlegel utilized two independent methods to estimate the value of the hospital project’s fixed assets and intangible goodwill: (1) revenues, and (2) seller’s discretionary cash flow.

First, Connors/CCG never disputes that an assessment of a business’ revenues alone is a proper basis on which to measure the value of a going concern. Schle-gel had obtained the hospital revenues for the five fiscal years between 1984 and 1989: 1984-85 ($15,582), 1985-86 ($167,-427), 1986-87 ($442,916), 1987-88 ($651,-715) and 1988-89 ($1,054,126), and noted that this compounded annual growth reflected substantial attractiveness to a hypothetical buyer of the partnership. Schlegel calculated the actual value of the hospital business as of March 16, 1988, by comparing the 1987-88 hospital revenue ($651,715) to 25 actual sales of accounting, auditing and bookkeeping businesses, an accepted valuation methodology. Schlegel concluded that the hospital recovery project, which essentially performed auditing services, qualified as an accounting, auditing and bookkeeping business under the Standard Industrial Classification Code # 8721. Schlegel arrived at a “revenue multiplier” (.93) based on these 25 comparable sales, which simply means that these businesses sold for some percentage of their annual revenues. Schlegel then multiplied the hospital business’ annual revenue by this multiplier to arrive at the value of the hospital project’s fixed and intangible assets, which includes goodwill implied by all of the following: client base, the trained workforce, related computer programs and audit work checklists, and future potential to springboard new business concepts from the existing business base. He concluded that the “revenue method” of valuation yielded a positive value for the hospital project’s fixed and intangible assets of $606,095.

Connors/CCG advances only two arguments to dispute Schlegel’s conclusion, neither of which carries convincing force. First, Connors/CCG claims that the 25 comparable sales that generated the revenue multiplier occurred between 1990 and 1998, and therefore these sales automatically should be disqualified from Schlegel’s valuation of the hospital business as of March 1988. Yet, Connors/CCG provides no explanation for this position, and Schle-gel, an experienced appraiser, states that these business sales provide valuable auditing data under economic and market conditions similar to those affecting auditing businesses in 1988. Moreover, the revenue multiplier is inherently immune from inflationary pressures since it is a proportion of revenue to sales price — the value of the dollar is irrelevant. Even so, Connors/CCG has not adduced any evidence suggesting that Schlegel’s revenue multiplier was unreasonable or that this methodology generally is unsound or unacceptable in the valuation community.

Second, Connors/CCG relies on its expert, Connett, to conclude that the hospital recovery project should not be compared to the sales of the 25 business designated as “accounting, auditing and bookkeeping businesses” under Standard Industrial Classification Code # 8721. Connett, who does not claim to be a valuation expert, nonetheless speculates without any supporting authority that because the hospital recovery business generates revenues contingent on recovery of uncollected hospital charges, it is somehow materially different than other auditing businesses classified under Code # 8721. Schlegel testified that the hospital business fell within Code # 8721 for valuation purposes, and we have no evidence undermining that conclusion. Also, the contingency nature of recovery does not necessarily affect the business’ value in any direction (recovering lk of uncollected charges could actually increase its value). Of course, other businesses classified under Code # 8721 may very well collect fees on a contingency basis as well. In a case such as this one, where credible evidence is hard to come by, we conclude that Schlegel reasonably relied upon the sales of the 25 auditing, accounting and bookkeeping businesses in attempting to value the hospital project’s fixed and intangible assets.

One might conclude at this point that our job is done on this front. We have accepted Schlegel’s utilization of the revenue method of valuation to gauge the worth of the hospital project’s fixed and intangible assets, and have concluded that a preponderance of the evidence supports his computations and methodology.

Yet, Schlegel also has identified a second method to accomplish the same valuation goal, seller’s discretionary cash flow. He testified that he employed this second method merely as a “sanity check” to corroborate his initial findings. Schlegel calculated the seller’s discretionary cash flow for the hospital business for fiscal year ending March 1988 ($307,955), compared it to the sales of the same 25 businesses discussed above to arrive at a multiple (1.98), and computed the value of fixed and intangible assets according to this second method ($609,751). Both independent valuation methods yielded remarkably consistent results ($606,095, revenue vs. $609,-751, discretionary cash flow), so Schlegel simply took the midpoint of the two totals to arrive at a final value ($607,900).

As expected, Connors/CCG asserts that Schlegel’s discretionary cash flow eompu-tation is flawed. Connors/CCG correctly observes that while the parties may have known hospital revenues for 1987-88 ($651,715), no figures have been compiled regarding the expenses for the hospital project for that (or any) year. Therefore, both Schlegel and Connett attempted to approximate those expenses. We are inclined to declare both expert’s estimations as simply too speculative, and instead rely upon Schlegel’s valuation based on the revenue methodology alone. But the parties have insisted on dwelling on the discretionary cash flow method, so to ensure fairness to Connors/CCG, we will attempt to craft a tolerable calculation of discretionary cash flow under the circumstances. We will then follow Schlegel’s lead and adopt the midpoint between that total and the $606,095 total derived from the revenue valuation method.

Schlegel estimated that the hospital project’s expenses would be 52.87% of CCG’s total expenses for fiscal year ending March 1988. Schlegel reasoned that because the hospital program’s revenue ($651,715) represented 52.87% of CCG’s total revenue ($1,232,712), the hospital program’s expenses, in the absence of any other documentation, could be estimated by assuming that they constituted 52.87% of CCG’s total expenses. Schlegel fully acknowledges that this assumption does not involve “precise accounting,” but accedes to the estimation in the absence of affirmative data on hospital expenses.

Connors/CCG contends that a better estimation of hospital project expenses for fiscal year ending March 1988 is to take the total activity of CCG and remove any expenses that the Special Master reported as related to FICA recovery activities. Connors/CCG reasons that Bert’s Bar and PCX, Inc., accounted for minimal cash flow through CCG’s accounts for that particular year, leaving only FICA and the hospital project expenses. Therefore, if the FICA expenses are removed from CCG’s total expenses for the fiscal year ending March 1988, Connors/CCG argue that only the hospital project expenses would remain. Schlegel characterizes this approach as a “negative assurance,” which understandably is not the preferred method to determine a business segment’s expenses. Trial Tr. 319-20. This method also fails to account for any expenses of Bert’s Bar and PCX, Inc., even if they happen to be minimal, not to mention any other projects on which Connors may have expended funds in 1987-88. Nonetheless, we realize (as do the parties) that calculating damages in this case, at best, involves educated approximations.

Connors/CCG accurately notes that the bulk of the FICA operation had been completed by the 1987-88 fiscal year, which it claims would increase the hospital project’s share of CCG’s overall expenses and decrease seller’s discretionary .cash flow. Therefore, Charles Connett estimates hospital expenses by starting with CCG’s total expenses for fiscal year ending March 1988 ($868,496), and then removes both FICA related expenses reported by the Special Master ($116,089) and management salaries ($175,349). (Recall that owner’s compensation is removed from the discretionary cash calculation.) Connett also erroneously failed to remove from hospital expenses clerical wages paid to Linda Connors amounting to $19,061, which changes his final total for hospita