Richmond v. Richmond

RABINOWITZ, Justice,

dissenting.

I dissent from the majority’s determination of the goodwill issue. In my opinion, the superior court properly determined that Robert’s professional corporation may have goodwill and that it should be included in the marital estate.

As the majority points out,1 this court held in Rostel v. Rostel2 that a professional practice’s goodwill is a divisible marital asset.3 Although some courts have held to the contrary,4 this view remains the majority view5 and, in my opinion and that of several commentators,6 the better view:

Including goodwill within the marital estate is consonant with the policies of equitable distribution. Goodwill represents the probability of future earnings based on circumstances created during the marriage. It reflects the value of a demonstrated capacity to draw business, i.e., the individual has already built up a following. After divorce the professional practice will continue to benefit from the goodwill generated while the parties were married. Much of the economic value of the practice produced during the marriage may be reflected in its goodwill. It would be inequitable to ignore the contribution of the other spouse to the development of that economic resource.
There is one crucial distinction between a professional practice, on the one hand, and the education, degree, and license which are its necessary predicates. The latter are intellectual accomplishments, personal achievements of the holder. The practice is a commercial enterprise, a business. It provides income upon which the family depends. Equitable distribution assumes marriage is a partnership, with both parties contributing to its economic well-being. If the financial foundation of that partnership, the source of income, is placed beyond the reach of one of the spouses, the theory loses its meaning.
If equitable distribution does not apply to a professional business, is there any reason to apply it to any business? Valuation problems are not confined to the professions (even assuming that professions can be defined with precision). If something is property it comes within the statute, whether it is difficult to value or not. It is contrary to the spirit and policy of the statute to say that because the value of the practice, possibly the most *1219substantial asset of the marriage, cannot be measured with certainty it will be given no value at all. If equitable distribution is to have vitality then such items must be included within its scope.7

To the extent that Moffitt v. Moffitt8 did implicitly alter our position on professional goodwill as expressed in Bostel, I think that any alteration was a mistake, and that the better view is that professional goodwill need not be marketable to be considered in dividing the marital assets.

In this regard, I find persuasive the criticisms leveled by commentators against Moffitt and other similar cases:

Several recent cases have adopted a limited form of divisibility, holding that goodwill is divisible only if it exists apart from the owner’s individual reputation and future earning capacity. Moffitt v. Moffitt, 749 P.2d 343 (Alaska 1988); Wilson v. Wilson [, 294 Ark. 194], 741 S.W.2d 640 (Ark.1987); [Prahinski v. Prahinski, 75 Md.App. 113, 540 A.2d 833, 843, cert. granted, 313 Md. 572, 546 A.2d 490 (1988) ]; Taylor v. Taylor [222 Neb. 721], 386 N.W.2d 851 (Neb.1986); see Buckl v. Buckl [373 Pa.Super. 521], 542 A.2d 65 (Pa.Super.1988). These cases display a curious inconsistency. Assume that an educated wife uses her own time and effort doing free public relations work for the husband’s business, causing its reputation to increase significantly. If the business is a close corporation practicing under a trade name, then the wife’s efforts have increased the corporation’s goodwill, and she will be compensated for her efforts. See, e.g., In re Brooks, 742 S.W.2d 585 (Mo.App.1987); Buckl. But if the wife makes exactly the same contributions to the husband’s solo professional practice, the goodwill will not be property and the wife will not be compensated. The court will solemnly assure her that unlike the wife in the first situation, her efforts went only to increase her husband’s personal reputation and future earning capacity, neither of which constitutes marital property. Thus, whether or not the wife receives compensation for her valuable efforts depends upon the type of business the husband conducts and the form in which he conducts it.
It is difficult to explain this difference of result on any defensible grounds. Some courts have noted that business goodwill is immediately realizable, while professional goodwill is not, see Buckl, but even these courts have generally held in other contexts that an asset need not be immediately realizable in order to constitute marital property. For instance, retirement benefits generally cannot be transferred before maturity, but courts in most states have nevertheless found them to be marital property.9
Other courts have noted that an award of unrealizable goodwill can be unfair to the owning spouse, because it may force him to pay the nonowning spouse her share by means of a promissory note, thus forcing him to remain employed in order to make the payments. E.g., Moffitt. The alternative, however, is to deny the nonowning spouse any rights in an asset of great economic worth which as a matter of economic fact will substantially benefit the owning spouse in the future. Possible difficulties in arranging means of payment should not justify depriving either spouse of their legitimate marital property rights.10

*1220In the instant case, there was extensive evidence presented as to Margaret’s direct and indirect contributions to the success of Robert’s law practice. Margaret’s brief presents an accurate characterization of these efforts:

When Robert Richmond opened his own law practice, Margaret Richmond was there to assist him. She worked as a secretary in the law office. When law clerks and associates were hired, she housed and fed them, and washed their clothes. She frequently entertained employees and clients of the law firm, giving annual New Year’s Eve parties and “surprise” birthday parties for Robert Richmond. She handled the remodeling of the law office building. She volunteered for community service activities [in part as an effort] to promote the public image of the law firm....
In addition to her efforts on behalf of the law firm, Margaret Richmond managed the family home and the family finances. She agreed to stay at home and care for their three children so that Robert Richmond could continue with developing the law practice and legal career. The specific agreement between the parties was that Robert Richmond’s only responsibility was to bring home money from the law practice and that Margaret Richmond would “do everything else.” Accordingly, Margaret Richmond acquired money from her parents to [assist in the purchase of the family home]. She acted as business manager for the Richmonds’ real estate, managing an apartment building, purchasing [and setting up for rental] a condominium in Hawaii, and remodeling the family home. Margaret Richmond’s job was full time as an equal participant in the Margaret and Robert Richmond partnership.

(Citations to trial transcript omitted.)

I agree with Margaret that her contribution to the goodwill of Robert’s law practice should be recognized in the marital property division:

After divorce, the law practice will continue to benefit from that goodwill as it had during the marriage. Much of the economic value produced during an attorney’s marriage will inhere in the goodwill of the law practice. It would be inequitable to ignore the contribution of the *1221non-attorney spouse to the development of that economic resource. An individual practitioner’s inability to sell a law practice does not eliminate existence of goodwill and its value as an asset to be considered in equitable distribution. Obviously, equitable distribution does not require conveyance or transfer of any particular asset. The other spouse, in this case the wife, is entitled to have that asset considered as any other property acquired during the marriage partnership.11

The majority opinion states that “it is clear that Robert’s goodwill12 is unmarket-able_ [and that] uncontroverted evidence established that his law practice’s goodwill could not be sold.”13 If Robert were dissolving or withdrawing from a solo law practice, I could agree that any goodwill in Robert’s practice could not be sold.14 However, this would not lead me to conclude that an ongoing solo law practice lacks goodwill for marital division purposes.15

The fact is, however, that Robert is not a sole practitioner, but rather the sole shareholder of an ongoing multi-lawyer professional corporation, Richmond and Associates.16 Thus, by expressing no opinion as to whether a multi-lawyer law firm has professional goodwill, the majority opinion fails to decide the central issue presented to this court on the issue of goodwill.17

In my opinion, both a solo practitioner (operating either as a sole proprietorship or as a professional corporation) and a multi-lawyer law firm (operating either as a partnership or as a professional corporation) may have goodwill.18 If it does, it should be considered in valuing the marital estate for the reasons that I have expressed above. Although the courts are deeply divided on the question of whether the goodwill of a sole legal practitioner’s practice is a divisible marital asset,19 the majority of courts that have considered the question of whether the goodwill of a multi-lawyer law firm is a divisible asset have answered that question in the affirmative.20

. Maj. op. at 1213.

. 622 P.2d 429 (Alaska 1981).

. Id. at 430-31.

. See, e.g., Powell v. Powell, 231 Kan. 456, 648 P.2d 218, 222-24 (1982); Nail v. Nail, 486 S.W.2d 761, 763-64 (Tex.1972); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343, 354-55 (App.1981).

. In re Marriage of Kapusta, 141 Ill.App.3d 1010, 96 Ill.Dec. 234, 237, 491 N.E.2d 48, 51 (1986) (citing Annotation, Accountability for Good Will of Professional Practice in Actions Arising from Divorce or Separation, 52 A.L.R.3d 1344 (1973)); Prahinski v. Prahinski, 75 Md.App. 113, 540 A.2d 833, 842 (citing authorities), cert. granted, 313 Md. 572, 546 A.2d 490 (1988).

.See, e.g., 2 H. Clark, The Law of Domestic Relations in the United States § 16.5, at 199 (2d ed.1987); L. Golden, Equitable Distribution of Property § 6.21, at 188 (1983 & Supp.1988) (hereinafter “L. Golden"); Note, Treating Professional Goodwill as Marital Property in Equitable Distribution States, 58 N.Y.U.L.Rev. 554, 555 (1983) (authored by Carmen Valle Patel); Comment, Identifying, Valuing, and Dividing Professional Goodwill as Community Property at Dissolution of the Marital Community, 56 TuLL.Rev. 313, 313 (1981) (authored by Bryan Mauldin) (hereinafter "Mauldin Comment").

. L. Golden .§ 6.21, at 189.

. Moffitt v. Moffitt, 749 P.2d 343 (Alaska 1988).

. Alaska is among these states. See Laing v. Laing, 741 P.2d 649, 655-56 (Alaska 1987) (non-vested pensions are marital assets subject to division by divorce court); Monsma v. Monsma, 618 P.2d 559, 560-61 (Alaska 1980) (vested federal civil service retirement benefits are a divisible marital asset).

. L. Golden § 6.21, supp. at 107 (citation forms altered; Prahinski citation inserted). See also Comment, Hanson v. Hanson, Mitchell v. Mitchell: The Division of Professional Goodwill upon Marital Dissolution, 11 Harv. Women's L.J. 147 (1988) (authored by Jane A. Materazzo).

The problem perceived because of the intangible and potentially nonliquid character of professional goodwill is magnified as courts are faced with astonishingly high valuations. Where the value of the non-professional spouse’s interest in the professional goodwill exceeds the combined value of the professional spouse’s share of all tangible community *1220assets, the courts are faced with an additional problem: How is the professional spouse going to obtain the cash necessary to make the ordered compensatory payment? It has been noted that "[i]n very few cases will the goodwill be a liquid asset similar to the items used to offset its value in a division of community property such as stock, real property or bank accounts.” At dissolution, all the assets of the practice, including the goodwill, must necessarily be awarded to the licensed professional spouse. The non-professional spouse's interest in the goodwill must be compensated with other property. Not only is the professional spouse faced with the forced liquidation of tangibles in order to pay the necessary compensation, but there may not be enough tangibles to liquidate.
However, this is also the precise situation in which the non-professional spouse needs the greatest protection. If his share in the professional goodwill is left uncompensated and there is also little tangible property to be awarded, the non-professional spouse will be left with few assets while the professional spouse enjoys continued possession of a very valuable asset. This would amount to a perpetuation of the economic superiority of the professional or working spouse over the nonprofessional or non-working spouse which community property is intended to remedy. Clearly the role of the court is not to force the professional spouse into bankruptcy or forced sale of his practice, nor is this a necessary result. It is equally unnecessary for the court to deny the non-professional spouse a fair division of property by intentionally undervaluing the professional goodwill.
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The solution is not bankruptcy, forced sale of the practice, undervaluation of professional goodwill, or unequal division of the community. The financial interests of both spouses require a far less onerous remedy which is readily available since it frequently is used and is certainly within the courts’ discretionary powers. A court, upon assigning a fair value to the professional goodwill and making an appropriate division of tangibles, need only, where necessary to avoid hardship, order periodic payments or the execution of a promissory note payable in installments over a term sufficient to meet the balance due plus interest accrued on the compensation for the non-professional spouse’s interest in the goodwill. Such a method meets the financial needs of both spouses.

Mauldin Comment, 56 Tul.L.Rev. at 328-30 (footnotes omitted; emphasis added).

. Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 6 (1983). Accord In re Marriage of Fenton, 134 Cal.App.3d 451, 184 Cal.Rptr. 597, 600-02 (1982).

. I cannot agree with the majority’s use of the words “Robert’s goodwill.” The issue here is not the goodwill possessed by Robert, but rather the goodwill (if any) possessed by Robert’s law practice.

. Maj. op. at 1214.

. See Geffen v. Moss, 53 Cal.App.3d 215, 125 Cal.Rptr. 687 (1975) (sale of goodwill of sole legal practitioner’s practice unenforceable as against public policy).

In Litman v. Litman, 93 A.D.2d 695, 463 N.Y. S.2d 24 (1983), aff'g 115 Misc.2d 230, 453 N.Y. S.2d 1003 (1982), aff’d, 61 N.Y.2d 918, 474 N.Y. S.2d 718, 463 N.E.2d 34 (1984), the appellate court reversed the trial court’s decision that “since a lawyer is enjoined by the Code of Professional Responsibility ... from selling his or her practice, it is unfair to subject the practice to equitable distribution upon dissolution of the lawyer’s marriage.” 463 N.Y.S.2d at 25 (citation omitted). The court held that, though the firm need not be sold, the husband would have to compensate the wife for her share of the equity in the firm. Id.

. The courts are divided on the question of whether a law practice operated as a sole proprietorship may have goodwill divisible for marital estate purposes. Compare Dugan v. Dugan, 92 NJ. 423, 457 A.2d 1, 6 (1983); In re Marriage of Freedman, 35 Wash.App. 49, 665 P.2d 902, 904-05 (1983) (both holding that goodwill may exist and be divided upon divorce) with Prahinski v. Prahinski, 75 Md.App. 113, 540 A.2d 833, 843-44, cert. granted, 313 Md. 572, 546 A.2d 490 (1988); Beasley v. Beasley, 359 Pa.Super. 20, 518 A.2d 545, 552 (1986) (both holding that there is no divisible goodwill).

. See also In re Marriage of Lopez, 38 Cal. App.3d 93, 113 Cal.Rptr. 58, 63 (1974) (solo attorney formed partnership with two associates by selling interests in firm which included goodwill), disapproved on other grounds, In re Marriage of Morrison, 20 Cal.3d 437, 143 Cal.Rptr. 139, 573 P.2d 41 (1978). In the instant case one of the associates in Robert’s firm became a partner, and the firm is now Richmond & Quinn.

. Thus, I cannot agree with the majority that “[tjhe uncontroverted evidence established that his law practice's goodwill could not be sold.” Maj. op. at 1214.

. The existence and value of goodwill must be determined regardless of whether it is “that of a sole practitioner, a professional partnership or a professional corporation.” In re Marriage of Lopez, 113 Cal.Rptr. at 68.

. See supra note 15.

. See Molloy v. Molloy, 158 Ariz. 64, 761 P.2d 138, 139-41 (App.1988) (goodwill of incorporat*1222ed law firm is a marital asset subject to distribution); Todd v. Todd, 272 Cal.App.2d 786, 78 Cal.Rptr. 131, 135-36 (1969) (goodwill of partnership divisible); In re Marriage of Brooks, 51 Wash.App. 882, 756 P.2d 161, 162-63 (1988) (goodwill of incorporated law firm may be valued even though assigned no value in the corporate bylaws). But see Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343, 354-55 (App.1981) (goodwill or intangible value of partnership interest in law firm not an asset subject to division).