ValueLinks Newsletter

December, 2006

In February/March of 2004 we last visited the issue of Personal Goodwill versus Entity Goodwill.  Many states outside New Jersey are beginning to segregate personal goodwill from entity goodwill and declaring the personal goodwill segment a non-distributable asset of the marital estate.  New Jersey, however, appears to be bucking the trend.  The spirit of Brown v. Brown [1] tells us that there should be no academic reductions in the value of a titled spouse’s interest if there is no intended sale of the business.  In Piscopo v. Piscopo [2], the family court would not deprive a spouse from sharing in “celebrity goodwill.”

A review of recent cases from other states continues to show a trend toward the separation of Personal v. Entity Goodwill.  This trend appears to favor the exclusion from the marital estate of Personal Goodwill in professional practice circumstances while including all goodwill associated with an operating entity in the marital estate.  Despite the pattern which is being established, contrary rulings exist.  An update on three recent cases follows.  Visit our website at koenigassociatesllc.com to read the full article that includes discussion on two additional cases.

1) Personal Goodwill Considered
In In re the Marriage of Brumback [3], the Washington Court of Appeals considered whether an attorney had personal goodwill.  Two years prior to divorce, the husband, an attorney, formed a personal injury law firm in which he received a 25 percent interest.  A second attorney received a 25% interest and a third original partner, the “rainmaker,” received a 50% interest.  Based on a recent divorce of the other 25% partner which valued his 25% interest at $135,000, the husband’s expert in the current matter valued the husband’s interest at $135,000.  The trial court agreed and placed a $135,000 value on the husband’s 25% interest in the law practice.  The wife appealed, claiming the practice had a value of $204,000, including personal goodwill ranging from $50,000 - $163,000. 

In reviewing the case, the appellate court looked to the Fleege [4] factors: age, health, past earnings power, reputation in the community and comparative personal success to ascertain whether the husband had any personal goodwill.  It concluded that the rainmaker was the partner that possessed personal goodwill, inclusive of his long-term relationships and reputation.  Accordingly, the appellate court affirmed the trial court’s valuation of the husband’s 25% interest at $135,000 without personal goodwill.  It appears the Court would have excluded personal goodwill had it found such goodwill to exist.

2) Personal Goodwill Excluded from Marital Estate
In In re Marriage of Schneider [5], the Illinois Supreme Court considered questions involving personal goodwill.  In 1987, during the marriage, the husband acquired a dental practice.  The husband filed for divorce in September 2000.  The trial court did not include any value for goodwill because, in their view, personal goodwill should not be included in the value of a professional practice.  The wife appealed and the appellate court found that inasmuch as she had waived maintenance, personal goodwill could be included in the valuation of a professional practice.  The husband appealed to the Illinois Supreme Court, which agreed with the husband that the appellate court erred when it included personal goodwill in the valuation of his dental practice.  The Supreme Court states “…The goodwill in a professional practice is generally personal in nature, while the goodwill in a corporation might include both personal and enterprise goodwill.”

3) Personal Goodwill Included in the Marital Estate
In Andrew Simon Mickler v. Terry J. Mickler, et al. [6], the Kentucky Court of Appeals considered the lower court’s valuation of the husband’s medical practice, including goodwill.  The wife’s expert concluded that the business had a fair market value of $218,123, including $170,925 in goodwill.  The husband’s expert determined that the practice had a fair market value of $18,704, exclusive of goodwill.  He did not factor in goodwill because “the only goodwill associated with a private practice is personal goodwill which is not a marketable business asset since it cannot be transferred unless that person stays with the business.”  The trial court accepted the valuation put forth by the wife’s expert which included personal goodwill.  The husband appealed.  The Kentucky appellate court upheld the lower court, stating “His goodwill has value despite its immarketability, and so long as he maintains his…practice…he will continue to receive a return on the goodwill associated with his name.”

Although a trend is emerging, the saga continues.  In situations where this issue exists, the courts are looking for well reasoned arguments for the inclusion or exclusion of personal goodwill regarding the marital estate.  Knowledge of the Fleege factors referred to above appears essential if one wishes to argue for the exclusion of personal goodwill from the marital estate.