The Court of Appeals in McDIARMID v. McDIARMID, for the first time in the District addressed whether goodwill of a law firm partnership interest is an asset subject to distribution upon dissolution of marriage.
The trial court had established some value associated with the goodwill partnership and had ruled in favor of awarding a specific sum to the wife during the distribution of assets phase of the divorce trial.
Appellant husband had argued primarily that:
- Professional goodwill is not a tangible asset, and thus not a marital property subject to distribution.
- In the alternative, if professional goodwill is marital property, the trial court had erred in attributing a value to this goodwill.
Goodwill has generally been defined as:
The advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital stock, funds, or property employed therein, in consequence of general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.
Whether professional goodwill is subject to distribution upon dissolution of marriage is of first impression in the District particularly because:
- There is no specific consensus as to a definition of professional goodwill, or
- Whether a sole practitioner of any profession can have goodwill, and
- What method or methods should be used to value professional goodwill.
A number of courts have concluded that professional goodwill in a law practice is not a tangible property subject to equitable distribution hence the concept of goodwill is indistinguishable from future earning capacity and thus too remote and speculative to be valued.
A professional business’s good reputation and goodwill is certainly a thing of value however it does not confer an ownership interest in the business, an actual, separate property interest thus intangible and escapes equitable evaluation.
The DC Court of Appeals however sided with jurisdictions that consider professional goodwill as marital property subject to equitable distribution. As a measuring mechanism, in order to ascertain value subject to distribution, courts must consider the contributions each spouse may have made to the tangible and intangible assets of the professional practice.
That is, courts should consider the goodwill of a law practice as a marital asset if the law practice has monetary value over and above its tangible assets and that value is separate from the reputation of an individual.
Moreover, goodwill should be valued and assessed with great care otherwise individual practitioner will be forced to pay the ex-spouse tangible dollars for an intangible asset valued by unconventional and hypothetical methods.
The Court of Appeals focused specifically at the partnership agreement of the law firm, which expressly stated that one should not associate any value to the goodwill clause as nonsalable.
Thus, the trial court had erred in valuing the goodwill of appellant’s partnership interest in the law practice in any amount when the appellant had no way of ever realizing the value of that goodwill himself.
In conclusion, the Court held: there is a disturbing inequity in compelling a professional practitioner to pay a spouse a share of intangible assets at a judicially determined value that could not be realized by a sale or another method of liquidating value.
Refer to our Washington DC Divorce Lawyer page for more details on this subject.