Goodwill Case Law in Arizona
In Wisner v. Wisner, 129 Ariz. 333, 337-338, 631 P.2d 115 (App. 1981), the Court of Appeals held that the goodwill of a professional corporation is based on numerous factors, including “the practitioner’s age, health, past earning power, reputation in the community for judgment, skill and knowledge, and his or her comparative professional success.” While some jurisdictions hold that goodwill in a business is not a divisible marital asset, Arizona has held that goodwill is a divisible marital asset. Id. In the same regard, some jurisdiction hold that although ‘enterprise goodwill’ may be subject to a goodwill value, that ‘professional goodwill’ is personal to the business owner and is not divisible. Arizona is among the states that hold that the community does have a property interest in both enterprise and professional goodwill.Id.
In Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208 (1987), the husband owned an accounting firm that he started during the marriage. The husband argued that because his accounting business was a professional practice (as opposed to a commercial enterprise), that there was no goodwill in his practice, and that any such goodwill was personal to himself. Id. at 319. As such, the husband argued that any goodwill value of his accounting firm should not be considered a community property right. The Supreme Court of Arizona disagreed and states:
“Because the professional practice of the sole practitioner or partner will continue after dissolution of the marriage, with the same goodwill as it had during the marriage, we find that a refusal to consider goodwill as a community asset does not comport with Arizona’s statutory equitable distribution scheme. We prefer to accept the economic reality that the goodwill of a professional practice has value, and it should be treated as property upon dissolution of the community, regardless of the form of business.”
Id. at 321, 732 P.2d at 212.
In the Mitchell case, the accountant husband also argued that a professional’s goodwill “is a personal, non-divisible asset because it is not readily marketable,” and is thus not a community asset. Id. at 320. The Supreme Court of Arizona in the Mitchell case disagreed with such position as personal goodwill regards how the community efforts, reputation and efforts of a professional have enhanced earning capacity as opposed to whether a business can actually be sold in the open market. Id. at 320-322. The Court went on to state:
“The proper focus in this case is therefore upon the partnership’s value as a continuing unit rather than on its value based upon what would happen if appellee withdrew from the partnership. From this perspective, there is true economic value in the partnership; it is value properly divisible upon dissolution of the marital community.”
Id. at 322.
Similarly, the husband in the Mitchell case argued that if he withdrew from the partnership, his compensation for his interests in the partnership would not be based upon a valuation, but rather a predetermined amount set forth in his partnership agreement. Again, the Mitchell Court rejected such argument and found that because the husband had no intention to withdraw from the partnership, the Court needed to look at the value of the partnership interest to the husband himself as a going concern.Id. at 321-322.
The Court of Appeals of Arizona’s decision in Wisner v. Wisner, 129 Ariz. 333, 631 P.2d 115 (App. 1981), is also instructive. Although the facts in that case were somewhat different, the overall principle that the existence of personal goodwill cannot be defeated by restrictions to a person’s professional practice (such as the inability to transfer one’s book of business) is evident. In the Wisner case, the husband was a plastic surgeon who had a solo practice. The husband argued that his clients were essentially one time clients, that there was no repeat business from such clients, and that there could thus be no “goodwill” associated with his practice. The Court disagreed. Id. at 337. The Court held that while the husband’s practice did not rely upon repeat patients, it did receive repeat referrals of patients from physicians and other medical personnel. Id. The Court went on to explain that the definition of goodwill is not limited to the concepts proposed by the husband, but embodied “that asset, intangible in form which is an element responsible for the profits in a business,” and that such includes “in its broadest sense, reputation.” Id.
In Molloy v. Molloy, 158 Ariz. 64, 761 P.2d 138 (App. 1988), the Court of Appeals of Arizona held that a partner’s interest in his law firm’s goodwill is an asset subject to expert evaluation and inclusion in the marital community estate for purposes of equitable division. In that case, the husband first argued that his “goodwill” in the law partnership was defined by the written partnership agreement that he entered into. The Malloy Court disagreed, finding that the partnership agreement applied to a different situation (i.e., the withdrawal from the partnership) as opposed to the personal value to the husband in the partnership as a going concern. Id. at 67.
The husband in Molloy also argued that a law firm is “ethically proscribed from selling its goodwill,” and that such distinguishes law firms from other professional corporations and renders the evaluation of a law firm’s goodwill inappropriate. Id. at 66. The Molloy Court emphasized that the Supreme Court in the Mitchell case “… expressly rejected an argument ‘that a partner’s goodwill is a personal, non-divisible asset because it is not readily marketable.” Id. The Court continued:
[B]ecause the professional practice of the sole practitioner or partner will continue after the dissolution of the marriage, with the same goodwill as it had during the marriage, we find that a refusal to consider goodwill as a community asset does not comport with Arizona’s statutory equitable distribution scheme. We prefer to accept the economic reality that the goodwill of a professional practice has value, and it should be treated as property upon dissolution of the community, regardless of the form of business.
Id. (citing Wisner v. Wisner, 129 Ariz. 333 and other cases). The Molloy Court went on to state:
The Mitchell court focused not on marketability or transferability of a professional’s goodwill but, rather, on the value of that asset to the professional himself as an ongoing member of his profession.
Id. (citing Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 6 (1983) (the “inability” to sell a law practice does not eliminate existence of goodwill and its value as an asset to be considered in equitable distribution). The Molloy Court went on to explain: “As a caveat to this holding, we emphasize that a distinction lies between future earning capacity and goodwill. As stated by the Supreme Court of New Jersey,
Future earning capacity per se is not goodwill. However, when that future earning capacity has been enhanced because reputation leads to probably future patronage from existing and potential clients, goodwill may exist and have value. When that occurs, the resulting goodwill is properly subject to equitable distribution.
Id. at 67 (citing Dugan, 92 N.J. at 433, 457 A.2d at 6).