In a Family Law Proceeding a Partner’s Future Earning Capacity is Not the Determining Factor Utilized in Determining Goodwill

The divorce court utilized a buy-sell agreement formula in determining value in a law firm.

In this case, Husband became a five percent shareholder in a corporate law firm during marriage.  His interest was held subject to a repurchase agreement which fixed the purchase price of his stock according to a prescribed formula.  The formula specifically excluded any allowance for goodwill.

At the divorce trial, Husband’s accountant testified that the law firm did not have a value beyond that expressed in the formula.  At the time of the divorce, Husband was 31 years old and had only been an attorney for seven years, and a shareholder of the law firm for only two years.  Wife's divorce lawyer argued in response that Husband’s future expectations of earnings constituted valuable goodwill, but failed to present any evidence contradicting Husband’s accountant’s testimony at the divorce trial.

In valuing the five percent stock interest in the law firm, the divorce court determined that Husband’s interest in the law firm was limited to the fair market value as computed under the formula set forth in the stock purchase agreement.  The divorce court did not make an explicit finding on the issue of goodwill.

On appeal, Wife's divorce lawyer argued that the divorce court’s failure to make a specific finding as to the effect of any goodwill in its valuation of Husband’s interest in his law firm was reversible error.  The Court of Appeal disagreed.  The Court of Appeal noted that Wife failed to request a special finding on the issue of goodwill, and that “implicit in [the divorce trial court’s findings] is a determination that husband had no goodwill interest in any value in the law firm . . . [and u]nder these circumstances, the family law judgment cannot be set aside for failure to issue finding as to the existence of goodwill as a community asset.”

Moreover, the Court explained that due to Husband’s “youth and comparative inexperience, the trial court could reasonably conclude that he had not contributed in any substantial way to whatever goodwill the law firm might possess.”  Taken with the testimony of Husband’s accountant, “these factors support the court’s determination that good will was not to be considered in evaluating his interest in the firm.”

Finally, Wife’s argument that Husband’s earning capacity and expectation of future income amounted to goodwill was squarely rejected by the Court, which explained that “in marital cases, the expectancy of future earnings is not synonymous with, nor should it be the basis for, determining the value of ‘goodwill’ of a professional practice, but is simply a factor to consider in deciding if such an asset exists.” 

In re Marriage of Aufmuth (1979) 89 Cal.App.3d 446

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