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Only Business Goodwill May be Divided

In Marriage of McTiernan & Dubrow, husband ranked number thirteen among movie directors in worldwide box office revenues for the previous ten years. Wife’s divorce attorney sought to value husband’s personal goodwill. At the divorce trial, wife’s expert testified that husband developed an earning capacity and reputation which greatly exceeded that of most in his profession, commanded a premium for his services, and could expect “continued patronage at his prior level of compensation.” The divorce court determined that husband had personal goodwill of $1.5 million, which was subject to division. Husband’s divorce lawyer filed an appeal.

The Second District agreed with husband’s divorce attorney and reversed the divorce court by holding that an individual performing services as a “natural person,” as opposed to as a business or profession, cannot have goodwill.  The Court of Appeal stated that goodwill means more than an expectation of continued patronage. “A common characteristic of a property right, is that it may be disposed of and transferred to another” and because husband could not transfer or confer his “elite professional standing,” it had no value to divide.

“[T]he fact that the trial court was able to, and did, apply the ‘excess earnings’ method to calculate goodwill does not mean that there is goodwill in this case. Boiled down to its essentials, the excess earnings method is a comparison of husband’s earnings with that of an ‘average’ peer. The fact that this calculation can be performed, does not convert husband’s skill and reputation into ‘a business,’ and does not transmute unique and idiosyncratic talents into property that can be transferred or sold.”  To do so would create an “asset” predicated on nothing more than predictions about earning capacity. On the other hand, when “a business” with assets is divided, there is some assurance that the obligation created by the division can and will be met.

In re Marriage of McTiernan & Dubrow (2005) 133 Cal. App. 4th 1090