A Partnership Agreement May Limit the Community’s Interest in the Goodwill of the Company

A partnership agreement, which excludes the partnership’s goodwill from the partner, may limit the community’s interest to the value of the spouse’s capital account.

In Iredale, wife’s divorce lawyer argued that the value of wife’s interest in her law partnership should include the value of the wife’s capital account and exclude any goodwill.  Wife testified that she held a minimal interest in the partnership and was not involved in firm management.  When wife became a partner, she was not required to buy into the firm's accounts receivable, work in progress, or goodwill.  Wife’s divorce lawyer presented expert testimony that wife’s partnership interest contained no goodwill and should be solely measured by the capital account.  Wife’s expert also conclude that wife received reasonable compensation for her services and had not received excess compensation.  Husband’s divorce lawyer argued that wife’s interest in her partnership should include goodwill.  Husband’s expert analyzed the partnership by appraising its assets and multiplying it by the wife’s interest.  However, husband’s expert acknowledge that the partnership existed as an established national law firm prior to wife become a partner, which demonstrated that the partnership had substantial goodwill. The divorce ultimately did not assign any goodwill to the community and husband’s divorce lawyer appealed.

The Court of Appeal affirmed the divorce court by holding that the circumstances of each case, and each professional practice, vary by and call for different methods of valuation. Here, the partnership agreement limited wife's partnership interest to the value of her capital account and excluded accounts receivable, work in progress, or goodwill. The Court of Appeal reasoned that because wife did not buy or otherwise acquire an interest in the accounts receivable, work-in-process, or goodwill and on termination, she would not receive any share of the partnership's goodwill, the goodwill was not a community asset to be valued or divided.

In re Marriage of Iredale & Cates (2004) 121 Cal. App. 4th 321