A New Jersey appellate court recently rebuked the trial court for its defective valuation rulings surrounding the goodwill component attached to the owner spouse’s equity interest in a law firm.” For valuation specialists active in this jurisdiction, familiarity with the appellate ruling is a must.

Large law firm interest: The husband, who specialized in complex tax matters, became an equity partner in 1984. He did not generate work but distinguished himself by working hard and accumulating billable hours. The firm calculated the value of the partners’ interests by way of a termination credit account (TCA). Once a partner turned 65, the board had discretion to decide whether the partner could continue to participate in the allocation of the firm’s excess income system or was moved to senior status, which meant to a salaried position.

The wife’s expert decided there was a separate goodwill interest in the husband’s firm ownership, about $1.18 million. The husband’s expert disagreed. Instead, he concluded the husband’s TCA alone represented the “true” value of the husband’s interest.

The trial court said it was “incredible” there was no goodwill in the firm and adopted the value conclusions the wife’s expert had submitted in his initial report but had later corrected because of admitted errors. The appellate court called down the trial court for failing to analyze the facts and support its conclusions as well as for obvious inconsistencies in the trial court’s findings. Further, the trial court seemed to misunderstand the conclusion the husband’s expert reached regarding goodwill. It wasn’t that the firm had no goodwill but that there was no additional goodwill component to the husband’s interest, the appellate court explained.

It reversed and remanded. Goodwill was a “complex question,” and this case in particular required a “nuanced methodology,” the reviewing court said. To “aid” the lower court on remand, the appellate court provided a review of New Jersey goodwill jurisprudence and alerted the lower court to crucial differences between the instant case and the controlling case law. It also ordered the case reassigned to a new trial judge. Stay tuned.

A digest of Slutsky v. Slutsky, 2017 N.J. LEXIS 120 (Aug. 8, 2017), and the court’s opinion will be available soon at BVLaw.