Washington court looks to ‘husband’s toil’ in goodwill analysis

BVWireIssue #179-2
August 9, 2017

A recent Washington state divorce case included a noteworthy discussion of goodwill where the owner spouse’s business arguably was separate property. Divorce experts will notice that the court’s goodwill analysis has much in common with an appreciation analysis.

Readers who are familiar with BVR’s Goodwill Jurisprudence Chart know that Washington is a community property state and professional goodwill is subject to division. The focal point in the case was the husband’s CPA firm, which he had set up before the marriage. The issue was whether the marital estate could claim any interest in the business.

Excess earnings approach: The short answer is yes. One theory—successful—was that the business had lost its character as separate property during the marriage. Another winning argument for the nonowner spouse was that most of the business’s value lay in the husband’s professional goodwill. Excess earnings valuations by the parties’ experts confirmed this claim. The experts, and the husband himself, also testified that, during the marriage, the husband worked continuously to renew his clientele. The trial court found, and the appeals court affirmed, that any goodwill in the business was acquired through the husband’s “toil,” so the goodwill, therefore, was community property.

The husband’s contention that, early on (presumably before the marriage), he had created systems that enabled the business to run itself lacked support in the record, the appeals court found.

A digest of In re Marriage of Vandal, 2017 Wash. App. LEXIS 1459 (June 19, 2017), and the court’s opinion, will be available soon at BVLaw.

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