Majority rule on goodwill in divorce is ‘mistaken’

Nearly a year ago, the Wisconsin Court of Appeals broke new ground in divorce law when it held that all the saleable personal goodwill in a professional practice, as evidenced by a non-compete agreement, is a divisible marital asset. (See BVWire #96-2) The husband appealed, and in McReath v. McReath, 2011 WL 2706249 (July 12, 2011), the state Supreme Court affirmed, ruling that a trial court “shall” include saleable professional goodwill in the divisible marital estate. It specifically rejected the current majority rule, reasoning that “some courts” follow that rule, but the “premise on which the distinction is grounded—that enterprise goodwill is saleable and personal goodwill is not saleable—is mistaken.”

The court also held that any rule against “double-dipping” did not apply to the salable goodwill in the professional practice, which—like an income-producing asset—has value separate from the income it generates. The Supreme Court appeared more concerned with this issue during oral arguments, according to Stephen Beilke (Murphy Desmond SC), counsel for the wife at trial and during the first appeal. When the justices did focus on goodwill, “there were various questions related to what type of goodwill can be sold since there have been obvious problems with different classifications in previous case law,” Beilke reports. In the end, he believes that the opinion appropriately addresses both issues of goodwill value and the “double dip” (although a number of his peers disagree). The decision does not create a new “formula” for determining goodwill, Beilke adds, but confirms that “trial judges will have to analyze each business evaluation on its own merit to determine what type of goodwill is saleable.”

The S. Ct. also notes what made the valuation by the wife’s expert more credible than the husband’s, as detailed in the trial court’s opinion. “Underneath all of this is a message to those valuators who take extreme positions,” says Dennis Kleinheinz (Meicher & Associates LLP), the wife’s income expert at trial. A close read of all three court opinions “might help educate our profession on things NOT to do when valuing dental practices (or any other professional service business),” Klenheinz adds. Look for his further insights in a future BVUpdate; the complete case digest will appear in the September 2011 issue, and the S. Ct. opinion will be posted soon at BVLaw.

Download update. Lastly, we’ve also updated one of our most popular downloads, Goodwill Hunting in Divorce, to reflect the new Wisconsin ruling: get your copy here.