Decision Does Not Clarify Goodwill

By Attorney Gregg Herman
August 30, 2010

To Dr. Tim McReath and His Counsel: It’s my sincere hope that you’ll petition the Wisconsin Supreme Court to review the Wisconsin Court of Appeals’ opinion in McReath v. McReath, No. 2009AP639 (Wis. Ct. App. July 29, 2010) (recommended for publication).

In the case, filed on July 29, 2010 by Dist. IV court, the court affirmed a trial court ruling that included professional goodwill as an asset for property division, and also included all of the professional’s income in awarding maintenance. The opinion rejected the argument that by doing so, the court was impermissibly double-counting income.

This article will analyze the implications of this decision.

As I mentioned last week, there is one part of the opinion with which I total agree: The court called the area of family law regarding professional goodwill a “quagmire” and predicted its decision would not clear it up. Uh-huh, it didn’t. In fact, it may have made the area murkier.

Holbrook is History

Let’s start with the good news. The decision implicitly overruled Holbrook v. Holbrook, 103 Wis. 2d 327, 309 N.W.2d 343 (Ct. App. 1981), at least as it has frequently been cited and utilized..

Holbrook has frequently been wrongly cited, not only in Wisconsin, but throughout the country, as standing for the proposition that professional goodwill is not divisible in Wisconsin.

To the extent Holbrook ever stood for such a proposition, it was decided at a time when selling a law firm conflicted with ethical rules. Today, law firms can be sold as long as the sale complies with the requirements of SCR 20:1.17.

Moreover, Holbrook dealt with a lawyer whose shareholder’s agreement prescribed that upon leaving the firm, he would be repaid his capital account and nothing more. While the holding is clearly premised on the unfairness (a term we will deal with later in this column) of charging a party more value for an asset than that party can receive if the asset is sold, unfortunately, the court did not stop there. In dicta, the decision included language that has led numerous courts throughout the country – and some in Wisconsin — to conclude that professional goodwill is not salable in this state.

Over the years, Wisconsin courts have recognized that this holding should be limited to its facts. (See Gregg Herman, The Slow Death of Holbrook, Wisconsin Journal of Family Law, January, 1991.)

The Case for Fairness

Next, the quagmire.

The issue of professional goodwill is complex, with many tentacles. If McReath held that personal goodwill is always included in the divisible estate, the income available for maintenance and double-counting be damned (which seems to be the holding), the issue of fairness is given lip-service only. It would be nice to think that fairness is still a consideration in this state. As a result, this case leaves more questions than answers in this area — hence, the murkier quagmire.

For example, in selling a professional practice, other than the nominal value of desks and chairs, the purchaser is actually buying the future income of the practice. As was the case in McReath, the value of the future income is often reflected on the insistence of the buyer that the seller sign a non-compete agreement. After all, what value are the future earnings if the seller opens up shop across the street, and the clients (and their fees) go to the new location? Doesn’t the existence, therefore, of a non-compete agreement prove that in the free market (which is the lodestar for valuation in Wisconsin) the value of the business is inextricably tied into the future income of the business? And, if so, why should the business owner pay twice for the same thing?

There are cases where the professional goodwill is salable, but the seller can continue to earn an income. For example, to be enforceable, a non-compete agreement must be limited in geographic scope. So, a dentist (like Dr. McReath, for example), could sell his or her professional goodwill, sign a non-compete but accept a job, rather than opening a new practice, which might require some time to generate income, outside the geographic limits.

In such a case, why would it be unfair (there’s that word again!) to include the value of the dental practice in the divisible estate and also award maintenance utilizing future income from a distinct source?

Of course, when a non-professional business is sold, many times that purchaser is also really purchasing the future stream of income. In theory, this future stream is more transferable in a non-professional practice and any “personal goodwill” can be remedied by a key man discount.

Still, if the value of the business that is included in the divisible estate is derived by capitalizing its future income, why would it be fair to utilize the same income in awarding maintenance? Why would that be more fair (or unfair) than in the case of a professional practice?

Dykman’s Dissent

Part of the problem with the decision in McReath was the apparent lack of a record fully examining these issues. Several times in its decision, the court uses such a lack of a record in concluding that it had little choice but to affirm the trial court.

Since this case will affect numerous cases in the future (how often are these cases litigated, then appealed?), why didn’t the appellate court remand for further findings rather than make a ruling that will have to be parsed for meaning for years to come?

Such a result was recommended by Presiding Judge Charles Dykman in his dissent, opining that the matter should be remanded for a finding of whether the double-counting was fair, in light of Cook v. Cook, 208 Wis. 2d 166, 180, 560 N.W.2d 246 (1997). Unfortunately, his entire dissent consumes merely three short paragraphs. If what he is saying is that this issue is too complex for a one-size-fits-all approach, that would make a great deal of sense.

Fairness is a concept that, like beauty, is very much to be left to the eye of the beholder. Double-dipping is certainly an issue that requires careful consideration of what is fair (or, as is typically the case in family law, equally unfair) to both parties. That determination needs to be left to the discretion of a trial judge who has full access to all relevant circumstances in an individual case, rather than trying to make square holes and expecting that each case will have square pegs.

Since Judge Dykman was outvoted, there is only means of clarifying this area, absent waiting for a new case to wind its way through the legal system. The Wisconsin Supreme Court has not decided a family law case since Frisch v. Henrichs, 2007 WI 102, more than two years ago, and there are no family law cases on its current docket.

Assuming Dr. McReath petitions for review — and he should — this would be an excellent case for the high court to accept, and consider further developing Judge Dykman’s dissent.

This article originally appeared in the Wisconsin Law Journal.

Attorney Gregg Herman is a founding partner of Loeb & Herman S.C. in Milwaukee, WI. He practices family law exclusively, and can be reached via e-mail or by calling (414) 272-5632.