Salable Professional Goodwill as Divisible Property

By Attorney Gregg Herman
August 23, 2010

When an appellate court decision starts by noting that a particular area of law has been characterized as a “quagmire,” one reasonably expects that the court will then proceed to clean up the confusion. So, when a recent Court of Appeals case explicitly states that its decision will not “pull Wisconsin out of the quagmire,” the case is worth reading more than once.

This article will summarize the holding of such a case. Next week, after I’ve read the case one more time (or twice, or three times!), I will analyze its implications.

So you don’t have to hold your breath, let me start with an area of agreement I have with the court: This decision will not pull Wisconsin out of the quagmire.

Dividing Professional Goodwill

The case is McReath v. McReath, No. 2009AP639 (Wis. Ct. App. July 29, 2010) (recommended for publication), filed on July 29, 2010 by the Wisconsin Court of Appeals. Judge Paul Lundsten’s opinion for the Dist. IV court affirmed the order rendered by Sauk County Circuit Court Judge James Evenson.

Tim and Tracy McReath were divorced after a 20-year marriage. Tim is a dentist with a specialty in orthodontia. The circuit court included the full $1,058,000 valuation of his practice as divisible property.

For maintenance and child support, the court calculated Tim’s earnings from his orthodontic practice by looking at his average net cash flow over the five years preceding the divorce, with some minor adjustments. Based primarily on these earnings, the court ordered Tim to pay maintenance to Tracy at the rate of $16,000 per month for 20 years.

Most important to the issues on appeal, the trial court had no problem with using the same income for support as utilized in property division, insofar as the value of the dental practice included personal goodwill. Not surprisingly, Tim appealed.

On appeal, Tim argued that the circuit court erred as a matter of law when it treated the professional goodwill portion of the valuation of his practice as divisible property. He contended that although he could sell his practice for just over $1 million, most of that amount was attributable to non-divisible professional goodwill. It follows, according to Tim, that the circuit court applied an incorrect legal standard when it treated the full $1,058,000 valuation as an amount subject to division.

Impermissible Double-Counting?

The Court of Appeals disagreed.

First, Tim argued that existing case law prohibited treating any of his professional goodwill, salable or not, as divisible property. Tim relied primarily on Holbrook v. Holbrook, 103 Wis. 2d 327, 309 N.W.2d 343 (Ct. App. 1981), and Peerenboom v. Peerenboom, 147 Wis. 2d 547, 433 N.W.2d 282 (Ct. App. 1988).

The Court of Appeals disagreed with Tim’s reading of both cases. It found there was no hint in either Holbrook or Peerenboom that they considered whether salable professional goodwill should be divisible property. Accordingly, the court held that neither case resolved whether salable professional goodwill may be treated as divisible property.

Second, Tim implicitly argued that, even if existing case law did not compel the result, the Court of Appeals should now hold, based on double-counting, that none of his professional goodwill is divisible.

The Court of Appeals addressed and rejected both of Tim’s argument. It agreed with Tim that if he continued in his practice there would be some double-counting. But, for several reasons, the appellate court declined to adopt Tim’s proposed blanket prohibition on including salable professional goodwill as divisible property.

First and foremost, if Tim’s blanket prohibition were adopted, unfairness would plainly be the result in some circumstances. Second, the appellate court found that it had no basis on which to conclude that double-counting was a significant problem.

Moreover, it had no reason to think that completely excluding the value of salable professional goodwill from divisible assets made economic sense. The court highlighted the lack of economic information before it.

An alternative approach suggested by Tim’s double-counting argument was to deal with the issue when calculating maintenance. The appellate court found that Tim did not develop this argument, so the court did not have the benefit of adversarial briefing on the issue. Also, under such an approach, the court would be unable to give circuit courts guidance on how to apply it. The court stated it would not reverse the circuit court and remand for further proceedings based on mere speculation that the maintenance award was unfair, and corresponding speculation that there was a workable means of avoiding the unfairness.

What remained was the approach advocated by Tracy, and effectively adopted by the circuit court: Include all salable goodwill, both corporate and professional, as a divisible asset and then, essentially, ignore the fact that Tim’s earnings are intertwined with part of the divisible assets.

Because there is no existing rule precluding this approach, and because the Court of Appeals declined to adopt a rule that required the exclusion of salable professional goodwill from divisible property, it affirmed the circuit court.

Presiding Judge Charles P. Dykman filed a dissenting opinion, believing that the matter should be remanded to the trial court 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).

The complex nature of this issue and the possible impact of this case makes a short but accurate analysis impossible. Therefore, look for a complete analysis next week.

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.