Dugan v. Dugan

• Citation: 92 N.J. 423,457 A.2d 1
• Parties: James P. DUGAN, Plaintiff-Appellant, v. Rosaleen M. DUGAN, Defendant-Respondent.
• Decision Date: 28 February 1983
• Court: United States State Supreme Court (New Jersey)

Page 423

92 N.J. 423

457 A.2d 1

James P. DUGAN, Plaintiff-Appellant, v. Rosaleen M. DUGAN, Defendant-Respondent.

Supreme Court of New Jersey.

Argued Oct. 26, 1982.

Decided Feb. 28, 1983.

James C. Orr, Newark, for plaintiff-appellant (Lum, Biunno & Tompkins, Newark, attorneys).

James P. Yudes, Mountainside, for defendant-respondent.

The opinion of the Court was delivered by

SCHREIBER, J.

This case involves the equitable distribution of marital property upon divorce, more particularly the evaluation of an attorney's goodwill in his exclusively owned professional corporation.

Plaintiff, James P. Dugan, and defendant, Rosaleen M. Dugan, were married in 1958 and separated in 1978. They had no children. The plaintiff, a member of the New Jersey Bar, carries on his practice as a professional corporation. The defendant had served as a secretary in plaintiff's law office and attended college during the marriage, graduating in 1972. She is certified as a public school teacher, but as of the date of the divorce judgment was unemployed.

The judgment entered for dual no-fault divorce provided for distribution of property, alimony and other relief. Plaintiff appealed from portions of the judgment relating to the assets of the marital estate, alimony, and counsel fees. The Appellate Division affirmed. Plaintiff filed a notice of appeal and a petition for certification. We dismissed the appeal and granted plaintiff's petition for certification, limited to the issues arising from the valuation of plaintiff's interest in his wholly-owned professional corporation. 89 N.J. 405, 446 A.2d 139 (1982). The trial court determined that the value of the material part of the marital estate was $606,966 as of December 29, 1978, the date the complaint was filed. It awarded the defendant $230,864 and the plaintiff $376,102 consisting of the following:

                Real property                              $285,400
                Law practice
                   Goodwill                      $182,725
                   Accounts receivable             18,891
                   Pension plan                    50,500
                   Common stock                     1,000
                       Less
                       Retained earning deficit     1,780
                Net value of law practice                   251,336 1
                Cash                                         55,313
                Miscellaneous                                14,917
                                                           --------------
                                                           $606,966
                

A major asset in the joint estate was the plaintiff's law practice. It comprised more than 40% of the entire estate and over 70% of the value of that asset consisted of the value placed on goodwill. The trial court's methodology in calculating that value was predicated on the theory that the plaintiff was to be compared with the typical incorporated attorney whose gross assets were roughly equivalent to the plaintiff's. The comparison was limited to the efficiency of the respective operations, that is, the percentage that net income before income taxes bears to gross receipts. The net income of a typical attorney was found to be 38.5% of gross receipts. Plaintiff's gross income was multiplied by 38.5%, yielding what could be termed a typical attorney's net income based on plaintiff's actual gross revenues. The excess of plaintiff's net income over that resulting from the application of the 38.5% standard was then multiplied by a factor of five. The trial court found that this figure equaled goodwill.

We must determine whether goodwill is a part of the value of plaintiff's law practice; if so, whether it constitutes property subject to equitable distribution; and, if so, how it is to be evaluated.

I

In a divorce judgment a court may "effectuate an equitable distribution of the property, both real and personal," acquired during the marriage. N.J.S.A. 2A:34-23. ² We have acknowledged that the Legislature intended that its reference to "property" be construed comprehensively. Painter v. Painter, 65 N.J. 196, 217, 320 A.2d 484 (1974); see Gauger v. Gauger, 73 N.J. 538, 544, 376 A.2d 523 (1977). Determining the "property" subject to equitable distribution requires a marshalling of the parties' economic resources. Kruger v. Kruger, 73 N.J. 464, 468, 375 A.2d 659 (1977). These economic resources cover a broad spectrum. Initially a list of the parties' assets and liabilities upon a particular date should be prepared. Personal tangible property is clearly includable. Id. Intangibles may also constitute property. See id. (stating "[t]he right to receive monies in the future is unquestionably such an economic resource") (emphasis in original). See also Kikkert v. Kikkert, 177 N.J.Super. 471, 427 A.2d 76 (App.Div.), aff'd o.b., 88 N.J. 4, 438 A.2d 317 (1981) (holding a vested pension plan providing future monetary benefits to be equitably distributable).

As distinguished from tangible assets, intangibles have no intrinsic value, but do have a value related to the ownership and possession of tangible assets. Some intangibles, such as a trademark, trade name or patent, are related to an identifiable tangible asset. Goodwill, which is another intangible, is not. Often referred to as "the most 'intangible' of the intangibles," D. Kieso & J. Weygandt, Intermediate Accounting 570 (3d ed.1980), goodwill is essentially reputation that will probably generate future business. Lord Eldon expressed that thought in Cruttwell v. Lye, 17 Ves. 335, 346, 34 Eng.Rep. 129, 134 (Ch. 1810): "The good-will, which has been the subject of sale, is nothing more than the probability, that the old customers will resort to the old place."

Justice Cardozo when Chief Judge of the New York Court of Appeals embraced the same concept when he wrote:

Men will pay for any privilege that gives a reasonable expectancy of preference in the race of competition. Such expectancy may come from succession in place or name or otherwise to a business that has won the favor of its customers. It is then known as good will. [In re Brown, 242 N.Y. 1, 6, 150 N.E. 581, 582 (1926) (citation omitted) ]

See also J. Story, Commentaries on the Law of Partnership § 99, at 157-61 (7th ed.1881).

There can be no doubt that goodwill exists. It is a legally protectible interest. See J.B. Liebman & Co. v. Leibman, 135 N.J.Eq. 288, 292, 38 A.2d 187 (Ch.1944). Indeed, we have enforced a restrictive covenant limiting a seller's right to compete that was designed essentially to protect the goodwill of the business for the buyer. Solari Indus. v. Malady, 55 N.J. 571, 576, 264 A.2d 53 (1970). The New Jersey inheritance tax, N.J.S.A. 54:34-1, requires consideration of goodwill. See, e.g., In re Hall's Estate, 99 N.J.L. 1, 125 A.2d 246 (Sup.Ct.1923), aff'd o.b., 100 N.J.L. 405, 126 A. 924 (E. & A. 1924); Schneider v. Zink, 2 N.J.Super. 53, 64 A.2d 612 (App.Div.1949); In re Deutz, 105 N.J.Eq. 671, 149 A. 257 (Prerog.Ct.1930). Upon dissolution of a partnership goodwill has been recognized as an element in determining value for purposes of liquidation. Blut v. Katz, 13 N.J. 374, 99 A.2d 785 (1953). In Kanzler v. Smith, 123 N.J.Eq. 602, 199 A. 35 (1938), the Court of Errors and Appeals held that the legally contemplated liquidation of partnership property upon the death of a partner required "an accounting by the surviving partner for the value of the deceased partner's interest, including the value of goodwill, if any." Id. at 606, 199 A. 35 (citation omitted).

The basic notion expressed by Lord Eldon in Cruttwell was embellished by Chief Justice Gummere in Hall's Estate, supra, where he observed that goodwill consisted of several elements, including:

the right to continue the business at the same place in which it has been established and where its reputation has been made, carrying with it the probability that old customers will continue to resort to the old place for the purpose of making their purchases, notwithstanding the change in the name under which the business has been carried on, so long as the service remains satisfactory and the standard of the goods sold is maintained; and this element undoubtedly has value, although perhaps not so much as the continued use of the name under which the business has theretofore been conducted.

But assuming this view to be unsound, a mere right to acquire the good-will of a business, which may be exercised or not at the option of the holder of that right, is not the equivalent of the ownership of the good-will. Good-will is property. [99 N.J.L. at 4-5, 125 A.2d 246]

The accounting profession has further expanded the concept of goodwill to encompass other advantages of an established business that contribute to its profitability. J.M. Smith & K.F. Skousen, Intermediate Accounting 283 (7th ed. standard vol. 1982), capture this thought in their definition:

Goodwill is generally regarded as the summation of all the special advantages, not otherwise identifiable, related to a going concern. It includes such items as a good name, capable staff and personnel, high credit standing, reputation for superior products and services, and favorable location.

See also Accounting Principles Board, Op. 17, "Intangible Assets," in FASB Financial Accounting Standards 266-72 (1981). ³ In a broad sense goodwill includes a whole host of intangibles including the quality of management, the ability of the organization to produce and market efficiently, and the existence and nature of competition. Some writers have been careful to differentiate between going concern value and goodwill. See Paulsen, "Goodwill and Going Concern Value Reconsidered," Mergers & Acquisitions, Winter 1980, at 10. Goodwill is keyed to reputation; going concern value to the enhanced value of the assets due to their presence in an established firm. See Danzig & Robison, "Going Concern Value Reexamined," The Tax Adviser, Jan. 1980, at 32. Going concern value has many of the characteristics of goodwill and in many situations will constitute an asset enhancing the value of an enterprise. In that event it will...