Levy v. Levy

• Decision Date: 06 December 1978
• Citation: 164 N.J.Super. 542,397 A.2d 374
• Parties: Ancy LEVY, Plaintiff, v. Ira LEVY, Defendant.
• Court: New Jersey Superior Court

Page 542

164 N.J.Super. 542

397 A.2d 374

Ancy LEVY, Plaintiff, v. Ira LEVY, Defendant.

Superior Court of New Jersey, Chancery Division.

Dec. 6, 1978.

Irving J. Soloway, Newark, for plaintiff.

Michael M. Rosenbaum, Newark, for defendant (Budd, Larner, Kent, Picillo & Rosenbaum, Newark, attorneys).

O'NEIL, J. C. C. (temporarily assigned).

When a going business enterprise is being appraised in marital litigation to determine the appropriate equitable distribution, an issue arises whether there is an intangible asset of good will to be evaluated. However, in recent marital litigation instances have multiplied where witnesses appearing to have expertise project widely differing values, based on differing theories of the nature of good will or at times without any theoretical justification at all. The attempts in the present case to assign or deny value to any element of good will in defendant-husband's law practice suggest again the need to begin some public review of the available precedents dealing with good will so as to develop some current judicial consensus on the point. The other issues in the case have no precedential significance.

The husband was admitted to the New Jersey bar in 1953 before the parties' marriage in 1956. He was then and continues to be a single practitioner, specializing in federal tax matters. Until quite recently he employed only clerical help, but in the last year he has engaged an associate and incorporated as a professional association.

The parties separated in 1972 and the wife's divorce complaint was filed in 1974. After a trial involving 11 different days judgment of divorce was entered in May 1977 on the eve of the trial judge's retirement. The judgment also adjudicated an appropriate distribution of the real estate and most of the personal property owned by the parties, using 1976 values. However, it reserved for further attention and later decision the value of the husband's law practice and the appropriate distribution to be made respecting it. Prior to the judgment defendant had testified to the financial details of his practice and the manner in which he billed and collected, but contended that there was no good will to the practice. An accountant testified for the wife from records of the practice he had examined. Although the trial judge's letter opinion observes that "some of his testimony was based on conjecture, some on assumption," the accountant opined that there was a good will factor in the law practice equal to one to one and a half times the gross annual earnings, an opinion, as the trial court noted, for which no authority was given in support. Because he found that he could not accept either side's opinion on the value of the practice, the trial judge appointed an experienced attorney with a specialization in tax matters as the court's expert to review the practice and report on its value. However, in his letter opinion the judge expressed his own view that defendant had "after all these years only a fair law practice." The record of the net income of the practice as shown on Schedule C of his personal income tax returns supports that impression:

                1976 ............ $35,621
                1975 ............ $37,240
                1974 ............ $39,261
                1973 ............ $40,754
                1972 ............ $53,277
                1971 (rounded) .. $43,000
                

The report of the expert was submitted thereafter and recommended values for the husband's accounts receivable and physical office equipment. As to good will he said this:

The certified public accountant attempted to place a good will value on the law practice. He based his opinion in this regard on practices followed in the accounting profession. I disagree. The courts of this state have consistently held that under the circumstances existing in this case, there would be no good will value to the law practice. It would be otherwise if defendant were a partner in a law firm. This is however not the case herein.

There has yet to be a published holding in a New Jersey marital litigation which distinguishes between a proprietorship and a partnership as to the elements of a business which should be appraised. On the other hand, the Appellate Division has twice effectively generalized that differences of form do not produce different valuation techniques. Scherzer v. Scherzer, 136 N.J.Super. 397, 346 A.2d 434 (1975); Grayer v. Grayer, 147 N.J.Super. 513, 371 A.2d 753 (1977):

We are satisfied that the manner of valuation of a law practice is not dependent upon its form and hence that the same principles and techniques of valuation apply whether the practice is conducted as a partnership or as a professional corporation. (147 N.J.Super. at 520, 371 A.2d 757)

* * * So far as the equitable distribution principle is concerned, there should be no essential difference between a situation in which the husband has an interest in an individual business and one held in a corporate name. The form should not control. (136 N.J.Super. at 400, 346 A.2d at 436)

Since Grayer held the same appraisal techniques appropriate for a partnership and a corporation and Scherzer held those for a corporation to be applicable to a proprietorship, the mathematical axiom that things equal to the same thing are equal to each other should equate and not differentiate the techniques applicable to a partnership and proprietorship. The significant element of both decisions was that form should not control, although it is possible that formal differences could be accompanied by practical factual differences in result.

Additionally, Stern v. Stern, 66 N.J. 340, 331 A.2d 257 [1975], has made it clear that the ethical nonsaleability of a law practice does not necessarily eliminate good will as an element of value:

The good will of a law firm, for ethical reasons, may not be sold or transferred for a valuable consideration. (Citations omitted.) It may, however, in a given case, be possible to prove that it does exist and is a real element of economic worth. Concededly, determining its value presents difficulties. Rev.Rul. 609, 1968-2 Cum.Bull. 327. (at 346, 347, n. 5, 331 A.2d at 261)

The suggestion of plaintiff's accountant that good will be measured in terms of a multiple of revenues follows a familiar mechanical technique for measuring good will, but his intention to use the gross earnings of the business ignores the reality that, analytically, good will is found in measuring neither the gross nor unadjusted net income of the business, but rather its Excess net earnings. In an enterprise where earnings are principally the product of invested capital the question of whether they are excess requires comparison of the rate of return on its own capital with the average or ordinary rate of return being realized in other businesses of the same type. Where the business is a service organization then the question of excess requires comparison of the net earnings with the reasonable value of the personal services which produced them. In either case testimony is needed.

These principles are neither arcane nor exotic, and the process of evaluating good will is not a newly devised exercise. Outside the judicial process it is a commonplace in negotiating sales of businesses. There, the parties' views of the value of good will normally account for the difference between the total value of the tangible assets (including receivables) and the sales price. Until it became relevant to marital litigation after the 1971 amendments, the principal need for judicial attention to it in common law states or in federal courts had arisen in the review of inheritance, estate or income tax assessments.

However, California has long dealt with the issue in applying its community property law to the consequences of divorce, and many decisions there and in other community property states are cited, quoted and digested in a comprehensive law review note, "Valuation of Professional Good Will upon Marital Dissolution", 7 SW.U.L.Rev. 186 (1975). According to the notewriter, the first case in California to recognize good will as an element attached to a nonmercantile enterprise was Mueller v. Mueller, 144 Cal.App.2d 245, 301 P.2d 90 (D.Ct.App.1956), which found measurable good will in a dentist's individual practice. It cited and quoted 24 Am.Jur. 808, which, after noting an earlier tendency attributed to Lord Eldon, to deny its existence except in commercial situations said:

* * * The better doctrine, however, appears to be that good will also exists in a professional practice or in a business which is founded upon personal skill or reputation. Where a person acquires a reputation for skill and learning in a particular profession, as, for instance, in that of a lawyer, a physician, or an editor, he often creates an intangible but valuable property by winning the confidence of his patrons and securing immunity from successful competition for their business, and it would seem to be well settled that this is a species of good will which may be the subject of transfer. (301 P.2d at 94)

More recent cases from that region which agree with this concept are In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49 (D.Ct.App.1974), concerning a medical practice, and In re Marriage of R. M. Lukens, 16 Wash.App. 481, 558 P.2d 279 (App.Ct.1976), dealing with an osteopath. In re Marriage of Lopez, 38 Cal.App.3d 93, 113 Cal.Rptr. 58 (D.Ct.App.1964), concerning a law practice, points to the distinction between the extinction of good will upon termination of a practice and its continuance as a productive asset in the case of marriage dissolution. It quotes Golden v. Golden, 270 Cal.App.2d 401, 405, 75 Cal.Rptr. 735, 737 (D.Ct.App.1969):

* * * But, in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under principles of community property law, the wife, by virtue of her position of wife, made to that value the same contribution as does a...