Marriage of Foster, In re

• Decision Date: 22 October 1974
• Citation: 42 Cal.App.3d 577,117 Cal.Rptr. 49
• Court: California Court of Appeals Court of Appeals
• Parties: In re the MARRIAGE OF Iris Ann and William Theodore FOSTER. Iris Ann FOSTER, Respondent, v. William Theodore FOSTER, Appellant. Civ. 34078.

Page 49

117 Cal.Rptr. 49

42 Cal.App.3d 577

In re the MARRIAGE OF Iris Ann and William Theodore FOSTER Iris Ann FOSTER, Respondent, v. William Theodore FOSTER, Appellant.

Civ. 34078.

Court of Appeal, First District, Division 1, California.

Oct. 22, 1974.

Rehearing Denied Nov. 14, 1974.

Hearing Denied Dec. 18, 1974.

Rawles, Golden, Hinkle & Finnegan by John J. Golden, Ukiah, for respondent.

Barry Wood, Ukiah, for appellant.

MOLINARI, Presiding Justice.

In this dissolution of marriage proceeding the primary question presented on appeal is whether the trial court used a proper method of evaluating the goodwill attributable to appellant's medical practice. It is conceded by appellant that any goodwill attributable to his medical practice is community property. ¹ A determination by us that a proper evaluation method was used by the trial court requires that we decide whether the evidence is sufficient to support the lower court's evaluation.

Commencing in August 1966 appellant became associated with Dr. Smalley in a medical practice in Willits, California, at a compensation which included a monthly salary of $1,750 and an additional sum of $100 per month for car expense. This association continued for approximately nine months when appellant and Dr. Smalley formed a partnership for the practice of general medicine. On January 1, 1971, the partnership was incorporated as the 'Willits Medical Group.' The corporation was dissolved in August 1971 and Dr. Smalley and appellant went their separate ways, each to pursue an individual medical practice in Willits. On June 1, 1972, appellant opened a new office location. It contained 3,500 square feet occupied by four examination rooms, one baby room, one minor surgery room, one physical therapy room, one consultation room, one waiting room and a visitor's office. Appellant regularly employed four persons and worked between 50 and 60 hours per week. He made hospital calls every day and sometimes twice a day.

The testimony concerning the value of the goodwill of the medical practice was conflicting. Donald Heller, an accountant whose qualifications as an expert were stipulated to, testified that he had examined appellant's financial records and that in his opinion the value of the goodwill was $27,000. On direct examination Heller was asked to explain 'some of the ways available to determine the fair value of goodwill of a medical practitioner.' Heller stated that 'One way is to take the net income for the year and subtract from that what a comparable employer (sic) would have as a salary in a comparable situation, and take that difference, and multiply that by a factor anywhere from, one year factor of anywhere from two to ten.' He testified further that 'You can take the net earnings of the business, one year's net earnings of the business. You can take two years net earnings of the business. You can take three years net earnings of the business. You can take three months charges to accounts receivable. You can take three months receipts on accounts receivable.'

Heller testified further that there is no definite method by which the value of goodwill can be determined and that it is 'always just somebody's opinion.' When queried as to how he arrived at the figure of $27,000 he stated he applied 'these methods' and took into consideration other factors such as the facts that Willits is a small town and appellant's office was near a hospital. Finally, he stated as follows: 'Mathematically I took the approximation of three months received on account, latest three months that I had, because some of the other ways I felt were resulted in a figure that was too high.'

On cross-examination Heller was asked what he meant by 'goodwill.' He replied: 'Goodwill is value that somebody has built up. . . . it is part of the business; it is separate from the accounts receivable, and is in addition thereto.' When asked if he was representing to the court that appellant could find a buyer who would pay $27,000 in addition to the other assets, Heller said 'not necessarily.' He explained that if appellant continued in his practice, his business had a value of $27,000 in excess of tangible items, but that it depended on how long appellant let the practice, 'sit,' whether he abandoned it, or whether he passed away. He said he had no opinion as to whether appellant could obtain $27,000 for goodwill from a buyer, but stated he would receive an amount for goodwill if he sold the practice. Heller reiterated that the $27,000 valuation for goodwill did not mean that appellant could obtain that sum by selling the medical practice and that he had no opinion as to the amount of money that could be obtained for goodwill upon a sale.

Appellant testified that the goodwill of his medical practice had no value as of July 31, 1972, the date that the parties separated. The trial court found that as of this date the goodwill of appellant's medical practice had a value of $27,000.

The specific issues tendered on this appeal are whether a proper method of evaluating goodwill was used by Heller and whether the evidence is sufficient to support a finding that the value of the goodwill of appellant's medical practice was the sum of $27,000.

In considering these issues we first observe that the parties apparently concede that a medical practice has a goodwill and that such goodwill has a value. The proceedings below were tried on the theory that appellant's medical practice had a goodwill and the sole issue with respect to this aspect of the case was confined to whether the goodwill of appellant's medical practice had a value, and, if so, what that value was.

'The 'good will' of a business is the expectation of continued public patronage.' (Bus. & Prof.Code, § 14100.) The following is a more complete definition: It is "the advantage or benefit which is accquired by an establishment beyond the mere value of the capital, stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances, or necessities, or even from ancient partialities or prejudices. (Citation.) . . . it is the probability that the old customers will resort to the old place. It is the probability that the business will continue in the future as in the past, adding to the profits of the concern and contributing to the means of meeting its engagements as they come in." (In re Lyons, 27 Cal.App.2d 293, 297, 81 P.2d 190, 193; see Piedmont Publishing Co. v. Rogers, 193 Cal.App.2d 171, 186, 14 Cal.Rptr. 133.) Goodwill is property of an intangible nature and is a thing of value. (Burton v. Burton, 161 Cal.App.2d 572, 576, 326 P.2d 855.) When it is sold it is not the patronage of the general public which is sold, but that patronage which has become an asset of the business. (Harrison v. Cook, 213 Cal.App.2d 527, 530, 29 Cal.Rptr. 269.) ²

In a divorce case it is well established that the goodwill of a husband's professional practice as a sole practitioner is taken into consideration in determining the community property award to the wife. (In re Marriage of Fortier, supra, 34 Cal.App.3d 384, 388--389, 109 Cal.Rptr. 915; Golden v. Golden, 270 Cal.App.2d 401, 405, 75 Cal.Rptr. 735; Brawman v. Brawman, 199 Cal.App.2d 876, 882, 19 Cal.Rptr. 106; see Fritschi v. Teed, 213 Cal.App.2d 718, 726, 29 Cal.Rptr. 114.) Since a community interest can only be acquired during the time of the marriage the value of the goodwill must exist at the time of the dissolution and that value must be established without dependence on the potential or continuing net income of the professional spouse. (In re Marriage of Fortier, supra, 34 Cal.App.3d 384, 388, 109 Cal.Rptr. 915.)

Adverting to the question of valuation, we observe the rule that when goodwill attaches to a business its value is a question of fact. (burton v. burton, supra, 161 cal.app.2d 572, 576--577, 326 P.2d 855; Mueller v. Mueller, supra, 144 Cal.App.2d 245, 251--252, 301 P.2d 90.) The courts have not laid down rigid and unvarying rules for the determination of the value of goodwill but have indicated that each case must be determined on its own facts and circumstances and the evidence must be such as legitimately establishes value. (Burton v. Burton, supra, 161 Cal.App.2d at p. 577, 326 P.2d 855; Mueller v. Mueller, supra, 144 Cal.App.2d at p. 251, 301 P.2d 90; see In re Marriage of Fortier, supra, 34 Cal.App.3d 384, 389, 109 Cal.Rptr. 915.) In establishing value of goodwill opinion evidence is admissible but is not conclusive. (Burton v. Burton, supra, 161 Cal.App.2d at 576, 326 P.2d 855.) The trier of fact may also take into consideration the situation of the business premises, the amount of patronage, the personality of the parties engaged in the business, the length of time the business has been established, and the habit of its customers in continuing to patronize the business. (See Burton v. Burton, supra, 161 Cal.App.2d at pp. 576--577, 326 P.2d 855.)

In Fortier we find the following statement: '. . . the value of community goodwill is simply the market vaue at which the goodwill could be...