Marriage of Hall, In re

• Decision Date: 13 December 1984
• Docket Number: No. 50234-0,50234-0
• Citation: 103 Wn.2d 236,692 P.2d 175
• Parties: In re the MARRIAGE OF Judith HALL, M.D., Respondent, and Phillip L. Hall, M.D., Petitioner.
• Court: Washington Supreme Court

Page 236

103 Wn.2d 236

692 P.2d 175

In re the MARRIAGE OF Judith HALL, M.D., Respondent and Phillip L. Hall, M.D., Petitioner.

No. 50234-0.

Supreme Court of Washington En Banc.

Dec. 13, 1984.

Larry Setchell, Seattle, for petitioner.

Chemnick & Moen, Eugene M. Moen, Seattle, for respondent.

Professor Luvern Rieke, Seattle, amicus curiae for respondent.

BRACHTENBACH, Justice.

Did the trial court err in this dissolution action in finding that the husband, a medical doctor in private practice, possessed goodwill valued at $70,000, but that the wife, a medical doctor employed as a salaried professor, did not possess goodwill? Secondarily, did the trial court apply the proper factors in valuing the husband's goodwill? By an unpublished split decision, the Court of Appeals affirmed. In re Marriage of Hall, noted at 36 Wash.App. 1026 (1983). We reverse in part and remand for further proceedings.

Judith G. Hall, M.D. and Phillip L. Hall, M.D. were married in 1963 while medical school students. In 1966 both received their medical doctorates, served internships and pursued specialized training--Judith in pediatrics and Phillip in cardiology. Returning to Seattle in 1972, Judith was hired by the University of Washington Medical School as an assistant professor. Phillip entered private practice as an internist employed by a private clinic.

At the time of trial, Phillip, age 41, enjoyed a good reputation in the community as a consulting cardiologist. In 1975, Phillip and another doctor formed a partnership, which was incorporated in 1977 as Northwest Cardiology Clinic. A third doctor became a shareholder in 1979. Three hospitals, as well as other doctors, referred patients to the clinic which was located on the campus of one of the hospitals. In the 3 years preceding trial, Phillip's average gross yearly earnings, exclusive of retirement contributions, were $52,411.83.

Judith, age 40 at the time of trial, was an untenured professor at the University of Washington with no expectation of tenure in the foreseeable future. In the 3 years preceding trial, Judith's average gross yearly earnings, exclusive of employer contributions to her retirement plan, were $32,750. In mid-1980 her salary increased to $42,000. Judith testified that her decision to pursue an academic career was primarily attributable to the need for a flexible schedule in order to care for the Hall's children. Although Judith is widely published and enjoys a reputation as one of the 10 top physicians in the nation in the field of pediatric genetics, there are few, if any, medical career opportunities outside academia, especially in the Seattle area. Numerous medical schools across the nation have offered her employment with salaries up to $60,000. Employment opportunities outside of academia with salaries in the range of $50,000 could be available with some retraining and relocation.

The trial court found that Judith had no professional goodwill due to the fact that she was a salaried physician. The court found that Phillip had professional goodwill in the amount of $70,000. A decree of dissolution was entered accordingly. The Court of Appeals affirmed the trial court's holdings; Phillip Hall petitioned for review.

Evaluation of professional goodwill is a troublesome issue. Since 1976, professional goodwill has been recognized in Washington as property of an intangible nature subject to division in a marriage dissolution. In re Marriage of Lukens, 16 Wash.App. 481, 558 P.2d 279 (1976). It is often defined as the "expectation of continued public patronage". Lukens, at 483, 558 P.2d 279. Justice Story has more thoroughly defined professional goodwill as:

a benefit or advantage "which is acquired 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.

Lukens, at 483-84, 558 P.2d 279, citing In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49 (1974).

In 1979, reviewing the decisions of other courts, this court noted that a number of states had refused, in a divorce proceeding, to assign a value to goodwill of a professional practice, but adopted the Lukens recognition of goodwill as a marital asset. In re Marriage of Fleege, 91 Wash.2d 324, 588 P.2d 1136 (1979). In Fleege, the issue was whether the goodwill of the husband's solo dental practice was a community asset. Despite expert testimony establishing that the value of his dental practice included goodwill, the trial court had refused to include goodwill as an asset subject to distribution. This court held that, although professional goodwill is not readily salable, the important consideration is not whether the goodwill of the practice could be sold without the personal services of the professional, but whether it has value to him. Fleege, at 327, 588 P.2d 1136. The dissent contended that goodwill is not a marital asset subject to division because no true goodwill could exist separate and apart from the services of the practitioner. Fleege, at 330-36, 588 P.2d 1136. (Stafford, J. dissenting).

Since Fleege, this court has not ruled further on the concept of goodwill. The Court of Appeals, however, applied the principles of Fleege to a case involving a lawyer in solo practice. In re Marriage of Freedman, 23 Wash.App. 27, 592 P.2d 1124 (1979) (Freedman I). In Freedman I, the trial court had included the lawyer's goodwill, valued at $100,000, in the community assets to be distributed. While adhering to Fleege, the Court of Appeals nevertheless remanded the case so that further testimony could be taken on all the factors set forth in Fleege. Although the existence of goodwill was not then at issue, the trial court, upon remand, found that goodwill could not exist in a solo law practice because it could not be sold. Instead, the trial court awarded the wife $19,451 as her "spouse's economic benefit expectancy" (SEBE). On a second appeal, the Court of Appeals did not analyze the nature of SEBE, nor did it consider the correctness of the trial court's finding of lack of goodwill. In re Marriage of Freedman, 35 Wash.App. 49, 51, 665 P.2d 902 (1983) (Freedman II). The Court of Appeals held that regardless of the name given, the trial court had considered the Fleege factors as required in Freedman I. Therefore, the award to the wife as SEBE was affirmed.

The last case to discuss professional goodwill was In re Marriage of Kaplan, 23 Wash.App. 503, 597 P.2d 439 (1979), which involved an attorney who was a "special partner" in a law firm. The trial court found that attorneys in general do not possess goodwill as an item of property. Alternatively, it found that even if attorneys in general do have goodwill, Mr. Kaplan did not. Relying on Freedman I, the Court of Appeals held that the legal question of whether an attorney has goodwill was foreclosed. The Kaplan court reversed and remanded for consideration of those factual elements used in determining the value of goodwill as discussed in Fleege and Freedman I.

The husband here contends that the Fleege doctrine should be reconsidered because (1) it presents confusing and unfair criteria for identifying and evaluating the economic benefit to one spouse or the other, from a professional degree and career; and, (2) it is unfair where, as here, it requires the determination that only one of two spouses, with identical professional educations and earning capacities, has professional goodwill. These contentions are based on the failure to distinguish between professional goodwill and personal earning capacity of the professional.

Goodwill is a property or asset which usually supplements the earning capacity of another asset, a business or a profession. Goodwill is not the earning capacity itself. It is a distinct asset of a professional practice, not just a factor contributing to the value or earning capacity of the practice. Comment, Professional Goodwill in Louisiana: An Analysis of its Classification, Valuation, and Partition, 43 La.L.Rev. 119, 123 (1982); 38 Am.Jur.2d Good Will § 8 at 916 (1968). Discontinuance of the business or profession may greatly diminish the value of the goodwill but it does not destroy its existence. When a professional retires or dies, his earning capacity also either retires or dies. Nevertheless, the goodwill that once attached to his practice may continue in existence in the form of established patients or clients, referrals, trade name, location and associations which now attach to former partners or buyers of the practice. Comment, Identifying, Valuing, and Dividing Professional Goodwill as Community Property at Dissolution of the Marital Community, 56 Tul.L.Rev. 313, 320 (1981). Reference to Judge Reed's example in Lukens, 16 Wash.App. at 485, 558 P.2d 279 illustrates the difference in that a professional can transport all of his skill (earning capacity) to a new town, but patients or clients, reputation and referrals (goodwill) cannot always be transported.

Once goodwill is distinguished from earning capacity, the error becomes apparent in the argument that a practicing professional and a salaried professional, with equal earning capacities and educations, both have goodwill. Both have earning capacities, and, yet, only the practicing professional has a business or practice to which the goodwill can attach. The practicing professional brings an earning capacity to the practice comprised of skill and education. The goodwill, comprised of such things as location, referrals, associations, reputation, trade name and office organization, can directly supplement this earning capacity. When the practicing professional dies, retires or...