Mitchell v. Mitchell, No. CV

CourtSupreme Court of Arizona
Writing for the CourtHOLOHAN; GORDON, C.J., FELDMAN, V.C.J., and CAMERON; HAYS
Citation152 Ariz. 317,732 P.2d 208
Docket NumberNo. CV
Decision Date30 January 1987
Parties, 77 A.L.R.4th 633, 55 USLW 2467 Robert K. MITCHELL, Petitioner/Appellant/Appellee/Cross-Appellee, v. Carole Anne MITCHELL, Respondent/Appellee/Appellant/Cross-Appellant. 86 0022-PR.

Page 208

732 P.2d 208
152 Ariz. 317, 77 A.L.R.4th 633, 55 USLW 2467
Robert K. MITCHELL, Petitioner/Appellant/Appellee/Cross-Appellee,
v.
Carole Anne MITCHELL, Respondent/Appellee/Appellant/Cross-Appellant.
No. CV 86 0022-PR.
Supreme Court of Arizona, In Banc.
Jan. 30, 1987.

Page 209

[152 Ariz. 318] John S. Schaper, Phoenix, for petitioner/appellant/appellee/cross-appellee.

Lewis and Roca by Jeremy E. Butler, John P. Frank, Paul G. Ulrich, Phoenix, for respondent/appellee/appellant/cross-appellant.

HOLOHAN, Justice.

Carole Anne Mitchell, appellant, sought review by this court of the decision of the Court of Appeals in Mitchell v. Mitchell, 152 Ariz. 312, 732 P.2d 203 (App.1985). We granted review to clarify the proper treatment to be accorded goodwill in a professional partnership under Arizona community property laws. The issues on review are:

1. In a marital dissolution proceeding is there a community property interest in the goodwill of a professional practice conducted as a partnership?

2. If so, did the wife forfeit her claim to the goodwill asset of the husband's ongoing CPA practice as a result of signing a partnership agreement that specified that no value be placed on the firm's goodwill?

We have jurisdiction under Arizona Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

The parties were married in 1954 and have two adult children. The appellee husband received his degree in accounting in 1958. Appellant was not employed outside

Page 210

[152 Ariz. 319] the home for most of the marriage. The couple moved to Arizona in 1958 where the appellee joined a national accounting firm. He was licensed as a Certified Public Accountant (CPA) in 1960. Several years later, appellee and two associates formed a partnership which lasted until 1968. From 1968 until 1975, appellee practiced as a sole practitioner. In 1975 he entered into an accounting partnership with Earl Hardy under the firm name of Mitchell & Hardy. A third person joined the partnership in 1978, but he withdrew before the end of 1979.

Since 1979 Mitchell & Hardy has operated under a written partnership agreement that was admitted in evidence. The agreement, signed by both appellee and appellant, provides in pertinent part:

17. GOODWILL. The parties to this partnership agreement specifically intend that no value be placed upon any Goodwill of the firm that may exist, and therefore, specify that no valuation shall be attempted in eventual determination of a partner's interest in the net assets of the partnership, its capital or for any other purpose.

Although the 1979 agreement specified no valuation for goodwill, it did contain special provisions providing for payments of money to a partner upon retirement or death. The provisions for such payments were not limited to the firm's tangible assets and accounts receivable but also included a share of the net profits for a limited period.

The trial court in granting a dissolution found inter alia that the community interest in the partnership was valued at $150,000. This sum included an amount for the partnership capital assets and goodwill. The Court of Appeals, Division II, reversed the judgment of the trial court and remanded the case for a redetermination of the value of the partnership interest without placing any value on goodwill. The Court of Appeals ruled that appellant was bound by the terms of the partnership agreement which placed a zero valuation on goodwill. The Court of Appeals also held that the goodwill of a professional partnership is not a divisible community asset. In doing so the court distinguished Wisner v. Wisner, 129 Ariz. 333, 631 P.2d 115 (App.1981), which held that the goodwill of a professional corporation was property subject to equitable distribution under A.R.S. § 25-318. The court analogized the goodwill of a partnership to a personal achievement such as an educational degree which cannot be exchanged on the open market, citing Pyeatte v. Pyeatte, 135 Ariz. 346, 661 P.2d 196 (App.1982); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (App.1981).

I. IS GOODWILL OF A PROFESSIONAL PARTNERSHIP A COMMUNITY PROPERTY ASSET?

The concept of "goodwill" is elusive, leading over the years to a variety of judicial definitions. Wisner v. Wisner, 129 Ariz. at 337, 631 P.2d at 119, citing Vol. 38 C.J.S. Good Will, § 1; 38 Am.Jur.2d Good Will § 1, and cases cited therein. The definitions range from the narrow view of goodwill as a probability of repeat customers, Annot., Accountability for Good Will of Professional Practice in Actions Arising from Divorce or Separation, 52 A.L.R.3d at 1344 n. 1, to its broadest sense as reputation, Spheeris v. Spheeris, 37 Wis.2d 497, 155 N.W.2d 130, 135 (1967). In Arizona, it has been defined as "that asset, intangible in form, which is an element responsible for profits in a business." Jacob v. Miner, 67 Ariz. 109, 120, 191 P.2d 734, 741 (1948).

In Wisner, the Court of Appeals held that the goodwill of a professional corporation is based on numerous factors, including: "the practitioner's age, health, past earning power, reputation in the community for judgment, skill and knowledge, and his or her comparative professional success." 129 Ariz. at 337-38, 631 P.2d at 119-20. Wisner relied upon a case from California and a case from Washington, both of which discussed goodwill within the context of marital dissolution proceedings. Both cases surmounted the difficulty of valuing professional goodwill while holding

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[152 Ariz. 320] that indeed there was goodwill in the professional partnership/and sole proprietorship at issue. In re Marriage of Lukens, 16 Wash.App. 481, 558 P.2d 279 (1976) (goodwill of sole medical practice a divisible marital asset regardless of asset's marketability); In re Marriage of Lopez, 38 Cal.App.3d 93, 113 Cal.Rptr. 58 (1974) (whenever the issue is raised, trial court must make specific finding of the existence and value of the goodwill of a professional practice whether in the form of sole practice, partnership or professional corporation). Wisner dealt with a professional corporation with one shareholder, but it is instructive in its description of the factors to be considered in establishing the value of goodwill in a professional practice. We believe that the Wisner principles are equally applicable to a professional partnership. Wisner does not support appellee's argument that a partner's goodwill is a personal, non-divisible asset because it is not readily marketable.

It would be inequitable to hold that the form of the business enterprise can defeat the community's interest in the professional goodwill. Such a result ignores the contribution made by the non-professional spouse to the success of the professional, especially when the marriage spans as many years as in the present case. Under community property principles the wife made the same contribution to the community asset of the professional partnership as she would have made had the business been a professional corporation. As one court has stated:

Under the principles of community property law, the wife, by virtue of her position as wife, made to that value [goodwill] the same contribution as does a wife to any of the husband's earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.

Golden v. Golden, 270 Cal.App.2d 401 at 405, 75 Cal.Rptr. 735 at 738 (1969).

The confusion in this area of the law exists partially because many of the cases concerning the existence and evaluation of goodwill involve partnership...

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53 practice notes
  • Endres v. Endres, No. 18812
    • United States
    • Supreme Court of South Dakota
    • June 26, 1995
    ...case was submitted did not participate. --------------- 1 See Moffitt v. Moffitt, 813 P.2d 674, 676 (Alaska 1991); Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 214 (1987); In re Marriage of Hargrave, 163 Cal.App.3d 346, 209 Cal.Rptr. 764, 770 (1985); In re Marriage of Huff, 834 P.2d 2......
  • Prahinski v. Prahinski, No. 1187
    • United States
    • Court of Special Appeals of Maryland
    • September 1, 1987
    ...294 Ark. 194, 741 S.W.2d 640 (1987); Wisner v. Wisner, 129 Ariz. 333, 631 P.2d 115 (Ct.App.1981), harmonized, Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208 (1987) (en banc ); In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49 (1974); In re Marriage of Nichols, 43 Colo.App. 38......
  • Sorensen v. Sorensen, No. 870102-CA
    • United States
    • Court of Appeals of Utah
    • February 10, 1989
    ...18 Several courts have found that "[t]he better analogy is to pension rights which are marital property." Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 211 (1987) (and citations therein). Both are property rights acquired during the marriage although their enjoyment and benefits are de......
  • Skrabak v. Skrabak, No. 674
    • United States
    • Court of Special Appeals of Maryland
    • September 1, 1995
    ...Only a few states have rejected the use of the capitalization of excess earnings method of valuing goodwill. See Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 214 (1987) (en banc); E.E.C. v. E.J.C., 457 A.2d 688, 694 (Del.1983); Mocnik v. Mocnik, 838 P.2d 500, 505 Other states have dis......
  • Request a trial to view additional results
53 cases
  • Endres v. Endres, No. 18812
    • United States
    • Supreme Court of South Dakota
    • June 26, 1995
    ...case was submitted did not participate. --------------- 1 See Moffitt v. Moffitt, 813 P.2d 674, 676 (Alaska 1991); Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 214 (1987); In re Marriage of Hargrave, 163 Cal.App.3d 346, 209 Cal.Rptr. 764, 770 (1985); In re Marriage of Huff, 834 P.2d 2......
  • Prahinski v. Prahinski, No. 1187
    • United States
    • Court of Special Appeals of Maryland
    • September 1, 1987
    ...294 Ark. 194, 741 S.W.2d 640 (1987); Wisner v. Wisner, 129 Ariz. 333, 631 P.2d 115 (Ct.App.1981), harmonized, Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208 (1987) (en banc ); In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49 (1974); In re Marriage of Nichols, 43 Colo.App. 38......
  • Sorensen v. Sorensen, No. 870102-CA
    • United States
    • Court of Appeals of Utah
    • February 10, 1989
    ...18 Several courts have found that "[t]he better analogy is to pension rights which are marital property." Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 211 (1987) (and citations therein). Both are property rights acquired during the marriage although their enjoyment and benefits are de......
  • Skrabak v. Skrabak, No. 674
    • United States
    • Court of Special Appeals of Maryland
    • September 1, 1995
    ...Only a few states have rejected the use of the capitalization of excess earnings method of valuing goodwill. See Mitchell v. Mitchell, 152 Ariz. 317, 732 P.2d 208, 214 (1987) (en banc); E.E.C. v. E.J.C., 457 A.2d 688, 694 (Del.1983); Mocnik v. Mocnik, 838 P.2d 500, 505 Other states have dis......
  • Request a trial to view additional results

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