Mitchell v. Mitchell
| Decision Date | 30 October 1985 |
| Docket Number | CA-CIV,No. 2,2 |
| Citation | 152 Ariz. 312,732 P.2d 203 |
| Parties | Robert K. MITCHELL, Petitioner/Appellant/Appellee/Cross-Appellee, v. Carole Anne MITCHELL, Respondent/Appellee/Appellant/Cross-Appellant. 5483. |
| Court | Arizona Court of Appeals |
Robert K. Mitchell (husband) appeals from three provisions of an August 24, 1983 judgment and decree of dissolution of marriage as amended and from a post-judgment order of March 13, 1984, modifying provisions of the decree of dissolution of marriage as amended. He claims any goodwill of his partnership had no value and could not be apportioned as a community asset; that the community interest in his life insurance policies was limited to their cash value, and the court could not change the ownership of his life insurance policies and award them to his wife; that there was no evidence to support the value established by the court for the Pinetop property; and that the court could not modify provisions of the judgment and decree of dissolution as amended after he and his wife had appeals pending. We agree and reverse, except for the interest in his life insurance policy.
Carol Ann Mitchell (wife) appeals from the provisions of the August 24, 1983 judgment and decree of dissolution of marriage as amended, awarding her spousal maintenance and an "equalizing" payment required by an unequal division of the community assets. We need not decide her claims on appeal because our opinion resolving the issues raised by husband's appeal will require remand for further proceedings consistent with our opinion and require the trial court to alter and modify the provisions of the original judgment and decree of dissolution of marriage as amended.
The necessary facts supporting our opinion will be stated during the following discussion of the issues.
Husband is one of the partners of a public accounting firm. The interest of the community upon dissolution is to be determined by the provisions of the partnership agreement and the Arizona statutes governing partnerships. During their marriage, husband and wife executed partnership agreements in 1975, 1978, and 1979. Each agreement provided:
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 the eventual determination of a partner's interest in the net assets of the partnership, its capital or for any other purpose.
According to the provisions of the valid partnership agreement, husband had no right to receive anything of value for goodwill upon dissolution, retirement or death. Since the community had no monetary interest in the goodwill of the partnership, the court could not value and award a nonexisting asset upon dissolution of the marriage. The trial court valued the community interest in the partnership at $150,000. This value included an amount beyond the value of the capital assets of the partnership which could only be supported by evidence received by the court from expert witnesses placing a value upon the goodwill of the professional partnership. We reverse and remand for a determination by the trial court of the community interest in the partnership without placing a value on goodwill.
Wife urges us to extend to professional partnerships the rule stated in Wisner v. Wisner, 129 Ariz. 333, 631 P.2d 115 (App.1981), for placing a value on the goodwill of a shareholder of a professional corporation. We decline to extend that rule beyond its facts. The court in Wisner supported its opinion with the general laws governing professional corporations, A.R.S. §§ 10-908(3)(a), 10-908(6), and 10-909(D), and the transferability and sale of shares of a professional corporation during and after the death of a shareholder and for its indefinite continuation after a shareholder's death. There is no similarity between the laws governing the interests of a shareholder in a professional corporation and the laws governing the interests of a partner under the Uniform Partnership Act. 1 Wife argues that she should not be bound by the terms of the partnership agreement she signed during her marriage because they would then become invalid, post-nuptial agreements. We reject the argument, but even if, arguendo, we could relieve her from the terms of the partnership agreement (placing no value on goodwill), we still would reverse the trial court because goodwill of a professional proprietorship or partnership is not a divisible community asset. Austin v. Austin, 619 S.W.2d 290 (Tex.Civ.App.1981); Powell v. Powell, 231 Kan. 456, 648 P.2d 218 (1982); Nail v. Nail, 486 S.W.2d 761 (Tex.1972); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (App.1981); 52 A.L.R.3d 1338.
An analysis of goodwill as an asset leads us to the conclusion that as applied to professions, its value is in reality both the ability to earn and the increased earnings from the practice of the particular profession because of an enhanced reputation. Jacob v. Miner, 67 Ariz. 109, 191 P.2d 734 (1948); Spheeris v. Spheeris, 37 Wis.2d 497, 155 N.W.2d 130 (1967); and Holbrook v. Holbrook, supra.
In Holbrook the court said:
The concept of professional goodwill evanesces when one attempts to distinguish it from future earning capacity. Although a professional business's good reputation, which is essentially what its goodwill consists of, is certainly a thing of value, we do not believe that it bestows on those who have an ownership interest in the business, an actual, separate property interest. The reputation of a law firm or some other professional business is valuable to its individual owners to the extent that it assures continued substantial earnings in the future. It cannot be separately sold or pledged by the individual owners. The goodwill or reputation of such a business accrues to the benefit of the owners only through increased salary.
We think this case is analogous to the situation in DeWitt v. DeWitt [98 Wis.2d 44, 296 N.W.2d 761] in which this court determined that a professional education or the increased earning capacity that it confers upon the spouse who holds it is not a divisible marital asset, even though the acquisition of the degree is partly attributable to the earnings and efforts of the other spouse. * * *
It was further explained in DeWitt that valuing a professional degree as a marital asset necessarily requires division of the post-divorce earnings of the degree-holding spouse, which is inconsistent with the requirement that only assets acquired during marriage can be divided.
Like an educational degree, a partner's theoretical share of a law firm's goodwill cannot be exchanged on an open market: it cannot be assigned, sold, transferred, conveyed or pledged. Although we recognize the factual distinction between a degree-holder and a partner or shareholder in a law firm, we think the similarities compel analogous treatment in a divorce setting. In both cases, the "asset" involved is not salable and has computable value to the individual only to the extent that it promises increased future earnings.
103 Wis.2d 327, 309 N.W.2d at 354-355 (footnotes omitted).
The analogy between an educational degree and partnership goodwill described is consistent with the view adopted by Arizona courts, that one spouse's education, professional degree and license, or the increased earning potential each represents, cannot be characterized as community property subject to valuation and division upon dissolution. Pyeatte v. Pyeatte, 135 Ariz. 346, 661 P.2d 196 (App.1983); Wisner v. Wisner, supra.
Since goodwill of a professional partnership is in reality the ability to increase future earnings based on an enhanced reputation, the trial court could not under existing Arizona law, accept and rely upon the testimony of the expert witness using a method of valuation for the partnership goodwill based on husband's future earnings for five years. To reach a theoretical value for the goodwill of...
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