Travis v. Travis

• Citation: 795 P.2d 96,1990 OK 57
• Decision Date: 03 July 1990
• Docket Number: No. 67851,67851
• Parties: , 1990 OK 57 Rex K. TRAVIS, Appellee, v. Bobby Jean TRAVIS, Appellant.
• Court: Oklahoma Supreme Court

Page 96

795 P.2d 96

59 USLW 2087, 1990 OK 57

Rex K. TRAVIS, Appellee, v. Bobby Jean TRAVIS, Appellant.

No. 67851.

Supreme Court of Oklahoma.

July 3, 1990.

Robert J. Turner, Oklahoma City, for appellee.

Janet L. Cox, Oklahoma City, for appellant.

ALMA WILSON, Justice:

In this divorce action, the appellant (Wife) presents as her sole issue whether the property division was erroneous and inequitable because the trial court declined to consider the good will of the appellee's (Husband's) law practice as a marital asset. In a summary opinion the Court of Appeals, Division 2, affirmed the judgment of the trial court. Because this case is one of first impression, we granted certiorari.

At the time of trial, October, 1986, Husband was a 47-year-old lawyer who had been licensed to practice law in this state since 1962. The parties were married on May 21, 1960, and separated on May 19, 1985. The parties stipulated that the value of the marital estate would be set as of September 30, 1985. The controversy in this case revolves around the division of Husband's law practice. Wife is not contesting the support alimony award in this case.

The facts reveal that Husband's law library, office equipment and furnishings were valued at $41,150.80. The total indebtedness resulting from the law practice was $414,894.39. Husband testified that he was a sole practitioner in a contingent fee practice in which 95% of his cases were referred to him by other lawyers with whom he associated in the handling of plaintiff personal injury insurance claims. Both Husband and his expert witness testified that the only value of the law practice was the physical assets. Wife's expert witness testified that the value of the law practice, based upon projected income, was $750,000.00. The trial court ruled that the law practice had no other value than the physical assets and Husband, himself.

Title 60 O.S.1981, § 315 defines the "good will" of a business as "the expectation of a continued public patronage." The next section (60 O.S.1981, § 316) states that the good will of a business is property, transferable like any other. "The 'good will' value of any business is the value that results from the probability that old customers will continue to trade with an established concern." Freeling v. Wood, 361 P.2d 1061, 1063 (Okla.1961). Good will is merely an intangible asset pertaining to an established business. Rosen v. Martin, 102 Okl. 65, 226 P. 577, 581 (1924).

As distinguished from tangible assets, intangibles have no intrinsic value, but do have a value related to the ownership and possession of tangible assets. Some intangibles, such as a trademark, trade name or patent, are related to an identifiable tangible asset. Goodwill, which is another intangible, is not. Often referred to as "the most 'intangible' of the intangibles," D. Kieso & J. Weygandt, Intermediate Accounting 570 (3d ed. 1980), goodwill is essentially reputation that will probably generate future business.

Dugan v. Dugan, 92 N.J. 423, 457 A.2d 1, 3 (1983). The Supreme Court of Missouri, En Banc, noted that "In addressing the question of the existence and value of goodwill in a professional context as marital property, the courts have not spoken with a uniform voice." Hanson v. Hanson, 738 S.W.2d 429, 433 (Mo.1987). Acknowledging that the states were split on the question of dividing the good will of a law practice as a marital asset, ¹ the Court of Appeals of Tennessee held that professional good will is not a divisible marital asset for the purpose of equitable distribution of a marital estate. Smith v. Smith, 709 S.W.2d 588 (Tenn.App.1985).

Even when courts agree that good will is divisible, trial courts apparently have trouble in placing a value on it in cases involving law practices. The appellate courts agree that good will is valued by comparing the actual earnings to the earnings which are expected based on a normal rate of return on an investment. Dugan, 457 A.2d at 5. The Dugan court conceded that determining the value of good will in a law practice presented difficulties, especially since the individual practitioner would be forced to pay the ex-spouse "tangible" dollars for an intangible asset at a value arrived at on the basis of some uncertain elements. Dugan, 457 A.2d at 7. That court goes into considerable detail in discussing the definition and method of establishing the value of good will in a law practice. ² The trial court was reversed for incorrect determination. Yet after detailing the method, the court added that other approaches equally or more compelling may be used and the court did not intend by the suggestions made in the opinion to preclude the use of other approaches.

The Supreme Court of New Mexico held that the good will in husband's law firm should have been set at $1.00 because of the uncontradicted testimony that all previous sales of the law firm's stock had been on a cash basis and no value was ever attributed to good will other than the $1.00 amount provided for in the stock subscription agreement. Hertz v. Hertz, 99 N.M. 320, 657 P.2d 1169 (1983). The Hertz court defined good will as "the difference between the total value of the professional association or corporation and the aggregate value of its separable resources and property rights, less liabilities." Hertz, 657 P.2d at 1173. The court listed factors to consider when determining good will: "[T]he length of time the professional has been practicing, his comparative success, his age and health, and any past profits of the practice. Attention should also be given to the physical and fixed resources of the practice." Hertz, 657 P.2d at 1174, citations omitted. Like the Dugan court, New Mexico also stated that the list of factors was not exclusive because each case depended upon its own particular facts and circumstances and the court recognized the difficulty in ascertaining the existence and value of good will in a law practice. Hertz, 657 P.2d at 1174. Even after recognizing good will and setting factors for determining good will in a law practice, the court stated that it found itself in agreement with a statement made by the Wisconsin Court of Appeals in Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343, 355 (Wis.Ct.App.1981):

There is a disturbing inequity in compelling a professional practitioner to pay a spouse a share of intangible assets at a judicially determined value that could not be realized by a sale or another method of liquidating value.

Hertz, 657 P.2d at 1174.

The Holbrook Court determined that no value could be set on the good will of the husband's law firm and vacated the trial court's valuation of the partnership. The court found that the good will or reputation of the partnership was reflected in the husband's substantial salary which had been considered in setting the family support award. The court reasoned that treating the good will of the law firm as a separate divisible asset would constitute "double counting" and that if circumstances warranted future amendment of the family support award, Wisconsin law provided a method of so doing. Holbrook, 309 N.W.2d at 355.

A similar case is Beasley v. Beasley, 359 Pa.Super. 20, 518 A.2d 545 (1986), allocatur denied, 516 Pa. 631, 533 A.2d 90 (1987). The Beasley court reasoned in discussing whether or not a sole proprietorship law practice had a good will value:

The good will of a sole proprietorship is related only to his future earnings, since an actual sale produces no value. To assess a value on future productivity and to award a proportionate amount to the spouse is akin to making a lump sum alimony payment since it is based on future earnings of the paying spouse. If, in addition to this payment, alimony is awarded, there is, in effect, a double charge on the future income of the paying spouse. Even without an alimony award, a fixed sum, not having the designation as alimony, carries none of the flexibility of an alimony award derived from its modifiability and, therefore, may penalize the payor if he suffers reverses, unemployment or dies.

Beasley, 518 A.2d at 553. Concerning alimony, the court commented: "Permanent alimony, as support, is modifiable, and should the expectations vary either upward or downward, adjustments can be made by the court in an expeditious and reasonable manner." Beasley, 518 A.2d at 554.

In the case of Prahinski v. Prahinski, 75 Md.App. 113, 540 A.2d 833 (1988), the Maryland court took a position on the issue of good will which they termed a "third approach." Citing Wilson v. Wilson, 294 Ark. 194, 741 S.W.2d 640 (1987); and Taylor v. Taylor, 222 Neb. 721, 386 N.W.2d 851 (1986), the Prahinski court held that for professional good will to be marital property it must be a business asset having a value independent of the continued presence or reputation of any particular individual. "That is, it must be shown to be an asset distinct from, and thus not dependent on, the reputation or continued presence of the individual professional." Prahinski, 540 A.2d at 843. The trial court in this divorce case found Mr. Prahinki's law practice in which he was a sole practitioner, to have a value of $300,000. This amount consisted entirely of good will since the tangible physical assets were worth less than the liens thereon and the business bank accounts were separately valued. He appealed the award of $150,000 to his wife. The appellate court stated that 95 to 97 per cent of his practice involved real estate settlement. The court observed that if he were to terminate his activity, the lights would go out and the value of his practice would be extinguished. The court further observed that the practice was nontransferable since a lawyer's clients cannot be sold and the right to represent them can only be transferred with their express consent. The court reasoned that the good will associated with appellant's law practice is of the type entirely dependent upon his reputation and not...