New Division One Decision Regarding the Marital Community's Interest in a Lawyer's Professional Goodwill.

Division One is out with an important family law decision, Walsh v. Walsh, which will be of particular interest to lawyers and other professionals in Arizona. The court of appeals held that the family court erred by employing a "realizable benefits" standard in determining the value of husband's professional goodwill as a practicing lawyer. The family court had rejected wife's argument for a "capitalization of earnings" approach as requiring the court to engage in "mere speculation."

"Wife's contention that Husband could move from [his national law firm] with his book of business, does not take into account a number of difficulties with such a move including conflicts that may occur at another law firm and the assistance of [the firm's] 'platform' in assisting Husband to bring in clients." 

According to the court of appeals, the family court should not have restricted the community's interest in the goodwill associated with husband's practice to the stock redemption value in the national law firm of which he was a shareholder. The court of appeals concluded that the family court improperly "conflated the firm’s net assets which were subject to the [Shareholder's] Agreement with Husband’s own goodwill."

The court acknowledged that professionals, such as lawyers, possess goodwill based on the personal skills and reputation of the professional that cannot be transferred and sold on the open market. According to the court, such "unrealizable goodwill" and the divisibility thereof are "problematical." But that does not excuse the family court from taking on the task. Instead, when goodwill has no immediate cash value, under this decision, the family court must apply its own judgment and discretion in making its determination.

In its 27 page opinion, the court of appeals distinguishes a number of goodwill valuation cases. It also distinguishes between the community's interest in goodwill and the amounts provided for by spousal maintenance. Family law practitioners will want to read this opinion carefully.

We'll be watching to see if the Arizona Supreme Court takes this one up.

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