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Personal Goodwill Considered Marital Property
© 2004 National Legal Research Group, Inc.
ILLINOIS: In re Marriage of Schneider, 343 Ill. App. 3d 28, 798 N.E.2d 1242 (2003).
The husband's personal goodwill was marital property, despite appellate case law holding generally to the contrary, where the wife waived spousal support, so that any division of personal goodwill would not consider the husband's future earnings as a factor in both property division and support. The trial court erred in failing to include various tangible assets in determining the value of the husband's dental practice, including most notably accounts receivable.
After the parties separated, they reached agreements regarding maintenance and child support. Both parties waived maintenance, although the wife reserved the right to seek a disproportionate share of the marital assets. Following the entry of a decree of divorce, the wife appealed the order of equitable distribution of the marital assets. Specifically, she alleged error by the trial court in the valuation of the husband's dental practice and, consequently, in its distribution of the marital estate.
First, the wife asserted that the court below failed to take into account the value of the goodwill in the dental practice. The trial court did consider enterprise goodwill, but assigned no value to it. It declined to consider personal goodwill because it believed that, under prior Illinois case law, it was not permitted to do so in valuing a professional corporation. The appellate court agreed with the wife that the court below had erred. It noted that goodwill is the value of a business or practice that exceeds the combined value of the physical assets. "Enterprise goodwill" was defined as any value of the practice as a going concern, independent of the tangible assets and the income potential of the practitioner. "Personal goodwill," alternatively referred to as professional goodwill, was defined as the goodwill that is personal to the practitioner, depends on his efforts, and will cease when his involvement with the practice ends. Citing to several Illinois Appellate Court decisions, the court noted that it has been established that a fair and just disposition of marital property requires considering goodwill in valuing a professional corporation. It distinguished the Illinois Supreme Court decision of In re Marriage of Zells, 143 Ill. 2d 251, 572 N.E.2d 944 (1991), which held that goodwill, which represents the ability to acquire future income, is not to be considered a divisible marital asset. According to the court, Zells simply provided that personal goodwill, if used as a factor in calculating income potential, on which maintenance and support awards are based, cannot also be used as a divisible marital asset. In the Zells case, the Illinois Supreme Court did not say goodwill cannot be included when valuing a corporation; rather, the court held that personal goodwill is not subject to valuation, division, or distribution as a marital asset, but should instead be reflected in maintenance and support awards. Consequently, added the court, if goodwill is not considered as part of a spouse's income-generating ability relative to a maintenance award, it may be considered in the valuation of a professional practice as a divisible marital asset. Since the parties had waived maintenance, the trial court erred in not considering personal goodwill in the valuation of the husband's dental practice.
The wife also complained of the lower court's failure in not including accounts receivable, cash on hand, the cash surrender values of insurance policies, and loans to officers of the professional corporation in valuing the dental practice. The appellate court agreed. Accounts receivable are business assets and must be included in the valuation of a professional practice. Furthermore, fixed assets, such as cash and other assets, are to be included when valuing a practice. Therefore, the trial court erred in not including cash on hand, the cash surrender values of insurance policies, and loans to officers in determining the fair market value of the husband's dental practice.
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