Court Opinion

ID: 9742125
Source: CourtListenerOpinion
Date Created: 2023-08-26 21:07:04.487213+00
Date Added: 2024-06-11T07:24:22.269328
License: Public Domain

BARTEAU, Judge,
concurring with opinion.
I write separately to express my dissatisfaction with the present state of Indiana law concerning the valuation of professional goodwill in dissolution proceedings. This issue has resulted in various and conflicting approaches among the states, and it is an issue that has not yet been addressed by the Indiana Supreme Court.
The Indiana Court of Appeals has held that professional goodwill is a divisible marital asset. See, e.g., Berger v. Berger, 648 N.E.2d 378 (Ind.Ct.App.1995); Cleary v. Cleary, 582 N.E.2d 851 (Ind.Ct.App.1991); Porter v. Porter, 526 N.E.2d 219 (Ind.Ct.App.1988). Goodwill has been defined as follows:
The advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds, or property *207employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers on account of its local position, or common celebrity, or reputation for skill, or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partiality or prejudices.
Cleary, 582 N.E.2d at 853; Porter, 526 N.E.2d at 223. Goodwill has been further defined as the expectation of continued public patronage. Cleary, 582 N.E.2d at 853; Porter, 526 N.E.2d at 224. Based upon these definitions of goodwill, and based upon case-law borrowed from other states, the Porter court further stated:
It is generally agreed that in valuing a professional practice, or an interest therein, for equitable distribution, it should not make any significant difference whether the practice is conducted as a corporation or a professional association, a partnership, or a sole proprietorship.
526 N.E.2d at 223.
The Porter court also held that goodwill has value subject to division even if it is not readily marketable. The court illustrated this concept as follows:
The recently graduated young professional who goes into business for himself may reasonably expect the initial years of his practice to be less profitable, this expectation being attributed in part to a lack of goodwill or “that the old customers will resort to the old place.” Similarly, if Dr. Lukens were to abandon his Tacoma practice and relocate as a sole practitioner in another state, he also should anticipate a shortage of business, even though his practice consists of the same physical assets and he presumably possesses the same degree of skill. Again the difference must be attributed to his not having developed in his new locale a reputation as to skill, efficiency, and the other elements comprising goodwill.
Accordingly we do not think the disposi-tive factor is whether Dr. Lukens can sell his goodwill. His goodwill has value despite its unmarketability, and so long as he maintains his osteopathic practice in Tacoma he unll continue to receive a return on the goodwill associated with his name.
Porter, 526 N.E.2d at 225 (citing In re Marriage of Lukens, 16 Wash.App. 481, 558 P.2d 279, 281 (1976)).
In sum, the Indiana Court of Appeals has held that professional goodwill is a divisible marital asset, regardless of whether or not the professional is a sole practitioner, and regardless of whether the professional’s goodwill is readily marketable. However, these concepts are not without opposition in other jurisdictions.
Illinois courts have divided the concept of goodwill into two categories, personal goodwill and enterprise goodwill.6 See In re Marriage of Talty, 166 Ill.2d 232, 209 Ill.Dec. 790, 794, 652 N.E.2d 330, 334 (1995). Personal goodwill is the goodwill that is attributable to one’s personal efforts and characteristics, and enterprise goodwill is the goodwill that inheres in a business, existing independently from one’s personal efforts. See id. Under Illinois law, only enterprise goodwill, and not personal goodwill, is a divisible marital asset. See id.; see also In re Marriage of Zells, 143 Ill.2d 251, 157 Ill.Dec. 480, 572 N.E.2d 944 (1991).
With respect to the goodwill of a professional practice, Illinois has determined that such goodwill is personal in nature, and is therefore not a divisible marital asset. In re Marriage of Zells, 157 Ill.Dec. at 482, 572 N.E.2d at 946. In making this determination the Supreme Court of Illinois stated:
*208Although many businesses possess this intangible known as good will, the concept is unique in a professional business. The concept of professional good will is the sole asset of the professional. If good will is that'aspect of the business which maintains the clientele, then the good will in a professional business is the skill, the expertise, and the reputation of the professional. It is these qualities which would keep patients returning to a doctor and which would make those patients refer others to him. The bottom line is that this is reflected in the doctor’s income generating ability.
_To figure good will in both [valuation of the business itself and as a factor in examining the husband’s income potential] would be to double count and reach an erroneous valuation.
Id. Thus, under Illinois law, professional goodwill is not a divisible marital asset, but rather, it is more appropriately considered as a facet of the spouse’s income potential which impacts the maintenance and/or support awards. See id.
Other jurisdictions have also determined that professional goodwill is not a divisible marital asset. See, e.g., Nail v. Nail, 486 S.W.2d 761 (Tex.1972), (holding that the accrued goodwill of a medical practice based on the personal skill, experience, and reputation, as well as the expectation that the doctor would continue to practice, was not a divisible marital asset). The Wisconsin Court of Appeals has stated:
We are not persuaded that the concept of professional goodwill as a divisible marital asset should be adopted in Wisconsin.... The concept of professional goodwill eva-nesces when one attempts to distinguish it from future earning capacity. Although a professional business’s good reputation, which is essentially what it’s 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 earning 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.
Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343, 350 (1981). The Wisconsin Court of Appeals also noted that because the professional goodwill was reflected in the spouse’s salary, and the spouse’s salary was considered to set a family support award, treating the goodwill as divisible marital asset would constitute double counting of the goodwill. Id. at 352.
Building on the analysis set forth in Hol-brook, the Supreme Court of Kansas has also held that professional goodwill is not a divisible marital asset. In Powell v. Powell, the court stated:
We are not persuaded that a professional practice such as Dr. Powell’s has a good will value. The practice is personal to the practitioner. When he or she dies or retires nothing remains. The professional’s files and lists of clients are of no use to others. The very nature of a professional practice is that it is totally dependent on the professional. We refuse to adopt the theory that good will in a professional practice is an asset subject to division in a divorce action. The issue is without merit.
231 Kan. 456, 648 P.2d 218, 222-23 (1982).
These cases illustrate the difficulties inherent in defining and valuing the goodwill of a professional practice. The personal nature of professional goodwill is especially obvious in the context of a sole practitioner. The Indiana Supreme Court has not yet addressed the issues of whether Indiana will recognize a distinction between personal/professional goodwill and enterprise/business goodwill, and, in the context of the valuation of the business of a sole practitioner, whether the sole practitioner’s business possesses any goodwill value that is subject to division as a marital asset; nor has the supreme court considered whether, if such a distinction is recognized, personal/professional goodwill is more appropriately considered, not as an asset, but as an indication of income potential which can be a factor in making an unequal division of marital assets and in making a *209maintenance award. See Ind.Code § 31-1-11.5-11..
Thus, although the reasoning previously set forth by the Indiana Court of Appeals indicates that Indiana will recognize professional goodwill as a divisible marital asset without any distinction between goodwill that is personal in nature and goodwill that is attributable to a business/praetiee itself, I disagree with such an approach for the reasons set out above. I therefore concur with the majority’s application of Indiana case-law, but urge the Indiana Supreme Court to refine the definition of goodwill and the circumstances under which it will be considered as a divisible marital asset. In all other respects I concur with the majority opinion.

. For a good discussion of the distinctions between personal/professional goodwill and enterprise/business goodwill, see Allen Parkman, The Treatment of Professional Goodwill in Divorce Proceedings, 18 Fam.L.Q. 213 (1984). In this article, Parkman states:
To the extent that a business is more profitable than it’s competitors because of the superior abilities or business connections of an individual, the profits are attributable to the individual, not the business.... It would be appropriate to view personal attributes as "reputation” rather than as "goodwill.” By using reputation and goodwill interchangeably, the courts have created a confused situation in the evaluation of professional businesses.
Id. at 214-15.