How Pennsylvania Courts Handle Professional Goodwill in Divorce

The division of marital property can prove to be very challenging if either of the spouses owns a professional practice or a closely held business. In many cases, it becomes necessary for the courts to decide if intangible business interests, such as professional goodwill, qualify as marital property in divorce proceedings. In this article, the Philadelphia family lawyers at the Law Offices of Lauren H. Kane will discuss an important case that addresses professional goodwill as marital property.

Background of the case

In the aforementioned case, the two individuals were in a divorce where the division of marital property was necessary. One of the main concerns of this case was the husband’s medical practice and how it should be valued for equitable distribution to take place.

The wife claimed that the value of the practice was more than the tangible property and the accounts receivable. This meant that there was professional goodwill in the practice that included the reputation of the business and its future earning capacity.

The husband, on the other hand, argued that professional goodwill is too speculative and should not be considered property. In addition, he claimed that the value of the practice does not depend on the business itself but on his own labor.

The trial court decided to exclude professional goodwill in valuing the practice.

The appeal

The wife appealed the lower court’s decision to exclude professional goodwill from the value of the business. On appeal, the Pennsylvania Supreme Court reviewed the question of whether professional goodwill was marital property eligible for equitable distribution.

The court acknowledged the existence of goodwill in certain business environments where such goodwill is valuable in its own right. However, the court further clarified the distinction between enterprise goodwill and personal goodwill. Enterprise goodwill is the business value that is not associated with an individual, whereas personal goodwill pertains to the reputation of the professional and their earning potential.

In its decision, the Pennsylvania Supreme Court found that personal professional goodwill could not be considered marital property eligible for equitable distribution. The rationale was that the earning potential of a professional could not be split into marital property since it is very closely related to the person’s future endeavors.

Therefore, the court affirmed the exclusion of the husband’s personal professional goodwill from the marital estate.

Key takeaways

This case continues to be a significant Pennsylvania family law case concerning the valuation of professional practice businesses in divorce. The decision has set important restrictions on the types of business value that are considered when making decisions about equitable distribution.

The case shows that the Pennsylvania court differentiates between business assets that can be transferred and value related solely to personal earning potential of the parties. While the division of tangible assets and some business interests might be considered, the court is unlikely to consider personal professional reputation as marital property.

Talk to a Philadelphia, PA, Divorce Lawyer Today

The Law Offices of Lauren H. Kane represent the interests of Philadelphia residents during their divorce. Call our Philadelphia family lawyers today to schedule an appointment, and we can begin preparing your case right away.

Source:

law.justia.com/cases/pennsylvania/supreme-court/1992/531-pa-113-1.html