Goodwill and the Partnership

While the personal goodwill of a partner is not divisible upon divorce, the commercial goodwill of a partnership belongs to the partnership, and, as a partnership asset, cannot be divided by a Texas trial court upon divorce. See, Nail, 486 S.W.2d at 764.

b. Finn and its progeny

There may be goodwill in a professional partnership that is separate from the skills or attributes of an individual partner, just as a mercantile partnership can have goodwill beyond the individual contributions or the partners. Welder, 985 S.W.2d at 178. Recall that, in Salinas, the Texas Supreme Court stated: “[t]o the extent that the valuation of the dissolved [professional] partnership was based on the goodwill attributable to the personal skills and talents of the former partners, it improperly took into account intangibles that were not partnership assets.” Salinas, 948 S.W.2d at 290 (emphasis added). Thus, there may be divisible practice goodwill in a professional partnership, as well as non-divisible professional goodwill.

Many Texas practitioners believe that the leading case regarding the valuation incident to divorce of the goodwill of a professional practice

operated in the form of a partnership is Finn, 658 S.W.2d 735. During the parties’ entire twenty year marriage, the husband practiced law with a prominent Dallas law firm, of which he was a senior partner.

Under the terms of the firm’s partnership agreement, if the husband died or withdrew from the partnership, he was only entitled to (1) the amount contributed in his capital account, (2) any earned income which had not been distributed, and (3) his interest in the firm’s reserve account less 10% of his proportionate share in the accounts receivable for client’s disbursement. The agreement did not provide for compensation for accrued goodwill to a partner who ceased to practice law with the firm, nor did it provide any mechanism to realize the value of the firm’s goodwill.

The trial court instructed the jury to exclude the goodwill of the law firm and its future earning capacity from the valuation of the community interest in the husband’s law practice. On appeal, the wife contended that the trial court’s instruction was erroneous.

Applying its new two-pronged test, i.e., (1) the goodwill must exist independently of the personal goodwill of the professional and (2) such goodwill must have a commercial value in which the community is entitled to share, the majority of the Dallas appellate court found that the restrictions in the husband’s partnership agreement deprived him of any legal entitlement to the value of the firm’s goodwill. Id. The Finn majority opinion is premised directly on the fact that the partnership agreement provided no recovery for goodwill on the husband’s death or withdrawal from the professional practice. According to the majority, the husband could not realize the value of the firm’s goodwill and therefore it had no commercial value. Id. at 740. Thus, the goodwill attributable to the husband’s partnership interest was not divisible upon divorce. Id at 741.

It should be noted that the Finn opinion was the result of an en banc rehearing (11 Justices sitting) with 4 of the Justices joining the majority, 2 concurring, and 5 joining in the dissent.

In a well-reasoned concurring opinion, Justice Annette Stewart strongly disagreed with the

Finn majority opinion:

The partnership agreement does not control the value of the individual partnership interests. The asset being divided is the husband’s interest in the partnership as a going business, not his contractual death benefits or withdrawal rights. The formula in the partnership agreement may represent the present value of the husband’s interest, but it should not preclude a consideration of other facts. The value of the husband’s interest should be based on the present value of the partnership entity as a going business, which would i n c l u d e c o n s i d e r a t i o n o f partnership goodwill, if any. Goodwill is property and, although intangible, it is an integral part of a business, the same as its physical assets.

Id. at 749 (Citations omitted).

Further, Justice Stewart asserted that the

Finn majority was concerned with “future

contingencies,” but noted that, under Texas law, the assets of a community estate are valued as of the time of dissolution of the marriage. Id. Consequently, argued Justice Stewart, there was no valid reason to exclude a professional partnership interest from the basic rule as to valuation at the time of dissolution, when the partner, whose interest was being valued, intended to continue as a member of the firm. Id. at 741-742.

The Texas Supreme Court’s refusal to find reversible error in the Finn decision may not have been an implicit approval of the opinion of the Dallas Court of Appeals on partnership goodwill. The Court of Appeals reversed the trial court, but on grounds unrelated to the question of partnership goodwill. Thus, it is at least arguable that the Finn opinion on partnership goodwill was dicta.

Fairly recently, the San Antonio Court of Appeals stated that, in Salinas, 948 S.W.2d at 291, the Texas Supreme Court recognized that goodwill may exist in a professional partnership that must be considered in dividing a community estate upon divorce. See, Southwest Texas Pathology

Associates, L.L.P. v. Roosth, 27 S.W.3d 204, 209

(Tex.App.–San Antonio 2000, pet. dism’d) (emphasis added). However, in Salinas, the Texas Supreme Court actually stated: “[n]evertheless, there may be goodwill in a professional partnership that is separate from the skills or attributes of an individual member.” Salinas, 948 S.W.2d at 291,

citing, Nail, 486 S.W.2d at 764. Thus, contrary to

the implication of the San Antonio appellate court in

Southwest Texas Pathology, in Salinas, the Texas

Supreme Court did not address the issue of the

divisibility, under Finn, of partnership goodwill, but

rather only the existence of potentially divisible commercial goodwill. Even so, the San Antonio appellate court’s misstatement notwithstanding, it is true that there may be goodwill in a professional partnership that must be considered upon divorce, as the Texas Supreme Court implicitly (but not explicitly) recognized in Salinas.

5. Common Problems in Valuing a Personal