Dugan v. Dugan
457 A.2d 1, 92 N.J. 423, 1983 N.J. LEXIS 2351 (1983)
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Rule of Law:
The professional goodwill of a solo practitioner's law practice is marital property subject to equitable distribution upon divorce. Its value is determined by calculating the practitioner's excess earnings over what a similarly qualified professional would earn as an employee.
Facts:
- James P. Dugan and Rosaleen M. Dugan were married in 1958.
- James Dugan, a member of the New Jersey Bar, conducted his law practice as a wholly-owned professional corporation.
- During the marriage, Rosaleen Dugan served as a secretary in her husband's law office.
- Rosaleen Dugan also attended college during the marriage, graduating in 1972 and becoming a certified public school teacher.
- At the time of the divorce proceedings, Rosaleen Dugan was unemployed.
- The couple separated in 1978 and had no children.
Procedural Posture:
- James P. Dugan (plaintiff) filed a complaint for a dual no-fault divorce.
- The trial court entered a judgment that provided for the equitable distribution of marital property, which included a valuation for the goodwill of the plaintiff's law practice.
- James P. Dugan, as plaintiff-appellant, appealed portions of the judgment to the Appellate Division.
- The Appellate Division affirmed the trial court's judgment.
- James P. Dugan, as plaintiff-appellant, then filed an appeal and a petition for certification to the Supreme Court of New Jersey.
- The Supreme Court of New Jersey dismissed the appeal but granted the petition for certification, limited to the issue of valuing the plaintiff's interest in his professional corporation.
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Issue:
Does the professional goodwill of a sole practitioner's law practice constitute marital property subject to equitable distribution upon divorce?
Opinions:
Majority - Schreiber, J.
Yes, the goodwill of a sole practitioner's law practice is a marital asset subject to equitable distribution. Goodwill is an intangible asset defined as reputation that will probably generate future business, and it is distinct from future earning capacity or a professional license, which are not considered property. While ethical rules prevent a solo practitioner from selling their practice's goodwill, this limitation diminishes its value but does not eliminate it as a distributable asset. The non-attorney spouse's contributions to the marriage helped develop this economic resource, and it would be inequitable to ignore its value. The proper method for valuation involves comparing the practitioner's actual average earnings to the earnings of a hypothetical employee with similar age, experience, and education in the same geographic locale. The excess earnings, capitalized by a reasonable factor, represent the value of the goodwill.
Analysis:
This decision established a significant precedent by classifying the intangible asset of professional goodwill as marital property, even when it cannot be sold on the open market. By providing a specific 'excess earnings' valuation method, the court moved the concept from a purely theoretical asset to one that could be quantified and divided in a divorce. This ruling has had a broad impact on divorce cases involving professionals like doctors, accountants, and lawyers, requiring courts to account for the value of a professional's reputation built during the marriage. It distinguishes goodwill from mere future earning capacity, solidifying it as a property right that arises from past performance and reputation.
