In Re Marriage of Slater
100 Cal. App. 3d 241, 160 Cal. Rptr. 686, 1979 Cal. App. LEXIS 2420 (1979)
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Rule of Law:
In a marital dissolution, a partnership agreement's buyout formula does not control the valuation of community property interest in the partnership's goodwill. The asset must be valued as an interest in a going concern, not by the contractual withdrawal rights.
Facts:
- The husband and wife were married in February 1958 and separated in December 1975.
- The husband, a gynecologist, was a partner in the Hayward Medical Group since 1954.
- The husband's partnership agreement stipulated a purchase price for a partner's interest upon death, withdrawal, or expulsion.
- This purchase price was defined as the partner's capital account plus accounts receivable less than six months old, and explicitly stated that this price included the partner's interest in the goodwill.
- The wife co-signed this partnership agreement.
- Based on the agreement's formula, the husband's interest was calculated to be $31,350.
- The wife's accountant determined the husband's interest was worth over $80,000, with $44,400 of that value attributed specifically to goodwill.
Procedural Posture:
- The husband and wife initiated dissolution proceedings in a state trial court.
- The trial court entered an interlocutory judgment of dissolution.
- In its judgment, the trial court valued the goodwill of the husband's medical practice at zero, relying on the withdrawal provision of his partnership agreement, and set the value of his interest at $31,350.
- The wife, as appellant, appealed the judgment to the intermediate appellate court, challenging the valuation of the medical practice among other issues.
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Issue:
Does a provision in a partnership agreement, which sets a specific value for a partner's interest upon withdrawal and attributes no value to goodwill, control the valuation of that interest for the purpose of dividing community property in a dissolution proceeding?
Opinions:
Majority - Taylor, P. J.
No. A partnership agreement's valuation formula upon withdrawal does not control the valuation of the community's interest in the practice for dissolution purposes. The asset being divided is the husband's interest in the partnership as a going business, which is analogous to pension rights, not his contractual withdrawal rights. The trial court erroneously felt constrained by the partnership agreement's provision which resulted in a goodwill valuation of zero. While the contractual withdrawal value may provide a basis for valuation, it does not preclude consideration of other facts to determine the value of the practice as a going concern on the date of dissolution. Citing 'In re Marriage of Foster,' the court affirmed that community goodwill is a portion of the community value of the professional practice as a going concern, and its valuation cannot be based on post-marital efforts of either spouse. Therefore, the judgment must be reversed for a corrected valuation of the husband's interest in the medical practice.
Analysis:
This case establishes a critical distinction between a partner's contractual rights within a partnership and the community's property interest in that partnership for dissolution purposes. By rejecting the binding nature of a buyout agreement, the court protects the non-professional spouse's interest in the true economic value of the professional practice, including its goodwill. This precedent prevents professional spouses from using such agreements, which are not designed for dissolution contexts, to artificially devalue a significant community asset. Future courts must now look beyond withdrawal formulas to assess the value of a professional practice as a 'going concern' at the date of separation.
