In Re Marriage of Watts
217 Cal. Rptr. 301, 1985 Cal. App. LEXIS 2420, 171 Cal. App. 3d 366 (1985)
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Rule of Law:
In a marriage dissolution, the goodwill of a professional practice is a community asset that must be valued even if it is not marketable, and a spouse who has exclusive use of a community asset after separation can be required to reimburse the community for the reasonable value of that use.
Facts:
- John D. Watts was a board-certified surgeon who, four months prior to marriage, left his job as a department chief at a medical center to start a medical partnership.
- John and Carol D. Watts were married on September 30, 1975.
- In 1976, during the marriage, John's medical partnership was converted into a medical corporation.
- Throughout the marriage, John's annual income from his medical practice increased significantly, from approximately $84,500 at the time of marriage to $131,500 at separation.
- The couple separated on April 29, 1979.
- Following the separation, John had exclusive use and possession of the community-owned family residence and his medical practice.
Procedural Posture:
- Carol D. Watts filed a petition for dissolution of marriage against John D. Watts in a California trial court.
- Following a trial, the court entered an interlocutory judgment of dissolution.
- In its judgment, the trial court found that John's medical practice had no goodwill and concluded that it lacked the legal authority to require John to reimburse the community for his exclusive use of community property post-separation.
- Carol D. Watts (appellant) appealed the judgment to the California Court of Appeal, challenging these and other findings.
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Issue:
In a marriage dissolution, does a trial court err by (1) finding a professional practice has no goodwill simply because it has no market value, and (2) concluding it lacks authority to order a spouse to reimburse the community for the exclusive use of community property after separation?
Opinions:
Majority - Best, J.
Yes. A trial court errs by finding a professional practice lacks goodwill solely because it cannot be sold and by concluding it lacks authority to order reimbursement for the post-separation exclusive use of a community asset. First, the goodwill of a professional practice is a divisible community asset, and its value is not dependent on its marketability. The court rejected the notion that market value is the sole method for valuation, citing precedents like In re Marriage of Foster for the principle that any legitimate method measuring present value based on past results, such as the capitalized excess earnings method, is proper. The court found the trial court's own findings contradictory, as they implied the existence of excess earnings while simultaneously concluding there were none. Second, the court has the authority to order a spouse who has exclusive, post-separation use of a community asset to reimburse the community for the value of that use. Citing cases like In re Marriage of Tucker, the court established that fairness may require such reimbursement to prevent one spouse from enjoying a valuable community asset for free pending dissolution, thereby ensuring an equitable division of property.
Analysis:
This case establishes two significant principles in California family law. First, it reinforces that professional goodwill is a valuable community asset that must be accounted for in a divorce, even if intangible and not salable, broadening the valuation methods available to courts. Second, and most importantly, it established the legal basis for what is now commonly known as a "Watts charge," which is a claim for reimbursement to the community for one spouse's exclusive use of a community asset after separation. This prevents the occupying spouse from receiving an unfair benefit and has become a standard, equitable consideration in virtually all California dissolution proceedings involving post-separation use of community property like a family home or business.
