Mitchell v. Mitchell
77 A.L.R. 4th 633, 152 Ariz. 317, 732 P.2d 208 (1987)
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Rule of Law:
In a marital dissolution, the goodwill of a professional practice organized as a partnership is a divisible community property asset. A partnership agreement that assigns zero value to goodwill, even if signed by the non-professional spouse, is not conclusive and does not forfeit that spouse's community interest.
Facts:
- Carole Anne Mitchell and her husband were married in 1954.
- The husband became a licensed Certified Public Accountant (CPA) in 1960 and, after several years in other roles, formed an accounting partnership named Mitchell & Hardy in 1975.
- In 1979, the partners executed a written partnership agreement.
- A clause in the agreement stated the partners' intent that 'no value be placed upon any Goodwill of the firm that may exist' for purposes of determining a partner's interest.
- Both the husband and Carole Mitchell signed this 1979 partnership agreement.
- The agreement also contained provisions for payments to a partner upon retirement or death that included a share of net profits, not just tangible assets.
Procedural Posture:
- Carole Mitchell and her husband were parties to a marital dissolution action in an Arizona superior court (trial court).
- The trial court found that the husband's interest in his accounting partnership, including goodwill, was community property and valued it at $150,000.
- The husband, as appellant, appealed the trial court's judgment to the Arizona Court of Appeals.
- The Court of Appeals reversed, holding that the partnership goodwill was not a divisible community asset and that Carole Mitchell, as appellee, was bound by the partnership agreement she signed which assigned zero value to goodwill.
- Carole Mitchell, now as appellant, sought review of the Court of Appeals' decision by the Supreme Court of Arizona.
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Issue:
In a marital dissolution, is a community property interest in the goodwill of a professional partnership defeated by a partnership agreement, signed by the non-professional spouse, that assigns zero value to that goodwill?
Opinions:
Majority - Holohan, Justice
No, a community property interest in professional goodwill is not defeated by such an agreement. The goodwill of a professional practice is a divisible community asset regardless of the form of the business, and a partnership agreement's valuation is not conclusive in a marital dissolution. First, it would be inequitable to allow the form of a business enterprise—partnership versus corporation—to defeat the community's interest in professional goodwill, which is an asset built through community effort. Second, goodwill is analogous to community property assets like pension rights, not to separate property like a professional degree. Third, the partnership agreement was designed to govern the withdrawal of a partner from the business, not to divide marital property upon divorce. Because the husband is not withdrawing from the partnership, the valuation clause is not triggered, and the proper focus is on the value of the practice as a continuing business. Therefore, the agreement is merely one factor to consider in valuation and does not operate to forfeit the wife's community property interest.
Analysis:
This decision establishes that professional goodwill is a community asset in Arizona, regardless of whether the practice is a sole proprietorship, corporation, or partnership, thereby preventing the form of business from dictating property characterization in a divorce. It significantly limits the power of private business agreements to define or eliminate community property interests in marital dissolution proceedings. By treating such agreements as only one factor among many, the court prioritizes the economic reality of the asset over contractual terms designed for a different context (like a partner's withdrawal). This precedent protects the financial interests of non-professional spouses by ensuring that the intangible, yet valuable, asset of goodwill is subject to equitable division.
