On certification to the Superior Court, Appellate Division.
For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler, Pollock and O'Hern. For affirmance -- None. The opinion of the Court was delivered by Schreiber, J.
This case involves the equitable distribution of marital property upon divorce, more particularly the evaluation of an attorney's goodwill in his exclusively owned professional corporation.
Plaintiff, James P. Dugan, and defendant, Rosaleen M. Dugan, were married in 1958 and separated in 1978. They had no children. The plaintiff, a member of the New Jersey Bar, carries on his practice as a professional corporation. The defendant had served as a secretary in plaintiff's law office and attended college during the marriage, graduating in 1972. She is certified as a public school teacher, but as of the date of the divorce judgment was unemployed.
The judgment entered for dual no-fault divorce provided for distribution of property, alimony and other relief. Plaintiff appealed from portions of the judgment relating to the assets of the marital estate, alimony, and counsel fees. The Appellate Division affirmed. Plaintiff filed a notice of appeal and a petition for certification. We dismissed the appeal and granted plaintiff's petition for certification, limited to the issues arising
from the valuation of plaintiff's interest in his wholly-owned professional corporation. 89 N.J. 405 (1982). The trial court determined that the value of the material part of the marital estate was $606,966 as of December 29, 1978, the date the complaint was filed. It awarded the defendant $230,864 and the plaintiff $376,102 consisting of the following:
Accounts receivable 18,891
Retained earnings deficit 1,780
Net value of law practice*fn1
A major asset in the joint estate was the plaintiff's law practice. It comprised more than 40% of the entire estate and over 70% of the value of that asset consisted of the value placed on goodwill. The trial court's methodology in calculating that value was predicated on the theory that the plaintiff was to be compared with the typical incorporated attorney whose gross assets were roughly equivalent to the plaintiff's. The comparison was limited to the efficiency of the respective operations, that is, the percentage that net income before income taxes bears to gross receipts. The net income of a typical attorney was found to be 38.5% of gross receipts. Plaintiff's gross income
was multiplied by 38.5%, yielding what could be termed a typical attorney's net income based on plaintiff's actual gross revenues. The excess of plaintiff's net income over that resulting from the application of the 38.5% standard was then multiplied by a factor of five. The trial court found that this figure equaled goodwill.
We must determine whether goodwill is a part of the value of plaintiff's law practice; if so, whether it constitutes property subject to equitable distribution; and, if so, how it is to be evaluated.
In a divorce judgment a court may "effectuate an equitable distribution of the property, both real and personal," acquired during the marriage. N.J.S.A. 2A:34-23.*fn2 We have acknowledged that the Legislature intended that its reference to "property" be construed comprehensively. Painter v. Painter, 65 N.J. 196, 217 (1974); see Gauger v. Gauger, 73 N.J. 538, 544 (1977). Determining the "property" subject to equitable distribution requires a marshalling of the parties' economic resources. Kruger v. Kruger, 73 N.J. 464, 468 (1977). These economic resources cover a broad spectrum. Initially a list of the parties' assets and liabilities upon a particular date should be prepared. Personal tangible property is clearly includable. Id. Intangibles may also constitute property. See id. (stating "[t]he right to receive monies in the future is unquestionably such an economic resource") (emphasis in original). See also Kikkert v. Kikkert, 177 N.J. Super. 471 (App.Div.), aff'd o.b., 88 N.J. 4 (1981) (holding a vested pension plan providing future monetary benefits to be equitably distributable).
As distinguished from tangible assets, intangibles have no intrinsic value, but do have a value related to the ownership and
possession of tangible assets. Some intangibles, such as a trademark, trade name or patent, are related to an identifiable tangible asset. Goodwill, which is another intangible, is not. Often referred to as "the most 'intangible' of the intangibles," D. Kieso & J. Weygandt, Intermediate Accounting 570 (3d ed.1980), goodwill is essentially reputation that will probably generate future business. Lord Eldon expressed that thought in Cruttwell v. Lye, 17 Ves. 335, 346, 34 Eng.Rep. 129, 134 (Ch. 1810): "The good-will, which has been the subject of sale, is nothing more than the probability, that the old customers will resort to the old place."
Justice Cardozo when Chief Judge of the New York Court of Appeals embraced the same concept when he wrote:
Men will pay for any privilege that gives a reasonable expectancy of preference in the race of competition. Such expectancy may come from succession in place or name or otherwise to a business that has won the favor of its customers. It is then known as good will. [ In re Brown, 242 N.Y. 1, 6, 150 N.E. 581, 582 (1926) (citation omitted)]
See also J. Story, Commentaries on the Law of Partnership § 99, at 157-61 (7th ed.1881).
There can be no doubt that goodwill exists. It is a legally protectible interest. See J.B. Liebman & Co. v. Leibman, 135 N.J. Eq. 288, 292 (Ch.1944). Indeed, we have enforced a restrictive covenant limiting a seller's right to compete that was designed essentially to protect the goodwill of the business for the buyer. Solari Indus. v. Malady, 55 N.J. 571, 576 (1970). The New Jersey inheritance tax, N.J.S.A. 54:34-1, requires consideration of goodwill. See, e.g., In re Hall's Estate, 99 N.J.L. 1 (Sup.Ct.1923), aff'd o.b., 100 N.J.L. 405 (E. & A. 1924); Schneider v. Zink, 2 N.J. Super. 53 (App.Div.1949); In re Deutz, 105 N.J. Eq. 671 (Prerog.Ct.1930). Upon dissolution of a partnership goodwill has been recognized as an element in determining value for purposes of liquidation. Blut v. Katz, 13 N.J. 374 (1953). In Kanzler v. Smith, 123 N.J. Eq. 602 ...