A Catalyst in the Cotton: The Proper Allocation of the Goodwill of Closely Held Businesses and Professional Practices in Dissolution of Marriages

Author:Kelly M. Haggar
Position:J.D./B.C.L. Candidate, May 2005, Paul M. Hebert Law Center, Louisiana State University.

I Introduction- II Background: Goodwill - Origin, Foundation, and Concepts - A Doctrinal Foundations of Property: Patrimonial and Extra-patrimonial Concepts - 1 The Classification Question: When Is Good will "Property?"- 2 Uncritically Accepted Assumptions - 3 A Note of Caution- B The Original Goodwill at Common Law - 1 Initial Definition and Subsequent Development of Goodwill within Law- 2 Legal Treatment of Goodwill Through the Recent Past- C Broadening of the Goodwill Concept: Multiple Meanings in One Term - 1... (see full summary)


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[I]nasmuch as you do not object to my taking my hog to Nebraska, therefore I must not object to you taking your slave. Now, I admit this is perfectly logical, if there is no difference between hogs and negroes. 1

Abraham Lincoln, speech on the Kansas-Nebraska Act, October 16, 1854

Mrs. Truman, Mrs. Truman, I just heard your husband use the word 'manure.' Can't you get him to stop?"

Why, no; it's taken me 30 years to get him to use that word."2

Apocryphal story about President Harry Truman, first attributed to opposition party politics in Wisconsin during the 1948 campaign; many variations of the story abound.

I Introduction

Noble Ellington, Jr. and Peggy McDowell married in 1964. They jointly owned and operated a cotton brokerage firm, the Noble Ellington Cotton Company, Incorporated (NECC), for more than thirty years before finally divorcing in 1998.3 The most hotly contested issue in their property settlement was the proper allocation and value of the family cotton business. The Ellington case turned upon the treatment and value of the goodwill of their brokerage firm, arguably a key element in determining the company's value.4 The positions of the parties were not directly opposed at trial nor on appeal. Mr. Ellington argued, in essence, that the family business had no value apart from him.5 Mrs. Ellington, to a somewhat less theoretical approach, argued instead that the court must rely entirely upon one side's experts or the other's, and thus could not mix portions of each expert's views to craft a partition of their community property.6 Ultimately, the trial court allocated NECC to Mr. Ellington and compensated Mrs. Ellington for half of its value, for a Page 1196 sum of $146,500.7 The court derived that value from a combination of each expert's conclusions.8

The trial court's written reasons for judgment concluded that the family cotton business "can and does have an intangible asset value and whether that intangible value is termed goodwill, customer base or something else is not important. What is important, and also much more difficult, is using intangible value in determining the total value of the business."9 Both parties appealed but the Louisiana Second Circuit Court of Appeal upheld the decision, stating that the trial court did not abuse its discretion in crafting a hybrid value from parts of each expert's calculations.10

Actually, whether the "intangible value" that the trial court weighed is termed "goodwill," Acustomer base," or "something else," is supremely important. This comment's principal thesis is that personal goodwill cannot be correctly classified as a marital asset in either a common or a civilian law jurisdiction.11 By contrast, the goodwill attributable to a distinct business or professional entity is Page 1197 properly subject to a regime of community property in both jurisdictions.

The following two major tenets support the thesis that personal goodwill cannot legitimately fall into community property: 1) The common law's concept of goodwill, as applied in divorce matters, is both too broad and too narrow. This conceptualization mixes "personal" with "commercial" and "professional" (which is too broad). It also encompasses only a portion of "commercial" goodwill's true scope (which is too narrow), since it lacks the civil law concept of "introduction." 2) That component of both professional and commercial goodwill arising from one's personality is exclusive to its possessor. It is thus separate property that should not devolve into the community.

Within Louisiana, Louisiana Revised Statutes 9:2801.2 attempted to exclude personal goodwill from community property when such goodwill results "solely from the identity, reputation or qualifications of the owner or from his relationship with clients or customers of the business."12 Yet, one must assess the 2003 version of Louisiana Revised Statutes 9:2801.2 as "unsuccessful" because the word "solely" negates the new law whenever any portion of the goodwill, however slight, results from any person other than the owner. Accordingly, "solely" should be deleted or amended with a qualifier. The Ellington case raises a multitude of perplexing theoretical questions, the answers to which carry serious practical implications. For example, just what is this "goodwill" so strongly contested in Ellington? Is the "goodwill" of a professional practice, such as law or medicine, different in any legally meaningful way from the goodwill of an ordinary business? Is either type of goodwill even a thing, such that it can be "property," at all? If so, is this intangible property divisible? If it can be divided, should it be divided? (A civilian would pose the question as, "Is it susceptible of partition?") If personal goodwill can and should be divided between the spouses, on what basis is it best apportioned? If it cannot be divided, should the other spouse be compensated in some manner for goodwill of the family business? For any of the personal goodwill of the other spouse? These difficult issues surrounding the unique nature and Page 1198 proper allocation of goodwill serve as the focus of this comment. The Background section begins by considering the theoretical foundation of goodwill within the framework of property law (Part II.A.). A review of some threshold classification issues often uncritically accepted follows, ending with a note of caution about the limited ability of the law to resolve value judgments. The next section, Part II.B., traces the evolution of the concept of goodwill from its birth in commercial contracts at common law. The shifting content of goodwill in common law jurisdictions as the term expanded in scope over the last few decades is the subject of Part II.C. Part II.D. then turns to the latest iteration of goodwill and explores its use in modern common law divorces. An examination of the civil law concept of "clientele" forms Part II.E., the last Background section.

The Analysis section begins by contrasting and comparing the civilian doctrine of clientele with goodwill in Part III.A. Treatment of the goodwill of closely held family businesses and professional practices is then examined in three types of jurisdictions: (1) Common law states without community property (Part III.B.1.); (2) Common law states with community property (Part III.B.2.); and (3) Louisiana, a "mixed jurisdiction" whose law is largely derived fromCand still heavily influenced byCthe civil law tradition (Part III.C.). This section devotes particular emphasis on one Louisiana case, the property settlement in Ellington. A discussion of Louisiana's legislative response to Ellington completes the Analysis Section in Part III.D.

The Conclusion section, Part IV, contains both general recommendations for matters of concept and doctrine (Part IV.A.) as well as recommendations for addressing specific Louisiana issues raised by Ellington and reflected in the newly enacted Louisiana Revised Statutes 9:2801.2 (Part IV.B.). "A Few Final Reflections" completes the comment as Part IV.C.

II Backgroundcgoodwill: origin, foundation, and concepts
A Doctrinal Foundations of Property: Patrimonial and Extra- patrimonial Concepts
1. The Classification Question: When Is Goodwill "Property?" Page 1199

Before the Ellington case and the issues it highlights can be profitably explored, the scope of the problem being investigated must be both explicitly delineated as well as placed in its proper context. Since...

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