Valuing Goodwill in a Divorce; If You or Your Spouse is a Creative Professional, There May Be a Twist

1099457_ciak.jpgThis year’s Academy Awards will be held at the Kodak Theater in Hollywood, California on February 27, 2011. It airs live in San Diego on ABC at 5 p.m.

Among the awards to be given out, perhaps one of the most anticipated is best director. This year’s nominees for best director include: Darren Aronofsky for Black Swan, David O. Russell for The Fighter, Tom Hooper for The Kings Speech, David Fincher for The Social Network, and Joel and Ethan Coen for True Grit. Who the Oscar will ultimately go to is anyone’s guess. But, regardless of who wins, all of the nominees share one thing in common: they are all celebrities.

The status of celebrity brings a twist on the issue of valuing goodwill in a divorce. Generally, goodwill, as defined by the California Business & Professions Code ยง 14100, is the expectation of continued public patronage of a business. In a divorce, if a community property business is found to have goodwill, that goodwill is valued and then included in the community property to be divided equally between the spouses.

One might think celebrity goodwill, or the excess earning capacity attributable to status as a celebrity, would be treated the same way. However, that is not the case.

Remember the 1980’s movie Die Hard? Die Hard director John McTiernan (other notable movies include Predator and the Hunt for Red October) was on the winning side of this issue, when it was decided in his divorce case. In re Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090.

The Court decided in McTiernan’s favor, finding that there was no goodwill value in his career as a director. Basically, the Court determined that goodwill can only exist where there is a business, that is, a professional, commercial or industrial enterprise with assets. A person simply doing business does not, by itself, qualify. Additionally, in order for goodwill to have value, it must be transferable.

Although the coined term is “celebrity goodwill”, this issue may arise in a divorce anytime one party is performing services as a natural person rather than as a business or profession, and their expectation of continued public patronage is not transferable, such as may be the case with a creative professional as opposed to a doctor, dentist or attorney, whose practices are generally thought to be transferable.