As a New Jersey divorce attorney with nearly 20 years experience, I have handled cases for a number of my colleagues. Valuing a law partnership for purposes of equitable distribution upon a divorce can be a difficult task. Even though our state’s history on the topic shows that looking to the partnership agreement is typically the right way to go, it is not always the best solution for valuation purposes. Since New Jersey lacks a statute detailing the standard of value in divorce proceedings, looking to case law on the topic is crucial. Let’s explore.
One of the first cases that the New Jersey Supreme Court decided regarding professional partnerships was Stern v. Stern, 66 N.J. 340 (1975). In Stern, Mrs. Stern was granted a divorce from Mr. Stern on the ground of adultery. The trial court sided with Mrs. Stern, awarding her alimony and child support. Additionally, the couples’ property was subject to equitable distribution. Mr. Stern, dissatisfied with the trial court’s orders, appealed. On appeal, however, the court affirmed only in part the findings of the lower court. It remanded the distribution of marital assets, stating that Mr. Stern’s earning capacity should not have been considered property pursuant to N.J.S.A. 2A: 34-23.
The Supreme Court of New Jersey stated that generally the standard of value of a party’s interest in a professional partnership will be made up of capital accounts, accounts receivable and payable, the value of the work in progress, any appreciation or depreciation in the value of tangible assets, and other liabilities not recorded on the books. Id at 347. The court stated that a partnership agreement is “of some assistance placing a precise or even an approximately accurate value upon an interest in a professional partnership, when the partner whose interest is in question intends to continue as a member of the firm.” Id. In the case at hand, the court found that the payout that most resembled the partnership agreement to divorce was what would be paid only if the partner had died.
The next significant case was decided in 1982, Dugan v. Dugan, 92 N.J. 423 (1982). In the Dugan case, the Supreme Court of New Jersey looked at goodwill and its role when valuing a law partnership for equitable distribution purposes. The court held that good will was a property interest, particularly marital property, subject to equitable distribution. It determined that “goodwill undoubtedly represents a legally protectable interest that is subject to equitable distribution. Id at 429, 433. Furthermore, the court most importantly stated that for equitable distribution purposes, “one’s goodwill value at a law practice includes a reputation that has been built after accomplishment and performance and future earning capacity based upon one’s reputation not only one’s degree.” Id at 433.
This case was the first in New Jersey to establish a formula for courts to utilize when calculating goodwill. As the Dugan court explained, the first thing to do would be to determine the earning capacity of a similar attorney in the area. Once that was established, the court would consider the attorney’s gross income for a five-year period. Then the court would compare the attorney to an average employee. Finally, goodwill would be calculated by adding the amount by which the attorney’s income exceeds the average employee and a return on investment in physical assets, subject to capitalization. Id at 440.
The most recent case to address valuing a law partnership is the unpublished trial court decision, Means v. Snipes, docket no. FM-07-859-08. The Means case was decided in 2009 by the Honorable Thomas P. Zampino, J.S.C. In the case, the judge was faced with determining the value of a spouse’s partnership interest in the renowned 680-person firm, Sullivan and Cromwell. Each of the parties to the lawsuit presented expert testimony on their behalf regarding the valuation of the spouse’s partnership interest.
Judge Zampino held that a “partnership agreement is not a proxy for value.” The partnership agreement included particular clauses for ending the partnership like death and retirement, yet no events occurred at the time of equitable distribution among the parties. The partner in Sullivan and Cromwell was going through a divorce; he did not die or retire from the firm. Therefore, the court determined that divorce was not a life event to be considered by his partnership agreement. The court held that the partnership agreement could not constitute the sole factor for calculating the spouse’s partnership value.
If you are a New Jersey lawyer and facing a divorce, we should chat. Thank you.