IN RE: the MARRIAGE OF MARRON. (1985)

I.

In this case we adopt a general rule that the date for valuation of the community property interest in a law partnership, for purposes of division of assets in a marital dissolution, is the date of separation of the parties, not a date as near as practicable to the time of trial.   We also hold it is error to value the community interest based upon the value of withdrawal rights contained in the partnership agreement, even though the lawyer spouse withdraws from the law partnership between the date of separation and the time of trial, when withdrawal value does not reasonably reflect the value of the community interest in the law partnership as of the date of separation.

Nancy Marron appeals from the final judgment of dissolution of her marriage to Michael Marron filed June 10, 1981.   She contends the trial court erred in valuing the community interest in Michael's law practice.¹  We conclude that the trial court did err in its valuation of the community interest in Michael's practice.

II.

As relevant to the issues on appeal, the facts are that Nancy and Michael separated on December 30, 1976, after a 17-year marriage.   Following separation Michael remained in the former family residence while Nancy and their minor children occupied rented housing.   Pursuant to court orders, Michael paid temporary and permanent child and spousal support to Nancy plus attorney fees and costs.

Michael, a 1962 graduate of Harvard Law School, joined the law firm of Steinhart, Goldberg, Feigenbaum and Ladar (hereafter “Steinhart law firm”) as an associate in May 1966.   He became a partner on January 1, 1970, under articles of partnership providing that in the event of a partner's withdrawal from the firm, his “withdrawal rights” would be limited to the amount of his capital account plus the undrawn portion of his share of the profits for that year.²  At separation, Michael had no intention of leaving the Steinhart law firm, however, in 1979, he and other lawyers withdrew from the firm to open their own office.   Upon withdrawal, Michael received the balance in his capital account, $26,000, and his undrawn portion of the firm's profits, $7,834, a total of $33,834.   He and the other attorneys also took a number of uncompleted cases with them, which had substantial value.

The valuation of the community property interest in the Steinhart law firm is the central issue on appeal.   At trial Nancy called Melvin A. Schiller, a certified public accountant, as an expert to testify to the value of Michael's law practice.   As part of the basis for his valuation Schiller used the financial statements prepared for the Steinhart law firm by an accounting firm for the years 1974 through 1978.   He concluded that the community's interest in the assets of the firm at the end of December 1976 was $102,531, excluding goodwill.   This included Michael's capital account, undrawn profits for 1976, and his pro rata share of unbilled work in progress and accounts receivable, less unpaid liabilities.   It also included a share of the value of the physical assets of the firm, the value of the furniture, furnishings, machinery, equipment, law library, supplies and inventory.   Schiller separately valued Michael's goodwill in the practice at $56,000.

Stephen Schwartz, an attorney, testified as Michael's expert.   Schwartz consulted the same financial statements as Schiller, and also considered the Steinhart articles of partnership.   He concluded Michael's interest in the Steinhart law firm was constrained by the statement of withdrawal rights contained in the partnership agreement and he included only the value of Michael's capital account, and undrawn profits in reaching his opinion of $33,834 for the community's interest in the firm.

The court found Michael received $33,834 at the time of his withdrawal from the Steinhart law firm, “which represents the community interest in the capital account and his undrawn share of the profits.  [Michael] received no other monies from the community interest in said law firm.”   The court also found that Michael's goodwill interest in the firm at the date of separation was worth $9,982,³ making the total value of the community's interest in the Steinhart law firm $43,726.

III.

Nancy contends the trial court erred by failing to consider Michael's share of the firm's accounts receivable, work in process and fixed assets, including personal property and supplies inventory, in its valuation of the community interest in his law practice.   We hold that the court erroneously excluded these factors.

 “[I]n determining the value of a law practice or interest therein, the trial court should determine the existence and value of the following:  (a) fixed assets, which we deem to include cash, furniture, equipment, supplies and law library;  (b) other assets, including properly aged accounts receivable, costs advanced with due regard for their collectability;  work in progress partially completed but not billed as a receivable, and work completed but not billed;  (c) goodwill of the practitioner in his law business as a going concern;  and (d) liabilities of the practitioner related to his business.”   (In re Marriage of Lopez (1974) 38 Cal.App.3d 93, 110, 113 Cal.Rptr. 58, disapproved on other grounds by In re Marriage of Morrison (1978) 20 Cal.3d 437, 143 Cal.Rptr. 139, 573 P.2d 41.)   Moreover, in reaching its valuation the trial court is not bound by the terms of a partnership agreement relating to a partner's withdrawal rights.  “The value of the contractual withdrawal right may provide a basis for ascertaining the value of the community interest [citation];  however, it does not preclude a consideration of other facts.”   (In re Marriage of Slater (1979) 100 Cal.App.3d 241, 246–247, 160 Cal.Rptr. 686;  see also In re Marriage of Fonstein (1976) 17 Cal.3d 738, 745, 131 Cal.Rptr. 873, 552 P.2d 1169;  In re Marriage of Fenton (1982) 134 Cal.App.3d 451, 461, 184 Cal.Rptr. 597.)

In both Slater and Fenton the professional spouse argued that the partnership agreement controlled on the question of existence or valuation of a professional practice.   In both cases the reviewing court disagreed, stating that the asset being divided was the community interest in the partnership, not the professional spouse's contractual withdrawal rights.   Therefore, while the court might find that goodwill did not exist under the facts of a particular case (In re Marriage of Aufmuth (1979) 89 Cal.App.3d 446, 463, 152 Cal.Rptr. 668, disapproved on other grounds by In re Marriage of Lucas (1980) 27 Cal.3d 808, 166 Cal.Rptr. 853, 614 P.2d 285), the terms of the partnership agreement were not necessarily controlling on the issue and the court must consider the factors listed in Lopez in order to decide the value of a professional practice.  (In re Marriage of Fenton, supra, 134 Cal.App.3d at pp. 461–463, 184 Cal.Rptr. 597;  In re Marriage of Slater, supra, 100 Cal.App.3d at pp. 245–247, 160 Cal.Rptr. 686.)

 Here the court apparently found itself constrained by the terms of the partnership agreement in valuing every asset of the law partnership except goodwill.   In its statement of intended decision the court was somewhat ambiguous about what it considered in reaching its valuation.   First, the court recited the limitations contained in the partnership agreement in the event of withdrawal.   Then the court noted that because Michael withdrew from the firm between the date of separation and time of trial, exactly what he received on withdrawal was known.   However, it included a value for goodwill, which was not included in Michael's withdrawal rights.   The court stated that $9,982 represented the value of Michael's “goodwill and the party's interest in the Steinhart partnership over and above the capital account and the undrawn share of the profits account.   In effect, the partnership agreement gave [Michael] the right to share in the Steinhart profits and this contract had a value as it enabled him to receive compensation for the value of his own services and also to receive something more, i.e., a share in the overall profits of the Steinhart firm.”

Nancy attempted to clarify the court's ambiguity by requesting a special finding of whether the value given to the law practice included Michael's share of the firm's accounts receivable, work in process, and other personal property.   In its findings of fact and conclusions of law the court:  (1) recited the limitations of the partnership agreement on withdrawal rights;  (2) noted the value of Michael's capital account and undrawn profits at the time of separation;  (3) specified that when Michael withdrew he received “no other monies from the community interest” of the law firm except the value of his capital account and undrawn profits;  and (4) then stated that in addition Michael had a goodwill interest of $9,982 at the time of separation.   It did not specifically respond to Nancy's request for a special finding.

It appears from the record, however, that the court did fail to consider the factors listed in Lopez.   While the court acknowledged that Michael's practice had a goodwill value over and above his contractual interest on withdrawal, it did not consider or include the value of the firm's accounts receivable, unbilled work in process, or personal property, supplies and inventory.

 Accounts receivable directly attributable to services performed prior to separation are earnings of the working spouse during marriage and therefore constitute community property.  (In re Marriage of House (1975) 50 Cal.App.3d 578, 580, 123 Cal.Rptr. 451.)   The value of an attorney's unbilled work in process should be apportioned to community and separate property according to the amount of effort performed before and after separation.  (Waters v. Waters (1946) 75 Cal.App.2d 265, 269–270, 170 P.2d 494.)   Fixed assets, including cash, furniture, equipment, supplies, and law library represent a portion of the value of a law practice.  (In re Marriage of Lopez, supra, 38 Cal.App.3d at p. 110, 113 Cal.Rptr. 58.)

Michael acknowledges that his share of accounts receivable and unbilled work in process existing at separation formed part of the profits he received between the date of separation and his withdrawal from the firm two-and-a-half years later.

 The trial court should have considered additional factors listed in Lopez in its valuation of the community interest in the law practice.   In addition, Michael's earnings and his share in the law practice up to the date of separation, including accounts receivable and unbilled work in process, are community property.   Money attributable to services performed by him after the date of separation is his separate property pursuant to Civil Code section 5118.⁴

Michael contends the trial court chose to value the practice at the time he withdrew in 1979, rather than at the parties' separation in 1976, since that represented the date “as near as practical to the time of trial” pursuant to Civil Code section 4800(a).   He ignores the fact that earnings attributable to services performed after the date of separation, in a professional practice of the type in which he engaged, are separate rather than community property.

The resolution of the proper date for valuation of community interests in most law partnerships requires a reconciliation between Civil Code sections 4800(a) (“․ the court shall value the assets and liabilities as near as practicable to the time of trial ․”) and 5118 (“․ earnings ․ of a spouse ․ while living separate and apart from the other spouse, are the separate property of the spouse.”).   With “the enactment of Civil Code section 5118, effective March 4, 1972, any portion of the law practice assets including goodwill which are attributable to the earnings and accumulations of a spouse living separate and apart are the separate property of the spouse earning or accumulating the same.”  (In re Marriage of Lopez, supra, 38 Cal.App.3d at p. 110, 113 Cal.Rptr. 58.)

At any given moment the major assets of most law firms are not capital assets, but are those related to the direct rendering of professional services, most particularly accounts receivable and work in process.  “Many past and present distinguished California lawyers of initial humble and impecunious beginnings will attest to the fact that it is not ordinarily capital investment by a sole legal practitioner which is the chief contributing factor in the realization of income and profits.”  (38 Cal.App.3d at pp. 106–107, 113 Cal.Rptr. 58.)

 For these reasons we adopt a general rule that in determining the community property interest in law partnerships (including goodwill) in order to divide community property in a marital dissolution action, the proper date of valuation is the date of separation of the parties, not a date as near as practicable to the time of trial.   This rule is applicable even though, as here, the lawyer spouse has withdrawn from the law partnership between the date of separation and the date of trial.   After all, between those dates, as here, the lawyer spouse will usually have received any balance of accounts receivable and work in process which existed on the date of separation.   Additionally, as a matter of public policy the lawyer spouse's unilateral decision after separation to withdraw from his law partnership, a decision in which his spouse has no voice, should not result in a reduction in the value of the community assets to be divided between the spouses.

 This will not be a general rule without exceptions.   However, exceptions will usually be related to situations where the postseparation efforts of the lawyer spouse have minimal impact upon any increase in the value of the law partnership interest.   In some cases the partnership interest in a large law firm (or shareholder interest in a large professional corporation) may be so relatively small that the lawyer spouse's postseparation efforts cannot be considered a significant factor in any increase in the value of the partnership (or professional corporation) between the date of separation and time of trial.  (See In re Marriage of Aufmuth, supra, 89 Cal.App.3d 446, 152 Cal.Rptr. 668.)   Under these circumstances, it could certainly be argued that the lawyer with a small partnership interest in a 200 member law firm, may be indistinguishable from an executive with General Motors who also owns shares of General Motors stock, and an exception to the general rule should be made to value the interest as near as practicable to the time of trial.   In other cases, the formula contained in the partnership agreement for payment upon withdrawal of a partner may also be an accurate method for determining the value of the partnership as a going business as well, or the parties may not dispute the use of the withdrawal formula to determine the value of the partnership interest.  (See In re Marriage of Fonstein, supra, 17 Cal.3d 738, 131 Cal.Rptr. 873, 552 P.2d 1169.)

In any event, Michael is incorrect in assuming the trial court valued his law practice at his withdrawal date.   The findings of fact state the trial court valued the practice as of the date of separation of the parties at the end of 1976.   The court calculated Michael's goodwill on the basis of his 1976 income rather than his 1979 income, and it stated that the goodwill at the time of separation was $9,982.   There is no reason to believe the court chose one date on which to value goodwill, and another to value the capital account and undrawn profits.   Moreover, the court itself noted the amount in Michael's capital account and undrawn profits was the same at the time of separation and at his withdrawal, however, at the time of separation, Michael had no intention of leaving the Steinhart law firm.

We conclude that the community interest in Michael's law practice should have been determined as of the date of separation and his withdrawal rights, not having been shown to reasonably reflect the value of his partnership at the date of separation, were not controlling.

IV.–VI.**

VII.

 Since the trial in this case Congress has enacted the Domestic Relations Tax Reform Act of 1984 which provides there is no recognition of gain or loss, for tax purposes, on transfers of property between spouses made incident to dissolution.   Thus, the former rule set forth in Carrieres v. Commr. (1975) 64 T.C. 959, affirmed (9th Cir.1977) 552 F.2d 1350, which made the execution of a note from one spouse to the other to accomplish an equal division a taxable event is changed.   The promissory note utilized here qualifies as incident to dissolution and is not a taxable event.  (26 U.S.C. § 1041, subd. (c)(2);  see also Fed.Tax.Reg., Vol. II (1985) § 1.1041–1T, pp. 1886–1887.)   Because of this change in the tax law, the requirement that Michael pay $18,560 to Nancy to compensate her for her tax liability incurred because of the receipt of the note from Michael is no longer appropriate.

VIII.

 The trial court ordered Michael to pay interest of nine percent on the promissory note utilized to accomplish an equal division of community property from the date of the interlocutory judgment.   At that time the legal rate of interest in judgments was seven percent.  “Marital property dispositions are not limited by the judgment interest rate of 7 percent, but are controlled by the dictates of fairness and equity in Civil Code section 4800.”  (In re Marriage of Stallcup (1979) 97 Cal.App.3d 294, 302, 158 Cal.Rptr. 679;  In re Marriage of Escasmilla (1982) 127 Cal.App.3d 963, 967, 179 Cal.Rptr. 842.)

Effective January 1, 1983, Code of Civil Procedure section 685.010 raised the rate of interest on judgments to 10 percent.  (See American National Bank v. Peacock (1985) 165 Cal.App.3d 1206, 212 Cal.Rptr. 97.)   Subdivision (b) of that section makes the changed rate applicable “only to interest that accrues after the operative date of the statute that changes the interest.”

Since the trial court found that nine percent was a reasonable rate of interest when the legal rate on judgments was seven percent, and it anticipated payment within six months of trial which has not occurred as a result of this appeal, the case should be remanded for consideration of whether a higher rate of interest should be charged beginning January 1, 1983.

IX.

We affirm the judgment in all respects except as follows:  We reverse that part of the judgment awarding Nancy $18,560 to compensate her for tax liability since she will incur no income tax liability by the division of assets ordered by the court.   We reverse and remand for retrial the valuation of the community interest in the law partnership, other than goodwill, and the appropriate rate of interest to be charged beginning January 1, 1983, on the amount to be paid by Michael to Nancy to accomplish an equal division of community property.

Being uncertain as to the financial circumstances of the parties and other relevant considerations, the issue of costs on appeal, including attorney fees, is also referred to the trial court for determination.

I respectfully dissent.   It should not be necessary to wrestle with the inherently defective process of evaluating the goodwill of a professional practice, since in this case there was no such asset to divide.   A brief chronology of relevant events bears repeating:

It is obvious that by the time of trial the husband had no interest in his prior law firm, and we know exactly what he received for his interest upon his departure therefrom—a total of $33,834.¹  Civil Code section 4800, subdivision (a) requires the court, upon dissolution of a marriage, to divide the community property equally.   In my opinion that was not done by the trial court, nor will it be accomplished by the majority's decision.   The Lopez, Fonstein, Slater and Fenton cases cited by the majority are all readily distinguishable in that they dealt with the evaluation of goodwill in an ongoing professional practice.   None of the professional spouses in those cases had imminent plans of terminating their practices, nor their interest in the firm, a group or corporation of which they were a member.

By contrast, the husband in the instant case had terminated his interest in his former law firm and had been fully compensated for that interest;  the amount of that compensation is undisputed.²  In short, for his entire partnership interest, goodwill included, the husband received from his former firm a grand total of $33,834.   To award the non-professional spouse anything more than one-half of this amount results in an unequal division of community assets, with one party receiving hard cash and the other nothing more than, with due apologies to Marcel Proust, a remembrance of things past.

The majority states that “as a matter of public policy the lawyer spouse's unilateral decision after separation to withdraw from his law partnership, a decision in which his spouse has no voice, should not result in a reduction in the value of the community assets to be divided between the spouses.”   This is an interesting concept if the lawyer husband were receiving something of value not shared with his wife, but in this case he is not.   To suggest, however, that a legitimate career change cannot be undertaken without spousal consent except upon payment of tribute, smacks of involuntary servitude.  (U.S. Const., amend. XIII;  Cal. Const., art. I, § 6.)   Whether the spouses are separated or not should not matter, since the decision is or should be that of the professional practitioner alone.   It seems to me that a better public policy is to permit doctors, lawyers, accountants and other professionally self-employed individuals the unencumbered freedom to make their own career choices.³  I would go even further and rule that such freedom is constitutionally protected.⁴

I would affirm the judgment except for that portion dealing with the division of the former partnership interest and the goodwill.   As to that I would reverse and remand with instructions to evaluate it in accordance with the undisputed evidence, and award each party one-half of the $33,834 received.

FOOTNOTES

1.   Nancy also contends the court erred in failing to compensate her for Michael's exclusive use of the family residence for the four years between the date of separation and the date of the interlocutory judgment.   Michael has cross-appealed contending the court erred by including any value for goodwill in his law practice.   We discuss these issues in unpublished portions of this opinion and conclude Nancy was not entitled to compensation for her loss of use of the community residence between separation and the interlocutory judgment, and the inclusion of a value for the goodwill of the law practice was correct.

2.   The articles of partnership of the Steinhart law firm specified in pertinent part:  “The voluntary or involuntary withdrawal of a partner shall terminate all his interest in the partnership, its property and assets, and all of his right or obligation to share in partnership profits and losses, except for the right to receive the payments provided for in Paragraph 5 of this Section C of Article V․  Payments to a withdrawing partner shall be as follows:  (a) A withdrawing partner shall receive the amount of his capital account together with his share of the profits of the firm for that portion of its current year ending on the effective date of his withdrawal.   His share of profits shall be computed on the basis of income earned to the date of withdrawal, after taking into account all withdrawals or charges and all obligations and expenses of the firm properly attributable to such period.   These amounts shall be paid to him within 30 days after the effective date of his withdrawal.”

3.   Since the sole basis of Michael's cross-appeal is that the court erred in finding there was any goodwill because of his withdrawal from the firm, and neither party otherwise challenges the trial court's valuation of goodwill, we need not consider how the court arrived at the figure of $9,982 for goodwill.   In the unpublished portion of this opinion we do hold that there was substantial evidence to support a determination that there was goodwill.

4.   Civil Code section 5118 provides:  “The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse, are the separate property of the spouse.”

FOOTNOTE.   See footnote * ante.

1.   I do not include any value for any uncompleted cases which the husband and the other departing attorneys took with them.   No evidence was presented concerning the value of these cases.   Assuming they had any value which could be properly classified as a community asset, then they should have been appraised and a finding made thereon.

2.   It is important to keep in mind that, insofar as “goodwill” is concerned, we are not dealing with any “individual goodwill” attached personally to the lawyer husband.   Rather, we are dealing with his alleged share of the goodwill of a law firm of which he has ceased to be a member.

3.   In the interest of preserving domestic harmony, it may be prudent to obtain spousal approval before exchanging a lucrative neurosurgical practice in Carmel for a chicken ranch in Topeka or a hotdog stand in Buffalo.   However, a public policy requiring such consent prior to leaving a partnership and opening one's own practice in the same community is quite another thing, particularly when the professional move is viewed as a gateway to “upward mobility,” and the attendant increased earnings which are expected to accompany the move.

4.   I refer only to legitimate career moves, and not to the situation where one spouse drops a promising and rewarding career for a life of meditation or wood-chopping merely to avoid lawful obligations of support.   In my experience this happens infrequently, and self-interest usually motivates most professionals to continue with their careers.

KING, Associate Justice.

LOW, P.J., concurs.