Marital Ownership of Business Goodwill

The Court of Appeal has held for the first time that a spouse’s professional “book of business” is a community asset subject to division in a divorce case. Marriage of Finby (Dec. 18, 2013) No. G046814. In Finby, the parties were married between 1995 and 2010. The wife was a financial advisor who had worked for UBS until 2009, when she was hired by Wells Fargo as a managing director of investments.

As part of her recruitment package, Wells Fargo agreed to pay the wife four bonuses totaling approximately $4 million. The first bonus of about $2.8 million was a “transitional bonus” based on the fee production of her portable “book of business” developed at UBS. The second bonus of about $185,000 was a deferred recruitment award bonus if she was still employed by Wells Fargo on February 1, 2016. The third bonus of about $380,000 was a first production bonus based on her fees earned during her initial period with Wells. The fourth bonus of about $890,000 was a performance bonus based on specific criteria for her work with clients.

The first, third and fourth bonuses were paid to the wife in full in the form of loans that would be forgiven over time periods between eight and 10 years, subject to and conditioned upon the wife achieving performance goals.

At trial, the parties’ expert witnesses predictably disagreed over how to characterize the bonuses. The wife’s expert opined that the transitional bonus was 13.5% community property, based on an allocation of the time period over which it would be earned. The wife’s expert concluded that the other two bonuses were her separate property because they would be earned after the date of separation.

The husband’s expert witness opined that the bonuses were compensation for her “book of business” developed during the marriage and, as such, were community property to be divided in the divorce case.

The trial court (Hon. Ronald Kreber of the Orange County Superior Court) found that the wife’s “book of business” was not an asset, such that the community had no interest in it. The trial court reasoned that, unlike a law or medical practice, the wife’s “book of business” could not be sold to a third party, and it therefore had no value and could not be a community asset. The trial court ruled that the portion of the second bonus that was earned during the marriage was community property, but that the third bonus was entirely the wife’s separate property because it was all earned after the date of separation.

The husband appealed, arguing that the wife’s “book of business” could be valued even if no market existed for it. He argued that the wife had essentially sold her portable business to Wells, and that the entirety of the book she had developed during the marriage was community property.

The Court of Appeal reversed the trial court judgment. It concluded that the wife’s portable business was analogous to the good will of a spouse’s business. Since the parties’ experts had agreed that Wells would not have paid the transitional bonus to the wife without her portable business, it was a valuable asset subject to division. The fact that the bonuses were subject to contingencies did not prevent them from being characterized as community assets. 

The Court of Appeal indicated that, upon remand, the trial court would need to either determine the present value of the community interest in the transitional bonus ($2.8 million) or, if the contingencies made this too uncertain, to award to each spouse an appropriate portion of each payment as it is paid.

The Court of Appeal ruled that the deferred recruitment award bonus ($185,000) was the wife’s separate property because it would not be earned until February 1, 2016.  

The Court of Appeal held that the first production bonus ($380,000) and the performance bonus ($890,000) were community property because the wife’s contractual right to these bonuses and at least some of the effort necessary to qualify for them had occurred before the date of separation.