Dividing Only What Can Be Sold: Establishing the Marketable Goodwill Test in Divorce Proceedings

Introduction

This comprehensive commentary examines the recent decision in Lydia May, f/k/a Lydia Petersen v. Jon-Marc Petersen, decided by the Supreme Court of Alaska on March 14, 2025. The case involves a long-term marriage of 19 years that ended in divorce, with significant financial and property disputes emerging, notably surrounding the valuation of a law firm owned by the husband, Petersen. At issue was whether the value of Petersen’s law practice could include intangible "goodwill" generated during the marriage. May, the wife, challenged the Superior Court’s determination that only marketable goodwill – that which could be sold to a third party – qualifies for inclusion in the marital estate. She further contested the classification of a $75,000 payout as a pre-distribution in lieu of interim spousal support and the manner in which child support was temporarily adjusted for adoption subsidies. This commentary analyzes the background, key findings, and the far-reaching implications of the Judgment.

Summary of the Judgment

The Superior Court’s decision, which is ultimately affirmed by the Supreme Court of Alaska, upheld a 60/40 division of the marital estate in favor of May. In its detailed opinion, the court found that Petersen’s law firm lacked any marketable enterprise goodwill – that is, any goodwill that could be quantified through its potential resale value. Instead, only the tangible net assets of the firm, valued at $22,000, were considered in the division. The court’s analysis included numerous evidentiary findings on asset classification, including the exclusion of an office building held by a separate LLC, and a determination that post-separation cash flow did not equate to excess cash available for division. Additionally, the court supported its treatment of a $75,000 pre-distribution as adequate to address May’s immediate financial needs, and it upheld the method for adjusting Petersen’s child support obligation in light of state adoption subsidy payments. With these decisions, the Court confirmed that only marketable goodwill, not personal goodwill which is inherently tied to an individual, should be subjected to division in divorce.

Analysis

Precedents Cited

The Judgment relies on several important precedents that have shaped Alaska divorce jurisprudence. Notably:

MILLER v. MILLER, 105 P.3d 1136, 1139 (Alaska 2005): This decision outlines the three-step process used in property division – identifying marital assets, determining their value, and equitably dividing the property – and establishes the standard for reviewing issues of property valuation and discretionary judgment.
Aubert v. Wilson, 483 P.3d 179, 186 (Alaska 2021) and Engstrom v. Engstrom, 350 P.3d 766, 769 (Alaska 2015): Both cases reaffirm judicial deference to trial courts’ factual determinations and the allocation of assets when faced with complex financial transactions.
RICHMOND v. RICHMOND, 779 P.2d 1211 (Alaska 1989) (and its partial overruling in HANSEN v. HANSEN, 119 P.3d 1005): This case provides the pivotal distinction between marketable enterprise goodwill and personal goodwill. The court emphasized that only the former, which can be sold as a going concern, qualifies for division. This principle resonated throughout the Judgment.

The Judgment also references cases from other jurisdictions – such as In re Marriage of Maxwell and STONEHOCKER v. STONEHOCKER – which mirror Alaska’s approach in valuing professional practices. This consistent reliance on precedent supports the court’s firm stance that intangible goodwill only acquires divisibility if it is marketable.

Legal Reasoning

At the core of the court’s legal reasoning is the necessity to treat marital property division in a way that permits both parties to make a “clean break” and move on with their lives. The court sustained the established approach that only marketable goodwill – the kind that could be sold to realize its economic value – is subject to division. Detailed testimony from expert witnesses, including valuations based on tangible net assets, underpinned the decision that Petersen’s law firm did not possess any transferable goodwill value.

The court emphasized the following:

Goodwill Distinctions: The Judgment meticulously distinguishes between personal goodwill – which is intrinsically tied to an individual’s reputation, skill, and personal contributions – and enterprise goodwill, which is marketable. The rationale is that awarding the latter merely reflects the fair exchange value in a potential sale, thereby preserving the divorcing parties’ ability to move forward independently.
Asset Valuation Methodology: The court’s reliance on an asset-based valuation, as presented by Petersen’s expert, underscores its commitment to principled methods over speculative calculations that might include non-salable personal goodwill.
Discretionary Remit on Interim Support and Child Support Adjustments: Recognizing the financial disparity between the parties, the court opted for a pre-distribution mechanism to temporarily support May while declining an interim spousal support award. Additionally, the meticulously structured method to adjust Petersen’s child support obligation – accounting for state adoption subsidies in proportion to physical custody arrangements – reflects an intricate balancing of statutory mandates and equitable principles.

Impact on Future Cases and Legal Practice

This Judgment solidifies the legal standard that only marketable goodwill is eligible for division in divorce cases involving professional practices. Consequently, divorcing spouses may no longer rely on personal goodwill, despite its real economic impact, as a basis for property division. This ruling is likely to influence future cases where one spouse’s professional enterprise forms a significant part of the marital estate. Moreover, by upholding a strict asset-based valuation method, the decision provides a clear framework for courts facing disputes over the intangible assets of a business, thereby reinforcing consistency and predictability in divorce proceedings.

The dissenting opinion, which argues for a broader inclusion of goodwill reflecting the contributions of both spouses to a professional practice’s success, may fuel future debates and potential legislative or judicial reviews. However, until such changes are adopted, the prevailing view as established in this Judgment will guide practitioners in asset valuation.

Complex Concepts Simplified

The Judgment employs several complex legal concepts that merit clarification:

Marketable vs. Personal Goodwill: Marketable (or enterprise) goodwill is the additional value a business earns from its customer base, contracts, and reputation – but only if this value can be captured through a sale. Conversely, personal goodwill arises from an individual's unique skills and personal relationships that have no standalone market value.
Asset-Based Valuation: Rather than incorporating speculative premium factors, the court valued the law firm based solely on its tangible net assets. This method provides a stable and objective measure when no active market exists for the intangible parts of a business.
Pre-Distribution vs. Interim Support: In divorce cases, a pre-distribution is a one-time monetary award from the marital estate meant to cover immediate expenses. It is distinct from interim spousal support, which is an ongoing payment intended to bridge a financial gap until a final settlement is reached.
Adoption Subsidy Adjustment: Adoption subsidies, meant for the benefit of the child, should not directly offset child support payments. Instead, the subsidy should be apportioned based on custody arrangements, ensuring that both parents contribute fairly to the child’s support.

Conclusion

The Supreme Court of Alaska’s affirmation of the lower court’s decision in this case establishes a significant precedent by underscoring that only marketable goodwill – and not the more nebulous personal goodwill – should be considered when dividing professional practices in divorce proceedings. The ruling reinforces a strict asset-based valuation methodology, one that prioritizes objective, discernible financial numbers over speculative future earning capacities.

Furthermore, the decision carefully delineates the boundaries of interim support and proper apportionment of adoption subsidies, demonstrating the court’s commitment to a balanced and equitable approach to resolving financial disparities post-divorce. While the dissenting opinion advocates for a broader inclusion of goodwill to better recognize each party’s contributions during marriage, the majority opinion reinforces long-standing legal principles designed to allow both parties a clean break and a path forward.

In sum, the Judgment not only clarifies the treatment of intangible assets in divorce but also offers valuable guidance for future cases involving high-earning professionals and the complex valuation of business assets. This decision will undoubtedly serve as a cornerstone in evolving divorce law debates and asset division in professional practices.