What Are Enterprise Goodwill and Personal Goodwill and Are They Marital Assets in SC?
The value of a business is determined by a number of factors, including its income, physical assets like buildings and equipment, and intangible assets like goodwill.
But what exactly is “goodwill” in business, and what’s the difference between personal goodwill and enterprise goodwill? And is goodwill subject to division as marital property in divorce proceedings (as discussed by the SC Court of Appeals in Bostick v Bostick, 2022)?
Personal Goodwill vs. Enterprise Goodwill
“Goodwill” is an intangible business asset. Goodwill can encompass many things, depending on the nature of the business, including branding and brand recognition, customer relations, employee relations, and intellectual property (trademarks, copyrights, patents, and trade secrets).
Goodwill can be divided into two types, personal and enterprise.
Personal goodwill is inextricably tied to an individual or individuals, often the business owner(s). The individual’s exceptional knowledge or skills, experience, reputation, and relationships with customers, employees, and suppliers may all be factors in a company’s personal goodwill valuation.
Enterprise goodwill is tied to the business itself rather than to an individual, such as its brand, location, convenience for customers, unique offerings, intellectual property, and the like.
Say a highly regarded chef sells one restaurant and leaves to start another. If the regular customers follow the chef to the new restaurant, that’s an example of personal goodwill. Once the chef has gone, the restaurant has lost that intangible asset (the personal goodwill tied to the chef) that brought in business and made money. But it still boasts a great location, convenient opening hours, and a unique menu, all of which will outlast the presence of the founding chef and continue to bring in revenue; that’s enterprise goodwill.
Determining the dollar value of a company’s personal goodwill and/or enterprise goodwill can be a challenge for business owners.
Is Goodwill a Marital Asset Divisible in Divorce? Bostick v Bostick Background
Another issue some business owners face is whether their company’s personal goodwill and enterprise goodwill are marital assets that can be divided in a divorce. This varies by state. The South Carolina Court of Appeals weighed in on the issue in the case Bostick v Bostick in March 2022 (read the opinion here).
Josie M. Bostick and Earl A. Bostick, Sr., were married in 1971 and began divorce proceedings in 2017. During their marriage, Earl was a dentist with a successful practice in two locations, Ridgeland and Bluffton. Earl retired before the divorce was finalized and sold the Ridgeland practice to the Bosticks’ son for $569,000 plus $51,113.15 in accounts receivable. The contract divided the $569,000 in two parts: $144,860 for purchased assets and $424,140 for goodwill. The contract also required Earl to be available for up to 60 days after the sale to help transition, and it contained a covenant not to compete.
How this money should be divided in the divorce was a point of disagreement. The family court determined that the hard assets and accounts receivable were marital assets to be divided 50/50, as the Bosticks had previously agreed. But it held that the goodwill was a nonmarital asset because it was personal goodwill and was therefore Earl’s alone. The court based this decision on Moore v Moore (2015), which ruled that enterprise goodwill is a marital asset subject to division, while personal goodwill belongs solely to the professional and is not subject to division.
Josie contended the family court erred in this decision. The appeals court agreed.
Was it Personal or Enterprise Goodwill?
The SC Court of Appeals notes that if the dental practice were an “ongoing concern,” then “the majority, if not all” of the goodwill would be personal, but it was known that Earl was leaving the practice and the profession altogether. The court does note that the agreement for Earl to be available for 60 days after the sale and the covenant not to compete do weigh in favor of personal goodwill but concludes that there was no evidence that the entire amount should be considered personal goodwill.
Plus, Earl had previously sold his Bluffton location, and the revenue from that sale – which also included a goodwill portion – was put on his side of the ledger for purposes of equitable distribution. The court says it sees no reason to treat the sale of this second location any differently.
“Therefore, we conclude the family court erred in not treating the entirety of the sales price as marital property,” says the court.
(Note that there is a possibility this decision could be appealed and go to the SC Supreme Court.)
Buying, Selling, and Growing Your Business in South Carolina
No matter what stage of business ownership you’re in, you can use the guidance and advice of an experienced business attorney like Gem McDowell. With over 30 years of experience helping clients in South Carolina, Gem is a problem solver who is ready to help you whether you need advice and assistance buying or selling an existing business, starting up a new one, or helping your business thrive while protecting your interests.
Call Gem and his team at his Mt. Pleasant, SC office at 843-284-1021 to schedule a free consultation.
Why Common Law Marriage was Just Abolished in South Carolina
Common law marriage will no longer be recognized in South Carolina. In making this determination, the Supreme Court of South Carolina joins the trend of several other states who have already put an end to the practice over the years.
This decision comes in the context of a case from family court and offers some interesting insights into the purpose of public policy and how society’s changing mores affect the law and its interpretation.
Where Did Common Law Marriage Come From?
Before we look at why it was abolished in SC, let’s look at where it came from.
Common law marriage comes from pre-Reformation Europe and arrived in the new world from England during colonization. Not all states adopted common law marriage, but the majority did at some point.
At the time, this institution made a lot of sense. America was sparsely populated, particularly in the Midwest and the West, and it was difficult to find and/or travel to religious or government officials to marry two people. It was also a way to add some legitimacy to a situation that would otherwise be seen as objectionable, e.g., living together, children out of wedlock, and women with children who might otherwise rely on the state for assistance.
However, times and situations have changed drastically, and the institution doesn’t make as much sense as it once did.
Common Law Marriage in Modern Times
In its decision (which you can read here), the Court states that “the common law changes when necessary to serve the needs of the people” and that it will act when it is “apparent that the public policy of the State is offended by outdated rules of law.”
Common law marriage is, indeed, outdated. Cohabitation before marriage, children born out of wedlock, and single mothers are widely accepted today without stigma, and rights to child support and inheritance no longer depend on marital status. Getting married legally is easy and inexpensive, and therefore there are no substantial practical barriers to marriage as there once were.
In addition, common law marriage presents some thorny problems. Namely, how do you know when you have entered into a common law marriage, since (by definition) there is no formal ceremony or documentation, and how are courts supposed to make that determination when asked? What if one party of a couple believes they are married, but the other party doesn’t? What happens when a couple like this decides to split? These issues were central in the case at hand.
Married or Not Married?
A. Marion Stone, III and Susan B. Thompson met in the 1980s and began dating. In 1987, they had a child together, and in 1989 they had a second child and began living together. For approximately twenty years following this, they lived together, raised kids, and managed rental properties. The relationship ended when Thompson discovered Stone was having an affair.
In 2012, Stone sought declaratory judgement that the two were common law married, a divorce, and an equitable distribution of alleged marital property. The family court held a trial to determine whether the two were common law married. After hearing evidence from both sides – including witness testimony on how they introduced themselves as a couple, proof of cohabitation, joint financial documents, and so on – the court concluded that Stone and Thompson were common law married starting in 1989, and so awarded over $125,000 to Stone in attorney’s fees and costs. The family court stated that the evidence showed a “presumption of marriage that could only be refuted by strong, cogent evidence they never agreed to marry.”
The South Carolina Supreme Court Disagreed
The Supreme Court disagreed, not finding the evidence as overwhelming as the family court did. Some witnesses said Stone and Thompson introduced each other as husband and wife, while others didn’t; some documents were signed jointly, others singly; and the children had their mother’s last name only until 2000, when their father’s last name was added. There was a period of time from 2005-2008 where documents were signed as though a married couple – medical documents and an application for a mortgage loan – but the Supreme Court viewed these as evidence of seeking financial benefits through the appearance of marriage, not as an indication of actual marriage.
Ultimately, common law marriage requires mutual understanding and assent. Both parties must understand what common law marriage is and express a desire for it, and understand that the other feels the same way. The Court didn’t find that this was the case with Stone and Thompson, and therefore reversed the family court’s decision (and the decision for Thompson to pay Stone’s attorney’s fees).
Prospective, Not Retrospective – and a Stronger Test
The Court notes that while it does have the power to “undo” current common law marriages, it’s reserving this right of retrospective power and its decision applies only prospectively. From the date of the Supreme Court’s decision (July 24, 2019) forward, you may only be married in South Carolina with a valid license.
At the same time, the Court took the opportunity to strengthen the test of validity of current common law marriages. “A heightened burden of proof is warranted,” which it calls an “intermediate” standard: more than a preponderance of the evidence but not to the level of beyond a reasonable doubt. The “clear and convincing evidence” standard used for matters of probate “should also apply to living litigants.”
The Supreme Court states that the “right to marry is fundamental, and so is the right not to marry” so it cannot be an institution that people enter into unwittingly. Furthermore, the Court can’t “see inside the minds” of litigants, it “must yield to the most reliable measurement of marital intent: a valid marriage certificate.”
Keeping Up with Changes in the Law
Though South Carolina is following in the footsteps of other states in ridding the practice of common law marriage, this is still a big step. It’s important to remember that laws can change, as can the interpretation of them, and that these changes can have very real consequences for residents of the state.
This is especially true for estate planning when it comes to complicated family dynamics. To make sure you’re covered, work with an experienced estate planning attorney Gem McDowell. He and his associates at the Gem McDowell Law Group in South Carolina can help you plan ahead and make sure your estate planning documents are in order. Schedule your free consultation by calling 843-284-1021.
A Closer Look at Transmutation
The issue of transmutation has come up on this blog before, when we did a quick overview of how non-marital property can undergo transmutation to be considered marital property. This issue can be critical in cases of divorce, when assets are divided between spouses. Often, one spouse comes into the marriage with an asset (non-marital property) and when it comes time to divide assets in the divorce, the other spouse claims that the asset should now be considered marital property so they can get what they consider their fair share of it.
But determining transmutation is not black and white. The court must look at the evidence to decide. Today we’re going to look at the details of a specific case to better understand what type of evidence courts look for when considering transmutation.
The case in question is Brown v Odom, heard by the South Carolina Court of Appeals in May 2018. (PDF of case) Grady C Odom and Emily S Brown divorced after an 8-year marriage. In the divorce, a family court determined that a company founded by Odom before he and Emily married, Twin Oaks Villas (LLC), had transmuted into marital property over the course of the marriage. It was therefore subject to division in the divorce settlement. Odom disagreed with the lower court and appealed.
Producing Evidence for Transmutation
The SC Court of Appeals affirmed the family court’s decision, finding that the LLC did indeed transmute into marital property. In its decision, it cites previous cases to establish a basis for analysis:
“Nonmarital property may transmute into marital property if ‘[1] it becomes so commingled with marital property that it is no longer traceable, [2] is titled jointly, or [3] is used by the parties in support of the marriage or in some other way that establishes the parties’ intent to make it marital property’” (Wilburn v Wilburn, 2003)
and
“The spouse claiming transmutation must produce objective evidence showing that, during the marriage, the parties themselves regarded the property as the common property of the marriage.” (Jenkins v Jenkins, 2001)
Quoting directly from the decision, Brown provided the follow evidence of her involvement in the LLC, which included:
- “Loaning the entities [referring to both the LLC and a separate Corporation Odom had also founded before the marriage] over $200,000 during the marriage—including $25,000 to upgrade the LLC’s building’s telephone system and $17,400 to make noncritical repairs to the building;
- Assisting in obtaining loans, including a HUD loan, and refinancing loans for the entities;
- Consulting with architects and engineers to implement Department of Health and Environmental Control (DHEC) regulatory codes;
- Overseeing compliance with structural standards;
- Purchasing sheetrock and iron needed for DHEC building upgrades”
And more. In addition,
- Brown and her son testified that Odom introduced her as his partner and owner
- Brown testified that Odom had said he intended for the LLC to be marital property
- Brown testified she sometimes worked without pay
- Brown testified she sometimes invested money in the entities rather than her retirement accounts
Shifting Burden of Proof
It isn’t necessarily enough for a spouse to provide evidence that an asset has been treated and considered as marital property. The Court of Appeals again cites a previous case: “If the [spouse] presents evidence to show the property is marital, the burden shifts to the other spouse to present evidence to establish the property’s nonmarital character.’” (Wilburn v Wilburn, 2013)
However, Odom did not present evidence to refute Brown’s evidence. In fact, he didn’t even appear at trial, let alone call witnesses or present evidence that refuted his wife’s evidence. In short, the burden of proof was on him, but he didn’t make any case to show that the property had not transmuted.
Dividing the Assets
The family court divided up the assets equitably, and Brown was awarded her share of the LLC (along with her share of the Corporation and other assets) which she had put time and money into in support of the marriage.
The family court ordered a “constructive trust” for Brown to secure the $590,018 awarded to her in the split. A “constructive trust” is one that doesn’t actually exist, and has no trustee, but is a fiction that orders a person (in this case, Odom) who might otherwise be “unjustly enriched” to transfer property to another party (Brown).
Estate Planning and Protecting Assets
By planning ahead, you can avoid many problems that could arise later on, such as a battle over marital and non-marital assets. Whether you’re considering a pre-nuptial agreement, post-nuptial agreement, a trust, or other estate planning advice, contact the Gem McDowell Law Group in Mt. Pleasant today by calling 843-284-1021. Gem has over 25 years of experience and he and his associatess can solve problems and help you protect your assets.
Transmutation: When Non-Marital Property Becomes Marital Property
Consider this:
Sandra and James have been married for 25 years. Once they were married, she gave up her job to become a stay-at-home mom. When the kids were old enough, she began to work in her husband’s dental practice, which he established before they married, becoming an integral part of the business. If Sandra and James get divorced, does she deserve compensation for any part of the dental practice that she helped grow?
Marital And Non-Marital Property, And How Non-Marital Becomes Marital
Before answering that question, it’s important to understand the difference between marital and non-marital property. Marital property is property that belongs to the marriage, i.e., to both spouses. In a divorce, it is subject to equitable division by the court (if the couple has not come to an agreement about how to split up the property). A common example of marital property is a house that the couple purchases together during the marriage.
Non-martial property is owned by one spouse or the other, and is not considered to belong to the marriage. In a divorce, it will remain in the hands of its original owner. Examples of non-marital property include gifts made to one spouse only, inheritance, and assets that were brought into or existed before the marriage, such as cars, real estate, and investments, to name just a few examples. Property that was excluded through a pre- or post-nuptial agreement is also considered non-marital.
Although the law gives clear definitions of the two, the application becomes difficult in situations where non-marital property becomes marital property through the process of transmutation.
How Transmutation of Marital Property Happens
If non-marital property becomes “commingled” with marital property to the point that it can’t be distinguished, or it’s used by the spouses in support of the marriage, it can become marital property.
However, determining how much commingling is enough, or what use constitutes “support of the marriage” is not straightforward. The Supreme Court of South Carolina has heard a number of cases where application of the law has depended on how and when transmutation occurs.Here are three cases from the last few years as examples:
Case #1: Wife works in husband’s business and argues that it’s transmuted
Pittman v. Pittman (PDF), Feb. 2014
Gloria Pittman separated from husband Jetter Pittman after seven years together. Over the course of their marriage, she reduced her hours at her job as a nurse and instead spent more time working in her husband’s surveying business, until she was no longer eligible for health benefits or a retirement savings plan through her nursing job. Instead, she became an integral part of her husband’s business. When they divorced, she argued that the business, which her husband owned before coming into the marriage, had become marital property.
The Court agreed. A few key factors in the decision: the husband and wife agreed that she should essentially give up her nursing career to help with his business, the wife was involved in making major decisions regarding the business with her husband, and they structured her pay to benefit the two of them.
Case #2: Wife argues that husband’s inherited land is transmuted
Wilburn v. Wilburn (PDF), May 2013
Harriet and Paul Wilburn were married for over 30 years. They had a unique situation: he had a stroke in his mid-40s that left him partially paralyzed. He granted his wife power of attorney and she took control of some of his accounts. She later got breast cancer and then decided to seek divorce. In the split, she argued that a tract of land he inherited had transmuted and was marital property.
The Court disagreed. Although the Court found wife’s testimony that she had contributed to the management of the property to be credible, that wasn’t enough to establish transmutation. The Court also found that even though income from the land was used in support of the marriage, the property had not transmuted.
Case #3: Husband argues properties are non-marital
Conits v. Conits (PDF), Mar 2016
Peggy and Spiro Conits were married over 30 years before seeking divorce. He owned a number of properties prior to the marriage. She argued that the properties should be considered marital property.
The Court agreed. The income from a property he owned in the U.S. was used to support the marriage and to extinguish debts. He also owned a property in Greece, which the Court determined was marital property. In both cases, loans taken out on the properties were fully paid during the course of the marriage.
Keeping Marital and Non-Marital Separate
With the Court’s interpretation of what constitutes transmutation varying so widely between cases, it’s hard to know exactly what will and won’t qualify as transmutation. If you want to avoid transmutation of property, there are ways you can protect certain assets, for example, through a pre- or post-nuptial agreement.
For advice on protecting your assets, and on other issues of estate planning, contact estate planning attorney Gem McDowell at his Mount Pleasant office today. He can help you create a robust estate plan that takes care of your future needs and the needs of your whole family. Get in touch by calling (843) 284-1021 or by filling out this contact form online.
