(SAMPLE) LEGAL MEMO FOR FAMILY LAW

Amy Hoffmann Morris Summer 2014

Scenario: Howard Fair, age 63, has been cohabitating in unincorporated Jefferson County with
Debbie Johnson, age 56, for 33 years. Debbie and Howard have held themselves out as married
since Howard moved into Debbies home in 1981. She purchased the home with an inheritance
from her father and kept the title solely in her name. The two have decided to part ways, because
Howard plans to move to Canada, while Debbie has decided to remain in Colorado.
Over the years, both Debbie and Howard have had monthly income and have combined their
funds and energies to update their home, take vacations, pay bills and fund hobbies. Six years
ago, Debbie created a pottery studio in an unused outbuilding on the property. Debbie purchased
a kiln, supplies and tools. Howard insulated the outbuilding, installed windows and a wood
heater, and built shelves for the pottery. Debbie sells her pottery in local stores and at craft
shows. She netted profits totaling $8,700 in 2011, $1,900 in 2012, and $4,500 in 2013. She has
lately received press from an art magazine, was nominated to present her work at three judged art
fairs, and signed a contract to create pottery for a country club for $18,000 plus the costs of
supplies. By June of this year, Debbie netted $17,000 in profits from her pottery. She
understands that a full time pottery manufacturer can expect to make, on average, $30,200 per
year. If another potter were to buy Debbies business, that person could purchase the pottery
tools and supplies for $1,000, but neither Debbie Johnsons name nor her reputation would be
transferrable.
Howard, who made her pottery studio inhabitable, helped to transport and sell the pottery and
emotionally supported Debbie, believes he has a right to a portion of Debbies current and future
pottery profits now that her pottery is beginning to become profitable and well known after years
of his support. Debbie asserts that the current spike in her profits is unlikely to be repeated, and
that the marital property is limited to the $1,000 she could expect if she sold the business.
Issue: In Colorado, can a court consider divisible marital property to include intangible business
assets, specifically goodwill?
Rule: Colorado courts must divide the marital property after considering the contribution of
each spouse to the acquisition of the marital property. C.R.S. 14-10-113(1)(a). The statute does
not itemize what property is subject to division and does not make specific mention of intangible
assets.
Analysis: Even though C.R.S. 14-10-113(1)(a) does not specifically define property subject to
division upon dissolution of marriage including intangible property such as goodwill created
by the work, talent and reputation of a business owner Colorado courts have consistently held
intangible property such as goodwill to be marital property and have set forth guidelines for the
division of such property. One appropriate method to determine the value of goodwill of a
professional practice is accomplished by fixing the amount by which the salary level of the
owner exceeds that which would have been earned as an employee by a person with similar
qualifications of education, experience, and capability. Parties can consider earnings exceeding

that salary level to be goodwill. In re Marriage of Bookout, 833 P.2d 800, 803 (Colo. App. 1991);
In re Marriage of Banning, 971 P.2d 289, 292 (Colo. App. 1998).
The value of goodwill is not limited to the amount the owner could expect when selling the
business to another person. Instead, it is a property or asset which supplements the earning
capacity of another asset, a business, or a profession, and therefore, it is not the earning capacity
itself. It has real value to the business and to the marital estate regardless of its intangible
nature because, as one predictor of future profits, goodwill can positively affect a businesss
bottom line. In re Marriage of Graff, 902 P.2d 402, 405 (Colo. App. 1995). In addition, the
goodwill a business owner develops during a marriage can be transferred to the owners future
business endeavors. Banning, supra.
Placing a dollar figure on the goodwill of a business can be challenging and subjective
especially in an unstable business such as a new artists line of pottery that has seen a wide
disparity in profits from year to year. See, Poley, Valuing Business Goodwill in a Divorce, 26
Colo.Law. 53 (April 1997). But precedent shows that value in such an intangible asset does
exist, can be calculated, and must be included as part of the marital property, as in the matter of
Bookout, supra.
Although goodwill developed during the marriage is among the predictors of likely future
patronage of that business, any actual earnings of the business based on goodwill after the
dissolution of the marriage is considered separate property. Whether profits in a business climb
or fall once the dissolution decree has been signed is not an issue for the courts to consider. The
Uniform Dissolution of Marriage Act specifically says that property must be valued as of the
date of the decree. C.R.S. 14-10-113(5). Therefore, for the goodwill to be considered marital
property, its value must exist at the time of the dissolution of the marriage.
Throughout the country and for decades, the definition and subjective valuation of goodwill has
been used in dissolution cases. It is an intangible asset that must be considered by the court for
equitable distribution. See, e.g., In re Marriage of Foster, 42 Cal.App.3d 577 (1974); In re
Marriage of Lukens, 16 Wash.App. 481 (1976); In re Marriage of Nichols, 43 Colo.App. 383
(1978); In re Marriage of Hall, 103 Wash.2d 236 (1984).
Conclusion: Debbies reputation in the community, the quality of her work and expected public
and private patronage is all goodwill, an intangible asset that a Colorado Court can value and
distribute. The market value of Debbies pottery is $36,000 at the time of dissolution, exceeding
by $5,800 the amount she could have been expected to earn as an average pottery manufacturer.
Because this $5,800 is considered goodwill and is an asset acquired during the marriage, and is
therefore marital property, Howard is entitled to an equitable portion of the value of that
intangible asset.
With respect to future earnings on Debbies pottery, any value earned by goodwill after the
dissolution of Debbie and Howards marriage is considered to be Debbies separate property.
Howard is not entitled to any portion of any future assets created by the current goodwill.