Should “goodwill” be a component in in determining the value of a partnership? The Commercial Division in Albany County recently tackled this issue in the case of Romanoff v. Center for Rheumatology, LLP, et al. (J. Platkin). The Center for Rheumatology is a medical practice founded in the 1980s and plaintiff Norman Romanoff, M.D. is one of the founding partners. In late 2013, Dr. Romanoff decided he wanted to retire and sought to dissolve the practice and receive payment for his interest in the practice. Despite Dr. Romanoff’s attempts to obtain an accounting from his partners, they allegedly refused to comply, so he brought a lawsuit against the practice and the other partners in 2015 under the New York Partnership Law seeking: (1) a valuation and distribution; (2) an accounting; (3) distribution of interest; and (4) winding up of the practice. Before any discovery took place, the defendants, believing the only issue to be determined was whether a value should be placed on the “goodwill” of the partnership, made a motion for summary judgment for a determination on that issue.
In support of their motion, the defendants submitted affidavits from the other partners stating that they never paid any monies toward the goodwill of the practice at any point during the partnership and that Dr. Romanoff was the first partner to leave the practice. The practice’s accountant also submitted an affidavit claiming that, since he became the accountant in 1993, the practice did not increase the value of goodwill despite the practice’s increase in revenues, profits, and reputation over the years and that the minimal value that was in the practice’s books for goodwill was merely a placeholder. In opposition, Dr. Romanoff attempted to establish the huge growth of the practice over time, including an additional office, annual revenues over $18 million, increase in employees, increase in services provided, and an extensive professional referral network. He also provided the affidavit of an accountant who opined that goodwill should be included in valuing Dr. Romanoff’s interest.
The Court, citing Dawson v. White & Case, 88 N.Y.2d 666, 670 (1996), noted in its decision that the term “goodwill,” as it pertains to professional firms, refers to the ability to attract clients as a result of the firm’s name, location, or the reputation of its professionals. However, “even if a given partnership might be said to possess goodwill, the courts will honor an agreement among partners – whether express or implied – that goodwill not be considered an asset of the [partnership].” Id. at 671. In the Dawson case, the Court of Appeals, in finding that the partnership did not assign value to goodwill, specifically relied upon an express agreement among the partners to assign no value to the goodwill of the partnership but also emphasized that the partners’ course of dealing demonstrated that incoming and outgoing partners never paid or received payment for the goodwill of the partnership.
Here, the Court decided that things were still too murky to come to a decision on this issue of “goodwill” so early in the litigation without any discovery. The Court denied the motion for summary judgment holding that issues of fact remained as to whether the practice has distributable goodwill and whether the practice has the ability to attract patients as a result of its name, location, and reputation. Importantly, unlike the Dawson case, there was no express agreement among the partners in this case to exclude goodwill as a distributable asset. The Court also rejected the defendants’ argument that the absence of an express agreement that includes the distribution of goodwill would preclude the plaintiff from obtaining the value of the goodwill because “Goodwill, when it exists as incidental to the business of a partnership, is presumptively an asset to be accounted for.” Matter of Brown, 242 N.Y. 1, 7 (1926).
The Court did acknowledge that, based on the proof submitted by the defendants, it appeared that there could be an implied agreement among the partners that goodwill would not be considered a distributable asset given their course of dealing and their accounting records. However, the Court ultimately concluded that, without the benefit of discovery, it was too early to conclusively determine that an implied agreement existed.
Although the Court did not reach a determination one way or the other as to the goodwill of the partnership and whether it is a distributable asset for this practice, this case provides important insight to individuals involved in partnerships as far as what factors courts will consider in reviewing the issue of goodwill as a distributable asset. As always, if you either want goodwill to be a distributable asset or want it to be excluded, the best approach is always to put it in writing so there can be no doubt as to the parties’ intentions.