## Facts

- Carol D. Watts and John D. Watts married in 1975 and separated in 1979.
- John was a board-certified surgeon practicing through a medical partnership later transferred to a professional corporation in exchange for stock.
- John’s earnings and retirement contributions increased substantially during the marriage.
- In the dissolution proceedings, disputes included: (1) whether John’s medical practice had divisible community goodwill at separation, and (2) whether the community was entitled to reimbursement for John’s exclusive post-separation use of community assets, including the family residence and the medical practice.
- The trial court found the medical practice had no goodwill at separation and concluded it lacked authority to require reimbursement for John’s exclusive use of community property between separation and trial.
- Both parties appealed; the Court of Appeal reversed in part and remanded on the published issues.

## Issues

1. Whether the trial court erred by finding the husband’s medical practice had no goodwill at separation and thus assigning no community value to goodwill.
2. Whether the trial court erred by concluding it lacked authority to order reimbursement to the community for the husband’s exclusive post-separation use of community assets (residence and medical practice).

## Decision

- The Court of Appeal reversed the “no goodwill” finding and remanded for proper valuation of the professional goodwill and corresponding community interest.
- The Court of Appeal held the trial court had authority to reimburse the community for the value of a spouse’s exclusive use of community property after separation and before trial.
- The case was remanded for the trial court to determine whether the exclusive use caused detriment to the community and, if so, the amount of reimbursement owed.

## Legal Principles

- Professional goodwill that arises during marriage is a community property asset that must be valued and divided in dissolution.
- A professional practice may have goodwill even if it cannot be sold and lacks an external market; nonmarketability alone does not support a finding of zero goodwill.
- The capitalized excess earnings method is an accepted approach to valuing goodwill in a professional practice; where evidence shows substantial excess earnings, a zero-goodwill finding requires support consistent with recognized valuation principles.
- A court may order reimbursement to the community when one spouse has exclusive post-separation use of a community asset; the court must assess community detriment and set an appropriate reimbursement amount (commonly termed a “Watts charge”).

## Conclusion

The court required a proper valuation of professional goodwill in a medical practice despite the absence of a sale market and confirmed the trial court’s authority to award reimbursement to the community for a spouse’s exclusive post-separation use of community assets, with the amount to be determined based on detriment and value of use on remand.


In re Marriage of Watts, 171 Cal. App. 3d 366 (Ct. App. 1985)