Adv. Yonathan Kanir || March 2019
The Financial Relationships between Spouses Law, 5733-1973 ("the Law") provides that upon termination of marriage each spouse is entitled to half the value of the couple's entire assets. In 2008, within the framework of a n amendment to the Law, the legislator prescribed that upon termination of marriage, the couple's entire assets would also include future rights.[1]
In addition, it was stipulated that in cases in which there were special circumstances that justified it, it could be decided that the balance of the assets' value shall not be in equal shares but determined according to a different ratio, having regard, inter alia, to future assets, including the earning capacity of each spouse.[2]
Since the Law was amended, there has been no unanimity in the case law which has addressed the issue of dividing goodwill, career assets and discrepancies in earnings – the circumstances vary, and with them so do the results of the cases. In the absence of a clear and definitive common law position, it is evident that judicial discretion has grown, and with it the range of proposals which Lawyers are required to provide.
What is goodwill?
As stated in the quote at the side of the page, goodwill is easy to describe but difficult to define. To simplify the concept of goodwill in the context of spousal resource balancing, we shall also look at
the rest of the terminology used in personal status law in this context: "Career assets", "income discrepancies", "earning capacity", "earning potential" and other terms which express the gap between a person in a particular job compared to other who work in the same job and the discrepancies between the abilities and incomes of the litigants themselves.
Goodwill can be the difference between the average incomes of persons holding similar positions and the income of the position holder in question. For illustration purposes only, if the average monthly incomes of self-employed pediatric dentists in the Gush Dan area was NIS 10,000, whereas Guy (a fictitious name) a pediatric dentist practicing in Givatayim earned NIS 15,000 a month, then the sum of NIS 5,000, which is the disparity between Guy and the rest of the physicians in his field, in principle constitutes the goodwill which Guy has accumulated. To elucidate the matter, it may be that Guy has no excess capabilities but his clinic happens to be located adjacent to the most popular candy store in Givatayim, or his wife is actually a recognized figure in the City of Givatayim and in her merit patients flock to Guy, so that the goodwill is an extremely elusive factor which depends on many variables.
Goodwill may also exist in a narrower sense of differences between a couple's earnings. For example: A wife may earn a monthly figure of NIS 40,000 whereas her husband earns only NIS 10,000 a month. The gap in this case between the parties of NIS 30,000 describes the income and earnings discrepancies between the parties themselves, even if the income of each of them does not happen to exceed the average income in their vocations.
We should already emphasize and clarify here that the existence of a discrepancy does not expressly attest per se to the existence of goodwill! The components of goodwill are based upon and comprise of the person's earning capacity, that is, the improvement in his earning capacity during the marriage. However, goodwill is also a function of his education and experience before the marriage and the personal skills which he was born with before the period of the spousal relationship.
Earning capacity is a divisible asset according to the law. However, the question is – whether goodwill is a balanceable and divisible asset?
The difference between the Supreme Court's early rulings and those made after the Amendment to the Law
In CA 7493/98 (the judgment in which was given in 2003), the Honorable Supreme Court addressed and adjudicated the issue of what constitutes goodwill and how can it be calculated, while expressly holding that goodwill is a divisible asset. In other words, when a person sells his name, he is selling an asset.[1] In 2007, another ruling was made by the Honorable Supreme Court (in CA 4623/04), which addressed and expressly adjudicated for the first time the question of dividing goodwill between a couple, and in which, inter alia, the following comments were made:[2
"A person's professional development constitutes a central chapter in his life story […] Frequently, the professional development of each spouse is intertwined with that of the other, so much so that the two tell one story together […] The couple may relinquish an education or a job, work or study shorter hours, sacrifice potential for advancement and even completely forego a career, all in order for the other spouse to develop himself, for his own good, for the good of the marital relationship and for the good of the family […]
The main thing is, that the couple may work together for the sake of increasing the earning capacity of one of them for the benefit of the whole family. The "career" of that person was not intended solely for the individual value inherent therein, but also for the collective value – the livelihood of the other spouse and the livelihood of the entire family. Indeed, the "family" time is one, and it is created in two. The ability of each spouse to maximize his earning capacity depends in no small measure on the contribution of time (and other resources) on the part of the other spouse.
[…] According to the community property rule, one spouse may not be deprived of his share in the fruits of the career assets of the other spouse, having regard to the support and assistance which he gave him; in other words: for his share of the marital relationship in improving his earning capacity. The couple may also acquire "the career assets" together […]
It is unreasonable to say that one spouse agreed to give of himself and assist in developing the earning capacity of the other spouse, without being assured of benefiting from it in the event of divorce."
As aforesaid, while in 2008 the expression "earning capacity" was added to the Law as part of the basket of considerations which the court must take into account when balancing the community property, the amendment to the Law did not classify goodwill (or earning capacity) as a balanceable asset, and ever since the courts have time and again engaged in analyzing the status of goodwill in the spouses' life.
Since the legislator refrained from expressly recognizing goodwill as a balanceable asset, the Family Courts and the District Courts are predisposed to a determination and interpretation according to which goodwill is not an asset, let alone an asset which may be balanced and divided[3]. Inter alia, according to recent rulings of the Haifa District Court, goodwill is only an equitable tool (a tool for doing justice).[4] In other words, since it is a future asset rather than one existing in the here and now (on the date of the schism between the parties), the alleged/existing goodwill shall affect how the assets are balanced as opposed to constituting an asset which must be arithmetically balanced itself.[5]
Towards the end of the era of goodwill assessment?
If the stance taken by the Haifa District Court is adopted, and we see fit to accept the ruling that goodwill is only a tool for doing justice, then the era of goodwill valuation is at an end, and there is no longer any need for experts or accountants' assessments and speculations.
If indeed goodwill is a tool for doing justice (and our opinion is at variance with this determination), then the competent court has an unfettered discretion to decide as it sees fit, without requiring any kind of expert opinion, but at the most only accounting assistance in analyzing the income disparities between the parties, in order to assess the amount of compensation required, if at all.
According to this approach, if goodwill is only a tool which influences how the rights are balanced, then there is no need to appraise it, there is no need to appoint experts and there is no need to check it. Accordingly, lawyers and litigants must now more determinedly examine whether the time is not ripe to end the routine race to appoint experts to assess goodwill, since it is evident from the prevailing position of the courts that an accounting discourse has been replaced with the exclusive discretion of the judge adjudicating the parties' affairs based on a number of simple factual findings (which shall be detailed hereinafter).[6]
Assessment of goodwill and earning disparities – Looking to the future
It we follow the emerging delineation, according to which goodwill is not a balanceable asset and an expert assessment offers no clear assistance in determining the goodwill, then instead of relying on an expert opinion the court must establish clear parameters, the main ones being (inter alia): the duration of the marriage, the parties' incomes and/or their employment status on the date of the marriage, the education which was acquired during the period of the marriage, job moves, the number of pregnancies and the resources which were required for each of them, births and periods of maternity leave, a determination of the parties' incomes as of the determining date and deriving therefrom – the income disparities on the determining date. In the same way that the method of examination by an expert is followed in matters of custody and children[7], a detailed list regarding goodwill and earning disparities must also be forthcoming.
However, the approach which does not regard goodwill as a completely balanceable and divisible asset may create difficulties and result in real injustice, especially in situations in which the disparities between the parties' incomes are huge and the compensation being offered for those discrepancies is meager or in situations in which the couple are not rich in assets and rights , but a substantial discrepancy exists in their earning capacities, so that the right thing would be to prefer an actual division of the marital earnings, including for a period of time after the date of the divorce.[8]
Take the example of a couple who were in a spousal relationship from the first day of the psychiatry studies of one of them. The external spouse accumulates knowledge and education, and progresses up the grade ladder in his field. The years pass, and the day before he is due to open a private clinic and reap its fruits, the external spouse decides to separate. How should the court divide (assuming it shall divide) the fruit of the private clinic's future success, which is manifestly the result of all the years of the marital relationship?
In a judgment given by the Rishon LeZion Family Court regarding the division of options in a divorce proceeding, His Honor Judge N. Fisher held that rights in options registered in a husband's name should be divided according to their value on the vesting date (that is, at a future point in time), relative to the period of the marriage.[9]
Having regard to each and every case, even if we decide to adopt the Haifa District Court's approach, that division mechanism must also be applied to the division of goodwill, so that the court should see the future transactions and future income of the psychiatrist husband as a divisible asset, including transactions entered into and income earned after the divorce.
Therefore, in those (common) situations in which on the separation date the couple does not own real estate assets and/or cash and savings in significant amounts, and the value of the future assets of one of the spouses is significantly higher than the existing ones, the courts must refrain from awarding paltry compensation and favor the continued economic relationship between the parties, in order to avoid prejudicing the domestic spouse.