As the Fourth District Court of Appeals explains in In re Marriage of Charles, community property, including a couple’s shared interest in a business, is usually valued at a time as close as possible to the time of trial, unless there is a good reason for valuing the property at the time of the couple’s separation.
“The subtext of this date of business valuation case illustrates for family law practitioners in how a strategy can backfire,” the court warned in describing the case. As the court went on to explain, a spouse who doesn’t operate or manage a business owned by the couple often asks a reviewing court to value the company based on the date of the couple’s separation rather than the date of the legal marriage dissolution proceedings. This is because the “non-operating spouse” is typically concerned that the business’s value may diminish over time. The operating spouse, on the other hand, has no incentive to dial back the valuation date. “Time is on their side as value slip slides away,” the court wrote.
In this case, Mr. and Ms. Charles separated in May 2006, but trial in the dissolution proceedings did not begin until more than five years later in August 2011. At the time of the separation, a certified public accountant valued Genesis Associates – Mr. Charles’s design partnership – at $226,000. Three years later, the same CPA valued the business at $198,000. The business flourished following the second valuation, however, and by October 2010 was valued by the same CPA at $716,000.
As the court describes it, Mr. Charles sprung into action. He hired a new attorney and filed a motion in December 2010 asking the trial court to value the business as of the time of the couple’s separation. At this point, all discovery had been completed and a trial date set for February. The trial judge denied Mr. Charles’s motion as untimely, noting that Mr. Charles waited until shortly before trial to file it.
Based on expert opinion, the trial court found that the total value of Genesis Associates – as of the date of the trial – was about $1.8 million.
On appeal, the Fourth District held that the trial court did not abuse its discretion by valuing the business based on the trial date. Civil Code section 4800 provides that a court shall base the value of assets and liabilities as close to the trial date as possible, but “may” base the value on the separation date “for good cause.” In what it termed, an “easy call,” the court said that the trial court did not err by exercising its discretion to reject Mr. Charles’ efforts to turn back the clock on valuation.
Nor was the trial court required to reduce the value of the company to reflect Mr. Charles’s efforts to increase its business after the couple separated, according to the court. By waiting to raise the valuation date issue until shortly before trial, the court said that Mr. Charles was simply engaging in “gamesmanship” and had obviously assumed that the company’s value had continued to decrease since the separation.
As a result, the Fourth District affirmed the trial court’s decision.
While the two spouses were far apart on community property value in this particular case, similar issues can often be resolved without resorting to a court through litigation alternatives like mediation and collaborative divorce. Specializing in these and other alternatives, Bay area divorce lawyer Lorna Jaynes provides innovative legal tools to resolve family law disputes without the bitterness and acrimony engendered by the adversarial process.
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