Under California’s community property system, any property obtained by one or both spouses during the course of a marriage and up until they separate is generally split evenly upon divorce. As the state’s Second District Court of Appeals recently explained, the value of community property is usually based on the property’s value at the time of a divorce trial, not the time of separation. That is, of course, unless the spouses agree to another valuation date.
Husband and Wife separated in January 2012, after roughly 37 years of marriage. Ten months later, Husband stated in an income and expenses disclosure that he planned to close his accounting and financial services practice. The business had generated $115,000 to $140,000 in net profits per year over each of the previous three years. In 2014, he began winding up the practice, advising clients that he was retiring and that they would need to find a new accountant for the upcoming tax season.
A trial court denied Wife’s request to value the business based on what it was worth at the time the couple separated, rather than at the time of trial. Wife had sought this ruling because it was likely that the business would be worth significantly less by the time trial rolled around, given that Husband was winding down the practice and his clients were going elsewhere. The court said Family Code Section 2552 required it to assess the business’ value as of the date of the trial unless Wife showed that there was “good cause” to use another value date “in order to accomplish an equal division of the community estate of the parties in an equitable manner.” Here, it said Husband’s plan to retire was legitimate and did not seem designed to devalue the business for purposes of the divorce proceedings.
Affirming the decision on appeal, the Second District said the lower court didn’t err in relying on the trial date for business valuation purposes. It is well settled, according to the Court, that a judge may use the separation date to value “a small business operated exclusively by that spouse, which was largely dependent for its success on that spouse’s skill, reputation, industry and guidance.” The Court said this rule was intended to address situations in which the work of one spouse greatly increased the value of the business between the separation and trial dates. “As the post-separation earnings of a spouse are that spouse’s separate property, any increase in value to the asset (the spouse’s business) caused post-separation should also be considered separate property,” the Court explained.
Yet while the trial court could have used this rationale to value Husband’s practice based on the separation date, the Court said there was no requirement that it actually do so. Instead, the trial judge found that it was more equitable to use the trial date because Husband’s decision to retire had changed the nature of the asset. “Wife’s evidence established that the vast majority of the value of the business was due to husband’s efforts; when those efforts reasonably came to an end, it would be inequitable to value the business as though husband would continue working there indefinitely,” the Court said.
California divorces often raise a wide variety of complex issues, including those related to assessing and dividing community property and untangling businesses in which both spouses have played a role. These issues – and much of the stress that often accompanies divorce cases – can be minimized through alternatives to litigation, such as collaborative divorce and mediation. With offices throughout the San Francisco Bay Area, divorce lawyer Lorna Jaynes provides innovative legal tools to resolve many family law disputes without the bitterness and acrimony engendered by the adversarial process.
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