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Recent Posts in Dividing Professional Practices Category
| October 18, 2010 |
| How Do I Get An Order for ATTORNEY FEES in a COMPLEX CASE? |
| Posted By Thurman Arnold |
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Q. My divorce seems like it has stalled. My wife operates our family business, we own several properties including a commercial building and she collects the rents, she isn't cooperating with me on custody on our kids, and I need money to pay my attorney. She is controlling this case, and I am getting nowhere. Any recommendations?
"Ed from Temecula"
[Please note - this Blog is updated with a recent Blog Article detailing the 2011 Revisions to the California Family Code affecting attorney fee awards 12/9/10]
A. Ed - I frequently hear from people whose cases are "stalled" because they have no money to pay their attorney, and no money to hire forensic experts. It is a problem I face in my practice with certain clients. It takes money to develop your case, and if there is really none available it is difficult to get anyone to pay attention. Often there are assets that only one spouse controls. That spouse or RDP (registered domestic partner) usually claims those assets to be their "separate property" even when the claim is ridiculous (for instance, closely held stock issued as "their sole and separate property" when the vesting of title in their name alone during marriage was just their manipulation and you didn't agree to it).
When there are assets that exist there is much that you can do. These assets, whether they be allegedly separate or community, are available to be borrowed against, or sold, to raise money so you can pay your attorney and hire experts to do the work that must be done.
However, your attorney needs to understand how to accomplish this or find one who does. Specifically one method that works well is to have a referee appointed under Code of Civil Procedure section 639 to oversee a "case management plan" under the circumstances described in
Family Code section 2032(d).
Specifically, have your attorney ask the Court in a motion to make a finding that your case involves "complex or substantial issues of fact or law." These can be related to property rights, custody, visitation, and support and may include bifurcations of issues. If you don't have an attorney, this would still be a start to obtaining findings that will generate money to hire one.
Once the Court so designates your case, it will itself begin to implement a plan or assign someone else - like an outside lawyer whom the court recognizes as an expert, to make recommendations as a referee. While the Court is not obligated to follow the recommendations of these referees, they ususally do. And if they don't the court may find itself overturned on appeal as happened 10/1/10 in In Re Marriage of Tharp, a case I will be writing about in detail as time permits.
This is a major step in not only getting someone to look more closely at the attorney fees you need (judges, after all, have really limited time) but also a good way to jump start a stalled dissolution or other family law case.
BTW, under the new statutes that take effect in 2011 as a result of the Elkins Task Force recommendations, case management may become the norm in California in family law proceedings.
TW Arnold
10/18/10 |
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| September 25, 2010 |
| How Do I Use a MARITAL BALANCE SHEET to Figure Out How to Best DIVIDE OUR PROPERTY? |
| Posted By Thurman Arnold |
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Q. I am considering filing for divorce, and am beginning to pencil out what the division of our assets and debts might look like. What is a good way to go about this?
A. Prepare a Marital Balance Sheet. This will give you an idea of how your property could be divided in a dissolution or legal separation, and to allow you to try out different combinations of division.
Its usefulness will depend the accuracy of your assumptions. Often times more information or outside opinions are required to do this with any degree of correctness. Sometimes the outside opinion that is required is the judge's decision on a disputed issue. Marital balance sheets can range from being exquisitely simple to exceedingly complex. Remember that it is the duty of the Court to divide the community estate equally - this division means an equal division in dollars, not that you divide the family residence with a chain saw.
The format itself is simple. You want two columns, one for you and one for your partner or spouse. You will categorize, value, and assign the community property between each of you. Some categories might be listed on a different balance sheet, like pensions.
Here are some suggestions for drafting a Marital Balance Sheet you can work with.
- Use net value numbers, i.e., equity in homes and automobiles. Secured debt is subtracted from fair market value - it is not divided as unsecured debt would be. If you take the house, you take 100% of the mortgage.
- Be sure to use realistic fair market value numbers. Don't make your final decisions based on Zillow. If your assumptions are flawed, your balance sheet analysis will be of limited use.
- Use wholesale Kelly Blue Book values for cars or at least make sure whatever yardstick you use is consistent for both parties.
- Obtain accurate and current pay-off information as to debts. Typically that will be the value of the debts on the date they are assigned, as adjusted for Epstein Credits.
- Don't treat apples and oranges as apples. For instance, list pension assets as a class separate from other assets - the present value of IRA's, 401k's, and other defined contribution plans is always different than the present value of a bank account. These pension accounts are not valued in real dollars but must be discounted, and that may require a pension forensic or CPA.
- Don't include separate property (the other spouse may dispute that characterization). Pure SP doesn't go on the marital balance sheet.
- Assign the debts, placing those numbers in parentheses to ensure they are subtracted and not added in your running total. Remember that it doesn't matter in whose name a credit card is parked. If a debt was incurred during marriage the general rule as between spouses is that each owes 50-50.
- Separate property debts don't go onto the balance sheet because they don't get evenly divided and if they were listed you may inadvertently charge yourself for half.
- Use total values rather than 1/2 community values. These numbers get divided as one of the last steps.
- Don't include support or support arrears.
- Calculate and note Watts' and Jeffries' claims
- List professional practices and businesses but realize you probably have no practical way to put a number on them, would be entirely guessing as to their value, and would probably be wrong anyway. Understand that business are worth more than the sum of their balance sheets or book values.
- If you share this document with your spouse, be sure to write "Confidential Evidence Code section 1152 Materials" on it, which makes them inadmissible as evidence against you. Otherwise you may find yourself stuck with your preliminary numbers when that is not what you intended.
- Realize that if you share this document, no matter how preliminary it is, with your spouse you will be creating in them expectations concerning value or division that they may become stuck on.
- Be careful how you treat negative equity on property. For instance, if you own a car that is worth $15,000 but you owe $25,000 and want that vehicle awarded to you, the other party will not be charged for one-half of the $10,000 in negative equity.
- Leased vehicles should be identified but have no value. I believe it is a good idea to list everything that you own or owe whether or not it has a value or can be valued at that time, since this list becomes an important road map for you and your lawyer.
- Make a note of alleged breach of fiduciary duty claims, but don't value them.
- Don't include your separate property. Include their separate property if you claim it to be all or partly community, but understand those aren't real numbers until a judge rules.
- Don't leave the document lying around where someone else might find it.
- If property is held in one spouse's name alone but a mortgage or taxes were paid during marriage, or if it was improved or refinanced during marriage, understand that the community probably has some Moore-Marsden interest in that property but that you will have great difficulty figuring out what that is without expert assistance.
- Similarly, if one spouse owned property (i.e, real estate) prior to marriage and the other was placed on title during the marriage, note to yourself that the property has community and separate property attributes and understand you will need more information or help to value those competing interests.
- Make a note of all separate property contributions you made for the acquisition or improvement of any property. These are called Family Code section 2640 credits.
- List all other reimbursements due to the community. For instance, there are many situations where the community property is used to pay one party's separate obligations (i.e., child support from a previous marriage) and if you know to assert the claim the community may be entitled to a reimbursement.
- List consumer goods like furniture at garage sale prices unless there is something truly special about the items. Nothing is valued at its purchase price or even its replacement cost new.
- Be sure to include loans from parents, work, or family members that were made during the marriage and assign those that relate to your family or work to you.
- Make a note of any gifts to one or the other of you alone that were used to purchase or improve community property, whether they were received before or during the marriage.
- Look at your bank balances at the date of separation and assign those balances appropriately. If your husband emptied the savings account the day before he walked out, list the amount he took under his column.
This is just a starting point and is valuable as a roadmap to get you thinking about what needs to be done to conclude the divorce. Once you discipline yourself to begin to overcome any paralysis you might feel, the marital balance sheet will speak to you about what is important for you, what the issues are, and will give you some idea of what important paperwork you need to obtain to evaluate your interests now or in the future. Get that paperwork at once. You are going to have to do this exercise anyway once a legal actin is filed.
This the some of the information that you must provide in your Declarations of Disclosure. It is an efficient idea to use those forms from the beginning. These California Judicial Council Forms include:
Getting started on this early will make any meeting with a family attorney cheaper and far more useful then if you've not even thought about these things.
To the extent you can determine values or ranges of values, add up the net equity in your column for the community property you want or get, and subtract 100% of the debts that are to be assigned to you. Again, chances are there will be categories where you can't put a number on the items. But if you had the numbers, then after totalling the total net to the other party, subtract the two net numbers. One of you will show a higher number. This number will reflect the over-credit amount to that person which needs to be equalized between you. Divide this number by 2, and the person who netted more owes that resulting number to the one who received less. This amount is called an "equalization payment."
This is just one way to do a marital balance sheet. Often times there is no money to pay the equalization payment because all or most of the community is held in the form of personal and real property. An equalization payment is no good to you unless you can collect it. Perhaps you can get a promissory note secured by a deed of trust on the family residence that is awarded to the wife. That is usually a bad idea - you don't want to become a bank, with all the attendant risks of default and depreciation.
Another option once you have these numbers are pencilled out is to go back and rethink how the property was divided. Maybe you should take those Peter Max lithographs after all. Maybe the residence or that vacant lot must be sold to raise money for the equalization payment. It is frequently seen in Stipulated Judgments or Marital Termination Agreements. It is not common in litigated judgments because courts generally must equalize the division at the time of trial, not in the future. This is why property may be ordered sold to ensure an equal, current division of the estate.
If defined contribution pension plans exist these are a good place to find the money to assure the equalization payment is actually honored. But a 401k with a net asset value of $100,000 might only be worth $80,000 after penalties and ordinary income taxes are charged on it. Pensions can be divided without tax consequences (QDRO's) but if you are owed a $100,000 equalization, creating a new pension in your name and transferring $100,000 from the other party's interest in it is like being handed a check for $80,000.
Thurman W. Arnold III
September 25, 2010
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| July 16, 2010 |
| DISCOVERY in California Marital Proceedings - What Are Requests for Admission? |
| Posted By Thurman Arnold |
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Q. How do I use Requests for Admission in my dissolution proceeding?
A. Requests for Admission ("RFA's") can be a useful discovery tool in family law proceedings because they allow parties in divorce and partnership litigation to resolve issues one way or another so that no evidence need be introduced at trial by asking the other party to admit or deny something. This typically involves establishing that certain documents are genuine (i.e., a prenuptial agreement entered into before marriage or a transfer deed or promissory note or copies of documents where original are missing or destroyed). Once this document is admitted as genuine, no further foundational evidence needs to be offered to admit the item into evidence. Other uses include establishing that certain property belongs to the community estate, or that it is one party's separate property. In such situations no further evidence need be offered on the subject issue at any later hearing in order for the Family Court to take what was admitted to be established fact. Once something is established in this way, no contradicting evidence can be introduced to disprove it.
Requests for Admission are governed by California Code of Civil Procedure section 2033.010 and the statutes that follow with that code. We have provided some of the more important ones on our Family Code Statutes page.
You are entitled to ask a total of 35 RFA's as a matter of right. But you can ask as many as you need, as long as they are requested for a proper purpose, relevant, not overly burdensome, and you also have executed and supplied the Declaration for Additional Discovery required by CCP § 2033.050.
There is a Judicial Council form that you can use for RFA's, but it is not required. I will upload and link to that form shortly. I also intend to provide my own form that you can modify for your use on our California Family Law Form Library page.
Another important use for Admission's Requests is that you can combine them with Civil Form Interrogatories, Number 17.1, which requires the responding party to state all facts and evidence that they know of, and other relevant information, for each RFA which they refuse to admit. This can flesh out claims and defenses of the other party that you may be wondering about, and the evidence and witnesses which the other party claims will support them. The answers to these form interrogatories may also establish that a denial of an otherwise undisputed fact, or genuine document, was not in good faith.
One of the chief benefits of RFA's beyond putting to rest matters that are really not issues (and hence saving the time and money to otherwise prove or disprove them), is that a failure to admit them in good faith gives the Court discretion to award the asking party their legal expenses and costs in producing evidence on those same issues if the Court later decides at trial that they were not reasonably in dispute.
As with some other types of discovery (interrogatories and production requests) the responding party has thirty days to answer (plus five more if you serve them by mail). Make sure you always provide a proof of service signed by a nonparty with any type of discovery you serve.
If the other party fails to respond to your Requests for Admission, you are entitled to file a motion that the requests be deemed admitted. Other sanctions might be available, like a court finding no evidence challenging the proposed undisputed items may be offered by the other side in later proceedings.
The subject of objections to discovery is a complicated one for another day. Check our search engine to see if I 've written about it by the time you've landed here.
TWA
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| May 24, 2010 |
| What METHODS are used for VALUING BUSINESSES in divorce? |
| Posted By Thurman Arnold |
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Q. I own a business that I began shortly after marriage. Now I am getting divorced. Is this community property even though my partner never worked the business, and if it is what methods might be used to value it?
A. With certain exceptions where, for instance, there has been a transmutation of a community property interest in a business to your separate property per Family Code section 852 (which requires a writing signed by the party adversely affect showing an intent change the character of property from community to separate), all property acquired during marriage through the time, skill and efforts of either spouse is community property. Family Code section 760.
A business begun by one spouse after the date of marriage and before physical separation will need to be divided in a dissolution or legal separation proceeding, and if you and your spouse cannot agree on its value it may need to be evaluated by an expert. This is usually accomplished under the provisions of Evidence Code section 730.
There are a number of methods that can be used to value a business, and depending upon whether the business sells services or products different valuation methods may be more appropriate than others. As a general overview, these include:
- Evaluating sales proceeds
When a business is actually being sold in an arm's length transaction to a third party, the price that a willing buyer will pay and a willing seller accept determines value. This is rare in the case of business valuations, but more common with respect to real property.
The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked. With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court. Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales. Comparables are also considering in setting the value of real estate.
Sometimes businesses will be cut up into parts that are sold separately. Sometimes the business is valued in terms of what these parts would sell for. It is rarely used except when the parties intend to actually liquidate the company. Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern). Goodwill is the nightmare component to valuing businesses. Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).
This relies upon the company records to determine what 'retained value' is. It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.
This is performed through a forensic audit. Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.
This describes a method that includes valuing the business as greater than the sum of its parts. There are a number of factors that are used.
This is the most common method for valuing businesses used in California because courts find it to be most reliable. If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics.
It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.
The law of business valuations is extremely complex and even contradictory. The purpose of this blog is merely to introduce the concepts. I will develop these themes in more detail in additional family law blogs.
Thurman W. Arnold III
http://www.ThurmanArnold.com
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| January 17, 2010 |
| Why is the date of PHYSICAL SEPARATION legally important? |
| Posted By Thurman Arnold |
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Q. Why is the idea of 'physical separation' important in California?
A. The idea of "physical separation" is one of the most important concepts to California law. If you think that the presumption that all property acquired during marriage is significant, the notion of physical separation is every bit if not more important. This appears to be one of the best kept secrets of California family law.
Physical separation is the date that the marriage ends, for most practical purposes. The date of physical separation is the date that community property ceases to accumulate. Family Code section 771 states "The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse, are the separate property of the spouse."
Once spouses separate, all their earnings and everything that is acquired with those earnings are separate property of each spouse, respectively.
Similarly, upon separation each spouse is no longer liable for the debts of the other spouse. The community estate is liable for a debt incurred by either spouse "during marriage". During marriage "does not include the period during which the spouses are living separate and apart before a judgment of dissolution ... or legal separation...." FC section 910. An exception exists as to "necessaries" except to the extent that the parties are living separate by agreement and whether or not support is stipulated by that agreement. FC section 4302.
Separation is of critical importance to the expanding interpretation and growing field of the law of fiduciary duties. The duty of confidentiality that arises because of the marital relationship by legislative fiat ( Family Code section 721) and which gives rise to major exposure for the conduct of spouses with regard to property and money, ceases at separation - meaning spouses no longer have the expectation and right of relying upon one another as trusted partners. Fiduciary duties continue pursuant to FC sections 1100 et seq. and sections 2100 et seq. as to assets that already exist, or can be considered marital opportunities arising after separation, until the time each asset in question is divided by agreement or court adjudication. Fiduciary duties are land mines. A good example of the consequences for breach of fiduciary duty is the Rossi case, where a wife who won the lottery and then filed for divorce the next day claiming she and her husband had already separated. She fails to list the lottery winnings in her paperwork, and refused to disclose it to the husband later claiming, among other things, that she had been a victim of domestic violence. Because the husband had no idea about the lottery winnings, he did not dispute the divorce or wife's asserted date of separation until much later when one day he received a letter intended for the wife by a company offering to buy out the winnings. He called the State Lottery Board, and then filed a motion to set aside the divorce degree and for damages for wife's fraud and breach of fiduciary duty. The court ordered the wife to disgorge all her winnings (100%) and pay them over to the husband.
The separation date is crucial to understanding reimbursement claims relating to payment on joint and separate debts, or in fixing rights to real property. For instance, California law provides that the community has an interest in the appreciation of a residence which is owned, meaning title is held, in one spouse's name alone where principal on a mortgage is being paid down. This is called the Moore-Marsden approach to equitable reimbursement. If the house appreciates after separation, the titled spouse may want to argue that all that appreciation belongs to them. Date of separation becomes important to the date of valuing the real estate and determining the relative principal loan amounts.
It is crucial where businesses are involved, regardless whether they are corporations, mom and pop shops, or sole proprietorships. For instance, what happens when a spouse who controls or who is the business, which was established before or during the marriage, continues to derive income from it after the parties separate? Maybe the business goes up in value. Perhaps it goes down in value through market factors, or maybe even the spouse intentionally drives it into the ground in order to reduce the amount that will be ordered to buy out the other spouse's interest. In all these situations a date of separation determination is crucial.
Another common area where it comes up in with regard to pensions, whether they be defined benefit plans or contributive benefit plans. Whatever accrues to the spouse who holds the pension by way of his post-separation contributions belongs to them.
Date of separation is also critical to determining the length of the marriage for purposes of spousal support or alimony rights. It is a snapshot in time with huge ramifications, including how long a spousal support obligation may continue and when it might be terminated.
It is critical that you hire an attorney who understands how to litigate and present the facts of physical separation.
Thurman W. Arnold III,
California Divorce Lawyer
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