Q. My Wife is a personal injury lawyer with a good practice which she started six years before we married. We have been separated for nine months, after nine years together. She just sent me a settlement agreement. It says the law practice is ordered to her, but it says nothing about me receiving any money for that. She says that since I am not a lawyer and can't practice law, and I get no share of its value. Is she right?
A. No, assuming it has a value that is greater than its value on the date you married!
The fact that you are not a lawyer has nothing to do with whether the "community estate" (the two of you as an economic unit) has an interest in the business that must be reimbursed. This would be true if she or you were a doctor, married to a person who isn't, and so who must have a license to practice their trade. Obviously the law practice must be awarded to her in your dissolution, but that doesn't mean she won't be forced to buy you out as though you were a licensed "silent partner."
When people marry or become domestic partners, they commonly already own
assets like businesses or professional practices. This is especially likely
for those who've been previously married.
During marriage a professional-trade spouse may increase the worth of
a business they manage, whether as a sole proprietorship or as a shareholder
of a professional corporation. Per
Family Code section 760, all economic value that is created during marriage is presumed to belong
to both parties. Value in this sense is measured by a benchmark date,
and these dates vary according to circumstances and scenarios. This is
called the "date of valuation", but there may be more than one.
What gives rise to the community property interest is either spouse's
contribution of time, skill, and efforts (TS&E) to - pretty much whatever
- from the period from the DOM (date of marriage) to DOS (date of separation).
By the way, a prenuptial (or post-nuptial) agreement may waive a legal
interest derived from these TS&E increases, meaning that the community
estate acquires no interest in the separate property of the business-owner
spouse. I assume you didn't sign one.
Unless you've waived the community property interest in your wife's
separate property, it is a breach of interspousal fiduciary duties to
deprive the community estate - of which you own one-half - of increases
to a party's separate property resulting from TS&E. This means
that the community (and separate) interests must be priced in terms of
recent or present values. Always a controversial area. Once you physically
separate, all your wife's TS&E belongs once again to her alone.
After separation a business or professional practice may likewise increase
in value through continuing TS&E type contributions. These may be
reimbursable to the separate property estate of the managing spouse and
so backed out of the community interest, because it is likewise unfair
that the community should benefit from separate property efforts.
There are three time periods relating to the value of your wife's
practice that matter here: (1) the value of the law practice as of the
date you married, (2) the increase in value (if any) that occurred during
marriage that existed as of the date of separation, and (3) at the time
of trial. Indeed, California law presumes that the property date for valuing
an asset is at trial.
Family Code section 2552.
Legal professionals refer to this manner of calculating the community
property interest as an "apportionment" or "equitable apportionment."
There are two basic apportionment "formulas" that California
judges are trained to apply in these situations:
- Fair return on investment. This is called the Pereira approach to apportionment, after Pereira v. Pereira (1909) 156 Cal. 1, 103 P. 488, which involved a husband saloon owner. It apportions a "fair return" on the owning spouse's separate property investment in the business as separate property, then apportions any excess to the community property as arising from that spouse's efforts during marriage.
- Reasonable compensation. This is the Van Camp apportionment method, which derives from Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885 (yes, seafood in Long Beach), which apportions the reasonable value of the spouse's services during marriage as community property, then treats the balance as separate property attributable to the normal earnings of the separate estate. Reasonable compensation is typically the analysis used in small business valuation cases, and is often found by looking at what other people in the same field performing the same functions tend to earn.
Either analysis (and there are hybrids and others) may be performed to
determine the value of the premarital interest in separate property and
in deriving the community interest in what began as separate property.
These methods deal with the first half of your question - valuing the
law practice as of the date of separation. They may have to be applied
in reverse to back out the separate property contributions after the date
of separation when a business is valued at time of trial.
Trial courts can pick the approach that they reasonably conclude makes
the best sense given the facts of each case. In achieving the apportionment
between separate and community property the Court has discretion to decide
which formula will achieve 'substantial justice' between the parties.
The
Pereira formula is commonly used when business profits are principally attributed
to the community efforts (i.e., during marriage).
Van Camp is applied when the community efforts are more than minimally involved
in a separate business, but the business profits that accrued are attributed
to the character of the separate asset (Mr. Van Camp was turning out cans
of tuna before marriage).
I'll write more on this fascinating subject.
T. W. Arnold, III, C.F.L.S.
