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In a Business Valuation Apportionment Matter, a Divorce Court May Utilize a Hybrid Pereira / Van Camp Approach

Husband founded an investment partnership before marrying wife.  At that time, the partnership managed about $20 million in assets and subsequently grew rapidly during the marriage. At the time of divorce, the partnership managed $85 billion in assets.

The divorce court entered a divorce judgment awarding the partnership to husband as his separate property.  However, the divorce court awarded the community an equitable allocation (1) under the Pereira approach for the partnership’s early period when its growth was primarily attributable to husband’s personal efforts, and (2) under the Van Camp approach for the later period when its growth was primarily attributable to other factors.  Wife’s divorce lawyer challenged the divorce judgment for this “hybrid” approach, arguing that the divorce court should have determined that the community owned all or most of the partnership for three reasons, which the Court of Appeal rejected.

First, wife’s divorce lawyer asserted that the partnership was entirely community property because it was a “completely different business” than the partnership that existed prior to marriage.  Wife’s divorce lawyer argued that the partnership grew so rapidly that it transformed, requiring changes in the corporate office, management, personnel, marketing and legal structure.  The Court of Appeal disagreed with wife’s divorce attorney by explaining that, standing alone, the substantial growth of a business during marriage does not cause it to lose its separate property character.  Wife’s divorce lawyer relied on Mueller v. Mueller (1956) 144 Cal.App.2d 245, but the Court of Appeal distinguished that case by noting that it involved a business commingling separate and community funds rather than rapidly growing partnership.

Second, wife’s divorce attorney argued that the community’s Pereira allocation gave the community a pro tanto ownership interest in the partnership similar to how the community may acquire a pro tanto interest in real property when community funds are used to make mortgage payments.  (In re Marriage of Moore (1980) 28 Cal.3d 366; In re Marriage of Marsden (1982) 130 Cal.App.3d 426.)  The Court of Appeal disagreed with wife’s divorce lawyer and declined to extend Moore/Marsden to award the community an ownership interest based on the community’s efforts related to a separate property business.  The Court of Appeal noted that “no case has held that the investment of community efforts should be treated the same as the investment of community funds.”

Third, wife’s divorce attorney argued that the divorce court’s hybrid Pereira/Van Camp approach failed to achieve “substantial justice between the parties” because there was no established family law precedent authorizing a “hybrid formula.”  However, the Court of Appeal explained that the community benefited more under the “hybrid formula” than the community would have under the Van Camp approach, which likely would have been the single approach applied.  The Court of Appeal noted that wife’s divorce lawyer asked for “an astounding windfall for the community,” approximately 90% of the partnership’s growth despite wife’s expert testifying that 99.75 of the growth resulted from factors other than the husband’s efforts.  As such, the Court of Appeal found the “hybrid formula” was not an abuse of discretion and resulted in a “fair” allocation.

In re Marriage of Brandes (2015) 239 Cal.App.4th 1461