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The Separate Property Investment in a Separate Property Business is Entitled to a Reasonable Rate of Return

In Pereira, Husband owned a successful saloon and cigar business prior to marriage. During the marriage Husband continued to manage and operate the business.  At the divorce trial the court characterized all of the increase in the value of the business from date of marriage to date of separation as community property and divided it as such.  Husband’s divorce lawyer appealed.

In analyzing the increase in value of the company, the Supreme Court of California noted that, “the principal part of the large income was due to the personal character, energy, ability, and capacity of the husband. This share of the earnings was, of course, community property. But without capital he could not have carried on the business. In the absence of circumstances showing a different result, it is to be presumed that some of the profits were justly due to the capital invested. There is nothing to show that all of it was due to [husband’s] efforts alone. The probable contribution of the capital to the income should have been determined from all the circumstances of the case, and as the business was profitable it would amount at least to the usual interest on a long investment well secured.”

Thus the court held that since the business was run by Husband during marriage, his community property labor accounted for a portion of the business’s increase in value and therefore the community should be apportioned some share of the increase in value.  The Court further noted that aside from Husband’s labor, his initial separate property investment in the company accounted a share of the increase in the value of the company.  The Court agreed with Husband’s divorce attorney and determined that the value of the business on the date of marriage along with a reasonable rate of return on that value was Husband’s sole and separate property.  The remaining increase in value was community property subject to division.

The Pereira apportionment method generally favors the community over the separate property business owner.  The Pereira method is commonly used when the efforts, skill, and labor of the owner spouse are the primary basis for the increase in the business’s value during the marriage.

Pereira v. Pereira (1909) 156 Cal. 1