How Courts "Apportion" Separate vs. Community interests in businesses owned before Marriage

Two very old cases dictate the approaches used by California Courts to determine interest and appreciation of a Separate Property Business (Owned or started before marriage).     The two (2) cases are Van Camp v. Van Camp (1921) 53 Cal. App.17, and Pereira v. Pereira (1909) 156 Cal. 1.     

PEREIRA ANALYSIS

Frank Pereira and Anna Pereira were married in 1900.   Frank previously owned a Saloon and Cigar business that were highly profitable.    Frank claimed the business, started before the marriage with his separate capital, was entirely his separate property.    The Court disagreed, stating "It is true that it is very clearly shown 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."    

Based upon the evidence presented, the Court believed that the great success of the business was the result of Frank's actual work efforts and labor, and his physical presence, decision making, and day-to-day involvement in the business.  Therefore, the Pereira analysis usually involves small businesses wherein the management and efforts of the owner is significant in the success of the business, and it is assumed the business would not have the same success without the owner's efforts.

VAN CAMP ANALYSIS

The Van Camp case came from the well-known family that canned foods and sold them in markets throughout the country.   Frank Van Camp arrived in Los Angeles in 1914 from Indianapolis to open a sea food cannery in San Pedro.      He had a successful packing company in Indianapolis and arrived with money to start his new venture and buy property.    The Court stated he "brought to California property of great value, consisting largely of cash and stock securities."   Van Camp at 20.

He was married in 1916 to Euphrasia, whom he had met in the local post office.     Aside from the various other factual claims made in the case, the Court examined Frank's work time at the new company during the marriage, and how that time impacted the appreciation of the business.

The wife relied on the holding of the Pereira case, that the Sea Food Company  "was a mere agency through which defendant conducted his business, and since its enormous income was due to the skill and ability with which defendant conducted the business, the community estate should be accredited with all the profits derived therefrom" Van Camp at 27.

The Court disagreed, and stated "In our opinion, the circumstances attending the Pereira case are not *28 applicable to the facts involved herein. While it may be true that the success of the corporation of which defendant was president and manager was to a large extent due to his capacity and ability, nevertheless without the investment of his and other capital in the corporation he could not have conducted the business" Van Camp at 28.

The Court determined that because of the large initial investment Frank made in the Sea Food Company before marriage and with his separate property funds, the business increased in value due to the initial investment, various assets and employees of the business, and not  because of Frank's work efforts alone during the marriage.

SUMMARY

The two (2) different approaches look to the need of the actual efforts of the spouse during the marriage, and whether or not those were significant to the growth or success of the business.     Other issues also occur in marriages as to whether or not employment during a marriage is really a business at all.  (See In Re: The Marriage of McTiernan and Dubrow (2005) as to what is a "business".  Court found Director's company was not  a business with value at all, but instead his employment)


Call Torrance Divorce Lawyer Kevin J. Kensik at 310-704-0879 to find out more about your particular business valuation or property valuation issue.

Understanding the impact of Name on Title vs. ownership of Real Property in a California Divorce

Title on real property can be held in many forms in California.     Particularly, title on deeds can be held by individuals, couples and other entities.      Many married couples often take title to deeds as either "Joint Tenants" with right of survivorship, or as community property.

Often, the deed will state that both parties are "married".       In these cases, the property is commonly "community" in ownership nature and there may not be a dispute as to the extent of ownership by either party.      A more common problem occurs when one party either takes title during the marriage, as "a married person as their sole and separate property", or when a person owns property before marriage as "a single person."

Even if the title is in one spouse's name, that may not mean that the property is 100% theirs.

Starting with a line of family law cases in the 1980's, the California courts have analyzed a common problem- that if "community earnings during the marriage" are used to pay-down the mortgage on a property belonging to one spouse, the other spouse can actually gain an interest, or what is known as
a "pro-tanto community interest".      This theory is based upon the cases of Marriage of Moore (1980)288 Cal 3d. 366, and Marriage of Marsden (1982) 130 Cal. App.3d. 426, now more commonly known as the "Moore/Marsden" interest.

The Moore/Marsden theory basically looks at the percentage the mortgage or encumbrance was paid down during the marriage as well as the increase in property value, and "awards" the community (both spouses equally) a fractional share in the property.

This effect has been compounded over recent years because of the case of Marriage of Branco (1996)
47 Cal. App.4th. 1621, which states that if a property is refinanced "by the community" instead of by the spouse individually, the community gets an even larger interest in the property proportional to the new "community" encumbrance or debt.

Many people are surprised to learn of this situation, but they are common in divorce cases.     If you have a question about title to real property or your interest in property during the marriage, contact Torrance Divorce Lawyer Kevin J. Kensik at 310-704-0879.