California Court Identifies Two Approaches to the Division of Community Property

Under California law, community property is defined as property acquired during the marriage (with certain limited exceptions). Property acquired prior to the marriage is presumptively considered separate property. Virtually every divorce proceeding involves the division of community property, to some degree. Of course, each case is unique in terms of the extent of property subject to division and the method of valuation of the assets in question. The importance of accurately identifying, characterizing, and valuing such property cannot be overstated. Accordingly, parties who are considering divorce are encouraged to contact an experienced San Diego family law attorney who can guide you through this extremely important part of any divorce case.

In a recent, complicated California divorce case, the parties argued over many financial issues, including whether the business founded by the husband before the marriage was subject to division as marital (community property) in divorce. The trial court awarded the husband the business as his separate property and also awarded the “community” an equitable allocation under two different prior court rulings. Among other things, the wife argued that the court erred by not concluding that the community owns all or most of the business in question. She claimed that the company became an entirely new business during the marriage, thus losing its characterization as separate property.

Under California law, the characterization of property as separate, community, or quasi-community has been described as an “integral” part of the division of property in divorce. Courts typically apply a “substantial evidence” standard of review when looking at a lower court’s determination of characterization. Significantly, when a spouse’s personal efforts increase the value of a separate business, courts must quantify the contributions of the separate capital as well as the community effort. One of the goals is to fairly attribute profits to the efforts of the community endeavor. This can quickly become a complicated and tedious process.

In this case, the court reviewed many factors, including two court decisions that offer distinct approaches for determining how to allocate business profits between separate and community estates. First, the Pereira method is usually applied when business profits are mainly attributed to the efforts of the “community.” Under this approach, the idea is to allocate a fair return to the separate property investment and apportion the remainder of the increase in value to the community property (as a result of community efforts).

As for the second approach, Van Camp is applied when the community effort is more than minimally involved in a separate business, yet the accrued profits are attributed to the character of the separate asset. The aim of this method is to identify the reasonable value of the community’s services, and to allocate that amount to the community property and the remainder to the separate property. Interestingly enough, California courts have indicated that courts may choose whichever formula will achieve “substantial justice” in the particular circumstances of the case before them.

While the ruling in this case is comprehensive and expansive, the court ultimately sent the matter back to the trial court for further proceedings. This decision nicely illustrates the need to consult with an experienced family law attorney when facing the division of community property in divorce. Roy M. Doppelt has been representing parties involved in family law disputes for more than 20 years. Doppelt and Forney, APLC serves clients throughout Southern California, including San Diego, Encinitas, La Jolla, and Chula Vista. For a free consultation, contact Doppelt and Forney, APLC through our website, or give us a call toll-free at (800) ROY IS IT (769-4748).

Related Blog Posts:

California Court Reviews State Laws Affecting “Transmutation” of Separate Property in Divorce

California Supreme Court Reviews Community Property Statute in Divorce Case

California Court Upholds Valuation of Marital Property in Divorce

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