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  In re: Marriage of Duncan

Use of Alternative date of valuation under Family Code §2552(a) proper where professional post-separation efforts result in increase in value of community-owned business.

This 2001 case out of San Diego addressed the question of whether an alternative date of valuation under Family Code §2552(a) requires that the change in value be related entirely to the post-separation efforts of the managing spouse.

The parties were married when they formed a pension investment firm in 1990. The company was managing over $1 billion in assets when the parties separated in 1994. Husband continued to operate the investment business after the date of separation. The trial court did not hear the valuation issues until 1997, by which time the investment portfolio of the company had increased substantially. Husband argued that because the increase in the size of the firm was due to his own post-separation efforts, the business should be valued as of the date of separation instead of the date of trial.

Wife asserted on appeal that the trial court’s use of the alternative date of valuation was improper because the post-separation increase in value was due to factors other than husband’s personal efforts.

In its analysis the appellate court reviewed the state of the law in California regarding the application of the alternative date of valuation provided for in Family Code §2552(a). “Case law has established that good cause generally exists for a professional practice to be valued as of the date of separation.” (Marriage of Kilbourne (1991) 232 Cal.App.3d 1518 [valuation of law practice]; Marriage of Green, (1989) 213 Cal.App.3d 20 [valuation of law practice].)

This exception applies because the value of such businesses “is primarily a reflection of the practitioner’s services and not capital assets… Because the earnings and accumulations following separation are the spouse’s separate property, it follows that the community interest should be valued as of the date of separation - the cutoff date for the acquisition of community assets.” (Marriage of Stevenson (1993) 20 Cal.App.4th 250, 253-254). Further, “[t]he rationale for the general exception is not limited to law practices. It applies with equal logic to other small businesses that rely on the skill and reputation of the [managing spouse].” (Marriage of Stevenson 20 Cal.App.4th at 254 [small general contracting business].) Thus an alternative date of valuation may apply to a business when its value “...devolves largely from the personal skill, industry and guidance of the [managing spouse].” (Ibid.)

Here the community company manifested all of the attributes of a professional practice, including performing a service for a fee, offering specialized knowledge and experience, being licensed and regulated, and having asset  that consist mostly of office equipment, accounts receivable, and work-in-progress.

Thus the value of the company derived not from its capital assets, but rather from the professional investment advisory services that husband provides to it. Nothing in Family Code §2552(a), the Court held, requires the trial judge to find that the entire post-separation change in value was due exclusively to the personal efforts of the operating spouse in order to apply an alternative valuation date.

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