I live in California. My marriage was in 1990 and we divorced in 2000.
In 1995, my husband started a company with $50000 using proceeds from
a CD that he claims he owed before marriage. He was a founder of the
company, worked in it and subsequently sold it 1997 for $8M. He
deposited the proceeds in an investment account that is now worth $3M.
In settlement proceedings, he is claiming that $3M in the investment
account is separate property. How strong is separate property
argument ? and what documents does he need to provide to support his argument ?

Hello.

First of all, I should note that, as always, Google Answers provides
general information and is not a substitute for professional legal
advice. If you need professional legal advice, you should contact
aqualified attorney in your area.

----------------

Your husband's claim is simply wrong.

Assuming that you never executed a prenuptial agreement waiving your
interest in community property, you acquired some community property
interest in the business (and the proceeds from its sale) due to your
husband's labor in the business from 1995 to 1997.

Under California's community property laws, the product of a spouse's
personal efforts (including the operation of a business) are
considered community property.

To the extent that the business increased in value due to your
husband's personal efforts, the community (i.e., the two of you)
acquired an interest in the business (and the proceeds from its sale).


From an attorney in Irvine, California:

"Because community property includes the personal efforts of each
spouse, the community property interest in a business owned by one
spouse prior to marriage, or otherwise established with separate
property during marriage will be determined based upon whether the
other spouse has worked in the business. The exact method of assessing
the community interest will depend on whether the business has
increased in value, and the reasons for the increase in value (passive
activity or active participation by a spouse)."
source: Roy Barry, Irvinelaw.com
http://www.irvinelaw.com/FAMILYBU.HTM

The exact valuation of the community property interest will be
somewhat complicated.  The value of the business was partially due to
separate property (i.e., the initial $50,000) and partially due to
community property (i.e., your husband's personal efforts from 1995 to
1997).

California divorce courts use various formulae when confronted with
this problem.  Two of the most common systems are the "Pereira"
appoach and the "Van Camp" approach.

Basically, the Pereira approach involves figuring out how much of the
increase in the value of the business was due to normal capital
appreciation of the initial separate property investment, subtracting
that amount out, and classifying that amount as community property. 
The "Van Camp" approach attempts to figure out the reasonable value of
the spouse's service to the business, subtracting that amount out, and
classifying the rest as separate property.

Under either approach, there'd still be some community property
interest in the business or the proceeds from its sale.


Here's a good summary:

      "When a married person uses both S/P [separate property] & C/P
[community property] and his or her time, energy and skill in
operating a business, a complex classification problem may arise.
      If business worth goes up it is either C/P or S/P.  If it arises
due to the capital investment it's S/P.  If it rises due to the
spouses energy, skill, labor it's C/P.
...
Pereira:  involves the allocation of a fair return on the spouse’s S/P
investment as separate income, and then the allocation of any excess
to the community.
 Reason for growth is from efforts during marriage.
...
Van Camp: involves the determination of the reasonable value of the
spouse’s service, allocate that amount to C/P, and treat the balance
as S/P.
 Reason for growth was due to other factors not attributed to spouses
efforts.  Growth was due to initial capital investment."
source: Community Property Outline - JimSansoneOutline.doc:
http://www.newbk.com/newbk/request.php?383

---------------
search strategy:
"community property" "established with separate property" 

I hope this helps.  Good luck!

---

Request for Answer Clarification by redemption-ga on 21 Nov 2005 14:32 PST

Thanks. 

There is no prenuptial agreement.


It seems from your answer that the Pereira approach is valid for the
Valuation of CP/SP as my ex was actively involved in running the
company..Since most of the gain on the sale of the technology company
can be attributed to Intellectual Property (Work efforts) and not as
much to the initial investment; Is there any case law that talks about
rate of return on the original investment that could be treated as
separate property ?

Of course, he still has to provide tracing for $50,000...

---

Clarification of Answer by juggler-ga on 21 Nov 2005 15:09 PST

Yes, there is some case law on the annual rate of return California
courts have imputed on separate property capital under the Pereira
approach:


 " California courts have applied the legal rate of interest to the capital
...
8. Pereira, supra (seven percent interest); Price v. Price, 217 Cal.
App. 2d 1 (1963) (seven percent interest); Weinberg v. Weinberg, 67
Cal. 2d 557 (1967) (seven percent interest); Elliott v. Elliott, 162
Cal. App. 2d 350 (1958) (six percent interest); Margolis v. Margolis,
115 Cal. App. 2d 131 (1952) (six percent interest))."
http://66.102.7.104/search?q=cache:b3HxXVDd6kYJ:www.wilentz.com/pubs/allocating.htm+%22legal+rate%22+pereira+%22van+camp%22&hl=en


Price v. Price, 217 Cal. App. 2d 1 (1963) - 7%
http://online.ceb.com/calcases/CA2/217CA2d1.htm

Weinberg v. Weinberg, 67 Cal. 2d 557 (1967) - 7%
http://online.ceb.com/calcases/C2/67C2d557.htm

Elliott v. Elliott, 162 Cal. App. 2d 350 (1958)  - 6% 
http://online.ceb.com/calcases/CA2/162CA2d350.htm

Margolis v. Margolis, 115 Cal. App. 2d 131 (1952) - 6%
http://online.ceb.com/calcases/CA2/115CA2d131.htm



 "The Pereira approach from Pereira v. Pereira (1909) 156 Cal. 1, 7,
allocates a "fair return" on the separate property investment as
derived from the separate property capital, and the balance of any
increase in value is deemed to be community property.  Without expert
testimony about what a fair rate of return is, this will be deemed
interest at the legal rate."
http://www.lawyers.com/gitlinpetlak/divorce.jsp


I hope this helps.

Thank you for the tip.
-juggler