Marriage of Charles
Filed 4/2/13 Marriage of Charles CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE
DISTRICT
DIVISION THREE
In re Marriage of ROGER C. CHARLES and DEBORAH C. CHARLES.
ROGER C. CHARLES,
Appellant,
v.
DEBORAH C. CHARLES,
Respondent.
G046813
(Super. Ct.
No. 06D008136)
O P I N I O
N
Appeal from a judgment
of the Superior Court
of
County, James L. Waltz, Judge.
Affirmed.
Patrick L. McCrary for
Appellant.
Snell & Wilmer,
Richard A. Derevan and Todd E. Lundell for Respondent.
* * *
The subtext of this
date-of-valuation-of-a-community-business case illustrates a lesson for family
law practitioners in how a strategy can backfire. Often, the spouse who doesn’t manage a
community business – the “nonoperating†spouse – worries about the dissipation
of the business’s assets in the period between the date of separation and the
date of trial. Accordingly, it is often
the nonoperating spouse who brings a motion to value the business as of the
date of separation, not the date of trial.
(See Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2012) ¶ 8:1383,
p. 8-330.2.) By contrast – at least in
the typical dissipation scenario – operating spouses have no incentive to value
a community business as of the date of separation. Time is on their side as value slip slides
away.
In the present case, in
line with the habitude of community businesses to decline in value in the
post-separation period, the operating spouse sat back during the
separation and the looming trial date, confident the community share of the
business (a two-man design partnership) would be valued at a figure
separation. After all, the CPA firm
jointly hired to value the business had, in 2009 – about a year and a half
before trial in 2011 – valued the community’s share at $198,000. The $198,000 figure was comfortably less than
the $226,000 figure at which the same accountants had valued the community
share at the 2006 date of separation.
But then the operating
spouse got a nasty shock. In the fall of
2010, the same CPA firm revised its estimate of current value dramatically
upwards to $716,000.
The bad news apparently
galvanized the operating spouse into action.
He retained new counsel, and the first thing the new lawyer did was to
bring a motion under Family Code section 2552, subdivision (b) to value the
business as of the date of separation.
completed, and the motion itself could not be heard until about a week before
trial was to begin.
The motion was, in
short, too late. The trial court denied
it as clearly untimely. The trial court
was well within its discretion in doing so, and we accordingly affirm the judgment.
BACKGROUND
Ironically enough, the
fact that drives this appeal does not feature prominently in the briefing. It is this:
Roger and Deborah Charles separated in May 2006, yet more than five
years would pass until trial would begin on August 22, 2011.
The story of those five
years can be told briefly. Roger filed a
petition for dissolution on September
12, 2006. The couple’s
marital status was dissolved in less than nine months, in May 2007. About a month after that they jointly
retained Duckworth & Mehner, CPA’s, as forensic accountants to value their
community interest in Genesis Associates, which is an interior design firm half
owned by Roger and half owned by Roger’s partner Greg Shubin. In April 2009, Roger had a conversation with
Glenn Mehner of Duckworth & Mehner, the gravamen of which was that Genesis
Associates was in deep trouble, and was projecting a $100,000 loss for first
quarter 2009. Based on Roger’s alarms,
the next month Duckworth & Mehner opined the community half of the firm to
be worth $198,000, which compared unfavorably with their earlier valuation for
the end of 2006 (the date closest to the date of separation) of $226,000.
The $198,000 valuation,
however, did not survive. 2009 was a
good year for Genesis Associates. The
firm had gross revenues of about $2.4 million, and a profit before officers’
compensation of $1.3 million. Duckworth
& Mehner, in a report dated October
22, 2010, valued the community share in Genesis Associates at
$716,000.
The timing of the
revised Duckworth & Mehner report was certainly not convenient for
Roger. Just the month prior, on September 29, 2010, Deborah had filed
an at-issue memorandum requesting the case be set for trial. Her memorandum checked the box declaring that
“all discovery has been completed.†The
memorandum, in turn, generated a notice of trial setting conference sent out in
mid-October, setting November 19,
2010 as the date for a trial setting conference.
Roger found himself new
counsel, who substituted into the case on December 2, 2010.
The first act of new counsel was to file, six days after substituting
in, a motion to value the community’s interest in Genesis Associates at the
date of separation. But by this time a
trial date had been set for mid-February (the exact date is not in the record
furnished us by appellant Roger), and the motion could not be heard until February 4, 2011. Deborah’s opposition pointed out that motions
to value assets of the date of separation must be heard by the time of the
trial setting conference,
name="_ftnref2" title="">[2]
hence the motion was untimely. The trial
judge agreed. He was clearly unimpressed
by the tardiness motion. Addressing
Roger’s new counsel, the court began:
“We have a trial, days ahead, and you filed a motion for a bifurcated
proceeding, arguing date of valuation just short of trial, what is up with
that?†Needless to say the motion was
soon denied.
Trial was continued a
couple of times to August. In the
interim, the other shoe dropped on the valuation issue when Deborah filed a
motion in limine to preclude Roger from presenting evidence of the value of
Genesis Associates at the date of separation.
The motion was granted – a logical consequence of the court’s denial of
Roger’s earlier motion. The case was
tried in late August 2011.
Judge Waltz’s statement
of decision was extremely thorough and cogent.
valuation of the competing experts
name="_ftnref4" title="">[4]
was the calculation of goodwill, which in turn depended on how much
“‘reasonable compensation’†was to be attributed to Roger. Ironically, the higher the reasonable
compensation, the lower the goodwill.
That is, the more income of the business is attributable to the
operating spouse, the less an investor wants to pay to buy the business and
replace the operating spouse.
The original jointly
retained expert, Glenn Mehner, posited a figure of $875,000 a year for
reasonable compensation. By contrast,
Roger’s expert Warsavsky opined the correct figure was $1.342 million. And Deborah’s expert Turk said it was
$649,000.
Ultimately, the judge
thought Dr. Turk’s figure the most persuasive, partly because his credentials
were “over-the-top impressive,†and mostly because his analysis was based on
Risk Management Association studies which provided a better comparison sample of
firms in terms of asset size and sales.
By contrast, Warsavsky used Economic Research Institute data, which did
not provide Warsavsky with any information showing how closely sample data
matched his own criteria.
Finding reasonable
compensation at $649,000 and applying a multiplier of 2 to gauge risk (the
judge noted gross revenues had held steady at no less than $2.3 million a year
from 2006 to 2010),
title="">[5]
the court found a goodwill value of about $1.45 million for the entire
firm. When combined with fixed assets of
some $190,000 and another $190,000 in owners’ equity, the total value of the
firm was ascertained at about $1.8 million, which translated into $918,000 as
the community interest.
In terms of cash flow
for purposes of support, the court fixed Roger’s income at $51,530 a month,
which pencils out to $618,360 a year.
Ironically, the $51,530 figure came directly from Roger’s own expert
Warsavsky, who recognized the $51,530 per month figure reflected the situation
of July 31, 2011, i.e., as
close to trial as possible.
Warsavsky, however, had
also projected a lower figure,
$41,612, would prevail for 2011 as a whole.
The trial judge rejected that projection. Warsavsky’s projection was based on data
given him from Genesis Associate’s controller, and neither the controller nor
Roger’s partner were called to corroborate the projection.
DISCUSSION
A. Valuation
Date
Roger’s main point,
framed in two permutations,
name="_ftnref6" title="">[6]
is that the trial court had no choice
but to either value Genesis Associates at the date of separation or, if it was
going to value it at the date of trial, reduce the value by some factor which
would account for the value of Roger’s post-separation efforts. (Cf. In
re Marriage of Imperato (1975) 45 Cal.App.3d 432, 439 [“Here, we have
community property acquired during the marriage, and, if the facts justify
apportionment we seek to allocate increases of the community property occurring
after separation into separate property.â€].)
The argument fails
because it ignores the standard of review.
The applicable standard of review
is abuse of discretion, not legal error.
After the
Legislature amended then Civil Code section 4800 to provide for a basic
“shall-may†model for valuation dates of community property. (See In
re Marriage of Barnert (1978) 85 Cal.App.3d 413, 423 [“The California
Legislature enacted an amendment to Civil Code section 4800, subdivision (a),
effective in 1976 which states that ‘. . . the court shall value the assets and
liabilities as near as practicable at the time of trial, except that, upon 30
days’ notice by the moving party to the other party, the court for good cause
shown may value all or any portion of the assets and liabilities at a date
after separation and prior to trial to accomplish an equal division of the
community property and the quasi-community property of the parties in an
equitable manner.’â€].)
Under the basic
“shall-may†model, it is presumed assets will be valued as of the date of trial
– “shall†– but the trial court retains the option – “may†– if there is good
cause, of switching to valuation as of the date of separation. The shall-may language is retained to this
day in the text of Family Code section 2552 subdivisions (a) [“shall†value at
date of trial] and (b) [“may†value at date of separation].)
That
means the standard of review used to evaluate the trial court’s decision to
deny Roger’s motion is abuse of discretion; the key word is “may.†Roger thus errs when he frames his argument
in terms of whether the trial court erred. The precise issue before us is whether the
trial court abused its discretion in
refusing to switch the normal default setting of valuation of date of trial to
the optional date of separation. In
other words, the dispositive question, like all questions tested under an abuse
of discretion standard, was whether the trial court acted reasonably. (See
Cal.App.4th 363, 374 [“An abuse of discretion is only demonstrated when no
reasonable judge could have made the challenged order.â€].)
And of course by that
standard it is an easy call. Roger
brought his motion too late, at a point when discovery had already been
completed, and when considerable discovery would have been necessary to test
the issue of a date of separation valuation.
Prejudice to Deborah alone, even if the motion was not formally
untimely, made the decision to deny eminently reasonable. As Deborah’s respondent’s brief notes, at the
very least Deborah would have needed a court order to redepose Roger, and she would have needed to take the depositions
of Roger’s partner Greg Shubin and 10 or more other employees of Genesis
Associates who might be somewhat less inclined to ascribe the entirety of the
business’s recent success just to Roger’s efforts. And that doesn’t include the extra work the
forensic accountants would need to do to reconstruct the business environment
in which Genesis Associates operated five years earlier in May 2006.
The trial judge’s
decision can also be justified independently by the need to deter operating
spouses from gamesmanship in the control of community businesses. Roger was content to let more than four years
go by (from May 2006 to December 2010) without making a motion to value at the
date of separation. The trial judge
could reasonably infer that if Roger was serious about his contention Genesis
Associates was fundamentally a two-man show (or maybe even a one-man show
he could easily have brought his motion to value as of the date of separation
sometime in 2007, or 2008, or maybe even 2009.
The earlier he might have done so, the more credible his assertion that
the post-2006 Genesis Associates success was entirely the product of his
separate efforts. In effect, he would
have said to the court, at a date early enough to mean it, “Hey, I’m willing to
take responsibility for the growth in value of Genesis Associates, and to prove
it, I’ll accept the value as of the date of separation, which can’t be manipulated
by what I do now.†By waiting so long,
Roger only confirmed what is pretty obvious from this record, namely, that he
thought the value of Genesis Associates would decline from its date of separation value.
The trial court thus did
not abuse its discretion in denying Roger’s motion and likewise did not abuse
its discretion in granting Deborah’s in limine motion, which was only the
logical outcome of the earlier denial.
B. Other
Issues
Roger presents three
other arguments of an evidentiary character:
1. Warsavsky’s
Projection
First, Roger complains
that the court “improperly discounted†Warsavsky’s projection that 2011 would
not be as good a year as it had been up to July 31 – because the projection was
not directly corroborated by testimony from either the company’s controller or
Roger’s business partner. Roger’s theory
is that since Evidence Code section 801 allows an expert to testify to hearsay
made available to him prior to the hearing, somehow it was error not to blindly
accept Warsavsky’s opinion.
This argument fails
because the trial court was merely comparing
among experts, deciding who was the most credible and whose methodology the
most reliable. The court was not
some supposed lack of in-court corroboration.
The statement of decision is very clear the court allowed Warsavsky’s
opinions into evidence, but simply found Turk’s figures more compelling. That was a perfectly reasonable choice given
that Warsavsky’s figure was based on projections, not actual data, and
therefore cried out for more backup.
(See Evid. Code, § 412 [“If weaker and less satisfactory evidence
is offered when it was within the power of the party to produce stronger and
more satisfactory evidence, the evidence offered should be viewed with
distrust.â€].) Indeed, it has long been
established that triers of fact choose which of several experts is the more
persuasive. (Liberty Mut. Ins. Co. v. Industrial Acc. Com. (1948) 33 Cal.2d 89,
94 [“The trier of fact may accept the evidence of any one expert or choose a
figure between them based on all of the evidence.â€]; Biren v. Equality Emergency Medical Group, Inc. (2002) 102
Cal.App.4th 125, 139 [“The trial court decides the credibility of
experts.â€].)
2. Turk’s
Supposedly Outdated Data
Next,
Roger raises the argument the trial court
necessarily had to reject Turk’s valuation because Turk supposedly relied
on “outdated data.†The “outdated dataâ€
to which he refers is the fact that Genesis Associates had an extraordinarily
good year in 2010, but (at least according to Roger) experienced reduced income
in 2011.
Turk did not exclude data from 2010
(but did exclude data from 2011), there was a lack of substantial evidence for
Turk’s valuation figure.
This
argument fails, as it applies to the year 2010, because both Turk and Mehner
averaged income for the years 2006 through and including 2010, obtaining a
properly representative longitudinal sample.
(See In re Marriage of Riddle
(2005) 125 Cal.App.4th 1075, 1082 [“the time period on which income is
calculated must be long enough to be representative,
as distinct from extraordinaryâ€];
Cal.App.4th 808, 820 [commending averaging over representative period of
time].)
And
the argument fails as it applies to the year 2011, because the trial judge was
reasonable to rely on experts who did not take 2011 into consideration. Most obviously, trial took place in August
2011, in the middle of the third quarter, so any decline in 2011 would at best
been a projection from data gathered in the first two quarters. The year was still subject to manipulation
and uncertainty. On top of that, the
trial judge could properly be skeptical of any such projection given Roger’s
track record. The judge heard testimony
from which he could draw the conclusion that Roger in fact misled expert Mehner
about the company’s health in 2009. The
sky was falling in the first quarter of 2009, or so Roger told Mehner. If Roger could play Chicken Little in 2009,
he could revisit the role in 2011.
And
in any event, given the need for long-term averaging, any arguable error in not
according to 2011 the status of somehow representing a “new normal†was
harmless. The projection for 2011 was actually
in line with some of Genesis Associates’ better years.
3. Roger’s
Monthly Income
The
final argument raised by Roger involves the projection for the balance of
2011. Roger argues Warsavsky’s
projection of reduced income for 2011 had
to be determinative. We have already
dealt with this point above, noting that the trial court was reasonable to
prefer hard historical data to the chimera of projection.
Moreover,
any arguable error is both invited and harmless. It is invited because the $51,530 per month
figure came from Warsavsky’s own
opinion of Roger’s cash flow as of July 31, 2011, which was as close to the
date of trial as possible. It is
harmless because the $51,530 a month figure arrived at by the court works out
to less than half of what Roger’s own
expert Warsavsky testified was Roger’s reasonable compensation of $1.343
million for purposes of good will. Had
the trial court decided Roger should be paid what his own expert Warsavsky
thought he was worth to the company in terms of reasonable compensation, his
income for support purposes would be more than twice what the trial court
determined. As another panel of this
court aptly put it in Barth, supra, 210
Cal.App.4th at page 365, “‘be careful what you wish for.’†In this case, Roger is lucky he didn’t get
it, or he really would have something to complain about by way of greatly
increased child and spousal support orders.
As it was, he got off easy: The
amount of income fixed by the trial court was even lower than the lowest
($649,000) reasonable compensation figure proffered by any of the experts.
DISPOSITION
The judgment is
affirmed. Deborah will recover her
BEDSWORTH,
J.
WE CONCUR:
O’LEARY, P.
J.
RYLAARSDAM,
J.
name="_ftn1" title=""> [1] All further statutory references
are to the Family Code unless otherwise stated.
As is common in family law cases, we refer to the parties by their first
names.
name="_ftn2" title=""> [2] Former California Rules of Court,
rule 5.175(a) provided, in 2011, that “On noticed motion of a party, the
stipulation of the parties, or on its own motion, the court may bifurcate one
or more issues to be tried separately before other issues are tried. The
motion must be heard not later than the trial-setting conference.†(Italics added.)
Effective
just this year (January 1, 2013), rule 5.175 (along with its sister rule 5.126
[prescribing the form for application]) were replaced by new rule 5.390. New rule 5.390 contains no language requiring
the motion be heard by the trial setting conference.
