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California Family Law Report

 

 

Case of the Month (from CFLR Monthly)

April 2014
[Archive]

Jacqueline was fit to be tied . . .

 

In reversal, First District holds that trial court that awards community property business to one spouse has authority to issue noncompetition order against other spouse to preserve value of that asset, but must restrict its scope to geographic area where parties conducted their business absent evidence that broader scope is needed

 

In re Marriage of Greaux and Mermin

(February 14, 2014)

California Court of Appeal 1 Civil A134662 (Div 4) 223 Cal.App.4 th 1242, 167 Cal.Rptr.3d 881, 2014 FA 1628, per Rivera, J (Ruvolo, PJ and Reardon, J, concurring). Marin County: Heubach, J, reversed and remanded. For appellant: pro per. For respondent: Cecilia Lannon, CFLS, (415) 461-8839. CFLP §H.58.15.

 

During their marriage, Jacqueline Greaux and Tristan Mermin created two companies, Specialty Application and Finishes (SAF) and Saint Bart's Spirit Company (SBSC). SBSC was engaged in the formulation and marketing of "' rhum agricole. '" Tristan used his innate business skills and drive to set up SBSC and keep it running. Jacqueline used her "'natural sales and marketing skills'" to gain customers for SBSC, and contributed her family contacts in the Caribbean and her "'impressive understanding of the production techniques and the unique nature and characteristics of rhum agricole '" to making the product successful. The couple worked hard to make SBSC successful, but their marriage suffered as a consequence. Ultimately, Jacqueline filed for divorce. At the same time, she filed lawsuits against SAF and SBSC and "key SBSC resource contacts," twice withdrew operating capital, and made statements to employees that disrupted business operations. In her lawsuits, Jacqueline made allegations that impugned the integrity of individuals, questioned the solvency of SBSC, and accused suppliers and corporate executives of shady activities. She later dismissed the lawsuits, but not before serious harm had been done to SAF and SBSC.

 

At their disso trial, Jacqueline and Tristan agreed that SAF had no value and should be awarded to Tristan. Jacqueline asked the trial court to award SBSC to her, claiming that Tristan had "'run SBSC into the ground'" and that expert testimony showed it had no value. The trial court pointed out that an expert had valued SBSC at $49,000, which was completely offset by Tristan's post-separation contributions of between $43,000 and $70,000 to keep SBSC going. The court awarded SBSC to Tristan, finding that he had shown he could operate the business under adverse circumstances, while Jacqueline appeared willing "'to sacrifice the interests of SBSC for what appeared to have been little more than spiteful retribution.'" In a statement of intended decision, the trial court ordered Jacqueline to surrender her SBSC stock, to execute all necessary documents, and to refrain from further conduct intended to harm SBSC in any way. The court also ordered Jacqueline to be subject to a five-year noncompetition order.

 

When Tristan prepared a proposed statement of decision, he included a noncompetition order that restrained Jacqueline from, among other things, competing with him or SBSC for five years from the date of judgment, setting up her own company with investors or others engaged in the production, bottling, marketing, or selling of rhum agricole , or any other kind of rum wherever produced or grown. The noncompetition order also prevented Jacqueline from consulting with or working for any of SBSC's competitors. Jacqueline opposed the order, claiming that it violated B&P C § 16600, which provides that a contract which restrains anyone from engaging in a lawful profession, trade, or business is void, and also California's public policy favoring open competition. She also asserted that the trial court lacked the authority to make such an order. The trial court, however, did not agree. It adopted Tristan's proposed statement of decision, including the noncompetition order, and entered judgment.

 

Jacqueline appealed, and the First District reversed and remanded.

 

When policies collide . . .
Jacqueline renewed her contention that that the trial court exceeded its jurisdiction by issuing the noncompetition order because B&P C § 16600 applied only to contracts and B&P C § 16601, which applies specifically to noncompetition agreements, does not give the trial court the authority to issue such an order in a disso proceeding. In addition, she argued that the noncompetition order violated California's strong public policy in favor of open competition. Tristan countered that those statutes do not specifically preclude the trial court from issuing such an order, which it could do in line with its power to make any orders necessary to effect an equal division of the parties' community property. The justices reasoned that B&P C § 16600 not only precludes contracts that restrict business or employment but also reflects the state's policy favoring open competition. However, the panel found, the state has an equally important interest in ensuring that the parties' community property is divided fairly and equally in dissolution proceedings. When the justices weighed the public policy against the state's interest, they concluded that the public policy must yield to the competing policy of the state's interest in fair and equal distribution of community property in a disso. Therefore, they determined, the trial court had the authority to make a noncompetition order against Jacqueline in order to preserve the value of SBSC, as awarded to Tristan.

 

Goodwill hunting . . .
The justices reasoned that noncompetition clauses are routinely made a part of the sale of a business or the dissolution of a corporation or partnership. These clauses are designed to protect the value of the goodwill of the business. In the same way, when a trial court awards a family business to one of the spouses, it must determine whether the business includes goodwill and if so, it may make a noncompetition order to preserve the value of that goodwill as part of the value of the asset awarded to that spouse. The panel could find no prior California case that had specifically authorized such an order, but found several out-of-state cases that were "largely in accord," such as Carr v. Carr (1985) 108 Idaho 684, 701 P.2d 304, in which the disso court dealt with the sale of the family business, a truck stop, that was to be sold to third parties. When the husband objected to having a noncompetition clause included in the sale (he wanted to open a truck stop on adjacent property after the disso), the trial court ordered him to sign the documents. He did so, but appealed, to no avail. The appellate court reasoned that the business had a goodwill component that would be protected by the noncompetition covenant and could be made a part of the disso court's judgment. The panel here agreed with the Carr court's reasoning, but not with the other out-of-state cases that had reached a different conclusion. Summing up, the justices held that the trial court could issue a noncompetition order without violating either the state's public policy or the provisions of B&P C § 16600.

 

How far is too far . . .
Having determined that the trial court could make such an order, the panel considered what the permissible scope of the order should be. Again, they found no California case that addressed the question and turned to out-of-state cases. The justices noted that in Lord v. Lord (Me. 1983) 454 A.2d 830, the court held that the trial court could make a noncompetition order in connection with its award of the family insurance agency to the husband, but it needed to ensure that the restrictions the order placed on the wife were not "unduly harsh, without an adequate evidentiary basis for their necessity." The panel here believed that, as the court said in Cesar v. Sundelin (2012) 81 Mass.App.Ct. 721, 967 N.E.2d 171, "noncompetition orders must be 'reasonable and not broader than necessary to protect the good will included in the valuation and transfer.'" The panel also recognized that other states have limited the scope of the order to "'a specified geographic area'" where the business was conducted, and they agreed with that restriction, absent evidence that a broader scope was necessary to protect the value of the business. Here, the panel found, the trial court had abused its discretion by failing to determine the proper geographic scope of the noncompetition order or to make findings as to why the scope of the order should not be limited. Accordingly, the justices reversed the part of the judgment pertaining to the noncompetition order and remanded for further proceedings consistent with this opinion.

 

 

Comment

  

COMMENT: This is the second case we've seen recently in which the appellate panel uses the concept of goodwill as a factor in reaching its decision. In In re Marriage of Finby (2014) 222 Cal.App.4 th 977, 166 Cal.Rptr.3d 305, 2014 FA 1622, the Fourth District was asked to determine whether a wife's "book of business" was a valuable community asset that was subject to division in a disso. The wife, a very successful financial advisor, had brought her book of business with her when she changed firms. The trial court found that it had no value and that the husband had no interest in it. The justices didn't agree. They analogized the book of business, defined as a licensed professional's list of clients, to goodwill, which is a community asset divisible on divorce. Finding that the wife acquired those clients during marriage, the panel reversed the trial court and remanded for a recalculation of the value of the book of business, as well as the wife's bonuses. Here, we see the First District using the concept of goodwill in its determination of whether the trial court had the authority to make a noncompetition order when it awarded SBSC to Tristan and concluding that where there is a goodwill component in the business, the court may make a noncompetition order to protect the value of the asset.

 

 

It may be a tricky task for the trial court to determine the proper scope of the noncompetition clause on remand. In fact, in a footnote, the justices say that the court "should also consider clarifying the meaning of the phrase 'any person or entity that . . . could be in competition with SBSC's rum product.'" In the panel's view, the phrase could be "interpreted either very narrowly or very broadly" (which is true of so many phrases in the law). In this case, however, the justices find that "the parties should be provided a clear understanding of its meaning." We're all for that. If Jacqueline and Tristan are unable to come to an agreement on the scope of the noncompetition clause, it may be necessary to get an expert opinion to support Tristan's contention that it should cover more than the geographical area in which SBSC does business. At the very least, the trial court will need to hear extensive evidence as to that area before it decides the proper scope for the order.

 

 

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