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California Family Law Report



Case of the Month (from CFLR Monthly)

July 2015

Higher lifestyle for Husband is ok if Wife is able to maintain marital standard . . .


In affirmance, First District finds no error in trial court’s evaluation date or choice of valuation method re spouses’ family business, its denial of Wife’s motion to reopen evidence, or its division of the parties’ community property


In re Marriage of Honer

(April 9, 2015; ordered published May 6, 2015)

California Court of Appeal 1 Civil A137961 (Div 4) 236 Cal.App.4 th 687, 186 Cal.Rpt.3d 607, 2015 FA 1689, per Bolanos, J (Ruvolo, PJ and Rivera, J, concurring). Mendocino County: Mayfield, J, affirmed. For appellant: Deirdre Kingsbury, (707) 545-7010. For respondent: Lawrence Moskowitz, CFLS, (707) 525-8800. CFLP §M.67.3.5.


Penny and Thomas Honer were married in 1982. During their marriage, they owned and operated several grocery stores in Mendocino County which specialized in natural and organic products and hard to find items. Thomas managed the stores, while Penny took care of payroll, billing, and advertising, along with the design and decoration of the stores, employee training, and customer relations. The stores were held by Cypress Holdings, Inc. (CHI), an S corporation of which Thomas was president and Penny vice-president. The couple used the profits from CHI to invest in other real estate, which housed a hardware store, a veterinary clinic, and a pharmacy, all of which generated rental income. They later acquired an acre of undeveloped land with an eye toward developing it into a small housing complex. Thomas and Penny also owned a 52-acre ranch, which contained the family home, a two-bedroom apartment, stables, a paddock, six horses, and a 2-acre pond. By 1997, Penny had cut back her involvement with the stores. From 2002 to 2009, she taught at the elementary school. In 2009, she was diagnosed with multiple sclerosis, which curtailed her ability to work. That same year, she and Thomas separated, and in September, Penny filed for divorce.


Their disso trial began in December 2011 and concluded in January 2012. Prior to trial, Penny would not commit to a valuation date for CHI, so Thomas had his expert, Thomas Berg, value CHI as of December 31, 2010. At trial, Berg testified that he had used the market approach and the income capitalization method in making his evaluation because CHI was a going concern with material cash flow. With adjustments, Berg valued CHI at $2.9 million. Penny’s expert, Matt Morris started his evaluation with the assumption that the grocery stores would be sold, used comparables, sales analysis, and adjusted earnings to arrive at a value of $3.5 million. On April 19, 2012, the trial court issued a statement of decision on the property division and spousal support issues, in which it awarded CHI, the ranch, a separate grocery store, and half of the value of two profit sharing plans to Thomas. The court awarded the building that housed the veterinary clinic, the undeveloped one acre property, a life insurance policy, three 401k funds, half of the value of the profit sharing plans, and four IRAs to Penny. Thomas was ordered to make an equalizing payment of $1,576,192 to Penny within 90 days of the date of the judgment. He was also ordered to pay Penny 20% of any distributions to him from CHI over and above his annual salary, along with spousal support of $7,084 per month. All in all, Penny received $3,333, 521, and Thomas received $3,333, 520.


On September 10, 2012, Penny moved to reopen the evidence to permit the trial court to divide profits, in the form of retained earnings, that CHI had earned since the evaluation date. She supported her request with declarations from two accountants and some updated CHI financial statements. Finding her motion “ ‘not well founded,’ ” the trial court denied the motion and ordered Penny to pay Thomas’s attorney’s fees of $21,745 as a sanction. After a further hearing on the issue of attorney’s fees, the trial court ordered Thomas to pay Penny $185,000 toward her attorney’s fees, per Fam C §2030 and §2032, offset by $40,000 to Thomas for Penny’s conduct that increased litigation costs and her attorneys’ “ ‘obstreperous and unprofessional conduct.’” The trial court entered the parties’ disso judgment on December 24, 2012.


Penny appealed the property division, the order denying her motion to reopen evidence, and the spousal support award, but, in a partially-published opinion, the First District affirmed.


A million here, a million there . . .
Penny argued that the trial court erred by accepting Berg’s evaluation of CHI and utilizing an appraisal that was too old to take into account subsequent changes to CHI’s value. The justices noted that the trial court had relied more on Berg’s valuation because Berg had seemed more credible than Morris. Berg had interviewed employees, become familiar with CHI’s strengths and weaknesses, taken into account Thomas’s opposition to selling the stores, and recognized that the stores generated income with which Thomas could pay spousal support. Morris, on the other hand, had started from the premise that the stores would be sold, and based his evaluation on that premise. There were some similarities in the methods used by the experts, the panel said, but Morris’s starting premise, which caused him to put greater weight on the comparable transaction analysis, was the key difference. The justices acknowledged that Morris had used a later evaluation date than Berg, but they attributed the difference in their conclusions as to CHI’s value to both the dates used and to the “different methodologies and assumptions employed.” Moreover, the justices noted that the lower court had expressed concern over the fact that Morris’s company was “directly involved in the sales and acquisitions of grocery stores and could potentially act as broker if the markets were sold.”


Many roads lead to Rome . . .
The panel was not persuaded that, as Penny contended, the trial court failed to consider the additional income earned by CHI between Berg’s 2010 analysis and the date of the judgment. The justices pointed out that the lower court had not valued CHI as of the 2010 date, but rather at the time of trial. The panel also emphasized that the trial court had not blindly accepted Berg’s evaluation, but had chosen a valuation that was between the amounts that each expert presented. The justices found no error in Berg’s use of the “ ‘marital value’ ” of CHI, which Berg defined as the economic value to the spouse who retains and runs the business, as opposed to the “ ‘investment value.’ ” They reasoned that the marital value and the fair market value seemed roughly the same on these facts and Berg’s evaluation method was not some “forbidden departure from ordinary rules of business valuation,” as Penny had suggested. Even if his method had been “novel” (the justices didn’t think it was), that would not have been disqualifying as long as the method was within the realm of usual concepts re business evaluations.


Nothing new here . . .
The panel then turned to the trial court’s denial of Penny’s motion to reopen evidence. They pointed out that the standard of review is abuse of discretion, not de novo, as Penny asserted. The justices found no error in the lower court’s determination that Penny’s motion was not clearly based on new evidence. They noted that Penny and her attorneys had been aware of CHI’s ability to generate profits at the time of the trial, but failed to raise the issue, as they should have. Moreover, her assertion that the retained earnings should have been considered, and the information supporting that claim were available to her at trial as well. Thus, it was clear that whatever “new evidence” Penny presented was not sufficiently material to support reopening the evidence, and the trial court had not erred by denying her motion.


Meaningful money . . .
Finally, Penny contended that the trial court’s division of community property “must be not only ‘mathematically equally divided’ but the division must also be ‘meaningful.’ ” She claimed that she would not have the means to invest that she had during the marriage, now that she was almost 60, disabled, and unable to work, while Thomas had $1 million a year that he could use for that purpose. The justices reminded Penny that the property division was not “grossly disproportionate,” and took into account her wish to have income producing assets and not the ranch. The panel found that the trial court had explained to Penny how her awarded assets would produce income and had the potential to produce more, if Penny developed the project on the one acre parcel. All in all, the panel said, the property division was sound and equitable. Besides, the justices said, the possibility that Thomas would end up with a somewhat higher lifestyle did not mean that the property division was unjust, since the division permitted Penny to maintain the marital standard of living.


Non-pub . . .
In the unpublished parts of the opinion, the panel found no error in the trial court’s award of spousal support and did not buy Penny’s contention that the trial court was biased against her. They noted that the lower court’s comments regarding her attorneys were based on evidence and testimony from Thomas’s daughter to the effect that Penny wanted to make the disso so expensive that Thomas would give up and reconcile.





This opinion contains a comprehensive description and analysis of the methods that the friendly forensics used to evaluate the various businesses that were part of the community property. For that reason, it is one that family law attorneys should keep in their files for future reference. That is not to say that any family law attorney whose clients have community property of this dollar worth should not immediately retain a forensic expert to do the evaluation of the various properties. Unless the attorney is also a highly experienced forensic accountant, it would border on malpractice not to use a forensic. However, having cases like this handy for reference can be a big help in determining whether your forensic is on the right track or is simply over his or her head in doing the evaluation. The family law attorney must work hand in hand with the forensic, not just sit back and let the forensic do his or her thing. After all, the attorney will need to explain to the client at some point what the forensic has done, what the evaluation means for the property division, and whether the client’s estimate of the community property is accurate or even reasonable.



All that said, the justices here make a couple of statements that seem to be departures from the usual property division. Penny has contended that the property division should be “meaningful” as well as mathematically equal. Neither she nor the panel defines what is meant by “meaningful,” although there is a cite to In re Marriage of Fink (1979) 25 Cal.3d 877, which appears to require that a property division be practical and equitable. A term such as meaningful is a little vague to be useful as a standard for dividing property. We got the feeling that Penny meant that the property division had not been meaningful because it left Thomas in a better position to invest his assets than she was with hers. Nonetheless, the justices carefully review the property awarded to Penny and explain how the property division was not “grossly disproportionate.” When they finish doing that, they opine that the assets awarded to Thomas will require him to spend time, energy, and talent if they are to produce the returns that they have in the past. And, if Thomas ends up with a somewhat higher lifestyle after putting in the work, it’s not unjust to Penny as long as she is able to sustain the marital standard of living. In saying that, it seems to us that the panel is borrowing the concept of marital standard, which is a part of a spousal support analysis, and impermissibly inserting it into a property division analysis. We’re even more persuaded of that by the two cases the justices cite for that proposition, In re Marriage of Weinstein (1991) 4 Cal.App.4 th 555, 5 Cal.Rptr.2d 558, 1992 CFLR 5157, 1992 FA 530, and In re Marriage of Smith (1990) 225 Cal.App.3d 469, 274 Cal.Rptr.911, 1991 CFLR 4588, 1990 FA 457, both of which deal with the concept of marital standard as it affects an award of spousal support. In all but the high dollar cases, the property division doesn’t allow either party to maintain the marital standard of living. Does this mean that the party whose standard of living is a little higher than the other party’s is somehow vulnerable to a claim that the property division was not equitable or meaningful. We’d hate to think that the justices here intended a result like that.



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