In re Marriage of Brandes: Community Property Law As Applied to Wealthy People

In this dissolution action, In re Marriage of Brandes (2015) __Cal.App.4th_, Linda F. Brandes (Linda) seeks more money, contending primarily that the trial court did not apply the law correctly in dividing their community property and that some stock Charles H. Brandes (Charles) acquired during their marriage should be deemed to be community property, whereas, Charles disputes the trial court’s generous award of spousal support to Linda.

To resolve the community property issues, the appellate court was tasked with deciding if the trial court applied the correct approach in distributing the couple’s property. The Pereira v. Pereira (1909) 156 Cal. 1 (Pereira) approach was used for the early period during which the growth was primarily attributable to Charles’s personal efforts. The trial court also used the the Van Camp v. Van Camp (1921) 53 Cal.App. 17 (Van Camp) approach for the later period during which the growth was primarily attributable to other factors.

The Pereira approach allocates a fair return to the separate property investment and the balance of growth to the community, and the Van Camp approach allocates the reasonable value of the owner spouse's services to the community and the balance of growth to separate property. (In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 853-854 (Dekker).) The appellate court explained that when a spouse's personal efforts increase the value of his or her separate property business, "it becomes necessary to quantify the contributions of the separate capital and community effort to the increase," because the "community is entitled to the increase in profits attributable to the community endeavor." (Dekker, supra, 17 Cal.App.4th at p. 851; Beam, supra, 6 Cal.3d at p. 17.)

California courts have developed two alternative approaches to allocating business profits between separate and community estates. (Dekker, at pp. 852-853, fn. omitted.) "Pereira is typically applied where business profits are principally attributed to efforts of the community." (Dekker, supra, 17 Cal.App.4th at p. 853.) "The Pereira approach is to allocate a fair return to the separate property investment and allocate the balance of the increased value to community property as arising from community efforts." (Id. at pp. 852-853.) In a Pereira allocation, the court need not "limit the community interest to a salary as reward for a spouse's efforts . . . ." (Id. at p. 853.) "To limit the community to compensation received by way of salary during the marriage would ignore California's egalitarian marriage model and the apportionment formula of Pereira . . . ." (Id. at p. 854.)

 "Conversely, Van Camp is applied where community effort is more than minimally involved in a separate business, yet the business profits accrued are attributed {Slip Opn. Page 13} to the character of the separate asset." (Dekker, supra, 17 Cal.App.4th at p. 853.) "The Van Camp approach is to determine the reasonable value of the community's services, allocate that amount to community property and the balance to separate property." (Ibid.) Although the appellate court found no error with how the trial court applied the law to distribute most of the couple’s community property. it did find error with regard to the distribution of some stock that Charles acquired during the marriage.

Linda contends the court erred by awarding Charles the 10,000 shares of BIP stock he purchased from Brown. In 1985, before the marriage, Brown, a client of BIP, purchased 10 percent of the business, which after stock splits gave him 10,000 shares of stock. That year, he and Charles entered into a shareholder agreement that gave Charles the option to purchase any or all of Brown's shares after April 1, 1990. The agreement included a formula for the purchase price, and called for a minimum down payment of 20 percent and a promissory note to cover the balance. {Slip Opn. Page 26}

 In 1994, Charles exercised the option for 4,000 shares at a price of $240,000. He signed an unsecured promissory note. He made all payments from the parties' joint accounts with funds designated as W-2 income. The stock purchase agreement provided that the 1985 shareholder agreement would be superseded by a new 1994 shareholder agreement "with respect to the 6,000 shares still owned by Brown."

In 1996, Charles and Brown entered into another shareholder agreement, which restated and amended the 1994 shareholder agreement. fn. 7 The new agreement gave Charles the option of purchasing the shares after the 10th anniversary of the agreement. It included a formula for the purchase price, and called for a minimum down payment of 25 percent and a promissory note to cover the balance. It provided that the security for the note would be the shares themselves. {Slip Opn. Page 27}

In 2002, Busby asked Brown to sell his remaining 6,000 shares of stock to Charles, and Brown agreed even though the 10-year period had not run. It appears that Charles made a down payment of $4,667,147. fn. 8 A promissory note in the amount of $18,668,588.80 was signed by Charles individually, and by Charles and Linda as trustees and beneficiaries of a family trust. He made the down payment with funds labeled as W-2 income, and note payments from a combination of funds labeled as W-2 income and profit distributions apparently not labeled as W-2 income. The payments came from the parties' joint accounts.

Linda contends the court erred by rejecting her argument that the 6,000 shares are community property under the lender's intent doctrine, since the stock was acquired partially on credit during the marriage. "There is a rebuttable presumption that property acquired on credit during marriage is community so that '[i]n the absence of evidence tending to prove that the seller . . . primarily relied upon the purchaser's separate property in extending credit, the trial court must find in accordance with the presumption.' " (Bank of California v. Connolly (1973) 36 Cal.App.3d 350, 375-376; Gudelj v. Gudelj (1953) 41 Cal.2d 202, 210 (Gudelj).) The "presumption is rebuttable upon a showing that the loan was extended on the faith of existing property belonging to the acquiring spouse." (In re Marriage of Stoner (1983) 147 Cal.App.3d 858, 864.) {Slip Opn. Page 31} Evidence of lender reliance on a spouse's separate property may be either direct or circumstantial. (Grinius, supra, 166 Cal.App.3d at p. 1187.)

The court declined to apply the lender's intent doctrine, in part because the "evidence is unclear whether there was a lender-borrower relationship between Brown and Charles . . . " Brown was asked whether he considered himself to be in a debtor-creditor relationship with Charles, and he testified, "I never really thought about it." He also stated he did not consider himself a lender because he and Charles had a contractual arrangement for Charles's purchase of the shares. fn. 11

The appellate court agreed with Linda’s assertion that the court erred as a matter of law by finding the lack of a debtor-creditor relationship for purposes of the lender's intent doctrine. "To be sure, 'A loan transaction contemplates a debtor-creditor relationship with an obligation of the "debtor" to repay the amount of the loan to the creditor. . . .' " (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 802.) The appellate court saw no reason to disregard the lender's intent doctrine based on a seller's testimony he did not consider himself a lender. The issue is one of law drawn from the promissory note, not one for Brown's opinion.

The appellate court explained that they had not been cited to any authority for the proposition that an option agreement anticipating a promissory note precludes the creation of a debtor-creditor relationship on execution of the note. {Slip Opn. Page 32}

 Additionally, Linda contends the court erred by denying her prejudgment interest on her share of the community's interest in BIP as of the end of the Pereira period, by {Slip Opn. Page 3} characterizing profit distributions BIP labeled as W-2 income as Charles's separate property, and by awarding Charles 10,000 shares of BIP stock he purchased from a third party in two transactions during the marriage. Linda claims 4,000 of the shares are community property because Charles used community funds to purchase them. She asserts the remaining 6,000 shares are presumptively community property under the lender's intent doctrine, because the purchase was financed under a promissory note entered into during the marriage, and Charles did not rebut the presumption by showing the seller relied primarily on his separate property for payment.

The community's ownership interest, however, does not extend to the entire 6,000 shares, but only to the number of shares purchased under the promissory note, which is unclear from the record. The lender's intent doctrine "applies only to the characterization of loan proceeds obtained during marriage." (In re Marriage of Starr (2010) 189 Cal.App.4th 277, 288.) Charles rebutted the general community property presumption as to the down payment (§ 760), by tracing it to his separate property. (Gudelj, supra, "41 Cal.2d at pp. 209-211 [husband rebutted presumption of community property as to 3/23 of business interest by tracing down payment to his separate property]; In re Marriage of Aufmuth (1979) 89 Cal.App.3d 446, 455, disapproved of on another point in In re Marriage of Lucas (1980) 27 Cal.3d 808, 858 ["there is substantial evidence to support the trial court's finding that the down payment was and continued to be separate property interest held by wife in the residence"].) Charles separately owns the percentage of {Slip Opn. Page 34} shares purchased with his down payment. For example, if the down payment was 25 percent of the full purchase price, he separately owns 1,500 shares. Thus, the appellate court partially agreed with Linda on the lender's intent doctrine.

The doctrine applies to the percentage of the 6,000 shares purchased under the promissory note, and the court erred by not finding in accordance with the community property presumption since Charles did not rebut it.

 On Charles’ appeal, which contends the court erred by awarding Linda $450,000 per month in spousal support, asserting that under Family Code section 4322, she is not entitled to any support because, if invested prudently, her share of the community property is sufficient to cover her actual postseparation expenses of approximately $100,000 per month, the appellate court declined to rule on this issue.  The court explained that this issue will likely become moot. On remand, the trial court must revisit the spousal support issue because this order is based, in part, on a spouse's separate estate (§ 4320, subd. (e)), and Linda's separate estate will likely increase when the trial court redistributes the community property from the loans.

 copyright © 2015 Christine Esser

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