Until Death Do Us Part: Marital Property Characterization in the Postmortem Setting

• Publication year: 2015
• Author: By James P. Lamping, Esq.

UNTIL DEATH DO US PART: MARITAL PROPERTY CHARACTERIZATION IN THE POSTMORTEM SETTING

By James P. Lamping, Esq.^*

I. INTRODUCTION

The commingling of community and separate property can present significant challenges when assets are to be divided at the end of a marriage. While the bulk of the law on this subject arises from marriages that end in divorce, the division of commingled property at death often receives short shrift. This article analyzes the primary authority on this subject, and discusses the reality that some secondary sources do not necessarily accurately reflect that authority.

II. COMMUNITY AND SEPARATE INTERESTS IN A BUSINESS

A. Division upon Divorce: Pereira-Van Camp

In Pereira v. Pereira, the husband owned a saloon prior to marriage.¹ On the date of marriage, the fixtures of the business were valued at $15,500 and the annual income was approximately $5,000 per year. During the marriage, the husband acquired the building where the saloon was located on credit for $40,000.² On the date of separation, the debt against the building was paid off, there was a $12,000 cash balance in the business bank account, and the annual income was $11,000 per year.³

The court acknowledged that community efforts were the predominant reason for the appreciation of the business during the marriage; the court also recognized that the husband would have had at least some return on his separate property, even if he had merely purchased passive investments.⁴ Consequently, the court held that a fair return on the separate property investment would be allowed and the community would receive the remaining appreciation, at least when the predominant reason for that appreciation was community efforts:

It is true that is very clearly shown that the principal part of the large income was due to the personal character, energy, ability, and capacity of the husband. This share of the earnings was, of course, community property. But without capital he could not have carried on the business. In the absence of circumstances showing a different result, it is to be presumed that some of the profits were justly due to the capital invested. There is nothing to show that all of it was due to defendant's efforts alone. The probable contribution of the capital to the income should have been determined from all the circumstances of the case, and as the business was profitable it would amount at least to the usual interest on a long investment well secured. We think the court erred in refusing to increase the proportion of separate property and decrease the community property to the extent of the reasonable gain to the separate estate from the earnings properly allowable on account of the capital invested.⁵

By contrast, Van Camp v. Van Camp involved a business in which community efforts were not the predominant factor in producing the appreciation. ⁶ In Van Camp, the 54-year-old owner of the well-established Van Camp Seafood Company married a twenty-one year old postal worker. The husband continued to be employed by the business and received a substantial salary during the marriage.⁷ As described in detail in the opinion (issued in the days before no fault divorce in California), the marriage went badly.⁸ Upon divorce, the wife argued that the Pereira approach should be used.⁹ The court compared the husband's premarital earnings, and concluded that the community had already been adequately compensated for the community efforts by the husband's salary. In particular, the court stated that the husband's ". . . . personal earnings having been conclusively fixed, any excess in value of property so acquired must be accredited to the income received from rents, issues, and profits of the separate estate, rather than to the income of the joint efforts of the community."¹⁰ In other words, the separate property rather than community efforts was the predominant cause of any appreciation in the business.

Courts do not apply a bright line test in choosing between the Pereira or Van Camp formulas. However, there are some general concepts that apply. As summarized by one practice guide:

No precise standards govern the trial court's decision in choosing between Pereira or Van Camp (or, for that matter, any other equitable apportionment method). Broadly, the court should adopt whatever formula will achieve substantial justice between the parties, depending on whether the capital investment or the spouse's personal activity, ability and capacity was the chief contributing factor in the realization of income and profits . . .

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Pereira is typically applied where profits on a spouse's separate property are principally attributed to community efforts, as that formula will usually yield the greatest amount for the community.

Conversely, Van Camp is usually applied where community effort is more than minimally involved in managing a separate property asset, yet the profits are attributable primarily to natural enhancement of the underlying separate asset . . . because that formula will usually yield the greatest amount to the separate property estate.¹¹

B. Pereira and Van Camp in the Postmortem Setting

The Pereira and Van Camp decisions established that community efforts adding to the value of a separate property business resulted in community property rights relating to the business upon divorce. If the saloon-owning spouse in Pereira had died instead, could he have deprived his spouse of her community property rights by leaving the saloon to someone else? In Patrick v. Alacer Corp, the court held that those community property rights do not disappear when the marriage ends by death rather than divorce.¹²

In Patrick, the surviving spouse of a corporate founder brought an action seeking, among other things, declaratory relief regarding her community property interest in her deceased husband's corporate stock.¹³ The court analyzed the facts of the case and the factors used in determining whether to apply the Pereira or Van Camp approach, and concluded as follows:

In sum, substantial evidence showed plaintiff had a community property interest in Alacer's increased value during the marriage, and supported apportioning that community property interest. The court acted within its discretion by using Pereira to apportion Alacer's value at the date of Jay's death, using the "capitalization of excess earning" method.¹⁴

While the court applied the Pereira approach, the decision indicates that it would have used the Van Camp formula under different facts.¹⁵ Implicit in this analysis is the premise is that the Pereira/Van Camp analysis applies in the postmortem setting. In other words, if a spouse had a right to reimbursement in an asset upon divorce, the right does not evaporate upon death.

To be clear, this is a right of reimbursement, not a direct ownership interest in the underlying asset:

Plaintiff contends that her community property interest in Alacer's increased value must be satisfied with an award of Alacer stock. She asserts several supporting theories, none of which hold[s] water.¹⁶

While rejecting the surviving spouse's arguments, the Patrick court's analysis is significant because it signaled that other theories of tracing would have applied in the postmortem setting under different circumstances. The surviving spouse argued that community property had been commingled by virtue of the decedent applying community property efforts towards the business on an ongoing basis during the marriage.¹⁷ The Patrick court's response was that the Pereira/Van Camp analysis was performed after the marriage ended, and not on an ongoing basis during the marriage:

California law does not require apportionment of community efforts devoted to separate property on an ongoing basis, upon pain of transmuting that separate property into community property. Courts account for community efforts toward separate property through equitable apportionment after the marriage, not transmutation during the marriage.¹⁸

By citing to In re Marriage of Dekker, the Patrick court's reasoning was that the same paradigm applicable to community property reimbursement in marital dissolution cases was also applicable in the postmortem setting.¹⁹ In other words, the Pereira/Van Camp analysis was performed after the marriage ended, albeit by death rather than divorce in this instance.

The surviving spouse's argument that she should receive a pro tanto interest in the underlying stock was also rejected by the Patrick court, not because the claim was made in the postmortem setting, but because Pereira/Van Camp was the proper approach to determine the value of community efforts towards a separate property business:

. . . [P]laintiff contends she should receive a pro tanto interest in Alacer. She relies on case law giving the community a pro tanto interest in separate property—real property, typically—purchased, paid down, or improved with community funds. (See, e.g., In re Marriage of Moore (1980) 28 Cal.3d 366, 373-374, 168 Cal.Rptr. 662, 618 P.2d 208, In re Marriage of Sherman (2005) 133 Cal.App.4th 795, 802, 35 Cal.Rptr.3d 137; see generally In re Marriage of Marsden (1982) 130 Cal.App.3d 426, 438-440, 181 Cal.Rptr. 910.) But using the Moore/Marsden approach here would conflict with the prevailing approach used when a separate property business is improved by the devotion of community efforts—equitable apportionment using Pereira or Van Camp. (See, e.g., Dekker, supra, 17 Cal.App.4th at pp. 852-853, 21 Cal.Rptr.2d 642.) The court did not err by declining to extend the Moore/Marsden approach to this set of facts.²⁰

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Again, the Patrick court did not hold that the Moore/Marsden approach inapplicable in the postmortem setting, but rather that it was inapplicable because Pereira/Van Camp was the proper approach. Indeed, the application of Moore/Marsden in the postmortem setting was already well-established law by the time the Patrick decision was issued.

III. COMMUNITY AND SEPARATE INTERESTS IN REAL...