Business Valuations and IRMO Finby- Orange County Divorce Information

A “Book of Business” is Community Property if Acquired During Marriage; Bonus Income Received After Separation may be Community Property; and a Contingent Deferred Recruitment Bonus is not Community Property

In the recent case of In re Marriage of Finby (CA 4/3- Opinion filed December 18, 2013), the Court of Appeal handled various issues involving the division of community property and income and issued some interesting verdicts that may hold some relevance to your divorce case, particularly if one of the spouse’s is self-employed or has any kind of job that may hold some kind of extrinsic value to the employee-spouse.

In Finby, the parties married in 1995 and separated in February 2010.  Before January 2009, wife worked as a financial advisor for UBS and built up a “book of business.”  In 2009, Wife accepted an offer from Wells Fargo to work as its managing director of investments.  She was offered a “transitional bonus” of $2.8M (equal to a portion of her expected fee production from the “book of business” she brought with her to Wells Fargo.)  However, wife was only eligible to receive the bonus if she remained employed by WF for 112 months and maintained a certain level of production.  WF also agreed to pay her a deferred recruitment bonus if she was still an employee 6 years later.  Wife took the entire transitional bonus immediately, which was structured as a loan that would be forgiven in monthly installments of $27,687 over 112 months.  WF credited wife with this same amount of income each month on her pay voucher.  Further, wife was eligible for two production bonuses, both of which she took as loans payable over time in the same manner as the transitional bonus.

Wife’s expert testified that the “time rule” should apply to the transitional bonus and accompanying loans.  He said that the character of the bonus/loans were “mixed” and that there was a 13.5% community interest.  He also said the other bonuses were separate property.  Wife’s second expert described the transitional bonus as a “kind of pay for the book of business being brought over” that was calculated as a multiple of the value of Wife’s production credits and the expectation that she would stay with the firm for 9 or 10 years. This expert said the production bonus was “performance-based” incentive for the “consultant to work extremely diligently in bringing their book over, as well as to continue to seek new business and continue to be successful . . . .”

Husband’s first expert, a Certified Family Law Specialist, testified that the book of business was entirely community property and was the consideration for the entire employment package.

The trial court found that the book of business had no value and concluded the husband did not have any interest in it.  The trial court said that although Wife’s high salary was based on the value of her book of business, the husband’s assistance in helping wife transfer her book to WF did not give him an interest in the book of business, and further, the book of business “cannot be transferred to another party for a price.”  As to the other bonuses, the court ruled that only a portion of the transitional bonus earned during the first 11 months of wife’s employment with WF was community property because it was received before separation, and the other bonuses were separate entirely they were not paid or due until after the parties’ date of separation.

The husband appealed and the Court of Appeal reversed the decision.

The Court of Appeal agreed with the husband’s argument that wife’s book of business was an “asset” that could be valued “even if there is no market for it,” and the book of business did in fact have a value because the wife actually sold it to Wells Fargo. The Court said that the wife’s status and ability to induce clients to go with her to WF is similar to goodwill found in businesses, which can be valued and characterized.

The Business and Professions Code section 14100 declares, “[t]he ‘good will’ of a business is the expectation of continued public patronage.” “[I]t is well established that the goodwill of a . . . professional practice as a sole practitioner created during marriage constitutes a divisible asset of the community in an action for dissolution of marriage. (Irmo Foster (1974) 42 Cal.App.3d 577, 582; see also Irmo Watts (1985) 171 Cal.App.3d 366, 372.) “‘[W]here the issue is raised in a marital dissolution action, the trial court must make a specific finding as to the existence and value of the “goodwill” of a professional business as a going concern'” even if it involves the business “‘of a sole practitioner . . . .'” (Irmo Fenton (1982) 134 Cal.App.3d 451, 460.) As for the nature of a client list, in Dairy Dale Co. v. Azevedo (1931) 211 Cal. 344, the Supreme Court recognized “[i]t is settled in this state that the names, addresses and requirements of an employer’s customers . . . constitute part of the goodwill of the business . . . .” (Id. at p. 345.)

This was a case “of first impression” by the Court of Appeal.  Never before had the Court ruled that a licensed professional’s list of clients is an asset subject to division in a divorce case.  The Court distinguished McTiernan because in that case the trial court had assigned a goodwill value simply on a movie director’s reputation.

With regard to the deferred bonuses, the Court concluded those two additional amounts were mere expectancies and thus not subject to division.