Court Opinion

ID: 857039
Source: CourtListenerOpinion
Date Created: 2013-04-02 20:47:10.849659+00
Date Added: 2024-06-11T12:59:57.638168
License: Public Domain

Filed 4/2/13 Marriage of Charles CA4/3

                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                DIVISION THREE

In re Marriage of ROGER C. CHARLES
and DEBORAH C. CHARLES.

ROGER C. CHARLES,
                                                                       G046813
     Appellant,
                                                                       (Super. Ct. No. 06D008136)
         v.
                                                                       OPINION
DEBORAH C. CHARLES,

     Respondent.

                   Appeal from a judgment of the Superior Court of Orange County, James L.
Waltz, Judge. Affirmed.
                   Patrick L. McCrary for Appellant.
                   Snell & Wilmer, Richard A. Derevan and Todd E. Lundell for Respondent.
                                          *                  *                  *
              The subtext of this date-of-valuation-of-a-community-business case
illustrates a lesson for family law practitioners in how a strategy can backfire. Often, the
spouse who doesn’t manage a community business – the “nonoperating” spouse – worries
about the dissipation of the business’s assets in the period between the date of separation
and the date of trial. Accordingly, it is often the nonoperating spouse who brings a
motion to value the business as of the date of separation, not the date of trial. (See
Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2012) ¶ 8:1383,
p. 8-330.2.) By contrast – at least in the typical dissipation scenario – operating spouses
have no incentive to value a community business as of the date of separation. Time is on
their side as value slip slides away.
              In the present case, in line with the habitude of community businesses to
decline in value in the post-separation period, the operating spouse sat back during the
four-year period between the date of separation and the looming trial date, confident the
community share of the business (a two-man design partnership) would be valued at a
figure less than its value as of the date of separation. After all, the CPA firm jointly hired
to value the business had, in 2009 – about a year and a half before trial in 2011 – valued
the community’s share at $198,000. The $198,000 figure was comfortably less than the
$226,000 figure at which the same accountants had valued the community share at the
2006 date of separation.
              But then the operating spouse got a nasty shock. In the fall of 2010, the
same CPA firm revised its estimate of current value dramatically upwards to $716,000.
              The bad news apparently galvanized the operating spouse into action. He
retained new counsel, and the first thing the new lawyer did was to bring a motion under
Family Code section 2552, subdivision (b) to value the business as of the date of

                                              2
separation.1 But by that time all discovery had been completed, and the motion itself
could not be heard until about a week before trial was to begin.
                 The motion was, in short, too late. The trial court denied it as clearly
untimely. The trial court was well within its discretion in doing so, and we accordingly
affirm the judgment.
                                              BACKGROUND
                 Ironically enough, the fact that drives this appeal does not feature
prominently in the briefing. It is this: Roger and Deborah Charles separated in May
2006, yet more than five years would pass until trial would begin on August 22, 2011.
                 The story of those five years can be told briefly. Roger filed a petition for
dissolution on September 12, 2006. The couple’s marital status was dissolved in less
than nine months, in May 2007. About a month after that they jointly retained
Duckworth & Mehner, CPA’s, as forensic accountants to value their community interest
in Genesis Associates, which is an interior design firm half owned by Roger and half
owned by Roger’s partner Greg Shubin. In April 2009, Roger had a conversation with
Glenn Mehner of Duckworth & Mehner, the gravamen of which was that Genesis
Associates was in deep trouble, and was projecting a $100,000 loss for first quarter 2009.
Based on Roger’s alarms, the next month Duckworth & Mehner opined the community
half of the firm to be worth $198,000, which compared unfavorably with their earlier
valuation for the end of 2006 (the date closest to the date of separation) of $226,000.
                 The $198,000 valuation, however, did not survive. 2009 was a good year
for Genesis Associates. The firm had gross revenues of about $2.4 million, and a profit
before officers’ compensation of $1.3 million. Duckworth & Mehner, in a report dated
October 22, 2010, valued the community share in Genesis Associates at $716,000.

         1        All further statutory references are to the Family Code unless otherwise stated. As is common in
family law cases, we refer to the parties by their first names.

                                                         3
                   The timing of the revised Duckworth & Mehner report was certainly not
convenient for Roger. Just the month prior, on September 29, 2010, Deborah had filed an
at-issue memorandum requesting the case be set for trial. Her memorandum checked the
box declaring that “all discovery has been completed.” The memorandum, in turn,
generated a notice of trial setting conference sent out in mid-October, setting November
19, 2010 as the date for a trial setting conference.
                   Roger found himself new counsel, who substituted into the case on
December 2, 2010. The first act of new counsel was to file, six days after substituting in,
a motion to value the community’s interest in Genesis Associates at the date of
separation. But by this time a trial date had been set for mid-February (the exact date is
not in the record furnished us by appellant Roger), and the motion could not be heard
until February 4, 2011. Deborah’s opposition pointed out that motions to value assets of
the date of separation must be heard by the time of the trial setting conference,2 hence the
motion was untimely. The trial judge agreed. He was clearly unimpressed by the
tardiness motion. Addressing Roger’s new counsel, the court began: “We have a trial,
days ahead, and you filed a motion for a bifurcated proceeding, arguing date of valuation
just short of trial, what is up with that?” Needless to say the motion was soon denied.
                   Trial was continued a couple of times to August. In the interim, the other
shoe dropped on the valuation issue when Deborah filed a motion in limine to preclude
Roger from presenting evidence of the value of Genesis Associates at the date of
separation. The motion was granted – a logical consequence of the court’s denial of
Roger’s earlier motion. The case was tried in late August 2011.

          2         Former California Rules of Court, rule 5.175(a) provided, in 2011, that “On noticed motion of a
party, the stipulation of the parties, or on its own motion, the court may bifurcate one or more issues to be tried
separately before other issues are tried. The motion must be heard not later than the trial-setting conference.”
(Italics added.)
                    Effective just this year (January 1, 2013), rule 5.175 (along with its sister rule 5.126 [prescribing
the form for application]) were replaced by new rule 5.390. New rule 5.390 contains no language requiring the
motion be heard by the trial setting conference.

                                                            4
                 Judge Waltz’s statement of decision was extremely thorough and cogent.3
The court noted the main difference in the valuation of the competing experts4 was the
calculation of goodwill, which in turn depended on how much “‘reasonable
compensation’” was to be attributed to Roger. Ironically, the higher the reasonable
compensation, the lower the goodwill. That is, the more income of the business is
attributable to the operating spouse, the less an investor wants to pay to buy the business
and replace the operating spouse.
                 The original jointly retained expert, Glenn Mehner, posited a figure of
$875,000 a year for reasonable compensation. By contrast, Roger’s expert Warsavsky
opined the correct figure was $1.342 million. And Deborah’s expert Turk said it was
$649,000.
                 Ultimately, the judge thought Dr. Turk’s figure the most persuasive, partly
because his credentials were “over-the-top impressive,” and mostly because his analysis
was based on Risk Management Association studies which provided a better comparison
sample of firms in terms of asset size and sales. By contrast, Warsavsky used Economic
Research Institute data, which did not provide Warsavsky with any information showing
how closely sample data matched his own criteria.
                 Finding reasonable compensation at $649,000 and applying a multiplier of
2 to gauge risk (the judge noted gross revenues had held steady at no less than $2.3
million a year from 2006 to 2010),5 the court found a goodwill value of about $1.45
million for the entire firm. When combined with fixed assets of some $190,000 and

         3        With plenty of footnotes and asides showing the judge was paying keen attention to the
proceedings. (See Reichert v. State Farm General Insurance Company (2012) 212 Cal.App.4th 1543, 1545 [“This
was no phoned-in minute order.”].)
                  For example, the court observed in footnote 8 that Roger had ceased paying the Duckworth firm,
which itself “substantially interfered with their on-going work.”
         4        Deborah employed Chapman University economist Thomas Turk, while Roger had hired CPA
Alfred Warsavsky after ceasing to pay Duckworth & Mehner.
         5        A multiplier of 1 represents the highest level of risk; the higher the multiplier the lower the
perceived risk.

                                                        5
another $190,000 in owners’ equity, the total value of the firm was ascertained at about
$1.8 million, which translated into $918,000 as the community interest.
                  In terms of cash flow for purposes of support, the court fixed Roger’s
income at $51,530 a month, which pencils out to $618,360 a year. Ironically, the
$51,530 figure came directly from Roger’s own expert Warsavsky, who recognized the
$51,530 per month figure reflected the situation of July 31, 2011, i.e., as close to trial as
possible.
                  Warsavsky, however, had also projected a lower figure, $41,612, would
prevail for 2011 as a whole. The trial judge rejected that projection. Warsavsky’s
projection was based on data given him from Genesis Associate’s controller, and neither
the controller nor Roger’s partner were called to corroborate the projection.
                                                 DISCUSSION
A. Valuation Date
                  Roger’s main point, framed in two permutations,6 is that the trial court had
no choice but to either value Genesis Associates at the date of separation or, if it was
going to value it at the date of trial, reduce the value by some factor which would account
for the value of Roger’s post-separation efforts. (Cf. In re Marriage of Imperato (1975)
45 Cal.App.3d 432, 439 [“Here, we have community property acquired during the
marriage, and, if the facts justify apportionment we seek to allocate increases of the
community property occurring after separation into separate property.”].)
                  The argument fails because it ignores the standard of review. The
applicable standard of review is abuse of discretion, not legal error.
                  After the Imperato decision in 1975, the Legislature amended then Civil
Code section 4800 to provide for a basic “shall-may” model for valuation dates of

         6        As he frames them in his brief: (1) Whether the trial court “erred” when it denied his motion for a
date-of-separation valuation date; and (2) whether the trial court “erred” in determining that Genesis Associates
should be valued as of the date of trial without apportionment to account for the value of Roger’s post-separation
efforts.

                                                          6
community property. (See In re Marriage of Barnert (1978) 85 Cal.App.3d 413, 423
[“The California Legislature enacted an amendment to Civil Code section 4800,
subdivision (a), effective in 1976 which states that ‘. . . the court shall value the assets
and liabilities as near as practicable at the time of trial, except that, upon 30 days’ notice
by the moving party to the other party, the court for good cause shown may value all or
any portion of the assets and liabilities at a date after separation and prior to trial to
accomplish an equal division of the community property and the quasi-community
property of the parties in an equitable manner.’”].)
                  Under the basic “shall-may” model, it is presumed assets will be valued as
of the date of trial – “shall” – but the trial court retains the option – “may” – if there is
good cause, of switching to valuation as of the date of separation. The shall-may
language is retained to this day in the text of Family Code section 2552 subdivisions (a)
[“shall” value at date of trial] and (b) [“may” value at date of separation].)7
                  That means the standard of review used to evaluate the trial court’s decision
to deny Roger’s motion is abuse of discretion; the key word is “may.” Roger thus errs
when he frames his argument in terms of whether the trial court erred. The precise issue
before us is whether the trial court abused its discretion in refusing to switch the normal
default setting of valuation of date of trial to the optional date of separation. In other
words, the dispositive question, like all questions tested under an abuse of discretion
standard, was whether the trial court acted reasonably. (See In re Marriage of Barth
(2012) 210 Cal.App.4th 363, 374 [“An abuse of discretion is only demonstrated when no
reasonable judge could have made the challenged order.”].)

         7         Here is the text of both subdivisions:
                   “(a) For the purpose of division of the community estate upon dissolution of marriage or legal
separation of the parties, except as provided in subdivision (b), the court shall value the assets and liabilities as near
as practicable to the time of trial.
                   “(b) Upon 30 days’ notice by the moving party to the other party, the court for good cause shown
may value all or any portion of the assets and liabilities at a date after separation and before trial to accomplish an
equal division of the community estate of the parties in an equitable manner.” (Italics added.)

                                                            7
                  And of course by that standard it is an easy call. Roger brought his motion
too late, at a point when discovery had already been completed, and when considerable
discovery would have been necessary to test the issue of a date of separation valuation.
Prejudice to Deborah alone, even if the motion was not formally untimely, made the
decision to deny eminently reasonable. As Deborah’s respondent’s brief notes, at the
very least Deborah would have needed a court order to redepose Roger, and she would
have needed to take the depositions of Roger’s partner Greg Shubin and 10 or more other
employees of Genesis Associates who might be somewhat less inclined to ascribe the
entirety of the business’s recent success just to Roger’s efforts. And that doesn’t include
the extra work the forensic accountants would need to do to reconstruct the business
environment in which Genesis Associates operated five years earlier in May 2006.
                  The trial judge’s decision can also be justified independently by the need to
deter operating spouses from gamesmanship in the control of community businesses.
Roger was content to let more than four years go by (from May 2006 to December 2010)
without making a motion to value at the date of separation. The trial judge could
reasonably infer that if Roger was serious about his contention Genesis Associates was
fundamentally a two-man show (or maybe even a one-man show8), he could easily have
brought his motion to value as of the date of separation sometime in 2007, or 2008, or
maybe even 2009. The earlier he might have done so, the more credible his assertion that
the post-2006 Genesis Associates success was entirely the product of his separate efforts.
In effect, he would have said to the court, at a date early enough to mean it, “Hey, I’m
willing to take responsibility for the growth in value of Genesis Associates, and to prove
it, I’ll accept the value as of the date of separation, which can’t be manipulated by what I

          8        Roger didn’t help his case by having a glowing website which emphasizes the institutional
stability of Genesis Associates (as distinct from the company simply being a manifestation of his own artistic
vision). The trial judge himself asked several questions about the website, and Roger had to back off from some of
the statements on it. E.g., “Q. [by the court]: Your point is, a lot of information on this website is not accurate. [¶]
A. [by Roger] Boy, is that true. . . . [¶] Q. You can understand and appreciate that I look at it as representing you,
your credentials and how you hold your company out to the public. [¶] A. As well you should.”

                                                           8
do now.” By waiting so long, Roger only confirmed what is pretty obvious from this
record, namely, that he thought the value of Genesis Associates would decline from its
date of separation value.
              The trial court thus did not abuse its discretion in denying Roger’s motion
and likewise did not abuse its discretion in granting Deborah’s in limine motion, which
was only the logical outcome of the earlier denial.
B. Other Issues
              Roger presents three other arguments of an evidentiary character:
              1. Warsavsky’s Projection
              First, Roger complains that the court “improperly discounted” Warsavsky’s
projection that 2011 would not be as good a year as it had been up to July 31 – because
the projection was not directly corroborated by testimony from either the company’s
controller or Roger’s business partner. Roger’s theory is that since Evidence Code
section 801 allows an expert to testify to hearsay made available to him prior to the
hearing, somehow it was error not to blindly accept Warsavsky’s opinion.
              This argument fails because the trial court was merely comparing among
experts, deciding who was the most credible and whose methodology the most reliable.
The court was not excluding Warsavsky’s opinion because of some supposed lack of in-
court corroboration. The statement of decision is very clear the court allowed
Warsavsky’s opinions into evidence, but simply found Turk’s figures more compelling.
That was a perfectly reasonable choice given that Warsavsky’s figure was based on
projections, not actual data, and therefore cried out for more backup. (See Evid. Code,
§ 412 [“If weaker and less satisfactory evidence is offered when it was within the power
of the party to produce stronger and more satisfactory evidence, the evidence offered
should be viewed with distrust.”].) Indeed, it has long been established that triers of fact
choose which of several experts is the more persuasive. (Liberty Mut. Ins. Co. v.
Industrial Acc. Com. (1948) 33 Cal.2d 89, 94 [“The trier of fact may accept the evidence

                                              9
of any one expert or choose a figure between them based on all of the evidence.”]; Biren
v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 139 [“The trial
court decides the credibility of experts.”].)
                 2. Turk’s Supposedly Outdated Data
                 Next, Roger raises the argument the trial court necessarily had to reject
Turk’s valuation because Turk supposedly relied on “outdated data.” The “outdated
data” to which he refers is the fact that Genesis Associates had an extraordinarily good
year in 2010, but (at least according to Roger) experienced reduced income in 2011.9
Roger goes so far as to assert that because Turk did not exclude data from 2010 (but did
exclude data from 2011), there was a lack of substantial evidence for Turk’s valuation
figure.
                 This argument fails, as it applies to the year 2010, because both Turk and
Mehner averaged income for the years 2006 through and including 2010, obtaining a
properly representative longitudinal sample. (See In re Marriage of Riddle (2005) 125
Cal.App.4th 1075, 1082 [“the time period on which income is calculated must be long
enough to be representative, as distinct from extraordinary”]; In re Marriage of Rosen
(2002) 105 Cal.App.4th 808, 820 [commending averaging over representative period of
time].)
                 And the argument fails as it applies to the year 2011, because the trial judge
was reasonable to rely on experts who did not take 2011 into consideration. Most
obviously, trial took place in August 2011, in the middle of the third quarter, so any
decline in 2011 would at best been a projection from data gathered in the first two
quarters. The year was still subject to manipulation and uncertainty. On top of that, the
trial judge could properly be skeptical of any such projection given Roger’s track record.
The judge heard testimony from which he could draw the conclusion that Roger in fact

         9        The statement of decision itself notes that 2010 gross revenue was $3.675 million when the figures
for 2006 to 2009 all ranged from a low of $2.326 million (in 2006) to $2.618 million (in 2008).

                                                        10
misled expert Mehner about the company’s health in 2009. The sky was falling in the
first quarter of 2009, or so Roger told Mehner. If Roger could play Chicken Little in
2009, he could revisit the role in 2011.
                  And in any event, given the need for long-term averaging, any arguable
error in not according to 2011 the status of somehow representing a “new normal” was
harmless. The projection for 2011 was actually in line with some of Genesis Associates’
better years.10
                  3. Roger’s Monthly Income
                  The final argument raised by Roger involves the projection for the balance
of 2011. Roger argues Warsavsky’s projection of reduced income for 2011 had to be
determinative. We have already dealt with this point above, noting that the trial court
was reasonable to prefer hard historical data to the chimera of projection.
                  Moreover, any arguable error is both invited and harmless. It is invited
because the $51,530 per month figure came from Warsavsky’s own opinion of Roger’s
cash flow as of July 31, 2011, which was as close to the date of trial as possible. It is
harmless because the $51,530 a month figure arrived at by the court works out to less
than half of what Roger’s own expert Warsavsky testified was Roger’s reasonable
compensation of $1.343 million for purposes of good will. Had the trial court decided
Roger should be paid what his own expert Warsavsky thought he was worth to the
company in terms of reasonable compensation, his income for support purposes would be
more than twice what the trial court determined. As another panel of this court aptly put
it in Barth, supra, 210 Cal.App.4th at page 365, “‘be careful what you wish for.’” In this
case, Roger is lucky he didn’t get it, or he really would have something to complain about
by way of greatly increased child and spousal support orders. As it was, he got off easy:

         10      In point of fact, the statement of decision noted that the projection from the first two quarters of
2011 would have yielded a gross of $2.571 million for the year, which was higher and 2006, 2007, and 2009, but a
tad lower than 2008 ($2.618 million).

                                                          11
The amount of income fixed by the trial court was even lower than the lowest ($649,000)
reasonable compensation figure proffered by any of the experts.
                                    DISPOSITION
             The judgment is affirmed. Deborah will recover her costs on appeal.

                                                BEDSWORTH, J.

WE CONCUR:

O’LEARY, P. J.

RYLAARSDAM, J.

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