In Depth Analysis of Pereira/Van Camp

By: Karen J. Kaseno, C.P.A.,
Brinig & Company, Inc.

I. Family Code Presumptions Relating to Pereira/Van Camp

II. Pereira Apportionment of Community and Separate Property Interest

1. Pereira method assumes participant spouse's personal time, effort, character, energy, ability and capacity caused an increase in the value of the business during marriage.
   
2. Earnings attributable to personal efforts of spouse during marriage are community property.
   
3. The Pereira method is applied as follows:

1. Step One

a.   Determine value at date of marriage.
b.  If acquired during marriage by gift or with separate property funds, determine value at time of acquisition.

2. Step Two

a. Determine value at date of separation or at alternative valuation date, if appropriate.

3. Step Three

a. Apply a rate of return (at least the usual interest on a long-term investment well secured) to the investment of the separate property at the date of marriage (later, if acquired by gift or separate funds).

4. Step Four

a. Calculate the community interest by subtracting step 3 from step 4.

D. Additional issues:

1. What rate of return should be used?

a. The trial court in Pereira stated that "as the business was profitable it would amount least to the usual interest on a long investment well secured."

b. Should the rate be compounded or simple interest?

i. Code of Civil Procedure §685.010 defines legal interest as simple interest.

ii. Marriage of Folb trial court awarded husband a rate of return without compounding. The Court of Appeals affirmed, stating such treatment (compounding) would substantially diminish the interest of the community. "Substantial justice" would not have been achieved by such a result.

III. Van Camp Apportionment of Community and Separate Property Interest

A. Determines if community has been adequately compensated for the personal efforts of spouse. Focuses on the adequacy of compensation paid to spouse from separate property business.

B. Compares owner's compensation to a standard or reasonable compensation of others in a similar business.

C. In general, the difference between the owner's actual salary over a given period of time vs. a reasonable/adequate compensation for a business owner/manager in a similar business over the same period of time is the community's interest.

D. What is compensation?

1. In Harrold v. Harrold, the trial court adopted husband's salary as value of community property. Wife objected, stating the amount was too low and asked for a Pereira-type calculation. The Court of Appeals disagreed with wife and affirmed the trial court. The Court of Appeals stated "no fixed rule can be laid down which would be equitable in all cases."

E. Living expenses

1. When using the Van Camp method, community living expenses must be deducted from community income to determine community interest.

2. The Van Camp court stated:

"In the absence of any evidence showing a different practice,. . .the rule is that the community earnings of husband and wife are chargeable with the family support. Hence any amounts of money expended for such purpose by either spouse during the existence of the marital relation are presumed to have been paid out of the community estate."

3. In Gilmore v. Gilmore, the trial court found Husband's salary was sufficient for his services and that all salaries were expended for community purposes during marriage. Wife appealed and the Supreme Court affirmed, stating husband was seldom at the business and his salary was a proper measure of the community's interest in the earnings of the business. In this case, the Court applied the Van Camp method, concluding "Pereira is to be applied only in the absence of circumstances showing different results. . ."

IV. Other Apportionment Issues

A. Post-separation change in value

1. Change in value after separation due to efforts of operating spouse must be apportioned.

2. Applies to either a community property business or a community interest in a separate property business.

3. Apportionment methods would be Pereira or Van Camp in reverse.

B. Selection of method - Pereira or Van Camp

1. The court has wide discretion. Apportionment between separate and community interests in separate property business may be made using whichever formula will achieve substantial justice.

a. The Beam court stated:

"In making such apportionment between separate and community property our courts have developed no precise criterion or fixed standard, but have endeavored to adopt that yardstick which is most appropriate and equitable in a particular situation. . .depending on whether the character of the capital investment in the separate property or the personal activity, ability, and capacity of the spouse is the chief contributing factor in the realization of income and profits [citations]. . .[Par.]In applying this principle of apportionment the court is not bound either to adopt a predetermined percentage as a fair return on business capital which is separate property [the Pereira approach] nor need it limit the community interest only to [a] salary fixed as the reward for a spouse's service [the Van Camp method] but may select [whichever] formula will achieve substantial justice between the parties."

2. Criteria for selecting Pereira or Van Camp per Dekker

a. Usually, the Pereira formula is used if community effort is primary contributor to value increase.

b. The Van Camp formula is used if separate investment is primary contributor. The court may select formula which will achieve substantial justice.

3. The court must allocate profits of separate property business between separate and community.

4. In Tassi v. Tassi, the trial court used the Van Camp method to determine husband's reasonable value of services. The court cited a large increase in profits due to pressures from World War II and the Korean War and not chiefly attributable to the husband's personal efforts, etc.

C. Equitable apportionment

1. Marriage of Zaentz provided the doctrine of "equitable apportionment." Award of $600,000 to community to compensate for Husband's efforts which benefitted his separate property stock affirmed.

2. Attorneys BreifCase describes the Zaentz case as follows:

"FACTS: In 1977, H formed movie production company (SZC), of which he owned 40 % of stock. H then assigned 34.5 % of stock to trusts of which he was a designated beneficiary. H and W married in 1978. SZC was in poor financial condition. In 1982, H entered into K to make movie ‘Amadeus.’ H was guaranteed a fee of $300,000 for producing, $213,000 of which was actually earned during his marriage. SZC was entitled to 1/3 of profits. Movie was financed in part by hypothecating H's c/p and s/p assets. When H and W separated, filming was completed and post-production work was in progress. Film was very successful.

"H argued W had no claim to any of profits as his share inured to SZC. Trial ct. held that community was entitled to remuneration, over and above $300,000, for H's production duties and financing contribution in amount of $600,000, and awarded W one-half.

"Trial ct. found H's net worth increased $2 million during marriage. H appealed, and Court of Appeals affirmed. Although trial ct. did not specify how it arrived at $600,000 figure, there was substantial evidence on which calculation could have been made. H argued that his only compensation was producer's fee; that profits were property of SZC; and that court could not rewrite K to make SZC share with him. H also argued adequacy of his compensation was at issue only if his s/p increased in value as result of his efforts, an issue which trial court did not resolve.

"Appellate ct. held that substantial evidence supported judgement. Decision could be affirmed based upon discretion of court to achieve equity or ‘doctrine of equitable apportionment in connection with the increased value of his separate property stock interest.’ (Id. at 267 Cal.Rptr. 31, 38) Although appellate ct. reviewed both Pereira and Van Camp lines of authority, it affirmed despite trial court's having made no findings to support either approach."

D. Apportionment of account receivable

1. Character of accounts receivable determined by when earned.