We've heard many husband and wife business success stories. One spouse has an amazing idea and the other supports them 100 percent by maintaining a steady paycheck. Within a few years, the business starts seeing a profit. The supporting spouse continues working at their job over the next several years, while the other manages their business. Things go well, until, of course, one spouse decides they would like a divorce.
In California, when a person is going through a divorce, he or she should expect the Court to divide all of the community property equally, unless there is an agreement to the contrary between the parties. A typical judgment of dissolution will divide property, for example, such as the family residence, the household furniture, cars, bank accounts and retirement accounts. When there is a family-owned business, in most cases the spouse operating the business will be ordered to pay the other spouse one half of the fair market value of the business.
All of this makes sense so far, right? But what if one party decides to throw a curveball into the system, demanding a non-compete or wanting a portion of the profit when the business is sold years after the divorce? Then there's the "book of business," where one spouse may not own a physical business per se, but his or her line of work includes high-earning clients who use the spouse for a specific service, such as an investment banker, doctor and other professional service trade.
In the case of Greaux and Mermin, a husband and wife started a business together. Both were equally capable of running the business, and they both made significant contributions towards growing the business. During the divorce process, the wife engaged in inappropriate conduct by attempting to sabotage the business and its clients. The trial court was aware of her actions and took them into consideration when dividing the parties' community property. Additionally, after further investigation, the court believed the husband was better qualified to run the business and awarded it to him. He had to buy out his ex-wife's share of the company, but it didn't stop there. The trial court ordered a non-compete against the wife -- and was upheld on appeal as a case of first impression, granting family law courts authority to issue non-compete orders. However, the trial court order was also reversed and the court of appeal remanded the matter back to the trial court, because the non-compete was overly broad, which would have prevented the wife to work in her profession.
I also represented a case where the couple had owned a business for 17 years. The husband was the exclusive manager, while the wife maintained her IT job over the years. During the divorce, the wife wasn't ready to let go of her share of the business just yet. She felt that the business would be worth more in the future, and wanted to maintain partial ownership of the company so that she could benefit from the profits once the business was sold. The court was reluctant to award co-ownership of a business during a divorce, especially a small, privately owned company. If the business were a publicly traded company or franchise purchased by the company, then this case may have been handled differently. We ended up settling out of court. However, during our interactions with the judge, the wife was told she would probably lose if she elected to take the matter to trial, as the court will normally award a closely held business only to one party.
In a recently published appellate court decision (In re Marriage of Finby), the Court of Appeal held that the husband had a one-half interest in his wife's transitional bonus, which was based on the wife's book of business she developed during the marriage. This case may have big implications for many people who develop books of business during a marriage, such as attorneys, accountants and talent agents.
The wife (Ms. Finby) was a highly successful advisor with a financial services firm, where she kept an impressive book of business, which consisted of a "rolodex" of high-earning clientele versus a brick-and-mortar or tangible type of business. One year prior to filing for divorce, Ms. Finby left the company and signed on with another large financial institution and was given more than a million dollars as a transitional bonus based on the previous year's production.
During the divorce proceedings, Mr. Finby argued that Ms. Finby's transitional bonus was community property and he was entitled to half of it, since it was based on Ms. Finby's book of business developed during their marriage. The Court of Appeal agreed with Mr. Finby and ordered the trial court to divide the transitional bonus among the parties.
No two divorces involving dividing up a business will be the same. My advice for a client who is seeking to take ownership of a closely held business that is mainly managed by the other spouse is to ask their attorney for a forensic accountant to review tax returns and other business related records to see potential gain, and hire a business expert to evaluate the interworking of the business to see if it is worth the fight.