CHARACTERIZATION PROBLEMS RAISED BY CERTAIN ASSETS Flashcards
What is the Pereira test?
(think personal skills and effort)
Use where spouse’s time, skill, and effort are major factors in growth of business. Look for instances where spouse contributed creative ideas or develops new techniques, and/or worked long hours and only drew modest salary.
What is the Pereira formula?
pay interest on separate property; the rest is community property (Pay interest (legal rate of 10% annum) on value of business at time of the marriage.)
H owned modest real estate business at time of marriage; worth $3 million at time of divorce. H claimed he was passive investor who got caught up in the real estate boom, but the court found that H was unusually skillful in developing raw land, supervising financing and construction, and negotiating lucrative leases of commercial properties. What test did the court apply?
the Pereira test
What is the Van Camp test?
(Think Valuable Company or Asset)
Use where capital investment was the major factor in the business’s growth, and spouse’s skills and efforts were less of a factor. Look for instances where spouse was paid substantial salary and large bonuses (meaning the community was compensated).
H owns Ford dealership at time of marriage in 1947, business grows dramatically due to increased demand for cars after WWII. What test will the court use?
The Van Camp test
What is the Van Camp formula?
Value of business-community labor and expenses and the rest is separate property
Start with value of spouse’s services at market rates (how much would executives in similar positions be compensated on the market?) MINUS family expenses paid from community funds EQUALS community component. The balance is SP.
Wendy owned a computer software company in San Jose worth $100,000 at the time of her marriage to Hal in 1986. When the couple divorce in 1996, the business is worth $4 million.
Hal contends that a substantial portion of the business is CP. He points out that because of the increased volume of business in the 1990’s, Wendy worked long hours and on weekends; they rarely took vacations; that Hal stayed home to watch their daughter; that Wendy drew a modest salary; and thus the great increase in the business was from W’s labor .
Wendy contends that the increase in value stemmed from her incredibly good fortune and timing; that only an idiot couldn’t have made a fortune when the computer and microchip business exploded in San Jose in the 1990’s; that she had hired two Cal Tech graduates whose ideas contributed to the business’s growth; and that the salary and bonuses she drew out of the business were substantial – far above the going rate for similar positions. Therefore, since the business was her SP at the time of the marriage the business is entirely her SP.
What tests are used?
The Pereira test and the Van Camp test.
Wendy owned a computer software company in San Jose worth $100,000 at the time of her marriage to Hal in 1986. When the couple divorce in 1996, the business is worth $4 million.
Hal contends that a substantial portion of the business is CP. He points out that because of the increased volume of business in the 1990’s, Wendy worked long hours and on weekends; they rarely took vacations; that Hal stayed home to watch their daughter; that Wendy drew a modest salary; and thus the great increase in the business was from W’s labor .
Wendy contends that the increase in value stemmed from her incredibly good fortune and timing; that only an idiot couldn’t have made a fortune when the computer and microchip business exploded in San Jose in the 1990’s; that she had hired two Cal Tech graduates whose ideas contributed to the business’s growth; and that the salary and bonuses she drew out of the business were substantial – far above the going rate for similar positions. Therefore, since the business was her SP at the time of the marriage the business is entirely her SP.
What is the result under the Pereira test?
if H & W had been married for ten years, W is entitled to the initial $100,000 (value of business at time of marriage) plus $100,000 in interest (10 x 10,000 (interest at 10%)). Therefore, the business is 5% her SP ($200,000/$4,000,0000) and the balance is CP.
Wendy owned a computer software company in San Jose worth $100,000 at the time of her marriage to Hal in 1986. When the couple divorce in 1996, the business is worth $4 million.
Hal contends that a substantial portion of the business is CP. He points out that because of the increased volume of business in the 1990’s, Wendy worked long hours and on weekends; they rarely took vacations; that Hal stayed home to watch their daughter; that Wendy drew a modest salary; and thus the great increase in the business was from W’s labor .
Wendy contends that the increase in value stemmed from her incredibly good fortune and timing; that only an idiot couldn’t have made a fortune when the computer and microchip business exploded in San Jose in the 1990’s; that she had hired two Cal Tech graduates whose ideas contributed to the business’s growth; and that the salary and bonuses she drew out of the business were substantial – far above the going rate for similar positions. Therefore, since the business was her SP at the time of the marriage the business is entirely her SP.
What is the result under the Van Camp test? (the market rate forexecutives in comparable positions was $100,000 and living expenses were $80,000/year)
if H&W married for 10 years, and the market rate forexecutives in comparable positions was $100,000 and living expenses were $80,000/year, the value of the community component would be $200,000. The business would be 5% CP ($200,000/$4,000,000) and the balance W’s SP.
$100,0000 x 10 years = $1,000,000 value of community labor
-( $80,000 x 10 years = - $800,000 family expenses paid from CP)
=community component: $200,000
California Supreme Court has said that court is not bound either to adopt Pereira or Van Camp. May select whichever formula will achieve substantial justice between the parties. So you must discuss ______
Both
H had worked for Shell Oil Co. for 10 years at the time he married W in 1982; the marriage ended by divorce in 1992, and H will be eligible to retire in 2002. In all of these years, H was a participant in Shell’s qualified pension plan, where the pension benefit is measured by years of service. H was not eligible for retirement at the time of the divorce action. W contends that a portion of the pension benefit is CP. Is she right?
Yes, Employee retirement benefits accumulated during marriage, whether or not vested at the time of divorce, are community property.
For pension benefits at divorce what formula do you use?
The proration formula
Years in service while married/total years employed to retiring
H had worked for Shell Oil Co. for 10 years at the time he married W in 1982; the marriage ended by divorce in 1992, and H will be eligible to retire in 2002. In all of these years, H was a participant in Shell’s qualified pension plan, where the pension benefit is measured by years of service. H was not eligible for retirement at the time of the divorce action.
Do the math
10/30= a 1/3 of the pension will be community property.
H had worked for Shell Oil Co. for 10 years at the time he married W in 1982; the marriage ended by divorce in 1992, and H will be eligible to retire in 2002. In all of these years, H was a participant in Shell’s qualified pension plan, where the pension benefit is measured by years of service. H was not eligible for retirement at the time of the divorce action.
Given that H is not yet eligible for retirement, in awarding W a share of the benefit, what form should the decree take, what are the 2 options?
- “if and when received decree”- if and when received, she gets her share (1/6, which is half of 1/3 CP share).
- “cash her out”- by awarding other assets of equal value.
H had worked for Shell Oil Co. for 10 years at the time he married W in 1982; the marriage ended by divorce in 1992. In all of these years, H was a participant in Shell’s qualified pension plan, where the pension benefit is measured by years of service. H was eligible for retirement at the time of the divorce action. W seeks payment of her community share of H’s pension benefit even though H has not retired. Is she entitled? Why or why not?
How much of the retirement plan is she entitled to?
Yes, Since H could have retired at the time of the divorce, his retirement benefit had matured. H’s election not to retire cannot defeat wife’s present right.
She is entitled to 1/6 (1/2 of the 1/3 in the pension plan that is community property)
If a nonparticipant spouse (“NPS”) in a qualified pension plan divorces a participant spouse, her community property interest is recognized; under what law?
Federal law
If a nonparticipant spouse (“NPS”) in a qualified pension plan divorces a participant spouse, her community property interest is recognized; under under federal law she can get a what? For what purpose?
qualified domestic relations order (“QDRO”) and receive payments from the plan.
What if the marriage ended by death rather than divorce. Does the nonparticipant spouse (NPS) have a devisable interest in a qualified plan if she predeceases the participant? Why or why not?
No, There is federal preemption under the Employment Retirement Income Security Act (“ERISA”), which trumps CP laws. Her interest is terminated when she predeceased the participant.
Disability retirement benefits and workers’ compensation benefits are treated as what? At what point are they classified?
Wage replacement, When they are received, not when they are earned.
H had worked for 10 years before marriage, 10 years during marriage, but H was also covered by Shell’s disability insurance program. Shortly before the divorce, H suffers an on-the-job injury and is given disability retirement; under the Shell plan H received disability pension of $900/month. Also, H is awarded a workers’ compensation benefit of $150/week. W claims a community interest in the disability and workers’ compensation benefits, arguing that these benefits were derived from H’s labor, and should be treated the same as pension benefits. Is W right? Why or why not?
No, Disability retirement benefits and workers’ compensation benefits are treated as wage replacement. Therefore they are treated as wages, anything after the permanent separation or divorce would be SP.
H had worked for 10 years before marriage, 10 years during marriage, but H was also covered by Shell’s disability insurance program. Shortly before the divorce, H suffers an on-the-job injury and is given disability retirement; under the plan H could elect to take, at his option, either a regular retirement benefit at $1,200/month or disability retirement at $900/month; H chooses disability retirement. Does W have CP interest in H’s retirement benefit?
Yes, H cannot elect go defeat her community interest.
How do courts treat severance pay?
There is a split.
H’s severance pay is SP because it replaced lost earnings which after a divorce or permanent separation would be H’s SP; OR
H’s severance pay is CP because it arose from a collective bargaining agreement and was thus earned by employment during marriage.
If a stock option is awarded during marriage but does not vest until after the economic community has ended how is it distributed?
the proration formula that is used in determining what portion of the option is CP and what portion is SP depends on the primary intent of the employer in granting the option.
Hank, married to Wynn, was employed by the Ajax Company on June 10, 1998. OnJune 10, 2004, Ajax Company granted Hank a stock option entitling him to purchase 5,000 shares of Ajax common stock if he is still employed by the company on June 10, 2008. Hank and Wynn are divorced in 2006; the economic community ended when Hank and Wynn permanently separated (with an intent not to resume the marital relation) on June 10, 2006. The divorce court determines that the stock options were awarded primarily to reward Hank for his past services, as a form of deferred compensation. The court should employ what method?
the Marriage of Hug proration formula
