Opinion
G044793
01-17-2012
In re Marriage of FERNANDA and KEVIN KROFT. FERNANDA KROFT, Appellant, v. KEVIN KROFT, Respondent.
Charles G. Kinney for Appellant. Dawn E. Wardlaw and Craig A. Darling for Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Super. Ct. No. 05D002113)
OPINION
Appeal from a judgment of the Superior Court of Orange County, Michael J. Naughton, Judge. Affirmed.
Charles G. Kinney for Appellant.
Dawn E. Wardlaw and Craig A. Darling for Respondent.
Kevin and Fernanda Kroft were married in 2002 and separated in February 2005. In 2009, this court considered Fernanda's appeal following the trial court's denial of her request for temporary spousal support. We concluded the trial court did not abuse its discretion or rely on inappropriate factors. (In re Marriage of Kroft (Dec. 29, 2009, G041233) [nonpub. opn.].) We now consider Fernanda's appeal asserting the trial court abused its discretion in failing to recognize some or all of Kevin's wages and investment dividends received in 2005 were community property. Finding her arguments lack merit, we affirm the judgment.
We will refer to the parties by their first names for the sake of clarity. No disrespect is intended. (In re Marriage of Smith (1990) 225 Cal.App.3d 469, 475-476.)
I
The following facts are taken from our prior opinion: After meeting and dating for a little over five months, Fernanda and Kevin married. They separated two years and a few months later. They dispute the actual date of separation, but this fact is not relevant to the issues raised on appeal. Suffice it to say, the marriage ended sometime during February 2005.
Kevin is an accountant. He was unemployed for the first 11 months of the marriage, so the couple paid their living expenses from Kevin's separate property assets. They lived in Kevin's Laguna Beach residence, paying the mortgage with Kevin's separate property assets.
In 2003, Kevin was hired and began earning approximately $85,000 to $100,000 per year. By the time of separation in February 2005, he was earning $225,000 per year plus an automobile allowance of $900 per month. Fernanda worked during the marriage, but her earning capacity as a fitness instructor was much less.
During the marriage, the couple purchased a Lexus automobile with money from Kevin's separate property bank account. They also purchased a Volkswagen. After their separation, Fernanda kept the Lexus, and Kevin kept the Volkswagen.
On April 22, 2005, Kevin filed a marital dissolution action. Within a week, Fernanda filed an Order to Show Cause (OSC), requesting Kevin pay her spousal support and fees. Thereafter the court granted Kevin's motion to amend his response, stating he wanted to nullify the marriage based on fraud. His motion was granted, and he filed an amended response. Fernanda's OSC regarding support was taken off calendar. In October 2007, the court considered Kevin's nullification issue and determined the marriage was valid.
In March 2008, Kevin lost his job. He began collecting unemployment benefits. Fernanda filed another request for spousal support and fees. After considering the parties' income and expense declarations and testimony, the court denied the request for support for three reasons: (1) Fernanda's testimony was not credible; (2) she was now cohabitating in a same-sex relationship with her employer who was supporting her; and (3) she had waited three years and eight months before seriously pursing spousal support. As mentioned above, we affirmed the trial court's ruling. (In re Marriage of Kroft, supra, G041233.)
The trial on the reserved issues took place in early October 2010. The court heard testimony from the parties as well as their respective accountants. After considering oral argument and the trial briefs, the court issued its judgment in December 2010.
First, the judgment stated what the parties had agreed on regarding certain life insurance policies and retirement accounts. They were deemed to be Kevin's sole and separate property and the total amount of community property interest in them was $36,418.70. Second, the court set forth its findings: (1) Fernanda's request for spousal support was denied; (2) the Laguna Beach residence was Kevin's separate property and the community interest pursuant to Moore/Marsden was calculated at $7,625 to each party; (3) the Lexus had a community interest of $7,000 and the car was awarded to Fernanda; (4) the household furniture and community interest in the Bank of America account was awarded to Kevin; (5) Kevin would receive a credit of $9,515 for community property bills he paid after separation; (6) Kevin would not recover money for Fernanda's use of the Lexis, or the loan he made to her company frBrazil, or other payments he made to Fernanda postseparation; and (7) Kevin would receive a credit for paying frBrazil's tax liability and Fernanda's wireless telephone bill. After considering the division of community property, credits, reimbursements, and charges, the court determined Fernanda owed Kevin $8,760.
In re Marriage of Moore (1980) 28 Cal.3d 366 (Moore); In re Marriage of Marsden (1982) 130 Cal.App.3d 426 (Marsden).
Specifically, Kevin was not given a credit for money he gave Fernanda after separation, medical and automobile insurance premiums he paid on her behalf, and the Lexus automobile registration paid postseparation.
II
The first dispute in this appeal concerns "incentive compensation" Kevin earned in 2004, but which was not paid until postseparation in 2005. Although the issue was raised during the trial, the judgment is silent as to characterization of this source of income. Kevin's postseparation income is presumed to be his separate property. We conclude Fernanda failed to satisfy her burden of proving the presumption can and should be rebutted.
The following undisputed facts were presented at trial regarding Kevin's income. Kevin was employed as an accountant for U.S. Lines, which was composed of two different entities U.S. Lines Holding Limited (U.S. Holding) and U.S. Lines, Inc. (U.S. Corporation).
Kevin invested substantial sums of his separate property into U.S. Holding, from which he received periodic payments. He had a 5.9 percent ownership of common stock and was part of the nine-member management team. Kevin's accountant opined the investment and returns were Kevin's separate property. We discuss the parties' dispute over how to characterize the investment returns in the next section of this opinion.
U.S. Corporation paid Kevin a salary. He also was entitled to incentive compensation from U.S. Corporation based on the performance of the company. Kevin began employment in 2003 and did not receive any incentive compensation in 2004. The first incentive payment Kevin received from U.S. Corporation was in 2005, after his separation from Fernanda. He admitted this payment related to a 2004 audited financial result. The amount was included in his 2005 W2 tax form but not separately listed as a line item.
Fernanda's expert, Dennis Sperry, was hired to analyze the financial affairs of the parties during their marriage. Sperry testified he did not consider the incentive payment Kevin received in 2005 for work done in 2004. Sperry also did not analyze what would be a reasonable salary for Kevin's services in 2005.
Before trial, Kevin admitted he had not disclosed his incentive payment received in 2005 for 2004 employment. He explained that after the couple separated in February 2005, he continued for several months to pay community expenses from his separate property. Kevin testified his earnings from U.S. Corporation and any incentive pay would have gone into the couple's joint Bank of America account. They used this bank account to pay community expenses. Fernanda testified she did not know Kevin received any incentive payments.
Neither party produced any evidence regarding the actual amount of the 2005 incentive payment. On appeal, they dispute who had the burden of producing this evidence, and what should occur after the failure to meet that burden. Without providing supporting authority, Fernanda argues that because Kevin failed to provide her with any accounting of the incentive income, all of his 2005 income should be deemed community property. On the other hand, Kevin asserts it was Fernanda's burden to show what portion of the postseparation earnings were from community efforts, and her failure to do so supports the court's judgment. We agree with Kevin.
"Before a trial judge can effect an equal division of community property as mandated by Civil Code section 4800, subdivision (a), the nature and extent of the parties' community assets must be ascertained." (Lehman v. Superior Court (1986) 179 Cal.App.3d 558, 562 [court cannot limit "wife's right to discover data essential for a characterization (as between community and separate) of" husband's purported separate property medical corporations].) "A spouse's time, skill, and labor are community assets and his earnings during marriage are community property. ([Fam. Code,] § 760.) After separation, earnings and accumulations of a spouse are separate property. ([Fam. Code,] § 771.) Fringe benefits provided by an employer are community property to the extent they are earned by the time, skill, and effort of a spouse during marriage. [Citation.]" (In re Marriage of Doherty (2002) 103 Cal.App.4th 895, 899.)
Thus, for property characterization purposes, the critical question is when the right to that stream of income accrued. (See In re Marriage of Lehman (1998) 18 Cal.4th 169, 177 [referring to the accrual of the right to pension benefits].) The timing of receipt of the benefits themselves is irrelevant. (In re Marriage of Shea (1980) 111 Cal.App.3d 713, 717 ["where a fringe benefit is earned entirely by employment before marriage, it is the separate property of the employee even if received after marriage"].)
As applied to this case, if the incentive compensation was "earned" during the marriage it is marital property even if it was not received until after the divorce was over, so long as an enforceable legal right to receive the bonus existed on the date of separation. In other words, to be deemed community property, Kevin's bonus earnings must be a vested and matured contract right that Kevin received during the marriage.
The burden of proving what portion of Kevin's postseparation income actually vested before separation fell on Fernanda. This is because there is a statutory presumption Kevin's earnings and accumulations while living separate from Fernanda are his separate property. (Fam. Code, § 771.) The record shows Fernanda failed to provide any evidence Kevin had a legal right to receive the bonus before the date of separation. Her expert testified he did not consider the nature of the 2005 incentive payment. Kevin was not asked any questions on cross-examination regarding when his right to receive the bonus matured. Kevin simply testified, "I knew I would be eligible to receive incentive pay based on the performance of the company." He did not suggest when that determination was made, whether it was contingent on his continued employment in the company, or whether there were other conditions or requirements relating to how or when the incentive pay vested. The trial court could reasonably conclude the presumption of separate property was not rebutted. We find no reason to disturb the judgment.
This answers Fernanda's claim there was proof of commingling community property with separate property in this case, and therefore any transmutation of the bonus was invalid. Without first establishing the bonus was community property, there is no need to consider the issue of whether it was transmuted into separate property.
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The second issue raised in this appeal is whether Kevin's separate property investment in U.S. Holdings generated returns that could be considered community property. "Profits from a spouse's business (sole proprietorship, partnership, or closely-held corporation) are 'earnings' to the extent attributable to either spouse's participation in the business. Conversely, income and profits not reflective of either spouse's labor or skill are strictly a return on the capital investment, characterized in accordance with the separate or community property status of the original investment. [Citations.]" (Hogoboom and King, California Practice Guide: Family Law (The Rutter Group 2011) ¶ 8.135, p. 8-41.) California courts have developed two alternative approaches to allocating the separate property profits. The Pereira approach (Pereira v. Pereira (1909) 156 Cal. 1), involves an apportionment of profits, where the separate property owner spouse is allocated a fair return on the investment. The Van Camp approach (Van Camp v. Van Camp (1921) 53 Cal.App. 17, 27-28), is to determine the reasonable value of the community services.
In designating the U.S. Holding's returns as Kevin's separate property, the trial court stated it was not aware of any cases where a "Van Camp/Pereira analysis was used in a case other than sole proprietorship or wholly owned corporation by one person [and in this case Kevin had invested in a] business entity with at least six other people who are part of the management team. There was no evidence that was proffered as to any particular expertise [contributed by Kevin] other than a thank you note, which was contained in a letter outlining the results of the board of directors meeting." The court determined there was not sufficient foundation offered for application of either the Van Camp or Pereira approach. It explained with six members on the management team, there needed to be evidence the profits were reflective of Kevin's labor or skill, as well as evidence as to a reasonable rate of return. The court noted, "I am not allowed to pull these figures out of the air as counsel did."
The trial court was correct. These approaches are generally used when a spouse's business is a sole proprietorship, partnership, or closely held corporation, because in such cases more than minimal community effort is devoted to the separate property investment. On appeal, Fernanda suggests it was enough for her to show Kevin was part of the management team and was also the chief financial officer (CFO) for U.S. Holdings. We disagree. The profits must be traced to a spouse's time, talent, or efforts rather than the underlying capital investment. (Beam v. Bank of America (1971) 6 Cal.3d 12, 17.) Fernanda failed to prove that after Kevin invested money in U.S. Holdings, profits were derived from his involvement in the company and not just earnings generally attributed to the underlying equity owners. The returns could be a return on the capital investment, and as such they should be characterized consistently with the separate property source of Kevin's original investment.
III
The judgment is affirmed. Respondent shall recover his costs this appeal.
O'LEARY, J.
WE CONCUR:
BEDSWORTH, ACTING P. J.
MOORE, J.