Even from just reading the opinion -- which forcefully argues in one particular direction -- I can definitely see both sides of this dispute, and why each might well be reasonable. But, on the whole, I probably think that Justice Streeter is right.
It's a family law dispute, so a tiny bit of background is probably helpful. In California, community property gets split 50/50 on divorce, whereas separate property goes 100% to the owner. But sometimes, separate property (say, an inheritance) gets used to fund a community asset (for example, as a down payment for a house). In that event, the amount of the separate property "gifted" to the martial estate gets refunded upon divorce to the separate ownership of the contributing spouse.
There are lots of reasons for that rule, and it's fairly well-established.
Today's opinion, however, involves a slight twist on the typical factual setting.
One spouse owns a company -- call it Company A -- before marriage. So that's his separate property. During the marriage, Company A becomes Company B. Basically the same business, but a different name. (He's probably doing this for asset protection reasons, because Company A is a sole proprietorship, which has individual liability concerns, but his motive isn't really all that important to our analysis.)
Now, if the spouse gifted Company A to Company B, he'd be entitled to a refund (upon divorce) of the value of the separate property (A) he contributed to the marital asset (B). But, here, he didn't do that. It wasn't a gift. Rather, he sold Company A to Company B.
Well, then, you don't get a refund. It was a sale. You already got as your separate property whatever the marital asset (B) paid for A.
But here's the rub: Company B paid exactly $1 for Company A.
We all know why they did it that way. It's nominal consideration. They want it to be a sale (rather than a gift or merger) for liability and other reasons, but they also want the sale price to be meaningful in order to avoid transfer taxes or other complexities. So it's essentially a gift, but it's nonetheless legally a sale.
There's zero doubt that Company A was in fact worth tons more than $1. But that's nonetheless what the sale price was. Do you get a refund of separate upon divorce, or not?
The Court of Appeal says: No, you don't. It was a sale. You set the price. So that's what it was worth. Period. It was a sale, so no contribution right upon divorce.
As I said, I get that. It's an overly formalist answer, because I'm sure that there was, in fact, value to A, and the nominal purchase price essentially was a gift -- in anything but name. Hence the argument that the usual contribution rules should apply.
But, in the end, I'm persuaded by the old aphorism -- which, to be clear, is found nowhere in the Court of Appeal's opinion -- that "you pays your money and you takes your chances." The spouse here called it a sale and set the price at $1. That was his call. When you call it a sale and say that the value of A is $1, well, okay then, that's what we'll find. The fact that the truth is probably otherwise doesn't really matter at this point. You thought, and said, otherwise at the time. Your call. Sorry it didn't turn out so well for you in the end, but that's life.
Maybe next time, call it what it actually is, and the result would be different.
Or, perhaps, see a lawyer before selling your business to yourself. One who knows a little bit about family law, maybe. Because it might well matter. As it did here.
