Dividing a Business in Divorce – Pereira and Van Camp

A business one spouse owned before the marriage is separate property. But if that spouse ran it during the marriage, the community contributed labor, and the community is entitled to a share of the growth. California has two methods for computing that share, and the choice between them can change the result by a large amount.

Under Pereira v. Pereira (1909) 156 Cal. 1, the court assigns the separate property a fair return on its value at the date of marriage, typically the legal rate of interest, and treats all growth above that return as community property attributable to the spouse’s efforts. Pereira favors the community and is used when the increase in value is mostly the result of the owner’s personal skill and work.

Under Van Camp v. Van Camp (1921) 53 Cal.App. 17, the court instead determines the reasonable value of the owner-spouse’s services during the marriage, treats that amount as community, and treats everything else as separate property growth attributable to the business itself. Van Camp favors the separate property owner and is used when the growth came mostly from the nature of the business, market conditions or capital rather than the owner’s labor.

The court chooses the method that achieves substantial justice on the facts; it is not bound to either. In a contested case the choice is usually argued through forensic accountants, and the record of what the owner was paid during the marriage, and whether that was a fair salary, is often decisive.