The Importance Of Record Keeping In Valuing Community Assets - Reape-Rickett
The Importance Of Record Keeping In Valuing Community Assets

The Importance Of Record Keeping In Valuing Community Assets

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In a recent opinion, the California Court of Appeal upheld a trial court’s decision to value a community property asset at the time of separation, rather than at the time of trial. In re Marriage of Nelson (May 31, 2006).

 

Under California’s Family Code, the general rule for valuation of community assets is that it should be done as near as practicable to the time of trial. Most often, the value of an asset is determined by fair market value at or around the time of trial, and the property is then distributed in accordance with community property laws. However, for certain types of assets which may have speculative value, determining the fair market value is a complicated process. Nelson represents the perfect example of this situation.

 

In Nelson, the wife opened a retail business which was never profitable. The parties separated in 1999, eleven years after the business had opened. The business closed in 2004, shortly before trial to divide the marital assets. The husband claimed that his experts could not adequate value the business because the records were poor and inconsistent in the years following separation. He therefore asked that the court value the business as of the date of separation, which was determined based on records that were available to him. The court agreed, and accepted the value extrapolated by the husband’s experts.

 

On review, the wife argued that the value of the business should have been made at the time of trial (when it had already closed down), rather than five years before. She noted that there was no evidence that she had tried to hide anything or that the allegedly bad bookkeeping was intentional. Examining previous case law, the Court of Appeal explicitly rejected this argument. Bad faith, or intentional concealment, is not the trigger for using a different valuation date.

 

The meaning behind this opinion is that the court is not willing to allow a party to benefit from confusion for which he or she is responsible. It found, therefore, that when one party’s records prevent valuation at trial, the trial court has discretion to allow the other party to use records from an earlier date if that would prevent injustice to the other party.

 

What this means for someone going through a divorce, or considering one in the future, is that it is vital to keep thorough and accurate records which might be used to value community assets. Especially where the value is uncertain, may substantially increase or decrease during the pendency of the proceedings or is disputed by the parties, clear and exact records are the key to easing the process of establishing the value of the property and simplifying the division of assets.

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