In Re the Marriage of Czapar
285 Cal. Rptr. 479, 91 Cal. Daily Op. Serv. 6041, 232 Cal. App. 3d 1308 (1991)
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Rule of Law:
When valuing a community property business in a marital dissolution, the value of the business cannot be reduced by the speculative value of a hypothetical covenant not to compete that might be executed in a future sale.
Facts:
- William and Phyllis Czapar were married for 22 years and co-owned Anaheim Custom Extruders, Inc. (ACE), a community property plastic extruding business started in 1977.
- William managed the business, and Phyllis was an employee.
- The couple separated in January 1983, after which William continued to manage ACE.
- In December 1984, William fired Phyllis from her position at ACE.
- During the separation, while managing ACE, William used company funds to purchase a second Porsche for himself, make a charitable donation to his alma mater, and pay a salary to his girlfriend for a marketing position for which she had no experience.
Procedural Posture:
- William Czapar filed a petition for marital dissolution against Phyllis Czapar in the trial court.
- The trial court initially ordered the community business, ACE, to be sold but later rescinded that order and appointed its own expert to value the business.
- Following a trial on reserved issues, the court awarded ACE to William.
- The trial court determined ACE's market value was $644,058 but reduced its value to the community to $494,058, after deducting $150,000 for the projected value of a hypothetical four-year covenant not to compete.
- The trial court also made rulings regarding spousal support, waste of community assets, and attorneys' fees.
- Phyllis Czapar appealed the trial court's judgment, challenging the valuation of ACE.
- William Czapar filed a cross-appeal challenging the trial court's other rulings.
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Issue:
Does a trial court err in a marital dissolution proceeding when it values a community property business awarded to one spouse by deducting the speculative value of a hypothetical future covenant not to compete?
Opinions:
Majority - Wallin, J.
Yes. A trial court errs by reducing the value of a community business by the speculative value of a hypothetical covenant not to compete. Such a valuation is improper because the existence, terms, and value of any future covenant are entirely speculative and depend on circumstances at the time of an actual sale, which may never occur. The court reasoned that while proceeds from an actual, negotiated covenant not to compete would be the separate property of the covenanting spouse, valuing a hypothetical covenant is analogous to other impermissible speculative deductions, such as future tax consequences or costs of sale where no sale is imminent or required. Citing persuasive authority from other community property states like New Mexico (Mitchell v. Mitchell), the court held that a covenant not to compete is a means to protect the value of business goodwill but should not be valued itself until it is actually negotiated. Reducing the community's interest in the business based on a theoretical future event that would affect the selling spouse's separate property post-dissolution is an error.
Analysis:
This case establishes a key precedent in California family law by clarifying that speculative future events cannot be used to devalue a community asset for purposes of division. By prohibiting the deduction of a hypothetical covenant not to compete, the court ensures a more equitable distribution based on the asset's present value, preventing the spouse who retains the business from receiving a windfall by artificially lowering its valuation. This decision aligns the treatment of non-competition covenants with existing rules that disallow deductions for uncertain future tax liabilities or costs of sale, reinforcing the principle that valuations must be based on present facts, not on theory or speculation about what a party might do with their property after the marriage is dissolved.
