IN RE: the MARRIAGE OF Carole and George KILBOURNE.

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Court of Appeal, First District, Division 1, California.

IN RE: the MARRIAGE OF Carole and George KILBOURNE. Carole M. KILBOURNE, Respondent, v. George W. KILBOURNE, Appellant.

No. A044736.

Decided: May 16, 1991

Barry L. Siders, Law Offices of Barry L. Siders, Danville, for respondent/appellant. William F. Urich, San Francisco, for petitioner/respondent.

This is an action for dissolution of marriage.   Wife's petition was filed February 14, 1983.   In protracted proceedings extending from October 1985 to January 1986, the trial court took evidence regarding the value of two pieces of real estate, husband's law practice, numerous bank accounts, stocks and bonds and items of personal property.   The trial court issued its memorandum of tentative decision on April 29, 1986, and eventually adopted it as its statement of decision.   The court ordered wife's attorney to prepare the judgment.   Two and a half years later, in November 1988, the trial court reiterated its order to wife's attorney to prepare the judgment.   Judgment was eventually entered in December 1988.1  Husband appeals and confines his arguments to two items:  the family residence and husband's law practice.

I. The House **

II. The Law Practice

Husband is a lawyer, who had been practicing law for eighteen years when he married wife in 1970.   At the time of the marriage, husband was working in the law offices of Marcus & Ury, Inc., from whom he received a salary.   Husband had a few cases of his own, but not enough to make a living.

In 1971, husband left Marcus & Ury and opened his own office, taking with him certain assets:  a desk, a chair, chair pads, and law books.   Husband's practice consisted almost entirely of personal injury cases with fees on a contingency basis.

In 1976 husband formed a joint venture with two other attorneys, Marcus and Kazan, to handle asbestos and tobacco litigation.   Husband spent most of his time on those cases through 1980.

In 1979 Marcus died.   Marcus's estate brought an action against husband and Kazan to determine proceeds due to the estate for cases handled by the joint venture.   At the time of trial in the present case, that litigation was still pending.   In 1980 husband formed a new joint venture with Kazan.

Husband and wife separated on May 13, 1982.   After separation, husband continued to conduct his law practice:  he worked on cases that had been opened before separation, and he worked on new cases.   He also received fees on cases that had been worked on in part before separation and in part after separation.   In at least one instance, however, he received no fee after working on the case for a year's worth of man-hours;  the case was dismissed before trial.

The main issue in this appeal is the value of husband's law practice.   In this respect, we are guided by the factors set forth in In re Marriage of Lopez (1974) 38 Cal.App.3d 93, 110, 113 Cal.Rptr. 58 disapproved on other grounds in In re Marriage of Morrison (1978) 20 Cal.3d 437, 453, 143 Cal.Rptr. 139, 573 P.2d 41:  “In determining the value of a law practice or interest therein, the trial court should determine the existence and value of the following:  (a) fixed assets, which we deem to include cash, furniture, equipment, supplies and law library;  (b) other assets, including properly aged accounts receivable, costs advanced with due regard for their collectability;  work in progress partially completed but not billed as a receivable, and work completed but not billed;  (c) goodwill of the practitioner in his law business as a going concern;  and (d) liabilities of the practitioner related to his business.”  (Accord, In re Marriage of Garrity and Bishton (1986) 181 Cal.App.3d 675, 688–689, 226 Cal.Rptr. 485.)

The courts have recognized that “[a]t any given moment the major assets of most law firms are not capital assets, but those related to the direct rendering of professional services, most particularly accounts receivable and work in process.”  (In re Marriage of Green (1989) 213 Cal.App.3d 14, 21, 261 Cal.Rptr. 294;  see also In re Marriage of Lopez, supra, 38 Cal.App.3d at pp. 106–107, 113 Cal.Rptr. 58.)   So, too, in the case at bar was the major asset of husband's law practice his work in progress:  fees receivable on a contingency basis.

The trial court dealt with the contingent nature of the fees receivable by dividing husband's law practice into segments.   First, the court ruled that cases in progress that were opened before separation but that remained unpaid “may have community value and that the Court cannot reasonably determine the community value until the fees have been received.   The Court reserves jurisdiction over all open cases.   The Court orders the Respondent to retain in his trust account all fees and costs as to all open cases and advise Petitioner's counsel within five days of any such funds.   The Respondent may distribute the client's share to the client.”   The court also issued an injunctive order restraining husband and Kazan from disbursing any funds from the joint venture cases until further order of the court.   The court ruled that fees due on cases opened after separation were husband's separate property, and they were excluded from consideration.   No issue is raised on appeal concerning that ruling.

Later in the trial, wife presented Leon Fish, a C.P.A., as an expert witness.   Mr. Fish prepared, among other things, balance sheets reflecting the book value of husband's law practice on the date of marriage (June 1970) and on the date of separation (May 1982).   As a result of the trial court's ruling, Mr. Fish excluded from his calculations of work in progress those cases with unpaid contingency fees.   He also excluded the joint venture cases.

At the conclusion of trial the court ruled as follows:

(1) The trial court found that no value could be placed on the unpaid contingency fees, and the court reserved jurisdiction to divide those fees as they are paid to husband.   The court restrained husband from disbursing any proceeds (except the client's share and except for $15,000) until a court hearing is held to divide the fees.

(2) The trial court also found that it was impossible to determine the present value of the unpaid fees receivable on the joint venture cases.   Hence, the court reserved jurisdiction to divide those fees as they are paid.   The court restrained both husband and Kazan from disbursing any fees from the joint venture cases until the court so ordered.

(3) The trial court found that husband had received from the date of separation through the date of the injunctive order (October 8, 1985) a total of $235,766 in fees from the joint venture cases.   The court determined that 90 percent of the work done on those cases had been before separation;  hence, the community had a 90 percent interest in the fees received.   The trial court charged husband with receipt of $212,189 in community property.

(4) The trial court placed a value of $312,021 on the rest of husband's law practice, i.e., excluding the joint venture cases and the work in progress set forth above.   This value was taken from the balance sheet as of the date of separation prepared by Mr. Fish.

Mr. Fish's balance sheet was based on the following assets:  cash in the bank;  furniture and equipment;  prepaid taxes;  costs advanced by clients;  discounted present value of fees on two cases payable over time;  and “work in progress.”   With respect to the “work in progress”, Mr. Fish, based on the trial court's earlier rulings, deliberately excluded from consideration any cases which remained unresolved such that the contingency fees were unknown.   He also deliberately excluded from consideration any fees being handled by husband as part of the Marcus–Kazan–Kilbourne or Kazan–Kilbourne joint ventures.   Instead, Mr. Fish examined only the cases for which fees were eventually paid during the period from the date of separation to the date of the injunctive order (October 8, 1985).

Mr. Fish calculated the value of the work in progress as of the date of separation by using a time rule.   That is, he measured the time the case had been open (from the date of the first cost to the date of recovery) and allocated a proportionate share of the proceeds to the time before separation and the time after.

Mr. Fish offset against the assets of husband's law practice a limited amount of liabilities:  funds due to clients from the trust account;  tax liabilities on fees payable for the work in progress;  and certain operating expenses.

In this appeal, husband raises several arguments to challenge the trial court's valuation of the law practice.

A. Date of Valuation

 The trial court ruled that the appropriate date for valuing the law practice was the date of separation.   This ruling was correct, as husband apparently now concedes.3

Ordinarily community assets and liabilities must be valued “as near as practicable to the time of trial.”  (Civ.Code, § 4800, subd. (a).)  But Civil Code section 5118 provides that earnings of a spouse while separated from the other spouse are separate property.   In reconciling these two provisions, the courts have held that in determining the community value of a professional practice the proper date of valuation is the date of separation.   (In re Marriage of Green, supra, 213 Cal.App.3d at pp. 20–21, 261 Cal.Rptr. 294;  see In re Marriage of Fink (1979) 25 Cal.3d 877, 888, 160 Cal.Rptr. 516, 603 P.2d 881.)

B. Reservation of Jurisdiction Over Unpaid Fees

 Husband argues that the trial court erred in failing to place a present value on the work in progress and choosing instead to reserve jurisdiction to divide the unpaid fees in the future.4  We find no error.   Civil Code section 4800 expressly empowers the trial court to reserve jurisdiction to make a property division at a later time.  (See e.g. In re Marriage of Munguia (1983) 146 Cal.App.3d 853, 195 Cal.Rptr. 199.)

We are, of course, aware of the decision in In re Marriage of Bergman (1985), supra, 168 Cal.App.3d 742, 214 Cal.Rptr. 661, in which this court held the trial court abused its discretion in ordering an open-ended jurisdiction over the community interest in wife's unvested pension plan to divide that interest if and when benefits became payable.   The Bergman court reasoned that Civil Code section 4800 “requires that community property be divided at the time of the litigation of the dissolution action․   Neither the legislative history of section 4800, nor any case analysis but one, provides authority for the proposition that a court may reserve jurisdiction indefinitely to divide a community asset.”  (168 Cal.App.3d at p. 755, 214 Cal.Rptr. 661.)

We conclude Bergman is clearly distinguishable.   First, the trial court did not in the present case reserve jurisdiction “indefinitely.”   California's dismissal statutes (Code Civ.Proc., §§ 583.110–583.430) operate to put a time limit on the resolution of litigation.   Cases not brought to trial within five years will be dismissed.  (Code Civ.Proc. § 583.360.)   At the time of the trial court's decision (1986) the cases opened before separation were four years old.   By the time of the judgment (1988) they were six years old.   Even if extensions of the five-year statute were given on some of the cases, the period of reserved jurisdiction was necessarily finite.

Furthermore, the trial court's decision in the present case to reserve jurisdiction was a response to husband's argument that no value could be placed on the unpaid contingency fees.   Indeed, the trial court faced a difficult task in determining the present value of husband's practice, for husband kept no time records and declined for reasons of client confidentiality to reveal his open files.

The trial court was additionally hampered by husband's omission to call an expert witness.   Husband gave only his own opinion on the value of his practice, but his testimony was found not credible by the trial court.

Under these difficult circumstances, the trial court had little choice but to reserve jurisdiction over the unpaid contingency fees.   We conclude the trial court acted within the bounds of its discretion.

C. Operating Expenses

 Although we uphold the trial court's decision to reserve jurisdiction over the unpaid fees, we are troubled by its method of calculating the value of the law practice.   None of the three formulas used by the trial court took into account the operating expenses of the law practice that went into generating the contingency fees.   In this respect, we think the trial court erred.  (See In re Marriage of Garrity and Bishton, supra, 181 Cal.App.3d 675, 689, 226 Cal.Rptr. 485.)   We recognize that the court was at a disadvantage in that husband did not provide an expert accountant witness of his own, either to refute Mr. Fish's methods of calculation or to establish an alternate valuation theory.   Nevertheless, we remand for a redetermination of the community property value of the law practice, whereby the legitimate and reasonable expenses incurred in operating the law practice are to be deducted from the gross fees received.

(1) Fees Collected on Own Cases

In placing a value of $312,021 on the law practice, the trial court accepted the balance sheet prepared by Mr. Fish, who calculated the value of the law practice by adding fixed assets (e.g., cash in bank, furniture, equipment, library) to “work in progress” (cases for which fees had been already collected) as of the date of separation and then subtracting a very limited amount of liabilities.   Mr. Fish reasoned that because husband's law firm kept current with its accounts payable, at any one point in time—e.g., on the date of separation—the firm would have had few accounts payable.   Thus, the expert used 1/12112 of the prior year's expenses, but excluded such major expenses as salary, payroll taxes and rent, reasoning that those expenses would always be paid in the month incurred and would not be an account payable.   In our view, this calculation is faulty in that it fails to account for what appear to be husband's actual and necessary costs of doing business.   In the absence of any findings to the contrary, those expenses should have been considered.

(2) Unpaid Fees on Own Cases

With respect to husband's open cases for which no fees had yet been collected, the trial court used Mr. Fish's time formula to allocate the fees between the community and husband's separate property:  “prorating the fees received based on the months which elapsed from the expenditure of the first costs to date of separation ․ vis-a-vis the months which elapsed from the date of separation to the receipt of the fee.”   Nowhere in this formula are husband's operating expenses accounted for.   Instead, the court provided only that the fees would be “net of referral obligations actually paid, and costs advanced reimbursed from settlement or judgment proceeds.”   This formula, too, is faulty in that it takes account of only the gross fees actually recovered without taking into account the expenses of operating the law practice.

(3) Fees on Joint Venture Cases

The same error occurred with respect to the proceeds from the joint venture cases.   The trial court found that husband had received over $235,000, of which 90 percent was community property.   Accordingly, the court charged husband with receiving $212,189.   Again, the court took no account of the operating expenses of the law practice that went into generating those fees, and husband was improperly charged with the gross, rather than the net income.

III.–IV.***

Disposition

The judgment is reversed and the matter is remanded for further proceedings related to distribution of the Christie Drive house and valuation of the law practice.   Each party shall bear their own costs on appeal.

FOOTNOTES

1.   On appeal, husband complains that the trial court should have prepared the judgment itself and should not have assigned the task to counsel.   Husband relies on Rule 232(c) of the California Rules of Court, which provides that the court shall prepare a proposed statement of decision and a proposed judgment, unless the court designates a party to prepare the statement of decision.   But husband has not demonstrated how a reversal by this court will provide relief.   In any event, the rule also provides that if the proposed judgment is not served within 15 days, any other party may submit a proposed judgment.   Husband did not avail himself of that remedy.

FOOTNOTE.   See footnote *, ante.

3.   In his opening brief, husband argues that the trial court should have valued the law practice as of the date of trial.   But in his closing brief, husband acknowledges that the proper date of valuation is the date of separation of the parties.

4.   There is no dispute that the fact that husband's right to receive his fees is contingent on future events does not negate their status as divisible community assets.  (See, e.g. In re Marriage of Fonstein (1976) 17 Cal.3d 738, 745–746, 131 Cal.Rptr. 873, 552 P.2d 1169 [right to withdraw from law firm has present value although contingent and subject to modification];  In re Marriage of Brown (1976) 15 Cal.3d 838, 126 Cal.Rptr. 633, 544 P.2d 561 [unvested pension right constitutes community asset although contingent];  In re Marriage of Harrison (1986) 179 Cal.App.3d 1216, 1226, 225 Cal.Rptr. 234 [stock options are community asset although exercisable in the future];  In re Marriage of Nelson (1986) 177 Cal.App.3d 150, 154, 222 Cal.Rptr. 790 [same];  In re Marriage of Judd (1977) 68 Cal.App.3d 515, 520–521, 137 Cal.Rptr. 318 [retirement annuity is a community asset although not yet matured];  see also In re Marriage of Zaentz (1990) 218 Cal.App.3d 154, 164, 267 Cal.Rptr. 31 [movie profits community asset although movie completed after separation];  In re Marriage of Marx (1979) 97 Cal.App.3d 552, 561, 159 Cal.Rptr. 215 [accounts receivable of medical practice are community asset];  In re Marriage of House (1975) 50 Cal.App.3d 578, 580, 123 Cal.Rptr. 451 [same];  Waters v. Waters (1946) 75 Cal.App.2d 265, 270, 170 P.2d 494 [contingency fee received after separation is community asset];  cf. In re Marriage of Andreen (1978) 76 Cal.App.3d 667, 676, 143 Cal.Rptr. 94 [disability allowance of nondisabled worker too conjectural to be a divisible community asset].)

FOOTNOTE.   See footnote *, ante.

DOSSEE, Associate Justice.

NEWSOM, Acting P.J., and STEIN, J., concur.