Marriage of Harvey CA5 ( 2021 )

Filed 12/16/21 Marriage of Harvey CA5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
In re the Marriage of MICHAEL S. and
CYNTHIA M. HARVEY.
MICHAEL S. HARVEY, F078166
Appellant, (Super. Ct. No. 457566)
v.
OPINION
CYNTHIA M. HARVEY,
Appellant.
APPEAL from a judgment of the Superior Court of Stanislaus County. Loretta
Murphy Begen, Judge.
Shore McKinley Conger & Jolley and John H. McKinley; Downey Brand, Jay-
Allen Eisen, Bradley C. Carroll, and Joseph K. Little for Appellant Michael S. Harvey.
Arnold & Porter Kaye Scholer, Sean M. SeLegue and Sean A. McCormick; Goss
& Goss, Michael A. Goss and Mark A. Goss for Appellant Cynthia M. Harvey.
-ooOoo-
INTRODUCTION
This is an appeal and cross-appeal from a July 23, 2018 judgment of the Stanislaus
County Superior Court.
Appellant Michael S. Harvey and appellant Cynthia M. Harvey1 married in 1988.
Three years later, Michael founded and incorporated Enviro Tech Chemical Services, Inc.
(Enviro Tech), a chemical manufacturing company. By 2010, the Harveys jointly owned
825 shares in Enviro Tech, amounting to nearly 70 percent of the outstanding common
stock. On March 14, 2011, they signed a “SHAREHOLDER BUY-SELL
AGREEMENT” (Agreement), which included provisions relating to a “Sale on Marital
Dissolution or Separation of Shareholder.”
The Harveys separated on October 23, 2011. Thereafter, Michael purchased
additional Enviro Tech shares from other stockholders. He also petitioned for dissolution
of marriage. Pursuant to Family Code section 2337, the superior court bifurcated the
issue of marital status. In May 2015, the Harveys’ marriage was terminated.
In a “FINAL JUDGMENT ON RESERVED ISSUES” filed on July 23, 2018,
the court concluded that the fair market value of Cynthia’s one-half interest in the jointly
owned Enviro Tech shares was $21,332,000 as of December 31, 2017; awarded Michael
“all right, title, and interest in and to” these shares; and ordered Michael to pay Cynthia
$21,332,000 as equalization, either as a one-time lump sum or in installments pursuant to
the terms and conditions of a seven-year promissory note. The court also concluded that
Cynthia “failed to establish any impairment of [her] undivided one-half interest in the
1 Henceforth, where appropriate, we will identify the parties individually by their
given names to avoid confusion. No disrespect is intended. (Estate of Austin (2010) 188
Cal.App.4th 512, 514, fn. 1; Rubenstein v. Rubenstein (2000) 81 Cal.App.4th 1131, 1136,
fn. 1.)
In addition, unless otherwise indicated, we will subsequently identify persons who
share a given name with a party by his or her last name to avoid confusion.
2.
community estate from any breach of fiduciary duty by [Michael].” (See Fam. Code,
§ 1101, subd. (a).)
On appeal, Michael contends that the court erred by disregarding Section 11 of the
Agreement, “which sets out the terms on which the [Enviro Tech] shares are to be
purchased from Cynthia,” and imposing “significantly more burdensome” and “onerous
terms and conditions on [his] acquisition of [Cynthia’s] shares.” We conclude that
Section 11 did not apply.
On cross-appeal, Cynthia contends that the court “erred in applying two discounts
to the valuation of [her] interest in the 825 community shares of [Enviro Tech].”
(Boldface & capitalization omitted.) First, “the court erred in applying a discount for
possible future taxes that were not immediate and specific.” (Capitalization omitted.)
Second, “the trial court improperly utilized a marketability discount in valuing [Enviro
Tech].” (Capitalization omitted.) Cynthia further contends that the court “erred by
denying relief to [her] regarding Michael’s secret purchases of additional [Enviro Tech]
shares.” (Boldface & capitalization omitted.) We conclude: (1) the valuation
erroneously accounted for a tax liability that was not immediate and specific, but
substantial evidence supported a discount for lack of marketability; and (2) the court
impliedly made the factual findings necessary to support its ruling regarding Cynthia’s
breach of fiduciary duty claim.
STATEMENT OF FACTS
I. The Agreement
The Agreement read, in part:
“This Shareholder Buy-Sell Agreement (‘Agreement’) is made and
entered into . . . by, between and among MICHAEL S. HARVEY and
CYNTHIA M. HARVEY, Trustees of the MICHAEL AND CYNTHIA
HARVEY REVOCABLE TRUST dated December 20, 2010 (‘Harvey
3.
Trust’) and MICHAEL B. ARCHIBALD[2] and DEBRA L. ARCHIBALD,
Trustees of the ARCHIBALD 2010 REVOCABLE TRUST dated June 22,
2010 (‘Archibald Trust’) and ENVIRO TECH CHEMICAL SERVICES,
INC., a California corporation (the ‘Corporation’). The Harvey Trust and
Archibald Trust are collectively but nonspecifically referred to herein in the
singular as ‘Shareholder’ and in the plural as ‘Shareholders.’ The
Corporation and Shareholders are collectively but nonspecifically referred
to in this Agreement in the singular as ‘Party’ and in the plural as ‘Parties.’
“Section 1. Recitals.
“A. The Shareholders are the owners of a portion of the
outstanding common stock of the Corporation as follows:
“Shareholder Number of Shares
“Harvey Trust 825 . . .
“Archibald Trust 275 . . .
“B. The remaining shares of the Corporation which are owned by
persons or entities other than the Shareholders are owned as follows:
“Shareholder Number of Shares
“Fernanda Cabral 5
“John Pray 60
“Jon Howarth, PhD 32
“The Shareholder’s [sic] agree that such shares are not subject to the terms
of this Agreement.
“C. This Agreement is entered into with respect to all shares of
common stock of the Corporation, now or hereafter owned by the
Shareholders, for the purpose of protecting the Corporation and the
Shareholders, as well as providing continuity for the Corporation’s business
in the event of the occurrence of certain events discussed in this Agreement.
[¶] . . . [¶]
2 Henceforth, where appropriate, we will identify Michael Archibald individually by
his full name to avoid confusion.
4.
“NOW, THEREFORE, in consideration of the mutual agreements,
conditions, covenants, promises, representations, undertakings, and
warranties contained herein, the Corporation and Shareholders agree as
follows:
“Section 2. Restriction On Transfer. The Parties hereby mutually agree
to restrict their respective right and ability to freely transfer the shares
owned by each Shareholder in accordance with the terms and conditions set
forth in this Agreement. None of the shares presently owned or
subsequently acquired by the Shareholders shall be sold, pledged,
encumbered, transferred, or disposed of in any way, whether voluntarily,
involuntarily, or by operation of law except under the terms of this
Agreement. . . . [¶] . . . [¶]
“Section 4. Option to Purchase.
“A. No Conveyance. Except as specifically provided in this
Agreement, no Shareholder shall sell, transfer, assign, pledge, encumber,
hypothecate, or in any way dispose of any of his or her shares (all of which
shall be deemed a ‘transfer’) or any right or interest in them. A Shareholder
desiring to transfer his or her shares shall give written notice (for purposes
of this Section 4.A., ‘Offer Notice’) to the Corporation and the other
Shareholders, in accordance with Section 19 of this Agreement, of his or
her intention to transfer his or her shares or an interest in them. The notice
must include the name and address of the proposed transferee and specify
the number of shares to be transferred, the interest to be transferred, the
price per share, and the terms of payment. Promptly on receipt of the
notice, the Secretary of the Corporation shall forward a copy of the notice
to each member of the Corporation’s board of directors.
“B. Corporation Option Period. Provided Section 7 below
(‘Drag-Along and Tag-Along Rights’) is not applicable or if such Section is
applicable, the option conferred thereunder has not been exercised, then for
a period of the longer of: (i) one hundred eighty (180) days following the
receipt of the Offer Notice by the Secretary of the Corporation, or
(ii) ninety (90) days following the final determination of value under
Section 10 of this Agreement (‘Corporation Option Period’), the
Corporation shall have the option to purchase all or any portion of the
offered shares, at either the price and terms stated in the Offer Notice or at a
price determined under Section 10 of this Agreement and the terms set forth
in Section 11 of this Agreement as determined at the option of the
Corporation. [¶] . . . [¶]
5.
“D. Shareholder’s Option Period. Provided Section 7 below
(‘Drag-Along Rights’) is not applicable or if such Section is applicable, the
option conferred thereunder has not been exercised, then, if the Corporation
fails to exercise its option as to all of the offered shares within the
Corporation Option Period, then for ninety (90) days following the
expiration of the Corporation Option Period, the other Shareholders shall
have the option to purchase all or any portion of the offered shares not
purchased by the Corporation (‘Shareholder Option Period’), at the same
price and terms as provided to the Corporation in subpart 4.B. above, as
elected by the purchasing Shareholder(s). [¶] . . . [¶]
“Section 5. Other Events Giving Rise To Option To Purchase.
“A. Triggering Events. On the occurrence of the following events
(each being a ‘Triggering Event’) the Corporation and the Shareholders
shall have an option to purchase the shares of the Shareholder and his or her
spouse (and the shares of any permissible transferee[3] to whom such
Shareholder has previously transferred shares of the Corporation), if any,
who is the subject of the event giving rise to the option to purchase.
[¶] . . . [¶]
“(1) Bankruptcy / Involuntary Dissolution. In the event any
Shareholder is adjudicated as bankrupt under the Federal Bankruptcy Code
(voluntarily or involuntarily), or makes an assignment for the benefit of
creditor, or files a petition seeking to force the involuntary winding up and
dissolution of the Corporation under California Corporations Code Section
1800 or a successor provision, or if substantially all property of the
Shareholder is levied on and sold in a judicial proceeding, the Corporation
first, and then the other Shareholders shall have the option to purchase all,
or any part, of the shares owned by the Shareholder and his or her spouse.
Any Shareholder who has information that would reasonably cause the
Shareholder to believe that his or her shares would be transferred
involuntarily or by operation of law, or who files a petition seeking to force
involuntary dissolution of the Corporation, shall give written notice to the
Corporation and the other Shareholders in accordance with Section 19, (for
purposes of this Section 5.A.(1), ‘Offer Notice’) and shall offer, or by such
action shall be deemed to have offered, to sell his or her shares and any of
his or her spouse’s shares, at the price provided in Section 10 and upon the
terms described in Section 11 of this Agreement. . . .
3 Section 13 of the Agreement, which related to “Permitted Transfer,” was not
relevant in the instant case.
6.
“(2) Unauthorized Encumbrance. In the event any
Shareholder encumbers, hypothecates, or pledges any shares in the
Corporation, all of such Shareholder’s shares in the Corporation shall be
subject to the option to purchase described in this Section. Any
Shareholder who has encumbered, hypothecated, or pledged shares in the
Corporation, shall give written notice to the Corporation and the other
Shareholders in accordance with Section 19, (for purposes of this Section
5.A.(2), ‘Offer Notice’) and shall offer, or by such action shall be deemed
to have offered, to sell his or her shares and any of his or her spouse’s
shares, at the price provided in Section 10 and upon the terms described in
Section 11 of this Agreement. . . .
“(3) Unauthorized Conveyance or Gift. In the event any
Shareholder assigns, conveys, or otherwise transfers any shares in the
Corporation in violation of the terms of this Agreement, all of such
Shareholder’s shares in the Corporation shall be subject to the option to
purchase described in this Section. Any Shareholder who makes such an
assignment, conveyance, or transfer of the shares in the Corporation, shall
give written notice to the Corporation and the other Shareholders in
accordance with Section 19, (for purposes of this Section 5.A.(3), ‘Offer
Notice’) and shall offer, or by such action shall be deemed to have offered,
to sell his or her shares and any of his or her spouse’s shares, at the price
provided in Section 10 and upon the terms described in Section 11 of this
Agreement. . . .
“(4) Death of Michael Harvey. In the event of the death of
MICHAEL HARVEY, if his interest in the Shares of the Corporation
(whether held in the Harvey Trust or otherwise) is transferred to anyone
other than his spouse or his then living issue (or the then living issue of his
spouse), then all of the interest of MICHAEL HARVEY and the HARVEY
TRUST in the Shares in the Corporation shall be subject to the option to
purchase described in this Section. On the death of MICHAEL HARVEY,
if such death will result in the transfer of his interest in the Corporation to
anyone other than his spouse or his then living issue or the living issue of
his spouse, the HARVEY TRUST shall give written notice to the
Corporation and the other Shareholders in accordance with Section 19, (for
purposes of this Section 5.A.(4), ‘Offer Notice’) and shall offer, or by such
action shall be deemed to have offered, to sell the shares and any of his or
her spouse’s shares, at the price provided in Section 10 and upon the terms
described in Section 11 of this Agreement. . . .
“(5) Termination of Employment of Archibald. In the
event MICHAEL ARCHIBALD is no longer employed by the Corporation
7.
(whether voluntarily by such employee Shareholder or because of
termination by the Corporation with or without cause), the interest of the
ARCHIBALD TRUST will be deemed, by the provision of or receipt of
notice of termination by MICHAEL ARCHIBALD, as the case may be (for
the purposes of this Section 6(vii), [sic] ‘Offer Notice’), will be deemed to
offer to sell its shares and any permissible transferees[’] shares at the price
provided in Section 10 and upon the terms described in Section 11 of this
Agreement. [¶] . . . [¶]
“B. Corporation Option Period. In the case of Triggering Event
under this Section, the Corporation shall have an option for a period of the
longer of: (i) one hundred eighty (180) days following the date of the
Triggering Event, or (ii) ninety (90) days following the final determination
of value under Section 10 of this Agreement (for purposes of this Section
5.B. the ‘Corporation Option Period’), to purchase all or any portion of the
shares of the Shareholder who is subject of the Triggering Event and his
spouse, at the price determined under Section 10 of this Agreement and the
terms as set forth in Section 11 of this Agreement. [¶] . . . [¶]
“D. Shareholder’s Option Period. If the Corporation fails to
exercise its option as to all of the offered shares within the Corporation
Option Period, then for ninety (90) days following the expiration of the
Corporation Option Period, the other Shareholders shall have the option to
purchase all or any portion of the offered shares not purchased by the
Corporation (for purposes of this Section 5.D. the ‘Shareholder Option
Period’), at the same price and terms as provided for the Corporation in
Section 5.B. above. [¶] . . . [¶]
“Section 6. Purchase Obligations On Death of Archibald. On the
death of MICHAEL ARCHIBALD, the HARVEY TRUST and/or
MICHAEL HARVEY shall acquire all of the outstanding Shares of the
Corporation owned by the ARCHIBALD TRUST and/or his spouse and
any transferee who received a transfer of Shares owned by MICHAEL
ARCHIBALD or the ARCHIBALD TRUST after the date of this
Agreement. . . . The purchase price and terms of purchase shall be as
specified in Section 10 and Section 11 of this Agreement. [¶] . . . [¶]
“Section 8. Sale on Marital Dissolution or Separation of Shareholder.
“A. Provisions For Divorce. For purposes of this Section 8,
MICHAEL HARVEY shall be deemed to be the owner of the Shares
owned by the Harvey Trust.
8.
“Any decree of dissolution, separation maintenance agreement, or property
settlement between a Shareholder and his or her respective spouse shall
include either of the following two (2) provisions:
“(1) A provision that the Shareholder shall purchase from
his or her respective spouse and the spouse shall sell to the Shareholder,
upon the terms and conditions provided in this Section, every interest the
spouse has in the Shareholders’ shares in the Corporation; or
“(2) A provision granting to the separated or divorced
Shareholder, his or her respective spouse’s (or former spouse’s) entire
interest in the shares of the Corporation as a part of the division of the
community property of the marriage pursuant to the California Family
Code.
“B. Option To Buy Spouse’s Interest. If neither of the above
provisions is included, and a decree of dissolution, a separate maintenance
agreement, or a property settlement between Shareholder and his spouse
grants the spouse shares in the [C]orporation, then the divorced or separated
Shareholder shall be required to purchase from his spouse or ex-spouse
(‘spouse’) and the spouse shall be obligated to sell, the shares of the
Corporation granted to him pursuant to the decree of dissolution, separate
maintenance agreement, or property settlement agreement at the price set
forth in Section 10 and upon the terms and conditions set forth in Section
11 of this Agreement. Such sale shall close within the later of sixty (60)
days after the date of the decree of dissolution, separate maintenance
agreement, or property agreement granting shares to the spouse is executed.
If such sale does not close within that period, the divorced Shareholder
shall provide notice of such failure to the Secretary of the Corporation and
the other Shareholders.
“C. Effect of Failure To Purchase. If the Shareholder fails to
purchase the shares from his or her spouse within the period specified in the
foregoing subsection, first the Corporation and then the other Shareholders
shall have the option to purchase any or all the shares of the divorced
Shareholder and the shares of the spouse of the divorced Shareholder. Such
option shall be exercisable from the date notice of the existence of such
option is received by the Corporation and the other Shareholders and in
accordance with the price and terms set forth in Sections 10 and 11, and in
the time periods and manner of exercise as set forth in Sections 5.B.
through 5.G. of this Agreement with such notice constituting a ‘Triggering
Event.’
9.
“Section 9. Marriage of Shareholder. If any Shareholder, after the
execution of this Agreement, becomes married, such Shareholder’s spouse
shall, within ninety (90) days of the date of marriage be provided a copy of
this Agreement by such Shareholder, and shall sign a spousal consent . . .
and shall deliver such consent to the Secretary of the Corporation. If such
consent is not received by the Corporation within such ninety (90) day
period, such failure of receipt shall constitute an Offer Notice by the newly
married Shareholder to the Corporation and the Corporation and other
Shareholders shall have the option to purchase such Shareholder and his or
her spouse’s interest in the Corporation at the price and terms set forth in
Sections 10 and 11, and in accordance with Sections 5.B. through 5.G. . . .
“Section 10. Valuation. The purchase price to be paid for the Shares
which are subject to purchase shall be the fair market value of the interest
in the Corporation which are represented by such Shares, all as determined
under this paragraph. For purposes of this paragraph, the fair market value
of the interest in the Corporation which is subject to purchase shall be
agreed on by the selling Shareholder or his or her successor in interest and
the Corporation and remaining Shareholders within thirty (30) days of the
event giving rise to the right to purchase (the ‘Negotiation Period’). If the
parties do not agree on a new value within the Negotiation Period, the value
of the selling Shareholder’s interest (and the value represented by the
Shares which are subject to purchase) shall be determined by appraisal as
follows: The remaining Shareholder (on the one hand) and the selling
Shareholder or his or her successor in interest shall each appoint an
appraiser to appraise the Shares which are subject to purchase within fifteen
(15) days after the expiration of the Negotiation Period. If either party fails
to select an appraiser within the time required by this Section, the fair
market value of the Shares which are subject to purchase shall be
conclusively deemed to equal the appraisal of the appraiser timely selected
by the other. The two appraisers as timely designated shall confer within
five (5) days thereafter to designate and appoint a third appraiser who shall
be the ‘Final Arbitrator Of Value’ if the same is required hereunder. If two
appraisers are properly appointed, they shall confer to agree on a value. If
the two appraisers cannot agree on a value within ninety (90) days after the
expiration of the aforementioned ten (10) day period they shall each
provide a written designation of their determination of value of the shares
which are subject to purchase and the following provisions shall apply:
“(i) if the difference between the lower determination of
value and the higher determination of value by the two appointed
appraisers is less than 15%, the average of the two appraisals shall
be the final determination of value;
10.
“(ii) if the difference between the lower determination of
value and the higher determination of value by the [two appointed
appraisers] is greater than 15%, the Final Arbitrator of Value shall
determine which of the first two (2) appraiser[s] most closely
approximates the actual value of the shares which are subject to
purchase within fifteen (15) days thereafter based on the information
provided by the two previous appraisers and whose determination as
to the value of the shares which are subject to purchase shall be
binding on all parties. The Final Arbitrator of Value shall not have
discretion to select a value other than one of the two values provided
by the first two appraisals hereunder.
“The selling Shareholder and the Corporation shall share
equally the fees and expenses of the appraiser jointly named by the
parties, but each party shall be responsible for the fees and expenses
of any appraiser named solely by that party. Each party shall bear
their own expenses in presenting evidence to the appraisers. In
determining the purchase price, the appraisers appointed under this
Agreement shall consider all opinions and relevant evidence
submitted to them by the parties, or otherwise obtained by them,
may consider appropriate discounts or bonus values represented by
the interests which are subject to purchase, and shall set forth their
determination in writing together with their opinions and the
considerations on which the opinions are based, with a signed
counterpart to be delivered to each party. Real estate and
improvements shall be valued at fair market value, machinery and
equipment shall be valued at replacement cost or at fair market
value, whichever is lower; inventory shall be valued at cost or
market, whichever is lower; receivables shall be valued at their face
amount less an allowance for uncollectible items that is reasonable
in view of the past experience of the Corporation and a recent review
of their collectibility; all liabilities shall be deducted at their face
value; and a reserve for contingent liabilities shall be established.
Any appraisal hereunder shall be as of the last day of the month
which is prior to the month in which the Triggering Event or other
event giving rise to an option or mandatory obligation to purchase
hereunder. The appraiser shall use such appraisal standards as are
customary for a business similar to the Corporation.
11.
“Section 11. Payment and Transfer of Shares.
“A. Transfer.
“(1) The consideration to be paid for the shares subject to
this Agreement shall be paid to the transferring Shareholder or such
Shareholder’s estate or spouse, as the case may be. If the purchase is
caused by death, the decedent’s personal representative shall apply for and
obtain any necessary court approval or confirmation for the sale of the
decedent’s shares as required. In all events, consideration for the shares
shall be delivered in accordance with the time periods specified in this
Agreement to the persons entitled to it, and the person holding the
certificates shall cause the certificates representing the shares to be properly
endorsed and upon compliance with applicable law, shall issue new
certificate(s) in the name of the purchaser or purchasers. [¶] . . . [¶]
“B. Payment Terms.
“(1) The purchase price shall be paid, at the option of the
purchaser, in the manner specified in the Offer Notice to the extent Section
5.A. is applicable, or in the case of a purchase under any other provision of
this Agreement, by a promissory note executed by the purchasing party
(executing separate notes if there is more than one) (the ‘Note’). The Note
shall: (i) be a negotiable instrument; (ii) shall be all due and payable on the
date which is fifteen (15) years after the consummation of the sale;
(iii) shall bear interest at the greater of: (a) ________ percent or (b) the
lowest applicable federal rate such that no interest is imputed on such
obligation; (iv) shall provide for fully amortized monthly installments of
principal and interest calculated over a fifteen (15) year period, and
(v) contain full privilege of prepayment of all or any part of the principal at
any time without penalty or bonus. All interest and principal payable under
such Note will, at the option of the holder, be accelerated upon default. The
Note shall be secured by a pledge of all the shares being purchased in the
transaction to which the note relates. The pledgeholder shall be an
independent third party designated by the purchaser and the pledge
agreement shall contain such other terms and provisions as may be
customary and reasonable. . . .”
12.
II. Valuation
a. Michael Smith
Smith, a forensic accountant, was hired by Michael to appraise the Harveys’ joint
ownership interest in Enviro Tech. Smith concluded that the fair market value of
Cynthia’s one-half interest in the 825 jointly owned shares was $21,331,895.
At the outset of his calculation, Smith adjusted for Enviro Tech’s $2,471,817
“deferred tax liability.” He testified:
“It’s a timing difference attributable to tax deductions that were
taken primarily in the area of depreciation. And so relative to the
computation, basically you have this liability where you’ve really deferred
it and it’s going to be paid at the point in time that the depreciation
basically reverses itself. That’s the way that I understand the deferred tax
liability computation. [¶] . . . [¶] It is going to be [paid at] whatever the tax
rates are when the reverse occurs. [¶] . . . [¶] . . . It’s a deferred tax liability
. . . . It will be paid at some point in the future.”
Later, Smith applied a “lack of marketability discount.” In his report, he explained:
“A discount for lack of marketability is commonly applied to the ownership
capital of closely held entities to reflect the lack of a recognized market for
the ownership interests and to show that such interests are not readily
transferable. Investors typically prefer investments that have access to a
liquid secondary market and can be readily converted into cash. All other
factors being equal, ownership interests without such marketability
characteristics will sell at a discount when compared to interests that
include such marketability features.”
Smith also testified:
“Basically, marketability considers the liquidity of the interest, how
quickly and with certainty it can be converted to cash at the owner’s
discretion. [¶] . . . [¶] . . . In my office, when we undertake an appraisal of
a closely held business, there basically are restrictions on the liquidity
relative to that particular investment. And so we go ahead and allow for
that when the standard of value is fair market to value. [¶] . . . [¶]
“. . . If you have a small closely held business, it generally doesn’t
have the same liquidity of a stock in AT&T or something that’s traded over
and over in the market. [¶] . . . [¶] . . . [T]he liquidity has to do with the
13.
security itself . . . . [¶] . . . [¶] . . . Of the shares of common stock in the
closely held business. It has some liquidity restrictions because it’s not as
easy to convert that to cash. [¶] . . . [¶] . . . [I]f you can convert it to cash,
then it’s a liquid asset. If you can’t, then there’s some liquidity restrictions.
[¶] . . . [¶]
“. . . [Enviro Tech], by virtue of the fact that it’s small and closely
held, it has liquidity restrictions relative to something that’s traded over and
over in an open market. And so that was the consideration that I factored
into preparing a marketability discount.”
Based on restricted stock studies, Smith arrived at a 22.72 percent discount for lack of
marketability.
b. John Iacopi
Iacopi, a forensic accountant, was hired by Cynthia “[t]o determine the fair market
value of the shares of stock owned by [her].” He concluded that the fair market value of
Cynthia’s one-half interest in the 825 jointly owned shares was $39,954,338, an amount
that exceeded Smith’s appraisal by $18,622,443. While both Iacopi and Smith “followed
the fair market value standard,” Iacopi “didn’t discount.” Regarding Enviro Tech’s
$2,471,817 deferred tax liability, he testified:
“[Smith and I] agreed on deferred income taxes, that they’re not
immediate and specific, but he allowed them to stand as . . . valid liabilities
of the corporation, while I didn’t.”
As to why no lack-of-marketability discount was applied, Iacopi explained:
“Fair market value is a standard of value that I applied in my assignment.
And in this particular case, the difference between fair market value and pro
rata value, I found to be one and the same because the buy-sell agreement
between the parties, in fact, created a market for the shares, and we weren’t
dealing with a fair market value standard by definition, which encompasses
the fact that the shares will be exposed to the open market, to a universe of
buyers and sellers, not a particular buyer or seller, but to a universe, and we
don’t have that in this case.
“The shares aren’t exposed to an open and free market. The buyer
of the shares is [Michael] Harvey. So we have a specific buyer.
14.
“And in this case, I determined that the fair market value and the fair
value, also know as pro rata value, also known as marital value, . . . are one
and the same in this particular case. It’s not uncommon. What the
difference is between fair market value per se and marital value or fair
value or pro rata value is the discounting process, which I found not to
apply because the shares aren’t supposed [sic] to an open and free market.
We have a particular buyer, not an unknown hypothetical buyer, which the
fair market value mandates. [¶] . . . [¶]
“. . . [T]he agreement created a ready market for the shares. . . . So
in my opinion . . . a lack of market discount exists because it’s a misnomer.
We have our market. We don’t need to speculate. The buy-sell agreement
creates a market. There is your market. [¶] . . . [¶]
“I actually quote [Michael] Harvey in his deposition about how
marketable this company is and I cover that and quote him in my report.
The company is very marketable. Would he have to give a 23 percent
discount to attract a buyer for this company? No. In my opinion, no. He’s
got buyers calling him all the time. Highly marketable.”
c. PricewaterhouseCoopers LLP
Given the disparity between Smith’s and Iacopi’s appraisals, Michael and Cynthia
hired the professional services firm PricewaterhouseCoopers LLP to “serve as the Final
Arbitrator of Value, as defined in Section 10 of the . . . Agreement . . . .” After reviewing
each expert’s valuation reports, PricewaterhouseCoopers LLP concluded that Smith’s
opinion “most closely approximated the actual value of the shares which are subject to
purchase (owned by Ms. Cynthia Harvey).”
d. The court
In its “FINAL STATEMENT OF DECISION REGARDING PRINCIPAL
CONTROVERTED ISSUES AT TRIAL” filed on July 20, 2018, the court found that
Smith’s appraisal was “more persuasive,” “compelling,” “accurate,” “reasonable,” and
“equitable” than Iacopi’s.
15.
III. Post-separation acquisition of additional Enviro Tech shares
Michael acquired a total of 115 additional Enviro Tech shares after he and Cynthia
separated: 50 from Michael Archibald in 2012; five from Fernanda Cabral in 2015; and
60 from John Pray in 2017.
At trial, Michael testified that he used post-separation earnings to purchase
Michael Archibald’s and Cabral’s shares. Harvey Archibald Partners—a limited
partnership that was awarded to Michael as his separate property pursuant to a
November 2, 2015 stipulation,—purchased Pray’s shares using proceeds of a
December 23, 2015 loan secured by “Plant 6,” a facility in Arkansas owned by Enviro
Tech. Michael explained that Harvey Archibald Partners owned real property, “lease[d]
it back to Enviro Tech primarily,” and “had been the landlord to Enviro Tech . . . for 10
or 11 years.” The limited partnership’s revenue stream was “rental income” paid by
Enviro Tech, which “was going to be the source of the funds to be [used] to repay the
loan.” Michael did not notify Cynthia about the purchase of Cabral’s shares but notified
her about the purchases of Michael Archibald’s and Pray’s shares.
Cynthia testified that she did not receive any advance notice about Michael’s
purchases of Michael Archibald’s and Pray’s shares.
Iacopi testified that he and Smith “normalized” Michael’s “alleged bad acts” as
part of their valuations and these acts “did not impair [his] opinion of value of Enviro
Tech . . . .” (Boldface omitted.)
DISCUSSION
I. Michael’s appeal
a. Applicability of Section 11 of the Agreement
i. Prior proceedings
On July 10, 2013, a bifurcated bench trial commenced on the issue of the
Agreement’s enforceability. Michael and Cynthia stipulated that the Agreement
advantaged Michael, raising a presumption that he exerted undue influence over her. In a
16.
September 17, 2014 statement of decision, the superior court concluded that Michael
rebutted the presumption of undue influence and upheld the Agreement. Thereafter,
Cynthia filed a request for order (RFO)4 seeking a ruling that her one-half interest in the
jointly owned Enviro Tech shares would be appraised in accordance with the Family
Code rather than the Agreement’s Section 10 (“Valuation”). In an April 23, 2015
statement of decision, the court denied the RFO, finding that the Agreement’s Section 8
(“Sale on Marital Dissolution or Separation of Shareholder”) required the shares to be
valued pursuant to Section 10. (In re Marriage of Harvey (Aug. 23, 2016, F070672,
F071535) [nonpub. opn.] (Harvey I).)
On consolidated appeal from the interlocutory orders, Cynthia argued that the
court erred by finding that Michael rebutted the presumption of undue influence and by
denying her RFO, among other things. We affirmed the orders. As to Cynthia’s first
contention, we concluded that substantial evidence supported the finding that the
presumption was rebutted. As to her second contention, we held:
“Generally, an appellate court interprets a written instrument de
novo. (Rooney v. Vermont Investment Corp. (1973) 10 Cal.3d 351, 372;
Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; In re
Marriage of Kelkar (2014) 229 Cal.App.4th 833, 845.)
“ ‘A contract must be so interpreted as to give effect to the mutual
intention of the parties as it existed at the time of contracting . . . .’ (Civ.
Code, § 1636; accord, Waller v. Truck Ins. Exchange, Inc. (1995) 11
Cal.4th 1, 18 (Waller).) ‘When a contract is reduced to writing, the
intention of the parties is to be ascertained from the writing alone, if
possible . . . .’ (Civ. Code, § 1639; accord, Waller, supra, at p. 18.) ‘The
language of a contract is to govern its interpretation, if the language is clear
and explicit, and does not involve an absurdity.’ (Civ. Code, § 1638;
accord, Waller, supra, at p. 18.)
4 In a family law proceeding, an RFO is the equivalent of a motion or notice of
motion. (See Cal. Rules of Court, rule 5.92(a)(1)(A).)
17.
“In her RFO, Cynthia argued Section 8, subdivision A., is not
subject to Section 10 at all and valuation must be ‘in accordance with the
Family Code.’
“Under subdivision A.(1) of Section 8, in the event of a divorce in
which Michael is not granted Cynthia’s interest in [Enviro Tech] shares as
part of the decree of dissolution, separation maintenance agreement, or
property settlement, the decree, agreement, or settlement must allow
Michael to buy Cynthia’s interest ‘upon the terms and conditions provided
in this Section . . . .’ [Citation.] The phrase ‘this Section’ clearly refers to
Section 8 in its entirety and is not susceptible to another interpretation.
(See Civ. Code, § 1644 [‘The words of a contract are to be understood in
their ordinary and popular sense . . . .’]; see also Prudential Ins. Co. of
America, Inc. v. Superior Court (2002) 98 Cal.App.4th 585, 599; Lunardi v.
Great-West Life Assurance Co. (1995) 37 Cal.App.4th 807, 820 [court will
not engage in strained or tortured interpretation of contractual language in
order to fabricate an ambiguity where none exists].) Section 8, by way of
subdivisions B. and C., specifies Cynthia’s interest in [Enviro Tech] shares
must be purchased ‘at the price set forth in’ or ‘in accordance with the price
and terms set forth in’ Section 10. [Citation.] Section 10—titled
“Valuation”—sets forth the mechanism by which to determine ‘[t]he
purchase price to be paid for [Enviro Tech] Shares which are subject to
purchase . . . .’ [Citation.]
“Section 8, subdivision A.(1), by virtue of its ‘terms and conditions
provided in this Section’ language, encompasses Section 10.
“Cynthia insists such an interpretation of Section 8, subdivision
A.(1), would transform subdivision A.(2) into ‘meaningless surplusage
language.’ It does not. Subdivision A.(2), which contains the distinctive
phrase ‘as a part of the division of the community property of the marriage
pursuant to the . . . Family Code’ [citation], applies in the event of a divorce
in which Michael is granted Cynthia’s interest in [Enviro Tech] shares as
part of the division of the community property. Our interpretation of
subdivision A.(1), which concerns a different scenario, does not render
subdivision A.(2) extraneous.” (Harvey I, supra, F070672, F071535.)
ii. Analysis
Michael argues that “the trial court was bound by the law of the case stated in
Harvey I to follow the [Agreement] in providing for [his] purchase of Cynthia’s shares.”
(Boldface & some capitalization omitted.) He specifies:
18.
“The promissory note and purchasing procedure the trial court
ordered in no way resemble the purchase terms and procedures mandated
by [the Agreement’s] [S]ection 11. The trial court did not follow the
mandate of [S]ection 8.B. to provide for the purchase of Cynthia’s interest
in the shares ‘upon the terms and conditions set forth in Section 11’ or
similar mandate of [S]ection 8.C. to provide for purchase of the shares ‘in
accordance with the price and terms set forth in Sections 10 and 11. . . .’
[Citations.]
“In failing to order purchase on the terms provided in [S]ection 11,
the trial court violated the law of the case that this Court established in
Harvey I: that the [Agreement] controls Michael’s purchase of Cynthia’s
interest in [Enviro Tech] shares.”
“The law of the case doctrine states that when, in deciding an appeal, an appellate
court ‘states in its opinion a principle or rule of law necessary to the decision, that
principle or rule becomes the law of the case and must be adhered to throughout its
subsequent progress, both in the lower court and upon subsequent appeal . . . .’
[Citations.]” (Kowis v. Howard (1992) 3 Cal.4th 888, 892-893; see Beam v. Dugan
(1940) 37 Cal.App.2d 491, 496-497 [“It is settled law that constructions of written
instruments are decisions upon questions of law and become the law of the case . . . .”].)
In Harvey I, we determined that the language of Section 8, subdivision A.(1)—
which concerned the scenario “in which Michael is not granted Cynthia’s interest in
[Enviro Tech] shares as part of the decree of dissolution, separation maintenance
agreement, or property settlement”—“encompasses Section 10” “by way of [Section 8,]
subdivisions B. and C.” (Harvey I, supra, F070672, F071535.) As noted, subdivisions
B. and C. of Section 8 referred to both the “price” set forth in Section 10 and the “terms”
set forth in Section 11. (See ante, at p. 9.) Thus, while there was no express
determination in Harvey I as to Section 11, by virtue of Harvey I’s rationale, Section 8,
subdivision A.(1) necessarily encompassed Section 11 as well. We also pointed out that
our interpretation of Section 8, subdivision A.(1) “does not render” “extraneous”
Section 8, subdivision A.(2), which concerned the scenario “in which Michael is granted
Cynthia’s interest in [Enviro Tech] shares as part of the division of the community
19.
property.” (Harvey I, supra, F070672, F071535.) We highlighted as “distinctive” the
phrase “ ‘as a part of the division of the community property of the marriage pursuant to
the [California] Family Code.’ ” (Ibid.)
Here, the court awarded Michael “all right, title, and interest in and to [Cynthia’s]
412.5 community property [Enviro Tech] shares . . . .” This is the scenario contemplated
in Section 8, subdivision A.(2). On appeal, Michael essentially contends that Harvey I
required the lower court to impose the terms and conditions set forth in Section 11
(“Payment and Transfer of Shares”). However, Harvey I never addressed whether
Section 8, subdivision A.(2) encompassed Section 11. The law of the case doctrine “does
not apply to points of law that might have been, but were not determined on the prior
appeal.” (Nally v. Grace Community Church (1988) 47 Cal.3d 278, 302.) We resolve
that question now.
Again, generally, an appellate court interprets a written instrument de novo.
(Rooney v. Vermont Investment Corp. (1973) 10 Cal.3d 351, 372; Parsons v. Bristol
Development Co. (1965) 62 Cal.2d 861, 865; In re Marriage of Kelkar (2014) 229
Cal.App.4th 833, 845.) “A contract must be so interpreted as to give effect to the mutual
intention of the parties as it existed at the time of contracting . . . .” (Civ. Code, § 1636;
accord, Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 (Waller).) “When a
contract is reduced to writing, the intention of the parties is to be ascertained from the
writing alone, if possible . . . .” (Civ. Code, § 1639; accord, Waller, supra, at p. 18.)
“The language of a contract is to govern its interpretation, if the language is clear and
explicit, and does not involve an absurdity.” (Civ. Code, § 1638; accord, Waller, supra,
at p. 18.) “The whole of a contract is to be taken together, so as to give effect to every
part, if reasonably practicable, each clause helping to interpret the other.” (Civ. Code,
§ 1641; accord, Code Civ. Proc., § 1858.) “This means that ‘[c]ourts must interpret
contractual language in a manner which gives force and effect to every provision’
[citation], and avoid constructions which would render any of its provisions or words
20.
‘surplusage.’ [Citation.] Put simply, ‘[a] contract term should not be construed to render
some of its provisions meaningless or irrelevant.’ [Citation.]” (In re Marriage of
Nassimi (2016) 3 Cal.App.5th 667, 688; accord, City of Atascadero v. Merrill Lynch,
Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473.)
In addition to Section 8, subdivisions A.(1), B., and C., other provisions in the
Agreement called for the application of Section 11 (in tandem with Section 10):
Under Section 4 (“Option to Purchase”), in the event the Harvey Trust or the
Archibald Trust desires to “sell, transfer, assign, pledge, encumber, hypothecate, or in
any way dispose of any of his or her shares . . . or any right or interest in them,” Enviro
Tech “shall have the option to purchase all or any portion of the offered shares, at either
the price and terms stated in [that shareholder’s] Offer Notice or at a price determined
under Section 10 of this Agreement and the terms set forth in Section 11 of this
Agreement as determined at the option of [Enviro Tech].” (See ante, at p. 5, italics
added.) If Enviro Tech fails to exercise its option, then the other shareholder “shall have
the option to purchase all or any portion of the offered shares not purchased by [Enviro
Tech] . . . at the same price and terms as provided to [Enviro Tech] above, as elected by
the purchasing Shareholder(s).” (See ante, at p. 6, italics added.)
Under Section 5 (“Other Events Giving Rise To Option To Purchase”),
subdivision A., in the event a shareholder is subject to one of five enumerated
“Triggering Events”—i.e., “Bankruptcy / Involuntary Dissolution,” “Unauthorized
Encumbrance,” “Unauthorized Conveyance or Gift,” “Death of Michael Harvey,”
“Termination of Employment of Archibald”—then that shareholder “shall offer” “to sell
his or her shares and any of his or her spouse’s shares, at the price provided in Section 10
and upon the terms described in Section 11 of this Agreement” or “will be deemed to
offer to sell its shares and any permissible transferees[’] shares at the price provided in
Section 10 and upon the terms described in Section 11 of this Agreement.” (See ante, at
pp. 6-8, italics added.) Section 5, subdivision B. specifies that Enviro Tech “shall have
21.
an option” “to purchase all or any portion of the shares of the Shareholder who is subject
of the Triggering Event and his spouse, at a price determined under Section 10 of this
Agreement and the terms as set forth in Section 11 of this Agreement.” (See ante, at p. 8,
italics added.) If Enviro Tech fails to exercise its option, Section 5, subdivision D.
specifies that the other shareholder “shall have the option to purchase all or any portion
of the offered shares not purchased by [Enviro Tech], at the same price and terms as
provided for [Enviro Tech] in Section 5.B. above.” (See ante, at p. 8, italics added.)
Under Section 6 (“Purchase Obligations On Death of Archibald”), in the event
of Michael Archibald’s death, “the HARVEY TRUST and/or MICHAEL HARVEY shall
acquire all of the outstanding Shares of the Corporation owned by the ARCHIBALD
TRUST and/or his spouse” and “[t]he purchase price and terms of purchase shall be as
specified in Section 10 and Section 11 of this Agreement.” (See ante, at p. 8, italics
added.)
Under Section 9 (“Marriage of Shareholder”), in the event a shareholder marries
and his or her spouse does not sign and submit a spousal consent form in a timely
fashion, “the Corporation and other Shareholders shall have the option to purchase [the
newly married] Shareholder and his or her spouse’s interest in the Corporation at the
price and terms set forth in Sections 10 and 11, and in accordance with Sections 5.B.
through 5.G. . . .” (See ante, at p. 10, italics added.)
Section 11 was clearly invoked in the aforementioned provisions. However, the
same cannot be said of Section 8, subdivision A.(2) upon a plain reading of its language.
It neither overtly raised Section 11 (unlike Section 4, subdivision B., Section 5,
subdivisions A. and B., Section 6, Section 8, subdivisions B. and C., and Section 9) nor
referred to another provision that—in turn—mentioned Section 11 (unlike Section 4,
subdivision D., Section 5, subdivision D., and Section 8, subdivision A.(1)).
Furthermore, we do not find this omission to be absurd. The provisions in the Agreement
invoking Section 11 congruously involved purchases of a signatory’s shares by Enviro
22.
Tech or another signatory under certain circumstances. On the other hand, while
Section 8 was titled “Sale on Marital Dissolution or Separation of Shareholder”
(italics added), subdivision A.(2) dealt with the conferral of the entirety of Cynthia’s
interest in the jointly owned Enviro Tech shares to Michael “as a part of the division of
the community property of the marriage pursuant to the California Family Code,” not its
sale. (See Smith v. Morton (1972) 29 Cal.App.3d 616, 620 [“ ‘Although the description
of an instrument by the parties may bear some weight on the question of its interpretation,
the name by which the parties designate their contract is not determinative of its
nature. . . . Reference must be had to the instrument itself, to a reading and consideration
of all its terms, conditions, and covenants, to determine its true character.”]; see also
d’Elia v. d’Elia (1997) 58 Cal.App.4th 415, 425 [“[T]he division of a community estate is
not a simplistic ‘sale’ of individual assets, asset by asset, but an equal division of the
whole of a community estate.”]; Hogoboom & King, Cal. Practice Guide: Family Law
(The Rutter Group 2021) ¶ 8:1035.1, pp. 8-361 to 8-362 [“The ‘asset distribution’
method (which may or may not include a ‘cash-out’ equalizing award) does not amount
to a ‘sale’ of individual assets between the spouses. Rather, it is part and parcel of the
overall net equal division of the whole of the community estate.”]5.)
“A bedrock principle of contract law in California has always been that competent
parties should have ‘ “ ‘the utmost liberty of contract’ ” ’ to arrange their affairs
according to their own judgment so long as they do not contravene positive law or public
policy. [Citations.]” (Series AGI West Linn of Appian Group Investors DE, LLC v. Eves
(2013) 217 Cal.App.4th 156, 164; see Naify v. Pacific Indemnity Co. (1938) 11 Cal.2d 5,
5 Hogoboom and King’s treatise, though not binding (see Ammerman v.
Callender (2016) 245 Cal.App.4th 1058, 1086), nonetheless has been cited
favorably by the California Supreme Court. (See, e.g., In re Marriage of Green
(2013) 56 Cal.4th 1130, 1137-1138; In re Marriage of Walrath (1998) 17 Cal.4th
907, 913; In re Marriage of Oddino (1997) 16 Cal.4th 67, 82, fn. 8, 84, 88.)
23.
11 [“Parties are, within reason, free to contract as they please . . . .”].) Had the parties to
the Agreement wanted Section 8, subdivision A.(2) to invoke Section 11, they could have
easily included language to that effect (as they had for other provisions). That they chose
not to do so signaled a contrary intent. (Cf. Scher v. Burke (2017) 3 Cal.5th 136, 144-145
[“As a general rule, when the Legislature uses a term in one provision of a statute but
omits it from another . . . we generally presume that the Legislature did so deliberately, in
order ‘ “to convey a different meaning.” ’ ”].)
In his reply brief, Michael acknowledges that section 8, subdivision A.(2) “does
not expressly require payment ‘upon the terms and conditions provided in this section,’ as
does subdivision A(1)” and “does not provide for or govern the terms and conditions of
the division, particularly when the court uses the cash-out method” (italics omitted).
Nevertheless, he suggests that Section 8, subdivision A.(2) must be construed to trigger
Section 11 to “carry out the manifest intent of the [Agreement].” We disagree. “When
the language of a contract is clear and explicit and is reduced to writing, the language of
the contract governs its interpretation, and the intention of the parties is to be ascertained
from the writing alone [citations].” (Crow v. P.E.G. Construction Co., Inc. (1957) 156
Cal.App.2d 271, 277.) “[W]hen courts construe an instrument, a judge is ‘not to insert
what has been omitted, or to omit what has been inserted . . . .’ ” (Edwards v. Arthur
Andersen LLP (2008) 44 Cal.4th 937, 954; accord, Code Civ. Proc., § 1858; see
American-Hawaiian Steamship Co. v. Home Sav. and Loan Assn. (1974) 38 Cal.App.3d
73, 82 [“Courts through the medium of construction may not put into contracts provisions
that are not already there.”].) We find that the plain wording of Section 8, subdivision
A.(2) did not contemplate Section 11 and will not rewrite this provision to “insert . . .
language which [Michael] now wishes were there.” (Levi Strauss & Co. v. Aetna
Casualty & Surety Co. (1986) 184 Cal.App.3d 1479, 1486.) Therefore, the court was free
to set its own terms and conditions for the equalization payment. (See In re Marriage of
24.
Bergman (1985) 168 Cal.App.3d 742, 761 [“Courts have discretion to use promissory
notes for relatively short periods at reasonable interest rates.”].)
II. Cynthia’s cross-appeal
a. Valuation
Cynthia makes two arguments regarding the valuation of her one-half interest in
the jointly owned Enviro Tech shares. First, “the court erred in applying a discount for
possible future taxes that were not immediate and specific.” (Boldface & capitalization
omitted.) Second, “the trial court improperly utilized a marketability discount in valuing
[Enviro Tech].” (Boldface & capitalization omitted.)
i. Standard of review
“Under [Family Code] section 2550, the court must divide the community estate
of the parties equally. In this regard, the court has broad discretion to determine the
manner in which community property is divided and the responsibility to fix the value of
assets and liabilities in order to accomplish an equal division.” (In re Marriage of
Duncan (2001) 90 Cal.App.4th 617, 631 (Duncan).) “Issues concerning the valuation
and apportionment of community property are reviewed for abuse of discretion.” (In re
Marriage of Finby (2013) 222 Cal.App.4th 977, 984.) “Generally, ‘the appropriate test
of abuse of discretion is whether or not the trial court exceeded the bounds of reason, all
of the circumstances before it being considered. [Citations.]’ [Citation.]” (In re
Marriage of Ackerman (2006) 146 Cal.App.4th 191, 197.) “Insofar as the trial court
made factual determinations—and the valuation of a business is a factual issue—we
accept those facts as true so long as they are supported by substantial evidence.” (In re
Marriage of Honer (2015) 236 Cal.App.4th 687, 694 (Honer); see Roddenberry v.
Roddenberry (1996) 44 Cal.App.4th 634, 651 [“ ‘Substantial evidence’ is evidence of
ponderable legal significance, evidence that is reasonable, credible and of solid value.”].)
“[A] court abuses its discretion if its findings are wholly unsupported, since a
consideration of the evidence ‘is essential to a proper exercise of judicial discretion.
25.
[Citation.]’ [Citation.]” (In re Marriage of Ackerman, supra, at p. 197.) “All issues of
credibility are for the trier of fact, and all conflicts in the evidence must be resolved in
support of the judgment.” (In re Marriage of Nichols (1994) 27 Cal.App.4th 661, 670.)
ii. Analysis
“Where economic circumstances warrant, the court may award an asset of the
community estate to one party on such conditions as the court deems proper to effect a
substantially equal division of the community estate.” (Fam. Code, § 2601; see Cal. Law.
Revision Com. com., 29D pt. 2 West’s Ann. Fam. Code (2020 ed.) foll. § 2601, p. 17
[“Section 2601 continues former Civil Code Section 4800(b)(1) without substantive
change.”].) “Under this provision it is contemplated that where a major item of
community property not reasonably subject to division is awarded one party, the other
shall be compensated in some manner so as to maintain the required equal division.” (In
re Marriage of Tammen (1976) 63 Cal.App.3d 927, 930 [citing former Civ. Code,
§ 4800, subd. (b)(1)].)
“[T]he court possesses no authority to divide the community estate between the
parties other than equally, and cannot delegate its responsibility to fix the fair market
value of the community estate where assets are not divided in kind.” (In re Marriage of
Cream (1993) 13 Cal.App.4th 81, 88; see Hogoboom & King, Cal. Practice Guide:
Family Law, supra, ¶ 8:1328, pp. 8-474 to 8-475 [“Unless the parties stipulate or agree to
accept some other measure of value (e.g., cost or book value), an equal division of the
community estate must be predicated on fair market value.”].) “[T]he fair market value
of a marketable asset in marital dissolution cases is the highest price on the date of
valuation that would be agreed to by a seller, being willing to sell but under no obligation
or urgent necessity to do so, and a buyer, being ready, willing and able to buy but under
no particular necessity for so doing.” (In re Marriage of Cream, supra, at p. 89, fn.
omitted; accord, Hogoboom & King, supra, ¶ 8:1329, p. 8-475; see In re Marriage of
26.
Sharp (1983) 143 Cal.App.3d 714, 719 [“ ‘Market value supplies a relatively objective
and easily administered basis of valuation that no other method can supply.’ ”].)
“ ‘[T]he determination of the value of infrequently sold, unlisted, closely held
stock is a difficult legal problem. Most of the cases illustrate there is no one applicable
formula that may be properly applied to the myriad factual situations calling for a
valuation of closely held stock. [Citation.] It is, therefore, incumbent upon a court faced
with such a problem to review each factor that might have a bearing upon the worth of
the corporation and hence upon the value of the shares.’ [Citation.]” (Duncan, supra, 90
Cal.App.4th at p. 632.) “The value of property may be shown . . . by the opinions of . . .
[¶] . . . [w]itnesses qualified to express such opinions.” (Evid. Code, § 813, subd. (a)(1).)
1. Deferred tax liability
“[I]t is improper to take into consideration the tax consequences of an order
dividing a community asset unless the tax liability is immediate and specific and will
arise in connection with the division of the community property.” (In re Marriage of
Czapar (1991) 232 Cal.App.3d 1308, 1315; accord, Hogoboom & King, Cal. Practice
Guide: Family Law, supra, ¶ 8:1356, p. 8-483.) “The division of the community estate
in a dissolution or legal separation proceeding is itself a non-recognizing event (neither
spouse thereby incurs tax liabilities . . .). And future tax consequences related to what
either might eventually do with his or her share of the community estate are inherently
speculative, controllable in large part by the taxpayer (e.g., he or she can decide whether
and when to sell, can engage in tax planning to reduce the impact, etc.).” (Hogoboom &
King, supra, ¶ 8:1357, p. 8-483, italics omitted.)
In the process of reaching his final calculation, Smith accounted for Enviro Tech’s
$2,471,817 deferred tax liability. According to his testimony, this liability—which
related to depreciation—was “going to be paid at the point in time that the depreciation
basically reverses itself,” i.e., “at some point in the future.” “The mere possibility of
taxation does not constitute a tax consequence sufficiently ‘immediate and specific’ to
27.
merit judicial recognition in achieving an equal division of community property.” (In re
Marriage of Davies (1983) 143 Cal.App.3d 851, 857.) Moreover, Iacopi testified that
both he and Smith agreed that the deferred tax liability was “not immediate and specific.”
Michael counters in his cross-respondent’s brief that “the trial court did not err in
. . . adjusting for deferred tax liability.” (Boldface & capitalization omitted.) However,
this contention “is not fully developed and is not supported by citation to any authority.”
(In re Marriage of Carlisle (2021) 60 Cal.App.5th 244, 255.) “ ‘An appellate brief
“should contain a legal argument with citation of authorities on the points made. If none
is furnished on a particular point, the court may treat it as [forfeited], and pass it without
consideration.” [Citation.]’ ” (People ex rel. Reisig v. Acuna (2010) 182 Cal.App.4th
866, 879, quoting In re Marriage of Schroeder (1987) 192 Cal.App.3d 1154, 1164.) We
do so here.
We conclude that the valuation erroneously accounted for a tax liability that was
not immediate and specific.
2. Discount for lack of marketability
A discount for lack of marketability “ ‘adjusts for a lack of liquidity in one’s
interest in an entity, on the theory that there is a limited supply of potential buyers for
stock in a closely-held corporation.’ [Citation.]” (Maughan v. Correia (2012) 210
Cal.App.4th 507, 520; see In re Marriage of Lotz (1981) 120 Cal.App.3d 379, 384 [“The
stock in a publicly traded corporation has liquidity value because its owners can sell stock
and get money in a matter of days, whereas the stock in [a closely held corporation] has
no liquidity value.”].)
Here, both Smith and Iacopi appraised the fair market value of Cynthia’s one-half
interest in the jointly owned Enviro Tech shares, though the experts’ calculations varied
significantly. Smith opined that a discount for lack of marketability was proper because
Enviro Tech was a “small and closely held” entity that had “liquidity restrictions”
compared to “something that’s traded over and over in an open market” like AT&T. His
28.
report detailed that “[i]nvestors typically prefer investments that have access to a liquid
secondary market and can be readily converted into cash.” Iacopi believed that such a
discount was a “misnomer” because (1) Michael would be a “specific buyer” of the
jointly owned shares, which were not actually “exposed to an open and free market”; and
(2) Enviro Tech was “[h]ighly marketable.” The court adopted Smith’s valuation, finding
it “more persuasive,” “compelling,” “accurate,” “reasonable,” and “equitable.” “Any
substantial quarrel [Cynthia] may have with [Smith]’s valuation methodology goes to the
weight . . . of his testimony.” (Honer, supra, 236 Cal.App.4th at p. 699; see Duncan,
supra, 90 Cal.App.4th at p. 632 [“Differences between the experts’ opinions go to the
weight of the evidence.”].) “To the extent [Cynthia] suggests we reweigh the two expert
opinions, she invites us to overstep the proper scope of our review.” (Honer, supra, at
p. 699; see Robinson v. Wilson (1974) 44 Cal.App.3d 92, 110 [“[T]he determination of
the credibility and weight to be given to the testimony of experts is made ‘by the trier of
fact and not by an appellate tribunal.’ ”].)6, 7
We conclude substantial evidence supported a discount for lack of marketability.
6 Cynthia asserts that Smith’s trial testimony differed from his deposition testimony.
Assuming, arguendo, this is true, “[i]nconsistencies only affect the credibility of the
witness or reduce the weight of his testimony and it was for the trier of the fact to weigh
the evidence and determine his credibility.” (Stromerson v. Averill (1943) 22 Cal.2d 808,
814-815, overruled in part on other grounds by Conservatorship of O.B. (2020) 9 Cal.5th
989, 1010.)
7 Cynthia suggests that Honer, supra, 236 Cal.App.4th 687 stands for the
proposition that a discount for lack of marketability is “rarely applied in a marital
dissolution action.” There is no such holding in that case. Cynthia also cites various
other cases in an attempt to discredit the use of this discount. However, they are either
factually inapposite or nonbinding out-of-state authorities. We once again reiterate that
“ ‘there is no one applicable formula that may be properly applied to the myriad factual
situations calling for a valuation of closely held stock. [Citation.]’ ” (Duncan, supra, 90
Cal.App.4th at p. 632.)
29.
b. Relief for breach of fiduciary duty
i. Background
In a “RESPONDENT’S REQUEST FOR STATEMENT OF DECISION”
dated May 22, 2018, Cynthia asked the court to “render a written statement of decision as
to all contested factual and legal issues as set forth in her Post Trial Brief . . . filed
concurrently herewith.” In the “RESPONDENT’S POST TRIAL BRIEF,” she
identified as a contested trial issue “Breaches of Fiduciary Duty by Mi[chael],” i.e.,
“Mi[chael’s] Breach of His Fiduciary Obligation in the Acquisition of Additional [Enviro
Tech] Shares Post-Separation (Archibald, Cabral, and Pray); Imposition of Constructive
Trust.” Cynthia “request[ed] that Mi[chael] be deemed to have acquired the shares in
trust for the benefit of the community, that they be awarded to him as community
property at the same per share value as the 825 [jointly owned] shares, and that he may
receive [Family Code section] 2640 reimbursements only to the extent that he proved that
no community property or unauthorized funds from [Enviro Tech] were used to pay for
the shares.”
In the July 23, 2018 judgment, the superior court concluded that Cynthia “failed to
establish any impairment of [her] undivided one-half interest in the community estate
from any breach of fiduciary duty by [Michael].” It explained in the July 20, 2018
statement of decision:
“Here, the evidence adduced at trial failed to demonstrate that any of the
alleged breaches resulted in harm to [Enviro Tech] or a significant
diminution in its value. None of the alleged breaches altered the opinions
of either party’s expert as to the value of [Enviro Tech] or the community’s
interest therein.
“Somewhat perversely, it must be admitted, Husband’s post-separation
acquisition of [Enviro Tech] shares operated to consolidate ownership of
the company in its founder and CEO, akin to a corporate ‘buy-back’ of
voting rights stock with respect to dilution of control. In any event, both
experts were in agreement that the value of [Enviro Tech] increased
substantially and consistently post-separation and it is therefore factually
30.
unsupported for Wife to contend that her community property interest in
[Enviro Tech] was impaired by the stock purchases.
“Likewise, Husband’s increases in income contrary to court orders and his,
frankly, candid admission of what Husband refers to as ‘bad acts’ and what
Wife refers to as ‘money laundering’ or ‘round tripping,’ as troubling as the
Court finds them, are nevertheless not demonstrated by the evidence to
have resulted in impairment of Wife’s community interest in [Enviro
Tech].”
Cynthia had filed a “RESPONDENT’S OBJECTIONS AND REQUESTS AS
TO THE STATEMENT OF DECISION AND PROPOSED JUDGMENT” dated
July 16, 2018. (Underlining omitted.) Regarding “Husband’s Breaches of Fiduciary
Duties, Resulting Harm, and Available Remedy,” she stated:
“The Court seems to find that Husband breached his fiduciary duties owed
to Wife in the management and control of their community property
interest in [Enviro Tech]. However, the Court then holds that Wife failed
to demonstrate that ‘any of [the] alleged breaches resulted in harm to
[Enviro Tech] or a significant diminution in its value’ and also that Wife
had failed to demonstrate that the alleged breaches ‘impaired Wife’s
present undivided interest in the community estate.’ Wife asserts that the
Court has construed the ‘harm’ and ‘remedy’ prongs of the analysis too
narrowly resulting in the Court declining to provide an appropriate remedy.
The Court stated that Husband’s conduct was very troubling, including his
‘increase in income contrary to court orders,’ ‘candid admission of what
Husband refers to as “bad acts,” ’ ‘duplicitous acquisition of [Enviro Tech]
stock from third-parties without notice to Wife,’ and ‘fraudulent
procurement of money from [Enviro Tech] . . . [.]’ Wife asserts that
Husband’s conduct, in each respect, was a breach of his fiduciary duties to
Wife. At trial, Husband either admitted to his conduct and/or failed to
controvert Wife’s evidence as to his conduct.”
ii. Analysis
“Under Family Code sections 721 and 1100, spouses have fiduciary duties to each
other with respect to the management and control of community property.” (In re
Marriage of Hokanson (1998) 68 Cal.App.4th 987, 992.) “A spouse has a claim against
the other spouse for any breach of the fiduciary duty that results in impairment to the
claimant spouse’s present undivided one-half interest in the community estate, including,
31.
but not limited to, a single transaction or a pattern or series of transactions, which
transaction or transactions have caused or will cause a detrimental impact to the claimant
spouse’s undivided one-half interest in the community estate.” (Fam. Code, § 1101,
subd. (a).)
Cynthia argues that “[t]he additional [Enviro Tech] shares were community
property as to which Cynthia was provided no equalizing payment.” (Boldface & some
capitalization omitted.) She later adds:
“[Family Code] Section 1101(a) refers to ‘impairment to the
claimant spouse’s present undivided one-half interest in the community
estate’ (emphasis added), not to any specific community asset such as
[Enviro Tech]. Cynthia’s interest in the community property that Michael
used to buy the additional shares was impaired when Michael used that
property to benefit only himself.”
In other words, Cynthia alleges that the court’s ruling should have accounted for
impairments to her undivided one-half interest in (1) the community property used to
purchase the additional Enviro Tech shares; and (2) the additional Enviro Tech shares
themselves. The statement of decision made no express findings as to whether
(1) Michael used community property to purchase the additional shares; and (2) the
additional Enviro Tech shares constituted community property.
“A party may . . . preserve perceived error in a statement of decision, by making
specific objections to the statement of decision. Code of Civil Procedure sections 632
and 634 prescribe a two-step process for doing so. ‘[F]irst, a party must request a
statement of decision as to specific issues . . . ; second, if the court issues such a
statement, a party claiming deficiencies therein must bring such defects to the trial court’s
attention to avoid implied findings on appeal favorable to the judgment . . . .’ ” (In re
Marriage of Ciprari (2019) 32 Cal.App.5th 83, 94, quoting In re Marriage of Arceneaux
(1990) 51 Cal.3d 1130, 1134.) “To bring defects in a statement of decision to the trial
court’s attention within the meaning of [Code of Civil Procedure] section 634, objections
32.
to a statement of decision must be ‘specific.’ [Citation.] The alleged omission or
ambiguity must be identified with sufficient particularity to allow the trial court to correct
the defect. [Citation.] ‘By filing specific objections to the court’s statement of decision a
party pinpoints alleged deficiencies in the statement and allows the court to focus on the
facts or issues the party contends were not resolved or whose resolution is ambiguous.’
[Citation.]” (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 498.)
Here, Cynthia’s objections to the statement of decision did not identify with
sufficient particularity any lack of findings as to Michael’s use of community property to
purchase the additional Enviro Tech shares or the characterization of these shares as
community property. “If the party challenging the statement of decision fails to bring
omissions or ambiguities in it to the trial court’s attention, then, under Code of Civil
Procedure section 634, the appellate court will infer the trial court made implied factual
findings favorable to the prevailing party on all issues necessary to support the judgment,
including the omitted or ambiguously resolved issues.” (Fladeboe v. American Isuzu
Motors, Inc. (2007) 150 Cal.App.4th 42, 59-60; see id. at p. 58 [“The doctrine [of implied
findings] is a natural and logical corollary to three fundamental principles of appellate
review: (1) a judgment is presumed correct; (2) all intendments and presumptions are
indulged in favor of correctness; and (3) the appellant bears the burden of providing an
adequate record affirmatively proving error.”].)
“ ‘Under the doctrine of “implied findings,” . . . appellate courts reviewing the
appealed judgment must presume the trial court made all factual findings necessary to
support the judgment for which there is substantial evidence.’ [Citations.]” (In re
Marriage of McHugh (2014) 231 Cal.App.4th 1238, 1248; see Roddenberry v.
Roddenberry, supra, 44 Cal.App.4th at p. 651 [“ ‘Substantial evidence’ is evidence of
ponderable legal significance, evidence that is reasonable, credible and of solid value.”].)
33.
1. Purchase of Michael Archibald’s and Cabral’s shares
Michael testified that he purchased Michael Archibald’s and Cabral’s shares with
post-separation earnings. (See Fam. Code, §§ 771, subd. (a) [“The earnings and
accumulations of a spouse . . . , after the date of separation of the spouses, are the
separate property of the spouse.”]; 772 [“After entry of a judgment of legal separation of
the parties, the earnings or accumulations of each party are the separate property of the
party acquiring the earnings or accumulations.”]; see also Hogoboom & King, Cal.
Practice Guide: Family Law, supra, ¶ 8:70, p. 8-26 [“A community property interest
may only be acquired during marriage and before separation.”].) “The testimony of a
single witness, even if that witness is a party to the case, may constitute substantial
evidence.” (Consolidated Irrigation Dist. v. City of Selma (2012) 204 Cal.App.4th 187,
201, citing In re Marriage of Mix (1975) 14 Cal.3d 604, 614.) We conclude that
substantial evidence supported the implied finding that Michael did not use community
property to purchase Michael Archibald’s and Cabral’s Enviro Tech shares.
“Property purchased with separate property funds is . . . the separate property of
the acquiring spouse.” (In re Marriage of Stoner (1983) 147 Cal.App.3d 858, 862, citing
In re Marriage of Mix, supra, 14 Cal.3d at p. 610.) In view of Michael’s testimony, we
conclude that substantial evidence supported the implied finding that the Enviro Tech
shares purchased from Michael Archibald and Cabral did not constitute community
property.
2. Purchase of Pray’s shares
Michael testified that Harvey Archibald Partners, a limited partnership awarded to
him as his separate property pursuant to a November 2, 2015 stipulation, purchased
Pray’s shares using proceeds of a secured loan. “[I]f community assets are hypothecated
to obtain the loan, the proceeds may be community property.” (Hogoboom & King, Cal.
Practice Guide: Family Law, supra, ¶ 8:281, p. 8-110.) In the instant case, however, the
collateral was a facility in Arkansas owned by Enviro Tech. (See Union Bank v.
34.
Anderson (1991) 232 Cal.App.3d 941, 949 [“When shareholders purchase stock in a
corporation, and the corporation includes certain holdings in real property, the
shareholders do not acquire an ownership interest in the real property. A share is simply
a unit of proprietary interest which the shareholder holds in the corporation. [Citations.]
That is, the shareholders are not the owners of corporate property; the whole title is in the
corporation.”].) We conclude that substantial evidence supported the implied finding that
Michael did not use community property to purchase Pray’s Enviro Tech shares.
“[T]he proceeds of a postseparation loan will be the separate property of the
borrowing spouse if it is not obtained in exchange for community property and is,
therefore, unrelated to the community.” (In re Marriage of Stephenson (1984) 162
Cal.App.3d 1057, 1085; accord, Hogoboom & King, Cal. Practice Guide: Family Law,
supra, ¶ 8:282, p. 8-110.) In view of Michael’s testimony (see Consolidated Irrigation
Dist. v. City of Selma, supra, 204 Cal.App.4th at p. 201), we conclude that substantial
evidence supported the implied finding that the Enviro Tech shares purchased from Pray
did not constitute community property.8
8 Cynthia filed a motion for judicial notice on October 23, 2019. We deferred our
ruling pending consideration of the appeal on its merit. Now having done so, we deny
Cynthia’s motion.
35.
DISPOSITION
The judgment is reversed in part and the cause is remanded to the superior court to
reevaluate Cynthia’s one-half interest in the jointly owned Enviro Tech shares without
consideration of the company’s deferred tax liability and readjust the division of
community property accordingly. (See In re Marriage of Fonstein (1976) 17 Cal.3d 738,
751-752.) Costs on appeal are awarded to Cynthia M. Harvey.
DETJEN, Acting P. J.
WE CONCUR:
FRANSON, J.
SMITH, J.
36.