Wife ’s book of business is similar to goodwill, which is a divisible community asset . . .
In reversal, Fourth District holds that trial court erred by characterizing part of wife ’s transitional bonus, along with remaining bonuses, as her separate property; and by finding that her (RLQ) ’book of business ” (licensed professional ’s list of clients) was not a valuable asset subject to property division
In re Marriage of Finby
(December 18, 2013; ordered published January 7, 2014)
California Court of Appeal 4 Civil G046814 (Div 3) 222 Cal.App.4 th 977, 166 Cal.Rptr.3d 305, 2014 FA 1622, per Rylaarsdam, J, (O ’Leary, PJ and Ikola, J, concurring). Orange County: Kreber, J, reversed. For appellant: Brian Saylin, CFLS, (714) 971-1979. For respondent: Gary Gorczyca, (949) 644-4007. CFLP §§J.70.5. M.42.2.5.
Mark and Rhonda Finby were married in 1995. During marriage, Rhonda developed a substantial book of business while working as a financial advisor with UBS Financial Services. In January 2009, she signed a contract with Wachovia Securities, in which she agreed to bring her $192 million book of business with her when she joined Wachovia as a financial advisor and managing director of investments. Soon after, Wachovia was bought by Wells Fargo Advisors (WFA). The “offer summary ” of Rhonda ’s contract provided that she would receive a transitional bonus of more than $2.8 million, based on her production during the previous 12 months ($1.8 million) and pre-hire assets of more than $192 million. Rhonda would receive the entire $2.8 million if she remained with WFA for 112 months, maintained a gross production level of $1.12 million each year, and remained current on any other obligations owed to WFA. Rhonda chose to receive the entire $2.8 million immediately, with payment arranged as a loan that WFA would forgive in 112 monthly increments. If she stopped working for WFA, the loan balance would be due; if she failed to meet production quotas, her monthly increments would be reduced accordingly. The contract also provided that if she was still working for WFA on January 13, 2016, she would receive a deferred recruitment award bonus of $188,863. It also made Rhonda eligible for a first production bonus of $373,726 if her gross production between February and March 2009 exceeded a certain amount and a second production bonus if she met a higher production level between April 2010 and March 2011. Rhonda achieved the first bonus in April 2010 and set it up as a loan as before, but failed to qualify for the second bonus. In mid 2009, WFA announced a “level 4front ” bonus, payable to financial advisors who met requirements regarding clients and their investment profiles. In mid-2010, Rhonda was paid $890,000 for this bonus, which was also set up as a loan that was gradually forgiven and was conditioned on her continued employment.
Meanwhile, in February 2010, Rhonda and Mark separated and began disso proceedings. At trial, Rhonda ’s experts contended that her transitional bonus was part community and part her separate property and that the other bonuses where her separate property. One of Rhonda ’s experts described her transitional bonus as payment for her bringing her book of business to WFA and the production bonuses as incentives to work hard and to encourage continued employment. One of Mark ’s experts characterized Rhonda ’s bonuses as community property assets and her book of business as the consideration for the employment contract benefits. Another of his experts testified that Rhonda ’s book of business could not be sold, but that “ ‘the market for it would be . . . [moving to] another [firm] ’ ” Mark ’s forensic CPA opined that Rhonda ’s bonuses were community property because they were based on her book of business or pre-separation production and because Rhonda signed her contract before separation. In a statement of decision and judgment, the trial court found that Rhonda ’s book of business had no value and that Mark had no interest in it. The lower court further found that Rhonda ’s transitional bonus was community property to the extent that it was earned and received before separation, and the balance of that bonus, along with the other bonuses, were her separate property because they were paid or due post-separation and were contingent on he continued employment.
Mark appealed, and the Fourth District reversed and remanded.
What ’s in a name . . .
Mark first contended that the trial court erred by finding that Rhonda ’s book of business had no value. The lower court reasoned that it lacked value because she couldn ’t sell it, but Mark contended that she effectively sold it when she moved from UBS to WFA. Moreover, he argued that Rhonda ’s book of business was similar to goodwill that is part of the professional practice of a doctor or lawyer in that it involves her “ability to induce clients to follow her when transferring to a new firm. ” The justices found merit in that argument, noting that per In re Marriage of Foster (1974) 42 Cal.App. 3d 577, professional goodwill is comprised of “ ‘the expectation of continued public patronage. ’ ” Moreover, the panel continued, In Dairy Dale Co. v. Azevedo (1931) 211 Cal. 344, the California Supreme Court held that a list of the employer ’s customers and their requirements was part of the goodwill of the business. The justices could find no California case that addressed the issue of whether a list of clients was an asset that was divisible on divorce, but they noted that courts in other states have generally come to that conclusion. The parties here agreed that Rhonda acquired her book of business during marriage and that she was a licensed financial advisor and professional. And, the justices found persuasive the fact that Rhonda ’s contract, as well as her transitional bonus, were based in part on her proven production record as evidenced by her book of business. Recognizing that this is a case of first impression, the justices found that Rhonda ’s book of business had value and was divisible as a community asset. Therefore, the trial court erred in concluding that it had no value and that Mark had no interest in it.
Look again . . .
The panel then turned to the lower court ’s characterization of Rhonda ’s various bonuses. The justices found that her deferred recruitment bonus was properly characterized as her separate property because Rhonda had to keep working to be eligible for it. However, they believed that her other bonuses could contain a community component to the extent that they were earned before separation. Accordingly, the panel reversed and remanded for the trial court to re-characterize and revalue Rhonda ’s bonuses in light of this opinion. At that same time, they concluded, the lower court should address Rhonda ’s challenges to the amount of child and spousal support that court had made.
As the justices said, this is the first opinion to deal with the issue of whether a financial advisor ’s book of business is a divisible community asset. It also is a valuable primer on bonuses, how they are structured and paid, and how they should be characterized. Keep this one in your file for future reference.