December 27, 2011 | Bulletin No. 988479.1

In Patrick v. Alacer (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., November 16, 2011), a California Court of Appeal considered a dispute between the widow of the founder of a company and trustees of the trust established by her husband to run the company, over whether she could make a claim to her husband’s stock holdings as community property to which she was entitled. The Court ruled that the stock acquired before the marriage was not community property and that the widow had no claim to it. However, the Court also ruled that the increase in the value of the stock during the time of the marriage, unlike the stock itself, was community property.

Facts

Jay Patrick ("Jay") founded Alacer Corporation ("Alacer"), a vitamin manufacturing company, in 1972 and was the company's sole shareholder. He met his future wife, Ymelda Patrick ("Ymelda") in 1975 and they married in 1988. In 2000, Jay transferred all Alacer shares to a revocable trust and named several business associates as trustees. The trust contained a "Distribution upon Death" provision that limited the amount of shares in Alacer to be inherited by Ymelda upon Jay's death to 46%. Jay died in 2003. Divorce proceedings from Ymelda were pending at the time of his death.

Ymelda filed suit alleging she and Jay had built Alacer together, both before and during their marriage, and that she had a community property interest in all of the Alacer stock despite the trust's provision to the contrary. The trial court ruled that Alacer stock was not community property because Jay had acquired it prior to his marriage. But the Court also ruled that the increase in value of the stock from the time of the Patricks' marriage until Jay's death was the result of Jay's efforts while he was married to Ymelda and therefore was community property. The court determined that the increase in value of Alacer during the time of the Patricks' marriage was approximately $6.5 million, with Ymelda's 50 percent community share of the increase just over $3.2 million. Both Ymelda and the trustees appealed.

Decision

The Court cited prior case law to determine how community property law applied to this case. "In California, property acquired prior to marriage is separate, while property acquired during the marriage is presumed community property." Further, "income from separate property is separate, the intrinsic increase of separate property is separate, but the fruits of the community's expenditures of time, talent, and labor are community property."

Given those rules, the Court found the trial court was correct to distinguish the stock owned by Jay before his marriage, which was not community property, from the increase in its value during the marriage, which was community property. The Court agreed that the trial court correctly awarded half of the increased value to Ymelda as community property. The trial court was also correct when it ruled Ymelda was not entitled to the Alacer stock acquired by Jay before he met and married Ymelda. That stock was determined to be separate property.

The trial court's ruling was affirmed.

Questions

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