A San Diego client recently asked me if the court could seize control of the parties community property business, which was started during marriage and is managed by his spouse.
His question was prompted by what recently happened to the Los Angeles Dodgers. The owners of the Dodgers, Frank and Jamie McCourt, are involved in a very public divorce. Ms. McCourt claimed the Dodges are a community property business. Mr. McCourt clamed they are his separate property. In December, the court threw out a post-marital agreement making the Dodgers his separate property. Although Mr. McCourt is appealing that decision and the parties are trying to negotiate a settlement, chaos now reigns in Dodger-Ville. Mr. McCourt borrowed $30 million to meet the Dodgers payroll obligations. Shortly thereafter, Major League Baseball seized control of the team and installed a trustee to oversee business operations. The team may not meet its May payroll obligations and Mr. McCourt may file for bankruptcy to keep control of the team.
Back to my clients question. While the divorce is pending, the managing spouse of a community property business usually has primary management and control of the business subject to fiduciary duties to the non-managing spouse. However, the court does have the power appoint a receiver to protect the non-operating spouse's interest in the business. Where the parties jointly manage the business, they can keep jointly managing the business, or if unable to do so, either party may request the court order one party manage the business. Whomever the court orders to manage the business would have fiduciary duties to the other party.
If the parties cannot agree how to divide the business, the court may award the business on any conditions it deems proper to make a substantially equal division of the community estate. The court usually does one of the following:
(1) Awards the business to the managing spouse. This may even be done over the objection of the party the business is awarded to.
(2) Awards the business to the non-managing spouse. In one case, a Burger King franchise was awarded to the non-managing spouse over the objection of the managing spouse.
(3) Divides the business in-kind. In one case, shares of stock of a business were divided in-kind. However, the court will not make an in-kind division if it would impair the business.
(4) Orders the business sold.