Opinion
NOT TO BE PUBLISHED
Original proceedings; petition for a writ of mandate to challenge an order of the Superior Court of Orange County, No. 07D005483, Theodore R. Howard, Judge.
Jeffrey W. Doeringer for Petitioner.
Levin, Margolin & Itzkowitz and Evan C. Itzkowitz for Real Party in Interest.
OPINION
Before Rylaarsdam, Acting P. J., Bedsworth, J., and Aronson, J.
In this marital dissolution proceeding, the trial court failed to value the community property stock in a closely held corporation in which the husband was heavily involved, instead ordering the stock to be divided in kind pendente lite so the wife could sell her share to a “secret buyer.” The husband petitioned for a peremptory writ of mandate directing the trial court to reverse its order. We find the trial court’s order was clearly erroneous and issue the writ.
BACKGROUND
Robert H. Gregg II and Janna J. McConnell married in 1993 and separated in 2006. Prior to marriage, Gregg, a dentist, developed a hand piece and fiber optic cable for use with a dental laser. He sold these devices to other dentists and wrote and taught about dental laser techniques. He performed these activities through a corporation formed in the Cayman Islands.
After marriage, Gregg dissolved the Cayman Island corporation and formed “an unincorporated entity, a DBA called ‘MDT, ’” which became the entity through which Gregg sold the devices. MDT incorporated in 1996; the stock was owned 50 percent by Gregg and 50 percent by Dr. Del McCarthy, his partner in their dental practice. Subsequently, Gregg’s father invested in MDT and received 0.64 percent of the stock, leaving Gregg and McCarthy with 49.68 percent each.
In 1996, Gregg and McCarthy obtained a “method patent” for periodontal treatment with the dental laser. The patent was assigned to MDT in 2005 but was not used because it was determined that two of the method’s steps were actually producing adverse results in patients. The patent was subsequently used by MDT as part of its marketing and to deter competition. In 1999, MDT partnered with Lares Research in a joint venture whereby MDT would provide training and Lares would provide a laser. This package was sold by MDT for about a year until MDT and Lares parted ways. In 2001, MDT developed and began to manufacture its own dental laser.
In August 2010, the bifurcated issue of the characterization of MDT was tried before Judge Nancy Weiben Stock. Judge Stock concluded that the hand piece and fiber optic cable were Gregg’s separate property, but that his share of MDT was community property. “The court finds that the uniqueness of MDT was the successful packaging, marketing and sale of a... superior outcome in the field of periodontical procedures.... [¶] [T]his package depended upon the successful joinder of a number of elements, not the least of which was a laser product. A second component would be the device-specific training associated with the product, and a third essential component would be a step-by-step treatment protocol designed to allow the client dentist to achieve the outcome.” Judge Stock found the hand piece and the fiber optic cable were not essential to the unique marketing success of MDT.
In December 2010, trial on the remaining issues began before Judge Theodore R. Howard. Both Gregg and McConnell presented extensive expert testimony on the value of MDT. Gregg argued the value was zero and McConnell argued the value was $2,325,000. On February 22, 2011, the court found “[t]here was a failure of proof from both parties’ experts so as to make a finding of a specific value for the community’s 49.68 [percent] stock ownership.... If the matter is left to the Court, there is no viable alternative to dividing the stock equally.” At a status conference on March 22, the parties agreed if the court would rule on certain components of the overall valuation, they might be able to determine the value of MDT themselves. Counsel agreed there were six valuation components at issue. The court ordered the parties to present additional evidence on these components or the stock would be equally divided. The parties filed additional briefs on April 15, 2011; the court has not yet ruled on the value of the components.
On April 19, McConnell filed an ex parte application asking the court to divide the community share of MDT stock in kind immediately because she had found a buyer for her interest for $1.18 million. McConnell did not identify the buyer “out of concern that [Gregg], or someone on [Gregg’s] behalf may try to contact the third party or take actions aimed at interfering with the offer and/or pending sale.” The offer was to expire on May 2, 2011. The buyer had 14 days after the agreement was signed by McConnell to perform a due diligence review and could cancel the sale during that period. The court set a hearing on the application for May 2.
After the hearing, the trial court ordered Gregg to transfer half of the community interest in the stock (24.84 percent) to McConnell forthwith. Gregg was enjoined from voting the stock before transfer; taking any action that would dilute the stock interest of McConnell; and taking any actions that would devalue, delay, or otherwise adversely affect the proposed sale, the value of the stock, or the financial condition of MDT. The court stated “delaying the proposed sale of this stock may seriously and adversely affect the opportunity on the part of [McConnell] to realize a value for this asset.... In balancing the interests of these two parties, the Court believes it has the jurisdiction to order the immediate division of this Community asset – the community stock. In such a situation the Court fails to see that [McConnell] has a fiduciary obligation to disclose the identity of the Offeror to [Gregg], if the stock becomes her separate property as a result of an immediate division in kind. If the offer is indeed genuine (and not a subterfuge by Offeror to obtain proprietary information belonging to MDT), [McConnell] would get the benefit of her bargain. She is relieved of the chance that it could become valueless, as argued by [Gregg].... If the proposed transaction is cancelled by the Offeror, during its due diligence period, without any liability on its part, then the stock would remain with [McConnell], pending any appellate review of this Court’s legal rulings.” The court found Gregg’s claims of harm were speculative and the harm to McConnell was not.
Gregg filed this petition for a peremptory writ of mandate, seeking relief from the order dividing the community stock in kind and awarding half to McConnell. We issued a stay of the order and solicited further briefing from the parties.
Discussion
Gregg argues that MDT has no community value, but has value to him. MDT has apparently been losing money for the last several years, but Gregg believes there is future value, which will be created “by his future, post separation efforts and the efforts of others who work tirelessly without adequate compensation to create that value. At present there is hope, but not value. At present, the liabilities exceed the assets.” Gregg worries that the transfer of the shares to either an outside third party or McConnell would upset the balance of control and the close personal relationship among the current shareholders and employees, thus diminishing the future value of MDT. Together with the small interest of his father, Gregg effectively controls MDT, giving him “the ability to fashion a reasonable combination of perquisites and compensation to him for the profits of his separate property, consistent with his relationship with the other shareholders and the reality of the business environment in which they find themselves.” Another dentist, identified as “Dr. Bloore, ” is an employee of MDT and serves on the board of directors. Bloore is Gregg’s girlfriend and the mother of his one-year-old child. Gregg explains that MDT owns the house where he and his family live, and he pays MDT fair rental value. Both he and Bloore receive perquisites from MDT, but no salaries. If McConnell is a shareholder, she will interfere with these arrangements, which the board of directors has determined are in the best interests of MDT.
The trial court has the duty to divide the community estate equally. In doing so, it has the power to divide a single asset in kind, awarding half to each party. The situation here does not appear to be an appropriate one for an in-kind division. The asset in question is stock in a closely held corporation. It is undisputed that McConnell has no experience or interest in the business of MDT and that Gregg has devoted much of his professional life to it. The record available to us suggests that awarding half of the community stock to McConnell would be destructive to the business and impair its future value. (See In re Marriage of Burlini (1983) 143 Cal.App.3d 65; In re Marriage of Smith (1978) 79 Cal.App.3d 725; In re Marriage of Clark (1978) 80 Cal.App.3d 417.)
But we are not reviewing a simple in-kind division of the MDT stock. The trial court ordered, pendente lite, the in-kind division of stock in a closely held corporation for purpose of a sale to a secret buyer. While the court has the authority to make appropriate pendente lite orders regarding “[t]he settlement of the property rights of the parties” (Fam. Code, § 2010, subd. (e)), it must also safeguard the rights of the objecting party. (Lee v. Superior Court (1976) 63 Cal.App.3d 705, 711.) Forcing a secret buyer on the shareholders of MDT poses an unfair risk of jeoparding the value of Gregg’s remaining stock.
McConnell points out that Gregg claims MDT has no value, thus he cannot be prejudiced by the order. She then argues that the value of the community interest in MDT is the market price, set by the offer from the secret buyer. Neither point of view is correct. The offer from the secret buyer is not, by itself, a reliable indication of the value of the entire community interest. The secret buyer has offered to buy half the community stock for $1.8 million. That does not translate to an offer to buy all the community stock for $3.6 million. Because the secret buyer’s identity has been withheld, the court does not know what relationship, if any, he has to McConnell or Gregg, or what motivation he has to acquire a piece of MDT. Furthermore, the secret buyer has the unfettered right to cancel the sale after a due diligence review.
Gregg’s assertion that the stock has no value to the community is likewise unpersuasive. It appears clear that MDT has some value to the community, which the trial court is obligated to determine from the available evidence. Decisions about the value of MDT are the responsibility of the trial court. “[S]uch businesses do not simply represent an investment of capital; they are also an investment of sweat, toil, worry, and hopes. No matter how difficult the decision, the trial judge must bite the bullet [and] value the business.... No one ever said judging was easy.” (In re Marriage of Cream (1993) 13 Cal.App.4th 81, 90.)
Disposition
Gregg requested the issuance of a peremptory writ in the first instance. At our request, McConnell filed an informal response and Gregg filed an informal reply. McConnell then requested and was granted permission to file a surreply. Because no procedural purpose would be served by issuing an order to show cause and holding oral argument, we will issue a writ of mandate in the first instance. (Lewis v. Superior Court (1999) 19 Cal.4th 1232, 1251; Palma v. U.S. Industrial Fasteners, Inc. (1984) 36 Cal.3d 171, 180.) Let a peremptory writ of mandate issue directing the superior court to strike its order granting McConnell’s motion for an immediate in-kind division and ordering Gregg to immediately transfer 50 percent of the community property stock in MDT to her. The superior court is then directed to complete the unfinished valuation process, appointing an expert to assist it if necessary (Evid. Code, § 730), and divide the community estate equally as required by statute. Gregg is awarded costs of this proceeding.