Duggan v. Schoenmann et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 05-33146DMLS
ROSEMARY DUGGAN, 	)
)
Debtor. 	) Chapter 7
___________________________________)
ROBERT C. DUGGAN, 	) Adversary Proceeding
) No. 06-3095DM
Plaintiff,)
)
v. 	)
)
E. LYNN SCHOENMANN, TRUSTEE, and 	)
ROSEMARY DUGGAN, 	)
)
Defendants.)
___________________________________)
MEMORANDUM DECISION REGARDING PROPRIETORSHIP AND ANNUITY
On May 14, 2007, this court conducted a trial in the above-
referenced adversary proceeding. 	Basil J. Boutris, Esq. appeared
on behalf of Robert C. Duggan (“Plaintiff”) and Reidun Stromsheim,
Esq. appeared on behalf of E. Lynn Schoenmann (“Trustee”). 	At the
conclusion of the submission of evidence and the presentation of
arguments, the court announced its rulings and findings as to
proceeds from the sale of Plaintiff’s former residence and as to
the estate’s interest in two motorcycles.
The court then requested the parties to submit further
Signed and Filed: July 24, 2007
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 26, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 06-03095 Doc# 39 Filed: 07/24/07 Entered: 07/26/07 13:16:05 Page 1 of 5

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1 The following discussion constitutes the court's findings
of fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a).
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briefing on the issues of the estate’s interest in a sole
proprietorship owned by Plaintiff and in allocation of
contributions to an annuity and burdens of proof regarding those
allocations. 	The parties submitted simultaneous briefs on June
29, 2007. 	For the following reasons, the court rules in
Plaintiff’s favor as to the proprietorship and in Trustee’s favor
as to the annuity. 1
With respect to the annuity, the court held in its oral
findings that the bulk of the contributions were made from
community property funds even though a portion of the
contributions came from Plaintiff’s separate property. 	In his
post-trial brief, Plaintiff conceded that he was unable to present
evidence to rebut the presumption of the community property nature
of the annuity. 	The court will therefore adhere to its tentative
oral ruling that the annuity is community property.
As to the proprietorship, the court asked whether a
proprietorship, having been formed before marriage, could somehow
become community property because of the efforts of the non-debtor
spouse to maintain, enhance, and grow the business. 	The evidence
showed that over recent years the net income, and thus the value
(based upon a multiplier of 1.0, the trustee producing no contrary
evidence) changed from year to year, with a $112,000 value in the
year of separation (2001) and a $90,000 valuation in the year that
Case: 06-03095 Doc# 39 Filed: 07/24/07 Entered: 07/26/07 13:16:05 Page 2 of 5

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2Plaintiff also testified that the proprietorship had a net
annual income of approximately $100,000 in its initial years (1979
and 1980).
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Plaintiff’s former spouse filed bankruptcy (2005). 2 	Plaintiff
testified, and the court finds, that during his marriage to
Debtor, all net profits from the proprietorship were committed to
community expenses. 	The parties’ supplemental briefs addressed
the issue of whether the proprietorship should be treated entirely
as community property.
Upon reviewing the law and the facts, the court concludes
that the proprietorship is Plaintiff’s separate property. 	Where a
spouse has a separate property business in which he is employed
and the business increases in value, the enhanced value and
profits are attributable in part to the original capital (the
separate property) and in part to the spouse’s labor and skill
(community property). 	11 B.E. Witkin, Summary of California Law,
Community Property § 121 (10th ed. 2005) (“Witkin”). 	To allocate
the proper portion of the enhanced value and profits to the
separate and community interests, California courts typically
choose between two approaches. 	Marriage of Dekker, 17 Cal. App.
4th 842, 853, 21 Cal.Rptr.2d 642 (1993). 	The first, the approach
set forth in Pereira v. Pereira, 156 Cal. 1, 103 P. 488 (1909), is
generally applied where, as here, profits are attributable to
community effort. 	Dekker, 17 Cal. App. 4th at 853; Witkin § 122.
Under Pereira, the court allocates a fair return on the separate
property as separate income and allocates the rest to the
community property. 	Id.
Here, the value of tangible property owned by the
Case: 06-03095 Doc# 39 Filed: 07/24/07 Entered: 07/26/07 13:16:05 Page 3 of 5

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proprietorship is negligible, as conceded by Trustee in her brief.
The value of the business is based on Plaintiff’s sales of
insurance policies and annuities. 	Plaintiff testified that his
proprietorship had a value of approximately $100,000 at the time
of marriage and a similar value now. 	Given the nature of the
business and the net income generated each year, the court agrees
and so finds.
Applying the Pereira approach, the community holds no
interest in the proprietorship as its value is roughly the same as
it was when it began as separate property. 	If the court accorded
Plaintiff’s separate property interest (the initial $100,000
value) a fair rate of return as required by Pereira, the
proprietorship would have been worth significantly more than it
was on the either the date of separation or the petition date.
Therefore, the court concludes that the proprietorship is
Plaintiff’s separate property.
Trustee’s counsel should prepare, serve and upload a judgment
consistent with the court’s rulings set out in its oral findings
and conclusions announced on the record on May 14, 2007, and in
this memorandum decision.
**END OF MEMORANDUM DECISION**
Case: 06-03095 Doc# 39 Filed: 07/24/07 Entered: 07/26/07 13:16:05 Page 4 of 5

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COURT SERVICE LIST
Basil J. Boutris, Esq.
Jon R. Vaught, Esq.
Vaught & Boutris, LLP
80 Swan Way, Ste. 320
Oakland, CA 94621
Reidun Stromsheim, Esq.
Stromsheim & Associates
201 California St., Ste. 350
San Francisco, CA 94111
Case: 06-03095 Doc# 39 Filed: 07/24/07 Entered: 07/26/07 13:16:05 Page 5 of 5