What happens when a business interest ends up in family court?
Consider the case of Marriage of Schnabel. Actually, cases would be more accurate, since there were four separate decisions in Schnabel, involving the California Court of Appeals and the California Supreme Court. The parties in the Schnabel cases decided to divorce. The husband was a 30% owner in a container company. This 30% interest was entirely community property of the husband and wife.
The wife in Schnabel wanted to involve the company in the divorce action for several reasons. The community’s interest in the container company needed to be valued. It was necessary to obtain company records for purposes of doing this valuation. The wife also wanted company records to determine husband’s income for support purposes. She also wanted the company involved in the divorce action because over time, the company showed bias and favoritism towards the husband. As a result, she was concerned that the company and her husband would conspire to deny her of her community interest in the company. She and her attorney felt that by making the company a party to the divorce action the Court could issue orders against the company, to protect her community interest. Finally, she also wanted the company involved in the divorce action in order to request attorney’s fees against the company. The company’s attorney also represented the husband and the company was paying the husband’s attorney’s fees in the divorce case whereas she was paying her own attorney’s fees.
The Court decisions in the series of Schnabel cases indicate that absent unusual circumstances a company should not be forced to be a party to a divorce action since there are usually other more appropriate and less contentious ways of accomplishing the goals of the out spouse (here, the wife was the out spouse). In so ruling the Court acknowledged that joining a company as a party to a divorce action could create a major distraction to the corporate officers/directors who would feel compelled to monitor the divorce action, could seriously disrupt the operations of the company, could possibly result in the divulgence of company business advantages and/or trade secrets, and could cost the company considerable amounts in the form of attorney’s fees.
When this scenario arises there are ways to cooperatively resolve the difficult issues raised in the Schnabel cases. For example, the discovery rights of the out spouse can be preserved without unduly involving the company by having the parties and the company agree that the company will provide records to the out spouse pursuant to a protective order which limits the disclosure of company records to the parties, their attorneys and their experts. The company can also agree that it will not transfer or otherwise dispose of the community interest without the prior written consent of the out spouse.