Property ContinuedStephen J. Wagner, CFLS
Family Law Fiduciary DutiesProperty Continued
Teach a Man to Fish
The Reason for the Rule is Important“When the reason of a rule ceases, so should the rule itself” [CC 3510]
“Where the reason is the same, the rule should be the same” [CC 3511]
Reason for QuotesViolates PP rules
Important to read what the court said
Slides are more stand alone for subsequent review
Reduces note taking
Which makes you a better listener
Putting Fiduciary Duty Issues Into the Context of Property Issues
For both the exam and your practice
Overview
Overview (cont’d)
Detailed Coverage of Fiduciary DutiesDuty of loyalty
Duty of care
Duty of disclosure preseparation
Duty of disclosure postseparation
Presumption of undue influence
Remedies for breach
Detailed Coverage of Fiduciary Duties (cont’d)Transmutation (overview for context)
Tracing
Moore/Marsden
Pereira/Van Camp
Detailed Coverage of Fiduciary Duties (cont’d)Business valuation – fundamental concepts
Miscellaneous property issues
Postseparation disclosure
Postseparation reimbursement/charges
Fiduciary Duties: Do They Change the Outcome?Property Continued
OverviewThis section covers
Duty of loyalty Duty of care Duty of disclosure preseparation Presumption of undue influence (overview) Remedies for breach
Overview (cont’d)Note: Presumption of undue influence to be discussed in Transmutation Section and postseparation disclosure will be discussed as the last subject of the day
Importance of Detecting Interspousal Fiduciary Duty Issues
Importance of Detecting Interspousal Fiduciary Duty Issues (cont’d) Fundamental Principles of Interspousal Fiduciary Duties
Fiduciary Duties
Historic Duties Relating to Management & Control of CP
Fiduciary vs. ConfidentialNature of Obligation from Confidential or Fiduciary Relationship
Fiduciary vs. Confidential (cont’d)Nature of Obligation from Confidential or Fiduciary Relationship
Pre-1992 Cases Require CautionThe primary purpose of SB 716 (Stats 1991, Ch. 1026) & AB 1437 (Stats 1992, Ch. 37) was to legislatively overrule pre-1992 cases which held that the fiduciary duty owed between spouses after separation was limited to disclosure of existence of assets and liabilities and facts relating to the valuation which were peculiarly within the knowledge of the spouse
But only as it relates to the disclosure of material facts and information relating to characterization and valuation
Nature of Obligation from Confidential or Fiduciary Relationship
Pre-1992 Cases Require Caution (cont’d)1-1-1992: SB 716 (Stats 1991, Ch.1026)
1-1-1993: AB 1437 (Stats 1992, Ch.37) & AB 1396 (Stats 1992, Ch. 36)
The Legislature completely changed this limitation with the passage of the legislation discussed above as it relates to disclosure of all material facts and information
Nature of Obligation from Confidential or Fiduciary Relationship
Vai v. Bank of America National Trust & Savings Ass'n (1961) 56 Cal.2d 329The prerequisite of a confidential relationship is the reposing of trust and confidence by one person in another who is cognizant of this fact
The key factor in the existence of a fiduciary relationship lies in control by a person over the property of another
It is evident that while these two relationships may exist simultaneously, they do not necessarily do so
Vai (cont’d)“It is evident that although the confidential relationship may be terminated by either party, if an individual continues to control property of the other he is held to the duties of a fiduciary as long as he retains such control, notwithstanding the termination of the confidential relationship.”
Nature of Obligation from Confidential or Fiduciary Relationship
Vai (cont’d)“The dissolution of a partnership and attendant agreements respecting partnership property appear to be remarkably similar to the dissolution of the conjugal relation and property settlement agreements.”
Nature of Obligation from Confidential or Fiduciary Relationship
Vai (cont’d)“Briefly, ‘in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.’”
Nature of Obligation from Confidential or Fiduciary Relationship
In re Marriage of Bonds (2000) 24 Cal.4th 1 “The primary consequences of designating a relationship as fiduciary in nature are that the parties owe a duty of full disclosure, and that a presumption arises that a party who owes a fiduciary duty, and who secures a benefit through an agreement, has done so through undue influence.”
Nature of Obligation from Confidential or Fiduciary Relationship
Marriage of Bonds (cont’d)“It long has been the rule that ‘[w]hen an interspousal transaction advantages one spouse, [t]he law, from considerations of public policy presumes such transactions to have been induced by undue influence.’ (In re Marriage of Haines, supra 33 Cal.App.4th at p.293 quoting from Brison v. Brison (1888) 75 Cal. 525, 529.)”
Fam C 721(b): “This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in [§§] 16403, 16404 and 16503 of the Corporations Code . . .”
The importance of the unique nature of marriage
Nature of Obligation from Confidential or Fiduciary Relationship
Unique Nature of MarriageNature of Obligation from Confidential or Fiduciary Relationship
Unique Nature of Marriage (cont’d)“The essence of a fiduciary or a confidential relationship is that the parties do not deal in equal terms because the person in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert unique influence over the dependent party” –Barbara A.
“Stronger party” vs. “weaker party” is not the concept
Nature of Obligation from Confidential or Fiduciary Relationship
Unique Nature of Marriage (cont’d)Nature of Obligation from Confidential or Fiduciary Relationship
Unique Nature of Marriage (cont’d)CASCT in Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197
“Plaintiffs argue that imposition of fiduciary obligations is appropriate whenever one party with a stronger bargaining position or greater knowledge has the ability to reach out and exploit the weaker party . . . . We do not agree that ability to exploit a disparity of bargaining power is a useful test of fiduciary duty. An agent owes a fiduciary duty to his principal, for example, even if the principal has the greater bargaining strength.” [Emphasis added.]
Nature of Obligation from Confidential or Fiduciary Relationship
Nature of Obligation from Confidential or Fiduciary RelationshipMarriage of Haines: “It is the public policy of this state ‘to foster and promote the institution of marriage’. [T]he structure of society itself largely depends upon the institute of marriage.”
“It is fundamental that a marriage contract differs from other contractual relations in that there exists a definite and vital public interest in reference to the marriage relation....”
“Marriage is a matter of public concern. The public, through the state, has interest in both its formation and dissolution . . . .”
“Further, while marriage includes a confidential relationship, it encompasses much more.”
Nature of Obligation (cont’d)Marriage of Bonds: “[M]arriage itself is a highly regulated institution of undisputed social value, and there are many limitations on the ability of persons to contract with respect to it, or to vary its statutory terms, that have nothing to do with maximizing the satisfaction of the parties or carrying out their intent. Such limitations are inconsistent with the freedom-of-contract analysis espoused, for example, by the Pennsylvania Supreme Court.”
Constructive FraudCC 1573: Constructive fraud defined as: “any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault…”
Breach of Fiduciary Duty Constitutes Constructive Fraud
Constructive Fraud (cont’d)Vai v. Bank of America National Trust & Savings Ass'n: “The failure of the husband in the instant case to disclose fully and fairly material facts relating to the value of community assets from which [he] gained an advantage constitutes a concealment of material facts and a breach of this fiduciary duty. This is constructive fraud, whether or not such failure to disclose was accompanied by an actual intent to defraud.” [Emphasis added.]
Breach of Fiduciary Duty Constitutes Constructive Fraud
Legal Effect of Imposing a Fiduciary Duty
In all transactions between parties by which the confidential or fiduciary relationship is implicated, and where one spouse gains an advantage over the other, a presumption of undue influence arises and the transaction is presumed invalid
The burden of proof to overcome the presumption of undue influence shifts to the advantaged spouse
Breach of Fiduciary Duty Constitutes Constructive Fraud
Legal Effect of Imposing a Fiduciary Duty (cont’d)The breach of duty constitutes constructive fraud subjecting the benefitting party to claims for rescission and other remedies
Such as restitution, disgorgement of profits, and constructive trusts
Breach of Fiduciary Duty Constitutes Constructive Fraud
Statutory Definition of Undue InfluenceCC 1575 defines undue influence as follows
In the use, by one and whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him
In taking an unfair advantage of another’s weakness of mind; or, In taking a grossly oppressive and unfair advantage of another’s necessities or distress.
Buchmayer v. Buchmayer (1945) 68 Cal.App.2d 462 (CA-2(3))“In cases of the first class which arise out of breach of a confidential relationship, weakness of mind of the person imposed upon is not a necessary element.”
“In the second class of cases, the existence of a confidential relationship is not a necessary element, although weakness of mind of the person imposed upon is such an element.”
Nature of Obligation from Confidential or Fiduciary Relationship
Buchmayer (cont’d) “Where no trustee or confidential relationship exists, proof that one of the parties to a transaction obtained an advantage over the other does not raise a presumption that undue influence was used and hence does not place the burden upon the one benefited of proving that it was not used.”
Nature of Obligation from Confidential or Fiduciary Relationship
Issues Arising from Premarital Agreements
Fiduciary Duties: Area 1 of 5
Fiduciary Duty Issues: Premarital Agreements
There is no presumption of a confidential relationship
No de jure confidential relationship, but a de facto one may exist
Marriage of Bonds: “Even when the premarital agreement clearly advantages one of the parties, the party challenging the agreement bears the burden of demonstrating that the agreement was not entered voluntarily.”
Premarital Agreements (cont’d)A de facto confidential or fiduciary relationship can be proven
Thus creating a fiduciary duty which is subject to a presumption of undue influence
Prior to Premarital Agreement
Opting Out of Confidential or Fiduciary RelationshipMarriage of Connolly (1979) 23 Cal.3d 590
“We have repeatedly held that parties may elect to deal with each other at arms’ length, and when they do so any fiduciary obligation otherwise owing is hereby terminated.” [Emphasis added.]
Opting Out
Corp C 16103: Partners CannotUnreasonably restrict access to books and records as set forth in Corp C 16403(b)
Unreasonably restrict the right to be furnished with info under Corp 16403(c)
Corp C 16103: Partners Cannot (cont’d)Eliminate the duty of loyalty under Corp C 16404(b), but if not manifestly unreasonable may do either of the following
The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty
Partners may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty
Corp C 16103: Partners Cannot (cont’d)Unreasonably reduce the duty of care under Corp C 16404(c)
Eliminate the obligation of good faith and fair dealing under Corp C 16404(d), but the partnership agreement may describe the standards by which the performance of the obligation is to be measured, so long as not manifestly unreasonable
Corp C 16103
Presumption of Confidential Relationship Arising from Marriage
Fiduciary Duties: Area 2 of 5
Nature of Confidential RelationshipGeneral presumption: Defining characteristic of general presumption is duties of loyalty & disclosure
Duty of loyalty: Corp C 16404(b) Duty of disclosure: Corp C 16403 Both incorporated into Fam C 721(b)
Fam C 721(b)(a) Subject to subdivision (b), either spouse may enter into any transaction with the other, or with any other person, respecting property, which either might if unmarried.
Fam C 721(b) (cont’d)(b) Except as provided in Sections 143, 144, 146, 16040, and 16047 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:
Fam C 721(b) (cont’d)(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
(2) Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
Fam C 721(b) (cont’d)(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.
Corp C 16403Corp C 16403(c)(1): “Without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this chapter.”
Corp C 16403(c)(2): “On demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise
improper under the circumstances.”
Corp Code 16403: Pre & Post DOS
Corp Code 16404: Pre & Post DOS
In re Marriage of Sonne (Sonne I) (2010) 48 Cal.4th 118 “Wife errs in characterizing Husband's right to redeposit his member contributions as an investment opportunity governed by the interspousal fiduciary duty (see Fam. Code, §1100, subd. (e)), inasmuch as the right to recover the prior service credit was Husband's separate property.” [Emphasis added.]
Duty of LoyaltyParties may opt out of confidential relationship
Confidential relationship presumptively ends at separation or commencement of legal proceedings
De jure – confidential relationship arises upon marriage
Includes acting in the highest good faith and not taking the slightest advantage over the other spouse
Presumption of Duty Arising from Management & Control of CP and Remedies for the Breach of Duty
Fiduciary Duties: Area 3 of 5
Duty of Management & ControlDuty of management and control does not end at separation – it arises from the fiduciary relationship, not a confidential relationship
The duty continues until: “the date of the distribution of the community or quasi-community asset or liability in question.”
Can Parties Opt Out of Fiduciary Duty Arising from Mgt. & Control?Family Code is silent
Fam C 721(b) incorporates by reference: Corp C 16403 & 16404
Corp C 16103
Nonmarital business partners may alter their obligations to some extent
Arguably, spouses may alter their management and control right, but likely must conform to Corp C 16103
Identifying and Distinguishing Confidential & Fiduciary Relationships
Fiduciary Duty
Fam C 1100“(a) . . . either spouse has the management and control of the community personal property . . . as the spouse has of the separate estate of the spouse.
(b) A spouse may not make a gift of community personal property, or dispose of community personal property for less than fair and reasonable value, without the written consent of the other spouse.”
Fam C 1100 (cont’d)“(c) A spouse may not sell, convey, or encumber community personal property used as the family dwelling, or the furniture, furnishings, or fittings of the home, or the clothing or wearing apparel of the other spouse or minor children which is community personal property, without the written consent of the other spouse.”
Fam C 1100 (cont’d)“(d) . . . a spouse who is operating or managing a business or an interest in a business that is all or substantially all community personal property has the primary management and control of the business or interest.”
Fam C 1100 (cont’d)“(e) Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court.”
Fam C 1100 (cont’d)Must disclose all MFI re: “…existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.” [Emphasis added.]
Corp Code 16404: Pre & Post DOS
Duty of Care and Management & Control of CPMarriage of Duffy (2001) 91 Cal.App.4th 923: No duty of care, only duty of loyalty
SB 1936 (Stats 2002, Ch. 310): Marriage of Duffy legislatively overturned
Marriage of Walker (1989) 216 Cal.App.3d 644: Sua sponte duty of disclosure pursuant to Fam C 721(b) and Corp C 16403 (SB 1936 eff. 1/1/2003) cannot be applied to conduct prior to effective date
Duty of Care (cont’d)Marriage of Walker: “We conclude therefore that the 2002 amendment to [FC] section 721, which based the scope of spousal fiduciary duty on the duties that did not exist prior to the 2002 amendment, makes [FC] section 721 retroactive, to the extent that Corporations Code sections 16403, 16404 and 16503 impose greater duties on partners than did former Corporations Codes sections 15109, 15020, 15021 and 15022.”
Remedies for Breach of DutyFam C 1101(g) and (h)
Equitable remedy of restitution
Restitution serves two purposes: (1) to make the wronged party whole, and (2) to strip the wrongdoer of unjust enrichment
Dollar-for-dollar reimbursement and discretionary prejudgment interest under CC 3288
Restitution depriving the wrongdoer of unjust enrichment: Discretionary interest pursuant to CC 3288 and pro tanto interest in appreciation of an asset
Statutory Remedy: Fam C 1101
Fiduciary Duty
Are Damages Required?No damages required for breach of postseparation disclosure duties
See Marriage of Feldman (2007) 153 Cal.App.4th 1470
Fam C 1101(a)“A spouse has a claim against the other spouse for any breach of the fiduciary duty that results in impairment to the claimant spouse’s present undivided one-half interest in the community estate, including, but not limited to, a single transaction or a pattern or series of transactions, which transaction or transactions have caused or will cause a detrimental impact to the claimant spouse’s undivided one-half interest in the community estate.” [Emphasis added.]
Fam C 1101(b)“A court may order an accounting of the property and obligations of the parties to a marriage and may determine the rights of ownership in, the beneficial enjoyment of, or access to, community property, and the classification of all property of the parties to a marriage.” [Emphasis added.]
Fam C 1101(c)“A court may order that the name of a spouse shall be added to community property held in the name of the other spouse alone or that the title of community property held in some other title form shall be reformed to reflect its community character, except with respect to the following:
(1) A partnership interest held by the other spouse as a general partner. (2) An interest in a professional corporation or professional association. (3) An asset of an unincorporated business if the other spouse is the only spouse involved in
operating and managing the business. (4) Any other property, if the revision would adversely affect the rights of a third person.”
Fam C 1101(d)“(1) Except as provided in paragraph (2), any action under subdivision (a) shall be commenced within three years of the date a petitioning spouse had actual knowledge that the transaction or event for which the remedy is being sought occurred.
(2) An action may be commenced under this section upon the death of a spouse or in conjunction with an action for legal separation, dissolution of marriage, or nullity without regard to the time limitations set forth in paragraph (1).” [Emphasis added.]
Fam C 1101(d) (cont’d)“(3) The defense of laches may be raised in any action brought under this section.
(4) Except as to actions authorized by paragraph (2), remedies under subdivision (a) apply only to transactions or events occurring on or after July 1, 1987.”
Fam C 1101(e)“In any transaction affecting community property in which the consent of both spouses in required, the Court may, upon the motion of a spouse, dispense with the requirement of the other spouse’s consent if both of the following requirements are met:
The proposed transaction is in the best interest of the community. Consent has been arbitrarily refused or cannot be obtained due to the physical incapacity,
mental incapacity, or prolonged absence of the nonconsenting spouse.”
Fam C 1101(f)“Any action may be brought under this section without filing an action for dissolution of marriage, legal separation, or nullity, or may be brought in conjunction with the action or upon the death of a spouse.”
Fam C 1101(g)“Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney’s fees and court costs.
The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.” [Emphasis added.]
Fam C 1101(h)
“Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty.”
AB 583 NoteNote that Section 8 of AB 583 (Stats 2001, Ch. 703) states
“This act shall apply to any judgment that becomes final on or after January 1, 2002.”
Case Law Addressing Remedies
Fiduciary Duty
In re Marriage of Geraci (2006) 144 Cal.App.4th 1278 (CA-2(7))T/Ct improperly imposed sanctions on H for breach of fiduciary duty relating to partnership that did not exist
“Failing to voluntarily and accurately declare his actual earnings was in fact a breach of the fiduciary duties he owed to Jane as a spouse. Based on the fact [husband] falsely understated his post-separation earnings the Court was warranted in imposing some type of punishment and/or sanction against [him].”
In re Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090 (CA-2(8))H properly charged with increased value of stocks he sold in violation of ATROs
In re Marriage of Rossi (2001) 90 Cal.App.4th 34 (CA-2(4))H entitled to 100% of lottery winnings under Fam C 1101(h) when W fraudulently concealed them from H and Court
In violation of CC 3294
T/Ct could have imposed attorney fees on W as additional sanctions/penalties under Fam C 1101(h) for fraudulently concealing lottery winnings
In re Marriage of Quay (1993) 18 Cal.App.4th 961 (CA-6)Bad loan made over W’s objection properly awarded to H without offset
In re Marriage of Brewer & Federici (2001) 93 Cal.App.4th 1334 (CA-2(3))Judgment set aside due to W’s failure to disclose pension information she was in a superior position to obtain
In re Marriage of Hokanson (1998) 68 Cal.App.4th 987 (CA-2(4)) W liable for attorney fees and lost value due to her refusal to comply with Court order regarding the sale of the family residence
In re Marriage of Lister (1984) 152 Cal.App.3d 411 (CA-2(6)) Using CP asset to pay off SP obligation held to be violation of duty of management and control of CP in good faith
Therefore, reimbursement proper
CRC Rule 8.1115(e) (eff. 7-1-16)(d) When a published opinion may be cited
A published California opinion may be cited or relied on as soon as it is certified for publication or ordered published.
(e) When review of published opinion has been granted
(1) While review is pending Pending review and filing of the Supreme Court's opinion, unless otherwise ordered by the
Supreme Court under (3), a published opinion of a Court of Appeal in the matter has no binding or precedential effect, and may be cited for potentially persuasive value only. Any citation to the Court of Appeal opinion must also note the grant of review and any subsequent action by the Supreme Court.
Marriage of Schleich (2017) 8 Cal.App.5th 267 (CA-6)T/Ct awarded W 50% of a CP asset
As a remedy under Fam C 1101(g)
After it had already awarded W the asset
In the division of the CP estate
Marriage of Schleich (cont’d)T/Ct awarded W the full value of certain CP assets
As a remedy under Fam C 1101(h)
And awarded W 50% of the same asset
In the division of the CP estate
Marriage of Schleich (cont’d)T/Ct found a breach of fiduciary duty under Fam C 1101
For dissolution disclosure violations involving H’s SP
T/Ct awarded W
100% of a SP account in name of H Did not deduct from an award of a CP account funds W previously received And sanctioned H for use CP income spent before separation
Marriage of Schleich (cont’d)T/Ct sanctioned H for breach of fiduciary duty
Under Fam C 1101 and 2107
H appeals
CA-6: REVERSES and REMANDS
Marriage of Schleich (cont’d)Fam C 1101 creates a right of action and specific remedies
For breaches of fiduciary duty
That impair a spouse’s present undivided ½ interest in the CP estate
Marriage of Margulis (2011) 198 Cal.App.4th 1252
Marriage of Schleich (cont’d)The property rights protected under Division 4
Are distinct from the duties of disclosure under Division 6 of the Family Code
Failure to disclose can be remedied by fees and mandatory sanctions under Fam C 2107
And those sanctions can include sanctions under Fam C 271
Marriage of Schleich (cont’d)The property award remedy under Fam C 1101(h) applies
Only to the nondisclosure of a CP asset, not the nondisclosure of a SP asset
Marriage of Simmons (2013) 215 Cal.App.4th 584
While Simmons focused on Fam C 1101(h) the same analysis applies to subdivision (g)
Marriage of Schleich (cont’d)As to the use of SP funds by H, his nondisclosure can be sanctioned
But the CP estate was not impaired by his conduct
H was properly sanctioned for failing to report this information in his disclosure documents
Marriage of Schleich (cont’d)Properly read, the statute provides
For an award of 50% of the value of the community asset
Or 100% of the community asset
If fraud or oppression is involved
Marriage of Schleich (cont’d)Any award under Fam C 1101 is limited to CP
Not the SP of the non-disclosing spouse
Marriage of Fossum (2011) 192 Cal.App.4th 336 Marriage of Rossi (2001) 90 Cal.App.4th 34 Marriage of Geraci 144 Cal.App.4th 1278
Marriage of Schleich (cont’d)On the SS issue, the T/Ct did not err in imputing investment rates of return on H’s portfolio
H argued that he had no earning capacity
The findings of the T/Ct were based on substantial evidence
And the SS award was not an abuse of discretion
Marriage of Schleich (cont’d)H argued that the need based fees awarded to W should be reduced
Based on what he had incurred in fees
The panel observed that some of the fees awarded to W included sanctions based on failure to disclose
Marriage of Schleich (cont’d)The matter is reversed on the fee award made in favor of W for breach of fiduciary duty under Fam C 1101
H was independently subject to sanctions under Fam C 2107 for his nondisclosure
On remand T/Ct shall reexamine amounts awarded for sanctions
Williams v. Williams (1971) 14 Cal.App.3d 560 (CA-2(1))H must account for funds received immediately prior to separation
Or be charged for them
Interspousal Transactions (Transmutations) and Undue InfluenceFiduciary Duties: Area 4 of 5
Three-Step Analysis
Transmutations
Overview of 3-Step AnalysisStep 1. Was the transmutation valid as to form?
Step 2. Was the transmutation obtained free of fraud?
Step 3. Did the transmutation waive the right of reimbursement? (Fam C 2640)
Step 1: Transmutation Must Be Valid as to Form
Transmutation
Step 1: Transmutations Occurring Prior to January 1, 1985
Step 1: Transmutations Occurring On or After January 1, 1985 Step 2: Transmutation Must have been Obtained Free of Fraud
Is the Agreement Enforceable?
Step 2: Transmutation Free of FraudIF a transmutation is valid as to form
THEN the next issue is whether the otherwise valid transmutation was obtained free from actual or constructive fraud
Party benefiting must have participated in the transaction
Nature of the Interspousal Fiduciary Duty & the Presumption of Undue Influence
Step 2: Transmutation Free of Fraud (cont’d)Was there a confidential fiduciary relationship?
Did the parties resurrect or opt out of the confidential relationship?
Did the transaction arise out of the relationship?
Did the party that benefitted participate in the transaction?
What advantage triggers the presumption?
Elements Necessary to Establish Presumption of Undue Influence
Confidential or Fiduciary Relationship?
Was there a confidential or fiduciary relationship?
There is a rebuttable presumption that when tow people marry, they are in a confidential relationship
Step 2: Transmutation Free of Fraud
Resurrect or Opt Out of Relationship?Did the parties resurrect or opt out of the confidential relationship?
The parties can “opt out” of the confidential relationship Based upon reposing trust & confidence in another Who voluntarily accepts the confidence & trust
Step 2: Transmutation Free of Fraud
Transaction Arise Out of Relationship?Did the transaction arise out of the relationship?
IF a confidential relationship is shown to have existed when the transaction occurred THEN the next element of the prima facie case of undue influence Is whether or not the parties relied on that relationship in entering into it
Step 2: Transmutation Free of Fraud
Party that Benefitted in the Transaction Did the party that benefitted participate in the transaction?
In Marriage of Saslow (1985) 40 Cal.3d 848, the court stated that in order to create a presumption of undue influence
It must be established that the “wrongful spouse made use of the confidence reposed for the purpose of gaining an unreasonable advantage over the mate”
Step 2: Transmutation Free of Fraud
“Active Participation” in Nonmarital SettingOutside of the marital arena, it appears clear that some active participation by the advantaged spouse is required
That is not new law
See Prob C 84 and Prob C 15200
See also Prob C 16002 and Prob C 16004
Step 2: Transmutation Free of Fraud
“Active Participation” in Marital SettingIn the marital setting, the rule seems similar, although perhaps not exactly the same
Taylor v. Taylor (1944) 66 Cal.App.2d 390
Marriage of Haines
Step 2: Transmutation Free of Fraud
What “Advantage” Triggers Presumption?Any advantage?
Unfair advantage?
Pre and post 1/1/1992 – Fam C 721(b) unfair advantage – Marriage of Burkle (Burkle II) (2006) 139 Cal.App.4th 712
Step 2: Transmutation Free of Fraud
Step 2: Adequate ConsiderationAdequate consideration is the issue: Long standing rule in a Court of equity
NOT “Any” OR “Sufficient”
Step 2: Adequate Consideration (cont’d)CASCT held in Golson v. Dunlap (1887) 73 Cal. 157
“To disregard the question of inadequacy, therefore, is to attempt to apply a rule while shutting one's eyes to its object and purpose.”
“‘Accidental subsequent advantage made of a bargain is nothing.’ The fair value at the time, under all the circumstances, must be the criterion.”
Step 2: Five Elements to Overcoming the Presumption of Undue Influence Step 3: Did Transmutation Address Fam C 2640 Reimbursement Rights?
Transmutation
Step 3: Reimbursement RightsReimbursement rights survive transmutation
Unless a party has made a written waiver or has signed a writing that has the effect of a waiver
The party shall be reimbursed for the party’s contributions to the acquisition of the property
To the extent the party traces the contributions to SP source
Step 3: Fam C 2640 Extrinsic EvidenceFam C 2640(b) states that the writing must have the “effect of a waiver”
Arguably, therefore, in order to evaluate the “effect” of a writing on the overall transaction, the Court will need to examine all evidence surrounding the transaction
Step 3: Fam C 2640(c)“A party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division”
Step 3: Fam C 2640(c) After 1/1/2005A deed transferring property from one spouse’s separate estate to the other spouse’s separate estate would probably result in no reimbursement
Whereas such a deed transferring property into CP does not relinquish the SP reimbursement right
Effect of Fam C 2640(c) on Transmutations After 1/1/2005
Undue Influence
Transmutations
CC 1575: Undue influence“Undue influence consists
In the use, by one in whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him;
In taking an unfair advantage of another’s weakness of mind; or, In taking a grossly oppressive and unfair advantage of another’s necessities or distress.” [Enacted 1872]
Starr v. Starr (2010) 189 Cal.App.4th 277 (CA-2(8))Residence purchased in 1996 during marriage using $50K of H’s SP for down payment
Broker tells parties that they can get a lower interest rate if W quitclaims to H, and her name is added to title later (W had poor credit)
W testifies that H agreed to add her name to title later
2004 Disso: W testifies she signed quitclaim deed voluntarily; H says that W intended it to be SP all along
All payments came from CP
Starr (cont’d)
T/Ct finds that residence is CP – orders H to convey it to himself and W as tenants in common
H to be reimbursed for his $50K SP contribution per Fam C 2640(b)
H appeals, relying on Marriage of Mathews (2005) 133 Cal.App.4th 624
CA-2(8): AFFIRMS
Cont’d
Starr (cont’d)H’s failure to keep promise to add W’s name to title amounts to constructive fraud and undue influence
Where an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence
The evidence supports a finding that the house was CP based on H’s violation of his fiduciary duties to W
Holding
Starr (cont’d)Fam C 721(a): Such transactions “are subject to the general rules governing fiduciary relationships”
“When an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence.” (Marriage of Haines at pp. 293-294)
Appellate Analysis
Starr (cont’d)H relies on Marriage of Mathews – “It is easy to see why Ron relies on Mathews. The factual setting seems virtually identical to this case, with the added bonus of Martha’s testimony that she signed the quitclaim deed freely and voluntarily.”
“There is a critical – and [the Court believed] fatal – distinction” between this case and Marriage of Mathews
“In Mathews, the wife said she merely assumed she would be added onto the title after escrow closed, while Martha testified that Ron [promised] her he would do so.”
“The importance of this distinction is tied up in both section 721 and its statutory predecessor, and the sometimes confusing use of the term ‘undue influence’ by decisions interpreting those provisions.”
Appellate Analysis
Starr (cont’d)Undue influence can be a defense to a contract based on the concept of coercive persuasion
“However, there is another type of conduct that amounts to undue influence: the use of confidence or authority to obtain an unfair advantage.” [CC 1575]
“This is triggered by one party’s breach of a confidential relationship.”
“It is also the type of conduct at issue in Brison I, supra, 75 Cal. 525, which… explains not only how ‘undue influence’ became shorthand for conduct that violates section 721, but why the evidence in this case supports the judgment.”
Appellate Analysis
Starr (cont’d)Brison v. Brison (Brison I) (1888) 75 Cal. 525 and Brison v. Brison (Brison II) (1891) 90 Cal. 323 announced the principle that “constructive fraud due to breach of a confidential relationship amounts to undue influence, terminology that was adopted by other Courts.”
They also “established a paradigm fact pattern of constructive fraud arising from one spouse’s conveyance of property to the other spouse based on an unfulfilled promise by the other spouse to reconvey.”
Appellate Analysis
Starr (cont’d)“Even if the attorney who advised the wife had been employed by her, the husband was not exonerated because ‘by accepting the deed upon the statement made in his presence of the purposes for which he was to hold the land, [he] became a party to the transaction, and by implication promised to fulfill the purpose of the trust.’ (Jones v. Jones (1903) 140 Cal. 587)”
“As a result, the failure to fulfill this agreement was constructive fraud, allowing the wife to have the deed declared void… In short, even when the suggestion to convey came from a third party adviser and no express promises were made by the husband, he impliedly promised to fulfill the conditions of the transfer, and the failure to do so was constructive fraud.”
Appellate Analysis
Starr (cont’d)Conclusion: “[T]he failure to add [W] onto the title is constructive fraud under [Fam C 721], and constructive fraud is presumed to be undue influence, which means the transaction was not free and voluntary.”
Appellate Analysis
Miscellaneous – BUT IMPORTANT!
In re Marriage of Fossum (2011) 192 Cal.App.4th 336 (CA-2(1))1994: Home purchased during marriage
Lender tells parties that they can obtain a better interest rate if W’s name not on title
H promises to add W’s name to title after transaction is completed
H keeps promise
Marriage of Fossum (cont’d)1998: Parties agree to take W off title so that H can refinance the property and obtain a better rate
They further agree that, as they had done in the past, H would add W’s name to title after the refinance was complete
H does not keep his promise this time; instead, the deed simply says property is H’s as “sole and separate property”
Marriage of Fossum (cont’d)T/Ct
H argues that the house is SP with a Moore/Marsden interest Court disagrees and finds that H failed to rebut the presumption that the home is CP
Marriage of Fossum (cont’d)H argues that T/Ct failed to adhere to the “form of title” rule and deed must control over W’s claim of the existence of an oral agreement to replace her name on the deed
CA-2(1) disagrees
Holding
Marriage of Fossum (cont’d)“If one spouse secures an advantage from the transaction, a statutory presumption arises under section 721 that the advantaged spouse exercised undue influence and the transaction will be set aside.” (Matthews/Haines)
“ ‘When a presumption of undue influence applies to a transaction, the spouse who was advantaged by the transaction must establish that the disadvantaged spouse’s action was freely and voluntarily made, with a full knowledge of all the facts, and with a complete understanding of the effect of the transaction.’ ”
“The advantaged spouse must show, by a preponderance of evidence, that his or her advantage was not gained in violation of the fiduciary relationship.”
Appellate Analysis
Marriage of Fossum (cont’d)“The statutory presumption of undue influence applies if
(1) there is an interspousal transaction by which (2) one spouse gains an advantage over the other. …
Those prerequisite elements are satisfied here with regard to the 1998 quitclaim deed.”
Appellate Analysis
Marriage of Fossum (cont’d)“Thus, Edward bore the burden to establish, by a preponderance of evidence, that Sandra's signing of the third quitclaim deed was freely and voluntarily made with full knowledge of all the facts and with a complete understanding of its effect of making the house Edward's separate property.”
Appellate Analysis
Marriage of Fossum (cont’d)“Substantial evidence supports the trial court’s finding that Edward failed to carry this burden.
Sandra did testify she executed the 1998 deed freely and voluntarily, and that she understood the legal import of a quitclaim deed.
However, when Sandra agreed to deed her interest in the property to Edward, she did so based on his promise to restore her name to the title once the refinance was complete.” [Emphasis added.]
A promise that husband never intended to fulfill
Appellate Analysis
Marriage of Fossum (cont’d)Although H argues that the form of title should control under Brooks / Ev C 662…
“The problem with Edward's argument is that it essentially ignores the rule that the form of title presumption simply does not apply in cases in which it conflicts with the presumption that one spouse has exerted undue influence over the other.”
H simply did not rebut the presumption that he failed to deal with wife in the highest good faith
Appellate Analysis
Marriage of Fossum (cont’d)Prior to separation (DOS 11-2002), W takes a cash advance on a credit card and “never” disclosed transaction to H
T/Ct says W breached her fiduciary duty to H, orders her to give him half of $24K cash advance and denies his request for atty fees under Fam C 1101
H appeals and argues that atty fees are mandatory
Fam C 1101(g)
Marriage of Fossum (cont’d)Under Fam C 721 and Fam C 1100 et seq., spouses owe each other fiduciary duties in the
management and control of CP
Where, as here, T/Ct finds a breach, but it does not rise to the level of sanctionable conduct, Fam C 1101(g) applies
This subdivision says that its remedies “shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or
transferred in breach of the fiduciary duty plus attorneys fees and costs.” [Emphasis added.]
Fam C 1101(g): Appellate Analysis
Marriage of Fossum (cont’d)Issue: Whether T/Ct properly interpreted subdivision(g) as vesting it with the discretion to deny an award of fees to H
“The language of section 1101, subdivision (g) is unambiguous and mandatory.”
It says SHALL!
“Once a breach is shown, the trial Court lacks discretion to deny an aggrieved spouse’s request for attorney fees.”
Fam C 1101(g): Appellate Analysis
Marriage of Fossum: 3 Duties Owed by SpousesDuty of Loyalty: Applicable per Fam C 721(b)
Duty of Care: No duty of care per Marriage of Duffy (2001) 91 Cal.App.4th 923; Legislature responds & incorporates Corp C 16404 (and Corp C 16403)
“(a) The fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c)…
(c) A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” [Emphasis added.]
Marriage of Fossum: 3 Duties Owed by SpousesDuty of Disclosure: Per Marriage of Walker, no duty prior to 1-1-2003
1-1-2003 forward, Corp C 16403 applies
Postseparation DisclosureProperty Continued
Postseparation Disclosure Rights and Obligations
Fiduciary Duties: Area 5 of 5
Importance of Postseparation Fiduciary Disclosure Obligations
Two Homes / Home-builders
Evolution of Postseparation Disclosure Obligations1987: Recreation of fiduciary duties in management & control of CP
SB 1071 (Stats 1986, Ch. 1091) Eff. 7-1-87
1992: Preseparation fiduciary duties
AB 2650 (Stats 1992, Ch. 162) / Fam C 721(b) & Fam C 1100(e)
1993: Postseparation fiduciary duties
AB 1500 (Stats 1993, Ch. 219) / Fam C 2120 et seq. AB 1500 (Stats 1993, Ch. 219) / Fam C 2100 et seq.
Postseparation Disclosure Obligations (cont’d)2002: Amendments to Fam C 2102 & other statutes
AB 583 (Stats 2001, Ch. 703) / Fam C 2102, 2105, 2107
2003: Amendments in response to Marriage of Duffy
SB 1936 (Stats 2002, Ch. 310) / Fam C 721(b), Corp C 16403, 16404
Trial by Ambush is No Longer Acceptable
Purpose of Discovery ToolsThe purpose of the discovery rules is to “enhance the truth- seeking function of the litigation process and eliminate trial strategies that focus on gamesmanship and surprise” [Williams v. Volkswagenwerk (1986) 180 Cal.App.3d 1244]
In other words, discovery process is designed to “make a trial less a game of blind man’s [bluff] and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent” [Greyhound Corp. v. Superior Court (1961) 56 Cal.2d 355]
Informal Discovery Under the Family CodeCodified public policy
Spouses’ bill of rights
Fam C 2100 & Fam C 2120o Schnabel v. Superior Court (Schnabel) (1993) 5 Cal.4th 704
Implementation statuteso Marriage of Feldman (2007) 153 Cal.App.4th 1470
The Bill of Rights for Spouses
The Bill of Rights: Fam C 2100(c)“In order to promote this public policy, a full and accurate disclosure of all assets and liabilities in
which one or both parties have or may have an interest must be made in the early stages… regardless of the characterization as community or separate, together with a disclosure of all income and expenses of the parties.”
Fam C 2100(c)“Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent there have been any material changes so that at the time the parties enter into an agreement for the resolution of any of these issues, or at the time of trial on these issues, each party will have a full and complete knowledge of the relevant underlying facts.”
Fam C 2120Can only be implemented with full disclosure of community, quasi-community & separate assets, liabilities, income and expenses and decisions freely and knowingly made
Schnabel: CASCT Weighs in“Whatever right [H] has to inspect records of the corporation, [W] also has…”
“Spouse is entitled to complete [financial] disclosure of all relevant information…”
“[D]ivision of assets and … support …those interests are strongly protected by California law.”
In 1993 CASCT applied Fam C 2100, 2120 and 1100(e)
Implementation Statutes
Fam C 721(b): Applicable Pre & Post DOSSubject to the same rights and duties of nonmarital business partners
Imposes a duty of the highest good faith & fair dealing on each spouse
H & W are subject to the general rules governing fiduciary relationships
Fam C 721(b) (cont’d)Trustee: Accounting and holding as trustee, any benefit or profit from any transaction
Rendering upon request, true & full information of all things affecting any transaction
Access at all times to any books kept
Corp C 16403 Applicable Pre & Post DOS
Corp C 16404 Pre & Post DOS
Fam C 2102 Postseparation sua sponte Obligation of Disclosure
From DOS to distribution–accurate and complete disclosure – duties per Fam C 721(b) all activities that affect the A & L of other party, including but not limited to
Assets & liabilities Written disclosure of any investment opportunity, business opportunity, or other income–
producing opportunity The operation or management of a business
In re Marriage of Sorge (2012) 202 Cal.App.4th 626 (CA-4(1))Long term marriage; 3 Cs
Pursuant to MSA, parties agree to $8,500/mo CS based on H’s gross income of approximately $800K per year
Also agree to $12K/mo in nonmodifiable SS for 120 months
Marriage of Sorge (cont’d)In 2007, 4 years after entry of judgment, W files OSC to modify, among other things, CS
W also seeks atty fees, sanctions, and SS arrears
Parties hire a joint expert to analyze respective financial situations
Marriage of Sorge (cont’d)Sanctions: H sanctioned $75K
In part, because the court found he had fiduciary duty to provide W with material facts and info regarding his income after judgment was filed and this duty continued until the court no longer had juris over CS
T/Ct found Fam C 2101(c) creates duty that lasts beyond end of divorce
Appellate Analysis
Marriage of Sorge (cont’d)Sanctions (cont’d)
The court also sanctioned H because his behavior “frustrated settlement” CA-4(1) REVERSES sanction award because it was based, in part, upon violation of a
fiduciary duty that does not exist
Appellate Analysis
Marriage of Sorge (cont’d)Fam C 2102(c) provides: “From the date of separation to the date of a valid, enforceable, and binding resolution of all issues relating to child or spousal support and professional fees, each party is subject to the standards provided in Section 721 as to all issues relating to the support and fees, including immediate, full, and accurate disclosure of all material facts and information regarding the income or expenses of the party.”
Appellate Analysis
Marriage of Sorge (cont’d)Trial Court’s analysis
“The trial court proceeded to conclude that if it were to agree with Joseph's argument that the Wyoming divorce decree constituted a ‘valid, enforceable and binding resolution’ of the child support issue, then the result would be that the fiduciary duties would be ‘available only to parents who are still married but not to parents who were never married or who are no longer married.’”
Appellate Analysis
Marriage of Sorge (cont’d)Trial Court’s analysis (cont’d)
“According to the trial court, Joseph's argument would result in a two-class system of parents: ‘One class of parents would be able to effectively obtain or modify child support orders fairly, efficiently, accurately and economically where the others would have to resort to formal discovery which can have the opposite effect.’
Surely the Legislature did not intend to create such a two class system”
Appellate Analysis
Marriage of Sorge (cont’d)There is no definition for “valid, enforceable, and binding resolution” in the statute
Therefore, the court looks to legislative intent
Looked to the Supreme Court’s distinction between temporary and permanent child custody orders
Looked to Fam C 3660 et seq. – annual request for I&E Declaration Entry of order re permanent support causes the duty of disclosure to cease
Appellate Analysis
Fam C 2102 Postseparation Sua Sponte Obligation of Disclosure From the DOS to the date of a valid, enforceable, and binding resolution of support & fees – duties per Fam C 721(b) as to all issues
Income and expenses Immediate, full and accurate disclosure All MFI
Fam C 2104: Prelim Declaration of DisclosurePDD executed under penalty of perjury
Not filed with the court Sufficient particularity
o Identity of all assets and liabilities
o Percentage of ownership in each asseto No requirement for characterization or values
Income & expense declaration
Within 60 days of filing the petition or within 60 days of filing the response [Fam C 2104(f)]
Fam C 2105: FDDFDD executed under penalties of perjury
(a) Before or at the time enter into agreement of property/ support (if goes to trial – no later than 45 days before 1st assigned trial date)
(b) FDD shall include specified information
(c) Limitations on order setting aside a judgment
(d) The parties may stipulate to a mutual waiver
Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951“Kaiser also claims that the Engallas failed to demonstrate actual reliance on its misrepresentations. Actual reliance occurs when a misrepresentation is “ ‘an immediate cause of [a plaintiff’s] conduct, which alters his legal relations,’ ” and when, absent such representation, “ ‘he would not, in all reasonable probability, have entered into the contract or other transaction.’ ” ( Spinks v. Clark (1905) 147 Cal. 439, 444 [82 P. 45]; see also 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 711 at p. 810.)
Engalla (cont’d)“It is not . . . necessary that [a plaintiff’s] reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct. . . . It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.” ( Rest.2d Torts, § 546, com. b, p. 103.)
Engalla (cont’d)Moreover, a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. ( Vasquez v. Superior Court (1971) 4 Cal. 3d 800, 814 [94 Cal. Rptr. 796, 484 P.2d 964, 53 A.L.R.3d 513]; see also 12 Williston on Contracts (3d ed. 1970) § 1515, p. 480; Rest.2d, Contracts, § 167.)
Engalla (cont’d)A misrepresentation is judged to be “material” if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question” ( Rest.2d Torts, § 538, subd. (2)(a); see also Barnhouse v. City of Pinole (1982) 133 Cal. App. 3d 171, 188, fn. 5 [183 Cal. Rptr. 881]), and as such materiality is generally a question of fact unless the “fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.” ( Rest.2d Torts, § 538, com. e, p. 82.)
Engalla (cont’d)Thus, the Engallas need only make a showing that the misrepresentations were material, and that therefore a reasonable trier of fact could infer reliance from such misrepresentations, in order to survive this summary-judgment-like proceeding, absent evidence conclusively rebutting reliance. (Cf. Security Pac. Nat. Bank v. Associated Motor Sales (1980) 106 Cal. App. 3d 171, 179-180 [165 Cal. Rptr. 38] [presumption which shifts the burden of proving evidence entitles plaintiff to summary judgment if defendant fails to produce evidence to rebut the presumption].)
Restatement 2nd of Contracts Section 167 as Cited to by EngalasWhen a misrepresentation is an inducing cause
A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent
Fam C 2105: FDD (cont’d)(b) Specified information
(1) MFI on characterization (2) MFI regarding valuation of CP / in which CP contended has an interest (3) MFI regarding amounts of CP obligations / for which CP contended has a liability (4) MFI regarding earnings, accumulations, and expenses
Fam C 2105: FDD (cont’d)(d) Representations for waiver
(1) PDD’s have been completed & exchanged (Fam C 2104) (2) I&E’s have been completed and exchanged with all MFI (3) PDD’s have been augmented for MFI: characterization of A&L, valuation, etc. (4) Waiver is knowingly, intelligently & voluntarily (5) Waiver does not limit disclosure obligations; confirms disclosure obligation fulfilled set
aside
What is “Material”?“Material” (Oxford University Press): “important, essential, relevant”
“Material” (Black’s Law Dictionary): “of such a nature that knowledge of the information would affect a person’s decision making process, significant, essential; Cf RELEVANT”
What is “Material”? (cont’d)“Material Fact” (Black’s Law Dictionary): “a fact that is significant or essential to the issue at hand”
“Relevant” (Black’s Law Dictionary): “Logically connected and tending to prove or disprove a matter in issue, having appreciable probative value …. Cf MATERIAL”
What is “Material”? (cont’d)
Fam C 1100(e) & Fam C 2105
All MFI
Fam C 2100(c)
“[E]ach party will have a full and complete knowledge of the relevant underlying facts”
What is “Material”?
What is “Material”? (cont’d)
In re Marriage of Margulis (2011) 198 Cal.App.4th 1252 (CA-4(3))Marriage of Margulis is a postseparation case involving the shifting of the burden of proof
However, look at the code sections the court addresses and determine if it has applicability to preseparation fiduciary duties
And, what other postseparation factual circumstances might Marriage of Margulis apply to, such as Fam C 721(b)(1)-(3)
Marriage of Margulis (cont’d)“This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
Marriage of Margulis (cont’d) (2) Rendering upon request, true and full information of all things affecting any
transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.”
Characterization: General Presumption“The characterization of property as community or separate can be determined by the date of acquisition, the application and operations of presumptions, or whether the spouses have transmuted the property.” [Marriage of Sivyer-Foley and Foley]
In re Marriage of Rossin (2009) 172 Cal.App.4th 725 (CA-6)“As we explain, in this case, the circumstances surrounding acquisition of the disability policy compel its characterization as separate property. The pivotal factor is the time of acquisition of the right to the benefits; a secondary consideration here is the source of funds for acquisition. In our case, the right to benefits was acquired by the wife prior to marriage with separate property funds. That being so, the benefits must be characterized as separate property.” [Emphasis added.]
Marriage of Rossin (cont’d)“Under the circumstances presented here, characterization of the disability benefits turns on ‘the single concrete fact of time.’ In this case, the wife accrued the full right to those benefits prior to marriage. For that reason alone, they are her separate property. There is no suggestion in the briefs or in the record that any contrary title presumption applies, that there has been a transmutation, or that any other circumstance has worked a change in the character of this property.” [Emphasis added.]
In re Marriage of Margulis (2011) 198 Cal.App.4th 1252 (CA-4(3))H controls finances during marriage (brokerage accts, two community IRAs held in H’s name)
H continues to manage community investments for 12 yrs after separation and has complete control of substantial community investment accts, pays all bills
W trusts H to manage finances for their mutual benefit
Just before trial, H discloses for 1st time that once-brimming investment accounts are virtually empty
Without any corroborating evidence, H attributes dissipation of account values to proper expenditures and stock market losses
Marriage of Margulis (cont’d)W argues H should be charged with missing funds unless he can prove money not misappropriated
W’s only evidence of missing funds is financial statement H prepared 3 yrs after separation and 9 yrs before trial
T/Ct: Document = insufficient evidence; declines to charge H with missing funds, but sanctions him for failing to keep adequate records
The ensuing property division requires W to make large equalizing payment to H
Marriage of Margulis (cont’d)CA-4(3): REVERSES
Based on relevant Family Code provisions, equitable principles, and caselaw, T/Ct erred in failing to shift to managing spouse B of P concerning missing community assets
Once nonmanaging spouse makes prima facie showing of existence and value of community assets in other spouse’s control postseparation, B of P shifts to managing spouse to prove proper disposition or lesser value of assets
Failing such proof, Court should charge managing spouse with assets according to prima facie showing
Holding
Marriage of Margulis (cont’d)DOS in September 1996
Limited documentary evidence of value of community investment accounts at DOS
1996 Schedule D, statement of capital gains and losses, reported H and W sold $1,142,111 worth of short- and long-term stock holdings, two other long-term investments that generated another $68,091
Size of community estate grew larger postseparation due to several infusions of community cash
After separation, H moved to Chicago and continued to manage community investments and to pay W’s bills, including community obligations
Analysis
Marriage of Margulis (cont’d)W provides 2-page personal financial statement (prepared and signed by H) dated 2-1-1999 which reflects total assets of $1.3M
Joint forensic accountant says that he cannot perform tracing because, despite repeated requests, H failed to provide adequate records
W argues that
H should be charged with receiving assets under his control during postseparation period = $901K
If Court agrees, W should retain home worth $450K, $20K in cash and $238K equalizing payment
Analysis
Marriage of Margulis (cont’d)H argues that home is only remaining community asset and proposes it be sold; offers no explanation as to disposition of substantial retirement accts other than to blame market losses and payment of community/family expenses during postseparation period
H does provide forensic accountant’s testimony and report showing disposition based on some records and “conversations with husband”
T/Ct gives W’s 2-page statement little weight, substantially agreeing with H’s suggested division—W owes H $189K equalizing payment; but, sanctions H $20K for failing to keep adequate records and $30K towards W’s fees
Analysis
Marriage of Margulis (cont’d)“Once a nonmanaging spouse makes a prima facie showing of the existence and value of community assets in the other spouse's control postseparation, the burden of proof shifts to the managing spouse to prove the proper disposition or lesser value of those assets. Failing such proof, the court should charge the managing spouse with the assets according to the prima facie showing.”
Analysis
Marriage of Margulis (cont’d)Court seeks amici curiae since this issue is not fully articulated in any published case
Why shift burden of proof in these situations?
Cases show that it is common to shift burden where there is unequal access to records The risk of incompleteness is now borne by the party obligated to keep records
Analysis
Marriage of Margulis (cont’d)Shifting B of P comports with overarching goal of fiduciary duty stated in Fam C [Fam C 721, 2100 et seq. and 1100 et seq.]
Accountability is fundamental Duty to account lasts until final division of assets Fiduciary duties in Fam C are very broad
o Partnership fiduciary duties identical to interspousal fiduciary duties o Parties must disclose existence and value of assets and their dispositiono Further, H’s duty to show disposition of funds is ongoing and must occur without
demand per Corp C 16403(c)
Analysis
Marriage of Margulis (cont’d)T/Ct found very narrow breach of “duty to keep records”; therefore, it applied wrong remedy (sanctions) instead of awarding W at least 50% of undisclosed or wrongfully transferred assets
Analysis
Marriage of Margulis (cont’d)Three other cases have had similar fact patterns with similar appellate level results: Williams v. Williams (1971) 14 Cal.App.3d 560; Marriage of Ames (1976) 59 Cal.App.3d 234; Marriage of Valle (1975) 53 Cal.App.3d 837
In Marriage of Williams Justice Thompson cited equitable “principle of burden based upon superior knowledge of the facts” as justification for shifting to managing spouse B of P on “unexplained disappearance of community funds ….”
Analysis
Marriage of Margulis (cont’d)H’s final arguments fail
Bono says you shift the burden only after FRAUD is shown; that did not occur here
CA-4(3) says Bono is estate case where H was dead and could not explain what happened to funds
Fam C 721: Nothing in statute is meant to impose burden of keeping detailed records
Court said maintaining these types of records is not burdensome and records are not “detailed” as citied in Fam C 721
Duty to account does not disappear due to long separation period (12 yrs)
Analysis
Marriage of Margulis (cont’d)T/Ct awarded H Epstein credits which was reversed on appeal
Epstein credits awarded when one spouse uses SEPARATE PROPERTY for community purposes postseparation
In this case, H could not show that funds used to pay postseparation expenses were SEPARATE PROPERTY since he could not trace character of funds in various accounts to his SP
After all, he had NO RECORDS
Minor Issue
In re Marriage of Kochan (2011) 193 Cal.App.4th 420 (CA-2(8))T/Ct finds H breached fiduciary duties to preserve community asset by failing to pay mortgage & cooperate in selling home; however, T/Ct reserves juris over issue of assessing actual damages caused by his conduct
H argues no substantial evidence to support T/Ct’s finding
Remedy
IRMO Kochan (cont’d)CA-2(8) disagrees with H: T/Ct’s finding of “an indivisible two-part assignment of fault” is supported by substantial evidence
H did not act reasonably to preserve whatever value may have been in home H did not “want to take any responsibility, or exert any effort” to preserve asset
Family Residence Analysis
IRMO Kochan (cont’d)However, it is unknown whether H’s dilatory conduct caused any actual loss to community: “It may well be that the debt owed on the residence exceeded its value, in which case Roman’s acts would not have caused any loss in any event. At this point, it is too early to address such matters.”
Since T/Ct reserved juris on FR issue, H can provide evidence that debt owed exceeded FR’s value – no financial harm
Family Residence Analysis
IRMO Kochan (cont’d)KEY ISSUE: did H’s conduct cause “a loss of equity or other damage.” – If so, it appears that the court would limit community’s recovery to damages which could be proven through admissible and credible evidence
Fees per Fam C 1101 (g)?
Family Residence Analysis
IRMO Kochan (cont’d)In 2007, during disso proceedings, H files Chapter 7
H’s bankruptcy petition listed secured debts including mortgage loans with a 1st and 2nd trust deed on FR, a lease on W's car, and a loan on another vehicle
H listed another $100K (rounded) in unsecured community debts, including $5K in atty fees that the family law court had ordered him to pay
In February 2008, H served and filed written notice advising family law court and W of automatic stay in his bankruptcy action
Bankruptcy Analysis
IRMO Kochan (cont’d)T/Ct held
Over several trial days, family law court tried issues exempt from bankruptcy stay, including atty fees
The court ordered an award of $120K (rounded) in atty fees to W’s counsel CA-2(8): REVERSES (Although it agrees that issue of atty fees should be revisited because
existing orders appear to be based, at least in part, on H’s earning capacity, rather than actual income)
Bankruptcy Analysis
IRMO Kochan (cont’d)H argues that $120K in atty fees to W’s counsel must be reversed because it “countermands the orders of the bankruptcy court.”
The court disagrees
“To the extent Roman appears to argue that all of the attorneys' fees incurred by Janice up to the date he filed his bankruptcy petition were discharged in his bankruptcy case, we do not agree.”
Appellate analysis (Bankruptcy/Fees)
IRMO Kochan (cont’d)The court disagrees (cont’d)
“The bankruptcy statutes provide that a petitioner's domestic support obligations are not
dischargeable in bankruptcy, and attorneys' fees orders in dissolution actions are encompassed in this rule. (11 U.S.C. § 523(a)(5); Jones v. Tyson (9th Cir. 1975) 518 F.2d 678, 680.)”
However, since T/Ct based its fee ruling at least in part on H’s earning capacity ($21K/mo), rather than actual income, the court is ordered on remand to reconsider the amount of fees awarded to W
Appellate analysis (Bankruptcy/Fees)
Fam C 2107: EnforcementIf one party fails to serve on other a PDD or FDD OR fails to provide info required with sufficient particularity
AND other party has served the respective DOD on the noncomplying party
Next Step: Complying party may request the appropriate DOD or further particularity
If failure to comply
File motion to compel a further response File motion for order preventing evidence
Fam C 2107: Enforcement (cont’d)Unless the court finds that noncomplying party acted with substantial justification or that other circumstances make imposition of sanction unjust
AND shall include reasonable attorney’s fees, costs incurred, or both
Sanctions shall be in an amount sufficient to deter repetition of the conduct or comparable conduct
In re Marriage of Fong (2011) 193 Cal.App.4th 278 (CA-2(3))W is not entitled to award of sanctions under Fam C 2107(c) because she was not a “complying party” since she had failed to file an FDD
The award of attorney fees and costs under Fam C 271 was proper
T/Ct was not required to issue a statement of decision
IRMO Fong (cont’d)T/Ct awards W $200K in sanctions under Fam C 2107 because of H’s obstructionist behavior (failed to comply with discovery requirements/court orders)
CA-2(3): REVERSES – Only a “complying party” can move for sanctions under Fam C 2107; W not a “complying party” because she failed to file FDD before the fee motion
Each party is required to fully disclose “in the early stages”
Appellate Court: The requirements for an award of monetary sanctions under Fam C 2107 is a question of statutory construction
Fam C 2107(c) Analysis
IRMO Fong (cont’d)Fam C 2107(a) expressly states that only a “complying party” may request a “noncomplying party” to prepare or supplement a declaration of disclosure
Fam C 2107(a) defines complying party as one who has “served the respective declaration of disclosure on the noncomplying party”
"Although subdivision (c) does not expressly state that only a "complying party" ... is entitled to an award of monetary sanctions", the court concludes that "this limitation is implicit" because complying party requirement is in subsections (a) and (b)
Statutory Construction
IRMO Fong (cont’d)The court points out that it would be odd for the Legislature to limit the availability of an order compelling disclosure (Fam C 2107(a) and (b)) to a “complying party” while making the potentially more severe remedy of monetary sanctions (Fam C 2107(c)) available to a “noncomplying party”
Statutory Construction
IRMO Fong (cont’d)Fam C 271 authorizes fees as a sanction for “uncooperative conduct that frustrates settlement and increases litigation costs” (IRMO Tharp/Corona)
H contended T/Ct failed to consider his ability to pay
CA-2(3) disagrees – H had yacht, 9 rental properties, etc.
H then argues W’s conduct uncooperative and court would effectively be awarding her noncompliance
Court disagrees – H did not show that W’s conduct was egregious
Attorney Fees Under Fam C 271
IRMO Fong (cont’d)"As the party in possession of a greater share of community assets, [H] bore a greater burden of disclosure and fiduciary responsibility with respect to the community assets."
"Unlike section 2107, subdivision (c), section 271 does not necessarily require that the moving party be in compliance…. Although the extent to which the moving party’s conduct furthers or frustrates settlement may be an appropriate consideration for a court considering an award under section 271." [Emphasis added.]
Attorney Fees Under Fam C 271
IRMO Fong (cont’d)T/Ct refused H’s request for a statement of decision
General Rule: Statement of decision is not required in connection with a motion
Exception to general rule: Gruendl v. Oewel Partnership, Inc. (1997) 55 Cal.App.4th 654
Gruendl does not apply
The motion for fees under Fam C 271 was not a substitute for trial of issues that could have been raised in the pleadings
Statement of Decision
IRMO Feldman Overview
IRMO Feldman (2007) 153 Cal.App.4th 1470: Detailed AnalysisBasic Facts (part 1)
34-year marriage H created corporation with many sub-entities H estimated value of assets at $50M W was not involved in businesses Characterization and reimbursement major issues
IRMO Feldman: Detailed Analysis (cont’d)Basic Facts (part 2)
H failed to disclose $1M Israeli bond, purchase of house by newly-created company after DOS, 401k, addition of new companies after DOS
H failed to inform W when asked in deposition W found out months later
IRMO Feldman: Detailed Analysis (cont’d)
Enforcement AttemptsInterrogatories
Request for production of documents
Depositions
Including attorney fees
Application for order imposing monetary sanctions
Schedule of Assets & Debts
IRMO Feldman Opinion: Point #1Sanctions may be imposed even if moving party fails to prove actual injury
IRMO Feldman Opinion: Point #2Calumet Ave property was a material fact giving H duty to disclose [Fam C 1100(e)]
W is claiming the Sunroad entities are CP; she needs info to trace In division of CP, W may attempt to claim reimbursement for any post DOS benefit that H
obtained
IRMO Feldman Opinion: Point #3Fact that business entity owns assets does not excuse spouse from disclosure duty
Transaction involving Calumet Avenue property is clearly relevant to understand “the existence, characterization, and valuation of all assets in which the community has or may have an interest”
IRMO Feldman Opinion: Point #4“Material fact” for disclosure purposes is one relevant to tracing or characterization, and
Identity Valuation Income Expenses
IRMO Feldman Opinion: Point #5The fact that the requesting party already has the info does not relieve the other spouse from disclosure obligations
IRMO Feldman Opinion: Point #6Spouse in superior position must acquire and disclose
“[A] spouse who is in a superior position to obtain records or information from which an asset can be valued and can reasonably do so must acquire and disclose such information to the other spouse”
IRMO Feldman Opinion: Point #7Failure to disclose new info for several months breaches duty to update/augment
“As we have explained, Aaron was under a duty, among other things, to give ‘an immediate, full, and accurate update or augmentation to the extent there have been any material changes’ as to his assets and liabilities (§2102, subd. (a)(1)).”
IRMO Feldman Opinion: Point #7
IRMO Feldman Opinion: Point #8No exception in Fam C 2102(a)(1) disclosure obligation for offsetting debts and assets
IRMO Feldman Opinion: Point #9Privately held entities enhance disclosure obligation
“It is significant that the Sunroad entities are privately held corporations. Because of their privately held status, information regarding them is not available to Elena, but it is available to Aaron as a shareholder and manager of the company, giving him a duty to obtain that information in carrying out his duty to provide disclosure about community assets.”
Ethical Considerations Related to Postseparation Disclosure
Ethical Issues (cont’d)
Applicable Criminal StatutesPC 118(a): Any material matter known to be false
PC 125: Unqualified statement not known to be true
PC 126: 2 to 4 years in prison
PC 127: Willfully procures another person… subornation of perjury
Applicability to family law attorneys (all MFI)
Ethical Issues Relating to Postseparation Disclosure
Applicable Disciplinary RulesPreliminary declaration of disclosure
Final declaration of disclosure
All material facts and information
Ethical Issues Relating to Postseparation Disclosure
Ethical Issues Relating to Postseparation Disclosure
EndThank you