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Recent Posts in Bifurcation of Issues Category
| January 21, 2012 |
| Court Upholds PRENUPTIAL AGREEMENT Where Wife Alleged Husband Falsely Stated Net Worth |
| Posted By Thurman Arnold, C.F.L.S. |
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While prenuptial agreements were once viewed with suspicion by trial courts, a recent decision reflects the current trend to uphold them particularly when the complaining party has competent legal representation and practical access to all relevant information concerning the other person's finances - whether they took advantage of that opportunity or not. One lesson is that people need to take the waivers set forth in these agreements quite seriously, because there is high likelihood you will become stuck with them.
One of the useful aspects to the Second Appellate District's decision in In Re Marriage of Hill and Dittmer is that the justices kindly include an Appendix setting forth selected portions of the prenup which were upheld as fully enforceable, providing family law practitioners who draft premarital agreements a useful partial template for language that will likely pass muster.
The opinion also demonstrates how important it is for the parties, and their attorneys, to maintain a complete file of the negotiations leading to the execution of such agreements including maintaining copies of the succession of drafts that come to be altered as discussions evolve, as potential evidence when the agreement is (inevitably?) attacked. Whether premarriage agreements will be enforced years later is a highly fact specific inquiry. Many lawyers are reluctant to be involved in drafting them, because they are seen to be potential malpractice traps. Those that do often charge significant fees as a result, in order to justify the risks of subsequently being sued by their own former clients. This case is interesting because the wife, who came to challenge the agreement some seven years after she signed it, ultimately had her own attorney be the primary drafter of the agreement. That attorney evidently did a good job in helping to create an agreement that would be, and turned out to be, binding - which is not what the wife wanted to have happen years later, after the fact. Where one party later perceives that they will be better off if their premarital agreement can be set aside, the first thing their (new) lawyer will do is to try to find a "hook" for attacking its enforceability. This case represents a creative attempt by wife's attorneys to create such a hook by contending that the husband had misrepresented his net worth when it was signed, but their efforts failed.
Parties' Circumstancs
Sandra Hill and Thomas Dittmer married in April, 2001. Some six months prior to the wedding, Dittmer insisted that before he would marry, they needed to execute a premarital agreement. At that time, Hill agreed. Each was wealthy and business savvy by any standard. Hill had a net worth of at least $10 million, and Dittmer possessed at least $40 million. Each had "high-pressure jobs which required deadlines to be met and contracts reviewed, edited, and signed." Hill had been a magazine editor and published author, and had her own television production company; Dittmer was the founder of a major commodities trading company.
Hill hired Santa Barbara family law attorney Jamie Raney to represent her, and they first met to discuss it three months before the marriage. While Dittmer's attorney prepared an initial draft, Raney decided that it would be better for her client if Raney drafted the agreement and Dittmer agreed to allow this to occur. Numerous versions were created and exchanged as the agreement took shape, and evidently these drafts were maintained in the attorneys' files over the ensuing years and so came to be admitted into evidence in the subsequent trial. The more drafts that are generated, as they agreements are being formed, the greater the inference that both parties are actively engaged in an arm's length transaction to create a contract that they both intend to be binding and which they both fully understand. Hence, when one soon to be spouse is favored over the other, or gains benefits they view as important, that spouse's counsel very much wants the other party's attorney to actively input into changes to the agreement. For instance, when I draft them on behalf of the person with greater income or assets, the last thing I hope for is that the other side will just accept my version. Indeed, some lawyers intentionally leave mistakes in a draft (misidentifying parties, misspellings, provisions they know aren't acceptable) exactly so there is a record that these were corrected or changed.
The agreement came to be signed on the day of the wedding, before the ceremony. It included a waiver of spousal support and precluded the creation of community property during the marriage by reason of the contributions of time, skill, and efforts of each party, that would otherwise have belonged to them jointly but for the prenup.
As is often the case where the enforceability of a premarital agreement is in issue, the trial court bifurcated the proceedings and permitted an early trial of that issue alone since if the agreement was upheld, the overall case would be severely truncated and shortened.
Hill's best argument to challenge her agreement was evidently that Dittmer had failed in the agreement to actually disclose the nature and extent of his income and assets beyond a generalized representation that his net worth amounted to $40 million. To prove this assertion Hill attempted to obtain discovery of Dittmer's net worth when the agreement was signed, which would likely have consisted in the information she could have obtained but did not then obtain. Dittmer resisted this discovery as largely irrelevant, but the trial court allowed some limited inquiry by Hill but not to the degree that she had wanted.
Dittmer's attorney had smartly insisted a provision be added to the agreement that acknowledged that Dittmer had provided Hill's legal counsel with full and complete access to Dittmer's financial information, including an opportunity to consult with Dittmer's attorney and his accountants and other representatives "as to the nature, value and cash flow from any of his assets and the nature and extent of his liabilities." This turned out to be Hill's undoing - Hill never availed herself of this invitation, and conducted no inquiry. This effectively waived her right to contest the agreement on this basis later, notwithstanding the fact that the first draft that Raney circulated was presented on March 23, 2011, and that the revision with this acknowledge came "a week later" and therefore on or about April 1. Raney faxed Dittmer's attorney the final draft of the agreement on April 11, 2001, three days before the wedding day, when it came to be signed. Hence, evidently the "opportunity" to inspect Dittmer's net worth representations, including what would certainly have been questions about a complex financial estate, was open for just the two weeks leading up to the marriage. As a practical matter relating to how we humans are hard-wired, I find it difficult to imagine how Hill could have undertaken any kind of real investigation within that time period (without, for instance, canceling or moving the wedding date). Nonetheless, she had the chance to do so and her decision not to deprived her of a legal basis to claim fraud for nondisclosure, or inadequate disclosure, of Dittmer's holdings and income as of that time.
Apparently the terms that the parties came to agree upon had little to do with specifics relating to their assets - one can speculate that if Hill cared enough then about what she claimed to care about now, had her inquiry resulted in the discovery that Dittmer was worth $50 million rather than merely $40 million, her attorney might have been motivated to negotiate a better deal or request some additional provisions. Of course, what is unsaid but implied in the decision is that Hill loses because her theory of the case is simply a technical ruse to invalidate what she doesn't like today - something that evidently didn't matter then. How the Court Ruled
The court's opinion states:
"The contention that the Agreement is tainted by fraudulent and inadequate disclosures is refuted by evidence that Hill, both in the Agreement itself and in her conduct during the three-month period of negotiation, waived this claim. The Agreement states in part: 'Each party waives the provisions of California Probate Code Section 143 and California Family Code Section 1615 relating to financial disclosures. . . . The absence of disclosures shall not create any legal right in favor of either party, nor any legal remedy by either party against the other including, but not limited to, challenging the validity or enforceability of this Agreement. Based upon each party's knowledge of the other's income and assets and their access to same, and in consideration of the prospective marriage, each party acknowledges that this Agreement is fair and equitable at the time of its execution. The foregoing waivers of disclosure are voluntary and express and shall be deemed conclusive for the purposes of Section 1615 (a)(2)(8) of the California Family Code and for all other purposes.'
The circumstances surrounding the execution of the premarital Agreement provide substantial evidence that Hill entered into the Agreement voluntarily. She had the advice of two attorneys specializing in family law and estate planning during the nine months the Agreement was being discussed and negotiated. Hill's lawyer drafted the Agreement and revised drafts of the Agreement in consultation with Dittmer and his attorney. These facts, coupled with Hill's professional background and evident skills are strong evidence that she entered into the Agreement voluntarily.
There is no evidence that Hill took any steps to obtain financial disclosures from Dittmer during the negotiation period, although she was invited to do so by Dittmer's attorney. Dittmer's attorney sent a memorandum to Rainey in this regard as follows: 'Article IV (perhaps in Section 4.4) should acknowledge that the financial information provided by Tom includes his Trust and that 'Tom has provided Sandy's legal counsel and representatives with full and complete access to the books and records of Tom and his Trust, with the opportunity to consult with him, and any of his accountants, agents and representatives as to the nature, value and cash flow from any of his assets and the nature and extent of his liabilities.' This provision was contained, in substance, in the Agreement.
Hill's additional argument, that she did not see the final draft of the Agreement until the date of the wedding and that the agreement she signed was incomplete, is not persuasive. As the trial court found, the record shows that the provisions upon which Hill bases her claims of invalidity had been in prior drafts of the Agreement. Hill's assertions that she was too busy with wedding preparations to read or understand the Agreement ring hollow in light of her education and her extensive business experience. In this regard, the trial court said: 'The Court further finds that the prenuptial agreement signed by [Hill] was full and complete and contained page 14. Even if the version that [Hill] signed was missing that page, the Court finds that the failure to include it was a clerical error by [Hill's] attorney and not a surprise to [Hill] and was included in prior drafts of the prenuptial agreement provided to [Hill]. It was a provision that had been agreed to by the parties prior to the execution of the agreement.' Moreover, any failure on her part in this regard is not a sufficient basis for invalidating a contract. (See, e.g., Wal-Noon Corp. v. Hill (1975) 45 Cal.App.3d 605, 615 ['[f]ailure to make reasonable inquiry to ascertain or effort to understand the meaning and content of the contract . . . constitutes neglect of a legal duty such as will preclude recovery for unilateral mistake of fact'].)
The trial court found as a fact that Hill had adequate opportunity to review the various drafts of the agreement and that she was aware of and understood its contents. Substantial evidence supports this finding. Furthermore, even if it were true that she was unaware of portions of the final Agreement, her failure to take reasonable steps to become aware of the contents of the Agreement, particularly given her business background, her awareness of earlier drafts, and her access to counsel, precludes a finding of that she entered into the Agreement involuntarily. (See, e.g., Bauer v. Jackson (1971) 15 Cal.App.3d 358, 370 ['[o]rdinarily, when a person with capacity of reading and understanding an instrument signs it, he may not, in the absence of fraud, imposition, or excusable neglect, avoid its terms on the ground he failed to read it before signing it'].)"
Hill also contended that the changes to Family Code section 1615 that became effective a year later, in 2002, should be retroactively applied to the question of the agreement's validity and that if they were a different result would have occurred. Specifically, current section 1615(c)(2) creates a presumption that a prenup is not executed voluntarily unless the court makes a finding that the party against whom enforcement is sought had at least seven calendar days between the date he or she was "first presented" with the agreement and advised to seek independent counsel, and the time he or she signed the agreement.
Hence, the amended provisions that are no effective presumes a premarital agreement is unenforceable when the party who is challenging it did not receive it at least seven days before it was signed - Hill argued that the final version was only given her the day of the wedding. The decision ignores the question whether the "final, final" draft needs to be presented more than seven days before, because the Court (and an earlier decision) have found that the 2002 revisions to the Uniform Premarital Agreement Act are not to be applied retroactively to agreements entered into prior to January 1, 2002.
The language that Dittmer's attorney requested will likely become the standard for future agreements like this one, and will create a method of by which actual disclosure of assets and debts in the prenup can be avoided - which, the standard of professional care now suggests based on this decision should become the rule and not the exception. Why now ever give a detailed financial disclosure, whether by way of exhibits or statements made in the agreement itself, when that can be waived? Giving detailed facts in an agreement would appear to be unwise, since the party who is attacking enforceability then has something specific to challenge. A 'multitude of sins' can be shielded if the opportunity to investigate is extended, but not undertaken.
It bears repeating that the provisions attached in the Appendix, including a form of spousal support waiver, are a very good starting point for drafting the language for your own agreements.
Thurman Arnold, III, C.F.L.S.
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| May 06, 2011 |
| Marriage of Davenport: Trial Court SANCTIONS Wife Under FC Section 271 for Her ATTORNEYS' "UNBRIDLED AGGRESSION" In Family Court Proceedings! |
| Posted By Thurman W. Arnold, III, C.F.L.S. |
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A Shifting Judicial Response to Overzealous Advocacy:
Excessively Exuberant and Inflammatory Litigation Tactics
Will Not Be Tolerated in California
Justice Richman of the First Appellate District for Sonoma County, California, issued this week a momentous opinion that signals that courts will no longer passively allow attorneys who embark on rampaging attacks in high conflict divorce, or elsewhere, to do so without meaningful reprisals. Clients who encourage or permit their lawyers to manage their cases in this style may find their purses and wallets pried open.
While my review of the case may seem harsh, I believe that it reflects the frustration of the appellate court. I have endeavored to quote the decision itself as much as possible for readability. The trend in recent reported appellate decisions suggests that the pendulum is swinging against litigants who get sucked into divorce trance and its insane warfare. Marriage of Davenport excoriates not only one lawyer and his client but also the Santa Rosa law firm for which the attorney worked.
Mediators, collaborative attorneys, ethical divorce practitioners, and holistic lawyers will appreciate that a major California appellate decision has outed the adversarial elephant in the courtroom for the destructive creature that it is, affirming consequences for litigious behavior that are necessary and overdue. Courts are not merely imposing monetary punishments, they are publicly shaming those professionals (attorneys, mental health professionals, and even trial court judges) who fail to act within the bounds of due process, fiduciary duty obligations, and the rules of civility. Indeed, last month the Second Appellate District in Ventura County upheld a sanctions award against a self-represented attorney in a family law proceeding, and reported him to the California State Bar as well.
Still, Davenport raises some important questions. These include:
- What level of vitriol and sarcastic behavior is permissible in the trenches of high-conflict divorce proceedings? When does zealous advocacy so exceed the bounds of civility that the behavior of litigants or their attorneys receives as much attention as the underlying property division and support issues in the case?
- Is it possible to remain a civil advocate without sacrificing the zeal that is required and expected of lawyer warriors?
- If attorneys, or the clients in their stead, are to be held accountable for conduct that increases the adversarial tone of the proceedings might this have a chilling effect upon strong and courageous advocacy, making less empowered parties more vulnerable to exploitative litigation tactics employed by the other side?
- Should the California legislature amend Family Code section 271 to authorize trial courts to sanction family law attorneys directly for abuses they themselves commit? Good arguments exist for and against (another day, another blog).
Marriage of Davenport (2011) 194 Cal.App.4th 1507
Marriage of Davenport was published May 4, 2011. It may be the most important annunciation in years by California jurists that some litigants and lawyers are stubbornly out of control, recognizing that the survival of our current family court legal scheme requires that the judiciary manage the worst behavior of such participants.
Davenport will be cited as a textbook illustration of what to overcome and avoid.
Click here for the full opinion.
Jill and Ken Davenport married in 1948 and separated in 1990, amassing an estate worth near 57 million dollars. Ken was a talented car salesman and real estate investor. It wasn't until March 1, 2006 that Jill filed a petition for dissolution of marriage. During that 16 years "there was agreement and cooperation, including their participation in joint estate planning favorable to Jill, and agreement to sell off many of the [community properties]." Jill was then 75 years of age, and Ken was 78.
This cooperation ended on February, 3 2006 when something set Jill onto the road to calamity. She fired a first salvo in the form of a letter to Ken which accused him of having "stepped over the line," having "lied to me," warning he being taken advantage of by others (sweet irony?), and demanding money and property. Although the parties had co-existed peaceably for almost 16 years, the status quo exploded with this letter.
What had changed for Jill? That month or before she'd retained the law firm of O'Brien Watters and Davis to protect and advance her interests. When her Petition was filed, senior attorney Michael Watters was named as her attorney of record. However, in November 2005 Andrew Watters (Michael's nephew), passed the California Bar and joined the law firm effective February, 2006. He was introduced to Jill three days later and became her gladiator, so beginning an odyssey that would continue unabated for more than five years. According to Andrew, thereafter he "personally handled or [was] personally involved in each and every transaction between the parties ..., as well as each and every discovery request, discovery event, court proceeding, and other substantive matter." As the First Appellate District court dryly notes, "[i]n short, Andrew Watters became the lead lawyer for Jill in what would necessarily be a complex family law litigation." "Early on, a young and inexperienced attorney at that firm [Andrew] became Jill's primary attorney, and interacted with Ken's attorneys for the next two years, interactions that would generate a 35-page register of actions and 19 volumes of court files."
Out of the gate Andrew Watters pursued a campaign of attack against Ken and his attorneys that seemed ill-fated. Five months into the proceedings, he filed a motion to compel further answers to Form Interrogatories after making negligible efforts to resolve the discovery dispute informally. California has long required that before litigants file motions to compel discovery, the record must show that they made reasonable and sincere efforts to resolve the argument informally. Proof of this is contained in what are called "meet and confer" letters. Unfortunately, these letters are often authored with a threatening tone, reflect posturing and grandstanding, and sometimes hope to set up the other side for sanctions when a motion to compel is heard. In this case, Andrew wrote a single letter, failed to respond to Ken's attorney's reply, and he didn't attempt to discuss the issues with Ken's attorneys directly before filing his motion. The trial court declared these efforts to be "unreasonable" and "admonished [counsel for both parties] to change their meet and confer practices so that meeting and conferring is meaningful and not just a token gesture."
Over the next two years Wife's side would file eight discovery motions. The court file came to consist of 19 volumes, something that the experienced trial judge, Judge Cerena Wong, would later describe as "outrageous" for a family law case. Wife filed three OSC re Contempts against the Husband, including one in which the Court in August, 2006, ordered the parties to meet and confer in a 4-way, as to which Ken "refused to meet and confer if attorney Andrew G. Watters was present in the room." Oh boy. Unfortunately, this reaction is not uncommon but risks forming a vacuum where the business of cooperatively resolving the case stalls.
The FC §271 Sanctions' Requests
On May 23, 2008, attorney Watters filed two motions that ultimately blew up in Jill's face, led to this appeal, but now provides a roadmap for how not to behave when representing parties to matrimonial proceedings. One motion requested Family Code section 271 sanctions and attorney fees.
Wife's initial motion paperwork was "blank", evidently designed to reserve hearing dates on the court's calendar. The appellate court notes that "Andrew Waters did not consult with [Ken's attorney] on the date, nor even advise him of the filings, causing him to complain about the timing of the motions, including that they were filed late in the afternoon of May 23, 2008, the Friday before the Memorial Day weekend, and at the last possible moment."
Family Code section 271(a) reads in pertinent part:
"the court may base an award of attorney's fees and costs on the extent to which the conduct of each party or attorney furthers or frustrates the policy of the law to promote settlement of litigation and, where possible, to reduce the cost of litigation by encouraging cooperation between the parties and attorneys. An award of attorney's fees and costs pursuant to this section is in the nature of a sanction.... In order to obtain an award under this section, the party requesting an award of attorney's fees and costs is not required to demonstrate any financial need for the award...."
Jill sought legal fees of $600,861 and costs of $332,933. Her attorney filed a 52-page declaration which attached 1250 pages of exhibits. Much of Watters' declaration was "inappropriate, asserting hearsay, argument, opinion, and conclusion, and was improper on several bases. An early passage ... illustrates some of this, where Andrew Watters purports to describe Jill's description of Ken's 'negotiating tactics, habits, and personality traits,' which he labeled 'Deal in the pocket,' 'Poor mouth,' and 'Artificial crisis,'...." This sort of sarcasm doesn't warm the hearts of judges.
Although the record is not clear, it appears that Watters requested that Ken's attorneys also be sanctioned. If so, personalizing sanctions between attorneys is always a dangerous mistake.
Watters' tone was reportedly sarcastic, deprecatory, improperly personal, and lacked objectivity (see several paragraphs below for the juicier stuff). Effectively he was "testifying" on behalf of his client. His declaration included assertions that:
- "I've seen first hand that Ken can be a very persuasive person, and that Ken seems to use all of his abilities and skill to get the best deals for himself. Unfortunately we've learned that Ken has also used this great skill and ability to take care of his wife."
- "I was skeptical ... that someone could really use these tactics effectively outside of a car dealership.... However, throughout our dealings with Ken in this matter, I have personally observed Ken use each of the aforementioned tactics."
- "During the pendency of this proceedings,...., the 'inconvenient truth' here is that Ken has used his unusually strong business skill and acumen against his spouse despite his fiduciary duties..."
Wife's attorney asserted several breaches of fiduciary duty including that Ken (1) omitted two assets worth $3.1 million on his schedule of assets and debts; (2) produced a written statement of the parties' net worth to be $30.5 million, when several months earlier he gave a financial statement to a loan officer showing the net worth to be twice that; (3) that his schedule of assets and debts failed to state values for many of the listed items; and (4) engaged in various discovery abuses, including stalling the taking of his deposition for ten months.
Watters' motion included Points and Authorities citing but one case: In re Marriage of Feldman (2007) 153 Cal.App.4th 1470.
Feldman is the most important fiduciary duty case of the last decade. It upheld $250,000 in sanctions against a Husband who clearly was frustrating the resolution of that case, and who was secreting assets from the Wife. "Feldman" has become the rallying cry behind many well-intentioned efforts by California Family Law attorneys to force the other side to comply with their fiduciary duties.
Many divorce attorneys have "Feldman letters" loaded and cocked on their computers, to fire off where the other side is 'hiding the ball.' Several years ago these were widely circulated within the family law community with a certain amount of glee. Some attorneys use these letters as an intimidation tactic.
Feldman sanctions' threats are indeed sometimes required to remind the other side they are straying from their obligations to be transparent - but misconduct must be egregious in order to succeed on a
Feldman claim.
Feldman is important authority for curbing and remedying abusive and dishonest conduct in divorce proceedings, but like all things it can be over-used, blunting its utility.
Watters urged: "'Here, the Davenport matter might as well be called
In re Marriage of Feldman - The Sequel. If ever a dissolution of marriage action in Sonoma County warranted the imposition of sanctions on a party, this is the case.... indeed, 'this case is
worse than what happened in
Feldman.'" The decision asserts
"F
eldman would become Jill's short-hand description of all that was claimed to be wrong with Ken's conduct,..."
"Feldman, Feldman, Feldman, Jill repeated below,..." The appellate justices noted that "Jill remains relentless ...."
For those who have been on the receiving end of nasty Feldman letters, this is the first reported decision that provides an antidote. However, at the same time,
Feldman is important authority to assist under-empowered spouses in family law litigation.
Ken naturally opposed Jill's Feldman motion, and gave notice that he would seek too would seek Section 271 sanctions. Jill's Reply argued Ken's motion was technically defective and filed on the wrong forms, and that Ken's requested fees "have little or no connection with the alleged 'sanctionable' conduct of Jill"
as opposed to that of Jill's attorney. It is not clear that they challenged the
amount of these fees.
The trial of these dueling Feldman claims took place over five days in October and November, 2008. Wife's attorney filed detailed evidentiary objections to the declarations and exhibits that Ken submitted, including motions to strike portions of his pleadings, and Judge Wong essentially ignored these objections making "it abundantly clear that she could separate the wheat from the chaff."
Davenport deals a blow to the common practice of using evidentiary objection briefs to attack declarations from the opposing side that contain improper matter (the function of these is to emphasize to the Court the lack of
admissible evidentiary support for statements contains in these declarations, and to strike some of the contents of these pleadings from the record). Judge Wong stated "as far as I'm concerned, fighting over comments or statements made as to whether or not they're relevant or whether or not they're objectionable, you know, this is not a jury trial for heaven's sake. I'm a judge. You know, I can sift through this stuff. I might have some comment about what I think to be more lawyerly conduct and lawyerly language . . . . You should be able to rely on the court being able to read what it reads and eliminate what's not relevant."
Well, maybe.... Judges are as human as the rest of us. Exactly what argument or "evidence" a court is relying upon in reaching its conclusions is of rightful concern to litigants and their attorneys. Short-circuiting a proper record that makes effective appellate review possible carries a danger of giving trial courts too much power and discretion.
Judge Wong issued a statement of decision that found that:
- Jill's counsel's failure to meet and confer before filing her motion, and during the proceedings, is sanctionable conduct.
- The facts Jill alleged "do not rise to the level [of Feldman]."
- No valid evidence or support was presented that justified an expedited hearing (normally Feldman motions are heard at the conclusion of a dissolution action, when the Court has the larger picture before it, but Attorney Watters had urged that an immediate hearing was required here to deter what he claimed was continuing sanctionable conduct by Ken and his attorneys.
- Jill's counsel's hostile and disrespectful correspondence is sanctionable.
- Jill's attorney repeatedly made references to what was said and presented in a mediation that the parties had undertaken, in violation of Evidence Code section 1119.
- Watters' surreptitious conduct with computer consultants in relation to extracting computer data on a computer in his possession that was believed to include privileged material was inappropriate and sanctionable (in connection with retrieving data stored on a computer that Wife controlled, Watters switched the computer experts, replacing the agreed upon forensic with an IT person whom he'd met at a karaoke Bar where he claimed such "nerds" are known to hang out).
- All fees relating to Wife's motions could have been avoided by Wife's counsel. Had he done any of the following, it was likely the costly motions and hearings relating thereto could have been avoided: (1) Met and conferred with counsel; (2) been more respectful and cooperative; (3) used the assigned case manager; (4) accepted Husband's counsel's offers to agree to a neutral forensic accountant.
- Watters' insistence on a expedited Feldman trial in the middle of the case rather than at its conclusion was unnecessary and unreasonably expensive to the parties, and wasted the Court's limited resources.
Judge Wong denied Jill's motions. "There has been a failure of proof sufficient to penalize husband and his attorneys Merrill, Arnone, Benoit or Johnson." She granted Ken's request that the Court find that the Petitioner, through her attorneys, engaged in a course of conduct that was sanctionable. Judge Wong observed:
"'The Court questions the wisdom of such a large firm as O'Brien, Watters to choose to 'educate' a newly admitted lawyer with a case that involved millions of dollars of varied assets in California and other states, with a long term marriage and complicated trust holdings. With no background in either civil or family law litigation, Mr. Andrew Watters admitted to the Court that he was taught to litigate this case with unbridled aggression. These uncooperative and uncivil courses of action have caused
Mrs. Davenport unnecessary delays and unnecessary attorney fees and costs.'" [Italics and emphasis added].
I don't know if this last reference is a typographical mistake , but if not Judge Wong's message that Jill's gladiators poorly served her is remarkable. It also spells "malpractice."
The court also criticized Ken, who had early on stated he would not engage in a court-ordered 4-way if Attorney Watters "was in the room." Judge Wong saw this position as "inexcusably rude and uncalled for. Respondent's arrogance must have hit a sensitive nerve in counsel because Petitioner's case became a case that rapidly deteriorated into unprofessionally rude conduct and speech after that."
What Divorce Lawyers Might Avoid
The appellate court found that "Andrew Watters' demeaning comments to opposing counsel were contrary to the California Attorney Guidelines of Civility and Professionalism promulgated by the State Bar in 2007 (Guidelines). These guidelines reflect that "attorneys have an obligation to be professional with . . . other parties and counsel, [and] the courts," which obligation "includes civility, professional integrity, . . . candor . . . and cooperation, all of which are essential to the fair administration of justice and conflict resolution." (Guidelines, supra, Introduction, p. 3.) Section 4 of the Guidelines further counsels that "An attorney should avoid, hostile, demeaning or humiliating words," further providing in relevant part that: "An attorneys communications about the legal system should at all times reflect civility, professional integrity, personal dignity, and respect for the legal system. An attorney should not engage in conduct that is unbecoming a member of the Bar and an officer of the court. For example, in communications . . . with adversaries: [¶] . . . [¶] c. An attorney should not disparage the intelligence, integrity, ethics, morals or behavior of the court or other counsel, parties or participants when those characteristics are not at issue. [¶] . . . [¶] f. An attorney should avoid hostile, demeaning or humiliating words." (Guidelines, supra, § 4, pp. 4-5.)"
Justice Richman continued "there is abundant evidence of Andrew Watters treatment - more accurately, mistreatment - of his opposing counsel in his correspondence with them. Bad enough that such correspondence occurs in any litigation. It is utterly inconsistent with a fundamental aspect of proper family law practice. "Family law cases are not supposed to be conducted as adversarial proceedings. Quite the contrary, the goal is to reduce acrimony and adversarial approaches common to general civil litigation and, instead, to foster cooperation between the parties and their counsel with a view toward settlement short of full-blown litigation. [See Fam. C. §§ 2100 (b), § 271(a) (sanctions for uncooperative conduct in family law cases); see also Cal. Atty. Guidelines of Civility & Professionalism § 19-in family law proceedings an attorney should seek to reduce emotional tension and trauma and encourage the parties and attorneys to interact in a cooperative atmosphere, and keep the best interest of the children in mind']."
"The record is replete with correspondence from Andrew Watters to Ken's attorneys that contained abusive, rude, hostile, and/or disrespectful language, correspondence that Andrew Watters himself acknowledged was substantial evidence, when in the course of his closing argument he stated that '[p]erhaps some unpleasant letters that could offend someone did substantially increase the cost of litigation.' Perhaps it did indeed. A few illustrations should suffice:
- his November 22, 2006 letter to Mr. Merrill referring to Ken's nonappearance for deposition, which letter provided in pertinent part as follows: 'Regarding your client's failure to appear once again for his continued deposition, we too regret that your client chose not to appear. As you know, we duly noticed his continued deposition for 11/20/06-11/22/06. Once again, you offer the same tired, old, and shopworn excuse. Your continued blustering about mutually agreeable dates, efficiency and promptness, and convenience is pathetic when your client's actions negate any semblance of cooperation. Talk is cheap. Actions speak louder than words. Your credibility is at stake here.'
- his March 13, 2007 letter to Mr. Benoit included remarks that were rude, including 'Enough already with the delays.' Worse, his letter indicated that he did not believe Mr. Benoit-the person he described as "the dean of the Family Law Bar"-telling him: 'We don't accept your implication that you didn't already have [the Request to Inspect] . . . . Perhaps you didn't look hard enough, because we filed a Motion to Compel . . . in which I attached RTI Set one to my Declaration. Or you weren't counting that copy.' And the letter ends with utter disrespect, with observations such as: 'this seems like a case of the pot calling the kettle black'; 'In your last paragraph, your first suggestion is illusory. . . ."; and, "Your last paragraph rings hollow.'
- his September 11, 2008 letter to Mr. Johnson which, bad enough, insinuated untruthfulness: 'We've noticed that, in the past, you have had some trouble keeping things straight. We also noticed that you tend to stretch things somewhat too far in the name of appearances.' Worse, it accused Mr. Johnson of unethical conduct: 'It's no surprise, then, that your letter of 8/7/08 appears to be an attempt to create a false and misleading exhibit for use at a later law and motion hearing so that your client can sit in court with a halo over his head, and so you can say look how many times Ken offered to settle! That wouldn't surprise us at all, given your practice of attaching a large pile of exhibits to your declarations without any testimony from you concerning their truth.'
Later confronted with such correspondence, Andrew's response was not apologetic. He indicated at one point it might have been "unfortunate," but that was it. In his words, 'So I should note if I caused undue emotional pain on the other side in terms of writing unpleasant letters, if I offended anyone, then that's unfortunate and certainly a learning process for me, but the fact is I am not on trial here. And, in any event, the attorneys on the other side-I'm sure they can handle it. Mr. Mike Merrill, I think, is a 35 year attorney, former Marine officer in Vietnam, has seen it all. Mr. Benoit is a 35- or 40 year family law lawyer. He's seen it all. Mr. Johnson was in the Navy, I believe. These are not attorneys not able to do lawyering because of unpleasant letters from a
baby lawyer on the other side.' [Italics added].
The appellate justices observed that Jill's position on appeal was equally unrepentant where, referring to "the tone of some of [Andrew Watters'] written communications," she describes it as "the expressions (sometimes intemperate) of a young lawyer frustrated that Ken was systematically obstructing the search for the truth by his actions in resisting routine discovery, which is supposed to be self-executing. Ken and his attorneys then created a smokescreen that prevented the trial court from seeing the substance of the communications in context."
Strong, strong language. An important caveat for the lawyers who will inevitably attempt to use Davenport to support sanctions' motions for uncivil conduct by opposing counsel is that just accusing the other side of behaving like Mr. Watters may itself seem abusive to a trial court. While the justices' opinion does not appear "overstated" given a record so rich in illustrations of what not to do, I think we need to be careful not to ourselves overstate it, or to try to fit conduct we don't like into a
Davenport box where that conduct fails to speak for itself. That is a species of risk that has blunted the edge of
Feldman claims since that decision was rendered, making it a less viable tool for under-empowered litigants. The corollary is that "trance begets trance." We don't want to make the same mistakes and so seem as aggressive as our opponents.
The Adversarial Tone Continued On Appeal
Accordingly, Jill was ordered to pay $100,000 in sanctions plus $304,387 in attorney fees to Ken. Unfortunately for her, Wife's attorneys' strategies on appeal remained obdurate. By this point Andrew Watters had gone "walkabout" and left the firm (following the trial court decision). O'Brien, Watters continued with the same verve as it had at the trial court level. For example, their briefs targeted Judge Cerena Wong with a number of arguments that one (including the appellate justices) might find to be offensive. The appellate court stated "[i]n sum, Jill manifests a treatment of the record that disregards the most fundamental rules of appellate review."
For instance, in addition to being highly histrionic, Jill's appellate arguments scolded the judge, accusing her of relying on inadmissible evidence while ignoring admissible evidence. Jill's brief posed the question: "Imagine if a high school civics class had been on a field trip to the court that day. How would the teacher be able to explain to his/her students that the judge said she would not follow the rules?" It is mind-boggling that seasoned attorneys would argue that high school students would see that the judge was not following the rules when the judge herself could not. Of course, the appellate justices concluded that just the reverse was true, and that all of Judge Wong's conclusions were well supported by the record and the law but that Jill and her "team" lacked a comprehension of the rules of evidence and basic propriety.
Frankly, Wife's team had reasons to be concerned about Judge Wong's treatment of the evidentiary objections, but is it possible that in assailing the trial court with the tone that they apparently used that this triggered a defensive reaction in the appellate justices which ultimately took center stage over the legal issues?
Jill argued that whatever the appropriateness of the statements made by attorney Andrew Watters, such communications were covered all by the "litigation privilege" set forth in California Civil Code section 47 and hence could not properly generate a sanctions' award. Similarly, Jill on appeal argued that Andrew Watters' communications were protected by the bounds of free speech and zealous advocacy. Not so ruled the Court. Family law is not the Wild West, nor is it a frontier where "anything goes".
What Went Wrong
(Or, 'Should People Living in Glass Houses Throw Stones')?
We family court lawyers are not entirely to blame for getting lost in the dark woods of adversarial divorce to such an extent that some misplace their ethics or, as here, lose control of our emotions - our clients' experiences of divorce are devastating, and lawyers respond to the felt needs of the consuming public like any other industry. Some clients entice us with a willingness to pay "whatever it takes" to personify their angst in formulating our strategies for them - and it is extremely difficult not to become enmeshed in their emotional struggles to an extent that blur the boundaries between their experiences and perspectives and our own.
Particularly as a younger lawyer I confess at times I was deluded into buying my clients' attitudes and personalizing the pain within the stories, and sometimes adopted an arrogance and one-sidedness in accepting their views as the entire picture. This remains a struggle for me at times today. Caring, which I suspect all the members of the O'Brien law firm share, is what is honorable about "zealous advocacy." Unfortunately, relationship wars tend to challenge us all beyond our capacity to stay mindful - within depth of caring lies a trap. We can care too much, and strong emotions in any direction are a potent drug. I for one need to constantly reground myself, and to release the ferocity that accumulates from the frustrations of interacting with high conflict litigants and attorneys. And since this is so for me, it must be so for the others - a realization that can offer some balance and even crack a door to forgiveness.
The Mission Statement of O'Brien, Watters & Davis LLP as published on their website identifies their aspirations as follows: "To render quality legal services and maintain the highest ethical standards; to provide excellent service to clients; to use our best efforts to have our clients succeed and achieve results; to make a reasonable and fair profit; to maintain an excellent reputation in the community and within the legal profession; to be actively involved in and give service to the community; and to have mutual respect and support for one another." I trust that they mean this. Something strikes me as odd, however, about it. I sense a wisp of a sentiment that implies that rendering quality legal services might be inconsistent with maintaining the highest ethical standards; that excellent service is only measured by achieving results, which in traditional lawyer-speak means winning (and not necessarily settling) cases; and that achieving reasonable and fair profits is dependent on strategies for winning adversarially. I guess it is hard to not interpret their advertisement outside the light of what went on in Davenport.
O'Brien Waters, me the writer of this Blog, and you the reader are given the invitation and opportunity to reflect upon, re-evaluate, and close the gaps between our intention and actions, every day. Which is always a good reason to be grateful, since we can dust ourselves off and start out anew.
Marriage of Davenport is a wake up call. Andrew Watters is no demon, but this case contains a concentrated dose of the pitfalls of the adversarial paradigm. Is anybody listening?
Save yourself unnecessary grief and expense, and live a longer life. Seek out family law specialists who have the genuine desire and interest to help you set (and reset as required) a tone that might free you from this mess, rather than binding you more tightly within it!
I believe that the law firm that assisted Ken in this case deserve recognition and naming for their role in this landmark case: Perry, Johnson, Anderson, Miller & Moskowitz by John E. Johnson and Deborah S. Bull. Congratulations!
Thurman W. Arnold, III, C.F.L.S.
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| October 18, 2010 |
| How Do I Get An Order for ATTORNEY FEES in a COMPLEX CASE? |
| Posted By Thurman Arnold |
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Q. My divorce seems like it has stalled. My wife operates our family business, we own several properties including a commercial building and she collects the rents, she isn't cooperating with me on custody on our kids, and I need money to pay my attorney. She is controlling this case, and I am getting nowhere. Any recommendations?
"Ed from Temecula"
[Please note - this Blog is updated with a recent Blog Article detailing the 2011 Revisions to the California Family Code affecting attorney fee awards 12/9/10]
A. Ed - I frequently hear from people whose cases are "stalled" because they have no money to pay their attorney, and no money to hire forensic experts. It is a problem I face in my practice with certain clients. It takes money to develop your case, and if there is really none available it is difficult to get anyone to pay attention. Often there are assets that only one spouse controls. That spouse or RDP (registered domestic partner) usually claims those assets to be their "separate property" even when the claim is ridiculous (for instance, closely held stock issued as "their sole and separate property" when the vesting of title in their name alone during marriage was just their manipulation and you didn't agree to it).
When there are assets that exist there is much that you can do. These assets, whether they be allegedly separate or community, are available to be borrowed against, or sold, to raise money so you can pay your attorney and hire experts to do the work that must be done.
However, your attorney needs to understand how to accomplish this or find one who does. Specifically one method that works well is to have a referee appointed under Code of Civil Procedure section 639 to oversee a "case management plan" under the circumstances described in
Family Code section 2032(d).
Specifically, have your attorney ask the Court in a motion to make a finding that your case involves "complex or substantial issues of fact or law." These can be related to property rights, custody, visitation, and support and may include bifurcations of issues. If you don't have an attorney, this would still be a start to obtaining findings that will generate money to hire one.
Once the Court so designates your case, it will itself begin to implement a plan or assign someone else - like an outside lawyer whom the court recognizes as an expert, to make recommendations as a referee. While the Court is not obligated to follow the recommendations of these referees, they ususally do. And if they don't the court may find itself overturned on appeal as happened 10/1/10 in In Re Marriage of Tharp, a case I will be writing about in detail as time permits.
This is a major step in not only getting someone to look more closely at the attorney fees you need (judges, after all, have really limited time) but also a good way to jump start a stalled dissolution or other family law case.
BTW, under the new statutes that take effect in 2011 as a result of the Elkins Task Force recommendations, case management may become the norm in California in family law proceedings.
TW Arnold
10/18/10 |
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| September 24, 2010 |
| I Have Been Paying the MORTGAGE Since SEPARATION - Am I Entitled to WATTS CREDITS? |
| Posted By Thurman Arnold |
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Q. I have been occupying our family home alone since my wife left over a year ago. I pay all the interest only mortgage, property taxes, and insurance with no help from her. Does she owe me half of any of this?
A. You may be owed you something, but not necessarily one-half of what you have paid out, and different categories of expenses may be treated differently.
This situation involves at least three potential legal concepts:
* Epstein Credits (Payment of CP Debts Reimbursed)
* Watts Credits (Reimbursement for Exclusive Use of CP)
* Jeffries Credits (Combination of Epstein and Watts Reimbursements)
Epstein Credits
"Epstein credits" is a doctrine that holds that as a general rule courts must reimburse one spouse who uses earnings or other separate funds after separation to pay pre-existing community estate obligations. Courts may not order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement. Where payments are made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement. This Blog addresses your question in terms of Watts and Jeffries credits that may be owing you upon divorce or legal separation - the prior blog details Epstein credits.
Watts and Jeffries Credits
We speak in terms of "Watts credits" when one party has the exclusive beneficial use of community property. When money is owed on that asset, "Jeffries" reimbursements or set-offs for the payment of that debt also come into play. On the one hand you are enjoying the use of a valuable jointly owned asset and should reimburse the community for that use; on the other you are paying something to a creditor for that use, and that amount should be deducted from what you owe the community. Watts is a calculation for the value of what should be charged for an exclusive enjoyment of community property by one spouse; Jeffries combines the value of that use with reimbursements under an Epstein analysis. Marriage of Watts (1985) 171 Cal.App.3d 366, 373-374; Marriage of Jeffries (1991) 228 Cal.App. 3d 548, 552-553.
Family lawyers most often see Watts and Jeffries issues arise in disputes over residences occupied by one spouse alone. In practice none of these concepts are typically applied to automobiles, although in theory they should be, or other consumer goods.
While Epstein credits are generally viewed by trial judges to be mandatory reimbursements, allowing Watts and Jeffries credits is discretionary. Having a working knowledge of your local judicial bench officer's attitude on these subjects is an important bit of information for you to obtain.
Watts credits and Jeffries credits are obviously implicated in your question since you occupy the house for which you seek mortgate and other payment credits and reimbursements.
This is how Watts Credit issues typically arise - you and your wife jointly own a home, and both of you are obligated on the mortgage. Assume the monthly mortgage payment is $3,200 (interest only in your case), the taxes average $400/month, and insurance costs $1,200/year. Mortgage payments are made on the 15th of the month, and she moves out on January 14, 2009. You were unable to make the payment on December 15, 2008, so there are two payments due on January 15. On January 15 you make these two payments, and then continue to make all these payments until the present time or the date of settlement or trial. You occupy the residence the entire time. You also incur charges for water for the landscaping, etc., along with the cable bill, electricity, phone and trash. You have a gardner and a poolman that together amount to $250/month.
Hence, you are spending $3,700 on the mortgage, taxes, and insurance plus the $250 for upkeep, along with whatever you pay for utilities each month. Over time this amount can grow to a considerable number.
Assume you had to borrow the money to pay December late from your mother. This is your separate property debt to Mom if borrowed after separation. But because your wife lived at the house up until the day she moved which include all of January, you are entitled to the equivalent of an Epstein reimbursement. Watts and Jeffries don't yet apply. The obligation existed before separation, was paid after separation, and the source of payment was your separate property. The community estate owed the payment, which means you owed one-half too (she also owes one-half the utilities charged during the same period as well that were paid with your separate property).
Watts and Jeffries credits answer questions how to deal with expenses you paid after she left where you had use of the home during some some of or the entire period. Watts credits deal with the value of that use, and Jeffries deal with the value of the use less a reimbursement claim for the cost to you of that use. Both parties can have these claims for the same property at different times, or one party may assert these reimbursements as against one property while the other may assert them as to another.
What if instead of you living in the home after separation, it was rented to others but the rent didn't cover all the house related debt service? The rents are deducted from the total and you each owe one-half of the shortfall. If you advanced the difference, you are entitled to one-half back from your wife.
Watts' Analysis
So, where one party enjoys exclusive use of a CP asset how is the reimbursement calculated?
As a pure Watts credit analysis, assume a community property house is free and clear other than upkeep and utilities and that you lived there for a time - effectively rent free since there is no mortgage. You can imagine how it might be unfair for you to receive this benefit without paying for it. The amount of reimbursement you owe the community depends upon the property's fair rental value. Fair rental value (FRV) is what you would expect to pay monthly to rent the same or a similar property on the open market in an arm's length tranactions. It is usually proven by expert broker or appraiser testimony, but as an owner of property you are free to testify to what you think its fair rental value is (as is the other spouse). Whether your opinion is believed or given weight by the court depends upon the assumptions you make in arriving at your opinion of FRV (as well as perceived credibility).
If the FRV is $3,000/month, and you reside in the house for 15 months from date of separation to time of trial, the total value of your use is $45,000. From this you would deduct fixed expenses like taxes ($400/month) and insurance ($100/month). You would therefore owe the community $2,500 x 15 = $37,500, but since you own half the community the net reimbursement to the other party is one-half that amount. You may also be able to deduct the gardner and poolman particularly where those payments help to maintain the asset itself. You might even deduct repairs depending upon the circumstances (installing a solid gold toilet wouldn't qualify).
All of these reimbursements are "Watts charges" to you. They are "Watts credits" to the party to be reimbursed.
Jeffries' Analysis
The more commmon situation is that some mortgage debt for the house you occupy is being paid monthly. Assume it to be $2,000 combined (including mortgage, taxes, and insurance). If the FRV is $3,000/month but you pay $2,000 monthly then the net benefit to you is $1,000 each month or $15,000 total. You would owe a Watts reimbursement of one-half that sum, or $7,500, on the marital balance sheet or as a direct payment to your spouse.
This is a Jeffries situation. Note that it assumes that these costs to you were paid by your separate property. If instead you used community monies remaining in a bank account after the DOS to pay this debt (or CP funds from some other source) then you do not subtract that from the fair rental value because the community estate has already been charged.
BTW, an interesting twist on this question these days involves what happens when there is a mortgage but the party in possession fails or refuses to pay it. They are living there at no effective charge while the other spouse may be actually paying rent elsewhere. In that case you should not receive a credit for one-half the debt you did not actually pay, but it is difficult to predict how a judge will handle this. After all, you may continue to owe the money and have to repay it later. Now what happens if you then decide to file a bankruptcy, so then never have to pay it because the debt is discharged? That bankruptcy if properly drafted should also destroy any reimbursement claims of your spouse altogether. Great unfairness can occur in these situations. In my experience many of the legal rules for these reimbursement claims developed in a completely different economy and fairness and common sense is struggling to keep up with the new world order.
These days with the mortgage and real estate bust another situation frequently arises: The amount a spouse pays to maintain the mortgage and related asset expenses may exceed the FRV of the property. Should the other spouse be charged with half of this net loss, and so forced to underwrite some of it?
Assume in the illustration above that the costs remain the same, but the mortgage is $4,000/month. Since FRV is $3,000, you are overpaying by $1,000. Are you entitled to a credit back for one-half of the net loss? In my experience most courts won't give it to you but make the argument anyway. Courts seem to feel that if you choose to live in a place that you want the other side to help underwrite, when cheaper alternate arrangements are available, then your choice to stay there should not bind the other person. The court cannot tell you what choices to make, but it can refuse to let you benefit unfairly by them.
This makes sense on at least one level - imagine that you have a large, beautiful, expensive home that is way under water, and that your estranged wife insists on continuing to live in it despite the fact that the costs to keep it are far in excess of what comparable lodgings would cost. Naturally she wants you to absorb as much of this to whatever extent possible which lowers her incentive to move. If she was allowed to stay and charge you for one-half the difference between a $10,000 mortgage and its $5,000 rental value, she might continue to reside in this losing, nonproductive asset if she effectively only paid $7,500/month after credit for your $2,500.
Conclusion
While Epstein reimbursements appear to be mandatory in dividing the community assets and liabilities, Watts and Jeffries credits are viewed as discretionary reimbursements. Many judges don't favor these reimbursements and so exercise their disrection to deny them. I tell my clients not to count on them in negotiating settlements, and many lawyers refuse to take the argument seriously when negotiating settlement. Another reason why lawyers tend to treat them as inconsequential, besides bluffiing, is that they can be expensive to prove and so you are being tested as to whether you have the stamina or the money to assert these claims at trial. After all, it is best to have forensic experts testify to them, and these individuals may include an accountant and a broker/appraiser.
One solution is to request the family court to bifurcate the issue so that a short, separate trial occurs on the Watts/Jeffries issues alone. Once the amount of Watts or Jeffries credits is fixed by judicial decision you can now place it on the marital balance sheet in your settlement discussions on the remaining issues.
The success of a Watts or Jeffries claim are fact specific. In doing justice and equally dividing the community estate, there is broad spectrum of fairness running from "its not big deal" to being "really unfair." You will not get much traction where the consequence of not reimbursing Watts credits or imposing Watts charges is a small number. But where one party enjoys the asset alone without paying creditors, a very strong argument exists in favor of finding reimbursements.
Finally, be sure to include reference to Esptein reimbursements and Watts and Jeffries in your Declarations of Disclosure to make it clear that you are asserting such a claim. If you are the spouse in possession omit any reference to it. It is not your job to assert that argument against yourself.
Thurman W. Arnold III
September 25, 2010
All Rights Reserved.
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| September 13, 2010 |
| How Are DEFINED BENEFIT PLANS divided in California Divorce? |
| Posted By Thurman Arnold |
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Q. How are defined benefit plans divided under California law?
A. In a defined benefit pension plan, the benefit does not depend on the dollars contributed by employee or employer, but is based on a combination of factors, including the following [Marriage of Bergman (1985) 168 CA3d 742, 748 n4]:
- Highest income level achieved,
- Years of service at retirement, and
- Age at retirement.
To determine the present value of such a plan, it is necessary that expert testimony, normally from an actuary,
be presented. This testimony includes the expert's opinion as to present value, and what economic, health, and other factors the expert considered in reaching the opinion. [Marriage of Bergman, supra.]
The valuation of a participant's interest in a defined benefit retirement plan is calculated by [Marriage of Stephenson (1984) 162 CA3d 1057, 1083]:
- Determining the value of the pension measured at the future retirement date, then
- Discounting that value back to the present date of valuation.
Family Code section 2610 is the most important statute on pension benefits and rights in dissolution, but federal law governs many pension rights and obligations.
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| May 24, 2010 |
| What METHODS are used for VALUING BUSINESSES in divorce? |
| Posted By Thurman Arnold |
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Q. I own a business that I began shortly after marriage. Now I am getting divorced. Is this community property even though my partner never worked the business, and if it is what methods might be used to value it?
A. With certain exceptions where, for instance, there has been a transmutation of a community property interest in a business to your separate property per Family Code section 852 (which requires a writing signed by the party adversely affect showing an intent change the character of property from community to separate), all property acquired during marriage through the time, skill and efforts of either spouse is community property. Family Code section 760.
A business begun by one spouse after the date of marriage and before physical separation will need to be divided in a dissolution or legal separation proceeding, and if you and your spouse cannot agree on its value it may need to be evaluated by an expert. This is usually accomplished under the provisions of Evidence Code section 730.
There are a number of methods that can be used to value a business, and depending upon whether the business sells services or products different valuation methods may be more appropriate than others. As a general overview, these include:
- Evaluating sales proceeds
When a business is actually being sold in an arm's length transaction to a third party, the price that a willing buyer will pay and a willing seller accept determines value. This is rare in the case of business valuations, but more common with respect to real property.
The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked. With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court. Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales. Comparables are also considering in setting the value of real estate.
Sometimes businesses will be cut up into parts that are sold separately. Sometimes the business is valued in terms of what these parts would sell for. It is rarely used except when the parties intend to actually liquidate the company. Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern). Goodwill is the nightmare component to valuing businesses. Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).
This relies upon the company records to determine what 'retained value' is. It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.
This is performed through a forensic audit. Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.
This describes a method that includes valuing the business as greater than the sum of its parts. There are a number of factors that are used.
This is the most common method for valuing businesses used in California because courts find it to be most reliable. If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics.
It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.
The law of business valuations is extremely complex and even contradictory. The purpose of this blog is merely to introduce the concepts. I will develop these themes in more detail in additional family law blogs.
Thurman W. Arnold III
http://www.ThurmanArnold.com
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| May 19, 2010 |
| When are ASSETS VALUED for purposes of DIVISION in a California DISSOLUTION? |
| Posted By Thurman Arnold |
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Q. My wife and I separated two years ago and we have decided to file for divorce. We don't agree on what date we should be setting the value of some of our property, like the residence where she has been living with the kids all this time. She wants it valued today, since prices are down, but when I left we agreed that she would take it at its value then. That value was substantially higher than today, and I don't think it is fair that I have suffer the decrease in real estate prices. What might a Court do?
A. First, it is always my hope that you and your spouse can agree on as many issues as possible, without court intervention. One never knows for sure what a Court will do, and my experience is that people are far better off working through their disagreements by way of Mediation. One reason why is to ensure you are in charge of your life, not a stranger. It is possible to mediate parts of your divorce.
Still, valuing real property is not a difficult legal issue. Family Code section 2552(a) directs the court to "value assets and liabilities as near as practicable to the time of trial." Time of trial is also the equivalent of the time of settlement - in order words, if you cannot settle your divorce and you take it to a judge, that will be the time of trial so the same rule for the date of valuation should apply to your settlement negotiations.
Family Code section 2552(b), however, gives the court discretion to pick another date before trial for the valuation of property "for good cause" in order to "accomplish an equal division of the community estate ... in an equitable manner." This concept is called an "alternate valuation date." It is often applied in cases of business valuations, which is a complex topic I will separately address, but the basic reasons for the potential different treatment includes the fact that business values can be intentionally depressed by the spouse who controls the assets (and so it may not be fair to apply a lower value) or because the "in-spouse" has contributed substantial value to the company since separation and it is not necessarily fair that the other spouse share those benefits.
Here you might argue that you and your spouse reached a verbal agreement to divide all your assets two years ago if that is in fact what you did, in order to hold to those values. But verbal agreements are difficult to prove if they are not admitted by the other party, absent witnesses and she will continue have various defenses where she was not independently advised before reaching agreement.
Most courts are going to value passive assets like houses or investments or pensions at the time of trial. That does not mean that post-separation increases in value, like increased equity by paying down principal on a mortgage, or contributions to a pension after the date of separation, will not be reimbursed to one or the other of you to compensate the separate property (post-separation) contributions.
If you do seek an alternate valuation date, you need to file a Notice of Motion to Bifurcate the issue (FL-315), along with the accompanying declaration establishing why this is more fair and appropriate than the basic rule. These forms appear in our Family Law Form Library.
A bifurcation is essentially a request of the court to carve off one or more issues in the divorce for separate trial or adjudication. It is often used where a call needs to be made on one issue that, once decided, will assist in resolving other aspects of the case.
Thurman W. Arnold III
http://www.thurmanarnold.com |
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