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Recent Posts in Family Law Evidence Issues Category
| August 16, 2011 |
| Marriage of MARGULIS - Fiduciary Duties of MANAGING SPOUSES |
| Posted By Thurman Arnold, CFLS |
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Marriage of Margulis, Part 2 - Duties of Managing Spouses
Please see Part I of my evaluation of
IRMO Margulis as the launching point for understanding the appellate court's outline of interspousal fiduciary duties.
The Margulis rule states that once a nonmanaging spouse makes a prima facie showing concerning the existence and value of community assets in the control of the other spouse postseparation, the burden of proof shifts to the managing spouse to rebut the showing or prove the proper disposition or lesser value of these assets.
The rule is justified by examining the scope of fiduciary duties imposed by the California Family Code. Interestingly, the trial court had found that the Husband (Alan) had breached his fiduciary duties to Wife (Elaine) "to maintain proper records of all community assets which he had exclusive control and management over...." Yet, other than imposing $20,000 in sanctions and assessing $30,000 in attorney fees against Alan, the trial court did not believe Elaine had produced sufficient evidence to explain what had really happened to the deposit accounts that were at issue beyond Exhibit 18, 'the smoking gun'. $50,000 in sanctions was a cheap price to pay relative to the disappearance of hundreds of thousands of dollars. It was reversed for applying too narrow a breach of fiduciary duty and applying the wrong remedy.
Since Margulis contains a great explanation of how statutory fiduciary duties operate I quote the decision as follows:
"Family Code provisions detailing the fiduciary obligations between spouses provide strong support for shifting the burden of proof to the managing spouse when determining the value and disposition of missing assets. The starting point is section 721, which provides that accountability for the management of community assets is a fundamental aspect of the fiduciary duties owed between spouses.
Section 721, subdivision (b), states, in relevant part: between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which 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: ¶(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 which 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 which concerns the community property.
Section 721's specific incorporation of the same rights and duties of nonmarital business partners, as provided in• section 16403 of the Corporations Code, makes clear that the duty to disclose relevant information concerning transactions affecting the community property is an affirmative and broad obligation. Corporations Code section 16403 requires each partner to furnish to a partner ... [¶] (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. Code, § 16403, subd. (c), italics added.)
Section 1100 further delineates the scope of a managing spouse's accountability. That statute not only prohibits a spouse from engaging in certain conduct, such as making a unilateral gift of community personal property or disposing of it for less than fair and reasonable value, without the written consent of the other spouse (§ 1100, subd. (b)), but it also requires each spouse to act as a fiduciary toward the other in the management of community assets in accordance with the general rules governing fiduciary relationships ... as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest.... (§ 1100, subd. (e).)
Importantly, section 1101 creates a right of action and specific remedies for the breach of fiduciary duty between spouses. Subdivision (a) of section 1101 gives each spouse 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.... The statutory remedies for a breach of fiduciary duty, specifically including a breach of those [duties] set out in Sections 721 and 1100, include a mandatory award of 50 percent of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs.... (§ 1101, subd. (g).)
If the nondisclosure or wrongful disposition of community property falls within the ambit of Civil Code section 3294 (punitive damages upon clear and convincing evidence of oppression, fraud or malice), the court must award to injured spouse the entire value of
the asset (§ 1101, subd. (h)).
Finally, section 2100 makes clear that these fiduciary obligations of disclosure and accounting continue to bind spouses after separation until final distribution of assets. Section 2100 states: [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 of a proceeding for dissolution of marriage or legal separation of the parties.... 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. (§ 2100, subd. (c), italics added; see also § 2102, subd. (a)(1) [from date of separation to date community assets are distributed, spouses are subject to § 721's fiduciary duty to disclose assets and update material changes].)
Taken together, these statutes impose on a managing spouse affirmative, wide-ranging duties to disclose and account for the existence, valuation, and disposition of all community assets from the date of separation through final property division. Simply put, these statutes require the spouse to account for his or her management of the property. The managing spouse must reveal if the community property changes value, ceases to exist, or is transferred for less than its worth, thereby depriving the nonmanaging spouse of his or her half-interest. Because of the fiduciary relationship between spouses, the managing spouse must reveal any self-dealing or other conduct that impaired the value of the property and entitles the other spouse to compensation.
Applying these statutes to the facts of this case, a trial court could conclude Alan breached his fiduciary duties of disclosure and accounting. A court could find he breached his duty to provide full and accurate disclosure of all community assets when in pretrial exchanges he failed to inform Elaine that $20,000 was in the Charles Schwab IRA's, asserting that the only existing community property was the Sycamore house. A trial court similarly could find Alan breached his duty to disclose immediately and fully any material changes in the community property (§ 2100, subd. (c)), by failing to tell Elaine until just before trial that all the community investment and checking accounts he had managed were virtually empty. Additionally, by refusing to provide Elaine with any documentary or other corroborating proof of what actually happened to the money that had once been in those accounts, Alan may have breached his duty to furnish to Elaine any information concerning the [community's] business and affairs reasonably required for the proper exercise of [her] rights (Corp. Code, § 16403, subd. (c)(1); § 721, subd. (b)), which included her right to pursue a claim against Alan for impairment to [her] ... one-half interest in the community estate (§ 1101, subds. (a), (g) & (h)).
The trial court, however, found a single, narrow breach of duty by Alan: a breach of the duty to keep and provide adequate records. In so ruling, the trial court impliedly found Alan did not owe broader fiduciary duties of disclosure and accounting. The trial court's erroneous finding on the scope of Alan's duties led it to apply the wrong remedy. Instead of awarding Elaine at least 50 percent of the value of undisclosed or wrongfully transferred assets (§ 1101, subds. (g) [50 percent], (h) [100 percent upon proof of oppression, fraud or malice]), the trial court ordered Alan to pay Elaine $20,000 as sanctions, plus attorney fees.
The trial court's failure to find Alan breached his broader fiduciary duties of disclosure and accounting stemmed from the court's denial of Elaine's request to charge Alan with the exhibit 18 asset values unless he disproved those values or proved he properly disposed of those assets. Although the trial court found that Elaine had satisfied the requisite foundation to admit the exhibit, it accorded the document little or no weight because Elaine had not prepared it and had no evidence to support it. Consequently, according to the trial court, Elaine failed to carry her burden of proving the accounts itemized in exhibit 18 ever had the values listed in that document, and Alan could not be charged with wrongfully disposing of assets he never possessed. But, as discussed above, the trial court misapplied the burden of proof.
Elaine's introduction of exhibit 18, which Alan conceded he prepared, satisfied her initial burden. The statutory fiduciary duties of disclosure and accounting then effectively shifted the burden to Alan to rebut the presumption he should be charged with the assets listed on exhibit 18, a document that was prima facie evidence of the account values it stated."
Based upon the foregoing the case was reversed and remanded to the trial court. The sanctions award of $20,000 plus $30,000 was also reversed "so that the court may revisit the question of the appropriate remedy should the evidence establish Alan's breach of fiduciary duty" - in other words, the appellate court is directing the trial court to hit Alan harder than was amounted to a slap on the wrist. As Justice Aronson wryly directs:
"Alan's cross-appeal merits little discussion. His challenge to the trial court's finding that he breached his fiduciary duties to Elaine is meritless. Likewise, his additional challenges to the award against him for sanctions and attorney fees fails, given the clear statutory authorization for both awards in light of Alan's breach of duty.... Nevertheless, we reverse the attorney fees and sanctions award so the court may revisit the question of the appropriate remedy should the evidence established Alan's breach of duty." Elaine is to be awarded her attorney fees and costs for this appeal.
Margulis also contains an excellent discussion regarding Epstein credits, debt payment in lieu of support, and tracing issues. I will endeavor to blog that portion of the decision in Part III.
Thurman W. Arnold, III, C.F.L.S. |
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| August 15, 2011 |
| IRMO MARGULIS - Managing Spouse Has BURDEN OF PROOF To Explain MISSING ASSETS |
| Posted By Thurman Arnold |
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Marriage of Margulis (8/11/2011) 198 Cal.App.4th 277
Part One
I am always pleased to report cutting edge rulings by our appellate courts, and this is one of the most important decisions in recent years affecting who has the burden of proof to explain what happens to assets that disappear after marriage partners separate, and what the consequences are for managing "in-spouses" who cannot explain what happened to liquid (or other assets) that existed at separation but seem to have evaporated in the meantime. While upon reflection it is hard to imagine how this decision could be news because it makes such perfect sense, the Fourth Appellate District's pronouncements (by the Honorable J. Aronson) are indeed a new extension of existing law - which is why the trial court in this case was reversed.
Special kudos to Attorneys Stephen Temko and Dawn Gray on behalf of the Association of Certified Law Specialists (an organization serving the public interest that I am proud to be a member of) for weighing in with amicus curiae briefs that probably helped to inform the appellate justices in positive ways.
Because this case is important I am going to help it be digested in two gulps - this is Part I.
The root holding of IRMO Margulis is this: Once a nonmanaging spouse makes a prima facie showing concerning the existence and value of community assets in the control of the other spouse postseparation, the burden of proof shifts to the managing spouse to rebut the showing or prove the proper disposition or lesser value of these assets. It is now clear that managing spouses have the burden of proof to account for missing assets that they controlled.
Family Code section 1100 states that "either spouse has the [right of] management and control of the community personal property, ..., as the spouse has of the separate estate of the spouse."
But when parties separate the more empowered partner often grabs or already manages all the marbles, and then enjoys the advantage of continuing to carry those marbles around and even spending them down until the community property pot is ultimately divided. Without accountability this frequently led to abuses and misappropriations that - in the absence of this new rule - favored that party and facilitates their practical ability to defraud the community property estate, notwithstanding a legal duty per Family Code section 721(b) to account for what went where. Until now. The
Margulis rule is necessary to protect the rights of an "out-spouse" as a matter of basic fiduciary protections.
The facts of the case as set forth in the appellate decision are these (and are reminiscent of the facts of the Davenport decision): Alan and Elaine separated after 33 years of marriage in August, 1996. Alan moved out of the parties' Irvine home and moved to Chicago to start a new job. Elaine remained in the family residence. They owned a home in Palm Desert, California.The marriage yielded two children who are now adults.
During the marriage Alan was the sole working spouse and exercised "complete control" of the couple's finances - sound familiar? This included retirement, bank, and investment account personal property assets. Although Alan moved out in 1996, Elaine did not file for divorce for another six years - in 2002. Five more years passed before Alan even filed a response in those proceedings. Throughout this period Alan paid Elaine just enough, evidently, for her to be satisfied with the financial status quo so that she undertook no steps to move the divorce towards a conclusion. I can only speculate what psychological and emotional dynamics were at play in these people's lives, but infer that Elaine trusted Alan enough that she did not perceive that she needed to take vigorous steps to protect herself. Which gave him free reign for a long, long time.
Once the case did begin to move forward, as often happens when there is a significant power imbalance in relationship, it began to move quickly and that pace certainly further advantaged the husband. Commonly it is the in-spouse who is rushing the case to trial while the out-spouse plays catch-up and the parties, or the in-spouse, play discovery games and hide and seek with assets, disclosures, and backup. Bank accounts are easily susceptible to this type of abuse because they are document intensive, and expensive to evaluate. In and out transactions (deposits in, transfers out) must each be traced in order for forensic experts and the court to know how to characterize and characterize transactions and the flow of cash. Here Alan filed his Response to Elaine's 2002 Petition on February 21, 2007, and the parties found themselves in a pre-trial Mandatory Settlement Conference only six months later. This means that Elaine's team had very little time to prepare since Alan knew where the marbles were but elected not to share their identity and location.
There was a single "smoking gun" in the case which consisted of what became at trial "Exhibit 18." This was a two-page document that was entitled "confidential personal financial statement" for "Alan/Elaine Margulis," dated February 1, 1999. It reflected total assets of $1,305,500. The liquid (i.e., cash) portion amounted to more than half of that number.
At trial Elaine testified that, as the nonmanaging spouse, she had no personal knowledge or records of the value of the accounts at any time. This was the sole extent of her evidence at trial about the status of the assets near the date of separation, and essentially Alan's attorneys argued that this proved nothing. Elaine's attorney responded insightfully that the effect of this document was to shift the burden of proof to Alan to explain and show that he had properly disposed of those assets, or that the stock holdings lost their value as a result of market conditions - as opposed to them having been withdrawn or mismanaged by him or for his sole benefit. But the trial judge disagreed, which set up this reversal in favor of Elaine.
The trial court explained "I don't believe it supports, standing alone [that] your assets listed did, in fact, exist." Wife had no other evidence to prove that they did - hence, without the rule established by Justice Aronson in this case, she would be out of luck. Her proof would have failed on the contested issues, and it did fail at the trial court level. Before this decision the trial court's perspective was a bit shallow but not surprising. It takes bold judges with considerable family law experience to read the sub-text.
Who has the burden of proof on a topic is often key to which party wins or loses on a given issue. This is why Marulis is important to control of asset cases.
Shifting the Burden of Proof
There are two common principles linked to the concept of the "burden of proof." One is the burden of persuasion and the other is the burden of producing evidence. Often if a party cannot produce evidence on a subject that the law imposes a burden upon them to produce in order to prevail, they lose. Irmo Margulis has implications beyond family law.
The Margulis decision observes: "the trial court concluded that Elaine, the nonmanaging spouse who lacked both personal knowledge and records concerning the assets listed on exhibit 18, failed to meet the difficult burden of proving these now missing assets had existed....
The trial court's failure to place the burden of the duty on Alan relieved him of the duty to account for his postseparation management of these assets. Thus, Alan did not have to prove the
amounts
that had been in these accounts or that he had properly disposed of those sums. This lack of accountability poses a risk of abuse and runs afoul of the statutory scheme imposing broad fiduciary duties of disclosure and accounting on a managing spouse." [Emphasis added].
It continued: "Given that 'bedrock concerns' of 'policy and fairness' drive the analysis [citation omitted]
, it is not surprising that a common trigger for burden-shifting is 'when the parties have unequal access to evidence necessary to prove a disputed issue. 'Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim.'....
Concerns over 'unequal access to evidence' [citations omitted]
are particularly pressing in the context of a marital dissolution where financial records can be crucial to ensuring the equal division of property required by Family Code section 2550.... Undoubtedly, in marriages and separations like the Margulis's where one spouse exercised exclusive control over community property, the parties will have vastly
unequal
access to evidence concerning the disposition of that property. When this occurs, fairness requires shifting to the managing spouse the burden of proof on missing assets. Moreover, ..., the statutory fiduciary duties of disclosure and accounting owed between spouses further justify that result."
The Appellate Court goes on to explain why this result is fair in light of the fiduciary obligations between spouses that I have written about so much over the past few years. I will separately blog that portion of the decision.
But as I have been trumpeting now for many months, the appellate courts are working overtime to save the existing California scheme of family law to ensure transparency - it is my opinion long overdue but much appreciated!
For those in-spouses who do act in good faith after separation and the pendency of the marital proceedings, Margulis is a cautionary tale - managing spouses had better keep records of transactions affecting the community property estate and make all required disclosures or find themselves assuming the risk of loss or diminution of the value of those assets.
Please note that the appellate Court's initial decision of August 11, 2011, was modified on August 26 and September 9, 2011. The citation to the modified opinion is Marriage of Prentis-Margulis v. Margulis (2011) 198 Cal.App.4th 1252. I have yet compare the differences in the two decisions.
Thurman W. Arnold, C.F.L.S. |
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| June 03, 2010 |
| "PARENTAL ALIENATION" at the 2010 AFCC Conference |
| Posted By Thurman Arnold |
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The topic of the 47th Annual Association of Family and Conciliation Court Conference is "parental alienation." Over 1,000 lawyers, judges, mediators, and mental health professionals (psychologists, therapists, counselors, and court personnel) have converged in Denver for plenaries and dozens of educational and training sessions to share wisdom and views not just about alienating parents, but also concerning many other topics including mediating high conflict partner breakups, understanding how the brain works in conflict and why people behave irrationally and reactively, the effects of parental conflict upon children, children's best interests and parenting plans, domestic violence, and much more.
This is reportedly the largest AFCC Conference turn out ever.
The AFCC a is multi-disciplinary and highly collaborative organization, made up of members of overlapping professions who are passionately cross-pollinating the international social landscape - but particularly within the U.S. - in fertile ways. AFCC is dedicated to facilitating the healthy resolution of family conflict. AFCC's most important function is to serve as a forum for mental health professionals and family scientists and legal scholars to educate and train all of us who are in the day to day trenches of the legal and social struggles surrounding, and consequences of, relationship breakup. It is a natural marriage of a number of related professions, and probably the most important organization affecting family law trends today both in and outside the courtroom.
The concept of "parental alienation" is a highly controversial subject. There is much debate and disagreement nationally and in Denver this week whether parental alienation is really a "syndrome" or "disorder" and whether it deserves its own category in the upcoming DSM-V.
The DSM is short for the Diagnostic Statistical Manual of Mental Disorders. It is published is by the American Psychiatric Association. The current DSM-IV was first released in 1994 and has since been updated. It appears that the DSM-V may be released as early as 2012. It is the APA and not AFCC that determines what is and what is not included.
Mental Health Professionals (MHP's) use this manual when working with patients as a common ground for better understanding their illness and potential treatment, to communicate between themselves, and to help insurance companies and other payors decide whether to cover treatments. It is considered the ‘bible’ for any professional who makes psychiatric diagnoses in the United States and many other countries, and hence what gets in and what does not has long ranging consequences about how MHP's and judges and lawyers view certain behaviors and functioning. In effect it constitutes a consensus over what is and what is not a 'mental illness.'
The parental alienation question in this context is essentially whether there are predictable and discrete behaviors that in combination and given certain levels of intensity can form an identifiable mental illness that can be credibly diagnosed, distinguished from other disorders, and treated?
Hence, the DSM has important consequences to families who find themselves within the Family Court systems, even though that is not what the manual is necessarily intended to be used for.
For instance, in forensic parenting evaluations the DSM-IV may be used to label parents in ways that can seriously impact and impede their parenting rights. Therapists, psychologists, social workers and others who must employ and rely upon its system of coding often provide diagnoses and recommendations to judges and other MHP's derived from the DSM that are used to establish parenting rights and parenting plans in custody disputes and move-away situations.
I will attempt to Blog some information about current parental alienation research soon. In the meantime, consistent with my goal of providing free educational materials to individuals and families who are investigating legal questions involving families, my hope here is to introduce people to these important concepts. Given the nature of Blogs it is easiest to do this in 'layers.'
Thurman Arnold
http://www.ThurmanArnold.com
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| May 10, 2010 |
| What does it mean that a judge has ordered a 730 EVALUATION in my custody case? |
| Posted By Thurman Arnold |
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Q. My ex wife and I are fighting over custody of our three children. The judge decided to appoint a psychologist to interview us all. How does this affect me and my case?
A. In high conflict cases where two sides have entrenched and opposing views about what is in the best interests of their children in terms of custody and visitation, California Evidence Code section 730 provides judges the option of appointing an expert witness to investigate the matter and report to the Court. This is often referred to as a forensic evaluation but in California we typically call them "730 evaluations."
What this means for you is that your family is likely in trouble, since these custody "evals" only are necessary where parents are failing to proactively resolve their parenting issues. They can be quite expensive in every way. I describe the process here in part to help encourage you avoid it. Still, there are times when it can lead to a lessening of conflict and it may be inevitable in move away situations.
Forensic evaluations can be used in a number of other settings as well, including valuing businesses or real estate. It is extremely common in move away cases and in fact a strong argument can be made that to allow a parent to relocate with minor children in the absence of such a report (if it is requested) violates the due process rights of the non-moving parent [In re Marriage of McGinnis (1992) 7 Cal.App.4th 473, 9 Cal.Rptr. 2d 182].
In your situation the Court has likely appointed a Psychologist or Marriage and Family Therapist whose work is already known to the Court because that person is on a panel the Court uses, or possibly because one or both lawyers have worked with the expert and either recommended him or her to the Court. Often the parties' lawyers will agree upon this third person.
Reliable evaluators are not hired guns for either side. However, like everyone else they can have their own biases. To the extent that you can, it is always a good idea to get as much information as possible about a potential evaluator before a selection is made. Courts generally don't impose someone on the parties where one of them objects to that person, but in smaller communities there may be fewer options in terms of qualified evaluators.
It can be very difficult for a judge to determine the truth of claims between family law litigants, what their underlying motives are, whether there is some mental health or substance abuse undercurrent, and whether one parent is more likely than the other to foster an ongoing relationship between the other parent and their children. Courts don't have the time or resources to do much more than call balls and strikes based upon witness declarations or live testimony. Therapists and psychologists are able to spend time interviewing parents and sometimes have them complete psychological testing, they meet children, talk to teachers, visiting homes, check with therapists who are seeing family members, and also interview significant others, new spouses, and other children in blended families. A much more reliable picture may emerge than that which comes from the parties' own descriptions of themselves, their children, and the other parent.
These custody evaluations can be quite expensive, typically starting at about $2,500. They seem to average between $4,000 and $6,000, but the costs skyrocket with the number of people other than the parents themselves (often called 'collaterals') whose input is required.
It typically takes at least three months for an expert psychologist or MFT to complete all the necessary interviews and write a detailed report. In my experience the time frame is closer to four months. This report is then submitted to the attorneys and to the Court.
Most courts require this report to be submitted at least 10 days prior to a hearing, so that both sides have ample time to review it. If you are involved in a custody dispute and you or your attorney receive the report late, if you disagree with its recommendations you may want to object that you have not had sufficient time if you want a continuance; otherwise, the Court may adopt the recommendations at that hearing.
In almost all cases where a 730 report has been completed, either side may request that an evidentiary hearing take place with live testimony and the ability to examine and cross-examine witnesses - including the custody evaluator whose recommendations are being considered. Depending upon the urgency of the family's issues and the Court's availability, these hearings may not be set for weeks or months.
In addition, if you feel that the evaluator failed to adequately investigate the case, or did not meet the standards of practice for such evaluations, you may want to consider hiring your own Evidence Code § 733 expert to advise you or your attorney on how to point out the shortcomings to the Court. This can be an expensive, but sometimes useful, way to challenge findings that you do not agree with. The usefulness of 733 evaluators is limited by the fact they do not get to perform a second evaluation (for instance, they rarely meet with the other party), and without conducting full interviews with all relevant persons they may be ethically bound not to render an opinion and certainly their views won't carry the same weight with a judge as the full evaluator. This is not to imply, however, that your children's interests are even your own interests are served by attacking an evaluator's report just because you don't like portions of it.
I will write more on this topic but want to leave you with this thought: Contested custody cases will damage your children, guaranteed. I urge you to consider mediating your custody differences instead, either by using a qualified mediator or a mental health professional.
Attorney T.W. Arnold III
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