Thurman W. Arnold, CFLS

Michael C. Peterson

Loans From Family and Friends to Pay
Attorney Fees For Your Divorce

Unfortunately for those who love or care about you, often the only source of funds to hire or keep a family law attorney involved in your case are friends, co-workers, significant others, and parents or other family members. It is exquisitely painful and humiliating to be forced to borrow from these folks. Yet without their financial aid you may be lost.

Often these cash advances can be recovered from the other spouse by one of the mechanisms described here, and so they will be repaid without jeopardizing your ability to conclude your family law matter.

However, there are a few tips you should know:

Have your helpers pay the attorney directly - whether by credit card or check. Whenever someone loans or gives you money to help with fees or living expenses, if you deposit those monies directly into your bank account even if you next write a check to your lawyer, the other party will argue that you have undisclosed income or resources and may wave your bank statements in front of the court. This forces you to explain the transactions and the source of these funds. You always want to be in a position of needing to explain as little as possible.

Ask them to keep a record of those payments -- in the form of canceled checks or the credit card statement. You may want to introduce these as evidence later. Take control of evidence you might need now.

Sign a promissory note at the time you receive the money -- and keep a copy; better yet, have it sent to the other party's attorney as a "sua sponte" (spontaneous) augmentation of your Preliminary Declaration of Disclosure - no one will later challenge it, and you've just proven you take your fiduciary duties to update your circumstances to the other party seriously. Frequently parents of children in divorce are pre-distributing your inheritance to you in the sense that if they never ask for the money back, they nonetheless are poorer for what they gave you. There is always a suspicion that these "loans" are disguised gifts. If a Court believes that your parents are funding your side of the litigation, it may affect the Court's willingness to order the other party to contribute. The attitude of most lawyers and judges is that a loan is not a loan unless some written agreement memorializes it as such.

Make repayment on these loans -- even if it is interest-only or small amounts. Not only do most people fail to sign a promissory note, they rarely think to create a record that these funds were being repaid. Obviously you cannot repay it all until you receive an attorney fee award or your case resolves - but demonstrating some effort to treat the insider loan as you would any other creditor is persuasive evidence that the monies you received were in fact loans and not gifts. Regular gifts begin to smell like income.

For more information about how to pay your attorney for services they render in your divorce, please visit us here!

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December 04, 2010

Making Attorneys Accessible to Family Law Litigants: 2011 ATTORNEY FEE REVISIONS TO THE FAMILY CODE

Posted By Thurman Arnold, CLFS

December is new legislation month at the California Family Law Blog presented by southern California Family Law Attorney Thurman W. Arnold. My goal is to inform you well, and early on, on any number of topics that will improve your outcome in your family law matters and hopefully to help you to reach results that are fairer for you, your spouse or ex-partner, your children, and your blended and extended families.

Effective January 1, 2011, a very important change to the rules that family courts must apply in deciding whether and when to award attorney fees to spouses (and domestic partners) who may have a relative inability to access the funds necessary to secure justice becomes effective.

This is revised Family Code section 2030. It is a welcome and much needed change in the California law impacting attorney fee awards in proceedings that take place in Family Courts. It is intended to assist parties who historically have been the "out spouse" or "out partner" in marriages and domestic partnerships, by reason of the fact that they may lack independent wealth or assets, or may not during the relationship have managed the community property, or who are otherwise marginalized in terms of access to such funds as are required to conduct litigation and protect their interests because one spouse acted first and grabbed all the funds.

Without money people cannot hire competent matrimonial law attorneys. This effectively created an imbalance of power that family court judges were too often not redressing (otherwise there would have been no need for the revisions).

As a result of the Elkins Task Force's year long study, which included obtaining commentary from jurists, lawyers, and family law specialists among others, the legislature has declared that the times when one spouse was able to grab or control community funds and so starve the other out in the course of adversary litigation, are ending.

Family Code section 2030 changes this playing field importantly by minting new judicial policies that include:

Facilitating access to counsel by parties early on in the proceedings should be encouraged, and attorney fee awards help to accomplish this. This is because cases are more likely to settle when people begin with a parity of access to resources, and settlement is always the ultimate goal. FC §2030(a).

Courts must now make findings on whether an award for attorney fees and costs is appropriate, including based upon the question whether there is a disparity in access to funds to retain counsel, and whether one party is able to pay for the legal representation of both parties. FC §2030(b). This revision directs trial courts to apply a variation of the disparity of earnings analysis that was first expressed in Marriage of Hatch (1985) 169 Cal.App.3d 1213, an appellate decision that some trial courts had ignored. Relative access measured in terms of such disparity is now key. "Disparity" implies 'a great distance or gap.'

The California Judicial Council is directed, by January 1, 2012, to promulgate and adopt state-wide court rules in order to implement this directive in terms of what information is to be submitted to court's to support attorney fee requests.

From an experienced family lawyer's point of view, my take on this revision is that its greatest value is in telling family court judges that attorney fee awards in appropriate cases are to be the standard and not the exception. I suspect, however, that judges and commissioners will remain overly conservative.

From a family sciences point of view I believe it is a significant improvement in the law if we are to equalize power between spouses and, frankly, genders. More often than not women have been on the losing side of the attorney fee question in the sense that they have not controlled community or other resources to the same extent, and in the same manner, as many of their husbands. I think that it will advance woman's rights in family law litigation.

I do not want to overstate the power of this revision. It is a move in the right direction, but nonetheless something of a baby step. We will await appellate court pronouncements as to what standards family courts should apply as trial courts are reversed for being too timid or parsimonious, or even too generous. The California Judicial Council is given to 2012 to propose state wide guidelines that will give direction to courts, and that may help to foster uniformity between different venues, in coming years.

Continue reading "Making Attorneys Accessible to Family Law Litigants: 2011 ATTORNEY FEE REVISIONS TO THE FAMILY CODE" »

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October 22, 2010

How Can I STOP My Spouse From LIQUIDATING OUR COMMUNITY PENSION?

Posted By Thurman Arnold

Q. I am afraid my husband may liquidate our 401k and IRA's that are in his name. Is there anything I can to do freeze the accounts or make sure he can't empty them out before I can hire a lawyer or file for dissolution?

A. There is always the risk that one party will loot the community estate in anticipation of a family law proceeding, or that they may even act innocently but still wind up depriving the other spouse of their community interest in a pension asset.

If the spouse in whose name an IRA, 401k, or other pension device is held wants to access these monies and you object, or just want to make it impossible for them to do so without first securing your agreement, there are important steps that will work so long as you undertake them in time.

Two situations with pension plans or retirement assets are common: 1) a retired or disabled spouse is already drawing upon them on a monthly or other basis and 2) or they may want to liquidate the account entirely. The latter situation is especially common, in my experience, with plans valued under $50,000.

Lets assume your husband has a Roth IRA for $50,000. It was opened during marriage when all contributions were made, and half therefore belongs to you. He instructs Fidelity Investments to cash it out. Since this is an early withdrawal (presumably), there is a both a 15% penalty to the IRS (unless the money is rolled into a new IRA within 60 days, or the withdrawal occurs within 60 days from the date of entry of a Divorce Judgment dividing the assets) and the monies he receives will be taxed as ordinary income at rates that depend upon his bracket.

If there is sufficient other property in the community estate to ensure that you will get your half from some other source down the road, this may not be a problem for you. However, down the road has a habit of never arriving and in this economy other assets from which you expected a reimbursement might evaporate.

Perhaps, this is not okay with you from a number of angles. For instance, an exception to the automatic restraining orders contained in the California Dissolution Summons regarding the prohibition from invading accounts allows parties to do so to generate the monies to hire their lawyers. These "ATRO's" will not likely protect you from this type of withdrawal after the fact - however, it may protect you as a preemptory strike. As always I urge you to act fairly and not to abuse power or be manipulative in your divorce.

You have a couple of options for protecting your interests, including joining the pension plan into the family law proceedings.

But the most important and immediate device you can use is a notice to the Plan Administrator pursuant to Family Code section 755(b). Essentially this written demand tells them that you are claiming an adverse interest in the pension assets and its legal effect is to put the Plan on the hook for any payments they make after receiving the notice. They will not release any money once you properly draft and serve it.

Serve it either personally through a process server (which may be difficult and expensive if they are in another town or state), or by registered or certified mail, return receipt requested.

Keep in mind that joinder of certain types of pensions - like federal public entity plans - cannot be achieved through a California joinder pursuant to Family Code section 2060. Thus, this §755 Notice is really important to freeze the status quo pending an ultimate QDRO.

By the way, this will also work to freeze other forms of payments - for instance from insurance companies.

T.W. ARNOLD

"We provide you cutting edge, insider information about the law"

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May 11, 2010

What are EPSTEIN REIMBURSEMENTS?

Posted By Thurman Arnold

Q. My soon to be ex wife and I are getting our divorce with the assistance of a paralegal. That person has prepared a Marital Settlement Agreement. The paralegal says she cannot give us legal advice. There is a phrase in the agreement that says something about each of us waiving Epstein reimbursements. I have no idea what this means.

A. "Epstein reimbursements" deal with the question: "How do we divide debts that we incurred during the marriage, where one of us made payments after we separated and up to the time of divorce?"

A common situation is that parties have credit card debt that needs to be divided in the divorce. Say there was a balance of $10,000 owing to American Express on December 31st, the day before your wife drank too much at the office New Year's celebration and had an unfortunate tryst with her boss - this isn't the first time this has happened, and your New Year's resolution is to move out (sorry, I am just trying to be colorful), and so you do move out the next day. Her reaction is to file for divorce, because her boss looks way more interesting to her than you do these days.

Under this example January 1 is your date of separation. From the date of separation on, the earnings of either spouse are no longer community property, or joint earnings, but instead these earnings belong to each of you separately. Family Code § 771.

Often where a credit card is in the name of one person alone, the other spouse or domestic partner doesn't contribute to the payments after separation - sometimes because they won't and sometimes because they can't. But as between the two of you, the $10,000 is jointly owed to American Express, even if the other spouse did not sign the credit card application or is not named on the card, or on the statement. This is also true whether or not both parties directly benefitted from the use of the credit card - for instance, maybe the $10,000 was charged by your wife to buy shoes over the course of the past year to help make herself feel better about the fact that you never have intimate conversations with her any more (or for any other reason), or perhaps you charged the card to add more chrome to your Harley Davidson FatBoy because your hairline is receding.

If the card is not paid, American Express can pursue collection either against the spouse who is the account holder, or against the community property of both spouses. Family Code § 910. If the credit card is in your name alone, it will be your credit that might be ruined if the monthly installments are missed.

Now again, as between you and your wife, the general rule is that each of you owe one-half of the credit card debt which means that all other things being equal, in a property settlement or if a Judge is forced to divide your property and estate, if one party is assigned 100% of the debt the other owes a reimbursement of $5,000. Lawyers and Judges speak of assigning the debt to one party or the other on the "marital balance sheet" which implies a corresponding credit or right of setoff against the division of some other item of property.

epstein reimbursements and gambling

There are, of course, exceptions. These exceptions frequently include (a) situations where a debt was incurred in breach of a fiduciary obligation owing the community estate or to the other spouse and (b) where one party retains the benefit of the property that the credit card was used to acquire (believe it or not, I am frequently asked about breast augmentations or other cosmetic surgeries - except in extreme cases, courts do not charge one party for these). For example, if when you learned of your wife's affair your reaction included flying to Las Vegas and having a wild weekend and you recklessly charged the $10,000 at the casino, this might be considered a breach of fiduciary duty and result in the entire $10,000 being your responsibility even though the two of you had yet to physically separate. Or, if instead you spent the $10,000 buying more chrome for your Harley and you expect to keep it in the divorce, then even though the $10,000 was otherwise a community obligation equitable considerations may result in the debt being assigned to you.  If in the divorce the two of you decide to sell the Harley but the chrome you spent $10,000 buying adds only $2,000 in value to the sale's price, in that case the $10,000 remains a joint obligation because you neither breached a fiduciary duty nor retained a sufficient benefit that the law would charge you for it and the asset is being divided. Another common situation is where one spouse retains the furniture or refrigerator charged at Lowes - in that case more of the debt may be assigned to that party.

Assuming you continue to make monthly payments of principal and interest on the credit card up to the point of dividing the debt in a marital settlement agreement (MSA), or if a judge makes the call for you both after a trial, as a general proposition your wife owes you one-half of all those payments. These are called Epstein credits or Epstein reimbursements in California, and many other community property states have similar rules. These are also called equitable reimbursements, meaning that the right to be reimbursed is not absolute and certain but that the court has wide discretion to grant the reimbursement or not depending upon fairness. Typically California family law courts do grant the reimbursement so long as the parties benefited equally (or the money was equally wasted).

The principle in California was first set forth in the case of Marriage of Epstein (1979) 24 Cal.3d 76. It is to be distinguished from the rule that the debt itself, if community, must be divided equally between parties in divorce.  Family Code § 2550. It covers reimbursements rights that accrue between physical separation and the date of ultimate division of the liability.

So, the agreement the paralegal has prepared includes an agreement each of you is giving up any right to be reimbursed for debt related payments made after separation. You are not being asked to waive your credit for $5,000 if the $10,000 debt is assigned to you (unless there is a separate provision assigning the credit card balance to you completely). You are being asked to waive all the debt maintenance up to this point. It is not an unusual clause in an MSA, but it may or may not be in your best interests to agree to it.

Epstein credits take a variety of forms, and are not limited to credit card debt. The Epstein case itself involved a husband who voluntarily made the mortgage, insurance, and tax payments on the family residence during the separation period. Wife and their son occupied the home. Up to that point the law was that if one party used separate property (earnings after separation) to pay community debt (the mortgage, etc., on the residence), there was a presumption that this was intended to be a gift to the community unless an agreement could be proved that it was not to be a gift.

Each party may have separate Epstein claims as to different items of debt.

Upon separating, it is a smart idea to get and keep copies of credit card statements and statements for all liability accounts as of the date of separation. From an accounting point of view, the date of separation is a critical snapshot of a point in time. It is essential that the parties maintain these records as proof of what the numbers were, and of what payments were made afterwards.

Whether or not you should waive the Epstein reimbursements that might be owing you is part of the give and take of negotiating a divorce settlement. These are usually simple accounting issues, but not always.

If your Wife gets an attorney that attorney might try to convince you to waive the Espteins, or hope that you don't understand the concept or have it independently explained to you. In my experience where we are speaking in terms of vanilla debt (meaning there is no questionable conduct and the charges were incurred in the normal course), your wife's lawyer would also agree that you are entitled to these reimbursements without a fight if you know enough to insist.

There is an important flip side and hybrid of the Epstein reimbursement concept - that of Watts charges and credits. The deal generally with who pays for the beneficial use of community property (i.e., the home) during the separation period, once the divorce is finalized.

I will address those separately.

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Loans From Family and Friends to Pay
Attorney Fees For Your Divorce

Recent Posts in Preparing for Divorce Category

Share Your Family Law Horror Story?

Loans From Family and Friends to Pay Attorney Fees For Your Divorce

Loans From Family and Friends to Pay
Attorney Fees For Your Divorce