Recent Posts in Sanctions 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 W. Arnold, C.F.L.S. |
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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.
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| May 15, 2011 |
| RECURRING GIFTS From Parents May Be "INCOME" For Purposes of Determining Need for ATTORNEY FEES! |
| Posted By Thurman Arnold, CFLS |
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As I have been trumpeting now for months, the appellate courts are actively attempting to control and limit family law litigants, their lawyers, trial courts, and the rest of the professionals involved in these cases and to curb the excesses of high conflict divorce and custody disputes. Following on the heals of the momentous decision in Irmo Davenport,
another court has responded to an excessive attorney fee claim by a family court disputant. In
Davenport it is a party who was sanctioned for the aggressive tactics of her attorney; now in the
Kevin Q. opinion, it is the lawyer herself who is undone because it appears she will never be paid for hundreds of thousands of dollars in fees run up in the course of her representation.
I raised the question in my
Davenport blog whether we can expect
Family Code section 271 to be amended to impose sanctions against attorneys themselves for litigious conduct (there is a split of appellate authority on whether 271 includes attorneys). While neither the attorney nor the client in
Kevin Q. was sanctioned (and apparently the conduct of the litigation did not rise to sanctionable levels), they were nonetheless denied any contribution to their fees from the other side. An attorney who handles cases "on the come" who finds herself not getting paid is pretty much equivalent a form of sanction.
Kevin Q. blew up in the face of the mother's attorney (although I applaud family lawyers who care enough to carry a case for a time, in appropriate settings). For those attorneys who tend to over-litigate cases, basic behaviorist principles of reward and punishment are likely to impact their decision-making. This is a message that I believe the appellate justices intend.
The Fourth Appellate District has taken the next predictable step for litigants who hope to force the other side to contribute to exorbitant attorney fees incurred in certain high conflict family law cases. In so doing the law as it relates to the "relative circumstances" of the parties has been expanded to require that trial courts treat recurrent monetary infusions made by family members as "income" for purposes of interpreting the larger picture as it relates to attorney fee requests. Previously that argument only existed within the realm of support obligations.
This is the first case that deals with what happens to attorney fees claims, in a situation family lawyers know is common where grandparents may be effectively encouraging (and often funding) a rancorous custody battle between their child and a now estranged former partner. Often in family court litigation there are not merely two individuals at war - their relatives have also been sucked into the trance. Many wealthier Americans are able to fund their child's litigation attorneys, or pay that child's household bills so that their need to find work is reduced. The parents of these children may feel forced to underwrite this status quo, effectively spending the family inheritance now. This may be the real subtext to the case.
Kevin Q. is a natural evolution of a doctrine which was recently stated in
Marriage of Alter (2009) 171 Cal.App.4th 718. In
Alter the trial court found gifts from the former husband's mother to be disguised as loans and imputed income to him for these gifts in deciding his ability to pay child and spousal support.
In Kevin Q. and Lauren W., published on May 13, 2011, the two parties incurred over $400,000 in lawyer's fees combined fighting over the paternity of a boy born outside of marriage. That these are warring high-conflict parents is made clear from the fact that this is their second published appeal (see
Kevin Q. v. Lauren W. (2009) 175 Cal.App.4th 1119). Mother won the first appeal; Kevin prevailed here. Both sets of litigants have had the same attorneys throughout the proceedings. Kevin Q. is himself an attorney who practices family law in Orange County. As it turned out in the earlier case, Kevin is not the child's biological father but he alleged he was the child's psychological parent - the appellate ruling was that Kevin was not the boy's "legal" father. Unfortunately for the child, it sounds as though the man declared to be the legal father went "walkabout." I cannot tell whether Kevin continued to maintain any relationship with the child after he lost his paternity claim ('once a psychological parent, always a psychological parent?'). Perhaps the parties or their attorneys will weigh in this Blog so I can have the facts corrected.
The first decision is dated June 19, 2009. In December, 2009, Lauren moved the court to order that Kevin pay her outstanding attorney fees, including those from the earlier appeal. Kevin had contributed a total of $20,000 up to that point. Her attorney was Debra Opri of Opri & Associates; Kevin was represented by Marjorie G. Fuller and Marc S. Tovstein. Hence, all the litigation after the first decision appears to be over recovering attorney fees relating to it (but this is unclear). Fees upon fees?
In this round Attorney Opri filed a declaration stating that there was $55,754 due from the earlier work and that another $178,581 and costs of $6,589 was incurred thereafter. Hence, Lauren's total unpaid fees amounted to $227,746. Opri's hourly billing rate was $575 and her law clerk's was $225/hour. Of these fees, Attorney Opri had only received the $20,000 from Kevin plus $28,280, which included a payment of $15,600 from Lauren's father. Lauren urged that Opri had been effectively working for free. She owes her father "tens of thousands" and he was tapped out.
Kevin responded that Lauren's fees were unreasonable. She'd incurred $311,242 in fees for the entire case while his fees totaled $141,384. He complained that $4,200 in charges were for driving time for her attorney to travel from Beverly Hills to Orange County.
The matter was submitted for decision to the trial court, with the issue being identified as whether "attorney fees should be paid to [Lauren], based on need and ability to pay, as set forth in ... [Family Code] sections 2030, 2032, 7605, and 7640." Lauren urged that because the underlying dispute concerned paternity, Family Code section 7605 and
section 7640 governed and that these statutes required a different analysis than under
sections 2030 and
2032.
The court made the following findings: Kevin's average monthly income was $12,803. He had borrowed $50,000 from his relatives for attorney fees, which he was paying back at the rate of $150/month. He had monthly expenses of $13,320 leaving a deficit of $517.
Lauren had zero income from employment and had not worked since 2006, although she had a master's degree in psychology and is a certified chemical dependency counselor. She received $8,700 per month from "others." Her monthly expenses were $9,197, leaving a shortfall of $497.
Which Statutes Control Attorney Fee Requests in Paternity Actions?
The court concluded that it had to apply Family Code section 2032(b) and so "consider the practicality of the expense of litigation consistent with the parties['] overall financial resources." While it appreciated that Lauren's counsel had expended time and talent to the case without substantial payment in advance, "[o]nly the wealthiest of our citizens can afford to expend more than $500,000 on their family law disputes. The fact that an attorney voluntarily takes on the lower earner does not mean that the law gives him or her carte [blanche] to litigate the case without limitation regardless of the parties['] ability to pay."
The court noted that Family Code section 2032(d) provides a mechanism that offers the parties and their counsel to early on seek to implement a case management plan for the purpose of allocating fees in an amount and to the extent that circumstances allow - Lauren did not avail herself of that opportunity "and forged ahead, incurring attorney's fees far in excess of either party's reasonable ability to pay." (Notably the appellate court did not weigh in on this question). It concluded that "neither party ha[d] a substantially greater ability to pay the other's fees" and therefore denied Lauren's request that Kevin contribute to hers.
On appeal Lauren contended that the trial court failed to limit its inquiry to the language of Family Code sections 7605 and 7640, which she felt would result in a different analysis than that under 2030 and 2032. The chief difference between the wording of the two sets of statutes is that "[u]nder section 2032, '[t]he court may make an award of attorney's fees and costs under Section 2030 . . . where the making of the award, and the amount of the award, are just and reasonable under the relative circumstances of the respective parties.' Section 2032 further provides: 'In determining what is just and reasonable under the relative circumstances, the court shall take into consideration the need for the award to enable each party, to the extent practical, to have sufficient financial resources to present the party's case adequately, taking into consideration, to the extent relevant, the circumstances of the respective parties described in Section 4320. The fact that the party requesting an award of attorney's fees and costs has resources from which the party could pay the party's own attorney's fees and costs is not itself a bar to an order that the other party pay part or all of the fees and costs requested. Financial resources are only one factor for the court to consider in determining how to apportion the overall cost of the litigation equitably between the parties under their relative circumstances.'"
Family code section 4320 is the key California spousal support statute. Of course, this was a paternity action and since the parties were never married no spousal support could have been awarded. Nonetheless, the Fourth Appellate District concluded that the legislature's reference to 4320 in section 2032 meant that the factors set forth in 4320 were relevant here. These included "the earning capacity of each party," "the obligations and assets of the parties," the "age and health of the parties," "the balance of hardships to the parties," and the "goal that the supported party shall be self-supporting within a reasonable period of time." Thus the appellate court concluded that "sections 2030, 2032 and (where relevant) 4320 form a statutory package" where fee awards must comply with all three provisions - at least in marital proceedings.
The Fourth District decided that the trial court did not error by taking into account the standards and circumstances pertinent under a section 2032 comparative analysis. "By dong so, the court was able to perform a more thorough evaluation of the parties' respective abilities to pay."
Loans vs. Gifts From Family Members
Lauren urged on appeal that the trial court erred by treating her father's payments to her as income, asserting these were loans and not gifts and that her father's financial support was not "an infinite obligation, regular or steady...." She argued that the trial court did not find the amount of her fees to be unreasonable.
The appellate court read the trial court decision as including a finding that Lauren's fees were in fact unreasonable. The court had stated that the law does not give either party carte blanche "to litigate the case without limitation." It noted the disparity in the amounts of fees charged by the two sets of attorneys. And the court had observed that Lauren's counsel had "forged ahead, incurring attorney's fees far in excess of either party's reasonable ability to pay."
The two seminal cases on imputing income derived from gifts from parties' parents are the Alter case, cited above, and
In re Marriage of Schulze (1997) 60 Cal.App.4th 519. In
Schulze a noncustodial father challenged an order requiring him to pay spousal and child support. The trial court there ordered him to pay $7,500 immediately and in full for his former wife's attorney fees. The trial court had presumed he could get this money from his parents because they had previously lent him about $8,000 to pay his own fees. This part of the ruling was reversed with the now oft quoted holding that "Charity, once extended, is still not an entitlement." As the
Kevin Q. opinion notes "[b]ut that statement related to a loan made by the parents for a particular purpose, as opposed to regular, recurrent monetary gifts intended as support for living expenses." Lauren responded that the trial court ignored the $50,000 loaned by Kevin's parents, but these were not the same as "recurrent payments" made over a lengthy period of time to cover Kevin's living expenses. And, Kevin's attorneys were smart enough to produce evidence that Kevin was paying back those loans.
Alter similarly examined recurrent gifts to an adult child. "There, the appellate court stated that 'where a party receives recurring gifts of money, the trial court has discretion to consider that money has income for purposes' [of determining] child support. The former husband in
Alter, who sought reduction of an existing child support order, had received regular monthly payments from his mother for many years. He claimed the payments were loans, produced promissory notes as evidence, and averred his mother's loans to him 'would not continue.' The appellate court found substantial evidence the payments were gifts, noting that no evidence showed the former husband 'ever repaid any of the money.' The Court of Appeal then addressed whether these gifts may be characterized as income under the relevant child support statute. It concluded 'that nothing in the law prohibits considering gifts to be income for purposes of child support so long as the gifts bear a reasonable relationship to the traditional meaning of income as a recurrent monetary benefit.' In reaching this conclusion,
Alter found it 'irrelevant that there is no legal obligation on the part of the donor to continue making the gifts or that the flow of cash does not appear on the income tax return.'
'Few, if any, sources of income are certain to
continue unchanged year in and year out. People can lose their jobs, interest rates can fall, business conditions can wipe out profits and dividends.'
In sum, 'the question of whether gifts should be considered income for purposes of the child support calculation is one that must be left to the discretion of the trial court.'
Alter
concluded the trial court had not abused its discretion in considering the payments to be income because they were 'periodic and regular,' resulting in money available to the former husband for the support of his children."
Hence, the Kevin Q. court ruled that "the regular, recurrent monetary infusions made by Lauren's father to her over a lengthy period of time, which relieved her of the need to work outside the home, constituted support (and, impliedly, monetary gifts) to her. The court explains: 'While the Court recognizes that [Lauren's] receipts from 'others' are not income as defined in the Family Code, they are however funds on which [Lauren] relies in order to maintain her lifestyle. It is clear to the Court that these funds received are not loans, in that [Lauren] reports debt only in the amount of $26,000, all from institutional lenders. [Lauren] reports that she has not been gainfully employed since August of 2006. She discloses that she has a bachelor's degree in English, a master's degree in psychology and is a certified dependency counselor. [Lauren] does not report receiving or applying for any benefits for disability income from any state or federal agency or private insurance provider.
The weight of the evidence therefore supports the proposition that [Lauren] chooses to remain a 'homemaker and mother' and is able to do so as long as other persons contribut[e] to her support. That support, in this Court's mind, is relevant to the issue of [Lauren's] need and ability to pay attorney fees.'" [Emphasis added].
The court did not abuse its discretion by considering those gifts to be support (or income) for purposes of calculating Lauren's ability to pay her attorney fees. The gifts bore "a reasonable relationship to the traditional meaning of income as a recurrent monetary benefit."
The Take Away
Parties to family court litigation who don't work, or have limited access to resources, find themselves in a catch-22: If they look to their families for financial support which they then receive as recurrent gifts, or unpayable loans, this stream of money will increasingly be classified as "recurrent income." Here Lauren's parents regularly supported her, at a pretty high standard of living at $8,700/month. One can't but help feel sorry for her parents for bearing this burden. I suspect that as naturally tends to happen her parents bought into her victimhood and sided with her against the evil empire that Kevin represented. Often high conflict litigation isn't simply a war between two parties: It is a war between two families, which isn't a lawyer's fault - but is still always a shame.
(Mirroring conflict between two religious groups; or two political parties; or two races; or two countries; or human beings vs. the rest of the natural world. Does any of this sound familiar? But I digress.)
True loans from parents may remain different from "recurrent income" depending how and how often it is received. Kevin was wise to show some repayment, however meaningless ($150/month towards a $50,000 debt is minimal at best).
We now know that Family Code section 2032 provides the central standard of measuring how attorney fees may successfully be sought from the other side in probably any manner of case that can be filed under the California Family Law Act. It gives trial courts wide discretion to look at all the relative circumstances, no matter whether the case is between married persons, domestic partners, and paternity contestants. Arguably the same result should control when dealing with attorney fee requests in domestic violence cases (Family Code section 6344).
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| April 30, 2011 |
| 271 SANCTIONS Ordered Against PRO PER ATTORNEY - Lawyers Are Some of the Most Conflicted Parties to Matrimonial Litigation |
| Posted By Thurman Arnold, C.F.L.S. |
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I have recently been reflecting on the fact that in my experience, lawyers who are parties to family law litigation behave far worse than most people suffering through the emotional ravages of relationship breakup. There is something about being a lawyer that threatens, and for some tends, to transform us into bullies and petty tyrants.
Lawyers should be even more mindful than the average litigant about taking bad faith positions. Courts hold attorneys to a higher standard, as they should. Not only are they more likely to be monetarily sanctioned for abusive behaviors, attorneys may also find themselves the focus of a State Bar investigation that ends with discipline including suspension or disbarment - an accountability unique to being a member of the legal profession. Hence, attorney pro se litigants have a lot more to lose than the average disputant. Aside from their ethical obligation to be act better than the rest as "officers of the court," there are practical reasons why they should exercise restraint.
There is a trend among our California appellate courts to fix boundaries and impose consequences for all divorce litigants who engage in uncooperative and dishonest behavior in marital and partnership dissolutions. This is a good thing: As I urge in my Blogs, the family law system for resolving disputes isn't working because the participants often approach them with so much blind rage and reactivity that their conduct overburdens the courts' resources and are too often manifested in attempts to beat the other person into the ground by increasing costs unnecessarily, by misrepresenting information, and by playing "hide the ball." We teach our children to self-regulate their behaviors, but sometimes we can't seem to get a grip on our own. We don't want judges to act as through they were our parents, but people often force them to.
Marriage of Greenberg (April 28, 2011) 194 Cal.App.4th 1095
As if to emphasize this phenomena, the Second Appellate District out of Santa Barbara issued its decision in Marriage of Greenberg on April 28, 2011. Self-represented Attorney Robert Greenberg was sanctioned in the amount of $2,800 in attorney fees to be paid to his former spouse by a Ventura County trial court when he took a meritless position to justify his stubborn refusal to pay a court ordered equalization payment to her. The trial court found that he was not only not credible in identifying his income in opposing a spousal support request, but declared that he'd engaged in perjury about his earnings and expenses. Moreover, the argument he urged to avoid paying the equalization payment was one that "should not have been an issue in the first place."
Accordingly, per Family Code section 271 sanctions were upheld as entirely appropriate and within the trial court's discretion. But that is not what is striking about the court's decision - and indeed $2,800 for uncooperative and dishonest behavior in family litigation is a very light slap.
Mr. Greenberg was not satisfied to accept his lumps and move on; instead, he filed a frivolous appeal from that order. Because Wife had not filed any brief in opposition to Husband's appeal Husband dodged a second monetary sanctions' award - but he did not dodge the bullet. BTW, Husband may have believed that because Wife could not afford to hire an appellate lawyer, given that it makes little sense to pay $10,000 to defend a $2,800 judgment, he would win in effect by default - he was sorely mistaken, however, since appellate courts don't accept arguments as valid simply because they are unopposed.
The Court concludes its opinion with the following:
"The record on appeal does not show that the trial court reported husband to the State Bar. We order the clerk of this court to send a copy of this opinion affirming the trial court's order to the State Bar. Whether husband should be disciplined is addressed to the judgment of the State Bar and we express no opinion thereon."
I suspect the author of that final sentence was smiling when they wrote it. Given the citations to Mr. Greenberg's tactics in the appellate record, it is hard to imagine that he will not be sanctioned by the Bar in the near future. Ironically, if the trial court's perjury findings have not previously been brought to the attention of the State Bar, Mr. Greenberg's insistence on pursuing a frivolous appeal guarantees they now will be. This is a wonderful example of an obsessed divorce litigant completely 'blowing themselves up.'
Justice Yegan, J. for the Second Appellate District begins this strongly worded opinion with the sentences: "Abraham Lincoln once said, 'He who represents himself has a fool for a client.' Here, the client is an attorney who represented himself in the trial court. He now represents himself on appeal. He is unschooled in the basics of appellate law, suggesting that Lincoln's observation applies on appeal. We understand that emotions run high in family law litigation and that this may cloud the judgment of a party. But that does not excuse the filing of a 'creative' (i.e., misleading or incomplete or inaccurate) income and expense declaration; or perjury,..., or the filing of a frivolous appeal." [Italics added].
The decision ends with this dry and understated observation: "Husband, a pro per attorney, suffers from a lack of objectivity." This fact, universal in differing degrees for those who are ending relationships, is at the core of why family litigation is so distressing and expensive for everyone involved, and in need of a major retrofit. But in the meantime, trial courts are repeatedly being given the green light to reign in parties who act like errant children so long as their due process rights are duly protected. Along with Marriage of Tharp,
Marriage of Fong, and Marriage of Duris & Urbany,
Marriage of Greenberg constitutes a warning to all family law litigants that abusive conduct will not be countenanced.
Also, Greenberg is important as good authority for the proposition that unfounded legal positions at the trial court level are sanctionable under FC §271. It should be cited to any judge where you encounter difficulties with the other side that sound familiar here, including advocating meritless claims.
Divorce trance is strong stuff. It causes most people to lose their minds for a time, before they can regain some balance and equanimity. Some high conflict litigants seem to never regain their poise (if they ever had it), and lawyers as parties to matrimonial matters seem to personify some of the coarsest aspects of our lower natures. One of the benefits of hiring a seasoned attorney, even if you think you can otherwise represent yourself, is that they can guide you to act in ways that are less destructive than what your impulses demand. Good lawyers don't just perform the mechanics of divorce, they help to set the tone. Conversely, seeking out "aggressive" lawyers whose advice mirrors or panders to your inner tension assures that your experience of the divorce and of the courts will be all the more unpleasant and unsatisfactory - oh, and expensive too.
Do yourself a favor - don't imagine that family court is your stage for expressing your upset and rage. Throw tantrums and the consequences may be more painful than a "time-out."
Or consider a different tact, if you wish and if your limbic "lizard" brain will allow it. Fortunately, we have other areas that we can access with just a smidgeon of mindfulness.
Thurman W. Arnold, III, CFLS
A disclaimer:
Very few humans can behave impeccably every time, and I don't want to create an impression that I claim to be freed from all personal reactivity. My discussion is aimed at reminding you and I that we have two primary choices: 1) Get lost in the trance of resentment and within our busy minds, and so be persistently and stubbornly deprived of any real decision-making ability or 2) to increasingly gently and firmly restore and ground ourselves, and exercise the choice to suffer less rather than more by resisting the impulse to jump and scream when we feel threatened or angry. This latter possibility exists apart from all proclaimed external "causes" to our misery - and requires that we not respond in kind to the perceived insults and injustices that others may seek to inflict upon us.
Every day we enjoy a fresh chance to re-evaluate our direction and so to reset our conditioned negative momentums. Might succeeding one time in ten be better than the alternative?
When I am distressed but lucky, the mantra "stop..., clear..., reset" sometimes comes to my mind. And sometimes, hopefully more often than not, this works for me. Find your own mantra and save yourself from needless pain.
The opportunity for freedom resides within us, not without! Conversely stated, victims tend to choose to be.
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| March 14, 2011 |
| FAMILY LAW SANCTIONS and DUE PROCESS: Santa Barbara Trial Court Reversed in IRMO DURIS |
| Posted By Thurman Arnold, CFLS |
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Visitors to my websites know that I am biased in favor of mediation, believing that parties to litigation involving their family should opt to resolve their disputes themselves rather than undertake the perils of having a judge, or anyone else, decide their matters for them. This includes mediators (whose role is not to decide your issues for you but to facilitate you finding solutions). However, I admit that sometimes this doesn't seem possible. Too often one or both parties are reacting so deeply to their hurt or resentment and spinning with angry, busy minds that they perceive family court as the killing field for their unresolved conflict - a public forum for the spectacle of flogging the other side.
A recent reported decision illustrates the financial waste that occurs in high conflict family court battles, where there are no winners and only losers. My remarks are not intended to convince you to hire me, or to impugn judges whom I contend are struggling valiantly to protect children and mete out justice as best they can within a system that is not equipped to cope with the multi-dimensional challenges of emotional divorce and its aftermath: The trial judges are not broken, but the framework for government sponsored attempts to regulate the processes of divorce and domestic partnership dissolution is. Nor should it be read as an indictment of divorce lawyers or any particular barrister. An adversary model for resolving family disputes guarantees that the experience of everyone connected with these cases will be ... adversarial. Surprise!
In the meantime appellate justices are stepping forth to triage for the litigants, their attorneys, and the lower courts. But is it realistic to expect lawyers (in that small relative percentage of domestic cases where people can afford them) or judges to not be swept into the reactive thinking that the parties' disputes are personifying? I say "no". Our brains are hard-wired to respond to conflict in predictable ways. While we all ought to conduct our affairs in increasingly enlightened and ethical ways, and lawyers and judges surely benefit by incorporating the wisdom of the mental health sciences, a legal and cultural framework grounded in adversarial processes can never escape them. How could it be otherwise?
Marriage of Duris & Urbany
On March 14, 2011, the Second Appellate District (Division Six) reversed Santa Barbara trial judge Colleen K. Sterne's decision to discipline a self-represented litigant (an unemployed attorney) for, among other things, her earlier attorney's tactics in filing a motion to compel document production evidently without first attempting to resolve the disagreement informally. Discovery motions generate large fees and consume valuable judicial resources.
At the end of the hearing on Wife's original requests (the custody and support modification request she'd filed eight months earlier), the trial court imposed $10,000 in attorney fee sanctions against the Wife. Husband's attorney had evidently suggested that the Court do this somewhere in his Reply paperwork, and reiterated the request in his closing argument. The trial court took the bait. Its ruling was found to be an abuse of discretion.
According to the Husband, by the time of the hearing on original OSC to modify custody and support he had spent $25,000 for fees. Wife probably spent a similar but slightly lesser amount since she was in pro per for many months. Their fees and costs for the appeal probably were $20,000 more apiece (but Mr. Urbany handled his own appeal). Husband will get none of his money back, and Wife will recover only a portion of hers. Neither will achieve an emotionally satisfying resolution and their matter likely obsessed their lives over the year and a half. This case is "a pox on both your houses."
Wife's former attorney, Jacqueline Misho, was hired some six months into the proceedings, initiated when the Wife filed a motion for "100% physical and legal custody" of the parties' two children, plus more child support. Attorney Misho took an aggressive stance in advancing her client's claims and filed a discovery motion to compel production of documents. This was unsuccessful. The attorney was then let go. A week later the Wife's custody motion was heard. Although sanctions against her had not been requested by way of a noticed motion (possibly because there was little time in which to file one), Husband urged that she should pay his attorney fees. At hearing end when Judge Sterne announced her intent to hit Wife with $10,000 in sanctions as a share of the Husband's costs in part based upon the prior discovery motion filed by Misho, Wife complained "How am I being penalized for hiring [Misho]? How was I supposed to know? I thought she was the best there was." In my experience, "the best there [is]" often means the meanest and toughest. Many family law attorneys advertise themselves in such a fashion.
I have no personal knowledge about either party's attorney beyond what Google searches of their names retrieve and what a review of the California State Bar website discloses. Both are reputed to be tenacious divorce litigators. The problem with vociferous advocacy, irrespective whether it occurred in this case or not, is that it tends to generate a story of its own and so to increase the conflict noise volume - I confess I know this from my own past personal experiences. It can infect the process - there is something of a reciprocal feedback loop that occurs between high conflict litigants and their attorneys that is difficult to resist. Sometimes it seems to be the only choice, but usually that justification is borne of the tensions within the conflict itself and is not necessarily true.
Family law litigation becomes particularly nasty when attorneys for each side compete to inflame the trial judge with sound bite characterizations about the other. Some clients demand this from their counsel or become quite perturbed if their advocate doesn't respond in kind to these sorts of attacks. Lawyers who are being paid large sums are pressured to speak their client's minds (read: resentments) or risk a loss of confidence by their client. Of greater concern to the integrity of the legal professional generally, there are many family law attorneys whose entire strategy is geared around slandering the other litigant (or their attorney), often by exaggerating or misrepresenting the facts or history of the case solely as a means of confusing the judge or just plain pissing the court off in the hope of creating a favorable bias. Tit for tat then threatens to overwhelm the process. This sort of behavior can include ignoring the procedural rules for raising the issues to be decided, which is a form of ambush that can be effective exactly because the answering party is unable respond to an oncoming train if there is no forewarning.
I am not saying that this was either attorney's conduct in Duris as I lack sufficient details to make a full assessment; instead I am pointing out that adversary litigation programs lawyers and unrepresented parties to use whatever tactics that might work, and sometimes to try them all. This seems to be viewed as not only within the standard of care for zealous advocacy but to be required by that standard. I can comment that one irony of this case is that while the Wife's attorney allegedly failed to act in a cooperative manner in choosing to file a motion to compel without first attempting to solve the argument informally, Husband's attorney seized upon that misstep to buttress a request for sanctions that was never properly placed before the court. Sometimes these sound bites do stick; they did here, at least with Judge Sterne. Unfortunately, under these rules of engagement lawyers are thus encouraged to act as badly as the talking heads we see arguing on many 'news' programs, something that the American public views as a form of 'entertainment.'
This is one of the many dangers of adversarial litigation. Both sides feel righteously indignant, and attorneys tend to internalize their client's upset so that the boundaries between the client's experience and the attorney's own blurs. It is a recipe for disaster, but understandable given that emotional and angry ex-spouse pressure-cookers are letting out steam on both sides of the table all at once.
The appellate court's decision doesn't give us sufficient facts to discern whether the mother's initial application was well-merited, but Judge Sterne's decision suggests she did not view mom's motives (or her attorney's decision-making) to be in good faith. Wife's request for 100% custody looks to be retaliatory and frankly when this is true - and too often it is, even if not here (Judge Sterne referred to Wife's prior discovery motion as a "fee sink") - trial courts need to discourage such conduct in strong ways, especially when it generates unnecessary fees for the other party or damages children. Some people only respond to monetary slaps. I can merely speculate about these proceedings without reviewing the trial briefs and reporter's transcripts, and emphasize that reading 'between the lines' cannot give the whole picture.
Still this is a published decision of the 2nd Appellate District. Following on the heals of Marriage of Fong released for publication on March 3, 2011, these decisions, along with
Marriage of Tharp, should be read together to glean the larger message. Reviewing courts are holding everyone accountable - litigants, attorneys, and bench officers. Due process and fundamental fairness require every side to cross their own t's and dot their own i's. This is welcome instruction to the entire spectrum of family court members and participants.
Be Careful What You Ask For,
and Consider Asking for Something Different
However inappropriate Ms. Duris' conduct may have been (if at all), the appellate justices ruled that due process required that she be informed in advance that the court was considering sanctions in order to have an opportunity to muster and present evidence in opposition. Husband's request for relief should have been properly placed before the Court and not have been based upon offhand arguments buried somewhere in his reply pleadings or first presented in closing argument. This is a good thing. Last year's Elkins legislation spotlights the public policy goal of ensuring transparency for self-represented and represented family law contestants alike.
Now, eighteen months later the odyssey is not yet ended - the Sterne decision is sent back to the trial court (not likely to be Judge Sterne, who can be disqualified as the judge on the next go-round) "with instructions to conduct a new hearing with proper notice." In other words, to relitigate whether sanctions should be assessed against the Wife.
In the meantime, she is awarded her costs on appeal. No appellate case costs only $10,000, the amount in controversy that led to this appeal. Hence, Husband - who won a short-lived victory at the trial court level - will now likely end up footing not only the bill for his trial attorney, but the Wife's attorney fees on appeal as well (be careful what your attorney asks for!) The saga can be now rebooted. Might it end differently this go-around? I'd wager (and I hope) the parties have had enough and that will agree that Wife will forego her appellate costs while Husband will waive a second sanction's motion. But divorce trance is stubborn stuff.
There are only losers in Marriage of Duris. The children of these two warring parents seem utterly forgotten. The take away is that using California court judges to beat up the person you now find despicable (who then smacks back) may blow up in the face of each contestant; given that people often view justice from the lens of their own desires it is a small wonder that government regulated divorce hasn't found a way to respond to such expectations, and possibly never will until the entire system is jettisoned and recreated.
In the meantime try a different tact, if you wish it and if you can. Work together to resolve your disputes collaboratively or through mediation. Even if the other side seems incorrigible, you determine how you respond. Remember, litigation induces trance - seek equanimity and send your kids to college instead!
Here is a link to Marriage of Duris & Urbany.
Thurman W. Arnold, III, CFLS
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| March 08, 2011 |
| More on Marriage of FONG: Obtaining SANCTIONS for UNCOOPERATIVE CONDUCT IN DIVORCE LITIGATION |
| Posted By Thurman Arnold |
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The March 3, 2011 Second Appellate Court decision of Marriage of Fong is so far the most important fiduciary duty case of 2011.
See my other blog on this site as it pertains to Final Declarations of Disclosure, and here is a link to an article I've written concerning its impact on Family Code section 271 sanctions.
Here is the appellate court's decision in Marriage of Fong. |
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| March 05, 2011 |
| SANCTIONS For Failure to Complete the FINAL DECLARATION OF DISCLOSURE |
| Posted By Thurman Arnold |
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The Preliminary Declaration of Disclosure
I've recently blogged the importance of complying with Family Code section 2103 and
section 2104, which obligate both parties to a pending dissolution, legal separation, or annulment proceeding to exchange a preliminary declaration of disclosure using Judicial Council Forms FL-140, FL-141 and FL-142 (please see our Form Library for the PDF's]. Its purpose is to ensure a "full and accurate disclosure of all assets and liabilities in which one or both parties may have an interest" and it is a prerequisite to successfully performing one's fiduciary obligations in the course of such proceedings. The exchange is supposed to occur "early on" in the proceedings, whatever that means.
No case can be settled and a marital termination agreement or stipulated judgment cannot be accepted by the court clerk for filing or transmittal to a judge for signature unless both parties have exchanged their PDD's. There is a single exception where the other party does not appear in the action (i.e., file a Response and pay the fees) and so the case is resolved by way of a "default judgment." Moreover, where both litigants have formally appeared and either wants to move the case to a trial status so that it can finally be resolved (where for instance agreement is not occurring), a settlement conference or trial date will not be set by the court unless both parties have each complied with the preliminary declaration exchange and have first filed proof of that with the court.
However, beyond simply concluding your case, there are other extremely important consequences for failing to do your half of the heavy lifting in terms of identifying and attempting to value all community and separate property assets by way of PDD. In my practice I find that many client's resent the work that completing these documents entails, and yet there is no way around it. Inadequate or inaccurate disclosure declarations can create grounds for the other party to attempt months or even years later to set aside a judgment or settlement agreement. They can form the basis for breach of fiduciary duty claims. They must be dealt with in good faith. They are critical documents that must not be treated casually.
The Final Declaration of Disclosure
However, there is an arguably greater obligation that is addressed by what is called the Final Declaration of Disclosure. This is a second and final disclosure that is required in all dissolution or similar proceedings, assuming it is not waived by both parties by agreement (not a good idea for reasons I will separately blog). Where the case winds its way to trial on any aspect of it, the Final Declaration cannot be waived and it must be served prior to trial. Family Code section 2105 governs what it must contain and when it can be avoided. It is even more burdensome to fill out and comply with because supporting documents must be attached and it has to bring current all of the information regarding community and separate property not just as of the date of separation or at the time the PDD was filed, but also up to the date that it is prepared.
Based upon an Second District appellate decision issued March 3, 2011 entitled Marriage of Fong, other consequences for disclosure noncompliance are now apparent. The Fongs are one of those unfortunate couples where one or both parties seem conflicted enough that they will litigate on for years that exceed the entire length of their marriage.
Family Code section 2107 authorizes courts to award monetary sanctions for failing to comply with the disclosure obligations. It is often used in conjunction with a request for attorney fee sanctions under
Family Code section 271.
In the Fong case the trial court hit the husband with $200,000 in non attorney fee sanctions under section 2107(c) for "breach of fiduciary duties" relating to nondisclosures in the property declarations, among other things, and heaped on an additional $100,000 in fees and costs per section 271 because it concluded that his side engaged in discovery gamesmanship. Wife had contended that Husband had failed to comply with his statutory disclosure obligations regarding his assets, that he failed to respond to formal discovery, and that at trial he surprised her with documents he'd failed to earlier provide despite requests for them. Husband's alleged behavior is not unusual in high conflict divorce litigation, and so it is important that an aggrieved party, possibly like the Wife in this case, have a meaningful remedy.
Unfortunately, Wife had waited three years from the date the action was filed to serve her Preliminary Declaration of Disclosure, and at the time of the trial that led to these sanctions against the Husband (seven years after the case began) she still had not prepared and served her Final Declaration of Disclosure. Lawyers for "out-spouses" sometimes delay completing the FDD because they fear that they lack sufficient information to do them properly and so are reluctant to have those documents completed and so held against their clients as "judicial admissions" (statements under oath in the pleading files) until later in the proceedings - after they've first gotten the disclosures from the "in-spouse" who probably controls all the information.
In the first reported California appellate decision squarely construing compliance with FC section 2105 together with 2107 sanction's requests, the Second District reversed the trial court's award under section 2107. I can only guess that Wife's efforts cost she and her attorneys between $500,000 and $1,000,000 in attorney fees.
The appellate court did uphold the sanctions award per Family Code section 271 for the $100,000. That part of the ruling is also important, but this blog will be way too long if I cover it here so I will write about it separately.
The Court determined that Wife's failure to have first served her Final Declaration of Disclosure before seeking sanctions by way of motion against the Husband, on the theory that he was himself out of compliance, deprived her of the right to complain. It interpreted section 2107(a) as permitting only a "complying party" to seek the sanction remedies. By the time of a trial on a motion for a sanctions for alleged disclosure misconduct, a party is not in compliance IF she has only served their PDD and therefore not entitled to maintain a sanctions' request.
This case reminds lawyers and parties that the California disclosure statutes mean what they say. It provides useful guidance to attorneys representing the disadvantaged spouse in terms of what they must do in getting their ducks in a row before going off half-cocked. IMHO. Both sides in a California family law case have equal burdens to meet their fiduciary duties. Please take them seriously.
Here is a link to Marriage of Fong.
Thurman W. Arnold, III, CFLS
www.PeacemakingDivorce.com
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