Recent Posts in Tracing Issues Category

Q.    I am not on title to a home my husband owned before we married but we paid the mortgage for 7 years. If we divorce, do I have any interest in it?

• what was the original purchase price
• what was the original mortgage and downpayment
• what was the property worth at the date of marriage (DOM)
• what was owed to the lender at that time
• what was the property worth at the date of separation
• what was owed at that time
• what is the property worth on the date of the calculation (i.e., the trial date) and
• what is the principal pay-off at that time?

This is an example of why family law and divorce cases can become complicated and expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. You need an experienced family law attorney for these types of matters. 

In your case, with a lengthy marriage, you have significant Moore-Marsden entitlements. However, these may be adversely affected by the crash in the real estate market since so much equity has evaporated. In any event, we need the numbers outlined above in order to calculate the reimbursement due to the community.

"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.

Shifting the Burden of Proof

PLEASE NOTE - The California Supreme Court granted review of this decision on 8/24/11 and as a result the opinion reviewed below has been vacated.

8/26/11
TWA

The California Second Appellate District issued its ruling in Marriage of Valli on May 18, 2011, reversing a Los Angeles trial court that had found that a $3.75 million insurance policy purchased during marriage was the parties' community property. Instead Justice Stanley Mosk declared that the 'super-presumption' contained in Evidence Code section 662 trumps the more general presumption per Family Code section 760 that property acquired during marriage is jointly owned. Interestingly, this was true even in the absence of direct evidence of the title to the policy itself; it was sufficient that the insurance agent who sold the policy testified the policy was issued in the name of the Wife and that he'd been told it was being purchased for the protection of the family.

At issue was who owned a 'blended universal life insurance contract' on Husband's life (this is THE singer Frankie Valli) bought some eighteen months before separation that had a cash surrender value of $365,032 by time of trial. Husband argued that since the policy was acquired during marriage and paid for with community funds, it belonged to the community and each party was therefore entitled to one-half. Wife contended that Husband had told her from the inception of the policy that she was to be the owner of the policy and its sole beneficiary, and this was not disputed. She introduced testimonial evidence that the policy listed her as its owner. The trial court sided with the Husband. The decision turns on legal and not factual issues, and I think it deserves mentioning that this appears to be a case that was ethically litigated - Mr. Valli was wholesomely honest and resisted the temptation to assert a version of what happened that included allegations of "pillowtalk" or other reassurances, for instance, from Wife that she had admitted the policy was joint because these did not occur (nor would they have been helpful) - something that is otherwise common in the "liar's contests" that many dissolutions devolve into.

Family Code section 2550 assigns trial courts a mandatory duty to value and divide equally the parties' community property estate. But what is community property? Generally, factors determinative of whether property is separate or community are the time of acquisition; operation of various presumptions, particularly those concerning the form of title; and whether the spouses have transmuted or converted the property from separate to community or vice versa ...." (In re Marriage of Haines (1995) 33 Cal.App.4th 277, 291).

Family Code section 760 states "[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." This is the "time of acquisition" rule, and it creates a rebuttable presumption in favor of the creation of CP. That presumption can be overcome by a "preponderance of the evidence" - that is by evidence that shows by a 51% likelihood that it is separate property. FC section 760 is the starting point for any analysis of assets and debts acquired during marriage for purposes of defining the marital balance sheet.

Evidence Code section 662 is an evidentiary presumption, found outside the California Family Code. It states "[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof." The "clear and convincing" standard of proof is considered to be a "super-presumption" exactly because of what it takes to overcome it. The public policy basis for this evidentiary presumption is to ensure the stability of titles to property and within the insurance context it is important that insurance companies have the ability to rely on their information of who holds title to a policy in paying out death benefits, and in not exposing themselves to multiple claims (and paying the wrong person or heir) upon death.

Hence, under some circumstances, when the general CP presumption and the form of title presumptions collide the form of title presumption trumps the more general presumption.

Here the evidence at trial was largely undisputed. A year before the parties separated crooner Valli was experiencing medical problems and told Wife that he wanted to buy a policy on his own life to make sure he took care of his family in the event he might die. He wanted to ensure the kids could go to college and that "there would be enough money for everybody." At that time the parties had no plans to split up.

Accordingly, he bought the policy from his insurance agent. Husband's business manager told Wife that they intended to make her the owner, and Husband himself testified that he "put everything in [Wife's] name, figuring she would take care and give to the kids what they might having coming." His insurance agent testified at trial the policy was issued in Wife's name. Of interest, however, the policy itself was never introduced into evidence.

Hence, on appeal Wife urged that "the act of taking title to property in the name of one spouse during marriage with the consent of the other spouse effectively removes that property from the general community property presumption. In that situation, the property is presumably the separate property of the spouse in whose name title is taken." Since Husband had failed to introduce "clear and convincing" proof that overcame the title presumption, the equity in the policy belonged to her. Nothing required that proof of the form of title be through documentary evidence where there was sufficient indirect testimony that the policy was titled in Wife's name.

The Second Appellate District Court agreed. "Frankie did not present evidence of an agreement or understanding with Randy [the Wife] that when the policy was placed solely in Randys name as owner, they intended title to the policy to be other than Randy's separate property. (In re Marriage of Brooks, supra, 169 Cal.App.4th at p. 189.) Likewise, Frankie did not present evidence that he was unaware that title to the policy was taken solely in Randys name. That Frankie knew the policy was taken solely in Randy's name is supported by substantial evidence. Frankie testified that he put everything in Randy's name, and Randy testified that Frankie and Siegel told her that they were going to make [her] the owner' of the policy."

Husband also unsuccessfully argued that Family Code section 721 creates an additional presumption of undue influence where one party by taking title in their name solely gains an advantage over the other, and that given that presumption the EC section 662 super-presumption could not come into play. However, 721 applies in interspousal transactions and this was not a transaction between the two married persons but between one of them and the insurance agent. "Randy could not have owed a fiduciary duty to Frankie in a transaction in which she did not participate." Moreover, even if the presumption of undue influence did arise there was sufficient proof rebutting Husband's clear intention to make Wife the owner; Wife had no role in the transaction whatever.

Moreover, the justices noted that there was no evidence that the cash surrender value of the life insurance policy was intended to be a "savings device." Instead, Husband's intent at the policy inception was clear that it was for the benefit of the Wife.

Finally, they dismissed Husband's argument that there had not been a valid transmutation of the policy from community to Wife's separate property. "A 'transmutation' is an interspousal transaction or agreement that works to change the character of property the parties already own. By contrast, the initial acquisition of property from a third person does not constitute a transmutation and thus is not subject to the [Family Code section 852, subdivision (a)] transmutation requirements." Keep in mind that Husband had purchased the policy only 18 months before the parties separated. They had had a 20 year marriage. In order to amass $365,032 in policy equity over such a short period, the community had to have made quite substantial premium payments to fund it. Mr. Valli was 69 when he acquired the coverage, and the cost of the policy had to be exorbitant.

Normally one might reasonably think that the claim that the cash surrender value was now Wife's separate property would require proof of a transmutation from the community to separate property - this is what the trial court assumed to be the case when it found in favor of the Husband. However, Wife's counsel never claimed a transmutation, a wise strategic move.

While this outcome might, at least for Husband, seem unfair it illustrates that in the realm of community verses separate property, when form of title presumptions come into play, as a matter of public policy favoring the stability of financial transactions with third parties (and not just between the spouses alone), the manner in which title is taken controls unless rebutted by extremely compelling evidence. This is not intuitively or even rationally obvious. In California matrimonial law certain fictions may dictate the outcome. This decision is important for any lawyer or self-represented party where one asset acquired during marriage is a life insurance policy. Common sense, and even the expectations of people who are married until the day of separation comes, would seem to militate in favor of a different result.

In remanding the case to the trial court (i.e., sending it back with instructions to enter a new decision consistent with the appellate court's reasoning), the Valli opinion does "leave to the trial court any reallocation of assets or award of reimbursement in light of our holding." Presumably that reimbursement applies to premiums paid by Husband after the date of separation that increased the cash value of the life insurance policy, but does not form a basis for reimbursing what was paid before. Since the policy was acquired in 2003 but trial occurred five years later, this reimbursement is not insubstantial. Of course, Frankie is too old now to be able to acquire a new $3.75 million dollar policy and Wife will receive this money upon his passing if the policy remains in force.

Wife was represented by the divorce powerhouse Los Angeles law firm of Jaffe and Clemens and Husband's appellate team included the highly notable legal scholar Garrett C. Dailey.