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IRMO MARGULIS - Managing Spouse Has BURDEN OF PROOF To Explain MISSING ASSETS

An Explanation of CA Fiduciary Duties!

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. Part II outlines Judge Aronson's own excellent summary of the California Family Code statutes that are critical to understanding fiduciary duties in this state.

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 post-separation, 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 Margulis 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 post-separation 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 another 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 to compare the differences in the two decisions.

Thurman W. Arnold, III

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