California Family Law Attorney
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September 24, 2010
Posted By Thurman Arnold

Q. I have been occupying the home after my wife left over a year ago. I pay all the interest-only mortgage, property taxes, and insurance with no help from her. Does she owe me half of any of this?

A. You may be owed you something, but not necessarily one-half of what you have paid out. This situation involves at least three potential legal issues:

  • Epstein Credits
  • Watts Credits
  • Jeffries Credits

This particular Blog addresses your question in terms of Epstein's - the next blog deals specifically with Watts and Jeffries credits.

Epstein Credits

I have described Epstein Reimbursements in another Blog. "Epstein credits" is a doctrine derived from the case of Marriage of Epstein (1979) 24 Cal.3d 76, 84-85. It holds that as a general rule, courts must reimburse one spouse by crediting them on the community property 'balance sheet' for their contribution of post-separation earnings, or other separate funds (loans from parents or inheritances), made after separation to pay pre-existing community obligations. This commonly occurs with credit cards where there was a balance remaining when the parties separated, that one or the other spouse pays after. Epstein's don't apply to new debt on an old credit card account that was run up after separation. Depending upon the parties' financial circumstances, it therefore can make the "date of separation" a more important disputed issue than elsewise. This rule is not limited to credit cards but applies to almost any class of debt.

Courts may be unwilling to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement. In almost any conversation you might have with an opposing lawyer, they will back down on demanding the offset UNLESS you derived some beneficial use from it.

If there was an agreement that a party would not be reimbursed for these payments, or if the paying spouse intended the payment as a gift, or if the payment is made on account of a debt for an asset that the paying spouse was or is exclusively enjoying, and the amount was not substantially in excess of the value of that use, the Court may decline to order reimbursement.

This idea of the value of use of some item of property that was acquired through a debt that continues to exist after the date of separation underlies the concepts of Watts credits and Jeffries credits, and is obviously implicated in your question since you occupy the house for which you seek credits and reimbursements. Few family court judges will want to hear testimony about what the portions were that were paid towards interest after the DOS, as opposed to principal, on the debt. You are pretty much stuck with the principal amount due at separation as the credit you can claim, even if principal plus interest for monthly payments over that time period amounts to more - at least unless these relative numbers are large. This creates unfair results in cases that take years to resolve, but arguably the parties should have moved the case to conclusion sooner.

So, Epstein's are almost always granted as to post-separation payments for expenses, for goods and services, that didn't leave a tangible asset behind that is now being exclusively enjoyed by only one of the two spouses.

As an example of how this works if there is $15,000 owing Visa for that trip to Hawaii, some groceries, and a child's school tuition at the time of separation and one party pays it off or makes monthly installments on the debt with their earnings or other separate property after that date, a benefit has been conferred upon the community because a joint obligation has been extinguished or reduced. That benefit must be equalized by a payment to the payor of one-half the amount paid or a credit or set-off against other property that gets divided. One-half is paid because the paying spouse owed their half anyway. Any portion paid before the DOS (date of separation) ordinarily will not be reimbursed.

This is generally true even if only one of the parties actually took the trip to Hawaii, unless that trip was in breach of a marital or fiduciary duty (if the husband snuck off with his paramour to Hawaii, an argument exists that he should not be reimbursed for paying that portion of the debt over the wife's objection). Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if debt was not "incurred for the benefit of the community." Family Code section 2602 empowers courts to "award ... the amount the court determines to have been deliberately misappropriated by the party to the exclusion of the interest to any other party in the community estate." FC section 2625 is a powerful and much underused statute (many attorneys seem to be unaware of it or try to bluff as though it didn't exist).

Compare this with a situation where a credit card was used to buy a dishwasher that the paying spouse possesses or receives in the divorce - since they are retaining a tangible asset it may not be fair to allow them to both keep the asset and get reimbursed for one-half its costs. Applying Epstein's can become fairly fact specific.

In situations involving use of a family residence or other tangible assets that continue to exist after separation and which are used and enjoyed by only one of the spouses, an Epstein analysis provides only a part of the answer to the reimbursement question. In effect first the amount of the Epstein reimbursements are determined, and then the question requires a Watts analysis to determine under equitable principles whether it is fair to actually order reimbursement and, if so, in what amount.

Hence, to resolve your issue you would begin by adding up the costs of everything related to the house that is spent to preserve or protect the asset. Property taxes are included, but utilities are not. The utilities you used after the physical separation are your obligation anyway, because they were not incurred during 'the marriage.' (Please see the Blog Category "Physical Separation.") Mortgage payments and insurance are considered, and probably the pool man or gardener as well.

Please continue on to the next blog for detailed information concerning Watts credits.

Epstein Credits and Fiduciary Duty Issues

Sometimes a spouse or domestic partner will raid the credit cards and take cash advances or buy a new wardrobe, or fix a car, during the weeks prior to separating. If it later appears that their intention was to stick the other spouse for one-half of this expense, the presumption that this is a community debt (because incurred during marriage) may be overcome and so it may be assigned to the one spouse alone. It is not fair to hold both parties responsible for debts incurred in anticipation of separation.

However, when one partner incurs a debt frivolously as opposed to recklessly before separation, in a situation not amounting to a breach of fiduciary duty - even over the prior objection of the other spouse - it is likely to be equally divided and Epstein reimbursements ordered. Both spouses have, under California law, equal rights of management and control of the community property and community credit.

Courts in my experience are reluctant to find breaches of fiduciary duty in Esptein situations unless the behavior was fairly egregious. Charging 10 pairs of shoes at Macy's a month before separation may not be viewed as a big deal. If the debt was incurred in pursuit of an illegal activity like supporting a drug habit or sex addiction, many judges are less reluctant to declare a breach.

To illustrate another twist, if the credit card was used to pay the spouse's tuition expense instead of a child's schooling, as in my example above, it may also be unfair to charge the non-schooled parent with one-half the tuition portion of the credit card balance. A court is likely to look at whether this schooling benefited the community in some way before splitting that debt between the parties - i.e., because of the schooling did the student spouse earn more money which was then contributed to the community standard of living and so confer a benefit on both? Pure student loans are usually awarded to the party who incurred the debt as their separate property obligation.

Continue reading "My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This?" »

February 08, 2010
Posted By Thurman Arnold

California Family Law Disclosure Forms

Whether you are representing yourself in your divorce, or a pro per family law litigant, you need to know about and understand the Declarations of Disclosure that are required in California before a Judgment of Dissolution may be entered. Getting it wrong can have serious consequences. In my experience, paralegal firms or non-lawyer mediators do not know how to properly assist clients in meeting these obligations, and even seasoned divorce attorneys get these disclosure forms wrong. You need to understand that these disclosure forms are not simply another document that needs to be prepared in a sloppy fashion in order to complete your divorce, but rather they are the proof that you have complied with important spousal fiduciary duties after your physical separation.

You can’t get even a default divorce and marital termination agreement past the family court clerk without a least a Preliminary Declaration of Disclosure (PDD) and when the other side has appeared in the action, you cannot obtain a Divorce Judgment without both parties have exchanged for waived the Final Declaration of Disclosure (FDD). Even if the documents have been exchanged, if they are incomplete or inaccurate the other party may be able to set all or parts of your divorce judgment or divorce settlement for up to several years after a judgment is filed. These rules and requirements apply equally to domestic partnerships, annulments, and legal separations.

This article covers the Preliminary Declaration of Disclosure.

Preliminary Declarations of Disclosure

California Family Code sections 2100 to 2113 cover declarations of disclosure for California divorces. FC section 2100(a) declares it is the policy of the State of California to “(1) marshal, preserve, and protect community, and quasi-community assets and liabilities that exist at the date of separation so as to avoid dissipation of the community estate before distribution, (2) to ensure fair and sufficient child and spousal support awards, and (3) to achieve a division of community and quasi-community assets and liabilities on the dissolution or nullity of marriage or legal separation of the parties as provided by California law.”

FC section 2100(c) states that in order to promote this policy “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, regardless of the characterization as community or separate, together with a disclosure of all income and expenses of the parties.”

This bears emphasis:

  • There must be a full disclosure
  • It must be accurate
  • It includes all assets
  • It includes all liabilities
  • It applies to assets or liabilities one has or may have
  • The disclosure must be made early on in the proceedings, although there is no specific time rule
  • It doesn’t matter whether you think the asset or debt is a separate property item, you still must disclose
  • You must also fully and accurately disclose all income and expenses
  • Although the statute doesn’t say it, you may see why these are forms that you do not want to lose – since, as mentioned below, the disclosures themselves are not filed with the court.

FC section 2100(c) does not, however, stop there. The statute continues “Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent that 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 underlying facts.”

Family Code section 2102 sets forth the rules governing interspousal fiduciary duties, including the operation and management of community or part community businesses. I will discuss this section elsewhere and link back to it when that article is finished.

Family Code section 2104 describes the Preliminary declaration of disclosure. It must be completed as set forth in this Judicial Council Form. It does not get filed with the Court, but a declaration stating it has been exchanged must be filed with the Court.

If, as commonly occurs where parties have negotiated and signed an agreement and the Dissolution Judgment proceeds by default with a Marital Settlement Agreement signed by both being submitted, no final disclosure needs to be exchanged between the parties but the Petitioner still must himself or herself complete and serve the Preliminary declaration; the defaulting Respondent is relieved of that obligation.

Family Code sections 2120 to 2129 describe when a judgment for dissolution, or a property settlement or a support settlement, may be set aside for defects in the Preliminary declaration of disclosure and for other reasons.

You can find the California Judicial Council forms here.

For more information on Declarations of Disclosure, visit this link!

Author: T.W. Arnold, C.F.L.S.

Continue reading "PRELIMINARY DECLARATION OF DISCLOSURE in California (PDD's)" »

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January 17, 2010
  What are interspousal FIDUCIARY DUTIES?
Posted By Thurman Arnold

Q. I keep hearing the phrase "interspousal fiduciary duties". What does it mean?

A. Few areas of California divorce and family law is changing as rapidly, or is having as great an impact upon property division and support obligations, as is interspousal fiduciary duties.

Until the mid-1970s lesser "good faith" standards were imposed upon married persons which had consequences to usually only in extreme situations of self-dealing by one spouse or domestic partner. These standards have since morphed into much higher level "confidential duty" and "fiduciary duty" standards.

On January 1, 1994 Family Code section 721 became operative. That was revolutionary, but widely not understand, for the next 10 years. Section 721 has since been revised, extended, and expanded by statutory amendments and judicial decisions, and this continues.

The penalties for violating a fiduciary duty can be severe. Many attorneys, and some judges, are behind the curve in understanding the nuances of the obligations imposed by FC section 721 and related statutes. This ignorance places clients at financial risk in the course of dissolution or legal separation litigation. Indeed, it opens the door to the litigation continuing or re-emerging long after Judgment if breaches of fiduciary duty are discovered or alleged downstream. Having a lawyer who understands this developing area of the law will make or break some litigants, today and for years to come.

The accountability that the law of fiduciary duties add to the dissolution mix is a useful tool for combating marriage fraud by the other spouse. If society favors the party with more money or power over the weaker party, it will become increasingly unglued.

Fiduciary Duties Explained

In financial and property transactions with third parties and each other, spouses owe one another important statutory duties that create huge responsibilities and pitfalls. As 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." Family Code section 721(b).

The essence of the "fiduciary relationship" is that the parties are treated under the law as though they do not deal with each other on equal terms because one person (typically the managing spouse) in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert influence over the dependent party. A presumption of undue influence arises whenever either party benefits from the transaction over the other, however innocuous the circumstances may seem. Breach of fiduciary duty is to some extent a strict liability offense, meaning if it occurs consequences may be set in motion that run the course to an expensive end.

In 2002 Family Code section 721 was amended to expand this confidential fiduciary relationship and impose the same rights and duties as applies to nonmarital business partners under the California Corporations Code, and includes but is not limited to:

(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.

(3) Accounting to the spouse, and holding as trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property (i.e., all property acquired by a married person during the marriage).

While Section 721 does not mention Registered Domestic Partners, it applies to them as well.

One major consequence is that transactions which benefit only one spouse may be set aside by the other, either before or during a divorce proceedings.

As a practical matter for divorcing couples, this means:

a) If one party has benefited over the other in a transaction involving money or property and thereby gained an advantage during the course of the marriage, the law presumes the advantage was gained through undue influence exerted on the part of the benefited party, and the transaction is presumed invalid and can be set-aside;

b) The burden of convincing a Court that a set-aside should not occur then shifts to the advantaged spouse;

c) All this can occur without regard to good or bad intent on the part of the advantaged spouse (i.e., actually intending to defraud as opposed to merely being sloppy). Either way the law declares the transaction to be the result of "constructive fraud". Once the Court finds constructive fraud the transactions can be set aside, the benefited party can be ordered to pay restitution to the other and to disgorge any profits they alone received, title may be reformed to include both parties' names, or the property may be held in trust for both on a present and go-forward basis rather than in the name of the one alone. If there is an actual fraudulent intent, the remedies to the injured spouse are more severe.

The fact that parties have separated or that a dissolution or legal separation is pending does not end the parties' fiduciary responsibilities. Family Code section 1100(e) continues those same duties "until such time as the assets and liabilities have been divided by the parties or by a court."

Remedies for breach of the fiduciary duty as described in Family Code section 721, and section 1100, include an amount equal to one-half of the value of any asset undisclosed or transferred in breach of fiduciary duty, plus attorney fees. This includes inadvertent or unintentional violations. Family Code section 1101(g). Where a court comes to believe a spouse acted intentionally to defraud the other spouse, the Court "shall" award 100% of the value of what should have been disclosed, or what should not have been transferred, to the innocent spouse! FC section 1101(h).

If you have a business, or investments in real estate or simply a family residence, and certain transactions have occurred, you may have a problem. If you are a dependent spouse, regardless whether the other party intended to cheat you, you may have important entitlements and remedies.

This is one of the most complicated, emerging areas of California family law. Do not go it alone! In every dissolution and legal separation case, regardless whether either party has an attorney, each party must exchange a Preliminary Declaration of Disclosure, and unless expressly waived, a Final Declaration of Disclosure. If these documents contain errors, misinformation, or are incomplete the consequences can be financially devastating because an entire settlement or judgment may later be set aside. These documents sit as leverage tools and land mines for years to come.

Author: T.W. Arnold, III, CFLS

Continue reading "What are interspousal FIDUCIARY DUTIES?" »

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3 entries found. Viewing page 1 of 1.