Marriage of Georgiou and Leslie:
If Your Attorney(s) Fails to Ask the Right Questions, and You Have Some
Information About the Nature of a Potential Community Property Asset,
You Had Better Act Fast!
by T. W. Arnold, III, CFLS
The Court of Appeal for the Fourth Appellate District, Division One (San Diego), by P.J. McConnell issued an important published decision today that limits the rights of late-coming divorce litigants to try to re-litigate their settlement decisions where they had, theoretically at least, the opportunity to discover the truth of the value of an asset that they traded away for something that seemed more important to them at the time.
While the readers of my Enlightened Divorce™ Blog know that I am something of a freak about insisting that spouses, and their attorneys (especially opposing attorneys), adequately comply with their fiduciary obligations to make full and complete disclosures about the nature and extent of the value of the parties' community and alleged separate property assets, too often I find that the fault for adequately pursuing a fiduciary duty breach claim rests with the 'victim's' prior counsel, or the victim him - or her - self, possibly for reasons relating to power imbalances during the course of the litigation that 'force' a party to settle.
At the same time, it deals a time-bar blow to the notion that spousal litigants have sua sponte duties to disclose their inside knowledge about the potential value of an asset, and to how the "out-spouse" or their attorneys might reasonably be expected to know how to value that asset. Unfortunately for the wife in this case, she just waited too long to reconsider her settlement decisions even as they were made on incorrect assumptions, which is really sad to me because it appears her husband was able to out-spend and out-litigate her.
So my readers are clear - I hate the consequences of power imbalances whenever either gender suffers the consequences. Strarving out the opposition is sickening, even if it is standard operating procedure in most divorces for many attorneys.
A Story of Byron and Marie's Divorce
Byron Georgiou, an attorney, and his wife, Marie Leslie, were married for eighteen years before finally separating in 2003. In 2000, husband referred to another contingency based law firm certain clients who ultimately brought a class action lawsuit on behalf of the Regents of the University of California in the federal class action litigation against Enron following that debacle.
Wife knew that her husband had referred this case on and that he was entitled to some referral fee for having done so, but she never received - and oh my god, her attorneys never asked - for a copy of the fee-split agreement, even though they deposed the attorney designated as the person most knowledgeable on behalf of the Enron plaintiffs and could have asked for a copy of that agreement, and what the fee agreement was between the Regents and their lawyers. Probably, the attorney who was deposed was happy to not volunteer answers to questions that were not directly asked, given that his employer law firm itself stood to gain huge contingency fees if the Enron litigation was favorably resolved and had to be grateful for the referral. Nothing in the appellate record, however, suggests any kind of conspiracy between the plaintiff's law firm and the referring husband - Wife's then attorney just stupidly failed to ask the most obvious questions.
So instead of insisting upon, or at least receiving, a competent assessment of the value of the referral fee agreement that husband had on this ultimately gigantic class action case (wife knew when she settled that $7.2 billion had already been collected) she leveraged and traded her potential claims on that basis for a "safe" settlement that included her receipt of the family home, which was the husband's separate property that she otherwise would not have received, eight town homes that produced income that she probably needed, and unknown retirement benefits that she hoped would secure her future as she aged.
She also agreed to take ten percent of the husband's referral fee for the Enron case, which she assume to have a gross value of between $9 and $33 million, based upon an assumption that the ultimate settlement would be in the neighborhood of $330 million even though she knew that the claim was for a much larger sum. Possibly she was emotionally worn out, or maybe the other side could and did outspend her in terms of attorney fees - but for whatever reason, she opted for certainty while having reasons to suspect she did not have the full picture.
Marie Decides to Take the Money and Run
Marie made a decision in February of 2007 to settle the per an MSA (marital settlement agreement) that came to be filed in December. In January, 2008, the plaintiff's law firm submitted a fee application to the federal court requesting 9.52 % of the $7.2 billion dollar recovery and it was awarded $688,000,000 in attorney's fees. Husband was entitled to about 10% of that amount, and Wife had agreed to accept 10% of his 10% - despite the fact that she probably was entitled to half. The appellate decision reflects that it is not even known how much the husband ultimately received, but it appears the number was about, or in excess, of $55,682,000. Wife received $5,568,200 for her ten percent, not the $27,500,000 she might have received as to this asset alone had it been adjudicated as community property and had the case not been settled for another year. It is important to keep in mind that she did receive other assets that she might not have otherwise have gotten - i.e., a family home that belonged to the husband as his separate property - but the decision doesn't provide us those numbers. Suffice it to say, her settlement must have been much less favorable that what she might have otherwise received, had she not felt pressed to settle.
In September, 2008, Wife learned that her ex-husband had in fact negotiated and received a nine percent referral fee on the total attorney fees recovered from the federal judge's fee ruling. She was paid $4 million dollars, which caused her to recognize - or at least it should have caused her to recognize - that the high end valuation she'd expected for his referral fee of $33,000,000 was low. In November, 2009 she learned she was entitled to an additional $1.5 million and at this point she (or more likely her family law attorneys) panicked. She was almost two years post-judgment. The Husband honored his discounted agreement, to be sure, and made no mistakes (for which he could be held accountable). And Wife clearly assumed some risks.
She fired her attorneys (who she will now be suing), and hired a new attorney that same month, who filed a specious but possibly creative motion for a set aside of the judgment based upon Wife's alleged mental incapacity because her original attorneys pressed her to settle the case so that they could be paid. Additionally, she was apparently taking psychotropic meds and was further under duress as a result. She continued on that course for almost another year, when she fired that set of attorneys and dismissed that motion.
Marie Comes Back for Another Bite of the Apple
On December 13, 2010, she filed a new motion under a new theory under Family Code section 1101 alleging breach of fiduciary duties against her former husband, alleging that her husband had a fiduciary obligation to have affirmatively provided the fee-splitting agreements that her first attorney had failed to previously ask for, even though they clearly could and should have, and seeking either 50% of the full value of the referral fee or 100% per subsections (g) and (h) thereof.
And it went down hill from there, because the problem is that there are clear family law statutory procedures for setting aside judgments that contain important statute's of limitation and time bars, each of which she had blown one way or the other by the time she found her final attorneys.
Was the Wife greedy, or victimized? I have no facts upon which to say (although possibly the lawyers will weigh in by commenting upon this Blog), but I suspect this is a classic case of an overwrought litigant who is pressed by her lawyers - who do have a right to be paid for the risk they undertake in representing an "out-spouse" - and who may not have received sensitive consideration by the family court judge(s) assigned to the case in terms of getting her attorney fees paid in real time. The California budget crisis is screwing under-empowered litigants big-time. Still, for whatever reason, Wife's first attorneys failed to ask some obvious questions of the class action plaintiff's law firm, the answers to which may, or may not have, made a difference to Wife's settlement decisions at that time.
Husband's lawyers filed a motion for summary adjudication of Wife's Family Code section 1101 motion, a clever way of attempting to kick the action out without it ever being heard as a contested evidentiary hearing. The trial court granted it, and came up with its own theory of why her claims were time-barred.
Not only did Wife lose the appeal, but she now has to pay the husband's attorney fees and costs (certainly six figures). While the case could be appealed to the California Supreme Court, I doubt it - while for me the central issue is whether the husband should have produced the fee-split agreement on his own, whether or not Wife's attorneys asked for it (and him getting a pass on this is a major failure of justice in this case), it does not appear that a claim was asserted for extrinsic fraud that can now be sufficient to beat the statutory time lines for filing set aside motions.
Fiduciary Duty Set Aside Rules - And How Did This Happen?
Family code section 2122 sets forth six grounds to set aside a judgment, or a portion thereof. These include actual fraud, perjury, duress, mental incapacity, mistake and the failure to make full disclosures of the value of assets under Family Code section 2100. These each contain different time limitations running from six months to three years to file a set aside motion, depending upon the factual grounds relied upon. This is why Wife's second attorneys, at the two year mark, asserted lack of capacity - not a sexy argument, which her next set of attorneys abandoned.
Lawyers rely extensively on treatises to obtain summaries of reported summary appellate court rulings interpreting family code provisions in divorce and related matters. One of the chief sources we rely upon is the Rutter Group's Hogoboom & King, Cal. Practice Guide: Family Law, cited in near almost every reported California family law appellate decision. Based upon the now infamous undisclosed lottery winnings case, In Re Marriage of Rossi (2001) 90 Cal.App.4th 34 (arising from fairly recently deceased Judge Richard Denner's trial court decision), the Rutter Group analysis and comments - which we at the Enlightened Divorce™ Blog ourselves have cited and commented upon - has been that an independent action can be maintained within three years of discovery of a non-disclosed asset per Family Code section 1101(f), which was the only choice left open to the attorneys for the Wife in this case by the time the case arrived into the truly competent hands of appellate super lawyer Stephen Temko (who represented the wife, inter alia, on appeal and who is an occasional reader of this Blog).
Unfortunately, in Rossi, when the case was resolved there had been no disclosure whatever as to that husband's undisclosed lottery winnings. In the Georgiou case, Wife's trial attorneys knew full well that a claim had existed on behalf of their client as to the attorney Husband's fee-split arrangement, even if they didn't have enough information (because they didn't ask) to evaluate it.
Therefore, San Diego appellate P.J. McConnell decided that the Rossi opinion, and Hogoboom & King's reference to it in their treatise, does not give rise to or support a theory sufficient for an independent set aside motion within three years of discovery of a breach of fiduciary duty where the aggrieved party knew or should have know that they had a claim that could have been addressed within the time frames set forth in section 2122. Hence, this is an example of an appellate court giving extreme deference to a much-relied upon treatise which contained a comment that could arguably be interpreted to be over broad in terms of the perceptions of the attorneys who read the treatise and relied upon it. and advised their client To be utterly fair, Hogoboom & King's commentary did imply the very limitation that ultimately defeated the appeal in this case.
But, as something of a populist legal commentator in this humble Blog, I just have to reiterate that California family law has reached a level of complexity and exceptions within exceptions that is totally insane and unsustainable in its incomprehensibility, even for expert family lawyers - much less newly minted family law commissioners and judges who until a year ago were criminal prosecutors or public defenders, who often are deciding these cases. Our system is broken, even as brilliant and diligent jurists and appellate judges try to harmonize it.
But I rant.
if you think you have a breach of fiduciary duty claim, get on it. If you need a second opinion, get it! Otherwise, the policy that favors finality of judgments and the end of litigation may bite you in the butt! Unempowered spouses lose, unless they can find remarkable attorneys to help them, and hang on!