Donald and Rochelle Sterling, the LA Clippers,
and California Family Law:
A Statutory Analysis of Their Looming Divorce
By: Michael C. Peterson, Esq.
Everyone who watches the networks (and especially the unending talking head legal pundit and media rehashes) now knows about the debacle in Los Angeles concerning billionaire Donald Sterling - owner of the Los Angeles Clippers basketball team - and of his presumably adulterous affair with Vanessa Stiviano. We've eavesdropped upon their erstwhile 'private' telephone conversations, with jaws agape, wherein this "Titan" of sports slams Ms. Stiviano's affiliation with Magic Johnson, and denigrates African-American professional basketball players for the Clippers and minorities in general. Such is the infiltrating power of our 'nowhere to hide' techno-society, with its by-products of stumbling apologias and embarrassing efforts at 'damage control' further amplified by Anderson Cooper in a futile attempt by Mr. Sterling to undo the injury to fame and fortune caused by this latest, ever-coarse manifestation of the American "selfie".
The media release (by TMZ on April 24, 2014) of the recorded conversations, made without Mr. Sterling's consent and in retaliation for a civil lawsuit filed by his wife Rochelle "Shelly" Sterling to recover some $1.8 million in community property cash and assets allegedly embezzled by Ms. Stiviano over the past several years (apparently there was another $2.5 million in gifts such as a condo and several luxury vehicles Mr. Sterling purchased for Ms. Stiviano, but the details are unclear), created a media firestorm just as the Clippers finished their best season ever (57 wins) and were entering the NBA playoff tournament.
Talk about maximum impact! Sponsors for the Clippers (including CarMax, State Farm and Kia Motors) pulled their names from the Staples Center and suspended advertisements, and the team itself protested at the beginning of the first playoff game by wearing their warm-up jerseys inside-out and black socks. The NAACP preemptively revoked Mr. Sterling's May, 2014 lifetime achievement award.
Then, on April 29, 2014 NBA Commissioner Adam Silver (just within his first 90 days of the office) announced that "[e]ffective immediately, I am banning Mr. Sterling for life from any association with the Clippers organization or the NBA." He continued "Mr. Sterling may not attend any NBA games or practices. He may not be present at any Clippers facility. He may not participate in any business or player personnel decisions involving the team. He will also be barred from attending NBA Board of Governors meetings or participating in any other league activity." Mr. Silver also fined Mr. Sterling the sum of $2.5 million dollars, the maximum amount allowable under the powers afforded to the office of the NBA Commissioner, with the fine to be donated to anti-discrimination organizations. Mr. Silver then promised to use all means to end Mr. Sterling's ownership of the Clippers.
The owners of the NBA apparently have the ability to 'force the sale' of a team with a three-quarter super-majority vote under the NBA constitution, through a form of mandatory, binding arbitration. I say apparently because the actual NBA constitution containing such covenants and servitudes is not public information. There appears to be a clause (according to Michael McCann's May 15, 2014 Sports Illustrated story entitled "How the NBA can keep both Sterlings away from the Clippers", which is based on his communications with Larry Coon, an expert in NBA governance and salary), known as Article 13, in the NBA constitution preventing unethical conduct and the taking of positions that damage the NBA, and an Article 14 provides the exact legal procedure to remedy a breach of Article 13, which is not so much a forced sale of the Clippers as much as it would be a disenfranchisement of the Clippers from the NBA, i.e. the Clippers' membership in the NBA would be rescinded/terminated, thus preventing them from playing games with other NBA teams. The Clippers being unable to play against other NBA teams would effectively leave the team a valueless asset, and the Sterlings with the choice of either selling the Clippers or watch a half-billion dollar asset evaporate into nothingness.
Shelly Sterling continued to attend Clippers playoff games, sitting courtside, after Mr. Silver's April 29 announcement. But she may not herself be faultless of activities that imply racial disparagement; there are reports and official complaints about her alleged use of racial slurs in connection with her management of the 5,000+ southern California residential rental apartments/houses that form a large part of the Sterling empire.
Yet, on May 8th Ms. Sterling told the Los Angeles Times that she was determined to keep the ownership of the Clippers in the hands of her family, and vowed not to allow an involuntary sale of the team. (Several of the Sterlings' immediate family members are employed by the Clippers organization, including positions in the front office). According to her May 11, 2014 interview with Barbara Walters, Ms. Sterling believes she owns fifty percent of the Clippers under California law, and she has a "passion" for the team and will fight to maintain control of the Clippers. She has signed a Petition for Dissolution of Marriage that is yet to be filed.
On May 19, 2014 the NBA released a Memorandum stating that it had initiated a charge to conduct a vote of the other 29 NBA team's governors to terminate Mr. Sterling's ownership of the Clippers. There was language in the Memo that implied Ms. Sterling's ownership in the team would also be cut off should the vote go against Mr. Sterling by the requisite super-majority.
Potential Legal Issues and Characterization of the Clippers
Given all the hoopla about the family law legal consequences of this tragi-comedy, I figured I might weigh in as well. Media pundits and their experts have been quick to raise and opine about complications the NBA may face in terms of the removal of Mr. Sterling's ownership interest in the team in light of Ms. Sterling's interest therein. As such, this case is actually a very good story to illustrate some basic but important family law principles that it implicates, including characterization of assets and liabilities, breach of fiduciary duties, and the rights as to third parties to transactions bearing on community interests in property.
Mr. and Ms. Sterling married in 1955, and have three adult children. Mr. Sterling bought the then-San Diego Clippers in 1981 for $12.5 million. It is unknown whether Ms. Sterling was a signer to any/all documents in connection with the team's acquisition in 1981 in addition to Mr. Sterling, including any contracts applying with the NBA's constitution and its conduct and disenfranchisement. According to most reported accounts, the Clippers are owned by the Sterlings through a family trust. This document, like the NBA constitution, is not publicly available. The Clippers are estimated to be worth between $500 and $700 million based on comparable recent sales of other professional sports franchises and taking into account the size of the Los Angeles market (e.g. the Sacramento Kings sold for about $535 million in 2013).
For the purposes of this article I am assuming that: (1) funds used to acquire the Clippers in 1981 are not traceable to any of either's pre-martial separate property or gift/inheritance separate property, (2) the Sterlings have not expressly transmuted the character of the asset known as the Clippers, and (3) the Sterling Family Trust is like many, common family trusts in that the Clippers are held by the trust, Mr. and Ms. Sterling each has been allocated a vested, fifty percent ownership interest in the undivided assets held by the trust, each is a co-trustee of the trust, and that the trust did not alter the character of the Clippers since the original team was first acquired.
As to the character of the Clippers, there does not appear to be a true 'form of title' issue that is applicable, per Marriage of Brooks & Robinson (2008) 169 CA4th 176, 86 CR3d 624. Illustrations of form of title documents include documents like real estate deeds, titles to automobiles, certificates of ownership, or as with Mr. Arnold's Jack Russell "Jasmine", AKC Registration papers. However, should a family law court determine that a titling to the Clippers exists by way of the purchase contract for the Clippers back in 1981 or some other writing, and assuming Ms. Sterling consented to such purchase without her being a named owner/signor, then it is possible the Clippers are Mr. Sterling's separate property and that therefore Ms. Sterling has no colorable claim to avoiding the NBA's disenfranchisement process.
Of course, since under these circumstances where it may be "all or nothing" for the Sterlings, Donald may support his wife's claim that she is an equal community property co-owner of the team; if such a title document for the Clippers in his favor exists he probably doesn't want to mention it at this time. Were that to change in the face of bona fide divorce litigation between the two of them, a brand new California Supreme Court ruling filed on May 15, 2014 makes a successful form of title analysis in favor of the Clippers being his separate property dubious. In Marriage of Valli (2014) __ C4th ___; Case No. S193990 the issue was whether an insurance policy on Frankie Valli's life, which intentionally and consensually listed his wife Randy Valli as the titled owner, was the wife's separate property under the form of title presumption in her name even though the policy was purchased during marriage and the premiums prior to separation were paid with community funds. The Supreme Court reversed an appellate court ruling holding that by operation of Evidence Code section 662 the insurance policy was her separate property. The California Supremes reasoned that the insurance policy's ownership provision did not meet the statutory transmutation requirements of Family Code sections 850 and 852 of an express written agreement to change character from community to separate property. Up to the Valli decision it appeared arguable that transmutation rules only applied to transactions between spouses, and not those of spouses with third parties. Randy urged that Frankie had negotiated only with the life insurance provider for the coverage on his life for the sole benefit of his wife, he'd essentially bestowed the cash surrender policy and its contingent benefits upon Randy Valli and that, for purposes of divorce, it had become her separate property. Wrong, sang the California Supremes, at least not if the parties' final break first occurred by reason of Frankie's death as opposed to divorce! Another blog for another day.
As applied here, the Valli ruling probably means that, even if there was a form of title as a result of Mr. Sterling's 1981 purchase of the Clippers through contract, or that the contract provided for Mr. Sterling as the only named owner, and even if Ms. Sterling consented to this form of the acquisition, the Clippers would still be the Sterlings' community property under the time of acquisition presumption of Family Code section 760 - assuming none of the $12.5 million purchase price of the Clippers can be traced to either party's premarital assets or inheritances during the marriage, and assuming there is no separate section 852 transmutation document that expressly changed the character of the Clippers from community property to separate. There are a lot of 'ifs' in this paragraph, but so much is unknown in terms of what transaction documents exist since they are presently private. Time will tell, since this seems to be destined to become a highly public spectacle.
Equitable Apportionment of the Clippers' Net Sale Proceeds
So assuming the Clippers are the Sterlings' community property, based on the known facts of the Sterlings' situation, what comes next in terms of Family Law analysis?
If the NBA does go forward with the disenfranchisement process, the Sterlings should sell the team or it will become valueless. Rents, issues and profits are community property if derived from community assets, and they are separate property if derived from separate assets. Fam.C. § 770(a)(3). Mr. Sterling will probably not be able to credibly argue that any equitable apportionment of the Clippers' net sale proceeds is his separate property, even though he was the prime/head executive of the team for more than 30 years during which time its value increased about forty-fold, but Ms. Sterling's recent conduct improves Mr. Sterling's chances in this regard. Profits traceable to a spouse's time, talent and efforts, as opposed to the underlying capital investment, are characterized according to a spouse's marital status (e.g. single, married, or separated) at the time the efforts are made (i.e. a spouse's time, skill and efforts are community property if utilized during the marriage and before separation). Where those efforts are not of the same character as the underlying investment, a community vis a vis separate property equitable apportionment analysis of the income and profits is mandate to the family law court. Beam v. Bank of America (1971) 6 C3d 12, 17, 98 CR 137, 140–141.
Separation determination is a two pronged analysis: a subjective component where one party holds no present intent to resume the marriage, and an objective component examining the parties' conduct (e.g. not living together, filing for divorce, separating finances, ceasing intimate relations, filing separate tax returns, lack of attempts to reconcile/counseling, expressions of love/fidelity, lack of travelling together, etc.) indicating a complete and final break in the marital relationship. Marriage of Hardin (1995) 38 CA4th 448, 451, 45 CR2d 308, 310. On this point, it is somewhat puzzling why Ms. Sterling has told the press that she and Mr. Sterling are estranged, do not live together, and why she is pursuing Ms. Stiviano (her husband's apparent lover) in civil court for a paltry sum of $1.8 million; it would be in her best interest (in the family court context) to avoid any such statements and to have never filed the civil suit; but hindsight is 20/20 and emotions can fuel decision-making as much as economically-rational thought processes. Moreover, she may be distancing herself from Mr. Sterling for the purposes of satisfying the court of public opinion.
In our as yet hypothetical divorce, assuming a date of separation is found to be at the present time and since Mr. Sterling no longer has the ability to directly manage or participate with the Clippers, the Sterlings will likely each receive one-half of the net sale proceeds without any SP v. CP equitable apportionment. However, Ms. Sterling's conduct creates fertile soil for Mr. Sterling to litigate an earlier date of separation, because this could result in him receiving a larger share of the net sale proceeds of the Clippers.
Joinder of Third-Parties and Injunctive Relief
Many pundits have been questioning the power of the family law court to temporarily and/or permanently enjoin the NBA's movement to force the sale of the Sterlings' ownership interest in the Clippers. As discussed above, the 'forced sale' language heard in the media is a misnomer; the NBA apparently has the power to remove the Clippers from the NBA (which would cause the value of the franchise to wither on the vine like a lemon on a lemon tree in the Coachella Valley in July). As such, it is really a matter of Mr. Sterling having the only option of selling the team, else face the pain of disenfranchisement and loss of NBA membership.
At present, Ms. Sterling has not filed for dissolution of marriage. Were she to do so, automatic temporary restraining orders (ATROs) would kick in and prevent Mr. Sterling from selling the Clippers without a court order or Ms. Sterling's written permission. Fam.C. § 2040(a)(2); see Marriage of McTiernan & Dubrow (2005) 133 CA4th 1090, 1102–1103, 35 CR3d 287, 296–297 (holding that the husband's unilateral sale of community property stock to pay community expenses violated § 2040(a)(2)).
Were Ms. Sterling to file for divorce, she might seek to join the NBA and each team's governor to the action pursuant to Family Code section 2021, and seek to have restraining orders placed on each of them concerning the disenfranchisement/dismembership of the Clippers from the NBA. This can create personal jurisdiction issues, but in light of interconference play in the NBA and the NBA's constitution's disenfranchisement provisions presumably being enforced in California, California would likely have proper personal jurisdiction over each of the NBA's team governors. Joinder is authorized where a third person "claims or controls an interest ... subject to disposition in the proceeding," or where joinder "would be appropriate to determine the particular issue in the proceeding" and the person to be joined "is either indispensable for the court to make an order about that issue or necessary to the enforcement of any judgment rendered on that issue." CRC 5.24(e); see also Marriage of Ramirez (2011) 198 CA4th 336, 344, 132 CR3d 41, 47. The NBA and its governors seem to fit the bill of joinable third-parties since, through the NBA constitution, they have a large degree of indirect control over the Sterlings' ownership interest in the Clippers. Of course, the Sterlings don't have to file an action under the Family Law Act in order to attempt to enjoin the NBA through other forms of civil litigation.
But even without joinder of the NBA's governors to the Sterlings' hypothetical divorce, family courts have express authority to issue property restraining orders against third parties without ordering their joinder to protect against dissipation of a community interest in property under the control of a third party business entity. Fam.C. § 2045(a); CRC 5.18; see also Schnabel v. Super.Ct. (Schnabel) (1993) 21 CA4th 548, 552–553, 26 CR2d 169, 172–173.
As a practical and political matter, and in light of public attitudes towards the Sterlings (or at least Mr. Sterling) as well as judicial officers being elected public officials, I think it unlikely a Family Law judge would enjoin the NBA from continuing its vote on the disenfranchisement/dismemberment of the Clippers. As a legal matter, it is California policy to "marshal, preserve, and protect" community and quasi-community assets and liabilities existing at the date of separation "so as to avoid dissipation of the community estate before distribution." Fam.C. § 2100(a). As such, a delay resulting from a court order enjoining the NBA governors from voting on the disenfranchisement/dismemberment of the Clippers would likely violate the fundamental policy of the law which bench officers are bound to uphold. The way to maximize the value of the Clippers is to have a sale now, not a couple years down the road once the talent leaves the team, sponsors and advertisers continue to pull their revenues from the team, and fans stop going to games. As such, if anything, a family judge should be favorable to the NBA's processes and have the sale of the Clippers occur as soon as possible after their best season ever, then place the net sale proceeds into a blocked account pending the outcome of divorce litigation between the Sterlings.
Fiduciary Duties and Remedies for Breach
The family court's distribution of the net sale proceeds of the Clippers to each of the Sterlings may be significantly impacted by a breach of fiduciary duties claim by Ms. Sterling.
Generally, spouses share equal management and control of their community property, "with like absolute power of disposition, other than testamentary," as they have over separate property, except that a spouse who is managing a business that is substantially all community personal property has the "primary" management and control of that business. Fam.C. §§ 1100(a) and (d), 1102(a). Moreover, per Fam.C. § 1100(a), management and control of community property held in a revocable trust is subject to Family Code section 761 (providing that a trustee may "convey and otherwise manage and control" trust property without either or the other spouse's consent consistent with the trust instrument). Unfortunately, the public presently has no idea what the terms and conditions are of the Sterlings' family trust, when it was created/modified, whether the Clippers are in the trust, etc. Nevertheless, whatever documents Mr. Sterling signed in 1981 (or subsequently) in connection with the acquisition and/or continued ownership/operation of the Clippers probably binds Ms. Sterling, including those provisions apparently in the NBA's constitution relating to disenfranchisement/dismembership.
"[I]n transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relationships 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 ._._." Fam.C. § 721(b). Included in those Revised Uniform Partnership Act provisions under the Corporations Code are the duties of care and loyalty (access to books and records, truthful accounting, sharing of profits, full disclosure of material facts and information, etc.).
The duty of care, and Mr. Sterling's breach thereof based on his racist comments, would be centerpiece of Ms. Sterling's divorce. The basic framework of Sterlings' duty of care is found in Corp.C. § 16404(c), per Fam.C. § 721(b) and Corp.C. § 16404(a). In a nutshell, during marriage and throughout a marriage dissolution proceeding until the community estate property is divided by the family court, the fiduciary duty of care requires each spouse to refrain from "engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law."
As such, the question for the fact-finder becomes whether or not Mr. Sterling's racist statements, recorded unbeknownst to him by his paramour and disseminated to the public by her (which she denies, by the way) through TMZ (basically a television tabloid) was an act rising to the level of grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law. I have searched high and low for an on-point case discussing the issue of express racist statements as a breach of fiduciary duty but have come up empty, but that may be because in corporate cases involving express racial discrimination settle rather than becoming reported appellate-level case law. Without further comment, I will leave the reader to ponder that question.
Conduct in violation of the fiduciary duty of care in the management and control of community property, whether by a single act or multiple acts, resulting in the "impairment to the claimant spouse's present undivided one-half interest in the community estate …" makes the wrongdoing spouse subject to a breach of fiduciary duty claim by which the other spouse is given several statutory remedies. Fam.C. § 1101. Those remedies generally include an "accounting" and incidental relief, a court ordered change in title documents to add the name of a spouse or to reflect that title is held as community property, penalties of 50 or 100 percent of the value of the subject property (but only where the issue is one of undisclosed assets and not 'mere' bad judgment), and attorney fees.
However, the Family Code section 1101 remedies for breach of fiduciary duties are not exclusive, and family courts have the power to fashion other remedies such as an unequal division of the affected asset impacted by the breach of duty of care in favor of the non-breaching spouse pursuant to Family Code section 2602; see Marriage of Quay (1993) 18 CA4th 961, 973 holding that the husband's risky, post-separation investment in a company of his friend could properly be assigned wholly to husband. Here, Ms. Sterling might seek to have the community property other than the Clippers, including some half-billion dollars in real estate, be assigned to her and have the Clippers' net sale proceeds or value go to Mr. Sterling.
As to the $2.5 million in gifts Mr. Sterling made to Ms. Stiviano, these transactions are likely violations of the fiduciary duty of both care and loyalty if done without Ms. Sterling's consent, since a spouse may not make a transfer of community personal property for "less than fair and reasonable value" without the other spouse's written consent. Fam.C. § 1100(b). Mr. Sterling could be made subject to the 50/100% penalties under Family Code section 1101, and also the transactions could be set aside and titled reformed by the family court. Marriage of Stephenson (1984) 162 CA3d 1057. Also, Ms. Stiviano could be joined to the anticipated divorce action. Babcock v. Super.Ct. (DiGiovanni) (1994) 29 CA4th 721, 725 holding that the joinder of the giftee was proper where a spouse alleges that the other spouse has illegally made a gift of community funds. Wouldn't those hearings be a show worthy of driving to the courthouse to see?
Lots of reading, huh? This article seeks only to introduce some family law related legal issues and analysis if the Sterlings were to divorce, based upon assumptions given the limited public information as to, for example, the Sterling family trust and the NBA's constitution. As such, it skims the surface of the potential legal issues the Sterlings, Ms. Stiviano, the NBA, the other team owners, the lawyers, and the family law judge may face in the future. Various other issues under anti-trust law, contract law, race discrimination law, etc. also have their aspects and stories to tell. In any event, I thank the reader for your patience in allowing me to wax somewhat loquaciously on this entertaining but unfortunate human story!
Author: Michael C. Peterson, Esq.
Law Firm of Thurman W. Arnold III