Recent Developments in Family Law

COURT OF APPEAL UPHOLDS TRIAL COURT’S DENIAL OF MOTHER’S REQUEST TO MOVE AWAY WITH MINOR CHILD AND CHANGE OF PRIMARY CUSTODY OF CHILD TO FATHER. IN RE MARRIAGE OF WINTERNITZ (2015) 235 CAL.APP.4th 644.

FACTS

After an approximately 20 year marriage and soon after the birth of their third child, the parties dissolved their marriage in 2004 in the Yolo County Superior Court. They stipulated to the appointment of a custody evaluator who addressed mother’s request to relocate with the children to San Diego. The evaluator found that mother manipulated the children and reported that the therapists who met with both parents concluded mother alienated the children from father. The evaluator initially recommended that the children remain with father but amended his report, changing his recommendation to permit mother’s relocation with the children. Noting mother’s act of alienating the children and the children’s strong opposition to living with father, the evaluator believed by staying with mother, the children would make a less conflicted adjustment and the possibility of reconciling with father would be left open. Despite the trial court’s finding that mother engaged in tactics resulting in the alienation of the children from father, the court allowed mother to move with the children to San Diego. Following mother’s move with the children, father, who is an orthopedic surgeon, relocated to San Diego and established a practice there.

Several years later mother filed a move away request in San Diego requesting to move with the one remaining minor child to Northern California where she had purchased a home. Her fiancé had been hired for employment in Northern California. Mother contended she was unable to find a job in San Diego and was unable to afford a home there. Father moved to modify custody and visitation, seeking physical custody of the child. After Family Court Services recommended that mother remain the child’s primary caregiver, father’s request for a custody evaluation was granted. The evaluator recommended that the move away request be denied and that the child be placed with father. Although the evaluator admitted making mistakes in the case, the court denied mother’s request to strike the evaluator’s report and denied mother’s move away request, changing primary custody of the child to father. The court found father met his burden of showing that the planned moved would cause substantial detriment to the child and found changing custody to father was in the child’s best interest. Mother appealed, but the Court of Appeal affirmed.

APPELLATE COURT DECISION

The Court of Appeal explained that a parent entitled to the custody of a child has the right to change the residence of the child, subject to the power of the court to restrain a removal that would prejudice the rights or welfare of the child. When a custodial parent proposes to relocate a child, the noncustodial parent has the burden of showing that the planned move would cause detriment to the child in order for the court to re-evaluate an existing custody order. If the noncustodial parent shows that the planned move would cause detriment to the child, the court then determines whether a change of custody is in the best interests of the child. The factors the court should ordinarily consider when deciding whether to modify a custody order in light of a custodial parent’s proposed change of residence are: (1) the child’s interest in stability and continuity in the custodial arrangement; (2) the distance of the move; (3) the age of the children; (4) the children’s relationship with both parents; (5) the relationship between the parents including their ability to communicate and cooperate and their willingness to put the interests of the children above their own interests; (6) the wishes of the children if they are mature enough for the inquiry to be appropriate; (7) the reasons for the proposed move; (8) and the extent to which the parents are currently sharing custody. (In re Marriage of LaMusga (2004) 32 Cal.4th 1072). The court may appoint a child custody evaluator to report on the best interests of the children to assist in making a change in custody determination.

At trial the custody evaluator admitted to procedural errors during the course of his evaluation but testified that he was not biased in favor of either party. Although it noted that many of mother’s objections to the evaluator’s report were valid, the trial court found the objections went to the weight of the content of the report and were not sufficient to justify striking the report. The court found the evaluator was not biased in favor of either party and considered the report and the evaluator’s testimony in entering its decision to deny mother’s request to move away and changing custody to father. The Court of Appeal explained that once it is established that a witness has adequate credentials to qualify as an expert, questions as to the degree of his or her expertise go to the weight not admissibility. Mother’s objections to the evaluator’s report went to the weight of the report, not its admissibility. It was for the trial court to assess the credibility of all of the witnesses, including the evaluator. The trial court did not err when it refused to strike the evaluator’s report.

The Court of Appeal also denied mother’s claim that the trial court did not apply the correct legal standard in assessing her relocation request. The trial court found that father met his initial burden of showing the planned move would cause substantial detriment to the child. The trial court then turned to the issue of whether changing the child’s custody would be in her best interest. In making the best interest determination, the trial court recited and addressed the eight LaMusga factors and other factors it considered relevant. The trial court acknowledged mother had been the primary caretaker and that denying mother’s request to move the child to Northern California would result in a change of custody and a disruption in the current custody arrangement. Despite the concerns, the trial court found the move away request was clearly in the child’s best interest. The trial court found a controlling factor to be the ability and willingness of one parent to provide the other parent with the opportunity to spend as much time with the child as possible and to be flexible with scheduling requests. The trial court’s emphasis on the respective attitude of each parent regarding visitation with the other parent did not demonstrate an abuse of discretion.

The Court of Appeal denied mother’s assertion that the trial court failed to give meaningful consideration to the child’s custodial preference to remain in her care as required under the Family Code. It was undisputed that the minor child had expressed the desire to move with her mother to Northern California. The court opined that to have the child testify would only cause emotional distress which was not necessary. In this regard the court considered the child’s wishes. Additionally the evaluator’s report, which was considered by the court, addressed risks to the child if she were placed with father. The evaluator nonetheless concluded that the greatest risk to the child was losing the relationship with father.

COMMENTS

The Court of Appeal’s concluding comments were that, “The parties have litigated to the point of financial ruin, to their own detriment and, more importantly, the detriment of their daughter.” While the facts of some cases warrant a request for a move away of a minor child or children, these are complicated cases. Litigants should seek legal advice and carefully consider the ramifications of a request for a move away before one is made. Litigants should understand the legal analysis required in such a request and the possible outcomes if such a request is denied.

Recent Developments in Family Law

COURT FINDS PUBLIC POLICY DOES NOT PRECLUDE FAMILY COURTS FROM IMPOSING NONCOMPETITION ORDERS IN DIVIDING COMMUNITY PROPERTY BUT SUCH ORDERS MUST BE REASONABLE AND NOT BROADER THAN NECESSARY TO PROTECT THE VALUE OF THE ASSET AWARDED IN THE DISSOLUTION. IN RE MARRIAGE OF GRÉAUX AND MERMIN (2014) 223 Cal. App. 4th 1242.

FACTS

Husband (H) and wife (W) owned and operated two businesses during their marriage, one of which formulated and marketed a particular type of spirits called “rhum agricole.” That business was created from the parties’ joint efforts during their marriage and therefore was community property. H had little formal education or training in business but his “considerable drive, energy and determination” as well as his contacts were a crucial part of the business. W’s sales and marketing skills, family contacts in the Caribbean, understanding of the production techniques and palate contributed to her standing as “the face of the brand.”

After W filed for dissolution of the parties’ marriage, she filed actions against the parties’ business and against key business contacts. She disrupted the business operations by withdrawing operating capital on two occasions and making statements to employees regarding the demise of the business. At trial W offered evidence that H’s post-separation efforts were less than exemplary but ignored her own actions aimed at destroying the business and reputations of key business contacts. She asked the court to award the business to her at zero value, arguing H had run the company into the ground.

The trial court awarded the business to H. While acknowledging W’s positive attributes toward the company, it found H was better qualified by experience to run the business. Further, H had demonstrated the will and ability to run the business under adverse circumstances while W had shown a willingness to sacrifice the interests of the business for what appeared to have been little more than “spiteful retribution.” The court ordered that W surrender all of her stock shares to the corporation and execute all documents and perform all acts necessary to effectuate the order. W was ordered to refrain from further conduct intended or likely to damage either business in any way and was subject to a five year noncompetition order. She was restrained from setting up a company of her own or with third parties engaged in the production, bottling, marketing or selling of rhum agricole or rum of any kind, wherever produced or grown. W was restrained from consulting with any person or entity in competition, or that could be in competition with the business’ rum product or who proposed to offer a competing product. She was restrained from working for a competitive rhum agricole product or other rum product during the five year period.

W appealed arguing that the court could not order her not to compete with H’s business.

APPELLATE COURT DECISION

Noting the public policy in favor of free competition, the appellate court discussed the state’s “paramount interest” in the fair and equal distribution of marital property upon the dissolution of marriage. The court found the public policy affirming an individual’s right to engage in a trade or business of his or her choosing does not trump the family court’s authority to issue any orders – and specifically a noncompetition order – to achieve an equal division of marital property. The court found that California’s policy that every person should have the right to pursue any lawful employment and enterprise of his or her choice is not undermined when a noncompetition order is imposed as part of a marital judgment. If an ongoing marital business is awarded to one spouse, and if the value of that business includes goodwill, a family court should have the power to issue a noncompetition order so that the value of that asset is preserved, just as a noncompetition clause in a business purchase and sale agreement is designed to protect the value of the asset purchased. As a general proposition, a party to a marital dissolution may be ordered not to compete where it is necessary to protect the value of the marital asset. This rationale applies whether the business is sold to a third party or assigned to one of the spouses as an ongoing concern. However, noncompetition orders must be reasonable and not broader than necessary to protect the goodwill included in the valuation and transfer. The terms of the noncompetition order (i.e. the scope of prohibited activities and the length of the prohibition) must be based on findings supported by substantial evidence that they are reasonably necessary to protect the value of the asset awarded in the dissolution.

In this case, the trial court’s statement of decision contained nothing about the geographic market of the business at the time of the dissolution, nor did it contain any findings to support the unlimited geographic reach of the order. The court therefore abused its discretion. The matter was remanded to the trial court to reconsider the geographic scope of the noncompetition order.

COMMENTS

Generally contractual promises not to compete are void in California. There are exceptions to this rule if the noncompetition provision is part of a contract for the sale of a business or upon dissolution of a partnership. Here the appellate court noted that, much like the breakup of a partnership, a divorce results in assigning to each party certain assets. The business’ value would be diminished if W, who had played a key role in the business’ operation during the marriage, was allowed to open another business in direct competition with H. So long as the court’s restraint does not exceed the bounds of reason, we like this result. It serves to protect the value of the asset H received.

Recent Developments in Family Law

SUPREME COURT FINDS THAT PURCHASES MADE BY ONE OR BOTH SPOUSES FROM A THIRD PARTY WITH COMMUNITY FUNDS DURING THE MARRIAGE ARE NOT EXEMPT FROM THE TRANSMUTATION REQUIREMENTS FOR CONVERTING COMMUNITY PROPERTY TO SEPARATE PROPERTY. IN RE THE MARRIAGE OF VALLI (2014) 58 Cal.4th 1396

FACTS

During the marriage, the Husband (H) used community property funds from a joint bank account to purchase a $3.75 million dollar insurance policy on his life, naming his Wife (W) as the sole owner and beneficiary. Until the parties’ separation, the premiums on the policy were paid with community property funds from a joint bank account. H argued that the policy was community property because it was purchased during the marriage with community funds. W argued that the policy was her separate property because H arranged for the policy to be put solely in her name, thereby changing the policy’s character from community property to separate property.

The trial court ruled that the insurance policy was community property because it was acquired during the marriage with community funds. The court awarded the policy to H and ordered him to buy out W’s interest in the policy by paying her $182,500, representing one-half of the policy’s cash value at the time of trial. The Court of Appeal reversed, holding that the insurance policy was W’s separate policy. H appealed that ruling to the California Supreme Court.

CALIFORNIA SUPREME COURT DECISION

The California Supreme Court explained that married persons may, through a transfer or an agreement, transmute (i.e. change) the character of property from community to separate or from separate to community. However, a transmutation of property is not valid “unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected” (Family Code § 852(a)). To satisfy the “express declaration” requirement, a writing signed by the adversely affected spouse must expressly state that the character or ownership of the property at issue is being changed. The express declaration requirement “does not apply to a gift between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taken into account the circumstance of the marriage” (Family Code § 852(c)).

H argued because the express written declaration requirement was not satisfied, and placing of the life insurance policy which was purchased during the marriage with community funds in W’s name did not transmute the policy into a separate property asset of W. W asked the court to draw a distinction between interspousal property transactions subject to the transmutation statutes and property acquisitions from third parties, which she argued would not be subject to those statutes even when it has the claimed effect of changing community property funds to a separate property asset or vice versa. Since the transaction was between H and the insurance company issuing the policy, W argued there was no interspousal transaction and the transmutation requirements do not apply.

The California Supreme Court rejected W’s proposed exemption for spousal purchases from third parties. Because spouses most often use community funds to purchase gifts of relatively inexpensive personal items for each other, the statutory exemption necessarily implies that gifts not qualifying for the exemption (because they are either substantial in value or because they are not items of a personal nature) are transmutations subject to the express declaration requirement, notwithstanding the fact that many or most involve purchases from third parties. The Supreme Court agreed with the trial court’s characterization of the insurance policy as community property. The Court of Appeal’s Judgment was reversed.

COMMENTS

This is a major clarification of California law. Many of our clients tell us about assets such as car, real estate, bank accounts, life insurance policies, etc. that have been purchased during the marriage with community property (CP) funds but are held in the name of only one of the parties. For example, sometimes the family home is purchased only in wife’s name due to economic reasons. Or husband buys a car in his name because wife is unable to sign the purchase documents because she is unavailable to do so. Some courts have held that the way title to the asset is held is controlling. Those courts have held that the house in our example is wife’s separate property (SP) because the title is held in her name alone. The car in our example is the husband’s SP for the same reason. We have long believed these courts were wrong. Spouses often use CP money to purchase an asset in one spouse’s name with no intention the asset will be the spouse’s SP. The California Supreme Court has now clearly said they agree. If an asset is to be one spouse’s SP there must be a written document, signed by the adversely affected party, that clearly states the asset is one spouses’ SP.

CAUTION

A deed may be that written document. Be careful what you sign. When in doubt, ask an experienced family law attorney.

Recent Developments in Family Law

COURT AFFIRMS DETERMINATION THAT MOTHER’S FORMER SAME-SEX PARTNER IS A SECOND PARENT TO CHILD ADOPTED BY MOTHER DURING THEIR RELATIONSHIP. L.M. v. M.G. (2012) 208 Cal.App.4th 133.

FACTS

M.G. and L.M., both women, lived together as same-sex partners from 1998 to the end of 2003. They were not registered domestic partners. In 2000, M.G. arranged to adopt a child from a birth mother who wanted to place her child for adoption when he was born. Upon the child’s birth in November 2000 the child lived in the household with M.G. and L.M. Both women participated in caring for the child in their household. M.G. formally adopted the child in October 2001. According to L.M., at the time of the adoption, the plan was for the couple to register as domestic partners, followed by L.M.’s eventual adoption of the child in a stepparent adoption.

M.G. and L.M.’s relationship ended in 2003 when the child was three years old. According to L.M., a part of the reason the relationship ended was M.G. would not agree to enter into a domestic partnership with L.M. so that L.M. could participate in a stepparent adoption of the child. After L.M. and M.G. ended their relationship, the child resided primarily with M.G. but regularly spent the night at L.M.’s house. The child regularly traveled on vacations with L.M., and L.M. cared for the child when M.G. was out of town. The child calls L.M. “mom” or “mommy,” and L.M. refers to the child as her son. L.M.’s friends and co-workers and the parents at the child’s school understand the child to be L.M.’s son.

In October 2009, M.G. informed L.M. she planned to relocate to Europe with the child for 18 months beginning in July 2010 because M.G.’s registered domestic partner would be temporarily assigned there for her job. Shortly before the scheduled trip, L.M. filed a Petition to Establish a Parental Relationship with the child pursuant to the Uniform Parentage Act (UPA) (Family Code § 7600, et seq.).

The trial court adjudged L.M. to be a parent of the child, finding that L.M. satisfied the requirements of the parentage presumption set forth in Family Code § 7611(d) because she received the child into her home and held him out to the world as her natural child. M.G. appealed.

APPELLATE COURT DECISION

On appeal, M.G. did not challenge the trial court’s finding that a presumption of parentage in favor of L.M. arose because L.M. received the child into her home and openly held him out as her natural child. Instead, M.G. argued a presumption of parentage in favor of a second parent is necessarily rebutted as a matter of law whenever the child who is the subject of a parentage petition was adopted by his legal parent through a single parent adoption decree. M.G. argued that a child who is adopted in a single parent adoption may not be adjudged to have a second parent under the UPA because the adoption decree constitutes a judicial determination that “this is not a two slot parent family. It is a one slot parent family. There is no extra (or second) parent slot for L.M. to occupy.”

The Court of Appeal disagreed. It found the adoption decree adjudged M.G. to be the child’s parent and was premised on the statutorily required finding that the interest of the child would be promoted by the adoption. The adoption decree also operated to extinguish the parental rights of the child’s birth parents. It did not establish that, regardless of future developments, the child should be limited to only one parent. It is well established under the law that a child raised in a same-sex relationship may have two mothers (or two fathers). The adoption decree did not preclude a determination under the UPA that L.M. is the child’s second mother.

COMMENTS

The parental rights of individuals who receive a child into his or her home and openly hold the child out as his or her natural child are increasingly being recognized by the courts. Legal parents who try to find loopholes in the laws that recognize these parental rights are rarely successful. Courts are remaining focused on the interests of children in making determinations regarding the parental status of a child’s caretaker.

Recent Developments in Family Law

COURT FINDS THAT ONCE A FINAL SUPPORT ORDER HAS BEEN ENTERED, DIVORCED PARTIES DO NOT HAVE A CONTINUING FIDUCIARY DUTY TO DISCLOSE TO EACH OTHER ALL MATERIAL FACTS REGARDING THEIR INCOME. In re Marriage of Sorge, (2012) 202 Cal.App.4th 626.

FACTS

Husband (H) and wife (W) agreed that H would pay W child support in the amount of $8,500 per month for their three minor children (and not less than $4,000 per month for one child) based on H’s gross income of more than $800,000 per year. The agreement was established as part of a judgment. Post- judgment W filed an order to show cause (OSC) seeking, among other relief, a modification of child support. Finding an increase in H’s income, the trial court increased H’s child support obligation from $4,000 per month to approximately $18,000 per month.

The trial court also determined that H breached his fiduciary duties to W by failing to disclose material changes to his income after the entry of judgment and continuing throughout the litigation. The court awarded W sanctions in the amount of $75,000 pursuant to Family Code Sections 271 and 2107, which authorize the court to impose sanctions in Family Law proceedings. H appealed, arguing that he no longer owed W any fiduciary duties since the two were no longer married and there was a final judgment in their marital dissolution case.

APPELLATE COURT DECISION

The District Court of Appeal that serves San Diego County (Fourth District, First Division) reversed the trial court’s sanction order. The sanctions were based in part on the court’s determination that H had breached his fiduciary duty to W by not disclosing information related to his income. The appellate court held that once a final order of child support has been entered in a dissolution case, the parties are no longer subject to the requirement of immediate, full and accurate disclosure of all material facts and information regarding their income or expenses. The court noted that after the entry of a judgment of dissolution, a custodial parent is entitled, upon written request, to an annual declaration of income and expenses from the parent paying child support, regardless of whether a notice of motion or order to show cause has been filed. Thus, the parties have a means to resolve support issues without judicial intervention, permitting them to reassess on a periodic basis whether a modification is warranted, discouraging the filing of meritless claims for a change in support, and encouraging the use of voluntary agreements to modify support payments.

COMMENTS

In re Marriage of Sorge stands for many propositions, however we find most notable the court’s findings that after the entry of judgment the parties are no longer required to disclose to each other all material facts and information regarding their income and expenses. Litigants should be aware of the fact that the fiduciary duty to disclose material facts and information regarding their income or their former spouse’s income terminates upon the entry of a final support order. Parties with final support orders should also be aware of the mechanisms available to them for ascertaining changes in the opposing party’s income which could affect support and should be diligent in utilizing those tools available to keep themselves informed regarding changes in their former spouse’s income.

Recent Developments in Family Law

COURT FINDS THAT FORMER WIFE WAS REQUIRED TO SHOW A CHANGE OF CIRCUMSTANCES TO SEEK AN EXTENSION OF A SPOUSAL SUPPORT ORDER WHICH TERMINATED BY ITS OWN TERMS ABSENT A SHOWING BY WIFE OF GOOD CAUSE AS TO WHY THE COURT SHOULD ORDER SPOUSAL SUPPORT TO BE CONTINUED.
In re Marriage of Khera and Sameer (2012) 206 Cal.App.4th 1464.

FACTS

Husband (H) and wife (W) reached a settlement agreement in their divorce which was incorporated into a final Judgment. H was ordered to pay W spousal support of $2,650 per month, commencing June 1, 2007. There was an annual step-down in H’s support obligation through June 1, 2010. The Judgment provided that on June 1, 2010, “Spousal support will be reduced to zero, unless, before that date, [W] files a motion to have spousal support continued and shows good cause as to why the Court should order spousal support to be continued.” With regard to child care expenses, the Judgment provided that commencing June 1, 2007, “The parties shall each pay one-half of all: (a) Reasonable child care expenses incurred to permit a Party to work; (b) Only through October 30, 2007, reasonable child care expenses incurred to permit [W] to obtain her MSW degree . . .”

On March 24, 2010, W filed an Order to Show Cause seeking a modification of the Judgment’s spousal support provisions. She requested that the court determine the marital standard of living and order an upward modification of support, including a Smith/Ostler obligation. In her declaration, W indicated she was earning $9 per hour as an associate social worker. She was in a clinical psychology doctoral program and only able to work 24 hours per week. She argued no showing of changed circumstances was required due to the fact that the language contained in the Judgment specifically allowed for W to seek modification of the order before June 1, 2010. Alternatively, she argued even if a change of circumstances is required, a modification may be grounded on a showing of unrealized expectations, namely that W was not self-supporting by the termination date of the support. The trial court denied W’s request finding there was insufficient evidence to modify the spousal support prospectively.

APPELLATE COURT DECISION

The District Court of Appeal that serves Santa Clara County (Sixth District) affirmed the trial court’s order. The court explained that a modification of spousal support, even if the prior amount is established by agreement, requires a material change of circumstances since the last order. A material change of circumstances may be in the form of unrealized expectations, however a family law court may not find a change of circumstances in the reconsideration of a circumstance which has not changed since the previous order.

The parties’ Judgment contained an order commonly referred to as a “Richmond order” which is named after the decision of In re Marriage of Richmond (1980) 105 Cal.App.3d 352. These orders provide for contingent termination of spousal support on a specific date unless, before that time, the supported spouse brings a motion to modify for good cause. A Richmond order is normally issued with the expectation that if the supported spouse exercises reasonable diligence, he or she will have become self-supporting by the date set for support payments to end. The effect of a Richmond order is to tell each spouse that the supported spouse has a specified period of time to become self-supporting, after which the obligation of the supporting spouse will cease. A Richmond order psychologically prepares the supported spouse for the time when he or she must be self-supporting. It also places the burden of showing good cause for a change in the order upon the one who is most able to exercise the control necessary to meet the expectations the trial Judge had in making the order.

The Court of Appeal explained the question of reasonable expectations is material, and a failure to realize them may constitute a change of circumstances justifying modification of the order. The clear implication of the Judgment was that, absent unforseen circumstances, W was expected to complete her MSW degree and be able to be fully self-supporting by June 1, 2010. The court noted W’s supporting declaration did not show that she diligently acted to achieve financial self-sufficiency and, despite her reasonable efforts, she had been unable to complete her MSW degree, she had been unable to obtain full time work as a social worker, or she had been unable to find full-time employment at a salary that made her self-supporting. An unrealized expectation of self-support requires a showing that, despite the supported spouse’s reasonable efforts, he or she was unable to support himself or herself. The burden was on W to show reasonable efforts to achieve this objective. W did not present evidence of the marital standard of living or her needs based on that standard. The court noted, in its view, a voluntary decision to pursue a doctoral degree rather than entering the working world full-time does not constitute a material change of circumstances in the context of this case.

COMMENTS

As discussed in the appellate court decision, requiring a material change of circumstances since the last order for a modification of that order helps to ensure the policy of the law supporting finality in dissolution cases. Absent such a requirement, dissolution cases could be endless allowing unhappy former spouses to bring repeated actions for modifications of orders with no burden of showing a justification to change the order. In deciding whether to file a request for a modification of an order, the moving party should consider the circumstances at the time the order was made and should review the order for any findings or indication of those circumstances. Absent the ability to prove those circumstances and a material change in those circumstances, a request for a modification of a prior order is likely to be a fruitless effort.

Recent Developments in Family Law

COURT FINDS WHERE THE NONMANAGING SPOUSE HAS PRIMA FACIE EVIDENCE THAT COMMUNITY ASSETS OF A CERTAIN VALUE HAVE DISAPPEARED WHILE IN THE CONTROL OF THE MANAGING SPOUSE POST-SEPARATION, THE MANAGING SPOUSE SHOULD HAVE THE BURDEN OF PROOF TO ACCOUNT FOR THE MISSING ASSETS. IN RE MARRIAGE OF MARGULIS 198 CAL.APP.4TH 277, AUGUST 11, 2011 (AS MODIFIED AUGUST 26 AND SEPTEMBER 9, 2011).

FACTS

Husband (H) and wife (W) separated after 33 years of marriage. For 12 years after their separation, they continued to handle their finances as they did during the marriage. H had exclusive control of the community’s substantial investment accounts and paid their bills. W trusted H to manage their finances for their mutual benefit. Just before trial, H disclosed for the first time that the parties’ once significant investment accounts were virtually empty. H did not present any evidence but asserted the account values diminished due to proper expenditures and stock market losses.

At trial W argued H should be charged with the missing funds unless he proved he did not misappropriate the money. W’s only evidence offered was a financial statement H prepared three years after the parties’ separation and nine years prior to the trial. The trial court concluded the document offered by W was insufficient evidence to charge H with the amount stated on the document. W appealed.

APPELLATE COURT DECISION

The District Court of Appeal that serves Orange County (4th District, 3rd Division) reversed the ruling of the trial court. The Appellate Court held that once a nonmanaging spouse makes a prima facie showing of the existence and value of community assets in the other spouse’s control post-separation, the burden of proof shifts to the managing spouse to prove the proper disposition decreased value of those assets. Absent such proof, the court should charge the managing spouse with the assets according to the prima facie showing.

COMMENTS

We think this case is reflective of the court’s increasing emphasis on the policy of the law for full and accurate disclosure throughout divorce proceedings. As explained in Margulis, the Family Code details the fiduciary obligations between spouses: “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 § 721, subdivision (b).) It is of the upmost importance that Family Law litigants are mindful of their ongoing duty to provide a complete and full disclosure to the other spouse throughout the separation and divorce process.

Recent Developments in Family Law

COURT FINDS IT IS AN ABUSE OF DISCRETION TO BASE SUPPORT ON THE PREDICTED RECEIPT OF A BONUS THAT MIGHT NEVER MATERIALIZE. IN RE MARRIAGE OF MOSLEY, 165 CAL.APP.4th 375, AUGUST 14, 2008.

FACTS

Husband (H) and Wife (W) were both lawyers when they divorced. H was a partner in the real estate division of a large law firm and W was a stay-at-home mother with five children. As a result of the downturn in the real estate market, H’s firm pared down its real estate practice and H was terminated from his employment. He obtained a job working for a home builder at a much lower salary. The new employer also offered H a discretionary year end bonus. H asked the trial court to reduce his child and spousal support obligations to W because of his reduced base income. The evidence at the hearing showed that H needed all of his net take home pay from his base salary to pay his child support and spousal support obligations. He had to borrow to pay his own monthly expenses in hopes of receiving a bonus to repay the loans.

APPELLATE COURT DECISION

The District Court of Appeal that serves Orange County (4th District, 3rd Division) reversed the ruling of the trial court. The issue before the Court of Appeal was whether the Judge should be bound by the past income (i.e. the receipt of the bonus) in determining the future support. The Appellate Court answered “no”. The court held that past income is a good measure of future income for purposes of setting support but it is not always determinative. The Judge has the discretion to adjust the monthly net income if it does not accurately reflect future earnings. The Appellate Court sent the matter back to the trial court for a recalculation of H’s support obligation to W.

COMMENTS

We think this case was decided on its unique facts. First, H had gone from a high paid position as a partner in a law firm to in-house employment with a home builder at a lower base income. He had only one year of employment with the home builder which was deemed not long enough to be a good predictor of his future income.

Next, he was employed in the real estate industry. The Appellate Court was well aware of the precarious nature of the real estate market.

Finally, H had to borrow to pay his expenses during the year in the hope of receiving a bonus to repay his loans. It was deemed to be unfair to him to have to borrow money to meet his personal expenses while wife received nearly all of his net take-home pay.

The Appellate Court noted that if and when H receives a bonus, a percentage of the bonus could be allocated as additional child and spousal support.

A WORD OF CAUTION

Allocating uncertain future income as additional support presents many potential problems. Family law judges and attorneys often refer to these allocations as Ostler/Smith orders (In re Marriage of Ostler and Smith (1990) 223 Cal.App.3rd 33). The idea is that the support payor pays a fixed percentage of any future income as additional child or spousal support.

By way of example, assume that H has a base income of $10,000 per month. H has the opportunity to earn additional income by way of bonus, commission, stock options, stock grants, etc. H agrees to pay W fifteen percent of his income in excess of $10,000 each month as additional child support. In January H earns $15,000. Therefore, he must pay W $750 ($15,000 – $10,000 = $5,000 x 15% = $750).

This sounds like a simple and fair solution to the problem of what to do about a payor whose income is variable. But consider these problems:

1. What about the payee (recipient) of the support? Shouldn’t the income of the payee be considered too?
2. What happens if the payor receives non-monetary compensation (i.e. a car, reduction in hours, paid vacation, etc.)? Shouldn’t that be considered for the purpose of calculating support?
3. What if the payor delays payment or under-pays? Who pays for the cost of enforcing the order? In our example, does it make sense to spend time and money collecting $750?
4. If you were the payor, do you want to provide weekly, monthly, quarterly, or annual accountings to your ex-spouse? If you are the payee, do you want to monitor these accountings?

We have seen many cases of Ostler/Smith orders that have resulted in expensive litigation for the parties to sort out the child and spousal support obligations. While the orders seem fair and reasonable in theory, in practice they tend to cause conflict and they result in litigation expenses. These orders should be entered into with extreme caution and care.

Recent Developments in Family Law

COURT FINDS THAT FAMILY CODE §853 DOES NOT APPLY TO ESTATE PLANNING TRUST INSTRUMENTS. IN RE MARRIAGE OF HOLTEMANN (2008) 166 Cal.App. 4th 166.

SYNOPSIS

Husband (H) and wife (W) separated after less than 3 years of marriage. H had considerable assets and W had few. To eliminate the need for probate and to reduce taxes in the event of H’s death, H and W consulted with an estate planning attorney. A living trust and “Spousal Property Transmutation Agreement” were prepared. The Agreement provided that the document was created solely for interpreting how property shall be disposed at the death of the parties and not in contemplation of separation or martial dissolution. Nevertheless the court of appeal affirmed the trial court’s decision that the Agreement effectuated a transmutation of separate property to community property.

FACTS

H and W separated in 2006 after a 3 year marriage. When the parties married, H had considerable assets and W had few.

During the marriage H and W jointly retained an Estate Planning Attorney to prepare Estate Planning documents that would eliminate the need for probate and minimize taxes in the event of either spouse’s death. The parties executed a “Spousal Property Transmutation Agreement” and a “Holtemann Community Property Trust.” An introductory provision of the Transmutation Agreement provided, “The parties are entering into this agreement in order to specify the character of their property interests pursuant to the applicable provisions of the California Family Code. This agreement is not made in contemplation of a separation or marital dissolution and is made solely for the purpose of interpreting how property shall be disposed of on the deaths of the parties.” The Transmutation Agreement also provided, “Husband agrees that the character of the property described in Exhibit A (including any future rents, issues profits, and proceeds of that property) is hereby transmuted from his separate property to the community property of both parties . . . The parties further acknowledge that, but for such agreed disposition of the subject property, [H] would not have affected the within transmutation of his separate property into community property. Wife agrees not to amend, modify or change the dispositive provisions of any of the trusts established pursuant to said declaration of trust without husband’s prior written consent and agreement.”

The trust provided that it was created to hold the parties’ community property which was created by the transmutation of the separate property of H concurrently with the execution of the trust. It further stated that each party acknowledged that the transmutation of H’s separate property into community property was “undertaken upon the condition of and with this trust instrument in mind”, in particular with the disposition of the trust estate upon the death of the parties and that but for such agreed disposition, H would not have affected the transmutation of his separate property into community property.

The parties agreed to bifurcate the issue of the validity of the transmutation agreement. The trial court found that under the express terms of the transmutation agreement, H had transmuted his separate property identified in Exhibit A to community property.

APPELLATE COURT DECISION

The court of appeal affirmed. On appeal, husband argued that the estate planning documents were not sufficiently specific to transmute his separate property to community property. He said the language in both documents indicating that the documents were executed solely for estate planning purposes rendered his intent ambiguous. The court of appeal rejected this argument. Family Code § 850(b) provides that married persons may transmute the separate property of either spouse into community property by agreement or transfer, subject to the provisions of §§ 851 to 853. Section 852(a) provides, “A transmutation of real or personal property is not valid unless made in writing by an expressed declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” An express declaration is language expressly stating that a change in the characterization or ownership of the property is being made.

A writing signed by the adversely affected spouse is not an express declaration for purposes of § 852(a) unless it contains language which expressly states that the characterization or ownership of the property is being changed. The court of appeal noted that the transmutation agreement and trust repeatedly referenced the transmutation of H’s separate property into community property. Rejecting H’s argument that the statement in the transmutation agreement that the document was made solely for the purpose of interpreting how property shall be disposed of on the death of the parties, the court of appeal found that regardless of the motivations underlying the documents, they contain the requisite express, unequivocal declarations of a present transmutation.

H next argued that the transmutation was limited to estate purposes only. The court of appeal rejected this argument, explaining that it was not aware of any authority for the proposition that a transmutation, once affected, can be limited in purpose or otherwise rendered conditional or temporary. Once the character of the property has been changed, a “re-transmutation” can only be achieved by an express agreement to that effect that independently satisfies the requirements of § 852(a).

Finally, H argued that the transmutation and trust are governed by § 853(a) which provides, “A statement in a will of the character of property is not admissible as evidence of a transmutation of property in a proceeding commenced before the death of the person who made the will.” The court concluded that H failed to demonstrate that §853 is intended to apply to anything other than wills.

COMMENTS

Be careful what you sign! It is very common for married couples to visit an estate planning attorney. The attorney will prepare numerous documents that the parties sign without a careful reading or true understanding of the documents legal effect. If you have a will, trust, or documents prepared by an estate planning attorney it might be wise to review those documents to be sure you understand their legal effect.