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Depletion of the Asset Pool premature distributions, wastage &

add backs pre and post Stanford

Paul Fildes BEc LLB DipFamLaw

Accredited Family Law Specialist (LIV) Partner | Taussig Cherrie Fildes

13 September 2013

Research by: Justine Clark

BA LLB (Hons) Associate | Taussig Cherrie Fildes

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In property settlement proceedings pursuant to section 79 or 90SM a party may:-

◦ receive or expend joint assets or assets held in a party’s name prior to separation or the adjustment of the legal

and equitable property interests as between the parties

◦ intentionally, recklessly or negligently deplete, reduce, minimise or diminish the legal and equitable interests in

property

◦ expend joint assets or assets held post separation on legal fees

In certain circumstances such sums can be notionally added back to the property pool for division in

accordance with the overall exercise of discretion pursuant to section 79 or 90SM

Recent decisions of the trial division of the Family Court of Australia following the decision in

Stanford & Stanford [2012] HCA 52 suggest that add backs may not constitute a legal or equitable

interest in property and may not be added back dollar for dollar. The law is presently unsettled as

there is no authoritative Full Court decision.

Practitioners should be aware of the recent decisions of the trial division following Stanford.

Overview

13 September 2013

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Pursuant to section 79 and 90SM the Court is required to identify the legal and

equitable property interests of the parties as at the date of the final hearing.

Add backs are an exception to this rule where property is notionally added back.

In several circumstances, well identified by the cases, this first step often involves

including in the “pool of assets” items which no longer exist but which in order to do justice and

equity to the parties need to be notionally considered in determining what a fair share of the

existing pool of assets should be...Frequently this involves a notional consideration of assets

which have been in the possession of one of the parties at some time after separation but which

have been dispersed for that party’s own use.

(Milankov & Milankov [2002] FamCA 195 at paragraph 113)

Premature Distributions, Wastage & Legal Fees

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Decided prior to the decision in Stanford, see paragraphs 72 to 81:-

Financial losses incurred by the parties or either of them during the course of the marriage should be

shared by them, although not necessarily equally (In the Marriage of Kowaliw (1981) FLC 91-092 at 76,643 –

76,644 per Baker J). Adding back to the pool is the exception, not the rule. An exception can exist where

one party has embarked upon a course of conduct designed to reduce or minimise the effective value or

worth of matrimonial assets; or where one of the parties has acted recklessly, negligently or wantonly with

matrimonial assets, the effect of which has reduced or minimised their value or the pool of assets

(Kowaliw).  

…

The Full Court in Omacini and Omacini ([2005] FamCA 195; (2005) FLC 93-218 at paragraph 30) noted that

circumstances in which it is appropriate to notionally add back to the pool of assets fall into “three clear

categories”: where the parties have expended money on legal fees; where there has been a premature

distribution of matrimonial assets; and in the circumstances outlined in Kowaliw referred to above.

Challen & Challen [2007] FamCA 1292

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Furthermore, that Court rejected the notion that “the mere fact that a party has expended money

realised from the disposition of assets that existed as at the date of separation, will result in that

expenditure being added back ...” as being unduly simplistic (Omacini at paragraph 39).

What is crucial, is an assessment of the reasonableness or otherwise of the expenditure:

There seems to be no appropriate basis for notionally adding back moneys that existed at

separation, but which have been subsequently spent on meeting reasonably incurred, necessary

living expenses. Neither the Family Law Act nor the case law require that parties go into a state of

suspended economic animation once their marriage breaks down pending the resolution of their

financial arrangements. Parties are entitled to continue to provide for their own support. Whether

any expenditure so incurred is reasonable or extravagant is a matter that can be determined by

the trial judge (M v M [1998] FamCA 42 at paragraph 2.11).

Challen & Challen (cont).

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Three main categories of add backs have developed, as detailed by

Murphy J above and identified in Omacini & Omacini at paragraph 30, and

arise in circumstances where:-

◦ there has been a premature distribution of “matrimonial assets” (Townsend);

◦ the parties have expended money on legal fees (DJM v JLM [1998] FamCA 97);

◦ a party has embarked on a course of conduct that has negligently or recklessly

diminished or wasted assets (Kowaliw).

Add Backs are the exception rather than the rule…

Add Backs

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Nicholson CJ, with Fogarty and Jordan JJ agreeing, reasoned at 81,654 that:-

In my view, what occurred in this case, as I said during the course of argument was, in fact, a

premature distribution of a proportion of the matrimonial assets. What the husband did was to distribute

to himself an asset in which the wife had a legitimate interest. In such circumstances I consider that it

would be unjust in the extreme to simply treat such conduct by the husband as a matter to

which regard should be had under section 75(2). It seems to me that the husband has had the

benefit of that money. Had he retained, for example, the taxi licence instead of selling it, that would have

been brought into account as an item of property which would have been dealt with in the same way as the

remaining items of property in this case. Accordingly, I am of the view that the correct way in which to

deal with the husband’s receipt of those moneys is to bring them into the pool of assets on a

notional basis and make a distribution accordingly.

See Clives & Clives [2008] FamCAFC 172; Essex & Essex [2009] FamCAFC 236.

Premature Distributions:Townsend

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Baker J reasoned at 76,644:

As a statement of general principle, I am firmly of the view that financial losses incurred by

parties or either of them in the course of a marriage whether such losses result from a joint or

several liability, should be shared by them (although not necessarily equally) except in the

following circumstances:

(a) where one of the parties has embarked upon a course of conduct designed to

reduce or minimise the effective value or worth or matrimonial assets,

(b) where one of the parties has acted recklessly, negligently or wantonly with

matrimonial assets, the overall effect of which has reduced or minimised their value.

Conduct of the kind referred to in para (a) and (b) above having economic consequences is

clearly in my view relevant under s 75(2)(o) to applications for settlement of property instituted

under the provisions of s 79.

Court must assess the evidence of the parties relating to the expenditure to determine if it is reasonable: M &

M and C & C.

Wastage: Kowaliw

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Paragraph 11.6 of DJM v JLM:-

For reasons set out in Farnell, s 117 provides that each party to proceedings under the

Family Law Act shall bear their own costs unless the Court otherwise orders. Failing to add

back monies expended by parties on costs frequently has the effect of defeating the

policy of s 117 by permitting the pool of available assets for distribution between the

parties to be diminished by any monies that either of the parties have managed to

spend on their costs up to the date of trial. We are of the view that the normal approach

ought be to add costs already paid back into the pool. Whilst there may be cases where

that approach is inappropriate, the reasons why it is not taken ought normally be spelt out.

Legal Fees: DJM v JLM / Chorn & Hopkins

13 September 2013

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Paragraphs 57 to 60 of Chorn & Hopkins :-

If the funds used existed at separation, and are such that both parties can be seen as having

an interest in them (on account, for example, of contributions) then such funds should be added

back as a notional asset of the party, who has had the benefit of them.

If funds used to pay legal fees had been generated by a party post-separation from his or her

own endeavours or received in his or her own right (for example, by way of gift or inheritance),

they would generally not be added back as a notional asset;...Funds generated from assets or

businesses to which the other party had made a significant contribution or has an actual legal

entitlement may need to be looked at different from other post-separation income or acquisitions.

Outstanding legal fees themselves are generally not taken into account as a liability.

If in the exercise of discretion, it is determined that legal fees already paid should be taken into

account as a notional asset, then normally any liability associated with the acquisition of the

monies used to pay the legal fees should also be taken into account.

Legal Fees: DJM v JLM / Chorn & Hopkins

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Mayne & Mayne [2011] FamCAFC 192 (Faulks DCJ, May

and Strickland JJ)

◦ Discussed Shimizu and Kouper & Kouper.

Kouper & Kouper (No. 3) [2009] FamCA 1080 (Murphy J) at

paragraphs 106 to 108.

Shimizu & Tanner [2011] FamCA 271 at paragraph 74 Bryant

CJ agreed with the approach of Murphy J above in Kouper.

Recent Decisions – pre-Stanford

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The Wife contended that the trial judge erred in adding back

approximately $173,841 and erred in the application of the

principles in Kowaliw & Kowaliw (1981) FLC 91-092.

The sum was received by the Wife as an inheritance from her

late aunt during the marriage and expended by her during the

marriage.

The Wife was unable to account for a significant proportion of

the expenditure.

Mayne & Mayne – Full Court pre-Stanford

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Faulks DCJ:-

◦ did not agree that the add back should have been allowed at first instance as the premature

distribution and expenditure occurred during the marriage as opposed to after separation;

◦ considered the decision of Bryant CJ in Shimizu and Her Honour’s application of Kouper;

◦ determined that the Federal Magistrate should have made an adjustment pursuant to section 75(2)(o)

rather than an add back.

May J:-

◦ concluded that the Wife’s expenditure constituted reckless expenditure or the reduction of matrimonial

assets per Kowaliw;

◦ concluded that the Federal Magistrate had erred in adding back the sum and considering the Wife’s

conduct pursuant to section 75(2)(o).

Mayne & Mayne – Full Court pre-Stanford

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Strickland J:-

◦ concluded that the Federal Magistrate was entitled to add back the inheritance expended by the Wife

pursuant to Kowaliw;

◦ concluded the Federal Magistrate erred in adding back the sum and taking into account the Wife’s

conduct under section 75(2)(o);

◦ concluded that the funds did not need to be expended by the Wife after separation to be added back

to the pool;

◦ did not apply Shimizu and Kouper & Kouper.

Mayne & Mayne – Full Court pre-Stanford

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The pre-Stanford decisions identify that if Kowaliw is not applicable then an

adjustment can be made pursuant to section 75(2)(o).

In Lovine & Connor [2012] FamCAFC 168 at paragraph 96 the Full Court suggested

that financial conduct can be considered in the exercise of discretion pursuant to

section 79 and 90SM if it falls short of the conduct described in Kowaliw:-

Before turning to the balance of the challenges contained within these grounds,

we note that in Polonius & York [2010] FamCAFC 228, the Full Court of this Court endorsed

several approaches to the way in which relevant financial conduct or financial behaviour

can legitimately be taken into account in the s 79 process. Those approaches include, first,

including a notional asset in the divisible pool; second, by taking it into account when assessing

contributions; and third, in considering s 75(2) factors.

Recent Decisions – pre-Stanford

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See paragraphs 35 to 41 of the plurality of the High Court (French CJ, Hayne, Kiefel

and Bell JJ).

Of particular importance is the High Court’s emphasis on the existing legal and

equitable interests of the parties in property and the identification of those

interests according to common law and equitable principles.

An add back does not constitute a legal or equitable interest or right pursuant to

common law or equitable principles and therefore cannot form part of the property of

the parties in section 79 or 90SM proceedings.

The position is not clear in relation to legal fees.

The impact of Stanford

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Murphy J considered add backs at paragraphs 27 to 35:-

 

Where, but for the disposal of money or other property by one party, legal or equitable interests in it would have been part of those

existing at trial, it may be possible to assert, in the particular circumstances of a case, that the money or property is nevertheless to be

considered as part of the existing legal or equitable interests of the disposing party (sham transactions and circumstances where it

can be established that the property is held, for example, on trust by another for the disposing party are examples). The investigation

of issues of that type might be seen to be part of the establishment of the existing legal and equitable interests at trial – a task which

the majority of the High Court in Stanford (at [37]) said should be the first step in considering, pursuant to s 79(2) (cf s 90SM(3)),

whether it is just and equitable to make an order.

In many other cases, for example those which come within the convenient rubrics of “waste” (see Kowaliw & Kowaliw

(1981) FLC 91-092) or “premature distribution” (see, for example, Townsend), legal and equitable title to the money or property will

have passed. It could not be said that the money or property is part of the “existing legal or equitable interests” of a party or

the parties. The notion that such money or property should be treated as a “notional asset” or “notional property” appears

to run contrary to the thrust of the decision in Stanford: at issue is the consideration of two separate questions, the first of

which is whether existing legal or equitable interests should be altered.

Watson & Ling [2013] FamCA 57

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Where the Court has determined that it is just and equitable to make an order pursuant to s 79(2) or s 90SM(3) and there is clear

evidence that one party has engaged in conduct and, but for that conduct, the legal and equitable interests of a party or the parties

(or the value of those interests) would have been significantly greater, justice and equity may require recognition of the unfairness

inherent in those circumstances in the terms of the orders to be made.

 

How might that be recognised? First, consistent with existing authority, it can be recognised pursuant to s 75(2)(o) (cf

s 90SF(3)(r)) (see, for example, Omacini & Omacini [2005] FamCA 195; (2005) FLC 93-218, Browne & Green [1999] FamCA 1483;

(1999) FLC 92-873 and Cerini). Secondly, it might be contended that it might be recognised within the assessment of

contributions. This Court has long eschewed the notion of “negative contributions” (see, for example, Antmann & Antmann

(1980) FLC 90-908). Nevertheless, it might be argued that the “non-dissipating party” can be seen to have made a

disproportionally greater indirect contribution to the existing legal and equitable interests (for example to their

preservation) if it is established that, but for the other party’s unilateral dissipation, those existing legal and equitable

interests would have been greater or had a greater value.

The assessment of the circumstance under discussion is, ultimately, a matter of discretion (see, for example, Cerini at [46] and

Townsend at 81,654)…  

Watson & Ling [2013] FamCA 57

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What arises from Murphy J’s reasoning above is that:-

◦ following Stanford add backs may no longer be applicable

◦ where a party has engaged in negligent or reckless wastage instead of providing for a notional dollar for

dollar add back of the expended funds such conduct may form the basis of an adjustment in favour of the

other party pursuant to section 75(2)(o) and section 90SF(3)(r) or be considered in the assessment of the

respective parties contributions with the non-dissipating party being credited with a greater indirect

contribution to the acquisition, conservation or improvement and preservation of the legal and equitable

interest in property held by the parties

◦ It is significant that Murphy J does not deal with add backs relating to legal fees in paragraph 34 of the

decision and states “It may be that aspects of the erstwhile treatment of legal fees pre-Stanford

(see for example Chorn & Hopkins…) will require further consideration in an appropriate case”.

See also Bateman & Bowe [2013] FamCA 253, Baglio & Baglio [2013] FamCA 105, Toft &

Royce [2013] FamCA 372 and Sebastian & Sebastian (No. 5) [2013] FamCA 191.

Other Decisions – post-Stanford

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Cronin J dealt with an application for a partial property settlement. At paragraph 14 His

Honour commented that:

The High Court directed in Stanford that the first step in the consideration of whether to

exercise the power under s 79 is to identify, according to ordinary legal and equitable principles,

the existing legal and equitable interests of each of the parties in the property in dispute (at [37]).

The practice of creating notional “add-backs” for assets that have been dissipated has no place in

this assessment; however, it does not follow that unilateral behaviours resulting in the dissipation of

property or premature distributions are no longer relevant – in appropriate circumstances they

may affect the final order by virtue of s 75(2)(o). (See for example Omacini & Omacini [2005]

FamCA 195; (2005) FLC 93-218, Browne & Green [1999] FamCA 1483; (1999) FLC 92-873,

and the discussion of Murphy J in Watson & Ling [2013] FamCA 57).

Toft & Royce [2013] FamCA 372

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In view of the recent decisions of the trial division following Stanford

practitioners should in the first instance seek add backs pending an

authoritative decision of the Full Court and ensure that in the alternative the

arguments in respect of their client’s contribution based entitlement and

adjustment pursuant to section 75(2) address:-

◦ the contribution based entitlement if the add backs are allowed;

◦ the contribution based entitlement if the add backs are not allowed;

◦ the section 75(2) adjustment if the add backs are allowed;

◦ the section 75(2) adjustment considering section 75(2)(o) if the add backs are not

allowed.

Conclusions

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Thank you for your attention…

Questions and comments

13 September 2013