property continued - welcome to cflr · web viewfiduciary duties: area 4 of 5 three-step analysis...

Property ContinuedStephen J. Wagner, CFLS

Family Law Fiduciary DutiesProperty Continued

Teach a Man to Fish

The Reason for the Rule is Important“When the reason of a rule ceases, so should the rule itself” [CC 3510]

“Where the reason is the same, the rule should be the same” [CC 3511]

Reason for QuotesViolates PP rules

Important to read what the court said

Slides are more stand alone for subsequent review

Reduces note taking

Which makes you a better listener

Putting Fiduciary Duty Issues Into the Context of Property Issues

For both the exam and your practice

Overview

Overview (cont’d)

Detailed Coverage of Fiduciary DutiesDuty of loyalty

Duty of care

Duty of disclosure preseparation

Duty of disclosure postseparation

Presumption of undue influence

Remedies for breach

Detailed Coverage of Fiduciary Duties (cont’d)Transmutation (overview for context)

Tracing

Moore/Marsden

Pereira/Van Camp

Detailed Coverage of Fiduciary Duties (cont’d)Business valuation – fundamental concepts

Miscellaneous property issues

Postseparation disclosure

Postseparation reimbursement/charges

Fiduciary Duties: Do They Change the Outcome?Property Continued

OverviewThis section covers

Duty of loyalty Duty of care Duty of disclosure preseparation Presumption of undue influence (overview) Remedies for breach

Overview (cont’d)Note: Presumption of undue influence to be discussed in Transmutation Section and postseparation disclosure will be discussed as the last subject of the day

Importance of Detecting Interspousal Fiduciary Duty Issues

Importance of Detecting Interspousal Fiduciary Duty Issues (cont’d) Fundamental Principles of Interspousal Fiduciary Duties

Fiduciary Duties

Historic Duties Relating to Management & Control of CP

Fiduciary vs. ConfidentialNature of Obligation from Confidential or Fiduciary Relationship

Fiduciary vs. Confidential (cont’d)Nature of Obligation from Confidential or Fiduciary Relationship

Pre-1992 Cases Require CautionThe primary purpose of SB 716 (Stats 1991, Ch. 1026) & AB 1437 (Stats 1992, Ch. 37) was to legislatively overrule pre-1992 cases which held that the fiduciary duty owed between spouses after separation was limited to disclosure of existence of assets and liabilities and facts relating to the valuation which were peculiarly within the knowledge of the spouse

But only as it relates to the disclosure of material facts and information relating to characterization and valuation

Nature of Obligation from Confidential or Fiduciary Relationship

Pre-1992 Cases Require Caution (cont’d)1-1-1992: SB 716 (Stats 1991, Ch.1026)

1-1-1993: AB 1437 (Stats 1992, Ch.37) & AB 1396 (Stats 1992, Ch. 36)

The Legislature completely changed this limitation with the passage of the legislation discussed above as it relates to disclosure of all material facts and information


Vai v. Bank of America National Trust & Savings Ass'n (1961) 56 Cal.2d 329The prerequisite of a confidential relationship is the reposing of trust and confidence by one person in another who is cognizant of this fact

The key factor in the existence of a fiduciary relationship lies in control by a person over the property of another

It is evident that while these two relationships may exist simultaneously, they do not necessarily do so

Vai (cont’d)“It is evident that although the confidential relationship may be terminated by either party, if an individual continues to control property of the other he is held to the duties of a fiduciary as long as he retains such control, notwithstanding the termination of the confidential relationship.”


Vai (cont’d)“The dissolution of a partnership and attendant agreements respecting partnership property appear to be remarkably similar to the dissolution of the conjugal relation and property settlement agreements.”


Vai (cont’d)“Briefly, ‘in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.’”


In re Marriage of Bonds (2000) 24 Cal.4th 1 “The primary consequences of designating a relationship as fiduciary in nature are that the parties owe a duty of full disclosure, and that a presumption arises that a party who owes a fiduciary duty, and who secures a benefit through an agreement, has done so through undue influence.”


Marriage of Bonds (cont’d)“It long has been the rule that ‘[w]hen an interspousal transaction advantages one spouse, [t]he law, from considerations of public policy presumes such transactions to have been induced by undue influence.’ (In re Marriage of Haines, supra 33 Cal.App.4th at p.293 quoting from Brison v. Brison (1888) 75 Cal. 525, 529.)”

Fam C 721(b): “This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in [§§] 16403, 16404 and 16503 of the Corporations Code . . .”

The importance of the unique nature of marriage


Unique Nature of MarriageNature of Obligation from Confidential or Fiduciary Relationship

Unique Nature of Marriage (cont’d)“The essence of a fiduciary or a confidential relationship is that the parties do not deal in equal terms because the person in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert unique influence over the dependent party” –Barbara A.

“Stronger party” vs. “weaker party” is not the concept


Unique Nature of Marriage (cont’d)Nature of Obligation from Confidential or Fiduciary Relationship

Unique Nature of Marriage (cont’d)CASCT in Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197

“Plaintiffs argue that imposition of fiduciary obligations is appropriate whenever one party with a stronger bargaining position or greater knowledge has the ability to reach out and exploit the weaker party . . . . We do not agree that ability to exploit a disparity of bargaining power is a useful test of fiduciary duty. An agent owes a fiduciary duty to his principal, for example, even if the principal has the greater bargaining strength.” [Emphasis added.]


Nature of Obligation from Confidential or Fiduciary RelationshipMarriage of Haines: “It is the public policy of this state ‘to foster and promote the institution of marriage’. [T]he structure of society itself largely depends upon the institute of marriage.”

“It is fundamental that a marriage contract differs from other contractual relations in that there exists a definite and vital public interest in reference to the marriage relation....”

“Marriage is a matter of public concern. The public, through the state, has interest in both its formation and dissolution . . . .”

“Further, while marriage includes a confidential relationship, it encompasses much more.”

Nature of Obligation (cont’d)Marriage of Bonds: “[M]arriage itself is a highly regulated institution of undisputed social value, and there are many limitations on the ability of persons to contract with respect to it, or to vary its statutory terms, that have nothing to do with maximizing the satisfaction of the parties or carrying out their intent. Such limitations are inconsistent with the freedom-of-contract analysis espoused, for example, by the Pennsylvania Supreme Court.”

Constructive FraudCC 1573: Constructive fraud defined as: “any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault…”

Breach of Fiduciary Duty Constitutes Constructive Fraud

Constructive Fraud (cont’d)Vai v. Bank of America National Trust & Savings Ass'n: “The failure of the husband in the instant case to disclose fully and fairly material facts relating to the value of community assets from which [he] gained an advantage constitutes a concealment of material facts and a breach of this fiduciary duty. This is constructive fraud, whether or not such failure to disclose was accompanied by an actual intent to defraud.” [Emphasis added.]


Legal Effect of Imposing a Fiduciary Duty

In all transactions between parties by which the confidential or fiduciary relationship is implicated, and where one spouse gains an advantage over the other, a presumption of undue influence arises and the transaction is presumed invalid

The burden of proof to overcome the presumption of undue influence shifts to the advantaged spouse


Legal Effect of Imposing a Fiduciary Duty (cont’d)The breach of duty constitutes constructive fraud subjecting the benefitting party to claims for rescission and other remedies

Such as restitution, disgorgement of profits, and constructive trusts


Statutory Definition of Undue InfluenceCC 1575 defines undue influence as follows

In the use, by one and whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him

In taking an unfair advantage of another’s weakness of mind; or, In taking a grossly oppressive and unfair advantage of another’s necessities or distress.

Buchmayer v. Buchmayer (1945) 68 Cal.App.2d 462 (CA-2(3))“In cases of the first class which arise out of breach of a confidential relationship, weakness of mind of the person imposed upon is not a necessary element.”

“In the second class of cases, the existence of a confidential relationship is not a necessary element, although weakness of mind of the person imposed upon is such an element.”


Buchmayer (cont’d) “Where no trustee or confidential relationship exists, proof that one of the parties to a transaction obtained an advantage over the other does not raise a presumption that undue influence was used and hence does not place the burden upon the one benefited of proving that it was not used.”


Issues Arising from Premarital Agreements

Fiduciary Duties: Area 1 of 5

Fiduciary Duty Issues: Premarital Agreements

There is no presumption of a confidential relationship

No de jure confidential relationship, but a de facto one may exist

Marriage of Bonds: “Even when the premarital agreement clearly advantages one of the parties, the party challenging the agreement bears the burden of demonstrating that the agreement was not entered voluntarily.”

Premarital Agreements (cont’d)A de facto confidential or fiduciary relationship can be proven

Thus creating a fiduciary duty which is subject to a presumption of undue influence

Prior to Premarital Agreement

Opting Out of Confidential or Fiduciary RelationshipMarriage of Connolly (1979) 23 Cal.3d 590

“We have repeatedly held that parties may elect to deal with each other at arms’ length, and when they do so any fiduciary obligation otherwise owing is hereby terminated.” [Emphasis added.]

Opting Out

Corp C 16103: Partners CannotUnreasonably restrict access to books and records as set forth in Corp C 16403(b)

Unreasonably restrict the right to be furnished with info under Corp 16403(c)

Corp C 16103: Partners Cannot (cont’d)Eliminate the duty of loyalty under Corp C 16404(b), but if not manifestly unreasonable may do either of the following

The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty

Partners may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty

Corp C 16103: Partners Cannot (cont’d)Unreasonably reduce the duty of care under Corp C 16404(c)

Eliminate the obligation of good faith and fair dealing under Corp C 16404(d), but the partnership agreement may describe the standards by which the performance of the obligation is to be measured, so long as not manifestly unreasonable

Corp C 16103

Presumption of Confidential Relationship Arising from Marriage


Nature of Confidential RelationshipGeneral presumption: Defining characteristic of general presumption is duties of loyalty & disclosure

Duty of loyalty: Corp C 16404(b) Duty of disclosure: Corp C 16403 Both incorporated into Fam C 721(b)

Fam C 721(b)(a) Subject to subdivision (b), either spouse may enter into any transaction with the other, or with any other person, respecting property, which either might if unmarried.

Fam C 721(b) (cont’d)(b) Except as provided in Sections 143, 144, 146, 16040, and 16047 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that 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. 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, including, but not limited to, the following:

Fam C 721(b) (cont’d)(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.

(2) Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.

Fam C 721(b) (cont’d)(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.

Corp C 16403Corp C 16403(c)(1): “Without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this chapter.”

Corp C 16403(c)(2): “On demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise

improper under the circumstances.”

Corp Code 16403: Pre & Post DOS


In re Marriage of Sonne (Sonne I) (2010) 48 Cal.4th 118 “Wife errs in characterizing Husband's right to redeposit his member contributions as an investment opportunity governed by the interspousal fiduciary duty (see Fam. Code, §1100, subd. (e)), inasmuch as the right to recover the prior service credit was Husband's separate property.” [Emphasis added.]

Duty of LoyaltyParties may opt out of confidential relationship

Confidential relationship presumptively ends at separation or commencement of legal proceedings

De jure – confidential relationship arises upon marriage

Includes acting in the highest good faith and not taking the slightest advantage over the other spouse

Presumption of Duty Arising from Management & Control of CP and Remedies for the Breach of Duty


Duty of Management & ControlDuty of management and control does not end at separation – it arises from the fiduciary relationship, not a confidential relationship

The duty continues until: “the date of the distribution of the community or quasi-community asset or liability in question.”

Can Parties Opt Out of Fiduciary Duty Arising from Mgt. & Control?Family Code is silent

Fam C 721(b) incorporates by reference: Corp C 16403 & 16404

Corp C 16103

Nonmarital business partners may alter their obligations to some extent

Arguably, spouses may alter their management and control right, but likely must conform to Corp C 16103

Identifying and Distinguishing Confidential & Fiduciary Relationships

Fiduciary Duty

Fam C 1100“(a) . . . either spouse has the management and control of the community personal property . . . as the spouse has of the separate estate of the spouse.

(b) A spouse may not make a gift of community personal property, or dispose of community personal property for less than fair and reasonable value, without the written consent of the other spouse.”

Fam C 1100 (cont’d)“(c) A spouse may not sell, convey, or encumber community personal property used as the family dwelling, or the furniture, furnishings, or fittings of the home, or the clothing or wearing apparel of the other spouse or minor children which is community personal property, without the written consent of the other spouse.”

Fam C 1100 (cont’d)“(d) . . . a spouse who is operating or managing a business or an interest in a business that is all or substantially all community personal property has the primary management and control of the business or interest.”

Fam C 1100 (cont’d)“(e) Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court.”

Fam C 1100 (cont’d)Must disclose all MFI re: “…existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.” [Emphasis added.]


Duty of Care and Management & Control of CPMarriage of Duffy (2001) 91 Cal.App.4th 923: No duty of care, only duty of loyalty

SB 1936 (Stats 2002, Ch. 310): Marriage of Duffy legislatively overturned

Marriage of Walker (1989) 216 Cal.App.3d 644: Sua sponte duty of disclosure pursuant to Fam C 721(b) and Corp C 16403 (SB 1936 eff. 1/1/2003) cannot be applied to conduct prior to effective date

Duty of Care (cont’d)Marriage of Walker: “We conclude therefore that the 2002 amendment to [FC] section 721, which based the scope of spousal fiduciary duty on the duties that did not exist prior to the 2002 amendment, makes [FC] section 721 retroactive, to the extent that Corporations Code sections 16403, 16404 and 16503 impose greater duties on partners than did former Corporations Codes sections 15109, 15020, 15021 and 15022.”

Remedies for Breach of DutyFam C 1101(g) and (h)

Equitable remedy of restitution

Restitution serves two purposes: (1) to make the wronged party whole, and (2) to strip the wrongdoer of unjust enrichment

Dollar-for-dollar reimbursement and discretionary prejudgment interest under CC 3288

Restitution depriving the wrongdoer of unjust enrichment: Discretionary interest pursuant to CC 3288 and pro tanto interest in appreciation of an asset

Statutory Remedy: Fam C 1101

Fiduciary Duty

Are Damages Required?No damages required for breach of postseparation disclosure duties

See Marriage of Feldman (2007) 153 Cal.App.4th 1470

Fam C 1101(a)“A spouse has a claim against the other spouse for any breach of the fiduciary duty that results in impairment to the claimant spouse’s present undivided one-half interest in the community estate, including, but not limited to, a single transaction or a pattern or series of transactions, which transaction or transactions have caused or will cause a detrimental impact to the claimant spouse’s undivided one-half interest in the community estate.” [Emphasis added.]

Fam C 1101(b)“A court may order an accounting of the property and obligations of the parties to a marriage and may determine the rights of ownership in, the beneficial enjoyment of, or access to, community property, and the classification of all property of the parties to a marriage.” [Emphasis added.]

Fam C 1101(c)“A court may order that the name of a spouse shall be added to community property held in the name of the other spouse alone or that the title of community property held in some other title form shall be reformed to reflect its community character, except with respect to the following:

(1) A partnership interest held by the other spouse as a general partner. (2) An interest in a professional corporation or professional association. (3) An asset of an unincorporated business if the other spouse is the only spouse involved in

operating and managing the business. (4) Any other property, if the revision would adversely affect the rights of a third person.”

Fam C 1101(d)“(1) Except as provided in paragraph (2), any action under subdivision (a) shall be commenced within three years of the date a petitioning spouse had actual knowledge that the transaction or event for which the remedy is being sought occurred.

(2) An action may be commenced under this section upon the death of a spouse or in conjunction with an action for legal separation, dissolution of marriage, or nullity without regard to the time limitations set forth in paragraph (1).” [Emphasis added.]

Fam C 1101(d) (cont’d)“(3) The defense of laches may be raised in any action brought under this section.

(4) Except as to actions authorized by paragraph (2), remedies under subdivision (a) apply only to transactions or events occurring on or after July 1, 1987.”

Fam C 1101(e)“In any transaction affecting community property in which the consent of both spouses in required, the Court may, upon the motion of a spouse, dispense with the requirement of the other spouse’s consent if both of the following requirements are met:

The proposed transaction is in the best interest of the community. Consent has been arbitrarily refused or cannot be obtained due to the physical incapacity,

mental incapacity, or prolonged absence of the nonconsenting spouse.”

Fam C 1101(f)“Any action may be brought under this section without filing an action for dissolution of marriage, legal separation, or nullity, or may be brought in conjunction with the action or upon the death of a spouse.”

Fam C 1101(g)“Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney’s fees and court costs.

The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.” [Emphasis added.]

Fam C 1101(h)

“Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty.”

AB 583 NoteNote that Section 8 of AB 583 (Stats 2001, Ch. 703) states

“This act shall apply to any judgment that becomes final on or after January 1, 2002.”

Case Law Addressing Remedies

Fiduciary Duty

In re Marriage of Geraci (2006) 144 Cal.App.4th 1278 (CA-2(7))T/Ct improperly imposed sanctions on H for breach of fiduciary duty relating to partnership that did not exist

“Failing to voluntarily and accurately declare his actual earnings was in fact a breach of the fiduciary duties he owed to Jane as a spouse. Based on the fact [husband] falsely understated his post-separation earnings the Court was warranted in imposing some type of punishment and/or sanction against [him].”

In re Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090 (CA-2(8))H properly charged with increased value of stocks he sold in violation of ATROs

In re Marriage of Rossi (2001) 90 Cal.App.4th 34 (CA-2(4))H entitled to 100% of lottery winnings under Fam C 1101(h) when W fraudulently concealed them from H and Court

In violation of CC 3294

T/Ct could have imposed attorney fees on W as additional sanctions/penalties under Fam C 1101(h) for fraudulently concealing lottery winnings

In re Marriage of Quay (1993) 18 Cal.App.4th 961 (CA-6)Bad loan made over W’s objection properly awarded to H without offset

In re Marriage of Brewer & Federici (2001) 93 Cal.App.4th 1334 (CA-2(3))Judgment set aside due to W’s failure to disclose pension information she was in a superior position to obtain

In re Marriage of Hokanson (1998) 68 Cal.App.4th 987 (CA-2(4)) W liable for attorney fees and lost value due to her refusal to comply with Court order regarding the sale of the family residence

In re Marriage of Lister (1984) 152 Cal.App.3d 411 (CA-2(6)) Using CP asset to pay off SP obligation held to be violation of duty of management and control of CP in good faith

Therefore, reimbursement proper

CRC Rule 8.1115(e) (eff. 7-1-16)(d) When a published opinion may be cited

A published California opinion may be cited or relied on as soon as it is certified for publication or ordered published.

(e) When review of published opinion has been granted

(1) While review is pending Pending review and filing of the Supreme Court's opinion, unless otherwise ordered by the

Supreme Court under (3), a published opinion of a Court of Appeal in the matter has no binding or precedential effect, and may be cited for potentially persuasive value only. Any citation to the Court of Appeal opinion must also note the grant of review and any subsequent action by the Supreme Court.

Marriage of Schleich (2017) 8 Cal.App.5th 267 (CA-6)T/Ct awarded W 50% of a CP asset

As a remedy under Fam C 1101(g)

After it had already awarded W the asset

In the division of the CP estate

Marriage of Schleich (cont’d)T/Ct awarded W the full value of certain CP assets

As a remedy under Fam C 1101(h)

And awarded W 50% of the same asset

In the division of the CP estate

Marriage of Schleich (cont’d)T/Ct found a breach of fiduciary duty under Fam C 1101

For dissolution disclosure violations involving H’s SP

T/Ct awarded W

100% of a SP account in name of H Did not deduct from an award of a CP account funds W previously received And sanctioned H for use CP income spent before separation

Marriage of Schleich (cont’d)T/Ct sanctioned H for breach of fiduciary duty

Under Fam C 1101 and 2107

H appeals

CA-6: REVERSES and REMANDS

Marriage of Schleich (cont’d)Fam C 1101 creates a right of action and specific remedies

For breaches of fiduciary duty

That impair a spouse’s present undivided ½ interest in the CP estate

Marriage of Margulis (2011) 198 Cal.App.4th 1252

Marriage of Schleich (cont’d)The property rights protected under Division 4

Are distinct from the duties of disclosure under Division 6 of the Family Code

Failure to disclose can be remedied by fees and mandatory sanctions under Fam C 2107

And those sanctions can include sanctions under Fam C 271

Marriage of Schleich (cont’d)The property award remedy under Fam C 1101(h) applies

Only to the nondisclosure of a CP asset, not the nondisclosure of a SP asset

Marriage of Simmons (2013) 215 Cal.App.4th 584

While Simmons focused on Fam C 1101(h) the same analysis applies to subdivision (g)

Marriage of Schleich (cont’d)As to the use of SP funds by H, his nondisclosure can be sanctioned

But the CP estate was not impaired by his conduct

H was properly sanctioned for failing to report this information in his disclosure documents

Marriage of Schleich (cont’d)Properly read, the statute provides

For an award of 50% of the value of the community asset

Or 100% of the community asset

If fraud or oppression is involved

Marriage of Schleich (cont’d)Any award under Fam C 1101 is limited to CP

Not the SP of the non-disclosing spouse

Marriage of Fossum (2011) 192 Cal.App.4th 336 Marriage of Rossi (2001) 90 Cal.App.4th 34 Marriage of Geraci 144 Cal.App.4th 1278

Marriage of Schleich (cont’d)On the SS issue, the T/Ct did not err in imputing investment rates of return on H’s portfolio

H argued that he had no earning capacity

The findings of the T/Ct were based on substantial evidence

And the SS award was not an abuse of discretion

Marriage of Schleich (cont’d)H argued that the need based fees awarded to W should be reduced

Based on what he had incurred in fees

The panel observed that some of the fees awarded to W included sanctions based on failure to disclose

Marriage of Schleich (cont’d)The matter is reversed on the fee award made in favor of W for breach of fiduciary duty under Fam C 1101

H was independently subject to sanctions under Fam C 2107 for his nondisclosure

On remand T/Ct shall reexamine amounts awarded for sanctions

Williams v. Williams (1971) 14 Cal.App.3d 560 (CA-2(1))H must account for funds received immediately prior to separation

Or be charged for them

Interspousal Transactions (Transmutations) and Undue InfluenceFiduciary Duties: Area 4 of 5

Three-Step Analysis

Transmutations

Overview of 3-Step AnalysisStep 1. Was the transmutation valid as to form?

Step 2. Was the transmutation obtained free of fraud?

Step 3. Did the transmutation waive the right of reimbursement? (Fam C 2640)

Step 1: Transmutation Must Be Valid as to Form

Transmutation

Step 1: Transmutations Occurring Prior to January 1, 1985

Step 1: Transmutations Occurring On or After January 1, 1985 Step 2: Transmutation Must have been Obtained Free of Fraud

Is the Agreement Enforceable?

Step 2: Transmutation Free of FraudIF a transmutation is valid as to form

THEN the next issue is whether the otherwise valid transmutation was obtained free from actual or constructive fraud

Party benefiting must have participated in the transaction

Nature of the Interspousal Fiduciary Duty & the Presumption of Undue Influence

Step 2: Transmutation Free of Fraud (cont’d)Was there a confidential fiduciary relationship?

Did the parties resurrect or opt out of the confidential relationship?

Did the transaction arise out of the relationship?

Did the party that benefitted participate in the transaction?

What advantage triggers the presumption?

Elements Necessary to Establish Presumption of Undue Influence

Confidential or Fiduciary Relationship?

Was there a confidential or fiduciary relationship?

There is a rebuttable presumption that when tow people marry, they are in a confidential relationship

Step 2: Transmutation Free of Fraud

Resurrect or Opt Out of Relationship?Did the parties resurrect or opt out of the confidential relationship?

The parties can “opt out” of the confidential relationship Based upon reposing trust & confidence in another Who voluntarily accepts the confidence & trust


Transaction Arise Out of Relationship?Did the transaction arise out of the relationship?

IF a confidential relationship is shown to have existed when the transaction occurred THEN the next element of the prima facie case of undue influence Is whether or not the parties relied on that relationship in entering into it


Party that Benefitted in the Transaction Did the party that benefitted participate in the transaction?

In Marriage of Saslow (1985) 40 Cal.3d 848, the court stated that in order to create a presumption of undue influence

It must be established that the “wrongful spouse made use of the confidence reposed for the purpose of gaining an unreasonable advantage over the mate”


“Active Participation” in Nonmarital SettingOutside of the marital arena, it appears clear that some active participation by the advantaged spouse is required

That is not new law

See Prob C 84 and Prob C 15200

See also Prob C 16002 and Prob C 16004


“Active Participation” in Marital SettingIn the marital setting, the rule seems similar, although perhaps not exactly the same

Taylor v. Taylor (1944) 66 Cal.App.2d 390

Marriage of Haines


What “Advantage” Triggers Presumption?Any advantage?

Unfair advantage?

Pre and post 1/1/1992 – Fam C 721(b) unfair advantage – Marriage of Burkle (Burkle II) (2006) 139 Cal.App.4th 712


Step 2: Adequate ConsiderationAdequate consideration is the issue: Long standing rule in a Court of equity

NOT “Any” OR “Sufficient”

Step 2: Adequate Consideration (cont’d)CASCT held in Golson v. Dunlap (1887) 73 Cal. 157

“To disregard the question of inadequacy, therefore, is to attempt to apply a rule while shutting one's eyes to its object and purpose.”

“‘Accidental subsequent advantage made of a bargain is nothing.’ The fair value at the time, under all the circumstances, must be the criterion.”

Step 2: Five Elements to Overcoming the Presumption of Undue Influence Step 3: Did Transmutation Address Fam C 2640 Reimbursement Rights?

Transmutation

Step 3: Reimbursement RightsReimbursement rights survive transmutation

Unless a party has made a written waiver or has signed a writing that has the effect of a waiver

The party shall be reimbursed for the party’s contributions to the acquisition of the property

To the extent the party traces the contributions to SP source

Step 3: Fam C 2640 Extrinsic EvidenceFam C 2640(b) states that the writing must have the “effect of a waiver”

Arguably, therefore, in order to evaluate the “effect” of a writing on the overall transaction, the Court will need to examine all evidence surrounding the transaction

Step 3: Fam C 2640(c)“A party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division”

Step 3: Fam C 2640(c) After 1/1/2005A deed transferring property from one spouse’s separate estate to the other spouse’s separate estate would probably result in no reimbursement

Whereas such a deed transferring property into CP does not relinquish the SP reimbursement right

Effect of Fam C 2640(c) on Transmutations After 1/1/2005

Undue Influence

Transmutations

CC 1575: Undue influence“Undue influence consists

In the use, by one in whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him;

In taking an unfair advantage of another’s weakness of mind; or, In taking a grossly oppressive and unfair advantage of another’s necessities or distress.” [Enacted 1872]

Starr v. Starr (2010) 189 Cal.App.4th 277 (CA-2(8))Residence purchased in 1996 during marriage using $50K of H’s SP for down payment

Broker tells parties that they can get a lower interest rate if W quitclaims to H, and her name is added to title later (W had poor credit)

W testifies that H agreed to add her name to title later

2004 Disso: W testifies she signed quitclaim deed voluntarily; H says that W intended it to be SP all along

All payments came from CP

Starr (cont’d)

T/Ct finds that residence is CP – orders H to convey it to himself and W as tenants in common

H to be reimbursed for his $50K SP contribution per Fam C 2640(b)

H appeals, relying on Marriage of Mathews (2005) 133 Cal.App.4th 624

CA-2(8): AFFIRMS

Cont’d

Starr (cont’d)H’s failure to keep promise to add W’s name to title amounts to constructive fraud and undue influence

Where an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence

The evidence supports a finding that the house was CP based on H’s violation of his fiduciary duties to W

Holding

Starr (cont’d)Fam C 721(a): Such transactions “are subject to the general rules governing fiduciary relationships”

“When an interspousal transaction advantages one spouse, public policy considerations create a presumption that the transaction was the result of undue influence.” (Marriage of Haines at pp. 293-294)

Appellate Analysis

Starr (cont’d)H relies on Marriage of Mathews – “It is easy to see why Ron relies on Mathews. The factual setting seems virtually identical to this case, with the added bonus of Martha’s testimony that she signed the quitclaim deed freely and voluntarily.”

“There is a critical – and [the Court believed] fatal – distinction” between this case and Marriage of Mathews

“In Mathews, the wife said she merely assumed she would be added onto the title after escrow closed, while Martha testified that Ron [promised] her he would do so.”

“The importance of this distinction is tied up in both section 721 and its statutory predecessor, and the sometimes confusing use of the term ‘undue influence’ by decisions interpreting those provisions.”

Appellate Analysis

Starr (cont’d)Undue influence can be a defense to a contract based on the concept of coercive persuasion

“However, there is another type of conduct that amounts to undue influence: the use of confidence or authority to obtain an unfair advantage.” [CC 1575]

“This is triggered by one party’s breach of a confidential relationship.”

“It is also the type of conduct at issue in Brison I, supra, 75 Cal. 525, which… explains not only how ‘undue influence’ became shorthand for conduct that violates section 721, but why the evidence in this case supports the judgment.”

Appellate Analysis

Starr (cont’d)Brison v. Brison (Brison I) (1888) 75 Cal. 525 and Brison v. Brison (Brison II) (1891) 90 Cal. 323 announced the principle that “constructive fraud due to breach of a confidential relationship amounts to undue influence, terminology that was adopted by other Courts.”

They also “established a paradigm fact pattern of constructive fraud arising from one spouse’s conveyance of property to the other spouse based on an unfulfilled promise by the other spouse to reconvey.”

Appellate Analysis

Starr (cont’d)“Even if the attorney who advised the wife had been employed by her, the husband was not exonerated because ‘by accepting the deed upon the statement made in his presence of the purposes for which he was to hold the land, [he] became a party to the transaction, and by implication promised to fulfill the purpose of the trust.’ (Jones v. Jones (1903) 140 Cal. 587)”

“As a result, the failure to fulfill this agreement was constructive fraud, allowing the wife to have the deed declared void… In short, even when the suggestion to convey came from a third party adviser and no express promises were made by the husband, he impliedly promised to fulfill the conditions of the transfer, and the failure to do so was constructive fraud.”

Appellate Analysis

Starr (cont’d)Conclusion: “[T]he failure to add [W] onto the title is constructive fraud under [Fam C 721], and constructive fraud is presumed to be undue influence, which means the transaction was not free and voluntary.”

Appellate Analysis

Miscellaneous – BUT IMPORTANT!

In re Marriage of Fossum (2011) 192 Cal.App.4th 336 (CA-2(1))1994: Home purchased during marriage

Lender tells parties that they can obtain a better interest rate if W’s name not on title

H promises to add W’s name to title after transaction is completed

H keeps promise

Marriage of Fossum (cont’d)1998: Parties agree to take W off title so that H can refinance the property and obtain a better rate

They further agree that, as they had done in the past, H would add W’s name to title after the refinance was complete

H does not keep his promise this time; instead, the deed simply says property is H’s as “sole and separate property”

Marriage of Fossum (cont’d)T/Ct

H argues that the house is SP with a Moore/Marsden interest Court disagrees and finds that H failed to rebut the presumption that the home is CP

Marriage of Fossum (cont’d)H argues that T/Ct failed to adhere to the “form of title” rule and deed must control over W’s claim of the existence of an oral agreement to replace her name on the deed

CA-2(1) disagrees

Holding

Marriage of Fossum (cont’d)“If one spouse secures an advantage from the transaction, a statutory presumption arises under section 721 that the advantaged spouse exercised undue influence and the transaction will be set aside.” (Matthews/Haines)

“ ‘When a presumption of undue influence applies to a transaction, the spouse who was advantaged by the transaction must establish that the disadvantaged spouse’s action was freely and voluntarily made, with a full knowledge of all the facts, and with a complete understanding of the effect of the transaction.’ ”

“The advantaged spouse must show, by a preponderance of evidence, that his or her advantage was not gained in violation of the fiduciary relationship.”

Appellate Analysis

Marriage of Fossum (cont’d)“The statutory presumption of undue influence applies if

(1) there is an interspousal transaction by which (2) one spouse gains an advantage over the other. …

Those prerequisite elements are satisfied here with regard to the 1998 quitclaim deed.”

Appellate Analysis

Marriage of Fossum (cont’d)“Thus, Edward bore the burden to establish, by a preponderance of evidence, that Sandra's signing of the third quitclaim deed was freely and voluntarily made with full knowledge of all the facts and with a complete understanding of its effect of making the house Edward's separate property.”

Appellate Analysis

Marriage of Fossum (cont’d)“Substantial evidence supports the trial court’s finding that Edward failed to carry this burden.

Sandra did testify she executed the 1998 deed freely and voluntarily, and that she understood the legal import of a quitclaim deed.

However, when Sandra agreed to deed her interest in the property to Edward, she did so based on his promise to restore her name to the title once the refinance was complete.” [Emphasis added.]

A promise that husband never intended to fulfill

Appellate Analysis

Marriage of Fossum (cont’d)Although H argues that the form of title should control under Brooks / Ev C 662…

“The problem with Edward's argument is that it essentially ignores the rule that the form of title presumption simply does not apply in cases in which it conflicts with the presumption that one spouse has exerted undue influence over the other.”

H simply did not rebut the presumption that he failed to deal with wife in the highest good faith

Appellate Analysis

Marriage of Fossum (cont’d)Prior to separation (DOS 11-2002), W takes a cash advance on a credit card and “never” disclosed transaction to H

T/Ct says W breached her fiduciary duty to H, orders her to give him half of $24K cash advance and denies his request for atty fees under Fam C 1101

H appeals and argues that atty fees are mandatory

Fam C 1101(g)

Marriage of Fossum (cont’d)Under Fam C 721 and Fam C 1100 et seq., spouses owe each other fiduciary duties in the

management and control of CP

Where, as here, T/Ct finds a breach, but it does not rise to the level of sanctionable conduct, Fam C 1101(g) applies

This subdivision says that its remedies “shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or

transferred in breach of the fiduciary duty plus attorneys fees and costs.” [Emphasis added.]

Fam C 1101(g): Appellate Analysis

Marriage of Fossum (cont’d)Issue: Whether T/Ct properly interpreted subdivision(g) as vesting it with the discretion to deny an award of fees to H

“The language of section 1101, subdivision (g) is unambiguous and mandatory.”

It says SHALL!

“Once a breach is shown, the trial Court lacks discretion to deny an aggrieved spouse’s request for attorney fees.”

Fam C 1101(g): Appellate Analysis

Marriage of Fossum: 3 Duties Owed by SpousesDuty of Loyalty: Applicable per Fam C 721(b)

Duty of Care: No duty of care per Marriage of Duffy (2001) 91 Cal.App.4th 923; Legislature responds & incorporates Corp C 16404 (and Corp C 16403)

“(a) The fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c)…

(c) A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” [Emphasis added.]

Marriage of Fossum: 3 Duties Owed by SpousesDuty of Disclosure: Per Marriage of Walker, no duty prior to 1-1-2003

1-1-2003 forward, Corp C 16403 applies

Postseparation DisclosureProperty Continued

Postseparation Disclosure Rights and Obligations


Importance of Postseparation Fiduciary Disclosure Obligations

Two Homes / Home-builders

Evolution of Postseparation Disclosure Obligations1987: Recreation of fiduciary duties in management & control of CP

SB 1071 (Stats 1986, Ch. 1091) Eff. 7-1-87

1992: Preseparation fiduciary duties

AB 2650 (Stats 1992, Ch. 162) / Fam C 721(b) & Fam C 1100(e)

1993: Postseparation fiduciary duties

AB 1500 (Stats 1993, Ch. 219) / Fam C 2120 et seq. AB 1500 (Stats 1993, Ch. 219) / Fam C 2100 et seq.

Postseparation Disclosure Obligations (cont’d)2002: Amendments to Fam C 2102 & other statutes

AB 583 (Stats 2001, Ch. 703) / Fam C 2102, 2105, 2107

2003: Amendments in response to Marriage of Duffy

SB 1936 (Stats 2002, Ch. 310) / Fam C 721(b), Corp C 16403, 16404

Trial by Ambush is No Longer Acceptable

Purpose of Discovery ToolsThe purpose of the discovery rules is to “enhance the truth- seeking function of the litigation process and eliminate trial strategies that focus on gamesmanship and surprise” [Williams v. Volkswagenwerk (1986) 180 Cal.App.3d 1244]

In other words, discovery process is designed to “make a trial less a game of blind man’s [bluff] and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent” [Greyhound Corp. v. Superior Court (1961) 56 Cal.2d 355]

Informal Discovery Under the Family CodeCodified public policy

Spouses’ bill of rights

Fam C 2100 & Fam C 2120o Schnabel v. Superior Court (Schnabel) (1993) 5 Cal.4th 704

Implementation statuteso Marriage of Feldman (2007) 153 Cal.App.4th 1470

The Bill of Rights for Spouses

The Bill of Rights: Fam C 2100(c)“In order to promote this public policy, a full and accurate disclosure of all assets and liabilities in

which one or both parties have or may have an interest must be made in the early stages… regardless of the characterization as community or separate, together with a disclosure of all income and expenses of the parties.”

Fam C 2100(c)“Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent there have been any material changes so that at the time the parties enter into an agreement for the resolution of any of these issues, or at the time of trial on these issues, each party will have a full and complete knowledge of the relevant underlying facts.”

Fam C 2120Can only be implemented with full disclosure of community, quasi-community & separate assets, liabilities, income and expenses and decisions freely and knowingly made

Schnabel: CASCT Weighs in“Whatever right [H] has to inspect records of the corporation, [W] also has…”

“Spouse is entitled to complete [financial] disclosure of all relevant information…”

“[D]ivision of assets and … support …those interests are strongly protected by California law.”

In 1993 CASCT applied Fam C 2100, 2120 and 1100(e)

Implementation Statutes

Fam C 721(b): Applicable Pre & Post DOSSubject to the same rights and duties of nonmarital business partners

Imposes a duty of the highest good faith & fair dealing on each spouse

H & W are subject to the general rules governing fiduciary relationships

Fam C 721(b) (cont’d)Trustee: Accounting and holding as trustee, any benefit or profit from any transaction

Rendering upon request, true & full information of all things affecting any transaction

Access at all times to any books kept

Corp C 16403 Applicable Pre & Post DOS

Corp C 16404 Pre & Post DOS

Fam C 2102 Postseparation sua sponte Obligation of Disclosure

From DOS to distribution–accurate and complete disclosure – duties per Fam C 721(b) all activities that affect the A & L of other party, including but not limited to

Assets & liabilities Written disclosure of any investment opportunity, business opportunity, or other income–

producing opportunity The operation or management of a business

In re Marriage of Sorge (2012) 202 Cal.App.4th 626 (CA-4(1))Long term marriage; 3 Cs

Pursuant to MSA, parties agree to $8,500/mo CS based on H’s gross income of approximately $800K per year

Also agree to $12K/mo in nonmodifiable SS for 120 months

Marriage of Sorge (cont’d)In 2007, 4 years after entry of judgment, W files OSC to modify, among other things, CS

W also seeks atty fees, sanctions, and SS arrears

Parties hire a joint expert to analyze respective financial situations

Marriage of Sorge (cont’d)Sanctions: H sanctioned $75K

In part, because the court found he had fiduciary duty to provide W with material facts and info regarding his income after judgment was filed and this duty continued until the court no longer had juris over CS

T/Ct found Fam C 2101(c) creates duty that lasts beyond end of divorce

Appellate Analysis

Marriage of Sorge (cont’d)Sanctions (cont’d)

The court also sanctioned H because his behavior “frustrated settlement” CA-4(1) REVERSES sanction award because it was based, in part, upon violation of a

fiduciary duty that does not exist

Appellate Analysis

Marriage of Sorge (cont’d)Fam C 2102(c) provides: “From the date of separation to the date of a valid, enforceable, and binding resolution of all issues relating to child or spousal support and professional fees, each party is subject to the standards provided in Section 721 as to all issues relating to the support and fees, including immediate, full, and accurate disclosure of all material facts and information regarding the income or expenses of the party.”

Appellate Analysis

Marriage of Sorge (cont’d)Trial Court’s analysis

“The trial court proceeded to conclude that if it were to agree with Joseph's argument that the Wyoming divorce decree constituted a ‘valid, enforceable and binding resolution’ of the child support issue, then the result would be that the fiduciary duties would be ‘available only to parents who are still married but not to parents who were never married or who are no longer married.’”

Appellate Analysis

Marriage of Sorge (cont’d)Trial Court’s analysis (cont’d)

“According to the trial court, Joseph's argument would result in a two-class system of parents: ‘One class of parents would be able to effectively obtain or modify child support orders fairly, efficiently, accurately and economically where the others would have to resort to formal discovery which can have the opposite effect.’

Surely the Legislature did not intend to create such a two class system”

Appellate Analysis

Marriage of Sorge (cont’d)There is no definition for “valid, enforceable, and binding resolution” in the statute

Therefore, the court looks to legislative intent

Looked to the Supreme Court’s distinction between temporary and permanent child custody orders

Looked to Fam C 3660 et seq. – annual request for I&E Declaration Entry of order re permanent support causes the duty of disclosure to cease

Appellate Analysis

Fam C 2102 Postseparation Sua Sponte Obligation of Disclosure From the DOS to the date of a valid, enforceable, and binding resolution of support & fees – duties per Fam C 721(b) as to all issues

Income and expenses Immediate, full and accurate disclosure All MFI

Fam C 2104: Prelim Declaration of DisclosurePDD executed under penalty of perjury

Not filed with the court Sufficient particularity

o Identity of all assets and liabilities

o Percentage of ownership in each asseto No requirement for characterization or values

Income & expense declaration

Within 60 days of filing the petition or within 60 days of filing the response [Fam C 2104(f)]

Fam C 2105: FDDFDD executed under penalties of perjury

(a) Before or at the time enter into agreement of property/ support (if goes to trial – no later than 45 days before 1st assigned trial date)

(b) FDD shall include specified information

(c) Limitations on order setting aside a judgment

(d) The parties may stipulate to a mutual waiver

Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951“Kaiser also claims that the Engallas failed to demonstrate actual reliance on its misrepresentations. Actual reliance occurs when a misrepresentation is “ ‘an immediate cause of [a plaintiff’s] conduct, which alters his legal relations,’ ” and when, absent such representation, “ ‘he would not, in all reasonable probability, have entered into the contract or other transaction.’ ” ( Spinks v. Clark (1905) 147 Cal. 439, 444 [82 P. 45]; see also 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 711 at p. 810.)

Engalla (cont’d)“It is not . . . necessary that [a plaintiff’s] reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct. . . . It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.” ( Rest.2d Torts, § 546, com. b, p. 103.)

Engalla (cont’d)Moreover, a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. ( Vasquez v. Superior Court (1971) 4 Cal. 3d 800, 814 [94 Cal. Rptr. 796, 484 P.2d 964, 53 A.L.R.3d 513]; see also 12 Williston on Contracts (3d ed. 1970) § 1515, p. 480; Rest.2d, Contracts, § 167.)

Engalla (cont’d)A misrepresentation is judged to be “material” if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question” ( Rest.2d Torts, § 538, subd. (2)(a); see also Barnhouse v. City of Pinole (1982) 133 Cal. App. 3d 171, 188, fn. 5 [183 Cal. Rptr. 881]), and as such materiality is generally a question of fact unless the “fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.” ( Rest.2d Torts, § 538, com. e, p. 82.)

Engalla (cont’d)Thus, the Engallas need only make a showing that the misrepresentations were material, and that therefore a reasonable trier of fact could infer reliance from such misrepresentations, in order to survive this summary-judgment-like proceeding, absent evidence conclusively rebutting reliance. (Cf. Security Pac. Nat. Bank v. Associated Motor Sales (1980) 106 Cal. App. 3d 171, 179-180 [165 Cal. Rptr. 38] [presumption which shifts the burden of proving evidence entitles plaintiff to summary judgment if defendant fails to produce evidence to rebut the presumption].)

Restatement 2nd of Contracts Section 167 as Cited to by EngalasWhen a misrepresentation is an inducing cause

A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent

Fam C 2105: FDD (cont’d)(b) Specified information

(1) MFI on characterization (2) MFI regarding valuation of CP / in which CP contended has an interest (3) MFI regarding amounts of CP obligations / for which CP contended has a liability (4) MFI regarding earnings, accumulations, and expenses

Fam C 2105: FDD (cont’d)(d) Representations for waiver

(1) PDD’s have been completed & exchanged (Fam C 2104) (2) I&E’s have been completed and exchanged with all MFI (3) PDD’s have been augmented for MFI: characterization of A&L, valuation, etc. (4) Waiver is knowingly, intelligently & voluntarily (5) Waiver does not limit disclosure obligations; confirms disclosure obligation fulfilled set

aside

What is “Material”?“Material” (Oxford University Press): “important, essential, relevant”

“Material” (Black’s Law Dictionary): “of such a nature that knowledge of the information would affect a person’s decision making process, significant, essential; Cf RELEVANT”

What is “Material”? (cont’d)“Material Fact” (Black’s Law Dictionary): “a fact that is significant or essential to the issue at hand”

“Relevant” (Black’s Law Dictionary): “Logically connected and tending to prove or disprove a matter in issue, having appreciable probative value …. Cf MATERIAL”

What is “Material”? (cont’d)

Fam C 1100(e) & Fam C 2105

All MFI

Fam C 2100(c)

“[E]ach party will have a full and complete knowledge of the relevant underlying facts”

What is “Material”?

What is “Material”? (cont’d)

In re Marriage of Margulis (2011) 198 Cal.App.4th 1252 (CA-4(3))Marriage of Margulis is a postseparation case involving the shifting of the burden of proof

However, look at the code sections the court addresses and determine if it has applicability to preseparation fiduciary duties

And, what other postseparation factual circumstances might Marriage of Margulis apply to, such as Fam C 721(b)(1)-(3)

Marriage of Margulis (cont’d)“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, including, but not limited to, the following:

(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.

Marriage of Margulis (cont’d) (2) Rendering upon request, true and full information of all things affecting any

transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.

3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.”

Characterization: General Presumption“The characterization of property as community or separate can be determined by the date of acquisition, the application and operations of presumptions, or whether the spouses have transmuted the property.” [Marriage of Sivyer-Foley and Foley]

In re Marriage of Rossin (2009) 172 Cal.App.4th 725 (CA-6)“As we explain, in this case, the circumstances surrounding acquisition of the disability policy compel its characterization as separate property. The pivotal factor is the time of acquisition of the right to the benefits; a secondary consideration here is the source of funds for acquisition. In our case, the right to benefits was acquired by the wife prior to marriage with separate property funds. That being so, the benefits must be characterized as separate property.” [Emphasis added.]

Marriage of Rossin (cont’d)“Under the circumstances presented here, characterization of the disability benefits turns on ‘the single concrete fact of time.’ In this case, the wife accrued the full right to those benefits prior to marriage. For that reason alone, they are her separate property. There is no suggestion in the briefs or in the record that any contrary title presumption applies, that there has been a transmutation, or that any other circumstance has worked a change in the character of this property.” [Emphasis added.]

In re Marriage of Margulis (2011) 198 Cal.App.4th 1252 (CA-4(3))H controls finances during marriage (brokerage accts, two community IRAs held in H’s name)

H continues to manage community investments for 12 yrs after separation and has complete control of substantial community investment accts, pays all bills

W trusts H to manage finances for their mutual benefit

Just before trial, H discloses for 1st time that once-brimming investment accounts are virtually empty

Without any corroborating evidence, H attributes dissipation of account values to proper expenditures and stock market losses

Marriage of Margulis (cont’d)W argues H should be charged with missing funds unless he can prove money not misappropriated

W’s only evidence of missing funds is financial statement H prepared 3 yrs after separation and 9 yrs before trial

T/Ct: Document = insufficient evidence; declines to charge H with missing funds, but sanctions him for failing to keep adequate records

The ensuing property division requires W to make large equalizing payment to H

Marriage of Margulis (cont’d)CA-4(3): REVERSES

Based on relevant Family Code provisions, equitable principles, and caselaw, T/Ct erred in failing to shift to managing spouse B of P concerning missing community assets

Once nonmanaging spouse makes prima facie showing of existence and value of community assets in other spouse’s control postseparation, B of P shifts to managing spouse to prove proper disposition or lesser value of assets

Failing such proof, Court should charge managing spouse with assets according to prima facie showing

Holding

Marriage of Margulis (cont’d)DOS in September 1996

Limited documentary evidence of value of community investment accounts at DOS

1996 Schedule D, statement of capital gains and losses, reported H and W sold $1,142,111 worth of short- and long-term stock holdings, two other long-term investments that generated another $68,091

Size of community estate grew larger postseparation due to several infusions of community cash

After separation, H moved to Chicago and continued to manage community investments and to pay W’s bills, including community obligations

Analysis

Marriage of Margulis (cont’d)W provides 2-page personal financial statement (prepared and signed by H) dated 2-1-1999 which reflects total assets of $1.3M

Joint forensic accountant says that he cannot perform tracing because, despite repeated requests, H failed to provide adequate records

W argues that

H should be charged with receiving assets under his control during postseparation period = $901K

If Court agrees, W should retain home worth $450K, $20K in cash and $238K equalizing payment

Analysis

Marriage of Margulis (cont’d)H argues that home is only remaining community asset and proposes it be sold; offers no explanation as to disposition of substantial retirement accts other than to blame market losses and payment of community/family expenses during postseparation period

H does provide forensic accountant’s testimony and report showing disposition based on some records and “conversations with husband”

T/Ct gives W’s 2-page statement little weight, substantially agreeing with H’s suggested division—W owes H $189K equalizing payment; but, sanctions H $20K for failing to keep adequate records and $30K towards W’s fees

Analysis

Marriage of Margulis (cont’d)“Once a nonmanaging spouse makes a prima facie showing of the existence and value of community assets in the other spouse's control postseparation, the burden of proof shifts to the managing spouse to prove the proper disposition or lesser value of those assets. Failing such proof, the court should charge the managing spouse with the assets according to the prima facie showing.”

Analysis

Marriage of Margulis (cont’d)Court seeks amici curiae since this issue is not fully articulated in any published case

Why shift burden of proof in these situations?

Cases show that it is common to shift burden where there is unequal access to records The risk of incompleteness is now borne by the party obligated to keep records

Analysis

Marriage of Margulis (cont’d)Shifting B of P comports with overarching goal of fiduciary duty stated in Fam C [Fam C 721, 2100 et seq. and 1100 et seq.]

Accountability is fundamental Duty to account lasts until final division of assets Fiduciary duties in Fam C are very broad

o Partnership fiduciary duties identical to interspousal fiduciary duties o Parties must disclose existence and value of assets and their dispositiono Further, H’s duty to show disposition of funds is ongoing and must occur without

demand per Corp C 16403(c)

Analysis

Marriage of Margulis (cont’d)T/Ct found very narrow breach of “duty to keep records”; therefore, it applied wrong remedy (sanctions) instead of awarding W at least 50% of undisclosed or wrongfully transferred assets

Analysis

Marriage of Margulis (cont’d)Three other cases have had similar fact patterns with similar appellate level results: Williams v. Williams (1971) 14 Cal.App.3d 560; Marriage of Ames (1976) 59 Cal.App.3d 234; Marriage of Valle (1975) 53 Cal.App.3d 837

In Marriage of Williams Justice Thompson cited equitable “principle of burden based upon superior knowledge of the facts” as justification for shifting to managing spouse B of P on “unexplained disappearance of community funds ….”

Analysis

Marriage of Margulis (cont’d)H’s final arguments fail

Bono says you shift the burden only after FRAUD is shown; that did not occur here

CA-4(3) says Bono is estate case where H was dead and could not explain what happened to funds

Fam C 721: Nothing in statute is meant to impose burden of keeping detailed records

Court said maintaining these types of records is not burdensome and records are not “detailed” as citied in Fam C 721

Duty to account does not disappear due to long separation period (12 yrs)

Analysis

Marriage of Margulis (cont’d)T/Ct awarded H Epstein credits which was reversed on appeal

Epstein credits awarded when one spouse uses SEPARATE PROPERTY for community purposes postseparation

In this case, H could not show that funds used to pay postseparation expenses were SEPARATE PROPERTY since he could not trace character of funds in various accounts to his SP

After all, he had NO RECORDS

Minor Issue

In re Marriage of Kochan (2011) 193 Cal.App.4th 420 (CA-2(8))T/Ct finds H breached fiduciary duties to preserve community asset by failing to pay mortgage & cooperate in selling home; however, T/Ct reserves juris over issue of assessing actual damages caused by his conduct

H argues no substantial evidence to support T/Ct’s finding

Remedy

IRMO Kochan (cont’d)CA-2(8) disagrees with H: T/Ct’s finding of “an indivisible two-part assignment of fault” is supported by substantial evidence

H did not act reasonably to preserve whatever value may have been in home H did not “want to take any responsibility, or exert any effort” to preserve asset

Family Residence Analysis

IRMO Kochan (cont’d)However, it is unknown whether H’s dilatory conduct caused any actual loss to community: “It may well be that the debt owed on the residence exceeded its value, in which case Roman’s acts would not have caused any loss in any event. At this point, it is too early to address such matters.”

Since T/Ct reserved juris on FR issue, H can provide evidence that debt owed exceeded FR’s value – no financial harm


IRMO Kochan (cont’d)KEY ISSUE: did H’s conduct cause “a loss of equity or other damage.” – If so, it appears that the court would limit community’s recovery to damages which could be proven through admissible and credible evidence

Fees per Fam C 1101 (g)?


IRMO Kochan (cont’d)In 2007, during disso proceedings, H files Chapter 7

H’s bankruptcy petition listed secured debts including mortgage loans with a 1st and 2nd trust deed on FR, a lease on W's car, and a loan on another vehicle

H listed another $100K (rounded) in unsecured community debts, including $5K in atty fees that the family law court had ordered him to pay

In February 2008, H served and filed written notice advising family law court and W of automatic stay in his bankruptcy action

Bankruptcy Analysis

IRMO Kochan (cont’d)T/Ct held

Over several trial days, family law court tried issues exempt from bankruptcy stay, including atty fees

The court ordered an award of $120K (rounded) in atty fees to W’s counsel CA-2(8): REVERSES (Although it agrees that issue of atty fees should be revisited because

existing orders appear to be based, at least in part, on H’s earning capacity, rather than actual income)

Bankruptcy Analysis

IRMO Kochan (cont’d)H argues that $120K in atty fees to W’s counsel must be reversed because it “countermands the orders of the bankruptcy court.”

The court disagrees

“To the extent Roman appears to argue that all of the attorneys' fees incurred by Janice up to the date he filed his bankruptcy petition were discharged in his bankruptcy case, we do not agree.”

Appellate analysis (Bankruptcy/Fees)

IRMO Kochan (cont’d)The court disagrees (cont’d)

“The bankruptcy statutes provide that a petitioner's domestic support obligations are not

dischargeable in bankruptcy, and attorneys' fees orders in dissolution actions are encompassed in this rule. (11 U.S.C. § 523(a)(5); Jones v. Tyson (9th Cir. 1975) 518 F.2d 678, 680.)”

However, since T/Ct based its fee ruling at least in part on H’s earning capacity ($21K/mo), rather than actual income, the court is ordered on remand to reconsider the amount of fees awarded to W

Appellate analysis (Bankruptcy/Fees)

Fam C 2107: EnforcementIf one party fails to serve on other a PDD or FDD OR fails to provide info required with sufficient particularity

AND other party has served the respective DOD on the noncomplying party

Next Step: Complying party may request the appropriate DOD or further particularity

If failure to comply

File motion to compel a further response File motion for order preventing evidence

Fam C 2107: Enforcement (cont’d)Unless the court finds that noncomplying party acted with substantial justification or that other circumstances make imposition of sanction unjust

AND shall include reasonable attorney’s fees, costs incurred, or both

Sanctions shall be in an amount sufficient to deter repetition of the conduct or comparable conduct

In re Marriage of Fong (2011) 193 Cal.App.4th 278 (CA-2(3))W is not entitled to award of sanctions under Fam C 2107(c) because she was not a “complying party” since she had failed to file an FDD

The award of attorney fees and costs under Fam C 271 was proper

T/Ct was not required to issue a statement of decision

IRMO Fong (cont’d)T/Ct awards W $200K in sanctions under Fam C 2107 because of H’s obstructionist behavior (failed to comply with discovery requirements/court orders)

CA-2(3): REVERSES – Only a “complying party” can move for sanctions under Fam C 2107; W not a “complying party” because she failed to file FDD before the fee motion

Each party is required to fully disclose “in the early stages”

Appellate Court: The requirements for an award of monetary sanctions under Fam C 2107 is a question of statutory construction

Fam C 2107(c) Analysis

IRMO Fong (cont’d)Fam C 2107(a) expressly states that only a “complying party” may request a “noncomplying party” to prepare or supplement a declaration of disclosure

Fam C 2107(a) defines complying party as one who has “served the respective declaration of disclosure on the noncomplying party”

"Although subdivision (c) does not expressly state that only a "complying party" ... is entitled to an award of monetary sanctions", the court concludes that "this limitation is implicit" because complying party requirement is in subsections (a) and (b)

Statutory Construction

IRMO Fong (cont’d)The court points out that it would be odd for the Legislature to limit the availability of an order compelling disclosure (Fam C 2107(a) and (b)) to a “complying party” while making the potentially more severe remedy of monetary sanctions (Fam C 2107(c)) available to a “noncomplying party”

Statutory Construction

IRMO Fong (cont’d)Fam C 271 authorizes fees as a sanction for “uncooperative conduct that frustrates settlement and increases litigation costs” (IRMO Tharp/Corona)

H contended T/Ct failed to consider his ability to pay

CA-2(3) disagrees – H had yacht, 9 rental properties, etc.

H then argues W’s conduct uncooperative and court would effectively be awarding her noncompliance

Court disagrees – H did not show that W’s conduct was egregious

Attorney Fees Under Fam C 271

IRMO Fong (cont’d)"As the party in possession of a greater share of community assets, [H] bore a greater burden of disclosure and fiduciary responsibility with respect to the community assets."

"Unlike section 2107, subdivision (c), section 271 does not necessarily require that the moving party be in compliance…. Although the extent to which the moving party’s conduct furthers or frustrates settlement may be an appropriate consideration for a court considering an award under section 271." [Emphasis added.]

Attorney Fees Under Fam C 271

IRMO Fong (cont’d)T/Ct refused H’s request for a statement of decision

General Rule: Statement of decision is not required in connection with a motion

Exception to general rule: Gruendl v. Oewel Partnership, Inc. (1997) 55 Cal.App.4th 654

Gruendl does not apply

The motion for fees under Fam C 271 was not a substitute for trial of issues that could have been raised in the pleadings

Statement of Decision

IRMO Feldman Overview

IRMO Feldman (2007) 153 Cal.App.4th 1470: Detailed AnalysisBasic Facts (part 1)

34-year marriage H created corporation with many sub-entities H estimated value of assets at $50M W was not involved in businesses Characterization and reimbursement major issues

IRMO Feldman: Detailed Analysis (cont’d)Basic Facts (part 2)

H failed to disclose $1M Israeli bond, purchase of house by newly-created company after DOS, 401k, addition of new companies after DOS

H failed to inform W when asked in deposition W found out months later

IRMO Feldman: Detailed Analysis (cont’d)

Enforcement AttemptsInterrogatories

Request for production of documents

Depositions

Including attorney fees

Application for order imposing monetary sanctions

Schedule of Assets & Debts

IRMO Feldman Opinion: Point #1Sanctions may be imposed even if moving party fails to prove actual injury

IRMO Feldman Opinion: Point #2Calumet Ave property was a material fact giving H duty to disclose [Fam C 1100(e)]

W is claiming the Sunroad entities are CP; she needs info to trace In division of CP, W may attempt to claim reimbursement for any post DOS benefit that H

obtained

IRMO Feldman Opinion: Point #3Fact that business entity owns assets does not excuse spouse from disclosure duty

Transaction involving Calumet Avenue property is clearly relevant to understand “the existence, characterization, and valuation of all assets in which the community has or may have an interest”

IRMO Feldman Opinion: Point #4“Material fact” for disclosure purposes is one relevant to tracing or characterization, and

Identity Valuation Income Expenses

IRMO Feldman Opinion: Point #5The fact that the requesting party already has the info does not relieve the other spouse from disclosure obligations

IRMO Feldman Opinion: Point #6Spouse in superior position must acquire and disclose

“[A] spouse who is in a superior position to obtain records or information from which an asset can be valued and can reasonably do so must acquire and disclose such information to the other spouse”

IRMO Feldman Opinion: Point #7Failure to disclose new info for several months breaches duty to update/augment

“As we have explained, Aaron was under a duty, among other things, to give ‘an immediate, full, and accurate update or augmentation to the extent there have been any material changes’ as to his assets and liabilities (§2102, subd. (a)(1)).”

IRMO Feldman Opinion: Point #7

IRMO Feldman Opinion: Point #8No exception in Fam C 2102(a)(1) disclosure obligation for offsetting debts and assets

IRMO Feldman Opinion: Point #9Privately held entities enhance disclosure obligation

“It is significant that the Sunroad entities are privately held corporations. Because of their privately held status, information regarding them is not available to Elena, but it is available to Aaron as a shareholder and manager of the company, giving him a duty to obtain that information in carrying out his duty to provide disclosure about community assets.”

Ethical Considerations Related to Postseparation Disclosure

Ethical Issues (cont’d)

Applicable Criminal StatutesPC 118(a): Any material matter known to be false

PC 125: Unqualified statement not known to be true

PC 126: 2 to 4 years in prison

PC 127: Willfully procures another person… subornation of perjury

Applicability to family law attorneys (all MFI)

Ethical Issues Relating to Postseparation Disclosure

Applicable Disciplinary RulesPreliminary declaration of disclosure

Final declaration of disclosure

All material facts and information



EndThank you

property continued - welcome to cflr · web viewfiduciary duties: area 4 of 5 three-step analysis...

Documents