Recent Posts in Complex Cases Category
| March 08, 2011 |
| Family Court SANCTIONS for UNCOOPERATIVE CONDUCT that FRUSTATES SETTLEMENT |
| Posted By Thurman Arnold |
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I've recently blogged the 2nd Appellate District's March 3, 2011 decision in Marriage of Fong as it pertains to
each party's obligation to comply with Family Code section 2105 and submit their Final Declarations of Disclosure prior to certain contested hearings, like a motion for attorney fees for noncompliance by the other party with the disclosure statutes.
Marriage of Fong is also instructive in its application of
Family Court section 271 governing sanctions awards for conduct that frustrates settlement and the efficient resolution of family law disputes. It reads:
"(a) Notwithstanding any other provision of this code, the court may base an award of attorney's fees and costs on the extent to which the conduct of each party or attorney furthers or frustrates the policy of the law to promote settlement of litigation and, where possible, to reduce the cost of litigation by encouraging cooperation between the parties and attorneys. An award of attorney's fees and costs pursuant to this section is in the nature of a sanction. In making an award pursuant to this section, the court shall take into consideration all evidence concerning the parties' incomes, assets, and liabilities. The court shall not impose a sanction pursuant to this section that imposes an unreasonable financial burden on the party against whom the sanction is imposed. In order to obtain an award under this section, the party requesting an award of attorney's fees and costs is not required to demonstrate any financial need for the award.
(b) An award of attorney's fees and costs as a sanction pursuant to this section shall be imposed only after notice to the party against whom the sanction is proposed to be imposed and opportunity for that party to be heard.
(c) An award of attorney's fees and costs as a sanction pursuant to this section is payable only from the property or income of the party against whom the sanction is imposed, except that the award may be against the sanctioned party's share of the community property. "
The Wife in Fong filed a request for 271 sanctions against the Husband and asked for $150,000 as attorney fees and accountant's costs that she alleged the other party had unnecessarily caused her side. Specifically she submitted evidence at the sanctions' hearing that showed:
- That Gary Fong had failed to fully and timely respond to discovery concerning bank records, mortgage loan applications, refinancing, and rental income
- That he failed to cooperate in obtaining bank records directly from Canadian banks where he'd held accounts
- That he failed to respond to her two settlement offers
- That at trial he produced bank records that he'd failed to produce in response to discovery requests seeking those same records
- That Gary refinanced community real property on several occasions in violation of court orders
- That he failed to provide an accounting of all rents and refinances and the disposition of those proceeds, when he'd been ordered by the court to do so, and
- That he attempted to sell real property located in Canada in violation of a court order.
The trial court was persuaded by Wife's evidence and argument and imposed $100,000 in sanctions upon the Husband. According to the Second District Appellate justices, it "reasonably could conclude based on this evidence that Gary's conduct
frustrated settlement and cooperation between the parties and counsel and justified an award of attorney's fees and costs...." Because 271 does not speak to a course of conduct as a predicate for sanctions, one can imagine that any of the above mis-steps could have supported the trial court's award. Taken in their totality however, once the trial court agreed with Wife's allegations it could clearly conclude that such conduct was the type that FC §271 is intended to punish. None of this is surprising (nor uncommon in high conflict divorces), but at least lawyers and parties making these types of requests have specific misconduct and the
Fong decision to buttress their sanctions' arguments.
But Fong supplies some additional guidance that was missing before. This involves the language of 271 that "[t]he court shall not impose a sanction pursuant to this section that imposes an unreasonable financial burden on the party against whom the sanction is imposed." In a way this section potentially allows a party guilty of misconduct to insulate themselves from sanction consequences where part of their misconduct involves either or both the nondisclosure of assets that could be used to fund the sanctions award, or the value of those assets. I've never understood this limitation because a bad actor can truly 'get away with it' if they apparently lack sufficient financial resources - people without assets, or minimal income or assets, evidently get a free pass where those with assets do not. Often a spouse is misrepresenting their income stream, and so their FL-150 Income and Expense Declaration is inaccurate. Hence, lying behavior may be rewarded. In my experience trial courts are already reluctant enough to issue punishing financial orders.
Marriage of Fong changes this result somewhat, but speaks obliquely to what asset base is sufficient to upholding a sanctions' order. The trial court here gave $100,000 of the $150,000 the Wife asked for (and undoubtedly would have been upheld if it had given her $150,000), but Gary contended that it failed to consider his ability to pay and so the award should be set aside. His Final Property Declaration was on file, as was his Income and Expense Declaration. While the appellate court references the former in upholding the trial court's exercise of discretion, it completely ignored whatever information was contained in the I & E. This is an important and new explication of the law on sanctions that extends the scope of 271 and what evidence is required to support these types of awards: If either the income stream
or the asset base support the conclusion of ability to pay, it will not work an "an unreasonable financial burden..." on the responding party. This was not clear before this ruling.
In terms of the sufficiency of the Husband's asset base to permit the sum of $100,000 to be awarded, all the reported decision tells us is this Gary owned:
- Nine rental properties
- A personal residence (a ranch)
- A yacht
- Savings accounts
- Gold coins
- And "other items" (possibly three calling birds and two turtle doves?)
Evidently the existence of these assets, the values of which are not set forth by the court, may create a presumption of an ability to pay that shifts the burden of proof onto the responding party to disprove that ability. Now, the decision doesn't exactly say that. What it does say is "Gary does not cite or discuss this evidence or argue that it is insufficient to justify the amount of the award" and that "Gary bore a greater burden of disclosure and fiduciary responsibility with respect to the community assets." The appellate language is a great victory for "out-spouses" - the disadvantaged party or domestic partner who doesn't control the community property marbles or the information relating to them. It is a realistic approach to remedying the difficulties and expense these litigants face in terms of producing evidence.
In guiding other trial courts this decision implies that a court can ignore income stream and does not need not know the actual value of the party's assets before sanctioning them under 271. After all, we have no idea whether the real estate contained equity. If the resisting party wants to disprove an ability to pay despite the existence of these types of items, once the requesting party has demonstrated misconduct the 271 respondent better present credible evidence of little or small value, or risk that value is assumed just by the existence of what appears to be an upper class lifestyle.
Marriage of Fong cites and follows upon
In re Marriage of Tharp (2010) 188 Cal.App.4th 1295.
Tharp is important for a number of reasons, not the least of which is that there the trial court
failure to sanction was overturned as being insufficient and a misapplication of the law. Both cases are sending a message. Is anybody listening?
Taken together, the twin sisters of Fong and
Tharp demonstrate that the noose is tightening around those parties who seek to obstruct either the fair exchange of information that is required by the fiduciary duties statutes, and those whom unreasonably fail to respond to settlement offers or to litigate cooperatively. Keep in mind that these folks must have spent a million dollars in legal fees with their back and forth.
As usual with these types of decisions, they tell family lawyers as much what not to do as what to do. It is a great decision, although without more information concerning Gary's net worth it provides only a generalized benchmark for what amount of sanctions is appropriate in these situations. This is the case's weakness, but also its strength.
Thurman W. Arnold, III, CFLS
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| December 12, 2010 |
| 2011 REVISIONS to the California Family Code: ATTORNEY FEES IN COMPLEX CASES |
| Posted By Thurman Arnold, CFLS |
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I have blogged separately about the very favorable changes to the California Family Code affecting disadvantaged spouse's ability to access funds to retain competent counsel in family law proceedings.
Another improvement is the revision of Family Code section 2034, which is that statute that allows a party to encumber equity in real property to ensure access to counsel. New FC § 2034 empowers courts to "
determine whether the case involves complex or substantial issues of fact or law related to property rights, visitation, custody, or support. If the court finds that the case involves one or more of these complex or substantial issues, the court may determine the appropriate, equitable allocation of fees and costs as provided in subdivision (d) of Section 2032."
This is called a "Family Law Attorney's Real Property Lien," or FLARPL. A FLARPL is a security interest like a mortgage can be recorded against real property in order to encumber it in favor of one party's attorney, similar as if they took out a mortgage. There are limitations, however, in that they are subject to Court approval and are not beyond attack and challenge by the other party. Most lawyers I know use them only as a last resort.
FLARPLs extend to the other party's separate property as well as to the community; in other words, they may be obtained against property owned solely by the other party, subject to the conditions of subsection (a) and the quoted language above. Whether courts will impose them on separate property more willingly, which they are characteristically reluctant to do, as a result of the new revisions remains to be seen. Without a doubt, however, this is a step forward in assuring the "out-spouse" equal access to justice.
As always, for more relevant information try my search engine at the upper right corner. It crosses over to each of my four websites, which take together are hoped to create a valuable library of family information for your use!
T.W. Arnold, III
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| October 14, 2010 |
| Marriage of Tharp, Important Victory Against Game-Playing Family Law Litigants |
| Posted By Thurman Arnold |
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On October 1, 2010, the Court of Appeal for the Fifth Appellate District issued what is a monumental decision affecting under-empowered spouses enmeshed in litigation in a case entitled IRMO Tharp (2010) 188 Cal.App.4th 1295. This is one of the biggest family law cases of 2010.
I am so excited by the Appellate Court's decision in response to what was clearly an abuse of litigation by in this case - the Husband - and of the abuses of discretion by the trial court, that I can barely contain my enthusiasm.
An obviously intelligent and experienced trial judge was reversed (up-ended) for failing to exercise fairness, for succumbing to bias, and for failing to maintain equanimity in the family court process under facts and circumstances that I will blog over the weekend - sorry.
This case speaks to abusive claims regarding prenuptial agreements, discovery abuse,
abuse of power by higher earners, and much more.
Judging is a terribly difficult task, but the administration of justice that our system depends upon requires that our appellate judicial officers act in appropriate circumstances. This they did, with vigor.
I will blog this important decision in detail over the coming weekend because there are a series of themes that may deeply affect family law litigants.
I predict that we will soon hear lawyers using this case name as a verb - as in "I was THARPED" or they "THARPED my client." Carl Tharp's name is destined to become a California Family Law synonym for abusive family litigation tactics and justice! I predict that we will see a THARP II once sanctions are issued.
Kudos to Attorney Dale R. Bruder - really nice job!
IMHO
Thurman W. Arnold III
http://www.ThurmanArnold.com/Blog.aspx
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| September 23, 2010 |
| What METHODS OF TRACINGS Do Family Courts Use? |
| Posted By Thurman Arnold |
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Q. What rules apply to how tracings are performed in California dissolutions and what must be shown?
A. In order to unwind transactions during marriage where monies and property with separate and community property attributes have been mixed together, the "separatizer" (the party seeking to establish their separate property contributions to the community or separate property of the other spouse or partner) has the burden of proof to present reliable tracing evidence to the Court. In order to settle even mildly complex disso's as between the parties without going to trial, this information must be provided to convince the other side that you have the ability to meet your burden.
Here are some of the rules that apply the mechanics of tracings in dissolution actions and legal separations.
If the commingled funds are used to purchase property, the party who deposited the separate funds may attempt to trace the source of the funds used to purchase the property to establish that it is separate because separate funds were used to purchase it. This may overcome the presumption that property acquired during marriage is community. Marriage of Mix (1975) 14 C3d 604.
If separate and community property or funds are commingled in such a manner that it is impossible to trace the source of the property or funds, the whole must be treated as community property. Marriage of Mix, supra.
If the title to the property was taken jointly, tracing cannot be used to overcome the presumption from the form of title. Marriage of Lucas (1980) 27 C3d 808, 813–814.
Direct tracing and tracing through family expenses are two independent methods of tracing to establish that property purchased with commingled funds is separate property.
Direct Tracing
Separate funds do not lose their separate character when commingled with community funds in a bank account so long as the amount of separate funds can be ascertained. Marriage of Mix (1975) 14 C3d 604.
If money is withdrawn to purchase specific property, questions of fact that must be determined include (Marriage of Mix, supra):
• Whether separate funds continue to be on deposit; and
• Whether the drawer intended to withdraw separate funds.
The party seeking to establish a separate interest in presumptive community property must keep adequate records. The party must show the exact amount of money allocable to separate property and the exact amount of money allocable to community property before it can be said that the money allocable to separate property is not so commingled that all funds in the account are community property. Marriage of Frick (1986) 181 CA3d 997. If the payments claimed to be separate were made periodically, each payment must have been made when separate property funds were in the account and must have been accompanied by an intent to use those funds rather than community funds.
Marriage of Higinbotham (1988) 203 CA3d 322, 329.
Tracing Through Family Expenses
The second method of tracing to establish that property purchased with commingled funds is separate property requires a consideration of family expenses. This tracing method is based on the presumption that family expenses are paid from community funds.
If at the time the property is acquired it can be shown that all community income in a commingled account was exhausted by family expenses, then all funds remaining in the account at the time the property was purchased were necessarily separate funds. Marriage of Mix, supra.
This method can be used only when, through no fault of the spouse claiming separate property, it is not possible to ascertain the balance of income and expenditures at the time property was acquired. See v See (1966) 64 C2d 778, 784.
The spouse claiming separate property must keep adequate records to overcome the presumption that property acquired during marriage is community property. See v See, supra. Most people don't.
If you are contemplating a divorce and have tracing issues, protect your records now so that they do not 'disappear.' It can be very expensive to obtain bank statements and canceled checks dating back years, and with all of the bank failures and mergers today these records may become impossible to obtain. If you cannot meet your tracing burden of proof, you lose on the particular reimbursement issue....
T.W. ARNOLD
www.ThurmanArnold.com |
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| September 16, 2010 |
| What Does TRACING Refer to in CALIFORNIA DIVORCE CASES? |
| Posted By Thurman Arnold |
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Q. What is meant by tracings in California in the context of divorce, domestic partnership dissolution, or legal separation?
A. Married people routinely combine cash and assets in ways that must be disentangled if either party later claims that some of those assets were their separate property and wants it returned - I rarely see a case where they don't. In the absence of a prenup agreement saying otherwise, money or property acquired through the time, skill, or industry of either spouse between the date of marriage or registered domestic partnership and physical separation is presumed to be the community property of both parties. Property owned or acquired by either before marriage or after the date of separation, or inherited or gifted to them during marriage, is considered to be that party's separate property to the extent it can be shown to still exist. Separate property is not reimbursed where it has been spent on living expenses, although it may be reimbursed when spent on certain other categories of items. Usually the question involves who is entitled to what share of some asset which is still in existence.
Typical examples include:
- One spouse has money in a savings or investment account before marriage. They then deposit earnings into that account after marriage. The account is used for living expenses. At the end of the relationship, what portion of what remains is separate and what is community?
- The other party is added to a formerly separate property deposit account, for instance so that the account can be held in joint tenancy to avoid probate in the event of death.
- Spouse A inherits $500,000 from grandma during the marriage. This separate property inheritance gets put into a jointly titled bank account, into which other monies flow in and out. How is the balance divided?
- Spouse A then contributes some of this inheritance to the purchase of a new residence. Title is taken jointly. When the couple splits, Spouse A naturally wants their contribution back. How is this achieved?
- A married couple decides to establish a Living Trust to protect them both in the event of death or incapacity. They fund the Trust by transferring cash and real estate into it. A common mistake made by Estate lawyers is to describe the trust property as "community property" and to add a provision that says that if the parties divorce, this property will not be considered to be community and will be restored to each contributing party. Unfortunately, once separate property is declared in such instruments to be community a transmutation has occurred and the language that it is to be restored is of no legal effect - only a new transmutation will resurrect the status quo before the transfer. However, Family Code section 2640 provides that separate property contributions will nonetheless be reimbursed to the extent that the amounts can be separated out and established. The person seeking to confirm their SP contribution must trace the funds in order to receive this reimbursement.
- One spouse places their separate property into the name of the other spouse, possibly to hide it from creditors or other family members. Upon separation, the receiving spouse claims it was a gift and wants to keep it all.
- During the marriage one spouse's separate property is used to build an addition to the jointly titled home that significantly increases its value. When the house is valued and ordered sold, or purchased by one of the two partners, this contribution to improvements may be reimbursed if it can be traced to a separate property source.
Variations of this theme are endless because people when they get married just don't contemplate the relationship failing, don't understand the legal consequences of what they do, are reassured by their spouse in pillow talk that they will be reimbursed, and so blindly throw assets into a common pot in which the character and value of the contributions become mixed and muddied.
The separation of these interests all require tracings, often involving transactions spanning many years. Maybe bank and other records still exist, but maybe they have been lost, destroyed, or hidden by the other. Even attorneys with some years in family law practice don't have a firm grasp on what tracings require in determining community separate property interests. When separate property and community property are commingled in an account, tracing issues arise.
Sometimes these accountings are relatively simple. Frequently they require the use of a forensic accountant.
Thurman W. Arnold, CFLS
www.ThurmanArnold.com
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