A California Court of Appeals has ruled that where a non-managing spouse makes a prima facie showing of the existence and value of community property assets in managing spouse’s post-separation control, the burden of proof shifts to the managing spouse to rebut that showing or prove proper disposition or lesser value of those assets. More specifically, Trial Court made a mistake, according to the Appellate Court, by failing to shift the burden of proof to Husband, as the managing spouse, to show that missing community property assets were not disposed of improperly and failing to charge Husband with the value of those assets when their disappearance was not explained. In the case of In re Marriage of Margulis, the parties were married for 33 years. On August 12, 1996, Husband moved out of the parties’ family home in Irvine and left for Chicago to start a new job. Wife stayed in the family home.
From then on, Husband continued his customary practice of having complete control over the parties’ finances. Husband paid the community property bills from several community property checking accounts, managed their investments (including accounts at Sutro & Co., John Hancock Clearing Corp., and two I.R.A.s at Charles Schwab), sent Wife money from time to time, and paid her expenses. Husband made payments from various checking accounts and freely transferred community property funds between them. According to tax returns, Husband and Wife sold stock worth $1.1 million, plus two other investments worth more than $68,000 in 1996, and added to community property account funds totaling $369,000 from Husband’s severance pay, sale of their Palm Desert home, and cashed-out life insurance policy. This situation continued until 2001, when Wife began making house payments on the family home from her earnings as an actress.
On June 7, 2002, Wife filed for divorce, but Husband did not file his response until February 21, 2007. Neither of those filings gave complete listing of parties’ community property assets and debts. In October of 2007, Wife filed a settlement conference brief in which she asked Trial Court to charge to Husband some $901,000 worth of community property assets, including proceeds from the Palm Desert sale, Bank of America line of credit, severance package, I.R.A. and securities sales, and life insurance cash-out. Wife asked Trial Court to award the family home to her, along with $20,000 received in re-finance proceeds, and $237,000 equalizing payment from Husband, and to assign to her a $45,000 unpaid tax obligation.
Husband claimed that family home was the only remaining community property asset, asked that it be sold and proceeds divided between him and Wife, and suggested dividing community property retirement or pension benefits equally, letting each party keep his or her car, bank accounts, and other financial accounts in his or her name at date of separation. Husband made no mention of any of the investment accounts or community property funds he received from his severance package, Palm Desert home sale, or life insurance policy cash-out.
On April 4, 2008, Trial Court granted parties’ status-only divorce judgment and scheduled a trial date on the remaining issues. Wife’s trial brief claimed higher values for investment accounts, but otherwise tracked her settlement brief. Husband’s trial brief claimed that existing community property consisted of the family home and its contents, and I.R.S. tax loss carry-forward of $312,000. According to Husband, funds in various investment accounts had been spent paying community property expenses and Wife’s living expenses, and further depleted by the stock market losses, all of which Husband promised to substantiate with evidence introduced at trial.
At trial, parties’ main bone of contention was whether Husband should be charged for value of community property assets managed by Husband post-separation. Husband presented no documentary evidence to back up his contention that all but $20,000 of those funds had been spent, or any tracing evidence to show from which accounts those payments were made. As to the I.R.S. tax loss carry-forward, Husband’s attorney claimed that the carry-forward was evidence of the I.R.A. withdrawals that had depleted those accounts. Wife testified that she had no personal knowledge or documentary records of any of the investment funds because Husband had kept them to himself. However, she submitted a two-page document (Exhibit 18), labeled as the parties’ confidential personal financial statement and dated February 1, 1999, which listed their assets as $133,000 in Merrill Lynch money market account, $230,000 in Charles Schwab I.R.A.s, $424,000 in marketable securities at Sutro & Co, real estate, and other investments.
After Husband admitted signing that document, Wife’s attorney urged Trial Court to accept the values listed on it unless Husband could prove that he used those funds for community property purposes and stock values declined in stock market. In closing argument, Husband’s attorney claimed that Trial Court should give little weight to Exhibit 18 because it was outdated and unreliable. Although Trial Court admitted Exhibit 18 into evidence, it did not rely on the values listed in it.
Trial Court found that Exhibit 18, by itself, did not establish that the listed assets "did, in fact, exist." Since it had no evidence on investment values except tax records and statements regarding the Charles Schwab account, Trial Court charged Husband with $184,000 in I.R.A. funds, but not with values of any other funds. In addition, Trial Court charged Husband with $369,000 in community property cash received from the desert property sale, life insurance cash-out, and severance pay, but not with Bank of America line of credit or funds representing unused vacation. Acting on Husband’s request for reimbursement for post-separation payments on community property debts and Wife’s expenses, Trial Court found persuasive testimony from Husband’s forensic expert, who testified that he had calculated the credits for Husband based on the check registers and Husband’s "verbal explanations." When Wife objected to that testimony as without proper foundation, Trial Court overruled her objections and awarded Husband reimbursement for community property expenses totaling $580,000.
Trial Court also found that Husband breached his fiduciary duty to Wife to maintain proper records of community property assets of which he had sole management and control, but, citing lack of evidence as to "what really happened to those accounts," Trial Court ordered Husband to pay sanctions of $20,000 to Wife for her attorney’s fees and costs. Trial Court then awarded the family home to Wife, and ordered her to make equalizing payment of $189,000 to Husband within 45 days or sell the family home.
Wife appealed the equalizing payment/sale provision of the judgment and Husband cross-appealed the finding of breach of fiduciary duty and sanctions order. Now, a California Court of Appeals has reversed the Trial Court’s decisions and has sent the case back to Trial Court.
California Court of Appeals has ruled that (1) Trial Court erred by putting the burden of proof on Wife to prove that the missing assets existed because, as the non-managing spouse, Wife lacked personal knowledge and records sufficient to meet that burden; (2) Trial Court could find that Husband breached his fiduciary duties of disclosure and accounting; (3) shifting the burden of proof to the managing spouse regarding the records in his or her control is in line with Husband’s statutory fiduciary duties and with the "policy and fairness concerns" that support the burden shifting; (4) the non-managing spouse does not need to show that there has been a mis-management or fraud as a prerequisite to shifting the burden of proof; (5) on these facts, the rule should be that when the non-managing spouse makes a prima facie showing of the existence and value of community property assets in control of the managing spouse, the burden of proof shifts to the managing spouse to rebut that showing or prove either that the assets were properly disposed of or had lesser value; and (6) if the managing spouse fails to meet that burden of proof, the Trial Court should charge him or her with the value of those assets. California Court of Appeals also ruled that Trial Court’s placing of the burden of proof on Wife regarding the disposition of missing assets was error that requires complete retrial of the community property issues.
The Appellate Court further ruled that Trial Court erred by ordering reimbursement for Husband because (1) reimbursement is appropriate only where one spouse pays post-separation community property expenses from his or her separate property funds; (2) Husband failed to trace the funds he used to make the post-separation payments to separate property source; and (3) the evidence showed that Husband freely commingled separate property and community property to the extent that tracing may not be possible. California Appellate Court directs Trial Court on remand to make the necessary findings regarding the source of payments, plus determination of whether payments were in discharge of his duty of support.
California Court of Appeals finds little merit in Husband’s contentions, but reverses the sanctions order so that Trial Court may revisit the issue of appropriate remedy for breach of fiduciary duty.