A new way to look at penalties for breach of fiduciary duty . . .
In reversal, Sixth District holds that trial court may not award “ ‘value of the asset’ ” remedy (50 or 100% of asset value) to wife per Fam C §1101(g) and (h) for husband’s breaches of fiduciary duty in addition to her half interest in the assets he failed to disclose; disclosure violations involving separate or community property funds spent before DOS are not punishable under §1101(g) and (h) but are sanctionable under Fam C §2107
In re Marriage of Schleich
(February 8, 2017)
California Court of Appeal 6 Civil H039870 and H041234 8 Cal.App.5 th 267, 213 Cal.Rptr.3d 665, 2017 FA 1776, per Grover, J (Rushing PJ and Elia, J, concurring). Santa Clara County: Zayner, J, reversed and remanded. For appellant: Russell Hanlon, CALS, (408) 975-7777. For respondent: Taline Boyamian, (818) 547-5300. CFLP §§J.184.108.40.206, J.220.127.116.11.
During their 10-year marriage, Lori Holek and Charles Schleich “enjoyed a high standard of living.” Charles lived and worked in the Silicon Valley during the week, earning over $200,000 annually from a semiconductor company and additional money from two side businesses. On weekends, he flew to the parties’ ranch in Tulare County, which Lori maintained while she pursued her hobby of raising and training horses. The couple also owned another ranch in Tulare County. When Charles filed for divorce in 2009, he and Lori owned, in addition to the ranches, 15 horses, 9 vehicles, 6 motorcycles, two Airstream travel trailers, an airplane, a boat, three horse trailers, and three tractors.
Upon serving Lori with disso papers, and a $75,000 settlement offer, Charles warned her that if she didn’t sign the settlement agreement, “ ‘it could get very ugly.’ ” Lori promptly retained counsel, rejected Charles’s offer, and sought pendente lite spousal support, along with $150,000 in attorney’s fees to enable her to ferret out Charles’s hidden assets. In April 2009, the trial court ordered Charles to pay $6,233 a month to Lori for temporary spousal support and $75,000 for need-based attorney’s fees. In July, Lori filed a motion for sanctions under Fam C §271 [fees as sanctions for conduct thwarting settlement] and Fam C §2107(c), claiming that Charles failed to comply with his duty of disclosure and blocked her efforts to determine the extent and amount of his income. She also sought $150,000 in need-based attorney’s fees and $25,386 a month for spousal support. In her supporting declaration, Lori claimed that Charles was refusing to settle unless she discharged her attorney and had warned that he would litigate the matter until nothing was left. In February, 2010, after a hearing, the trial court ordered Charles to pay $7,600 a month for spousal support retroactive to March 2009, $6,800 a month for 2010, and attorney’s fees of $30,000. The lower court noted that Charles was showing “ ‘an unwillingness or inability to completely self-report income,’ ” and was failing to inspire trust in his handling of investments. Accordingly, the trial court reserved judgment on the sanctions issue. Lori appealed, but the Sixth District affirmed in an unpublished opinion.
In July 2011, Lori filed another motion for attorney’s fees of $200,000 and sanctions in the same amount, on the basis of Charles’s breaches of fiduciary duty and other misconduct. She also asked for increased spousal support. In opposition, Charles sought $100,000 in fees as sanctions for Lori’s actions that increased litigation costs. In their trial briefs, Charles renewed his request for fees as sanctions, while Lori asked for $950,000 for attorney’s fees and $300,000 for fees as sanctions. She also alleged several breaches of fiduciary duty by Charles and sought an award of 100% of any undisclosed or transferred asset, per Fam C §1101(h).
In February 2013, following an eight-day trial, the trial court issued a 50-page statement of decision regarding temporary and permanent spousal support, property characterization, reimbursement claims, and sanctions for breaches of fiduciary duty by Lori (2) and Charles (12). The lower court followed up with an order and accounting in which it ordered Charles to pay Lori $25,498 for spousal support arrearages, $245,273 as an equalizing payment for property division, and $556,020 for Charles’s breaches of fiduciary duty. The court reserved ruling on Lori’s fee requests, pending mediation.
The trial court issued its statement of decision re attorney’s fees in May 2014, awarding $318,510 in fees and $5,737 in costs to Lori as remedies under Fam C §1101 (g) and (h) and Fam C §2107 for Charles’s fiduciary duty breaches. These amounts were to be offset by $15,000 awarded to Charles for Lori’s breaches. The court also awarded her $412,486 in Fam C §2030 fees, less the $105,000 Charles had already paid.
Charles appealed, and the Sixth District reversed and remanded.
Separate means separate . . .
The justices began by noting that Fam C §1101 creates a right of action and remedies for breach of fiduciary duty that results in the impairment of the non-offending spouse’s community property interest in a community asset. Fam C §1101(g) authorizes an award of 50% or an amount equal to 50% of an undisclosed or transferred asset in breach of a spouse’s fiduciary duty; §1101(h) authorizes an award of 100% or an amount equal to 100% of an undisclosed or transferred asset when the breach constitutes fraud, oppression, or malice. Charles contended that the lower court erred by imposing those penalties for his failure to comply with financial obligations regarding his separate property, some pre-separation business income, a pre-separation loan from community funds, and a car purchased post-separation with community funds. Relying on In re Marriage of Simmons (2013) 215 Cal.App.4 th 584, 213. Cal.Rptr.3d 665, 2013 CFLR 12435, 2013 FA 1586, the justices found that parts (g) and (h) did not apply to a spouse’s separate property because they focus on fiduciary breaches that impair the value of a community interest. Therefore, the panel concluded, the lower court erred by penalizing Charles under (g) for failing to disclose his separate property Corvette. However, they cautioned, he may be subject to sanctions under Fam C §2107 for breaching his disclosure obligation regarding its sale.
No harm, no foul . . .
The lower court also erred, the justices continued, by imposing a §1101(h) penalty for Charles’s failure to disclose income from his side businesses. In their view, Charles had successfully shown that the income was spent for the benefit of the community before the date of separation. As for the pre-separation loan, the panel agreed with the lower court that Charles had a fiduciary duty to disclose it, but found that he had not breached that duty by failing to disclose the loan repayment, which was invested in a community asset and did not impair Lori’s community interest in that asset as of the date of separation. The panel then turned to Charles’s contention that the lower court erred by awarding Lori 50% of the value of a Mercedes Benz that he bought post-separation, but failed to disclose. Charles had pointed out that Lori had also bought a car post-separation, which she had only tardily disclosed, but the trial court imposed no penalty on her. The justices reasoned that unlike Lori, Charles had failed to disclose the purchase until two years later; whereas, she had disclosed the purchase when she next updated her schedule of assets and debts.
Is that right . . .
Charles next argued that the lower court had made duplicative awards to Lori by awarding her 50% of the sale proceeds from the post-separation sale of a Porsche, which he failed to disclose, and then also awarded her the community share of the proceeds in the property division, and again when it awarded her 100% of the undisclosed side business income, while recognizing her community share in the property division. In opposition, Lori asserted that the awards made under §1101(g) and/or (h) are penalties and are unrelated to the property division. The panel reasoned that the question was whether an award under those provisions “necessarily encompasses the prevailing spouse’s interest in a community asset upon dissolution, or whether the award is in addition to that interest.” The justices determined that “the 50 percent interest awarded under subdivision (g) must be the same 50 percent interest that would be awarded in the overall division of community assets.” And, when the prevailing spouse is awarded 100% of the asset or its value under §1101(h), he or she has been awarded the entire asset and is not entitled to an additional 50% for his or her community interest in it. Therefore, the panel concluded, the trial court erred by awarding Lori her community interest in the Porsche sale proceeds, the side-business income, and the remaining loan repayment funds “twice-once as a section 1101 remedy for [Charles’s] fiduciary breach and again in the division of community property.”
There is there there . . .
Charles also challenged the trial court’s award of spousal support to Lori, claiming that he did not have the ability to pay what was ordered. The justices pointed out that the trial court had recognized Charles’s “ ‘entrepreneurial talent,’ ” his industry contacts and business savvy, and his skills and experience, which all added up to an ability to be gainfully employed without a doubt. Moreover, the justices said, although Charles had in the past “favored dealing in cash” and investing with an eye toward lowering his support obligation, his income from investments and assets should yield sufficient funds to pay his spousal support obligation. Moreover, the lower court had imputed income to Lori of $35,000 a year. Summing up, the panel concluded that the trial court had not abused its discretion by making the spousal support order that it had.
What goes around comes around . . .
Charles made similar contentions about his ability to pay the attorney’s fees that were ordered. The justices were convinced that the trial court had properly considered his ability to pay, and that he was “reasonably likely to have the ability to pay” the fees. As for the needs-based award, the panel noted that it was based largely on the discovery, investigations, and documentation of Charles’s breaches of fiduciary duty, which took up considerable time and attorney effort. He might have avoided such an “expensive and burdensome proceeding,” the justices opined, by being less threatening and more “forthright” with Lori; as it was, she retained counsel who “acted aggressively to protect her interests.” Summing up, the justices reversed the disso judgment and remanded for the trial court to reduce Lori’s award under §1101 by $327,357, and her equalizing payment by $48,950. They also reversed the attorney’s fee judgment and remanded for the trial court to reexamine the amounts ordered under Fam C §1101 and §2107 in light of their other rulings.
We note that there has been an unsuccessful attempt to have this case depublished, and there is now a request pending for a partial depub. This court’s reasoning as to the Fam C §1101(g) and (h) penalties is confusing and its conclusions suspect, in our opinion. The justices seem to be saying that in order to receive an award under either statute, the prevailing party must relinquish his or her community interest in the asset. Given that the intent of the statute is to provide a remedy for a breach of fiduciary duty that results in the impairment of a community interest, it seems odd that a litigant must relinquish that interest in order to receive it. This in itself is an impairment of the community interest. And, it’s hard to see where the penalty is, at least in an §1101(g) award, where the prevailing party ends up with the same community interest that he or she had in the first place. We hope that some clarification, perhaps in an opinion on rehearing, is forthcoming. As it is, we’re left shaking our heads at this one.