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California Family Law Report

 

Case of the Month Archive

November 2017

Trial court did not impermissibly consider second wife’s income . . .

 

In affirmance, Second District holds that trial court did not err by finding that husband had transferred his business to his current wife for no consideration in a bad faith effort to avoid his spousal support obligation or by imputing income from that business (now run by his current wife) to him

 

In re Marriage of Berman

(September 27, 2017)

California Court of Appeal 2 Civil B272324 (Div 8) 15 Cal.App.5 th 914, __Cal.Rptr.3d__, 2017 FA 1808, per Flier, J (Bigelow, PJ and Grimes, J, concurring). Los Angeles County: Seigle, J, affirmed. For appellant: Gary Fishbein, (310) 820-6700. For respondent: Robert Schibel, CFLS, (310) 473-6888. CFLP §§F.100.1.15, F.97.30.

 

Kevin Berman married his first wife, Cathy, in 1974. The marriage lasted until a trial court issued their status only disso judgment in December 2006. On March 6, 2009, the trial court ordered Kevin to pay $9,500 a month to Cathy for spousal support. They stipulated to a reduction of that amount to $4,000 a month in May 2013.

 

In September 2015, Kevin filed a request for an order terminating his spousal support obligation. In a series of declarations, he stated that on June 29, 2015, he had signed a transmutation agreement, transferring his ownership of his investigation and security firm, Berman and Ely (B&E), to his current wife as her separate property for no consideration, in anticipation of his retirement at age 65. Kevin explained that his current wife had learned the business and was now running it full time. He claimed to have no current involvement in any aspect of the business. In an I&E declaration, Kevin reported a pre-retirement salary of $3,675 per month and disability payments of $2,659 a month from his former employment as a police officer. In an attachment to the I&E, he reported a pre-retirement gross income from B&E of $280,000 from January 2014 through June 2015. Cathy, however, submitted Kevin’s 2014 income tax return, which showed $50,113 as Kevin’s salary and $220,442 in business income from B&E.

 

At a subsequent hearing, the trial court “expressed doubt” that Kevin could justify his spousal support termination request by divesting himself of an income-producing asset, and continued the hearing to permit Kevin and Cathy to provide additional briefing on that issue. In his memorandum of points and authorities, Kevin argued that he was entitled to retire at age 65, that there was no evidence that the business transmutation was made in bad faith in order to avoid paying spousal support, and that the trial court should not impute income from the business to him because B&E was now in his second wife’s “ ‘capable hands.’ ”

 

After further hearing, the trial court found that Kevin’s retirement was a significant change of circumstances because he would not be receiving his $50,000 salary. But, the lower court also found that Kevin’s transfer of B&E to his current wife “ ‘d[id] not look like a transfer in good faith.’ ” The court therefore imputed business income to Kevin as income from an asset that he would have had absent the transfer. When Kevin’s attorney asserted that there was no evidence showing that Kevin’s current wife could generate the same income as Kevin had, the trial court pointed out that Kevin himself claimed that she was “ ‘running the business capably.’ ” The trial court then issued a new spousal support order that reduced Kevin’s current obligation by $500 a month to reflect his loss of salary on retirement.

 

Kevin then filed motions for a new trial, to vacate, and for reconsideration, claiming that the trial court was forcing him to work in order to pay his spousal support obligation. After a hearing on April 13, 2016, the trial court denied all three motions, finding that the evidence showed that Kevin gave up his ownership interest in B&E, but continues to receive the benefits of the business income and profits through his current wife’s ownership and the likelihood that she would “ ‘act at his behest.’ ” Besides, the lower court concluded, Kevin could always seek another modification if and when he could present evidence that the business income had actually dwindled.

 

Kevin appealed, but the Second District affirmed.

 

Bad faith, no no . . .
The justices first noted that a trial court may consider a party’s actual earned income and his or her unearned income and assets in making a spousal support order or modification. In addition, the court may take into account evidence of bad faith actions taken in an effort to avoid paying spousal support. And, where the trial court finds bad faith, it may hold the party to the obligation he or she had before the bad faith actions, even if those actions made a substantial reduction in his or her ability to pay. The panel recalled that in In re Marriage of Dick (1993) 15 Cal.App.4 th 144, 18 Cal.Rptr.2d 743, 1993 CFLR 5717, 1993 FA 595, the court found that a support obligor could not avoid his spousal support obligation by structuring his ownership of certain assets to make it appear that he could not meet that obligation. In that case, the husband “created ‘ “a labyrinth of trusts and corporations” ’ ” with the intent to avoid his creditors and transferred ownership of certain assets without consideration to persons who could be expected “to act at his behest.” However, the appellate court found ample evidence that the husband’s actions were taken in bad faith and had no trouble imputing income from those assets to him. The justices here found that the lower court could reasonably infer that like the husband in Dick , Kevin could be expected to continue to enjoy the benefits of the business income through his wife’s ownership. The fact that he no longer took part in the business did not make that assumption erroneous, as Kevin had argued.

 

Tote that barge, lift that bale . . .
Kevin also contended that the trial court’s order impermissibly forced him to work past retirement age. The panel interpreted that contention as Kevin saying that without his working at B&E, the income from the business will be either greatly reduced or cease to exist. The justices reminded Kevin that he failed to produce business records or other evidence to show how much of the business income was the result of his efforts and how much was due to the efforts of others; they had only his declarations. Without more, the justices could not conclude that the trial court’s order imposed an impermissible work burden on Kevin.

 

Fancy phrasing . . .
Kevin next argued that the trial court’s order violated Fam C §4323 [new-mate income not considered in making spousal support order] by considering his current wife’s income in making its spousal support order. He contended that any future business profits would be her separate property because B&E was now her separate property, and thus, should be out of reach. Not so, the panel said. Rather than considering his current wife’s income, they reasoned, the lower court was “declining to recognize a bad faith transfer and instead treating the business income as if it were still Kevin’s.” The justices pointed out that Kevin could have retired and sold his business, or even given B&E to his current wife, without any inference that he did so in a bad faith effort to avoid paying support. When he transmuted B&E to his current wife without consideration on these facts, the justices said, the trial court did not abuse its discretion in finding that it was a bad faith transfer, and imputing income to Kevin as if the transfer had not occurred.

 

Come back any time . . .
In conclusion, the justices considered whether, as Kevin argued, the lower court erred by basing its support order on income information from 2014. Here again, they found that Kevin failed to submit more recent income information to support his contention that the order was too high. The justices noted that Kevin was free to seek a modification in the future if events or circumstances constitute a material change of circumstances. Until then, the lower court’s order was affirmed as issued.

 

 

Comment

  

The key to this case is the justices’ stating that “[t]he only evidence that the transfer was in good faith came from Kevin’s declarations and papers below, in which he insisted that he did not transfer the business to avoid his support obligations. The [trial] court did not believe him, and that credibility determination is binding on this court.” Once the trial court determined that the transfer was “a sham” it could then treat the transfer as if it never happened and the appellate court could affirm that. That allows the justices to engage in a tricky bit of semantics when they say the trial court didn’t consider new mate income in making its order, but simply declined to recognize the bad faith transfer and treated the business income as if it were still Kevin’s. And, throwing in a little bit of a floodgates argument, the panel says that “[t]o hold otherwise would be an invitation for supporting parties to use section 4323, subdivision (b) to shield their assets through bad faith transfers to their new spouses.”

 

 

However, the justices aren’t the only ones to engage in tricky semantics. As the panel recognizes, Kevin argues that he transferred the business into his new wife’s capable hands when he wants to show that the transfer was legit, but then argues that its income will not reach former amounts with her at the helm. He can’t have it both ways. The panel repeatedly finds that Kevin hasn’t presented sufficient evidence for the trial court to rule in his favor. But, we wonder whether it would have done so even if he had presented more financial data. Once the trial court decided not to believe Kevin, would it have found that data reliable? Whatever the answer is, attorneys who represent someone like Kevin would be well advised to flood the trial court with as much supporting data as they can muster up. As this case shows, your client’s word is not enough.

 

 

 
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