Written by attorney Anthony Payman Azemika

Fiduciary Duty Ends Upon Divorce

In a partial reversal, a California Court of Appeals has ruled that Trial Court was wrong by basing a sanctions order partly on erroneous belief that the parties’ continuing fiduciary duty of disclosure under California Family Code Section 2012(c) extends beyond final judgment until end of Trial Court’s jurisdiction to order child support. But, the Court of Appeals did affirm Trial Court’s decision to calculate child support modification without considering Father’s valid business expenses. In the case of In re Marriage of Sorge, Mother and Father were married in 1983, and subsequently had three children. They separated in September of 2000, and Wife filed for divorce in Wyoming in November of 2000. Mother and Father later signed a Marital Settlement Agreement that, among other things, provided that Mother and Father would share joint custody of Children, Father would pay $8,500 per month in child support for Children (but not less than $4,000 per month for one child) beginning in July of 2002, or the first day of the month in which Mother and Children moved to San Diego (based on Father’s annual income of $800,000 from a company he founded), and F would pay nonmodifiable spousal support of $12,000 per month for 120 months. Wyoming Trial Court incorporated the Marital Settlement Agreement into the divorce judgment entered on March 28, 2003. Mother and Father later registered the Marital Settlement Agreement with San Diego Trial Court, where it was established as a judgment on November 21, 2005.

On August 24, 2007, Mother filed Order to Show Cause, seeking child custody and visitation modification for the parties’ 14 year-old son, child support modification, attorney’s fees, and spousal support arrearages. In schedule of assets and debts filed in July of 2008, Mother listed more than $14 million in assets and no debts. Mother’s Income and Expense Declaration stated that she had assets of $13.5 million and a little more than $43,000 in monthly expenses. Father’s Income and Expense Declaration showed that he had sold his company, that his monthly income included $10,000 in salary, $224,000 in dividends and interest, and investment and ordinary losses of $426,000, and that he had monthly expenses of $62,000.

Mother and Father then retained a joint expert to analyze their incomes and assets and prepare a report. Expert prepared an initial report that included two methods of analyzing Father’s income. One method included Father’s net losses from start-up companies he founded after selling his original company, and another method did not include those losses. Father strongly objected to Expert using the second approach, calling it "professional malpractice" and threatening to sue for damages if he incurred any from Expert’s use of the second method. Expert’s firm then sought ex parte order from Trial Court as to how to present Father’s income in Expert’s report, and Trial Court told Expert to use whatever approach he deemed necessary, including alternative approaches.

In Expert’s final report, he stated that Father received more than $100 million from 2007, sale of his original company, part of which he used to fund several new start-up companies. Father used some of the money to buy real estate, pay down mortgages, and pay income tax, and placing the rest in several investment accounts, the balances of which totaled $63.6 million on December 31, 2008. Expert said that if he included both income and losses from start-up companies from June of 2007, through December 2008, in calculating Father’s monthly income, Father would have net monthly loss of $9,100 in 2007, and $235,600 in 2008. However, if Expert excluded the losses, Father would have net monthly income of $320,000 in 2007, and $229,000 in 2008. Expert also reported that from June of 2007, through December of 2007, Father had interest and dividend income of $1.9 million and $2.35 million from January 2008, to December 2008.

In October of 2008, Mother filed a motion to compel production of documents, plus request for sanctions of $125,000 for Father’s failure to produce information and documents regarding millions in income he received from his company’s sale and other income, and his providing "false, evasive, and misleading discovery responses" to Expert and her counsel.

At the hearing, Expert testified about his final report, his methodology, his belief in the validity of Father’s business expenses and profit intent, and his failure to examine any particular expenses. In lengthy statement of decision issued on January 29, 2010, Trial Court declined to consider operating expenses of Father’s start-up businesses in calculating Father’s income for child support purposes, noted that Father’s "affluent, even wealthy lifestyle" had continued despite his business losses (multiple homes, private jet for international travel), and concluded that Father should not be permitted to "invest in businesses and thereby minimize his support obligation while he maintains a wealthy lifestyle," or to "take a break from his child support obligation in favor of his business investments." Relying on In re Marriage of Berger (2009) 170 Cal.App.4th 1070 [Trial Court should have considered Father’s deferred salary in calculating child support order], Trial Court found that California Family Code Section 4058(a)(2) does not require Trial Court to deduct business losses if doing so enables payor to voluntarily minimize income available for child support, while maintaining a wealthy lifestyle. Trial Court then increased Father’s child support obligation from $4,000 per month to $18,000 per month. Trial Court also found that Father had engaged in conduct that frustrated settlement and added to litigation costs and had breached his fiduciary duty, under California Family Code Section 2012(c), to disclose material changes in his income since 2006. Reasoning that F’s duty of disclosure continued until Trial Court’s jurisdiction to make child support order ended, Trial Court ordered Father to pay sanctions of $75,000 pursuant to California Family Code Sections 271 and 2107. Concluding that Father ended up with 80% of the parties’ combined incomes and 85% of their combined liquid assets, Trial Court ordered Father to pay $200,000 toward Mother’s attorney’s fees and costs.

Father appealed. On August 16, 2010, Mother filed a request for additional fees of $60,000 to defend Father’s appeal, plus $250 for costs, declaring that Father had posted cash undertaking to stay payment of $18,000 in child support, $414,000 in child support arrearages, $200,000 for attorney’s fees, and $75,000 for sanctions. In her Income and Expense Declaration, Mother reported liquid assets of $8.5 million, monthly income of $50,000, and monthly expenses of $60,000. Mother’s counsel and appellate counsel filed declarations regarding their fees. Father filed his Income and Expense Declaration reporting cash and checking account total of $207,000, and liquid assets of $51 million. He listed $393,000 in monthly expenses, $330,000 of which were business expenses. On November 9, 2010, Trial Court granted Mother’s request, ordering Father to pay her $60,000 toward her appellate fees and costs. Father appealed that order too.

Now, acting on consolidated appeals, a California Court of Appeals has affirmed Trial Court’s decisions in part and has reversed it in part. Child Support Calculation: Court of Appeals has ruled that Trial Court was not wrong in declining to consider Father’s business losses because (1) Trial Court based its calculation on Father’s earning capacity, not his actual income; (2) Trial Court has the discretion to consider payor’s earning capacity and to impute positive income to payor when payor underutilizes income-producing assets (as Father did regarding his start-up companies); and (3) the case of Berger is not on point, but is instructive as to whether payor may voluntarily take actions that negatively impact his or her ability to pay child support, while he or she continues to maintain wealthy lifestyle. Therefore, Court of Appeals has affirmed the child support order.

Sanctions award

: Court of Appeals has ruled that (1) Trial Court based its sanctions order partly on erroneous belief that Father’s fiduciary duty to provide financial information extended beyond the parties’ divorce judgment; (2) pursuant to California Family Code Section 2102(c), a spouse’s continuing duty of disclosure extends from date of separation to the date of a "valid, enforceable, and binding resolution" of child support, spousal support, and attorney’s fee issues; (3) "valid, enforceable, and binding resolution" regarding child support orders means a final child support order (not interim, temporary, or pendente lite orders); (4) here Father’s disclosure duty ended when Wyoming Trial Court issued the final child support order as part of the parties’ divorce judgment; and (5) Trial Court was wrong in basing its sanctions order partly on Father’s disclosure duty. Therefore, Court of Appeals reverses that order and remands the case back to Trial Court for further proceedings regarding sanctions.

Attorney fees orders

: Court of Appeals has ruled that Trial Court was not precluded from awarding fees to Mother in its January 29, 2010, and November 9, 2010, orders because (1) Trial Court considered the parties’ comparative need, respective incomes, and disparity of assets before making its orders; and (2) facts clearly showed that Father had considerably greater assets than Mother. Therefore, Court of Appeals has affirmed those orders.

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