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In Re the Marriage of Julie and Roger Schlafly. v. Roger Schlafly

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SIXTH APPELLATE DISTRICT


December 21, 2010

IN RE THE MARRIAGE OF JULIE AND ROGER SCHLAFLY. JULIE TRAVERS, RESPONDENT,
v.
ROGER SCHLAFLY, APPELLANT.

(Santa Clara County Super. Ct. No. FL018328)

The opinion of the court was delivered by: Mihara, J.

Marriage of Schlafly CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

The trial court found that appellant Roger Schlafly breached his fiduciary duty to respondent Julie Schlafly Travers, his former wife, and awarded her $277,121 in damages. On appeal, appellant contends that he never concealed his income and his payment of respondent's law school loans was not a gift. We find no error and affirm.

I. Factual and Procedural Background*fn1

Appellant and respondent were married in December 1996. In October 2003, respondent filed for dissolution of marriage. Appellant presented respondent with a "Confidential Financial Disclosure" statement, which was dated October 17, 2003. This document listed appellant's income from 1997 through 2003 as follows: $25,025 in 1997; $69,987 in 1998; $83,224 in 1999; $29,555 in 2000; $45,211 in 2001; $28,254 in 2002; and $43,000 in 2003. Appellant's income for 1997 through 2002 was designated as "taxable income" and for the period from January to October 2003 as "gross earned income."

In November 2003, the parties entered into a marital settlement agreement (MSA). The parties' intention was "to make a final and complete settlement of all" of their rights and obligations concerning, among other things, the division of property. The MSA stated that "[e]ach party has made a full and honest disclosure to the other of all current finances and assets, and each enters into this agreement in reliance thereon. Each warrants to the other and declares under penalty of perjury that the assets and liabilities divided in this agreement constitute all of their community assets and liabilities."

In August 2004, a hearing was held to determine appellant's income for purposes of child support. Appellant claimed that he received $6,000 per month in earned income and royalties from Information Security Corporation (ISC) and $2,167 per month in dividend income from his separate property assets of $2,500,000. Respondent took the position that appellant made $6,000 per month in income from ISC, $2,333 per month in royalty income, and $2,167 per month in dividend income, as well as $3,000 per month for mortgage-free housing for a total income of $13,500 per month. Despite respondent's request, appellant did not present any evidence of the checks sent to him from ISC. Appellant testified that the determination of the amount of royalty income from ISC was based on ISC's accounting. The trial court noted that appellant was "very vague" regarding his income and issued an order awarding child support that was "modifiable retroactive to the effective date when we have more information" on appellant's income.

On November 14, 2004, appellant gave respondent a schedule of assets and debts. With the exception of furnishings, this document did not provide the value of any assets. Though it listed accounts at Bank of America and Comerica Bank, it did not include the Vanguard account.

On May 13, 2005, the trial court held a hearing on discovery issues relating to appellant's current income for purposes of child support. Respondent asserted that appellant's income was $8,000 per month according to his 1099 tax forms. The trial court found that appellant had not provided respondent with sufficient information to determine his income, and issued a temporary order pending appellant's submission of additional information.

On October 20, 2005, appellant filed an income and expense declaration in which he indicated that his income was $1,000 per month and his dividend income was $3,250 per month.

In April 2006, respondent sought, among other things, to set aside the MSA based on appellant's failure to disclose community assets. At this time, appellant requested reimbursement for the $80,000 he paid in 1997 for respondent's law school loans. On April 17, 2006, the trial court denied respondent's request to set aside the MSA without prejudice, indicated that respondent could file a motion regarding appellant's violation of his fiduciary duties, denied appellant's request for reimbursement for the law school loans, and ordered further discovery on appellant's investment accounts and the use of community funds on appellant's residence.

On April 23, 2007, respondent filed a status conference statement in which she indicated that subpoenas had been issued to various entities based on account names and numbers that appellant had recently provided. As of March 14, 2008, respondent was still waiting for some of the documents that she had subpoenaed.

On September 15, 2008, a hearing was held. Respondent argued that she had signed the MSA under duress, appellant failed to disclose his community property earnings during the marriage and in connection with the MSA, she had previously believed that the community income was so small that appellant paid community expenses with his separate property, she had recently discovered that appellant deposited significant community property earnings in his separate property account and a portion of these funds was used to construct appellant's residence. Appellant asserted that respondent knew about all of his earnings because he reported them on his tax returns.

Respondent testified that appellant gave her blank tax returns to sign. She pointed out that the schedule of assets and debts listed accounts with Bank of America and Comerica Bank, but no money was ever deposited into the Bank of America account and very little money was deposited into the Comerica Bank account. Respondent submitted exhibit 4, which was a summary of payments of approximately $600,000 to appellant from ISC between December 21, 1996 and October 31, 2003. Only seven payments, which totaled at most $36,170, were labeled royalties, and payments of approximately $3,710 were labeled "reimbursement." Respondent focused on the year 2000 to demonstrate how appellant had misled her regarding community finances. She presented evidence that appellant earned a total of $114,394.45 ($104,394.45 from ISC and $10,000 from the University of California) during 2000, and deposited this amount in his Vanguard account. Appellant wrote checks totaling $12,359.64 from the Comerica Bank account and $76,626.09 from the Vanguard account for community expenses. After the community expenses were paid, a total of $25,408.70 was left in the Vanguard account, which was later used to pay for the construction of the family residence that appellant claimed was his separate property.

Appellant testified that the ISC payments were not reflected in the schedule of assets and debts because these funds were spent during the marriage. Appellant conceded that he used the Vanguard money market account as a checking account, but he disputed that he ever made more than $96,000 from ISC. According to appellant, he made all his financial documents available to respondent before she signed the MSA. He also asserted that respondent could have contacted the Internal Revenue Service to obtain the necessary financial data.

Following the hearing, the trial court found that respondent was the disadvantaged spouse regarding disclosure, and that the burden had shifted to appellant to prove that he had fully disclosed financial information to respondent.

On November 10, 2008, another hearing on financial issues was held. Respondent testified that she had not previously known how much income appellant had made from ISC, but thought that it was very little. She also testified that appellant kept his financial records in "stacks and stacks" on his office floor, and he told her that she could go through these stacks prior to the execution of the MSA. According to respondent, appellant also told her attorney that she could come to his office to review his financial records for four hours the day after Thanksgiving.

Appellant testified that he would complete the tax returns and file them at the "last minute" so respondent would sign them in advance. Appellant was unable to explain how in 2000 he could claim a separate property loss against his community income on his income tax return. He also indicated that he commingled community funds with his separate funds in the Vanguard account.

The trial court gave the parties another opportunity to complete discovery on the failure to disclose issue and continued the matter.

On January 16, 2009, respondent introduced evidence that appellant had deposited community funds between 1997 through 2003 in his Vanguard account, appellant failed to disclose these funds as community property to respondent, these funds were in excess of community expenses, and the funds were used to construct his house. Appellant testified that he "could have " cashed an ISC check for $8,000, but did not know how many times and he "might have" received half of the check in cash and deposited the remaining half. He also testified that he paid cash for "a lot of" community expenses. The trial court decided that appellant should have additional time to review the documents prepared by respondent and continued the matter.

On January 21, 2009, respondent testified that the parties had reviewed the exhibits, appellant had objected to some of the amounts, and she had made certain revisions regarding the amounts to which she had previously testified. She testified that the amount of community income in excess of community expenses was as follows: $34,483 in 1997; $73,397 in 1998; $87,325 in 1999; $42,001 in 2000; $26,900 in 2001; $7,700 in 2002; $18,815 in 2003.

Appellant testified that the amount of community expenses was incomplete because he did not have records of cash payments or records from his Comerica Bank for part of 1998 and all of 1999. He also noted that respondent did not include property taxes and house insurance as community expenses. Appellant further testified that a "substantial part of [ISC income] was a royalty and a royalty for work done before the marriage." According to appellant, ISC originally indicated which checks were royalty checks, but they eventually stopped doing so. At that point, appellant began making this determination. Appellant reiterated that respondent could have gone through his financial records during the marriage or at the time of the dissolution.

On February 27, 2009, the trial court issued its statement of decision. The trial court found that appellant had exclusive control over the community's finances and respondent was not aware of the extent of the community's income during the marriage or at the time of dissolution. It also found: appellant deposited community income in the Vanguard account which was his separate property; though some community income was transferred to another account to pay for community expenses, the remaining community income was left in the Vanguard account; and appellant did not disclose the remaining community income when the parties negotiated the MSA. The trial court further found that community income was used to fund construction of appellant's residence and to pay taxes on appellant's separate investment income, and consequently, respondent had been deprived of her share of the community interest in the residence and appellant's investment accounts. The trial court concluded that appellant had breached his fiduciary duty to respondent by failing to disclose community finances during the marriage and the dissolution process, set aside a portion of the MSA, and awarded respondent $277,121 in damages, which represented the total amount of community income that appellant failed to disclose.*fn2

II. Discussion

Appellant contends that there was overwhelming evidence that respondent was aware of his income.

Since spouses have a fiduciary relationship to one another, there is a presumption of undue influence when one spouse obtains an advantage over the other spouse in an economic transaction. (In re Marriage of Haines (1995) 33 Cal.App.4th 277, 293; Fam. Code, § 721.) The spouse who gains the advantage has the burden of rebutting the presumption of undue influence. (In re Marriage of Haines, at p. 293.) For an advantaged spouse to show he or she did not exercise undue influence over the other spouse, he or she must present evidence that the value and nature of the property was fully disclosed, as well as the specific rights being given up, or that the disadvantaged spouse knowingly and freely negotiated the transaction. (Estate of Brimhall (1943) 62 Cal.App.2d 30, 34.) We review the trial court's factual findings under the substantial evidence test. (In re Marriage of Mix (1975) 14 Cal.3d 604, 614.)

Here, there was substantial evidence to support the trial court's finding that respondent did not know the extent of the parties' community income. She testified that appellant handled the parties' finances. She also testified that she believed that he earned very little money during the marriage, and that he paid community expenses with his separate income. Respondent was also not aware that appellant was depositing community income in his separate property account and that there was an excess of community funds in this account at the time of dissolution of the marriage. That appellant offered respondent and her former attorney the opportunity to search through "stacks and stacks" of documents on his office floor did not constitute disclosure of the relevant financial information. Moreover, the parties' tax returns and other documents presented to her by appellant did not accurately reflect the nature of the parties' income.

Appellant points out, however, that respondent claimed on May 13, 2005, that he made $15,000 per month, and spousal support and child support were calculated on this basis. As appellant acknowledges, this information was used to determine the support orders beginning in July 2004. Thus, this evidence was irrelevant to any determination of which assets constituted community property.

Appellant next contends that the trial court made a number of incorrect statements regarding the tax returns in its statement of decision. There is no merit to this contention.

Appellant argues that his declaration of certain income as royalty income did not affect the taxable income disclosed to respondent. Appellant appears not to understand that the amount of taxable income was irrelevant. As the trial court stated, appellant "arbitrarily and unilaterally declared certain sums to be royalty income . . . ." For example, his 2003 federal income tax return states that he received $28,000 in royalty income. However, the 1099 Form from ISC states that he received no royalty income in 2003. Since royalty income was his separate property, his declaration of royalty income misled respondent as to the full amount of income to the community.

Appellant challenges the trial court's characterization of the schedule of assets and debts (exhibit 1). He acknowledges that this document was incomplete. He claims, however, that it was not inaccurate. To the extent that appellant did not list all of his assets and their value, the document was inaccurate.

Appellant argues that exhibit 15 is not more accurate than the parties' joint tax returns because the income listed in exhibit 15 was declared on those returns. Appellant again misses the point that exhibit 15 summarized royalty and earned income payments from ISC, and this information conflicted with the information on the tax returns.

Appellant next refers to the MSA, which stated that all disclosures have been made, and again claims that he made tax returns and financial statements available to respondent. However, the MSA also stated that "[e]ach party has made a full and honest disclosure to the other of all current finances and assets, and each enters into this agreement in reliance thereon. Each warrants to the other and declares under penalty of perjury that the assets and liabilities divided in this agreement constitute all of their community assets and liabilities." As previously discussed, the record establishes that appellant failed to carry his burden of showing that he correctly disclosed to respondent the amount of community income prior to the execution of the MSA, thereby violating the terms of the MSA.

Relying on In re Marriage of Loh (2001) 93 Cal.App.4th 325, 332, appellant claims that "[t]his court should accept the tax returns, and not question such things as to how royalties were reported ten years ago." However, the presumption that tax returns are correct is not relevant to any issue in the present case. As previously discussed, appellant failed to disclose that the Vanguard account included community funds.

Appellant next argues that he disclosed all necessary information to respondent. He asserts that the "Confidential Financial Disclosure" statement in October 2003 and the schedule of assets and debts were incomplete only because the financial data was listed elsewhere. There is no merit to this argument. As previously discussed, appellant did not disclose that he had commingled community income with his separate property.

Appellant also argues that "even if [his] discovery disclosures were incomplete, that would have only justified a motion to compel back in 2004 or 2005, and that cannot justify a financial penalty in 2009." Appellant has mischaracterized the record. Appellant had a fiduciary duty to respondent to disclose the nature and value of their community income, which he failed to do. In April 2006, respondent brought an action to set aside the MSA. When the matter was then continued several times, appellant did not object. Thus, appellant cannot now complain that he has been unjustly penalized by any delay in the proceedings.

Lastly, appellant claims that his payment of respondent's law school loans in the amount of $80,000 should not have been considered a gift.

On April 17, 2006, the trial court held a hearing on support and property issues. Appellant requested reimbursement for the $80,000 he paid in 1997 for respondent's law school loans. Respondent testified that this amount was a gift, and the trial court denied the request. Appellant did not appeal from this order. Even assuming this court has jurisdiction over the issue, there is substantial evidence to support the trial court's finding. (In re Marriage of Mix, supra, 14 Cal.3d at p. 614.)

III. Disposition

The order is affirmed.

WE CONCUR: Bamattre-Manoukian, Acting P. J. McAdams, J.


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