(Super. Ct. No. 02D005672) Appeal from a judgment of the Superior Court of Orange County, Robert H. Gallivan, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.) Reversed.
The opinion of the court was delivered by: Aronson, J.
CERTIFIED FOR PUBLICATION
Stephen Temko and Dawn Gray for the Association of Certified Family Law Specialists and the Southern California Chapter of the American Academy of Matrimonial Lawyers as Amici Curiae, upon the request of the Court of Appeal.
In a marital dissolution proceeding to divide the community property, where the nonmanaging spouse has prima facie evidence that community assets of a certain value have disappeared while in the control of the managing spouse post-separation,*fn1 should the managing spouse have the burden of proof to account for the missing assets? The answer is yes.
Husband and wife separated after a 33-year marriage and, for 12-post-separation years, continued to handle their joint finances as before: Husband had complete control of substantial community investment accounts and paid all the bills; wife trusted him to manage their finances for their mutual benefit. Just before trial, however, husband disclosed for the first time that the once-brimming investment accounts were virtually empty. Without any corroborating evidence, he attributed the dissipation of account values to proper expenditures and stock market losses.
At trial, wife argued the court should charge husband with the missing funds unless he proved he did not misappropriate the money. Her only evidence of missing funds was a financial statement husband prepared three years after separation and nine years before trial. The trial court concluded the document was insufficient evidence the accounts had contained the stated amounts post-separation, and declined to charge husband with the missing funds. The ensuing property division required wife to make a large equalizing payment to husband.
Based on relevant Family Code provisions, equitable principles, and case law, we conclude the trial court erred in failing to shift to the managing spouse the burden of proof concerning the missing community assets. Once a nonmanaging spouse makes a prima facie showing of the existence and value of community assets in the other spouse's control post-separation, the burden of proof shifts to the managing spouse to prove the proper disposition or lesser value of those assets. Failing such proof, the court should charge the managing spouse with the assets according to the prima facie showing.
I FACTUAL AND PROCEDURAL BACKGROUND
Alan and Elaine Margulis separated after more than 33 years of marriage. On August 12, 1996, Alan*fn2 moved out of the family residence in Irvine and relocated to Chicago to start a new job. Elaine remained in the family home (the Sycamore house), while the couple's two adult children lived elsewhere.
Marital Finances from Separation Through Filing of Dissolution Petition
During the marriage, Alan had been the sole breadwinner and exercised complete control of the couple's finances. He managed several community checking accounts from which he paid the bills. He also managed their investment portfolio, which included brokerage accounts at various institutions, including Sutro & Company, John Hancock Clearing Corporation, and Charles Schwab, the custodian of two community IRA's held in Alan's name.
As explained more fully below, the record contains limited documentary evidence of the value of the community investment accounts Alan was managing at separation, or afterward.*fn3 The joint income tax returns Alan submitted into evidence provide some inkling of value. The Margulis's 1996 Schedule D, the statement of their capital gains and losses, reported that between January and July of 1996, they sold $1,142,111 worth of short- and long-term stock holdings, and two other long-term investments that generated another $68,091.
The size of the community estate grew larger post-separation due to several substantial infusions of community cash. This increase consisted of $104,839.75 in severance pay related to Alan's preseparation employment, $179,708 from the sale of the couple's Palm Desert house, and $84,858 from cashing out a life insurance policy.*fn4 Collectively, these additional sums amounted to $369,405.
After Alan moved to Chicago, he continued to manage the community investments and to pay Elaine's bills, including all the expenses for the Sycamore house, and other community obligations. On a number of occasions, Alan also wrote a check directly to Elaine, typically for $1,000 to $1,500.
Initially, Alan paid the bills with checks drafted from the couple's Merrill Lynch money market checking account. In September 1998, Alan began paying his, the community's, and Elaine's bills from a new separate property account, identified as his "Chevy Chase" bank account. In testimony, Alan acknowledged that he freely transferred community property funds into his Chevy Chase account and other separate bank accounts.
Both parties appeared content with the post-separation status quo since neither filed for divorce, and Elaine did not seek a temporary support order. During the separation, as before, Elaine left management of their joint finances entirely to Alan. She received no account statements from the various banks or brokerage firms holding the community assets.
The Petition for Dissolution and Alan's Property Disclosures
In 2001, Elaine began paying the mortgage on the Sycamore house and also began earning income as an actress. On June 7, 2002, nearly six years after separation, Elaine filed a marital dissolution petition. Alan waited until February 21, 2007, to file his response. Neither document disclosed the extent of the marital property. Elaine's declaration regarding community assets listed only the Sycamore house and miscellaneous art and jewelry, but stated she would amend the petition to add community assets as they became known. Alan claimed in his declaration that "[t]he nature and extent of community . . . property has not yet been ascertained" and that he would amend the petition as the property "is discovered."
The mandatory settlement conference briefs, exchanged in October 2007, more than 11 years after separation, gave the first inkling of the dispute brewing. The two briefs painted dramatically different views of the community property subject to division.
Elaine's brief identified the following community assets within Alan's possession and control, and thus chargeable to him in the division: $180,000 proceeds from the sale of the Palm Desert house; $100,000 proceeds from a Bank of America line of credit; $271,000 severance package from his preseparation employer; $350,000 proceeds "from the IRA and securities sale"; and $75,000 when Alan cashed out a life insurance policy. Elaine estimated the total community property chargeable to Alan as approximately $901,000. Elaine asserted the court could achieve an equal property division if it allowed her to retain the Sycamore house, with $450,270 in equity, and $20,000 cash received from refinancing the property in 1994, and she paid an outstanding tax obligation of $45,000, with Alan providing her a $237,865 equalizing payment.
Alan's settlement conference brief identified the Sycamore house as "the main remaining community asset" and proposed that it be sold and the proceeds divided equally between the parties. He asserted the court could achieve an equal property division by halving any community retirement or pension benefits and allowing each party to keep the car, bank accounts, and "other financial accounts in [his or her] name since the date of separation."
Alan's brief failed to mention any of the community property investment accounts that had existed at date of separation, such as the Sutro & Company account or the John Hancock and Charles Schwab accounts. Nor did his brief mention the Merrill Lynch bank account or the $369,405 in community funds Alan received post-separation from the severance package, desert house sale, and life insurance policy.
The parties obtained a status only judgment of dissolution on April 4, 2008, and a trial date to resolve the reserved property division issues.
The parties' trial briefs simply expanded on their settlement briefs. Elaine's trial brief asserted higher values for the investment accounts chargeable to Alan, based on a key document she would later offer into evidence as "exhibit 18." She contended Alan had received "from Charles Schwab [IRA] accounts . . . $230,000" and "from Sutro EQ Account . . . $450,000 . . . ."
Alan's trial brief asserted the only "presently existing community" property consisted of the Sycamore house, the personal property within it, and an IRS tax loss carry-forward of $312,122. As for the various financial accounts Alan maintained post-separation, he asserted these had been depleted over the ensuing 12 years by paying community expenses, Elaine's "daily maintenance and expenses," and by stock market losses. He claimed he would introduce evidence of both the expenditures and market losses that depleted the accounts.
Evidence and Findings on the Community Assets Chargeable to Alan
Though the parties clashed at trial on a number of issues relating to the value of the community assets chargeable to Alan,*fn5 the most significant dispute concerned whether to charge Alan with the value of the stock brokerage and money market accounts in Alan's post-separation control, namely, the Sutro & Company, John Hancock, Charles Schwab, and Merrill Lynch accounts.
Except as to the Charles Schwab IRA's, Alan presented no evidence on the value of these community accounts at any time post-separation. Instead, Alan generally testified that these community accounts were now virtually empty (except for $20,000 at Charles Schwab) due to stock market losses and expenditures for the community's or Elaine's benefit. Alan argued that the only community assets chargeable to him were the $20,000 remaining in the Charles Schwab IRA's.
Contrary to the representation in his trial brief, Alan produced no evidence at trial to show how he disposed of the funds under his control. Nor did he produce evidence tracing funds from community accounts to a community expenditure or purchase. The only specific evidence he offered concerning the disposition of any community funds was his testimony about withdrawing funds from the Charles Schwab IRAs in 1999, 2000, and 2001, in amounts collectively totaling $164,390, as reported on the couple's joint tax returns. Alan testified that he withdrew these IRA funds because he needed money to pay current expenses and wanted to avoid further losses in a declining market. Alan did not offer any evidence to corroborate this claim.
In closing argument, Alan claimed that his general assertion of loss-related IRA withdrawals corresponded to the $312,000 tax loss carry-forward identified as a community asset in his trial brief. Alan's counsel asserted, "The remaining balance [in those investment accounts] would have been . . . in the tax loss carried forward . . . ." In other words, he argued that after subtracting Alan's expenditures for the community and for Elaine, all that remained in the investment accounts was $312,000, a sum that was lost in the market as "evidenced" by the $312,000 tax-loss carry forward that existed at time of trial.*fn6
Elaine introduced evidence to prove the value of the investment accounts in Alan's control post-separation. She testified that, as the nonmanaging spouse, she had no personal knowledge or records of the value of the accounts at any particular time. But she offered into evidence as exhibit 18 a two-page document entitled "confidential personal financial statement" for "Alan/Elaine Margulis," dated February 1, 1999, reflecting total assets of $1,305,500. The itemized list of assets included $133,000 in a money market (identified on the second page as the Merrill Lynch account); $230,000 in the Charles Schwab IRAs; $424,000 in "marketable securities" (presumably the Sutro & Company account), real estate and other investments. Alan admitted under cross-examination that he had prepared and signed this document in February 1999. Elaine's counsel argued the trial court should accept the values of the Merrill Lynch, Charles Schwab, and Sutro & Company accounts as stated on exhibit 18 unless Alan proved he properly disposed of those assets for community purposes or the stock holdings lost value due to market decline. In other words, Elaine argued the burden of proof should shift to Alan to disprove the values stated on exhibit 18 because he controlled those accounts and therefore was the only one with the personal knowledge or records to prove the value and disposition of the community funds post-separation. The trial court admitted exhibit 18 into evidence.
In closing argument, Alan's counsel argued exhibit 18 should be given "little weight" because Elaine presented no testimony explaining the document Alan created, and the document was unreliable because it failed to distinguish between community and separate property. Alan also argued exhibit 18 was outdated and therefore shed little light on the value of "the community assets present now."
The trial court ultimately did not rely on the account values listed in exhibit 18. The court explained, "I don't believe it supports, standing alone, [that] your assets listed did, in fact, exist." Without exhibit 18, the trial court had no evidence on the value of any specific investment accounts, except for the Charles Schwab IRA's. As for the IRA's, Charles Schwab account statements showed a combined value in December 1996 of $202,763, tax records reported Alan's withdrawal of $164,390 from those accounts in 1999-2001, and current account statements showed $20,000 remaining in the IRA's. Based on that evidence, the trial court charged Alan with $184,390 in IRA funds. The trial court made no findings on the value of the other investment accounts at separation or later, and did not charge Alan with any of those funds, impliedly accepting Alan's assertion that he spent the money from these accounts on the community and Elaine, and lost the remainder in market downturns.
The trial court also charged Alan with the $369,405 community cash he received from the desert property, life insurance policy, and severance pay. The trial court rejected Elaine's argument that Alan should be charged with the $100,000 Bank of America line of credit or the $46,500 for ...