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In Re the Marriage of Joseph and Maryanne K. Sorge. v. Maryanne K. Sorge

January 5, 2012

IN RE THE MARRIAGE OF JOSEPH AND MARYANNE K. SORGE. JOSEPH A. SORGE, APPELLANT,
v.
MARYANNE K. SORGE, RESPONDENT.



APPEAL from orders of the Superior Court of San Diego County, Jeffrey S. Bostwick and Robert C. Longstreth, Judges. (Super. Ct. No. D488526)

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

CERTIFIED FOR PUBLICATION

Reversed in part and remanded with directions as to the January 29, 2010 order; affirmed as to the November 9, 2010 order.

I.

INTRODUCTION

Joseph A. Sorge appeals after the trial court modified the child support awarded to his ex-wife, Maryanne K. Sorge, and awarded Maryanne*fn1 sanctions and attorney fees, both related to the costs of the underlying litigation, as well as pendente lite attorney fees for defending against Joseph's appeal.

On appeal, Joseph first contends that the trial court erred in calculating the child support amount. According to Joseph, the trial court ignored his bona fide business expenses in calculating his monthly income, in contravention of Family Code*fn2 section 4058, subdivision (a)(2).

Joseph also contends that the trial court erred in concluding that for purposes of section 2102, subdivision (c), the parties' duty to disclose to each other, sua sponte, all material changes in their financial status continues from the date of separation until the trial court no longer has jurisdiction to order child support. Joseph argues that the court erred in determining that the cessation of a child support obligation is the event that constitutes a "valid, enforceable, and binding resolution of all issues relating to child . . . support" under section 2102, subdivision (c). According to Joseph, because the trial court's award of sanctions to Maryanne was based in part on the court's erroneous interpretation of section 2102, subdivision (c), the sanctions order must be reversed.

Finally, Joseph contends that the trial court abused its discretion in awarding Maryanne attorney fees in the amount of $200,000 for proceedings in the trial court, and $60,000 in pendente lite attorney fees for proceedings on appeal*fn3 because Maryanne has no need for these fees, since she has a net worth of over $14 million, more than half of which is in liquid assets.

We conclude that the trial court erred in sanctioning Joseph on the ground that he breached his fiduciary duty under section 2102, subdivision (c) to disclose to Maryanne all material changes in his income. Specifically, we conclude that any fiduciary duty that Joseph had to disclose material changes in his income to Maryanne ended upon entry of their 2002 divorce decree. We reject all of Joseph's other contentions.

The trial court's sanction order must be reversed and the matter remanded for the trial court to reconsider that issue. In all other respects, we affirm the trial court's orders.

II.

FACTUAL AND PROCEDURAL BACKGROUND

A. Factual background

Maryanne and Joseph were married in 1983, and separated in September 2000. The parties had three children. Maryanne filed a petition for divorce in Wyoming in November 2000.

Pursuant to a marital settlement agreement (MSA) that the parties entered into in Wyoming, the parties agreed to share joint custody of the children, who were minors at the time the divorce petition was filed. Maryanne and Joseph also agreed that Joseph would pay Maryanne child support in the amount of $8,500 per month for all three children (and not less than $4,000 per month for one child)--an amount that was based on Joseph's gross income of more than $800,000 per year related to his position at Stratagene Holding Corporation, Inc. (Stratagene), a company that Joseph founded. The child support was to commence in July 2002 or the first day of the month in which Maryanne and the children moved to San Diego, California. Joseph also agreed to pay Maryanne $12,000 per month in non-modifiable spousal support for 120 months.

The MSA was made a judgment of the Wyoming court on March 28, 2003. The parties subsequently registered the MSA with the San Diego County Superior Court, and it was established as a judgment on November 21, 2005.*fn4

B. Procedural background

1. Maryanne's motion to modify custody of the remaining minor child, modify child support, award attorney fees, and establish spousal support arrears

On August 24, 2007, Maryanne filed an order to show cause (OSC) seeking to modify the child custody and visitation arrangement for the parties' minor son, who was 14 years old at the time. Maryanne also requested modification of child support, as well as attorney fees, and spousal support arrears.

The parties retained Tony Yip as a joint expert to perform an analysis of the parties' income and assets.

Maryanne filed a schedule of assets and debts in July 2008, which showed that she had no debt, and that she had $14,237,593 in assets. In an income and expense declaration dated August 1, 2008, Maryanne indicated that she had $13.5 million in assets and $43,214 in monthly expenses.

Joseph's income and expense declaration demonstrated that he had sold Stratagene and no longer held his position at the company. His average monthly income included $10,980 in salary, $224,867 in dividends and interest, and $426,556 in investment and ordinary losses. Joseph listed his monthly expenses as $62,539.

Yip prepared an initial report in which he presented Joseph's income in two different ways, the first of which included Joseph's net losses from a number of start-up companies that he founded after selling his interest in Stratagene, and the second of which excluded those losses. Joseph objected to the second approach, and suggested to Yip that taking an approach that excluded his net losses would constitute "professional malpractice." Joseph threatened Yip's firm with a lawsuit for damages that Joseph might suffer as a result of Yip's report.

Yip's firm appeared ex parte before the trial court, seeking guidance as to how to present Joseph's income in the report. The trial court ordered that Yip could present his report as Yip deemed necessary, and specifically, that Yip could include alternative approaches to determining Joseph's income.

In the final report, Yip noted that Joseph had received in excess of $100 million, before taxes, from the sale of his interest in Stratagene when he sold the company in 2007. Joseph used those funds for a number of purposes, including making capital contributions to several new start-up companies, purchasing real property, paying down mortgages, and paying income taxes. Joseph placed the remainder of the proceeds from the sale of Stratagene in various investment accounts. His portfolio balance as of December 31, 2008 was $63.6 million.

With respect to the companies that Joseph started in 2007, Yip noted that the companies experienced significant operating losses in 2007 and 2008. In Yip's final report, Yip presented Joseph's income using the same two methods that he had used in his initial report. Applying the first method to calculate Joseph's income, Yip included both income and losses from Joseph's start-up companies between June 2007 and December 2008. Using this method, Joseph had a net monthly loss of $9,100 in 2007, and a net monthly loss of $235,600 in 2008. Applying the second method, Yip excluded the losses from Joseph's start-up companies. Under this method, Joseph had a net monthly income of $320,800 in 2007, and $229,100 in 2008.

Yip did not analyze the detailed expenses of the start-up companies for possible personal and/or nonrecurring expenses. Yip explained that the reason he did not analyze the expenses was because he determined that if the trial court decided to include the $5.69 million in net losses over the relevant period for purposes of calculating support, then Joseph would have a net loss of $2.8 million in 2008 as the basis for support, and the "[a]dd backs" of personal and/or nonrecurring expenses, if they existed, would not result in a net positive number.

In addition to the income and/or losses from Joseph's start-up companies, Joseph had interest and dividend income of $1.9 million from June to December 2007, and $2.35 million from January to December 2008.

2. Maryanne's motion to compel and request for sanctions

In October 2008, Maryanne filed a motion to compel the production of documents and other information, and a request for sanctions against Joseph in the amount of $125,000. The request for sanctions was based, for the most part, on Joseph's "refus[al] to produce . . . information and documents, and for providing false, evasive and misleading discovery responses to the parties' joint expert and Respondent's counsel." Among the things that Maryanne complained of in her request for sanctions was that Joseph failed to disclose that he received more than $3 million in income during 2006, failed to disclose that he received more than $9 million in cash between January and June 2007 from the sale of Stratagene stock, and failed to disclose that he received more than $100 million in cash from the sale of his interest in Stratagene.

3. Yip's testimony

At the hearing, Yip testified about his final report, and explained the two different methods that he used to calculate Joseph's income for purposes of the report. Yip agreed that the expenses that appeared in Joseph's accountings for his start-up businesses were current operating expenses, and said that he had no reason to believe that the expenses were not legitimate business expenses. Yip also testified that he assumed that Joseph was operating all of the businesses with the intent of making them profitable, and that he understood the expenses to be "start-up" expenses not because they fit a particular Internal Revenue Code definition of a "start-up" expense, but because he viewed the companies as being at an early stage in their development. Yip further explained that he did not assume that Joseph was engaging in any of the businesses as a hobby or tax shelter.

Yip did not examine any of the particular expenses reported by the companies. Instead, he considered and included all of the expenses under the first method for calculating Joseph's income, and excluded all of the expenses under the second. Using the first method, Joseph's income was negative.

4. The court's January 29, 2010 order

In addressing the parties' contentions with respect to Maryanne's various requests, the trial court issued a lengthy statement of decision and order that covered a number of topics. Of relevance to this appeal are the court's comments with respect to modification of child support, sanctions against Joseph, and attorney fees and costs awarded to Maryanne. The trial court declined to consider the operating expenses of the start-up companies in determining Joseph's income, for purposes of calculating child support, and increased child support from $4,000 per month to approximately $18,000 per month. In addition, the trial court determined that Joseph had engaged in conduct that frustrated settlement and furthered the litigation, and that he had also breached his fiduciary duties to Maryanne by failing to disclose material changes to his income, beginning in 2006 and continuing throughout the litigation. Finally, with respect to attorney fees and costs, after noting that "Joseph retains 80% of the parties' combined incomes and approximately 85% of the combined liquid assets," the trial court ordered Joseph to pay $200,000 in attorney fees and costs to Maryanne.

5. Maryanne's request for pendente lite attorney fees and costs to defend against Joseph's appeal from the trial court's January 29, 2010 order

On August 16, 2010, Maryanne filed a request for an additional $60,000 in pendente lite attorney fees and $250 in costs to defend against Joseph's appeal. According to Maryanne, because Joseph appealed the order of the trial court, he had not paid her any of the $18,030 in child support, $414,444 in child support arrears, $200,000 in attorney fees, or $75,000 in sanctions that the trial court had ordered, but instead, posted a cash undertaking to stay the order for those amounts.

Maryanne attached an income and expense declaration in which she stated that her only income derived from dividends and interest on her investments. For the month prior to her request for pendente lite attorney fees, that income had been in excess of $50,000. Maryanne estimated her assets to be approximately $11.5 million, of which $8.5 million were liquid assets. Maryanne indicated that she was remarried, but declined to state her husband's income. Maryanne's expenses were listed as $60,527 per month.

Maryanne's trial attorney filed a declaration stating that it had cost $4,143 to prepare the motion for pendente lite attorney fees, and that his firm would be required to spend approximately 30 hours assisting appellate counsel in drafting Maryanne's respondent's brief on appeal. Maryanne's appellate counsel declared that he was a Certified Appellate Specialist and Certified Family Law Specialist, and estimated that it would take him approximately 160 hours to defend Joseph's appeal. He requested a pendente lite award of $50,000, and asked the court to retain jurisdiction over the issue of appellate attorney fees and costs, given the potential for further complications.

Joseph's income and expense declaration listed cash and checking accounts valued at $207,208, and stated that the value of his stocks, bonds and other assets that he "could easily sell" was $51,630,000. Joseph stated that the value of his less liquid assets was $16,280,000, for a total asset value of more than $68 million. Joseph's estimated expenses were listed as $393,253 per month, including business expenses of $330,003 per month.

On November 9, 2010, the trial court*fn5 granted Maryanne's request for pendente lite attorney fees and costs on appeal, and ordered Joseph to pay Maryanne $60,000 as a contribution to her appellate attorney fees and costs, pursuant to sections 2030 and 2032. Joseph filed a timely notice of appeal with respect to the court's order requiring him to pay Maryanne $60,000 in pendente lite attorney fees and costs.

III.

DISCUSSION

A. The trial court did not err in determining Joseph's income for purposes of setting child support

Joseph contends that the trial court "never calculated guideline support pursuant to the [Family] Code" (underscoring omitted) because, according to Joseph, the court excluded "bona fide business expenses" and, therefore, the court "calculated child support based on only the positive numbers." Joseph asserts that the expenses shown on his profit and loss statements were required for the operation of his good faith businesses, and that the court had no legal basis for excluding those business expenses from its calculation when it determined his income. What Joseph fails to acknowledge is that the court had discretion under subdivision (b) of section 4058 to consider Joseph's "earning capacity," rather than his actual income, for purposes of calculating guideline child support. It appears from the court's discussion of the child support issue that this is precisely what the court did when it elected not to consider the expenses from Joseph's start up businesses in calculating child support.

1. Additional background regarding the trial court's order with respect to whether to consider or exclude Joseph's business expenses in determining child support

The court noted that the existing child support order was based on Joseph having an annual gross income of $800,000. The court found that Joseph's sale of Stratagene constituted a substantial change in his financial circumstances because that sale netted him approximately $100 million. In 2008, after the sale of Stratagene, Joseph's non-real property investment portfolio, alone, generated unearned income of more than $2.35 million.

The court then considered the losses that Joseph suffered as a result of the start-up businesses that he formed after he sold Stratagene. The court quoted section 4058, subdivision (a), and also cited and explained the case of In re Marriage of Berger (2009) 170 Cal.App.4th 1070 (Berger). The court noted that Yip had calculated Joseph's 2008 income in two ...


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