In re Marriage of Rosalinda

          APPEALS from a judgment of the Superior Court of San Diego County No. D533280, Lisa C. Schall, Judge. Affirmed in part, reversed in part, and remanded with directions.

          Higgs, Fletcher & Mack, John Morris and Rachel E. Moffitt for Appellant Rosalinda Deluca.

          Stephen W. Hogan for Appellant George Deluca.

          DATO, J.

         In this marital dissolution action between Rosalinda Deluca and George Deluca, both parties appeal from a judgment determining the division of property and other matters, including spousal support.^[1] During the marriage, George's sister transferred to him title to an apartment complex referred to in this case as the Florida Street property. Rosalinda contends the trial court erred in ruling the Florida Street property was George's separate property rather than community property. George has custody of the parties' two children and contends the court erred by awarding Rosalinda spousal support in an amount greater than his total net income available to support the children. Specifically, he asserts the court erred by including the amount of monthly loan principal payments he is required to make on his income-producing properties as income available for spousal support.

         We reverse the portion of the judgment awarding the Florida Street property to George as his separate property and remand with directions to characterize that property as community property and determine the amount of reimbursement to which George is entitled for his separate property contributions to the acquisition of the property under Family Code section 2640.^[2] We also reverse the spousal support award and direct the trial court to reconsider spousal support after determining the extent to which George's loan principal payments reasonably and legitimately reduce his income for purposes of support. We otherwise affirm the judgment.

         FACTUAL AND PROCEDURAL BACKGROUND

         A. Background Facts

         George and Rosalinda were married on September 7, 1996, and separated 15 years and two months later, on November 21, 2011. They had two children during the marriage-one born in 1998, and the other in 2003. At the time judgment was entered, George had sole physical custody of the children.^[3]

         Before and during the marriage, George owned and operated an insurance agency. He also owned and managed several income-producing rental properties that the court found to be his separate property. Rosalinda has a bachelor's degree in political science and a paralegal certificate. She worked as a legal secretary for over 26 years, including throughout the marriage.

         B. The Deluca Properties Trust Litigation

         Before George's father died in 1990, he acquired multiple parcels of real property that he held in various trusts, including the Deluca Properties Trust that contained the Florida Street property. George, his brother Sylvester, and his sister Rosalie were the beneficiaries of the Deluca Properties Trust. After their father's death, disputes over his trusts led to four and one-half years of litigation between George and his siblings.

         On October 25, 1996, just after George married Rosalinda, the three siblings entered into a written agreement (the settlement agreement) to resolve their litigation over the family properties. The settlement agreement noted the existence of "claims, demands and differences" between the parties relating to the ownership and management of the subject properties and the administration of the Deluca Properties Trust, and stated the parties had "settled all of these claims, demands, differences and disputes...."

         Under the settlement agreement, George received title to three properties: (1) a commercial property in Santee (referred to as the Santee Property); (2) a commercial property in Encinitas (referred to as the Encinitas Property); and (3) a commercial property on Orange Avenue in San Diego (referred to as the Orange Property). Rosalie received title to the Florida Street property and a promissory note from George in the amount of $75, 000. The note was to be secured by a first priority deed of trust encumbering the Orange Property. Sylvester agreed to forgive an outstanding debt Rosalie owed him in the amount of $32, 000. Sylvester received title to a property on West Palm Street in San Diego and a promissory note from George in the amount of $250, 000. The note was to be secured by a third priority deed of trust encumbering both the Santee Property and the Encinitas Property.

         The settlement agreement provided that "[i]n exchange for receiving the Santee, Encinitas and Orange Properties, GEORGE relinquishes his right to receive or claim an interest in any of the assets of the [Deluca Properties] Trust, and expressly agrees that he is no longer a beneficiary of the Trust[, ]" and that "all assets of the Trust belong solely to ROSALIE and SYLVESTER...." The settlement agreement also provided: "This agreement may be amended only by a written agreement executed by all the Parties."

         C. George's Later Acquisition of the Florida Street Property

         At trial, George testified that Rosalie never wanted the Florida Street property. So in September 1997, roughly one year after the original settlement agreement, George and Rosalie signed another agreement under which Rosalie transferred title to the Florida Street property to George. This second agreement, labeled "AMENDMENT TO SETTLEMENT AGREEMENT AND MUTUAL RELEASE," states that it amends "that Agreement of Settlement and Mutual Release... executed October 25, 1996, by and between Rosalie... George... and Silvester [sic].... This amendment does not in any way [affect] the terms of the original settlement with respect to George... and Silvester... or as between Rosalie... and Silvester..., and makes no other changes or modification, other than those set forth herein."

         The "amendment" to the settlement agreement provided that Rosalie would transfer the Florida Street property to George by grant deed, and George would execute a promissory note to Rosalie in the amount of $164, 700, secured by the Florida Street property. George would "have the option to assume the first deed of trust on [the] property, in the approximate amount of $235, 300 or continue making the monthly payments on [the] first deed of trust." George would also pay $20, 000 in cash to Rosalie at the close of escrow. Thus, what George referred to at trial as the "transfer price" of the Florida Street property was $420, 000 ($164, 700 $235, 300 $20, 000), which was the value of the property when it was appraised in 1995, in connection with the original settlement agreement.

         The amendment to the settlement agreement stated: "It is expressly agreed between the Parties that this exchange and transfer of ownership to the Florida Street property is an extension of and modification of the Parties' original settlement agreement..., and the Parties' express intent herein is to redistribute trust assets." It also stated: "Except as expressly stated herein, all other terms and provisions of the original settlement agreement remain in full force and effect, without modification or change." George and Rosalie signed the amendment; Sylvester did not sign it.

         At trial, George testified that he had many conversations with Rosalinda about the Deluca properties and that as "my fiancée, my wife, my confidant, [Rosalinda] was aware of everything that was happening in the litigation [with his siblings] so I'm sure she had a chance to see [the settlement agreement] numerous times if she wanted to or she glanced at it. It was available for her." He also testified that he provided Rosalinda a copy of the trust that was the subject of the litigation.

         George testified that he told Rosalinda his sister was transferring the Florida Street property to him and the property was his inheritance. He explained that the Florida Street property had been part of his family trust, his parents had built the apartment building on the property, and it was to remain his separate property. He gave Rosalinda a copy of the amendment to the settlement agreement before the close of escrow on Rosalie's transfer of the Florida Street property to him, and he discussed the terms of the amendment with her. When asked if Rosalinda "[made] any reply" to him about the terms of the amendment, George testified, "She thought it was good."

         At George's request in January 1998, Rosalinda signed a quitclaim deed transferring any interest she had in the Florida Street property to George as his sole and separate property. When George refinanced the property in 2002, Rosalinda signed a "SPOUSAL ACKNOWLEDGEMENT" document stating that she claimed no ownership rights in the Florida Street property.

         Rosalinda testified at trial that when she and George were dating, he told her that he was involved in litigation with his brother regarding the "trust for his inheritance," but he did not tell her any details about his claims. He never provided her with a copy of any of the family trusts, and he never discussed the details of the terms of the settlement agreement between him and his siblings or the amendment to the settlement agreement before or during the marriage. The first time she saw the settlement agreement and the amendment to the settlement agreement was during the divorce proceedings, and George did not tell her anything about terms of the amendment to the settlement agreement when he asked her to sign the quitclaim deed to the Florida Street property. He told her the Florida Street property was part of his inheritance and his sister was going to transfer it to him as part of the inheritance because she was unable to manage the apartments. He explained that his lender needed the quitclaim deed "to get everything through." She did not seek legal advice before signing the quitclaim deed because she trusted her husband and "just signed it."

         Rosalinda's counsel argued at trial that the Florida Street property should be divided as community property because George purchased it from his sister during the marriage with community funds. Counsel further argued that George induced Rosalinda to sign the quitclaim deed to the Florida Street property by undue influence in breach of the fiduciary duty he owed her because she did not sign the quitclaim deed with full knowledge of the material facts, her signing it unfairly advantaged George, she waived a valuable right by signing it, and she received no consideration for signing it.

         George's counsel argued that Rosalinda knew she had no interest in the Florida Street property, knew it was part of George's inheritance, and knew the effect of the quitclaim deed-i.e., she knew that if she had any interest in the property, she was transmuting it. He argued that the presumption of undue influence had been rebutted by evidence that Rosalinda "knew at all times that these properties were being handed down through the family. Even if he had to make a payment to his siblings, the payment was supported by the loans on the commercial properties and the loans on the commercial properties were supported by the commercial properties themselves...."

         D. Statement of Decision and Judgment

         1. Character of the Florida Street property

         In its "Final Statement of Decision and Judgment," the trial court ruled that the Santee Property, the Encinitas Property, and the Orange Property were George's separate properties under section 770 "in that they were received through inheritance and devise."^[4] The court relied on the fact that George acquired the properties through the settlement agreement between him and his siblings, which was reached before the marriage but executed two months after the marriage. It found that all of the properties at issue in the litigation between George and his siblings were "a direct result of an inheritance received and an agreement devising the real properties at issue."

         Regarding the Florida Street property, the court determined that George "met his burden of proof to establish that the real property is his separate property... in that it was received through inheritance and devise." His acquisition of the Florida Street property was "memorialized" by the amendment to the settlement agreement, which "provided for the same value of the property that existed at the time of the original Settlement Agreement and Mutual Release...." Rosalinda, in turn, "freely and voluntarily executed a Quit Claim Deed at the time of the transfer of the property to [George]." She testified that she read the quitclaim deed before she signed it and that George did not threaten her to make her sign it. When George refinanced the property in 2002, Rosalinda "executed a spousal acknowledgement indicating that she claimed no ownership interest in the property...." Noting that the Florida Street property was solely in George's name during the marriage, the court found that "[t]he community did not acquire an interest in the property by way of pay down of principal (as established through the tracing report of [George's expert witness, accountant Anna Addleman])."

         The court ruled that George met his burden of proof by substantial evidence to overcome any presumption of undue influence and unfair advantage in his relationship with Rosalinda, and that Rosalinda did not present sufficient evidence to support a finding of constructive fraud. Based on findings that Rosalinda had access to legal advice because she worked in a law firm, and that George discussed the amendment to the settlement agreement with her and informed her that his sister would transfer the Florida Street property to him under the agreement, the court concluded Rosalinda executed the quitclaim deed and spousal acknowledgment regarding the Florida Street property "freely and voluntarily, and with full knowledge of all the facts, and with understanding of the effect of the transfers."

         The court found that Addleman's tracing report accurately traced the payments on the Florida Street property, reflecting that $974 of community funds were used to pay down the principal on the property, and that "the indirect tracing (Recapitulation/Family Expense) by Ms. Addleman [was] accurate and properly provide[d] for tracing of separate property. (See findings in (b) above)."^[5] Observing that the loans against the property were solely in George's name, the court found "the lender relied upon the rent/profitability of the property itself to underwrite the loan...."

         2. Income available for support

         The court noted that George had self-employment income from his insurance agency and rental income from his real property. It found George's monthly self-employment income was $7, 281, based on the "competing testimony" of George's expert witness Addleman, and Rosalinda's expert witness, accountant Karen Kaseno.

         According to Addleman's report, George's monthly average income was $25, 332 before principal payments on the loans against his commercial and residential properties. The court noted that Kaseno had testified it would not be appropriate to reduce George's income available for support by the amount of his principal payments on his separate property, ^[6] and that Addleman's position was that if the court "set support without consideration for the principal payments [George] would ultimately be unable to pay for the real properties he needs to generate income and he would lose the properties themselves." It concluded Addleman's reasoning was "flawed[, ]" stating: "Payments made to solely benefit the separate property of [George] cannot operate to reduce his income available for support. If that were the case then any party could divert income to the benefit of their separate property at the exclusion of being considered income available for support." The court added that "[n]either party provided the Court with any case authority addressing this issue." Based on Addleman's report, it found George's combined self-employment income and separate property rental income available for support was $25, 332. The court imputed annual income of $60, 000 to Rosalinda ($5, 000 per month) based on her earning capacity.

         The court found that during the marriage the parties enjoyed an upper middle class lifestyle, which "was in large part supplemented by the separate property income of [George]." Rosalinda "had been living rent free for approximately the last three years[, ]" and George had been "living in a 2 million dollar plus residence in Point Loma." During the marriage, the parties traveled to Europe each year, which "in large part was supported by the separate property residence that [George] inherited from his mother." The court noted that Rosalinda had been able to put money into a profit-sharing plan and a 401(k) account when she was employed, the parties drove older vehicles, and the minor children were enrolled in private schools.

         The court ordered George to pay spousal support of $7, 500 per month. The court explained that although Rosalinda had made minimal efforts to become self-supporting and had the ability to earn $60, 000 per year, George's total income was $25, 332 per month and he lived with the children in a home valued in excess of $2 million. Rosalinda, on the other hand, "live[d] with her sister's ...