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California Family Court Decisions - In re Marriage of McTiernan and

March 14, 2022

California

,

United States of America

Issue

What remedies are available when a divorcing spouse destroys community property?

Conclusion

In a divorce proceeding, there is an automatic temporary restraining order preventing the transferring, encumbering, hypothecating, concealing, or in any way disposing of any property, regardless of whether it is community, quasi-community, or separate property, unless the disposing party has the written consent of the opposing party to do so. The temporary restraining order in a divorce action remains in effect from the filing of the petition and issuance of the summons until the final judgment is entered or the petition is dismissed, or until further order of the court. (Cal. Fam. Code § 233, Cal. Fam. Code § 2040)

Cal. Fam. Code § 1101 provides that a spouse has a claim for breach of fiduciary duty against any spouse that impairs the claimant spouse's undivided one-half interest in the community estate. This includes but is not limited to actions that consist of a single transaction or a pattern or series of transactions. The remedies for a breach of this section include, but are not limited to, an award of half of any asset undisclosed or transferred in breach of the fiduciary duty. If the fiduciary breach falls within Cal. Civ. Code § 3294, then the remedy includes but is not limited to an award to the nonbreaching spouse of the full amount of the asset.

Cal. Civ. Code § 3294 provides that in actions outside breach of contract claims, a plaintiff may recover punitive damages in addition to actual damages where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.

Where a spouse has breached the fiduciary duty outlined in Cal. Fam. Code § 1101, but has done so in a manner that is not malicious, the non-breaching spouse is nevertheless entitled to a remedy under Cal. Fam. Code § 1101. (In re Marriage of McTiernan and Dubrow)

No published decisions were identified that discussed the appropriate remedy when a spouse destroys community property; however, in the unpublished opinion of Lane v. Crouch (In re Marriage of Lane), the California Court of Appeal for the First District found that actively destroying community property also falls under conduct in breach of the fiduciary duty outlined in Cal. Fam. Code § 1101. In that case, the husband and wife had sourced their income primarily through a business they co-owned. In the course of their separation, the husband decided to work for a competitor. The Court found that this decision was an attempt to actively destroy the community property on which the wife expected to rely and that she was entitled to a remedy under Cal. Fam. Code § 1101 (but not punitive damages because the husband's actions did not rise to the level of maliciousness).

No decisions were identified that discussed a spouse's physical destruction of personal property.

Law

Cal. Fam. Code § 2040(a)(2) provides that in a divorce proceeding there is an automatic temporary restraining order preventing the transferring, encumbering, hypothecating, concealing, or in any way disposing of any property, regardless of whether it is community, quasi-community, or separate property, unless the disposing party has the written consent of the opposing party to do so:

(a) In addition to the contents required by Section 412.20 of the Code of Civil Procedure, the summons shall contain a temporary restraining order:

(1) Restraining both parties from removing the minor child or children of the parties, if any, from the state, or from applying for a new or replacement passport for the minor child or children, without the prior written consent of the other party or an order of the court.

(2)

(A) Restraining both parties from transferring, encumbering, hypothecating, concealing, or in any way disposing of, any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life, and requiring each party to notify the other party of proposed extraordinary expenditures at least five business days before incurring those expenditures and to account to the court for all extraordinary expenditures made after service of the summons on that party.

(B) Notwithstanding subparagraph (A), the restraining order shall not preclude a party from using community property, quasi-community property, or the party's own separate property to pay reasonable attorney's fees and costs in order to retain legal counsel in the proceeding. A party who uses community property or quasi-community property to pay the party's attorney's retainer for fees and costs under this provision shall account to the community for the use of the property. A party who uses other property that is subsequently determined to be the separate property of the other party to pay the party's attorney's retainer for fees and costs under this provision shall account to the other party for the use of the property.

Cal. Fam. Code § 233(a) provides that the temporary restraining order in a divorce action remains in effect from the filing of the petition and issuance of the summons until the final judgment is entered or the petition is dismissed, or until further order of the court:

(a) Upon filing the petition and issuance of the summons and upon personal service of the petition and summons on the respondent or upon waiver and acceptance of service by the respondent, the temporary restraining order under this part shall be in effect against the parties until the final judgment is entered or the petition is dismissed, or until further order of the court.

(b) The temporary restraining order is enforceable in any place in this state, but is not enforceable by a law enforcement agency of a political subdivision unless that law enforcement agency has received mailed notice of the order or has otherwise received a copy of the order or the officer enforcing the order has been shown a copy of the order.

(c) A willful and knowing violation of the order included in the summons by removing a child from the state without the written consent of the other party or an order of the court is punishable as provided in Section 278.5 of the Penal Code. A willful and knowing violation of any of the other orders included in the summons is punishable as provided in Section 273.6 of the Penal Code.

Cal. Fam. Code § 1101(a) provides that a spouse has a claim for breach of fiduciary duty against any spouse that impairs the claimant spouse's undivided one-half interest in the community estate. This includes but is not limited to actions that consist of a single transaction or a pattern or series of transactions:

(a) A spouse has a claim against the other spouse for any breach of the fiduciary duty that results in impairment to the claimant spouse's present undivided one-half interest in the community estate, including, but not limited to, a single transaction or a pattern or series of transactions, which transaction or transactions have caused or will cause a detrimental impact to the claimant spouse's undivided one-half interest in the community estate:

Cal. Fam. Code § 1101(g) provides that remedies for a breach of this section include, but are not limited to, an award of half of any asset undisclosed or transferred in breach of the fiduciary duty:

(g) Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs.

The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.

Further, Cal. Fam. Code § 1101(h) provides that, if the fiduciary breach falls within Cal. Civ. Code § 3294, then the remedy includes but is not limited to an award to the nonbreaching spouse of the full amount of the asset:

(h) Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty.

Cal. Civ. Code § 3294(a) provides that in actions outside breach of contract claims, a plaintiff may recover punitive damages in addition to actual damages where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice. Cal. Civ. Code § 3294(c) defines "malice" as conduct intending to cause the plaintiff injury. It further defines "fraud" as an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention of depriving another of their rights, or otherwise causing injury:

(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

(b) An employer shall not be liable for damages pursuant to subdivision (a), based upon acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.

(c) As used in this section, the following definitions shall apply:

(1) "Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.

(2) "Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.

(3) "Fraud" means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

(d) Damages may be recovered pursuant to this section in an action pursuant to Chapter 4 (commencing with Section 377.10) of Title 3 of Part 2 of the Code of Civil Procedure based upon a death which resulted from a homicide for which the defendant has been convicted of a felony, whether or not the decedent died instantly or survived the fatal injury for some period of time. The procedures for joinder and consolidation contained in Section 377.62 of the Code of Civil Procedure shall apply to prevent multiple recoveries of punitive or exemplary damages based upon the same wrongful act.

(e) The amendments to this section made by Chapter 1498 of the Statutes of 1987 apply to all actions in which the initial trial has not commenced prior to January 1, 1988.

In In re Marriage of McTiernan and Dubrow, 35 Cal.Rptr.3d 287, 133 Cal.App.4th 1090 (Cal. App. 2005), the California Court of Appeal for the Second District affirmed that, where a spouse has breached the fiduciary duty outlined in Cal. Fam. Code § 1101, but has done so in a manner that is not malicious, the non-breaching spouse is nevertheless entitled to a remedy under Cal. Fam. Code § 1101. In that case, the husband, finding himself in need of cash to pay for living expenses, sold a number of shares of stock. The wife asked the court for the value of the stocks at the time of adjudication rather than the time of sale and transfer, since the value of the stocks had risen substantially since the date they were sold. The lower court awarded the wife the value of the stock at the time of the sale, reasoning that the higher requested award would amount to an unreasonable penalty for the husband's violation. The Court of Appeal affirmed the lower court's decision (at 1102-1103):

Husband's final assignment of error concerns the remedy imposed for his violation of a restraining order. Pursuant to sections 2040, subdivision (a)(2), and 233, subdivision (a), upon service of the petition for dissolution both parties became subject to a temporary restraining order against their transferring or disposing of any property, "whether community, quasi-community, or separate," without an order of the court or written consent of the other party, "except in the usual course of business or for the necessities of life. . . ." (§ 2040, subd. (a)(2).) In April 1998, faced with a cash shortage, husband sold certain community property stocks, the proceeds

[35 Cal.Rptr.3d 297]

of which he used in part to pay community expenses. Husband did not inform wife or seek court approval of the stock sale before conducting it.

[133 Cal.App.4th 1103]

Wife subsequently requested relief on account of the sale, the stock's market price having increased substantially between the sale and the time of trial. In its statement of decision, the court found that husband had violated the restraining order by disposing of the asset, "although the court believes he did not do so maliciously or of ill will." The court noted that husband could have consulted wife, and if she had not agreed to sell he could have sought court approval — but "he did neither." The court therefore ruled that the asset would be valued as if it had not been sold, and that the valuation date for all securities controlled by either party would be the date trial commenced. The outcome was that the judgment awarded wife "Lost appreciation on community property securities valued at $284,087 as of June 24, 1999." The court did not obligate husband for the substantial further appreciation that occurred during the extended trial, a remedy the court eschewed as "an unreasonable penalty on [husband] for his violation of the ATRO. . . ."

Husband nonetheless contends that the award of wife's share of profits lost by his violation of the injunctive order constituted a form of punitive damages, unauthorized and inappropriate for what husband terms "a technical violation" of the order. But the violation could just as well be labeled "a square one."9 And the remedy imposed was not a form of punitive damages, but rather restitution of the loss caused wife by husband's violation.

In fact, the remedy here precisely paralleled the one provided by section 1101, subdivision (f), for breach of a spouse's fiduciary duty involving asset transfer that impairs the other spouse's undivided one-half interest (see id., subd. (a)). Husband argues that he did not breach such a duty, especially in light of the trial court's finding he did not act maliciously. But the statutory remedy applies to nonmalicious breaches (In re Marriage of Hokanson (1998) 68 Cal.App.4th 987, 992, 80 Cal.Rptr.2d 699), and it was not inappropriate to treat in the same manner husband's violation of an injunctive order, designed to preserve the parties' property interests from unilateral disposition.

No published decisions were identified that discussed the appropriate remedy when a spouse destroys community property; however, the following unpublished decision may be instructive.

In the unpublished opinion of Lane v. Crouch (In re Marriage of Lane), A154434 (Cal. App. 2021), the California Court of Appeal for the First District found that actively destroying community property also constitutes a breach of the fiduciary duty outlined in Cal. Fam. Code § 1101. In that case, the husband and wife had sourced their income primarily through DCCH, a business they co-owned. In the course of their separation, the husband decided to work for Zega Builders, a construction company owned by a man who had been the husband's partner before separating from the wife. The Court found that this decision was an attempt to actively destroy the community property on which the wife expected to rely and that she was entitled to a remedy under Cal. Fam. Code § 1101 (at 14-17):

(2) Crouch next argues that he "did not breach his fiduciary duty by going to work for Zega," "by taking steps to wind down DCCH's activities in 2012 based on his desire to change his work." He believes that the family court "did not find that [he] stopped working at DCCH and went to work for Zega for any bad-faith reason such as in order to deprive [Lane] of funds, or that his conduct was grossly negligent, reckless, intentional misconduct, or in violation of law."

This is not only hair-splitting, it is simply wrong. The family court did expressly find that Crouch's conduct was "in violation of law," namely, the Family Code statutes codifying the obligations of spousal fiduciary duty. A finding of breached fiduciary duty would certainly

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cover much of the same ground as a finding of bad faith.[3] The word "destroy" imparts a mental intent that excludes the possibility of negligent, or even reckless, conduct. There can be no dispute that attempting or actually destroying a community asset is contrary to the statutory duties discussed above, particularly section 1101, subdivision (e) and section 2100, subdivision (c).

As for Crouch being motivated by a simple "desire to change his work," the record is clearly otherwise: Crouch stayed in the construction business, in the same area, and continued on an almost full-time basis, but with the new intent. Recalling that Zega did not even have a contractor's license, one is tempted to conclude that Zega was just as much an alter ego of Crouch as was DCCH.

As for "winding down" DCCH, the family court found that "the parties did not agree to 'wind down' DCCH," which is the equivalent of finding that Crouch unilaterally tried to "wind down" the business in a way that would be maximally disadvantageous to Lane.

There follows six pages in Crouch's brief narrating events-from Crouch's perspective-culminating with the following: "The evidence falls far short of establishing gross negligence or intentional misconduct. The lower court's conclusion that [Crouch] breached his fiduciary duty by going to work for Zega radically expands the scope of a party's fiduciary duty with respect to operating a business. Finding a

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breach on these facts was a misunderstanding of law and therefore an abuse of the court's discretion."

Crouch does not expressly mount a direct attack on the sufficiency of the evidence to support the family court's crucial finding that he breached his fiduciary duty to Lane "by trying to destroy" the business. However, such an attack is unquestionably the predicate for Crouch's argument. Only by accepting his exculpatory version of events can Crouch launch his legal arguments: "Finding a breach on these facts was a misunderstanding of law and therefore an abuse of the court's discretion."

Yet accepting this alternative narrative would entail disregarding a number of fundamental principles of appellate review, namely: (1) that the judgment is presumed correct until the appellant proves otherwise (Jameson v. Desta (2018) 5 Cal.5th 594, 608-609); (2) that the reviewing court will presume that all factual findings made by the trier of fact are supported by the evidence (Fink, supra, 25 Cal.3d 877, 887); (3) that" 'an appellant who contends this some particular finding is not supported is required to set forth in his brief a summary of the material evidence upon that issue. Unless this is done, the error . . . is deemed to be waived'" (ibid.); and, as already mentioned, (4) that the reviewing court will credit all inferences and deductions that favor the trier of fact's finding or conclusion. (In re Marriage of Goodwin-Mitchell & Mitchell, supra, 40 Cal.App.5th 232, 239.) Clearly, these principles will not permit an appellant to present a highly selective recitation of the record that ignores contrary evidence and deductions that are supportive of the finding and the judgment. And, we reiterate, the existence of a breach of fiduciary duty is a

17

question of fact. (Kamgar, supra, 18 Cal.App.5th 136, 144; Marzec v. Public Employees' Retirement System (2015) 236 Cal.App.4th 889, 915.)

Accordingly, we must reject Crouch's conclusory assessment that "The evidence falls far short of establishing gross negligence or intentional misconduct."[4] This means we also must reject Crouch's argument that the family court's "conclusion . . . radically expands the scope of a party's fiduciary duty with respect to operating a business" because it ignores the evidence that Crouch was not merely trying to "operate a business," but intended to "destroy" Lane's community property interest in the business. It also follows that Crouch has no basis for asserting that the family court "misunderstood" the law and abused its discretion.

However, the trial court found, and the Court of Appeal affirmed, that the husband's actions did not rise to the level of maliciousness, and therefore were not subject to punitive damages under Cal. Fam. Code § 1101(h) (at 2-3):

On her appeal, Lane presents the most far-reaching contention. She argues that, having found that Crouch had violated his fiduciary duties, the family court erred in awarding her only half of the value of the business, not the 100% allowed by Family Code section 1101 (section 1101). There is authority for Lane's argument that in some situations it is "mandatory" for the family court to award one party the full value of the community asset. But "mandatory" is subject to a critical condition: the family court, as the trier of fact, has concluded that one or more of the criteria specified in the section's subdivision (h) has been proven. That was not the case here, where the trier of fact expressly found that the evidence of Crouch's manifold breaches of his fiduciary duties did not satisfy one of those criteria, namely, that Crouch was "guilty of oppression, fraud, or malice," the standard for punitive damages in civil actions that is incorporated by reference into section 1101.

Lane asks this court to conclude that the family court erred in not making that determination, and that correcting such error requires this court to decide that, because both fraud and malice are shown, as a matter of law, the criteria for a mandatory award are established by the record. In effect, Lane is proposing that this court should award

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her punitive damages in the face of an express determination by the trier of fact not to award those damages. So far as we can discover, no California reviewing court has ever overruled such a decision by a trier of fact. This court will not be the first. We will affirm the judgment.

No decisions were identified that discussed a spouse's physical destruction of personal property.

The following unpublished decisions may be instructive as to the circumstances in which the court will find punitive damages to be appropriate.

In an opinion certified for partial publication, Burwell v. Burwell (In re Burwell), F064265 (Cal. App. 2013), the California Court of Appeal for the Fifth District found that the husband violated Cal. Fam. Code § 1101 when he failed to disclose during divorce proceedings that he had a life insurance policy. Particularly, during a deposition, he stated, "I think I have a million-dollar policy." Although the Court found that this response did not fulfill the husband's fiduciary duties, the Court similarly found that it did not preclude the trial court from finding that the same breach was not the result of oppression, fraud, or malice and that therefore it was not subject to punitive damages under Cal. Fam. Code § 1101(h) (at 32-33):

On cross-appeal, Becky contends that she should have been awarded 100 percent of the proceeds due to Gary's failure to disclose. (See Fam. Code, § 1101, subd. (h).) As the court found, Gary failed to disclose the term life policy and thereby violated his fiduciary duty.

When the court finds a breach of fiduciary duty, the remedies "shall include, but not be limited to, an award to the other spouse of 50 percent, or any amount equal to 50 percent, of any asset undisclosed ... in breach of the fiduciary duty ...." (Fam. Code, § 1101, subd. (g).) When the breach "falls within the ambit of Section 3294 of the Civil Code," the remedies "shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed ...." (Fam. Code, § 1101, subd. (h).)

Here, the trial court did find that Gary breached his fiduciary duty by "fail[ing] to disclose the ... policy pursuant to Family Code sections 2104 and 2105." However, it awarded only 50 percent of the asset to Becky. Thus, the court impliedly found that Gary's breach did not fall within the ambit of section 3294 of the Civil Code.

We review findings regarding "oppression, fraud, or malice" (Civ. Code, § 3294) under the " 'substantial evidence' " standard of review. (In re Marriage of Rossi (2001) 90 Cal.App.4th 34, 40.) We review a trial court's implied findings of fact under the substantial evidence test as well. (Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729, 739.)

While Gary failed to disclose the policy on his disclosure declarations, he did state at his deposition: "I think I have a million-dollar policy." Becky contends this "was not

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enough" because Gary had a duty to "augment his disclosures and to be strictly transparent." We agree that Gary's deposition testimony did not bring him into compliance with disclosure requirements under the Family Code. (See Fam. Code, §§ 2104, 2105.) But a 100 percent award under subdivision (h) requires finding a breach of fiduciary duty and oppression, fraud or malice. (Fam. Code, § 1101, subd. (h); Civ. Code, § 3294, subd. (a).) Gary's deposition testimony is relevant to the latter determination. While Gary's deposition testimony did not preclude the trial court's finding that he had breached his duty of disclosure, it similarly did not preclude the trial court from finding that the same breach was not a result of oppression, fraud or malice. To the contrary, Gary's deposition testimony is substantial evidence supporting that implied finding. Therefore, we will not disturb it on appeal.

In the unpublished opinion of Haghighat v. Haghighat (In re Marriage of Haghighat), G054993 (Cal. App. 2019), the California Court of Appeal for the Fourth District affirmed the lower court's ruling to set aside the previous divorce judgment and to award the wife punitive damages under Cal. Fam. Code § 1101(h). In that case, the husband misrepresented to the court a number of transactions, both in the nature and amount of these transactions. For example, a $1.5 million investment in a friend's endeavor was misrepresented as a $700,000 loan (at 6-8):

In January 2017, the court issued a detailed tentative decision, which included findings on every disputed issue identified by both parties. Among other things, the court found that Hamid "owned (purchased) a 25% interest in FMF with monies starting in 2004," and he "considered himself an owner of FMF since 2004 (even though his disclosures in the dissolution[] proceedings characterized [the] $700,000 as a 'loan' and did not disclose the rest of the funds used.)" Moreover, Hamid "disguised his over $1.5 million investment in FMF as a $700,000 promissory note to his cousin, Dr. Daneshmand and to FMF."

The court further determined Hamid "was untruthful during trial in 2008 when he testified about a loan to his cousin instead of disclosing that he had invested money in FMF," and "was also untruthful at his 2007 deposition regarding his investment and saying that he was receiving interest payment instead of profits." "[Hamid's] 2005, 2006 and 2008 written disclosures intentionally failed to disclose his investment in FMF and Javaher to [Sofia], which he had an obligation to do . . . under penalty of perjury." Hamid also "admitted during the trial herein that the $700,000 promissory note disclosed at the time of the dissolution was a 'fiction' which he presented to the court during the original trial."

The court found that Hamid also "requested that his cousin, Dr. Daneshmand, not include him as a member or interest holder in FMF until he requested otherwise." There was "evidence that [Hamid] hid documents, including bank statements and failed to disclose them upon requests by [Sofia, but later] produce[d]

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some of the requested documents during this trial in response to inquiries from the expert[, which may have] caused a change in the expert's opinion." The court concluded that in this case, it "appear[ed] that [Hamid] produced a fabricated document, under oath and in response to the expert's inquiries, in an attempt to lead the expert and the court to believe that $100,000 of the funds invested in FMF can be traced to a separate property source."

It therefore "appear[ed] to the court that [Hamid] got caught in his lies and nondisclosures and . . . tried to produce things to counter this." The court warned "[t]his late production [will be] a factor when the court considers sanctions." Ultimately, the court concluded "[t]he evidence showed that [Hamid] was not able to trace $505,000 of the funds invested in FMF to his separate property and that they were invested before the date of separation."

The court found that although "[Hamid] did disclose that some funds [were] provided to FMF as a loan in the dissolution proceeding, . . . this was not and was never intended to be a loan and . . . the full amount of the investment was never disclosed, nor its

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