In re Marriage of Margulis (2011)

In re Marriage of Margulis: The statutes obligate a managing spouse to disclose soon after separation community property, losses of assets, etc.

By Garrett C. Dailey, CFLS, AAML

Aronson, J. DCA4

Facts:

H and W separated after a 33-yr. marriage and, for 12-post-separation years, and continued to handle their joint finances as they had before. H had complete control of very substantial community investment accounts and paid all the bills; W trusted him to manage their finances for their mutual benefit. Just before trial, H disclosed for the first time that the 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, W argued the court should charge H with the missing funds unless he proved he did not misappropriate them. Her only evidence of missing funds was a financial statement H prepared 3 yrs. after separation and 9 yrs. before trial, which showed $787,000 in investment accounts. Trial ct. concluded this was insufficient evidence the accounts had contained the stated amounts post-separation, and declined to charge H with some $602,610 of missing funds. Property division required W to make a large equalizing payment to H. W appealed and Court of Appeal reversed.

Held:

In dissolution proceeding to divide c/p, where the non-managing spouse has prima facie evidence that community assets disappeared while in the control of the managing spouse post-separation, managing spouse has the burden of proof to account for the missing assets.

Based on Family Code provisions, equitable principles, and case law, Court of Appeal concluded the trial ct. erred in failing to shift to the managing spouse the burden of proof concerning the missing community assets.

“Once a non-managing 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.” (Id. at p. 1258.)

Court of Appeal carefully analyzed the statutory scheme as well as equitable principles in determining that the burden of proof had to shift to the managing spouse under these circumstances:

“Taken together, [the] Family Code provisions impose on a managing spouse affirmative, wide-ranging duties to disclose and account for the existence, valuation, and disposition of all community assets from the date of separation through final property division. These statutes obligate a managing spouse to disclose soon after separation all the property that belongs or might belong to the community and its value, and then to account for the management of that property, revealing any material changes in the community estate, such as the transfer or loss of assets. This strict transparency both discourages unfair dealing and empowers the non-managing spouse to remedy any breach of fiduciary duty by giving that spouse the ‘information concerning the [community’s] business’ needed for the exercise of his or her rights [Corp. Code §16403 (c)(1); Fam. Code §721 (b)], including the right to pursue a claim for ‘impairment to’ his or her interest in the community estate [Fam. Code §1101 (a), (g) & (h)]. And most importantly for present purposes, in a trial where community assets are missing, these statutory duties of disclosure and accounting serve to shift the burden of proof on missing assets to the managing spouse. [¶] We find support for this crucial shift of the burden of proof in the recurring mandate, running throughout the statutory scheme, that the managing spouse must furnish information to the other spouse concerning the community property.” (Id. at pp. 1270-1271.)

NOTES:

1. The Court of Appeal invited ACFLS to file an Amicus Brief, which it did, joined by the AAML Southern California Chapter. The Court of Appeal adopted the rule they advocated.
2. Modified 9/9/11; no change in judgment.
3. Previously modified 8/26/11; no change in judgment.

COMMENT: (By Garrett C. Dailey, CFLS, AAML) This case eliminates confusion caused by the Family Code §721’s statement that fiduciary duty does not “impose a duty for either spouse to keep detailed books and records of community property transactions.” Some previous opinions have held that merely proving that a spouse possessed assets at separation was not enough to charge them with them in the property division. Rather than putting the burden of proof where it should have been, namely on the party with greater access to the information, the opinions placed the burden on the other spouse to prove that they were still in existence. This violated the statutory duty to account for community property and common sense. Marriage of Margulis corrects this with an easily understood and logical test.

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