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Be Wary of the Kitchen Table Divorce

  
  
  

Understandably, some people are quite eager to complete their divorce as quickly and inexpensively as possible.  To that end, spouses may prematurely rush into discussions about how they want to divide their assets and debts even before filing for divorce, or before at least collecting sufficient information to really understand their global financial picture.  But rushing through a divorce won’t necessarily save you time or money, and doing so may even put you at a substantial disadvantage in your marital dissolution/ divorce proceedings.

In a recent marital dissolution case heard by the California Court of Appeal, Marriage of Evans (2014), Husband and Wife (who were separated at the time) reached an agreement on the disposition of their family home before either of them filed a Petition for Dissolution of Marriage.  Husband, pursuant to this property agreement, agreed to buy out Wife’s interest in the home and keep the property.  The two assumed the residence had a net equity value of $600,000, and Husband agreed to pay Wife $300,000 for her interest in the residence.  After signing the agreement, Husband paid Wife $197,000, leaving a balance of $103,000 owing.          

Husband subsequently filed for divorce in February 2009.  When the parties were trying to finalize the divorce in October 2012, the approximate fair market value of the home had dropped to $420,000.  The home was encumbered by a deed of trust with an unpaid balance of $350,000, leaving the actual net equity of the home at about $70,000—far less than the $103,000 Husband still owed to Wife.  Husband petitioned the court to set aside the parties’ original property agreement to escape having to pay Wife the additional $103,000, but the court denied Husband’s request and upheld the agreement.  The Court of Appeal affirmed.

California law provides strict disclosure requirements between spouses in a divorce action.  Family Code § 2104 requires spouses to exchange financial disclosures, including their current income and expenses and a full list of each of their assets and debts.  Unless otherwise agreed to, a spouse is required to exchange his or her preliminary declarations of disclosure within 60 days after filing the Petition for Marital Dissolution, and the other spouse is required to exchange their preliminary declarations of disclosure within 60 days after filing his or her Response.  Spouses are also required to exchange final declarations of disclosure prior to judgment, unless the spouses agree to waive this requirement.  However, the Court of Appeal, in Marriage of Evans, ruled that the requirement to exchange financial disclosures is only triggered by the filing the Petition. 

Settlement agreements that spouses reach after filing for divorce may be set aside if one or both spouses fail to comply with the disclosure requirements.  This is the theory Husband in Marriage of Evans tried to argue in order to set aside his agreement to buy out Wife’s interest in the home – that the parties had not exchanged their final declarations of disclosure, and that their agreement regarding the home was therefore invalid.  The court determined that the requirement to exchange financial disclosures did not apply to Husband’s pre-divorce agreement to buy out Wife’s interest in the home because the agreement was made before they started a legal action for divorce and before the disclosure requirement was triggered.  Husband’s eagerness to finish his divorce (even before filing for divorce) ended up costing him a lot of money. 

In general, it is important for each party to postpone settlement negotiations to divide assets and debts in a divorce until after they exchange preliminary declarations of disclosure.  The disclosures provide each spouse with a global picture of the marital estate, and can help each spouse better understand their respective rights and responsibilities for the purposes of settlement.  If Husband in Marriage of Evans had waited until after he and his wife exchanged financial disclosure to agree to buy her out of the home, then he would not have made such a bad deal.  

So, if you and your spouse decide to have a friendly discussion about divorce at the kitchen table before actually starting a legal action or exchanging financial disclosures, then be careful not to sign any “napkin” agreements.  That napkin could end up costing you a lot of money if a court determines that it contains an enforceable agreement. 

Congratulations to Commissioner Susan L. Greenberg and Commissioner Stephanie Garratt

  
  
  

Congratulations to Commissioner Susan L. Greenberg and Commissioner Stephanie Garratt, our newest Superior Court Judges. For the results of the June 3, 2014 Statewide Direct Primary Election, click here: https://www.shapethefuture.org/elections/results/2014/june/(09)Semi/JUN14_Semi.pdf

Divorce and Personal Injury Damages

  
  
  

QuestionMy spouse and I are divorcing.  What will happen to the personal injury award that my spouse received during our marriage for injuries he incurred related to an auto accident?

AnswerThe short answer is that absent compelling circumstances, it is likely your spouse will receive 100% of the personal injury award pursuant to California Family Code §2603.

California Family Code §2550 mandates an equal division of community property upon divorce or legal separation.  Cal. Fam. Code §2550.  However, there are some limited exceptions to this otherwise straightforward rule under which the court may divide the community estate unequally.  One such exception is regarding community estate personal injury damages which are subject to special rules with respect to division in dissolution or legal separation actions.  Cal. Fam. Code §2603.

Generally, personal injury awards are characterized as community property if the cause of action arose during the marriage, and before separation.  Cal. Fam. Code §780.  A cause of action arises, in general, when the injury was suffered.  This is true regardless of when the money or property is actually received by the injured spouse.  See California Family Code §781 for guidance on when personal injury damages are characterized as separate property of the injured spouse.  Pursuant to California Family Code §2603, community estate personal injury damages must be assigned to the injured spouse upon divorce, unless the interests of justice require otherwise.    

California Family Code §2603 provides that:

“(a)’Community estate personal injury damages’ as used in this section means all money or other property received or to be received by a person in satisfaction of a judgment for damages for the person’s personal injuries or pursuant to an agreement for the settlement or compromise of a claim for the damages, if the cause of action for the damages arose during the marriage but is not separate property as described in Section 781, unless the money or other property has been commingled with other assets of the community estate.

(b) Community estate personal injury damages shall be assigned to the party who suffered the injuries unless the court, after taking into account the economic condition and needs of each party, the time that has elapsed since the recovery of the damages or the accrual of the cause of action, and all other facts of the case, determines that the interests of justice require another disposition.  In such a case, the community estate personal injury damages shall be assigned to the respective parties in such proportions as the court determines to be just, except that at least one-half of the damages shall be assigned to the party who suffered the injuries.”  Cal. Fam. Code §2603.

What this means in plain language is that once a personal injury award is characterized as community property, upon divorce it will be awarded 100% to the injured spouse unless the court exercises its discretion, after consideration of the factors listed above, to apportion it otherwise.  Another distinguishing characteristic of this special rule is that the injured spouse receives 100% of the award without offset i.e. the non-injured spouse does not get more of other community assets to equalize the division of the estate.  

However, that is not to say that all non-injured spouses will receive 0% of the award.  As stated in Family Code §2603, the court retains discretion to award a portion (of not more than 50%) of the damages to the non-injured spouse if the interests of justice so require.  There are also other circumstances in which the community and/or the non-injured spouse may receive some of the personal injury award.  For example, if the community or the non-injured spouse has incurred costs in caring for the injured spouse the community and/or the non-injured spouse may be entitled to reimbursement.  See Cal. Fam. Code §781(b).  Finally, if the personal injury award has been so commingled with other community property that its source as a personal injury award becomes untraceable by the injured spouse, it may lose its character as “community estate personal injury damages” and be subject to equal division as community property.  See Cal. Fam. Code §2603(a). 

It should also be mentioned that community estate personal injury damages within the meaning of Family Code §§2603, 780, and 781 do not include disability awards and/or worker’s compensation.  And, if the injured spouse’s injuries were caused by his or her spouse (i.e. the action is an interspousal tort), it is likely that the personal injury damages will be characterized as separate property of the injured spouse notwithstanding when the cause of action arose.  See Cal. Fam. Code §781(c).  Different rules likely apply to these situations, and different outcomes may arise.

Parenting Plans: A Useful Resource From the Arizona Supreme Court

  
  
  

A parenting plan is the document that states when children are with each parent.  Effective parenting plans sometimes can be difficult to create.  Challenges can arise not only when parents do not agree on a schedule; but also when parents in agreement have to synchronize busy schedules into one usable calendar. 

Parenting plans are important because they provide both children and parents with consistency and reliability – both of which are critical to preserving healthy relationships between parent and child. 

To assist parents with the task of creating a parenting plan, the Supreme Court of Arizona has published a guidebook titled Planning for Parenting Time: Arizona’s Guide for Parents Living Apart.  This resource, created by a committee of Arizona judicial officers, mental health providers, and attorneys, provides parents with sample parenting plans based on the age of the child.  It also provides sample holiday and school break schedules, and addresses special issue scenarios that may arise.  To access this useful resource, please click here.

How Do I Know Whether the Child Care Costs in my Case are Reasonable?

  
  
  

QUESTION:   My Court Order states that I am to split the cost of child care expenses with my child’s other parent.   Do I have to pay half of child care expenses even if the amount charged is extremely high?

ANSWER:  As is often the answer often in family law matters – it depends on the facts and circumstances of your case.  In the explanation below, we shed light on the rationale of the court with regards to this issue.

                California Family Code §4062(a)(1) states that “[t]he court shall order the following as additional child support: (1) [c]hild care costs related to employment or to reasonably necessary education or training for employment skills.”  This means that the court must order as additional child support (above and beyond base child support) the costs of daycare, preschool, or extended care after school or during breaks from school, which is used while a parent is at work or while gaining skills or training deemed by the court to be reasonably necessary for work.  When parties disagree on the selection of the child care provider, courts typically look to the “reasonableness” of the child care costs.

                While it is true that no one can predict with certainty how the court will rule, the court routinely takes into consideration the going market rate for child care in the community in which the child attends daycare, preschool, or extended care programs.  The court, with the help of the parties’ counsel, often tries to assist the parties in fashioning an agreement selecting a child care provider or facility that is both cost-effective and a safe and nurturing environment for the child(ren) – these are typically the court’s goals.   

                That said, location and convenience are factors to bear in mind when analyzing your child care situation.  When selecting a child care provider, parents may argue over the price of one daycare facility versus another.  From our experience, the court is likely to balance child care costs against the convenience and location for the working parents.  Provided that the cost of the convenient location does not greatly exceed the cost of the other facility, the court is more likely to select the convenient childcare provider.   

                In answer to your specific question, and with this background explanation in mind, the issue that the court will consider is not whether an hourly rate charged by a child care provider is especially high, but whether the total monthly child care cost is reasonable given your case-specific facts and circumstances, including location and convenience for both parents.  That said, the going market rate for child care expenses in your community will often be the “benchmark” that the court will use when ordering child care expenses. 

When can a parent request reimbursement for childcare expenses and health care costs?

  
  
  

Child Support in California Generally

California’s Family Code governs issues of child support.  When a court orders child support, the Family Code states that the court must adhere to the statewide uniform guideline (usually referred to as “formula” or “guideline”), except in special circumstances as described in the Family Code (Fam. Code §4052). 

In California both parents are mutually responsible for supporting their children and the Family Code states that a parent’s “first and principal obligation is to support his or her minor children according to the parent’s circumstances and station in life” (Fam. Code §4053(a)).  One’s duty to support his or her children includes the duty to contribute to additional support for the minor children beyond the basic guideline child support order.  The Family Code states that there are two categories of additional child support (add-ons) that could be implicated in a case; specifically mandatory child support add-ons and discretionary child support add-ons (Fam. Code §4062).          


Mandatory Child Support Add-Ons

There are two types of mandatory child support add-ons that the court must order if requested by a party; 1) child care costs related to employment or reasonably necessary education and/or training and 2) reasonable uninsured health care costs for the minor child (Fam. Code §4062).

 

Uninsured Health Care Costs for the Minor Child

Reasonable uninsured health care costs for minor children are subject to orders for payment and/or reimbursement from the other parent (Fam. Code §4062(a)(2)).  Also, there is a rebuttable presumption that costs actually paid for uninsured health care needs are reasonable (although exceptions exist)(Fam. Code §4063(d)). 

 

Procedures for Reimbursement of Uninsured Health Care Costs

An order made to pay and/or reimburse the other parent for costs incurred from uninsured health care needs (for example co-pays) must conform with the guidelines of Family Code §4063.  This section states that the court has a duty to advise the parties of their rights and liabilities and include in the order the time period for a parent to reimburse the other parent (Fam. Code §4063(a)(1)-(2)).  The court usually satisfies this requirement by providing the parties with FL-192 form titled “Notice of Rights and Responsibilities – Health Care Costs and Reimbursement Procedures.” 

The parent that has paid the costs has a duty to provide an itemized statement of the costs to the other parent within a reasonable time, but not more than 30 days after accruing the cost (Fam. Code §4063(b)).

However, it is important to note that the 30-day accounting rule is not triggered until an order for payment of add-on health care costs exists (In re Marriage of Lusby, Cal.App.4th 459, 475 (4th Dist. 1998)).  The Lusby court clarified the 30-day notice rule by stating that “the duty to give such notice is not triggered until there is an order for payment” (Id.).   

 

Childcare Expenses

Unlike uninsured health care costs, childcare expenses as a mandatory add-on do not appear to have to be reasonable (Fam. Code §4062(a)(1)).  Nor is there the requirement that the parent paying the costs provide the other parent with an itemized statement; rather, the parent ordered to pay/reimburse has the burden to seek a prospective modification if that parent believes the amount ordered is not the actual cost (Marriage of Tavares, Cal.App. 4th, 620, 628 (2007)).

The time limit for reimbursement of childcare expenses appears to follow the retroactivity rules for child support that state an order can be made retroactive to the date of filing the motion or date of service in some instances.  However, in the Lusby case, the court held that Mother was entitled to reimbursement for childcare expenses incurred for an elapsed period that occurred before she filed her motion to requesting add-ons (In re Marriage of Lusby, Cal.App.4th 459 (4th Dist. 1998)).  The Lusby court held that the reimbursement order was not a modification to the existing guideline child support order but rather an “amplification” of it and therefore did not contradict the rules regarding retroactivity of child support modifications (Id. at 473). 

 

Discretionary Child Support Add-Ons

Pursuant to the Family Code, discretionary child support add-ons (meaning that the court does not have to order them) include costs related to the educational or other special needs of the children, and travel expenses for visitation (Fam. Code §4062(b)(1-2)).  Because the court has discretion when fashioning an order for this second category of add-ons, the facts and circumstances of each case will be the driving force behind this type of order. 

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Important Development in Disclosure Rules

  
  
  

Effective January 1, 2013, California Family Code Section 2104 has been amended to add a new subsection (f), which requires family law litigants to serve their Preliminary Declarations of Disclosure within 60 days of filing their initial pleading, whether it be the Petition or the Response.  (See Fam. Code §2014(f) at http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fam&group=02001-03000&file=2100-2113.)

Preliminary Declarations of Disclosure consist of the Schedule of Assets and Debts (FL-142) and Income and Expense Declaration (FL-150) forms.  The purpose of these forms is to put your spouse on notice of everything you own and owe, separately and together, so you can divide your property and debts.  The financial information contained on the Income and Expense Declaration form provides the parties (and the court) with the information necessary to make decisions about child and spousal support.  In a marital dissolution case, these forms are critical – you cannot get a divorce without them - and serve as a roadmap for resolution of the entire case.  (For more information about these forms, see http://courts.ca.gov/1229.htm#tab8759.)

Previously, there was no time limit for the service of these forms.  Now, if a spouse fails to complete his or her disclosure within 60 days, the other spouse will have the option of filing a motion to compel with the court and requesting sanctions.  In complex divorce cases, 60 days will likely not be enough time and may result in attorneys or pro per litigants stipulating to a longer period of time for the exchange.

IBM Moves to Once-a-Year 401(K) Contributions - Implications for Divorce and Family Law?

  
  
  


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IBM recently announced that it will be delaying its match to its employees' 401(k) plan until December.  In December, it will make a lump-sum payment.  As a result, the company should save money because it will not contribute to the plan of employees who leave the company before December. The downside for employees is that they may lose investment gains that they would have otherwise had access to during the year.  It will be interesting to see whether other technology companies follow suit.  

This may motivate IBM employees to file for divorce sooner so as to protect the December employer match from division under community property law.  Typically, pre-marriage and post-separation contributions to 401(k) plans are the separate property of the recipient spouse and not subject to community property division. 

A good article on the topic appeared this week on Salon.com

Partner Kimberly Madigan Named a Rising Star for 2012 by Super Lawyers

  
  
  

Seeley & Madigan, LLP is pleased to announce that partner Kimberly Madigan has been selected for inclusion in the 2012 Northern California Super Lawyers Rising Stars list. 

Annually, Super Lawyers recognizes outstanding lawyers who have attained a high-degree of peer recognition and professional achievement.  The Rising Stars list names the state's top up-and-coming attorneys and represents no more than 2.5 percent of lawyers in the state.  The Super Lawyers Rising Stars list will appear in the September issue of Northern California Super Lawyers magazine and in the August issue of San Francisco magazine.

Stock Options and Divorce - How Do Family Law Courts Divide Stock Options?

  
  
  

Stock Options in California Divorce resized 600

Allocation of stock options upon divorce generally requires two steps.  A court must first determine what portion of the option constitutes marital property, and must then decide the value to apply to this percentage.  With respect to the first step, stock options both granted and vested during marriage generally constitute community property subject to allocation upon divorce.  When stock options are granted during marriage but do not vest until after separation, some jurisdictions hold that the option is nothing more than an expectancy that is not subject to property division upon divorce.  However, in California, stock options owned but not vested as of the date of separation may constitute community property to the extent such options are attributable to services rendered during marriage.  See In re Marriage of Brown (1976) 15 Cal. 3d 838, 844 (finding contractual rights to future benefits, though unvested and contingent, are property subject to allocation between community and separate interests).  Similarly, options granted before, but vested during marriage, or granted after separation, but awarded for services rendered during the marriage, may also be subject to distribution.

Notably, California courts have broad discretion to fashion any apportionment of interests that is equitable.  When a trial court determines property contains both separate and community interests, allocation of such property may be accomplished by any method or formula that will achieve substantial justice.  In re Marriage of Steinberger (2001) 91 Cal. App. 4th 1449, 1459.   There is thus no precise formula employed to divide spousal stock options, and the community share (if any) of such options will necessarily depend on the circumstances of each case.  However, because options are considered community property to the extent they are attributable to work performed during the marriage, California courts attempting to divide stock options have generally relied upon various versions of the “time rule.”  Though there is no uniform computation, the time rule formula generally takes into account the number of years the employee spouse has worked for the company, the years of the marriage, the time lapse between granting and vesting, and the relation between such time periods and the date of separation.  As a threshold issue, however, the time rule formula considers the nature of the option, or whether it constitutes deferred compensation for past or present services, or an incentive for future services, or a combination of both.  An option serving as deferred compensation must be divided in accordance with marital status at the time it was earned.  In re Marriage of Hug (1984) 154 Cal. App. 3d 3d 780, 787.   Where the option consists of both deferred compensation and future incentive, the apportionment test may be adjusted to focus more on the future services component.  In re Marriage of Nelson (1986) 177 CA 3d 150, 153-54. 

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