California Court of Appeal Addresses the Problem of Missing Community Assets
Posted on Sat, Oct 22, 2011 @ 12:51 PM
The area of fiduciary duty law was expanded with the Court of Appeal’s recent decision in the Marriage of Prentis-Margulis v. Margulis, Case No. G041948, filed August 11, 2011. Basing its decision largely on the Amicus Brief filed by Stephen Temko and Dawn Gray for the Association of Certified Family Law Specialists and the Southern California Chapter of the American Academy of Matrimonial Lawyers as Amici Curiae, the Fourth Appellate District held that the in-spouse or spouse who manages and controls the community’s assets has the burden of accounting for all post-separation spending and/or depletion of those assets in a dissolution proceeding. For instance, if wife can prove that husband was managing a community investment account with funds in the amount of $500,000 and the value of this account at the time of the dissolution proceeding has dropped to $100,000, he must account for the missing $400,000. If he can’t do this either by proving that the $400,000 was lost due to market forces or was spent on community expenses, the Court will charge him with these assets on the marital balance sheet. This means that wife should be offset and receive assets or cash of an equal value.
This, in our view, is the correct and fair result. Frequently, the out-spouse, or spouse that does not control community assets, will have no way of proving that community funds were misappropriated by the in-spouse because the financial records no longer exist, whether it be because they have been destroyed by the in-spouse or they are so old that they can’t be obtained directly from the financial institution. In the Margulis decision, the only evidence wife could produce regarding missing funds in the amount of $767,000 from stock brokerage and money market accounts in husband’s post-separation control was a financial statement prepared by husband and the Schedule D from the parties’ joint income tax returns. In response, husband argued that the values of certain accounts were dissipated due to proper expenditures and stock market losses, although he had nothing to back this up apart from his testimony at trial that he needed money to pay current expenses and wanted to avoid further losses in a declining market. The trial court concluded that Wife had not met her burden of proving that husband misappropriated assets and declined to charge husband with the missing funds in the property division. The Court of Appeal rejected the trial court’s decision and held that, “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.”
The Court of Appeal’s decision in Margulis has major implications for divorce litigation in California. It is not enough for the in-spouse to assert that community funds were spent on community expenses or lost in the market, without documents to back this up. As noted by the Court of Appeal at page 14, “This lack of accountability poses a risk of abuse and runs afoul of the statutory scheme imposing broad fiduciary duties of disclosure and accounting on a managing spouse.” In appropriate cases, the attorneys at our firm will work closely with a forensic accountant to gather together all the necessary documents and trace the flow of cash post-separation so that all monies spent or lost due to investment losses can be accounted for and the in-spouse can meet his or her burden of proof.