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In re Marriage of Ford

Court of Appeal of California
Apr 22, 2008
No. A114997 (Cal. Ct. App. Apr. 22, 2008)

Opinion

A114997 A115857

4-22-2008

In re the Marriage of KATHERINE T. and JOHN FORD. KATHERINE T. FORD, Appellant, v. JOHN FORD, Appellant. KATHERINE T. FORD, Respondent, v. JOHN FORD, Appellant.


On June 19, 2001, Katherine T. Ford (Katherine) filed a petition for dissolution of her marriage with John Ford (John). The court entered judgment dissolving her marriage and reserved jurisdiction over all other matters. After a bench trial on these other matters, the court enforced the prenuptial agreement and divided the assets. Katherine appeals and claims the lower court erred when it did not use tracing to determine whether the assets were community or separate property. Additionally, she contends the lower court should have found that John breached his fiduciary duty and that she was entitled to rescind the prenuptial agreement on the basis of unilateral mistake and fraud. We are unpersuaded by Katherines arguments.

John filed a protective cross-appeal from both the judgment and courts order requiring John to pay the attorneys fees of Katherine. Since we are affirming the judgment, Johns protective appeal is rendered moot.

BACKGROUND

Katherine and John began living together in Johns apartment in Sausalito in January 1967. They each had been married earlier to other partners, which had resulted in divorce. John had recently become a partner at the Lillick, McHose, Wheat, Adams & Charles (Lillick) law firm. Katherine had worked as a secretary to the president of a company, but was currently unemployed. Katherine and John decided to get married, and set the date for July 8, 1967. They rescheduled the marriage, however, because of the illness and death of Johns father.

John told Katherine that he wanted a prenuptial agreement. A partner at Johns law firm drafted the agreement. John testified that he told the attorney that any of Katherines earnings during marriage should be her separate property, and such a provision was included in the agreement. He also reported that he told the attorney to remove from the original draft a provision that there would be no community property.

The agreement provided that any contribution of community property "in any form, including, but not limited to, money payments of any sort, the personal services, skill and effort of both or either party to the separate property of the other shall not alter the character of such separate property which shall be and remain the others separate property." Income from Johns work was to be his separate property for a period of five years until a sum of $60,000 was reached. The agreement also allotted to John all of the death and retirement benefits from his law partnership.

In the agreement, John enumerated his separate property, which totaled $65,609. He also listed his anticipated inheritance from his father, consisting of $15,000 in bank accounts and life insurance proceeds, and two buildings on Bridgeway in Sausalito.

John testified that he gave Katherine the agreement to review in late May or early June 1967 and that he watched her read it. He also reported that he told her to retain her own attorney to represent her regarding the agreement. Katherine testified that she did not receive the agreement until the day prior to the wedding. She stated that John would not discuss the agreement with her, but admitted that he told her to consult with an attorney.

Katherine acknowledged retaining the services of attorney Harvey Black to review the prenuptial agreement. He was referred by the Lillick office. Katherine reported that when she met with Black he spent five or 10 minutes reading the agreement. She testified that he then told her that she would "be protected the rest of [her] life." According to Katherine, he also told her that she did not have to worry. She signed the agreement, which was notarized. She stated that she left the office without keeping a copy of the agreement and without reading it.

The parties separately signed the prenuptial agreement below the provision stating that the agreement was executed on August 4, 1967. The paragraph directly above the date stated the following: "John . . . and Katherine . . . stipulate that he and she are represented by counsel of their own choosing; that he and she have read this agreement and have had its contents fully explained to them by such counsel and are fully aware of the contents thereof and of its legal effect."

On August 5, 1967, when John was 40 years old and Katherine was 32, the parties married. In addition to the separate property listed in the agreement, John also had about $124,500 in bonds that he said he owned jointly first with his mother and then with his father.

During the marriage, John controlled the family finances; Katherine never asked about or knew the amount of money he earned from his law practice. They did not have children. Katherines main responsibilities were caring for the home and caring for Johns separate properties on Bridgeway in Sausalito. Katherine cleaned, gardened, painted, did renovations, and other maintenance work at the Bridgeway properties. Later, during the marriage, Katherine did unpaid work for a Weight Watchers spa, which was an investment of Katherine and John.

John established a community checking account and a community savings account. Katherine used the community checking account, but John had complete and sole control over the community savings accounts. The community accounts were in both parties names. John testified that he deposited his Lillick earnings into these accounts. John maintained two separate property accounts at the bank, which read "John W. Ford, Sep."

During the marriage, John wrote various agreements and had Katherine sign or initial them. Often John would make what he characterized as loans to the community property from his separate property and also make loans to his separate property with community assets. For example, he used a loan from his separate property as part of the sum used for a down payment on a house they bought together in 1969 in Greenbrae. Some of the loans were memorialized in a signed writing, but John testified that he kept track of other loans on a piece of paper that he kept in his check register.

The marriage had its problems, partly because both Katherine and John drank heavily, which sometimes led to violent fights between them. Katherine testified that John broke her eardrum on two occasions, smashed the furniture, chipped her tooth, and at one time was arrested and detained without charges for domestic violence. John stopped drinking in May 1972.

In late 1976, John invested in a limited partnership called Kapiolani Commercial Center (KCC) in Hawaii. John maintained that he discussed the investment with Katherine and they decided that the community and Johns separate property estate would acquire a 20 percent interest in the KCC partnership by the community investing $26,800 and Johns separate property investing $242,700. Katherine wanted to add $1,000 from her separate property funds, and John matched that amount from his separate property; he added both of their amounts to the community property share. A document known as the KCC agreement set forth the agreement regarding the KCC investment. John drafted the agreement and Katherine typed it. John suggested that Katherine retain an attorney to review the agreement with her, but she told him that was not necessary.

In 1978, the parties were told of another investment opportunity with Dr. Schwartz, the same general partner who had organized the KCC project. This involved the building and the operation of a Weight Watchers spa in a Santa Rosa hotel (spa investment). The parties memorialized their investment on January 31, 1979 (spa agreement). The spa agreement indicated that the investment of $115,000 was 50 percent from the community and 50 percent from Johns separate property.

The parties agreed that John would buy out the communitys interest in KCC and use the community funds for the spa investment. John would assume the KCC benefits and obligations, and the community would assume the spa benefits and obligations. The community provided additional money to the spa investment, but this investment eventually went into bankruptcy.

On June 15, 2001, the parties separated; Katherine filed a petition for dissolution four days later. On December 17, 2003, a judgment was entered dissolving the marriage, and reserving jurisdiction over all other matters.

Trial on the other matters began on January 5, 2006. At the time of trial, Katherine was 70 years old. John was 79 years old and suffered from arthritis, depression, and other serious health issues, which caused a four-month break in the trial. The court issued its tentative decision on April 10, 2006, and its final statement of decision and judgment on June 15, 2006.

With regard to the prenuptial agreement, the trial court found that either John or a person from his law firm arranged for Katherine to see attorney Black. The court noted that Katherine did not allege any fraud, undue influence, misrepresentation, or duress at the time she entered into the agreement. The court found that Katherine did not make any effort to read and understand the agreement, but willingly and voluntarily signed it. The agreement indicated that Black advised her and fully explained the legal effects of the agreement to her. If Black failed to do this, the court found that an action against him, rather than a cause to set aside the agreement, was the appropriate action. The court concluded that Katherines negligence in failing to take the opportunity to understand the agreement precluded the court from finding the contract void for fraud. The court noted that the contract was "clearly favorable" to John, but not unconscionable at the time it was made.

With regard to the KCC agreement, the court found that John dictated its terms and Katherine typed the various drafts of the agreement. The court noted that Katherine said she did not understand the agreement, but there was no evidence of undue influence in entering into the agreement. The court found "[t]he terms of the agreement were explanatory and clearly provided sufficient background to inform her of the risks, sources of the funds, and buyout formula. The provisions were fair under the standards of fiduciary duty in effect in 1976 as long as both parties agreed to them. They may not have been in accordance with financial fiduciary responsibilities in the family law provisions enacted 15 years later. Some terms of the agreement were more favorable to Mr. Ford and his separate property interest. Under the provisions he controlled whether the buyout option would be exercised. The terms also provided that the minority interest, the community, would pay the taxes and capital gains. The latter provision was never applied." The court ruled there was no agreement between the parties regarding the buyout, but concluded from the evidence that John did buy the communitys interest.

The court determined that this was not a tracing case. The court explained that John "scrupulously kept everything separate and obsessively documented every penny of expenditure." It noted that the community account acted as a bank for his separate property, but he repaid the community without having to give up the interest he was acquiring in his separate accounts.

The court explained: "In spite of the presumption that property acquired in the course of marriage is community property and because of the antenuptial agreement he now, through a fortuitous real estate development deal and careful investing and scrupulous husbandry of assets, has an estate of almost eight million dollars while Mrs. Ford in this difficult marriage of almost 34 years will have about two and a half million as her share of community assets. Mr. Ford compulsively and obsessively acted to protect his separate interest throughout the entire marriage. . . ." The court also awarded to Katherine $12,000 per month as permanent spousal support.

Katherine filed a timely notice of appeal from the judgment and John filed a timely cross-appeal.

With regard to attorneys fees, the court ordered John to pay the attorneys fees and costs of Katherine, except for the fees incurred by her attorney in preparing a brief ordered stricken. John filed a motion to vacate and modify portions of this order requesting, among other things, that the court correct its miscalculation of the fees advanced by the community, which had erroneously included at least $70,000 of fees that had been paid by Johns separate property. The court granted Johns motion on this latter point, but denied it in all other respects. John filed a timely notice of appeal from the attorneys fee orders. The attorneys fees appeal was consolidated with Katherines appeal and Johns cross-appeal.

DISCUSSION

I. Katherines Appeal

During the marriage, the parties made two investments that were acquired by both community property and separate property funds, KCC and the spa investment. The trial court determined that John was entitled to the money from the KCC investment, because it was his separate property. The court found that the spa investment, which had no value, was a community asset.

Katherine challenges the lower courts conclusion that the KCC investment was Johns separate property. The court found that the KCC agreement and the subsequent documentary evidence regarding Johns buyout of the community interest provided sufficient evidence to rebut the presumption that this investment belonged to the community. Katherine does not challenge the courts interpretation of the KCC agreement, but contends that the presumption that the investment was community property could not be rebutted by the written agreement. She claims that John commingled his separate assets with the community assets and, once he did that, the court was required to use tracing as the method to determine the character of the KCC investment. Additionally, she asserts that the court erred in failing to find that John breached his fiduciary duty and in enforcing the prenuptial agreement. We consider each of these contentions.

Katherine also contends that tracing should be used regarding the Sausalito properties but, as is explained in footnote 6, she has waived raising this issue on appeal.

A. The Lower Courts Use of the Written Agreement Rather than Tracing to Rebut the Community Property Presumption

Katherine argues that the evidence shows that John "unquestionably" commingled the community and separate assets, triggering the tracing requirement. She maintains the lower court therefore erred in refusing to consider this a case that required tracing.

The evidence establishes that John loaned money from community assets to separate property assets and then either memorialized the loans in a signed writing or on a piece of paper that he kept in his check register. Katherines argument is essentially that his running account of the loans was inadequate and the alleged loans represented a commingling of the assets.

1. Standard of Review

Katherine argues that the lower courts refusal to use tracing should be reviewed de novo. John responds that tracing was not necessary because the court used evidence of the KCC contract to overcome the community property presumption, and evidence regarding the existence of a contract is principally factual. (See, e.g., In re Marriage of Haines (1995) 33 Cal.App.4th 277, 290 (Haines).)

The law is well settled that we apply the substantial evidence standard to the trial courts factual findings as to the existence and character of the parties property and we review de novo the trial courts determination of what legal principles apply. (See, e.g., Bono v. Clark (2002) 103 Cal.App.4th 1409, 1421.) Thus, we examine de novo the question whether tracing must be used to rebut the community property presumption when there is commingling. If we conclude that tracing is not required as a matter of law, we look to see whether the court properly considered the contract as rebutting the community property presumption and whether substantial evidence supported the courts findings. " `When a finding of fact is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the finding of fact. [Citations.] [¶] When two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. [Citation.]" (Scott v. Common Council (1996) 44 Cal.App.4th 684, 689, quoting Green Trees Enterprises, Inc. v. Palm Springs Alpine Estates, Inc. (1967) 66 Cal.2d 782, 784-785.) The testimony of a single credible witness may constitute substantial evidence. (In re Marriage of Mix (1975) 14 Cal.3d 604, 614.)

2. The Type of Proof Necessary to Rebut the Community Property Presumption

All property acquired during marriage by a married person domiciled in California is either community property or separate property. (Practice Under the Cal. Family Code (Cont.Ed.Bar 2002) Property, § 5.3, p. 60.) Separate property includes all property owned by either spouse before marriage or acquired during marriage "by gift, bequest, devise or descent," and the "rents, issues and profits" thereof. (Fam. Code, § 770, subd. (a).) Generally, all real or personal property acquired by a spouse during marriage, while domiciled in California, is community property. (§ 760.) "Where property status cannot otherwise be proved, characterization [of property as community or separate property] is determined by applicable presumptions." (Haines, supra, 33 Cal.App.4th at p. 291, italics added.)

All further unspecified code sections refer to the Family Code.

The basic presumption is that all property acquired by a married person during marriage is community property unless it comes within the specific statutory exception of being characterized as separate property. (§ 760; Haines, supra, 33 Cal.App.4th at p. 289.) The presumption may be rebutted by the preponderance of evidence standard of proof. (In re Marriage of Ettefagh (2007) 150 Cal.App.4th 1578, 1584-1586.)

"Since this general community property presumption is not a title presumption, virtually any credible evidence may be used to overcome it, including tracing the asset to a separate property source, showing an agreement or clear understanding between parties regarding ownership status and presenting evidence the item was acquired as a gift." (Haines, supra, 33 Cal.App.4th at p. 290, italics added; see also In re Marriage of Dawley (1976) 17 Cal.3d 342, 357 [enforceable prenuptial agreement made clear parties intended there to be no community property during their marriage].) Similarly, section 1500 provides that "[t]he property rights of husband and wife prescribed by statute may be altered by a premarital agreement or other marital property agreement." (See also § 2581.)

Katherine dismisses the language in Haines stating that the community property presumption can be rebutted by a writing or "any credible evidence" (Haines, supra, 33 Cal.App.4th at p. 290) as merely dictum. She contends that, once there is any commingling, tracing is required even when a contract sets forth the character of the property. To support this contention, Katherine cites numerous cases that used tracing to determine the character of commingled property; she stresses that these cases did not cite the foregoing language in Haines. (See In re Marriage of Mix, supra, 14 Cal.3d at pp. 611-613; In re Marriage of Braud (1996) 45 Cal.App.4th 797, 823 [evidence of tracing inadequate to rebut community property presumption]; Patterson v. Patterson (1966) 242 Cal.App.2d 333, 341 [trial court erred when it determined entire business was separate property of husband because husband could only partly trace the source of asset and could not establish an excess of community living expenses over community assets],overruled on other grounds in See v. See (1966) 64 Cal.2d 778, 783, superseded by statute on another issue; Buehler v. Buehler (1946) 73 Cal.App.2d 472, 474-475 [party asserting asset is separate property has burden of proof when community and separate property assets are commingled]; See v. See, supra, at p. 783 [tracing may overcome community property presumption].) As Katherine emphasizes, these cases do not cite the language in Haines stating that the community property presumption may be rebutted by any credible evidence, such as tracing or an agreement (Haines, supra, 33 Cal.App.4th at p. 290). However, with the exception of In re Marriage of Mix, none of the cases cited by Katherine involved evidence of a written agreement or other credible evidence establishing the character of the property and therefore there was no need to cite this language in Haines. None of these cases holds that tracing is required even when there is a written contract providing the nature of the property.

The sole case cited by Katherine that even considered evidence of an agreement is In re Marriage of Mix, supra, 14 Cal.3d 604, and this decision does not support Katherines argument. In In re Marriage of Mix, the lower court found that property acquired during marriage was the wifes separate property on the following two independent grounds: it determined the character of the property (1) through tracing and (2) from evidence of an agreement between the parties. (Id. at p. 610.) Our Supreme Court granted review and affirmed on the basis of the evidence of tracing. (Id. at p. 614.) However, the court made it clear that evidence of an agreement could provide an independent basis for rebutting the community property presumption. The Supreme Court explained: "Since we conclude that the judgment can be upheld on the basis of an adequate tracing of [the wifes] separate property, it is unnecessary for us to consider whether it can also be upheld on the independent basis of an agreement between [the parties] as to the separate character of the properties in controversy." (Id. at pp. 614-615, italics added.)

The Supreme Court does not discuss the specifics of the agreement, but there is no indication that there was any written agreement. The evidence was that "all property purchased by the [wife] in her own name during marriage was to be her separate property." (In re Marriage of Mix, supra, at p. 610.)

Katherine devotes much of her opening brief to presenting evidence of the commingling of the community and separate property assets and sets forth in detail the two methods of tracing. We note, however, that the lower court found that this was not "a case where the parties commingled everything." Indeed, the evidence is that John made loans from one type of asset to the other and then kept track of the loans on a piece of paper that he kept in his check register. However, even if we were to presume that the record contains undisputed evidence of commingling of all of the assets, tracing would not necessarily be required. We are aware of no authority that requires tracing as the only method of rebutting the presumption of community property. Tracing is one method—another method is to consider evidence of a written agreement or other documentary evidence. Thus, if there is evidence of a written agreement regarding the nature of the property, there is no need to trace.

John asserts that Katherines argument is really an argument for reimbursement, since Katherine presented evidence of loans, but not any evidence that separate property assets were deposited into a community property account or that community property assets were deposited into a separate property account. Katherine responds that John named these payments as "advances" or "loans," but this testimony was insufficient as a matter of law to rebut the community characterization absent affirmative tracing evidence. Even if we presume that Katherine indisputably proved commingling, we conclude that other credible evidence may be used rather than tracing to rebut the community property presumption.

When setting forth the two types of tracing methods, Katherine maintains that we should remand and the "remand should [be] limited to recharacterizing and dividing Johns assets as community property, including a pro tanto interest in the Bridgeway properties reflecting principal contributions from mortgage payments during marriage." This argument is improper for a variety reasons, including Katherines following statement in her "Bench/Bar Conference Statement" in the lower court: "Wife concedes that the two income properties [on Bridgeway] on the water in Sausalito are Husbands separate property."
Additionally, when Johns counsel stated in her opening statement that Katherine wants an interest in the Sausalito Bridgeway properties, which John inherited from his father, counsel for Katherine stated: "Thats not accurate, Your Honor. Theres no such claim. There was discussion in the course of the case, but you can see in our Bench Bar there was no claim for that." Counsel for Katherine further clarified: "Im going to say shes going to testify to the way she worked like a slave on the property. But Im not—shes not going to claim that this entitles her to it."
Katherine has clearly waived any claim to the Bridgeway properties as she may not change the theory of her case. (See, e.g., Estate of Westerman (1968) 68 Cal.2d 267, 279.) Additionally, she cannot raise this claim, which is not an issue of law and was not raised in the court below, for the first time on appeal. (Ibid.)

The court repeatedly stated that John had kept an account of the separate and community property assets. The record establishes that he did take money from the community property account and lend it to his separate property account, to ensure that his separate property would earn interest, but he kept a running account of these transactions. The court found: "The parties kept accountings of separate and community expenditures, used written agreements for all of their property transactions, entitled all of their investments using separate or community property designations reflecting their respective shares, initialed the check registers, and made reconciliations as to individual [Internal Revenue Service] responsibilities. It is difficult to understand what Mrs. Ford thought all the meticulous recordkeeping throughout the marriage was about if it were not to scrupulously keep account of separate and community property interests."

Evidence of a writing is not simply other credible evidence, but stronger evidence than tracing. We agree with John that a reading of the burdens of proof set out in sections 1500 and 2581 indicate that a signed written agreement is a more convincing form of evidence than tracing. Under section 2581, property acquired in joint title is community and can be rebutted only by evidence of a writing. Tracing, a lesser form of proof, is insufficient. Our Supreme Court has expressly stated that the writing requirement needed to rebut the presumption that property owned in joint title is community is " `a greater showing " than that " `necessary to overcome the more general presumption that property acquired during marriage is community property . . . . " (In re Marriage of Fabian (1986) 41 Cal.3d 440, 446.) It would be ludicrous to require a court to require a lesser form of proof, tracing, when presented with evidence of intent set forth in a written agreement.

Section 2581 states: "For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property. This presumption is a presumption affecting the burden of proof and may be rebutted by either of the following: [¶] (a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property. [¶] (b) Proof that the parties have made a written agreement that the property is separate property."

We reject Katherines argument that commingling of community and separate property assets requires that tracing be the only method for rebutting the community property presumption and we therefore do not need to consider whether, under the facts of this case, a tracing requirement would be inequitable. John argues that Katherine made the decision to destroy financial records relevant to tracing because these documents were being stored in the parties bedroom closet and therefore it would be unfair to require tracing.

Accordingly, we hold that the lower court did not err in refusing to use the method of tracing to rebut the presumption of community property when there was evidence of a written agreement that set forth the nature of the property.

3. Evidence of an Agreement Regarding the KCC Investment and Undue Influence

Katherine argues that the court erred in refusing to require tracing but does not challenge the lower courts finding that the KCC agreement and subsequent documents established that the KCC investment was Johns separate property. In her tracing argument, Katherine maintains that she "was simply acquiescing to the dictates of a controlling and obsessive mate." She further contends that "[s]he was not required to investigate her trusted spouse, or treat him as an adversary." To the extent that Katherine is raising the issue that the KCC agreement was unfair or the result of undue influence, we reject this contention.

Katherine does not expressly address the buyout issue and does not dispute that the evidence supported the ruling that John bought out the community property interest. Further, even if she did challenge this ruling, she would be unable to establish prejudice since the lower court found that the buyout resulted in the community receiving more than it would have received had there not been any buyout.

In connection with her tracing argument, Katherine also asserts that John breached his fiduciary duty. She, however, does little more than list some cases that hold a spouse has a fiduciary duty. This argument is oblique and not supported with any analysis. She does, however, separately argue that the court erred in failing to find that John breached his fiduciary duty to her, and we consider this argument more fully below.

A spouse claiming the agreement was the result of undue influence must show that the agreement was not fair in order to prevail. (See, e.g., Estate of Cover (1922) 188 Cal. 133, 144 ["Of course, the mere existence of the marriage relation alone will not, in and of itself, suffice to initiate and support the presumption of undue influence where the transaction between husband and wife is prima facie, or, from all of the circumstances thereof, shown to be fair and free from any material advantage to the husband from and over the wife"]; In re Marriage of Baltins (1989) 212 Cal.App.3d 66, 88; In re Marriage of Burkle (2006) 139 Cal.App.4th 712, 731.) In Haines, supra, 33 Cal.App.4th 277, the court expressly stated that the presumption of undue influence arises under section 721 "[w]here one spouse has taken advantage of another" in the transaction. (Haines, supra, at p. 301.) "The word `advantage, in this context, plainly does not mean merely that a gain or benefit has been obtained. Taking `advantage of another necessarily connotes an unfair advantage, not merely a gain or benefit obtained in a mutual exchange." (In re Marriage of Burkle, supra, at p. 731.)

In the present case, Katherine did not establish that John took advantage of her. Katherine testified that she trusted her husband and relied upon him, but she signed the KCC agreement, which disclosed the contribution of the community. In fact, she typed the agreement. At trial, Katherine read from the KCC agreement, which stated that the starting contribution would be $26,800 from the "community sale of bonds." Katherine had initialed that provision. The KCC agreement clearly specified that $242,700 was from Johns separate property and sets forth the buyout option. As the trial court found, "[t]he terms of the agreement were explanatory and clearly provided sufficient background to inform her of the risks, sources of the funds, and buyout formula." Further, John advised her to consult with an attorney regarding the argument, but she decided not to do so.

Further, the record supports the lower courts finding that, though the agreement may have favored John, Katherine failed to establish that the agreement was unfair. The KCC agreement favored John in that he controlled whether the buyout option would be exercised and the agreement required the community to pay the taxes and capital gains. However, John testified that his separate property paid his portion of the gains and taxes; therefore, the community did not suffer any actual loss. Further, the buyout provision was not unfair in the respect that John paid the community $367,000, which the trial court noted resulted in the community receiving more than it would have received had John not exercised this option.

Not only did Katherine fail to establish that the community suffered any loss as a result of the KCC agreement, but the court found that the community did not have the assets at the time the KCC investment was contemplated to put in more than $26,000 plus the extra $1,000 from each party. Johns testimony at trial supported this finding. John testified that the community was purchasing property in Marin and therefore the principal investment in KCC was with his separate funds. At trial, he reviewed various documents and explained why the community lacked any more than $26,800 to make the initial investment.

We therefore conclude that Katherine did not establish that the KCC agreement was the result of undue influence.

B. The Lower Courts Finding of No Breach of Fiduciary Duty

Katherine contends that the lower court applied the incorrect legal standard when considering whether John violated his fiduciary duty. She maintains that this error should result in reversal.

1. Standard of Review

Katherine argues that whether a fiduciary duty exists and whether the court applied the correct legal standard is reviewed de novo. (See In re Marriage of Leni (2006) 144 Cal.App.4th 1087, 1093 [husband claimed wifes fiduciary duty included a duty to give husband right of first refusal on house and reviewing court held that "the existence of the kind of fiduciary duty he proposes is a question of law"].) She claims that the trial courts improper application of law requires reversal.

We review de novo whether the lower court applied the law correctly. However, we review the trial courts finding of no breach of a fiduciary duty under the substantial evidence test. (See, e.g., In re Marriage of Duffy (2001) 91 Cal.App.4th 923, 929-930, superseded by statute on another issue.) Moreover, under the mandate of article VI, section 13 of the California Constitution, we will not reverse, even when the trial court commits error, unless there has been a miscarriage of justice. (See, e.g., Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 800-802.) A "miscarriage of justice" occurs when it appears there is a reasonable probability that the appealing party would have realized a more favorable result in the absence of the error; probability in this context meaning merely a " `reasonable chance, more than an abstract possibility. " (Id. at p. 800.) Under Cassim, we are required to examine " `each individual case to determine whether prejudice actually occurred in light of the entire record." (Id. at pp. 801-802.) Katherine has the burden of showing that the error resulted in a miscarriage of justice. (See, e.g., County of Los Angeles v. Nobel Ins. Co. (2000) 84 Cal.App.4th 939, 945.)

2. Fiduciary Duty

The legal standard by which interspousal transactions are reviewed is governed by section 721, subdivision (b). Section 721, subdivision (b) provides: "[With the exception of certain provisions in the Probate Code], in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following: [¶] (1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying. [¶] (2) Rendering upon request, true and full information of all things affecting any transaction which concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions. [¶] (3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property."

Section 721, subdivision (b), derives from former Civil Code section 5103, which in turn derived from former Civil Code section 158. (Haines, supra, 33 Cal.App.4th at p. 296.)

In its statement of decision, the trial court stated, among other things, in reference to the KCC agreement, the following: "Mr. Ford dictated and Mrs. Ford typed up the KCC agreement. They both wanted to take advantage of this investment opportunity in 1976 with Dr. Schwartz. While Mrs. Ford alleges she did not read or consider what she typed up and signed there is no evidence of undue influence in entering onto this agreement. The terms of the agreement were explanatory and clearly provided sufficient background to inform her of the risks, sources of the funds, and buyout formula. The provisions were fair under the standards of fiduciary duty in effect in 1976 as long as both parties agreed to them. They may not have been in accordance with financial fiduciary responsibilities in the family law provisions enacted 15 years later. . . ."

Additionally, when ordering spousal support, the court observed: "Most of the significant financial transactions in this marriage were governed by the law in effect at a time which required the partner to act in good faith with respect to the other spouse rather than by the general rules governing fiduciary relationships that have been required by codes since 1991. . . ."

Katherine claims the trial court was mistaken in believing that the amendments to the Family Code modified in any manner the fiduciary standard that was applicable to acts occurring before 1976. We agree that the statutes have always imposed a fiduciary duty on John. (See, e.g., In re Marriage of Burkle, supra, 139 Cal.App.4th at p. 730 ["the principle of unfair advantage was codified by the predecessor to . . . section 721 (former Civil Code section 5103), which expressly defines the fiduciary duties of spouses in transactions with each other"].) It appears that the trial court may have confused the duty of good faith, which pertained to the management of community property between 1975 and 1992, with the fiduciary duty of spouses that requires them to act in good faith and not obtain an unfair advantage (see In re Marriage of Duffy, supra, 91 Cal.App.4th at p. 937).

John argues that Katherine invited any error that the court may have made because Katherine stated in a motion that the 1992 legislative changes to section 721, subdivision (b) created a new and higher duty for transactions between spouses. We need not determine whether waiver applies, because we conclude that any alleged error was nonprejudicial.

Although the court may have misstated the law, we reverse only when the court actually applied the law improperly and that improper application was prejudicial. In the present case, we conclude there was no prejudice.

Katherines argument appears to be that John breached his fiduciary duty when he promised her that she would benefit from her work on his Bridgeway properties, and when he failed to manage the community property properly because he did not maintain proper books and records and made loans to his separate property from the community property assets. We consider these contentions.

With regard to promises Katherine alleges John made throughout the marriage, she points to the trial courts findings that John promised Katherine that she would benefit from her work on the separate property, despite knowing the advantages provided by the prenuptial agreement. Specifically, the trial court stated that Katherine relied on John when consenting to financial agreements, which contained "[s]ome terms" that were "more favorable to [him] and his separate interest." The court also reported: "In spite of the antenuptial agreement [John] promised Mrs. Ford they would share the fruits of her labors in their old age and she worked hard in reliance on it. For over eight years she put enormous work into cleaning, gardening, renovating and maintaining his separate property rental units. . . ." The court further observed: "With full awareness of the advantages provided by the antenuptial agreement Mr. Ford continually promised her they would live frugally so that they both could benefit from the nest egg they had built up. She went along with all of his financial decisions and agreements in reliance on this arrangement." Finally, in the order concerning attorneys fees, the court noted: "While the antenuptial agreement could not be set aside as unconscionable at the time it was entered into, its application under the circumstances of this case was highly detrimental to the petitioner. She worked hard throughout the marriage for the benefit of both the community and the separate property of respondent without realizing that the agreement she signed before marriage affected her contribution to the property."

Katherine appears to be arguing that she is entitled to an interest in the Bridgeway properties in Sausalito based on the fiduciary duty imposed by former law on the husband in the management of community property. As discussed earlier in footnote six, any interest that she now claims in these properties has been waived. Moreover, the court did consider these efforts when awarding her permanent monthly spousal support of $12,000 a month.

We conclude, however, that the abovementioned statements by the trial court do not establish breach of fiduciary duty. As discussed more fully below, the prenuptial agreement may have favored John, but Katherine signed a statement indicating that she had read the agreement. She also met with an attorney regarding the content of this agreement. Katherine voluntarily signed the prenuptial agreement, which clearly specified that efforts of either party to separate property would not alter the character of the others separate property. Since Katherine met with Black about the prenuptial agreement and is charged with reading the terms of the agreement, she cannot claim that John breached a duty to her by making promises that were contradicted by the express terms of the agreement.

With regard to the KCC agreement, the trial courts statement of decision establishes that it would not have found any breach of a fiduciary duty on this basis. As already discussed, the court found that the community did not have the funds to invest any greater amount in the KCC investment; thus, John did not take unfair advantage by primarily using his separate property funds to invest in KCC. Further, as already discussed, the trial court found that the community benefited from the buyout of the communitys interest.

Not only does Katherine fail to establish that Johns promises constituted a breach of a fiduciary duty, it is unclear what remedy Katherine is requesting even if there had been a breach. To the extent that she is arguing that she is entitled to the Bridgeway properties, this issue is improperly being raised on appeal. Moreover, the lower court considered Katherines efforts and work on the separate property when awarding permanent spousal support. The court stated that it was giving more weight to "equitable considerations" in making a permanent spousal support award. The court concluded that $12,000 a month of permanent spousal support was a fair award "given the couples standard of living and the assets amassed in the course of this marriage."

Katherine also argues that John breached his duty to maintain books and records because he commingled funds. However, as John points out, he did not violate any of the duties set forth in the Family Code. John testified that the financial records were kept at the house and available to either party. Katherine did not dispute this and testified that he did not hide the documents from her. She saw the bank statements at the end of the month and did not ask him to explain the other financial documents to her.

Katherine cites non-family law cases to support her argument that commingling is a breach of fiduciary duty. (Ridge v. State Bar (1989) 47 Cal.3d 952 [disciplinary case involving an attorneys breach of fiduciary duty]; Leff v. Gunter (1983) 33 Cal.3d 508 [unsuccessful bidder on government construction project alleged breach of fiduciary duty against former partners who were the successful bidders]; McCain v. Phoenix Resources, Inc. (1986) 185 Cal.App.3d 575 [limited partners entitled to examine partnership records held by general partners because of fiduciary relationship].) These cases have no application to the fiduciary duty between spouses.

Additionally, the trial court found that John did not commingle community and separate funds, but loaned money from one asset to the other. The court ruled that he regularly conducted accountings, documenting every penny of expenditure. The court explained that "[t]he parties kept accountings of separate and community expenditures, used written agreements for all of their property transactions, entitled all of their investments using separate or community property designations reflecting their respective shares, initialed the check registers, and made reconciliations as to individual [Internal Revenue Service] responsibilities. It is difficult to understand what Mrs. Ford thought all the meticulous recordkeeping throughout the marriage was about if it were not to scrupulously keep account of separate and community property interests." The court further explained: "Mr. Ford was so compulsively driven to preserve every penny of his separate property that he had continuous ongoing battles with banks, brokerage institutions, and title companies as to the designation on his accounts. He scrupulously kept everything separate and obsessively documented every penny of expenditure. Mr. Fords separate accounts were labeled BWAY or BW referring to his inherited properties on Bridgeway in Sausalito. Community accounts were kept under two designations, John W. Ford CP, to which Katherine was not a signatory and another smaller checking account Mr. Ford and Mrs. Ford used for ongoing expenses. . . . In a sense the community account acted as a bank for his separate property. He re-paid the community for paying the ongoing mortgage and expenses for his separate property but he did not have to give up interest he was acquiring in his separate accounts in the meantime. [¶] The parties kept a tally of community and separate loans and expenditures during the year and reconciled it at tax time. They would initial checks and transactions that constituted loan repayments of community or separate obligations purchases or reimbursements from the community property account."

Still later, the court reiterated: "The court finds that Mr. Ford meticulously maintained separate accounts, had written agreements delineating the community and separate portion of investments, and took title to property in a way that reflected the partys interests. . . . There is abundant [evidence other than actual checks and bank statements] supported by the title on the accounts, check registers, and tote sheets to show what was substantially community and separate property. He established separate checking, savings and brokerage accounts for the community and separate property cash and assets. Titles to community real property were taken as husband and wife agreements regarding investments indicated the percentage consistent with their respective contributions. He saw to it that each co-signed subsidiary agreements regarding separate and community interests. Quit claim deeds were signed as to his inherited properties. They conducted yearly accounting and reconciliation concerning reimbursements to the community. Their accountant made sure there were proper tax allocations relating to their separate and community interests and incomes. Every aspect of the marriage from beginning to end was one long accounting tour de force in order to avoid what Mr. Ford testified he feared would be `a wipe-out. . . ."

These findings by the court make it clear that Katherine cannot establish any prejudice based on a claim that John breached his fiduciary duty by keeping incomplete records.

Accordingly, even if the trial court misstated the law regarding fiduciary duty, Katherine has failed to establish that this misstatement resulted in prejudice to her.

C. Rescission of the Prenuptial Agreement

Katherine claims she may rescind the prenuptial agreement based on unilateral mistake and fraud. We conclude that this argument has little merit.

John contends that Katherine has waived this argument because rescission would give her an interest in the Bridgeway properties and she expressly waived any interest in these properties. We agree that she forfeited any interest in the Bridgeway properties but, to the extent other separate properties are covered by the prenuptial agreement, we consider the issue of rescission.

The party seeking to rescind the contract must show that the mistake was material to the contract and the mistake was not caused by the neglect of a legal duty. (Civ. Code, § 1577; see also M.F. Kemper Const. Co. v. City of L.A. (1951) 37 Cal.2d 696, 701; White v. Berrenda Mesa Water Dist. (1970) 7 Cal.App.3d 894, 900-901.) The party seeking to rescind the contract must show that the other party knew of the mistake or caused the mistake. Alternatively, the party may show the following facts: (1) the mistake was regarding his or her basic assumption in making the contract; (2) the mistake had a material affect on the agreed exchange of performances adverse to him or her; (3) the party did not bear the risk of the mistake; and (4) that it would be unconscionable to enforce the contract. (See Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 282 (Donovan ).)

We view the entire record in the light most favorable to the prevailing party to determine whether there is substantial evidence to support the trial courts findings that Katherine did not prove mistake or fraud. (See, e.g., Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874; accord, Campbell v. Southern Pacific Co. (1978) 22 Cal.3d 51, 60.)

Katherine argues that unconscionability is reviewed de novo. However, on appeal she does not assert that the agreement was unconscionable. Rather, her contention is that she is entitled to rescission due to mistake or fraud. She does propose that mistake occurred under the theory set forth in Donovan, supra, 26 Cal.4th 261. Under Donovan, once she establishes material mistake not caused by neglect of a legal duty, she has the burden of establishing, among other things, that the agreement is unconscionable. (Id. at p. 282.) We, however, never reach the issue of unconscionability, because we conclude that she failed to establish that any alleged mistake was not caused by neglect of a legal duty.

In the present case, Katherine testified that John told her that he would not get married without a prenuptial agreement, particularly because his first wife received more money in the divorce than he thought she deserved. In her deposition, Katherine stated that John told her that he was afraid the same thing would happen if they divorced and that there would be an unfair division. She also acknowledged that John told her that he was having an agreement prepared and that she should review it with an attorney. Katherine reported that she asked no questions about the agreement.

Katherine signed the prenuptial agreement after meeting with attorney Black. Moreover, the final paragraph of the agreement states that both John and she were represented by counsel, that each had read the agreement, and that each had its contents fully explained to them by their counsel and were fully aware of the contents of the agreement and its legal effect. In addition to signing the agreement, Katherine initialed each page of the agreement.

At trial, Katherine testified that she relied on Johns promise that the prenuptial agreements sole purpose was to protect each partys premarital separate property and post-marital inheritances. She claimed that she did not understand that $60,000 of Johns marital earnings would remain his separate property or that the efforts or monetary contributions of either party to the others separate property would not alter the character of that property. She also claimed not to know that Johns death and retirement benefits were his separate property.

We conclude that this record is devoid of any evidence supporting Katherines argument of unilateral mistake. " `Mistake to be available in equity, must not have arisen from negligence, where the means of knowledge were easily accessible. The party complaining must have exercised at least the degree of diligence "which may be fairly expected from a reasonable person[.]" " (Roller v. California Pacific Title Ins. Co. (1949) 92 Cal.App.2d 149, 153.) A mistaken partys "neglect of legal duty" bars relief; however, ordinary negligence does not constitute such "neglect of legal duty" that will preclude rescission. (Ibid.)

In the present case, Katherines failure to read the agreement constitutes neglect of her legal duty and bars rescission. In her reply brief in this court, Katherine unequivocally states that she has "never claimed that she didnt read the agreement, just that she didnt understand it." This statement in her brief contradicts her argument in her opening brief and is contrary to her testimony at trial. At trial, Katherine testified that she had not seen the prenuptial agreement prior to going to Blacks office to consult with him regarding the agreement and that she left his office without a copy of the agreement. At trial, in response to questions during direct examination, Katherine responded as follows: "Q. So you left [Blacks] office without a copy or original; is that what youre saying? [¶] A. Yes. I think there was only one copy. [¶] Q. Up to this time had you read the agreement? [¶] A. No. [¶] Q. Why not? [¶] A. Well, I felt that I trusted my future husband. I trusted his firm to do right by me. And I probably wouldnt have understood a lot of the legal terminology had I read it. And that was rather embarrassing, as it is today. So I didnt really feel any need to read it. And I got an `okay from Harvey Black that everything was okay."

The record conclusively establishes that Katherine admitted that she did not read the prenuptial agreement and asked no questions about it. Indeed, the trial court expressly found that Katherine "did not make the effort to read and understand the agreement . . . ."

Katherine claims that she did not understand the prenuptial agreement, but the terms of the agreement are clear and are not buried in the agreement. Paragraph C. unambiguously provides as follows: "(1) Each party agrees that the contribution of community property in any form, including, but not limited to, money payments of any sort, the personal services, skill and effort of both or either party to the separate property of the other shall not alter the character of such separate property which shall be and remain the others separate property. [¶] (2) Each party agrees that the contribution of separate property in any form by one party, including but not limited to, money payments of any sort the personal services, skill and effort of such party to the separate property of the other shall not alter the character of such separate property which shall be and remain the others separate property."
Paragraph D.(2) states: ". . . Katherine Delfosse agrees as long as the parties live together as husband and wife that John W. Ford may have and enjoy as his separate property the following sums annually to be derived from his personal services, skill, effort and work until a total sum of $60,000.00 is reached . . . ."
Paragraph D.(4) reads: "Katherine Delfosse agrees that any death or retirement benefits payable to John W. Ford or his estate by Lillick, McHose, Wheat, Adams & Charles upon his death or upon his retirement shall be his sole and separate property."

There is no dispute that John told Katherine to talk to an attorney about the contents of the prenuptial agreement, and therefore she cannot show that John attempted to prevent her from reading the agreement. Katherines failure to read a document that she knew affected her legal rights establishes that she did not exercise the degree of diligence that one would expect from a reasonable person.

Katherine maintains that she was not negligent in failing to read and understand the prenuptial agreement because she justifiably relied on her counsels misrepresentations. (See Lynch v. Cruttenden & Co. (1993) 18 Cal.App.4th 802, 808 (Lynch ).) The documentary evidence indicates that Black explained the legal significance of the terms to her. Black signed a certification that he advised and consulted with Katherine "in connection with her property rights" and "fully explained to her the legal effect of the foregoing agreement and the effect which it ha[d] upon her rights otherwise obtaining as a matter of law . . . ." The certification further provided that Katherine, "after being fully advised by [counsel], acknowledged to [counsel] that she understood the legal effect of the foregoing agreement and executed the same freely and voluntarily in the presence of [counsel]." Similarly, Katherine signed the agreement, which contained a provision stipulating that she had legal representation and that she had read the agreement and "had its contents fully explained" to her "by such counsel and [was] fully aware of the contents thereof and of its legal effect."

Katherine complains that Black only spent a short time reviewing the prenuptial agreement and told her the following: "[The prenuptial agreement] is fine. Youll be protected the rest of your life. You dont have to worry." These statements, however, are not false and do not establish that Black misrepresented any material aspect of the agreement. Rather, he merely expressed his opinion. She may disagree that the agreement protected her for the rest of her life, but she did receive $2.5 million under this agreement. This is not a situation, like the one in Lynch, where the stockbroker urged the clients to sign an agreement without reading it and also told them that the document would not affect their legal rights. (Lynch, supra, 18 Cal.App.4th at p. 805.) Here, the record is devoid of any evidence that Katherines attorney or anyone else told her not to read the agreement or that the prenuptial agreement had no legal consequences. The record also contains no evidence that Black failed to or refused to answer any questions posed by Katherine about the agreement or made any actual misrepresentations regarding the terms of the agreement.

We conclude that this record simply provides no support for Katherines argument that her unilateral mistake was not the result of her neglect of a legal duty. Under the circumstances of this case, it was unreasonable for her not to read the agreement.

Katherine also claims that she established fraud in the inducement. The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) Fraud in the inducement "occurs when " ` "the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable." " (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 415.) Justifiable reliance requires proof of "actual reliance," that is, the party must "`establish a complete causal relationship between the alleged misrepresentations and the harm claimed to have resulted therefrom." (Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1092.)

In the present case, Katherine cannot establish justifiable reliance. Katherine testified that John told her to hire an attorney to review the prenuptial agreement with her. Thus, Katherine sought counsel and she therefore did not actually rely on the representation of John, but relied on the representations of her counsel. Further, she also cannot establish that any reliance on Johns promises were justifiable. She testified that John told her that he believed his prior wife received too much from the divorce and that he wanted this prenuptial agreement to ensure that such an occurrence would not happen again. Thus, any reliance on his promises were not reasonable given his statements that he wanted a prenuptial agreement to prevent her in the event of a divorce from receiving more than he believed she deserved.

Accordingly, we reject Katherines claim that she is entitled to rescission based on unilateral mistake and fraud.

II. Johns Appeal

John filed a protective appeal and argues that, if the judgment were to be reversed in any respect, he challenges the permanent support provision of $12,000 a month and the order that he pay the attorneys fees of Katherine. Since we are rejecting Katherines contentions on appeal, the judgment is not being reversed, and Johns appeal is moot.

DISPOSITION

The judgment is affirmed. Katherine is to pay the costs of appeal.

We concur:

Haerle, Acting P.J.

Richman, J.


Summaries of

In re Marriage of Ford

Court of Appeal of California
Apr 22, 2008
No. A114997 (Cal. Ct. App. Apr. 22, 2008)
Case details for

In re Marriage of Ford

Case Details

Full title:In re the Marriage of KATHERINE T. and JOHN FORD. KATHERINE T. FORD…

Court:Court of Appeal of California

Date published: Apr 22, 2008

Citations

No. A114997 (Cal. Ct. App. Apr. 22, 2008)