Opinion
A157055
12-29-2023
IN RE the MARRIAGE OF Quin WHITMAN and Douglas F. Whitman. Quin Whitman, Appellant, v. Douglas F. Whitman, Appellant.
McManis Faulkner, James McManis, William Faulkner, Brandon Rose, and Beverly Bergstrom, for Appellant Quin Whitman. California Appellate Law Group, Complex Appellate Litigation Group, Charles Kagay, Robert A. Roth, and Kelly A. Woodruff, for Appellant Douglas F. Whitman.
(San Mateo County Super. Ct. No. FAM0117304) Hon. Elizabeth M. Hill
McManis Faulkner, James McManis, William Faulkner, Brandon Rose, and Beverly Bergstrom, for Appellant Quin Whitman.
California Appellate Law Group, Complex Appellate Litigation Group, Charles Kagay, Robert A. Roth, and Kelly A. Woodruff, for Appellant Douglas F. Whitman.
STEWART, P.J.
Douglas F. Whitman (Doug), the founder of a once highly successful hedge fund, and Quin Whitman (Quin) each appeal from a judgment entered after a lengthy court trial in their contested divorce.
We affirm the judgment in all respects but one. We conclude:
(1) The trial court did not err in ruling that Doug failed to prove he retained any separate property interest in the hedge fund at the time of dissolution, despite an initial $300,000 capital investment of his own separate funds.
(2) The community is not financially responsible for any of the legal fees Doug incurred to defend against criminal charges brought against him for insider trading or the $250,000 fine imposed on him in that case. The trial court thus did not err in characterizing those as Doug’s separate debts. It erred in holding the community responsible for the $935,000 penalty the Securities and Exchange Commission (SEC) imposed on Doug in the parallel enforcement action for engaging in illegal insider trading while running the hedge fund during the marriage. It did not err in holding the community responsible for $290,000 in legal fees Doug incurred in that parallel SEC enforcement case.
(3) Quin has not demonstrated the court erred in holding the community responsible for legal fees expended by the hedge fund when it intervened as a third party into these proceedings.
(4) The court did not err in concluding Quin failed to prove her claim that Doug breached his fiduciary duty in connection with the sale of the couple’s luxury home.
BACKGROUND
Quin and Doug married in 1992. By then, Doug had spent nearly a decade working as a highly compensated financial analyst at several investment firms and had amassed substantial separate property savings. During the first two years of their marriage, the couple lived frugally, while Doug continued to work in the financial sector and earn a high income. In 1994, Doug was terminated from his position at the investment bank where he had been working and decided to form his own investment fund (or "hedge fund").
To launch the hedge fund and attract outside investors, Doug invested $900,000 of capital in three rounds of funding during 1994. A major contested issue at trial was whether any portion of that capital infusion was Doug’s separate property and, if so, whether it could be adequately traced decades later at the time of dissolution. We will discuss that subject in great- er detail below in the unpublished portion of this decision.
By the end of 2011, the hedge fund had proved a tremendous success, having grown cumulatively 2118.7 percent from its inception. At its peak, it had more than 60 outside investors and nearly $300 million in assets.
But in February 2012, the U.S. Attorney in the Southern District of New York charged Doug with crimes and the SEC filed an enforcement action against him and Whitman Capital for insider trading. Within months, by the end of March 2012, all the outside investors had withdrawn from the hedge fund, leaving only about $29 million in equity belonging to Doug (effectively). The following year, in January 2013, Doug was convicted of four counts of insider trading, sentenced to 24 months in prison, assessed a $250,000 criminal fine and ordered to forfeit $935,306. Then in March 2013 Doug settled the SEC action and paid a $935,306 civil penalty.
Doug created three related entities when he formed the hedge fund: a limited partnership called Whitman Partners, L.P. (WPLP) that constituted the actual investment fund itself, in which Doug and outside investors were limited partners; Whitman Capital, LLC, which was owned and managed by Doug and was the general partner of WPLP (effectively making Doug the managing general partner of WPLP); and Whitman Capital, Inc., of which Doug was the president, director and sole shareholder, which was a member of Whitman Capital, LLC. Whitman Capital, Inc. was used to pay all operating expenses of the hedge fund, including employee salaries.
Over time, the hedge fund had earned handsome profits and Doug was extremely well compensated. During their marriage, Doug reinvested all of his annual compensation back into the fund, and the parties withdrew more than $88 million from the fund.
On April 11, 2012, two months after the civil and criminal charges were filed, Quin filed a petition for legal separation that was later amended to a petition for dissolution. The following year, in June 2013, the hedge fund was granted leave to intervene in the case after Quin sought the appointment of a receiver to wind it down. Her efforts in that regard were ultimately not successful, and we discuss in greater detail below (in the unpublished portion of this opinion) the trial court’s ruling concerning the legal fees the hedge fund incurred to appear in the case.
The case proceeded to 30-day bench trial between March 2017 and January 2018 on the characterization and division of numerous marital assets. The court issued a 133-page statement of decision, entered judgment and denied the parties’ new trial motions. Both parties then timely appealed.
DISCUSSION
See footnote * , ante.
II.
Legal Fees and Fines Arising from Doug’s Insider Trading
Between 2007 and 2009, while the parties were married, Doug engaged in insider trading, purchasing interests in Google and two other companies based on tips he received from company insiders. The question of who should be responsible for the financial repercussions of Doug’s criminal conduct divided the parties below and remains an issue in this appeal.
Both parties challenge the trial court’s ruling on Quin’s request that it treat as Doug’s separate obligation, and reimburse the community for, the debts incurred as a result of his criminal conduct, including the debts for the civil penalty, the criminal fine and the attorney fees incurred for his defense in the parallel criminal and SEC cases. The trial court ruled the community was responsible for the $935,000 civil penalty and $290,000 in attorney fees and costs associated with the SEC action. It held that the $9.4 million in attorney fees spent defending him against the criminal action and the $250,000 criminal fine were Doug’s separate debts for which he, not the community, was responsible.
Doug claims the trial court erred in failing to allocate the entire cost of his criminal conduct to the community. Quin, who knew nothing about Doug’s criminal wrongdoing until after the fact, and therefore had no opportunity to avoid it, argues the trial court should not have allocated any of these losses to the community.
In the alternative, Doug also challenges the amount of legal fees and costs the trial court attributed to the SEC action, contending the trial court erroneously excluded evidence that resulted in the court vastly underestimating those expenses.
We affirm the trial court’s decision in all but one respect. It erred only to the extent it characterized the SEC penalty Doug was ordered to pay in the SEC case as a community obligation. The penalty he paid to settle the SEC case, the criminal fine imposed against him, and all but $290,000 of the attorney fees Doug incurred to defend himself are Doug’s separate responsibility. And our reasoning for affirming the allocation of the $290,000 to Doug is distinct from that of the trial court and renders it unnecessary to address Doug’s challenge to the amount of legal fees the court allocated to his defense of the SEC case.
Our analysis concerns the allocation of financial responsibility between divorcing spouses arising from one spouse’s criminal conduct. We do not address either spouse’s or the community’s liability to third parties for such conduct.
A. Background
In January 2011, Doug retained the law firm Sidley Austin to assist him in connection with investigations into his trading activities launched by federal prosecutors in New York and the SEC. His legal team spent the next year negotiating with both sets of New York investigators in an attempt to convince them not to charge Doug, while simultaneously investigating the case and preparing a defense.
Their negotiating efforts failed, and in February 2012, a grand jury returned an indictment. Doug was charged in the federal district court for the Southern District of New York with four federal criminal securities law violations, including two charges for conspiracy to commit securities fraud and two charges of securities fraud. The charges alleged Doug engaged in two insider trading schemes that involved purchasing securities in three publicly traded companies based on inside information obtained from two different sources.
Contemporaneously, the SEC filed a complaint against Doug and Whitman Capital arising out of some of the same insider trading as was alleged in the criminal indictment. The complaint alleged that based on the insider information, "Whitman Capital hedge funds reaped approximately $980,000 in ill-gotten profits." It sought injunctive relief, disgorgement and civil penalties.
Two months later, in April 2012, Doug and Quin separated.
After pleading not guilty in the criminal action, Doug was tried by a jury, which in August 2012 found him guilty on all four counts. In January 2013, the court sentenced him to two years’ imprisonment, a year of probation, a fine of $250,000 and forfeiture of $935,306. The forfeiture amount represented "the amount of proceeds obtained as a result of the offenses" charged in the indictment.
About two months later, on March 19, 2013, Doug and Whitman Capital consented to entry of judgment against them in the SEC action. The judgment permanently enjoined them from violating the anti-fraud provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933; imposed joint and several liability on them for "disgorgement in the amount of $935,306, representing profits gained as a result of the conduct alleged in the Complaint" (plus prejudgment interest), which was to be "credited" by the amount paid for the criminal forfeiture; and also required Doug to pay a "civil penalty in the amount of $935,306" to the SEC. Doug also agreed he would "not seek or accept, directly or indirectly, reimbursement or indemnification from any source" or claim any tax deduction or credit with regard to the civil penalty. The settlement also included an order barring Doug from associating with brokers, dealers, investment advisors and other securities industry entities.
The disgorgement payment was charged against the limited partners’ shares, about two-thirds of which were the "public" limited partners and one-third Doug’s and his companies’ shares. The civil penalty was paid out of Doug’s partnership account at Whitman Partners.
Doug posted bail and apparently avoided serving prison time while he appealed the criminal conviction, but ultimately, the Second Circuit affirmed his convictions, the United States Supreme Court denied his petition for certiorari, and he served all or some part of a 24-month prison sentence.
The trial court found that Doug’s intentional, criminal conduct benefitted the community in the amount he and Whitman Capital were ordered to disgorge ($935,- 306) and "arose from the operation of the community business" but that Quin had no knowledge of it or any opportunity to "avoid it."
The SEC complaint alleged that the proceeds of the insider trading went to the Whitman Capital hedge fund, and Doug admitted that he charged the disgorgement to the limited partners, including his one-third share. This suggests that only a third of the $935,000 in proceeds from Doug’s insider trading ultimately were disbursed to the community. However, the trial court found that the community benefited from Doug’s criminal conduct "in the amount of the $935,306 disgorgement that [Doug] was obligated to pay," and the parties do not challenge this finding. Further, Quin withdrew her request for reimbursement of the disgorgement payment in the trial court for reasons that are not clear. Therefore, we need not address the issue of the precise amount of money the community received as a result of Doug’s insider trading.
However, one thing is clear from the undisputed facts: the cost of Doug’s criminal conduct far exceeded the amount of short-term financial gain to the community as found by the trial court. First, the gain was completely wiped out by the criminal forfeiture, which was dollar for dollar offset by the amount of the civil disgorgement remedy. On top of that, there was the additional civil penalty of $935,000 and the criminal fine of $250,000. And dwarfing even that substantial penalty and fine combined was the $9.7 million Doug spent for the Sidley Austin law firm to defend him in the parallel actions. Even assuming the community benefited in the amount of $935,000 from Doug’s insider trading (see fn. 10, ante, page 819), the combined total of the civil penalty, criminal fine and attor- ney fees Doug incurred ($11,885,000) is almost 13 times that amount. And it is impossible to quantify the ongoing loss of income available to support the community that resulted after Doug’s criminal conduct was discovered and the limited partners withdrew from the fund and it was effectively shut down.
In allocating responsibility between Doug and Quin for the financial consequences of Doug’s insider trading, the trial court distinguished between the SEC case and the criminal case. It ruled that the community was responsible for all the costs associated with the SEC enforcement action: the $935,306 civil penalty Doug paid to the SEC, along with the legal fees and costs attributable solely to Doug’s defense of that action, which it determined was $290,608.63 of the $9.7 million he spent. By contrast, it ruled that all the costs associated with the criminal case were Doug’s sole and separate obligation, which included the $250,000 criminal fine and the $9,423,596 in attorney fees and costs he incurred in defending that action.
The amount the trial court allocated to fees and costs for the SEC enforcement action was based on evidence showing Sidley Austin billed $290,608,63 in fees and costs exclusively for the defense of the SEC matter, finding Doug was "only partially successful in proving the amount of fees expended on the SEC action separate and apart from the criminal action."
The trial court opined, "the spouse who knowingly commits a crime willfully accepts the risk that he will be caught and have to face the consequences, whereas the spouse who was unaware of the risk and could do nothing to avoid it should not bear the same burden." We could not agree more.
B. Standard of Review
[1] " ‘ "Appellate review of a trial court’s finding that a particular item is separate or community property is limited to a determination of whether any substantial evidence supports the finding." [Citations.] [¶] But de novo review is appropriate where resolution of "the issue of the characterization to be given (as separate or community property) … requires a critical consideration, in a factual context, of legal principles and their underlying values, [such that] the determination in question amounts to the resolution of a mixed question of law and fact that is predominantly one of law."’ [Citation.]" (In re Marriage of Walker (2012) 203 Cal. App.4th 137, 152, 137 Cal.Rptr.3d 611.)
C. Characterization of the Debts Arising from Doug’s Insider Trading
[2] Throughout the parties’ briefing in the trial court and initially on appeal they treat the relevant statutes as secondary and focus much of their argument on the relatively few relevant appellate decisions. But division of property and debts upon dissolution is, first and foremost, governed by statute. As Doug acknowledges, the Family Code specifies that, "Except … as otherwise provided in this division [7]" of the Family Code, which governs property division (or an agreement between spouses), community property must be divided "equally." (§ 2550.) Therefore, trial courts have no discretion to divide the community estate unequally unless authorized by a provision in Division 7 of the Family Code to do so. (See In re Marriage of Peterson (2016) 243 Cal.App.4th 923, 937, 197 Cal.Rptr.3d 588; see also Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2023) ¶ 8:900 ("Hogoboom & King") ["Property division jurisdiction must be exercised in the manner provided by Fam. [Code,] § 2500 et seq…."].)
We requested supplemental briefing asking the parties to address the relevant statutes more specifically.
Other provisions in Division 7 of the Family Code qualify the equal division principle of section 2550, including provisions that specifically address debt. It is to those provisions we now turn.
1. Under the Plain Language of the Relevant Statutes, the Civil Penalties, Criminal Fine and Attorney Fees Were Doug’s Separate Obligations.
a. The Statutes
Section 2551 requires trial courts, for "purposes of division and in confirming or assigning the liabilities of the parties for which the community estate is liable," to "characterize liabilities as separate or community and confirm or assign them to the parties in accordance with Part 6 (commencing with Section 2620)." As the leading practice guide states, "Characterizing the status of property interests as ‘community’ … or ‘separate’ property is the foundational starting point for the resolution of marital property rights and obligations. ‘Characterization must take place in order to determine the rights and liabilities of the parties with respect to a particular asset or obligation and is an integral part of the division of property on marital dissolution.’" (Hogoboom & King, supra, ¶8:30; see § 2551, second italics added.)
As a general rule, "the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt." (§ 910, subd. (a), italics added.) The general rule has a proviso, that it applies "[e]xcept as otherwise expressly provided by statute." (Ibid.)
Under the Family Code, "Debt" is defined as "an obligation incurred by a married person before or during marriage, whether based on contract, tort, or otherwise." (§ 902.) The Code further specifies when debts are "incurred": a debt arising because of a contract is incurred when the contract is made (§ 903, subd. (a)); a debt arising from a tort is incurred "at the time the tort occurs" (id., subd. (b)); and all other debts are incurred "at the time the obligation arises." (Id., subd. (c)).
Under section 2620, "The debts for which the community estate is liable which are unpaid at the time of trial, or for which the community estate becomes liable after trial, shall be confirmed or divided as provided in this part." Further, section 2626 authorizes the trial court to "order reimbursement in cases it deems appropriate for debts paid after separation but before trial."
Several statutes in Part 6 of Division 7 of the Family Code address characterization and division of debts, three of which are potentially relevant here.
[3] First, section 2625 states: "Notwithstanding Sections 2620 to 2624, inclusive, all separate debts, including those debts incurred by a spouse during marriage and before the date of separation that were not incurred for the benefit of the community, shall be confirmed without offset to the spouse who incurred the debt." Section 2625 thus requires a trial court to determine whether a debt incurred during the marriage is a separate debt, and if it is separate, to confirm it without offset to the spouse who incurred it. Section 2625 makes clear that a debt "not incurred for the benefit of the community" is a separate debt that "shall be confirmed without offset" to the spouse who incurred it during the marriage. [4] Second, section 2627 provides in relevant part, "Notwithstanding Sections 2550 to 2552, inclusive, and Sections 2620 to 2624, inclusive, … liabilities subject to paragraph (2) of subdivision (b) of Section 1000 shall be assigned to the spouse whose act or omission provided the basis for the liability, without offset." Section 1000, subdivision (b)(2), addresses "the liability of a married person for death or injury to person or property" that "is not based upon an act or omission which occurred while the married person was performing an activity for the benefit of the community." Under section 2627, then, liability for "death or injury to a person or property" that resulted from an act or omission of one spouse is a separate debt if it was not based on an act or omission that occurred while performing an activity for the benefit of the community.
[5, 6] Notably, sections 2625 and 2627 both address debts or liabilities incurred by one spouse during the marriage, but they are distinct. Section 2625 broadly defines debts incurred during the marriage that were "not incurred for the benefit of the community" as separate debts. Section 2627 is narrower. It addresses the liability of a married person "for death or injury to person or property" and requires the liability to be assigned to the person whose act or omission provided the basis of the liability, without offset, if the liability is "not based upon an act or omission which occurred while the married person was performing an activity for the benefit of the community." (§ 1000, subd. (b)(2), italics added.) Unless a debt or liability of a married person is "for death or injury to person or property" within the meaning of sections 2627 and 1000, it is not governed by section 2627 and must be analyzed under the more general provisions of section 2625.
The parties disagree as to whether the debts are a "liability for death or injury to person or property" within the meaning of section 1000, subdivision (b)(2).
Quin argues they are because insider trading causes harm to the investing public.
Doug argues they are not. He asserts that although injured investors might have sued to recover compensation for actual losses, that did not happen here.
We agree with Doug. The fact that his actions might have caused property injury to individual investors does not mean that the specific debts he was required to pay represent a "liability" for any such injury (rather than, for example, a fine or punishment). Indeed, Quin concedes that the criminal charges and the SEC action were brought to vindicate public interests not the interests of private parties. We elaborate further below.
Finally, section 2623 addresses debts incurred "after the date of separation but before entry of a judgment of dissolution of marriage or legal separation of the parties." (Italics added.) It states in relevant part, "(a) Debts incurred by either spouse for the common necessaries of life of either spouse or the necessaries of life of the children of the marriage for whom support may be ordered, in the absence of a court order or written agreement for support or for the payment of these debts, shall be confirmed to either spouse according to the parties’ respective needs and abilities to pay at the time the debt was incurred. [¶] (b) Debts incurred by either spouse for nonnecessaries of that spouse or children of the marriage for whom support may be ordered shall be confirmed without offset to the spouse who incurred the debt." Section 2623 thus requires the court to confirm any post-separation debts not incurred for the necessaries of that spouse or children of the marriage "without offset to the spouse who incurred the debt."
The Code treats certain other debts as separate, but the parties do not contend any of those other sections apply here, and we do not address them.
See, e.g., §§ 2621 (debts incurred before marriage); 2624 (debts incurred by one spouse after entry of judgment of legal separation or dissolution); see also § 2602 (court may award from party’s share amount it determines to have been deliberately misappropriated by the party to the exclusion of the interest of the other party).
b. Analysis
Although the parties disagree as to whether the division of the debts incurred as a result of Doug’s insider trading must be treated as an all-or-nothing proposition, there are multiple distinct debts here, each of which must be analyzed under the appropriate statute. These include: the $935,000 civil penalty incurred in the SEC enforcement action ; the $250,000 criminal fine incurred in the contemporaneous criminal action; the attorney fees incurred to defend Doug in the criminal action; and the attorney fees incurred to defend Doug and Whitman Capital in the SEC enforcement action. While the trial court treated the debts relating to the SEC action differently from those relating to the criminal action, it did not, expressly at least, apply the Family Code provisions to ascertain whether each debt was a separate or community debt, including whether the debts arose before or after the parties separated or otherwise satisfied the criteria of the relevant statutes. Proper characterization of these debts depends on the resolution of those issues.
The parties clarified their positions about this in supplemental briefing. Doug argues there is "no reason to" evaluate them separately ("because they all arose from a single act"), whereas Quin argues that the court should look at "the matter as a whole" but also ask whether a particular debt was incurred for the benefit of the community. She argues that "While it is necessary to consider the underlying act … the Court must also determine whether a specific debt was incurred for the benefit of the community."
The penalty amount of $935,000 is in the same amount as the restitution/disgorgement of profits Doug was required to pay. However, the two were separate obligations, each of which he had to pay. Only the penalty is at issue here because, as we have indicated (see fn. 10, ante, page 819), Quin withdrew her request for reimbursement with respect to the restitution/disgorgement payment.
The debts for the $935,000 SEC penalty and the $250,000 criminal fine are post-separation debts governed by section 2623. That is because they are neither contract nor tort debts, and therefore under section 903 were incurred "at the time the obligation ar[ose]." (§ 903, subd. (c)). The obligations arose when Doug became obligated to pay them, which happened after the parties separated when the criminal judgment was entered and the SEC settlement took place. (See U.S. v. Davani (N.D. Cal., Mar. 22, 2023, No. 04-cr-00224-JSW-1) 2023 WL 2601354, at p. *4 [under section 903, husband incurred debt for criminal restitution when court imposed it as part of criminal judgment, not earlier when he committed criminal offenses].) We therefore affirm the trial court’s decision that the criminal fine and assessment were Doug’s separate obligation but reverse its characterization of the $935,000 penalty as a community obligation.
The trial in the criminal action resulted in a guilty verdict in August 2012, and in January 2013 the court imposed a prison sentence and ordered Doug to pay a $400 assessment, "forfeiture in the amount of $935,306" and a fine of $250,000. Thereafter, Doug settled the SEC action, with the result was that he paid a $935,306 criminal penalty and was obligated to disgorge $935,306, with the latter being credited dollar for dollar by the amount of the criminal forfeiture. Under section 903, subdivision (c), the criminal fine and the forfeiture were incurred in January 2013, and the civil penalty was imposed as part of the SEC settlement sometime after that. Both of those obligations were incurred after the parties’ separation in April 2012.
[7] Citing no legal authority, Doug argues all the debts were incurred pre-separation, and thus section 2623 does not apply. He asserts that because his actions constituted a tort, the debts were incurred at the time the tort occurred under section 903, subdivision (b). We do not agree. No tort claims were asserted against Doug, and thus no tort debt is at issue.
[8–13] The criminal fine and civil penalties sought in those actions were not tort remedies; they were in no sense damages to compensate victims of a tort for injuries. Instead, they were sanctions imposed to punish Doug and to deter him and others from engaging in the crimes for which he was convicted. "Fines arising from convictions are generally considered punishment." (People v. Alford (2007) 42 Cal.4th 749, 757, 68 Cal.Rptr.3d 310, 171 P.3d 32.) SEC enforcement proceedings, while civil in nature, serve to "prevent and punish more serious securities law violations," to "protect the integrity of the markets" and to "vindicate the public interest." (Jones v. S.E.C. (4th Cir. 1997) 115 F.3d 1173, 1180.) The imposition of monetary penalties in an SEC enforcement action are "disciplinary" and "intended to discourage and punish legal and ethical misconduct." (Lang v. French (5th Cir. 1998) 154 F.3d 217, 222-223; see also Kokesh v. S.E.C. (2017) 581 U.S. 455, 459, 137 S.Ct. 1635, 198 L.Ed.2d 86 [in 1990, Congress added monetary penalties as additional "enforcement tool[ ]"].) They are distinct from disgorgement, and are payable directly to the United States Treasury. (See 15 U.S.C., § 78u, subds. (d)(3)(A)(i), (d)(3)(B), (d)(3)(B)(C)(i).) In bringing an enforcement action, the SEC "‘acts in the public interest, to remedy harm to the public at large, rather than standing in the shoes of particular injured parties.’" (Kokesh, 581 U.S. at p. 463, 137 S.Ct. 1635.)
Private persons who are injured by insider trading may file civil suits against the perpetrator. (Freeman v. Decio (7th Cir. 1978) 584 F.2d 186, 191.) Sometimes they are also permitted to join in an SEC action, although there is no evidence that occurred here.
[14] Doug also argues, in the alternative, that "[t]o the extent the commission of a crime can be considered an ‘other case’ under section 903[, subdivision] (c)," he "became subject to" the criminal fine and other punishment when he committed the crime and thus "the obligations flowing from those activities were incurred during [the] marriage." Again, we disagree. He became subject to those penalties when sentence was imposed in the criminal case and he settled the charges brought against him by the SEC. Doug’s contrary position disregards the federal authority addressing this issue (see U.S. v. Davani, supra, 2023 WL 2601354, at p. *4; U.S. ex rel. Simoneaux v. E.I. duPont de Nemours & Co. (5th Cir. 2016) 843 F.3d 1033, 1040 ["most regulatory statutes … impose only a duty to obey the law, and the duty to pay regulatory penalties is not ‘established’ until the penalties are assessed"].) Doug also disregards the statutory text. Unlike the statutory definitions of when a contract or tort debt is incurred, notably absent from the definition of when "other" debts are incurred is any reference to the timing of the conduct that is the debt’s underlying source. (Compare § 903, subds. (a) & (b) with subd. (c).) We find that omission significant. Unlike tort and contract damages, the responsibility for which arises when the tort or breach of contract occurs, imposition of regulatory and criminal fines is discretionary and it is not until that discretion is exercised that the legal liability to pay them arises. [15] Applying section 2623, then, which addresses post-separation debts, the conclusion that these are Doug’s separate debts is not even debatable. Under section 2623, debts incurred after legal separation that are not for the necessaries of the spouse or children are separate debts of the spouse who incurred them. (See § 2623.) The parties agree that the criminal fines or civil penalties do not constitute the "common necessaries of life." (See Direct Capital Carp. v. Brooks (2017) 14 Cal. App.5th 1168, 1174, 222 Cal.Rptr.3d 601 ["common necessaries are those that all families need (e.g., food, clothing, & shelter)"].) Thus, the trial court correctly treated the criminal fine as Doug’s separate obligation but erred in characterizing the civil penalty imposed by the SEC and agreed to by Doug to settle the enforcement action as a community obligation.
[16, 17] The bigger question by far both monetarily and otherwise is the treatment of the attorney fees Doug incurred in both cases. Although the criminal and SEC actions were not filed until February 2012, the evidence suggests Doug retained Sidley Austin to represent him in those matters in or about January 2011, which was during the marriage and before the parties separated in April 2012. Because those debts were contractual, under sections 902 and 903 they were "incurred" when the contract was made, which was during the parties’ marriage. Accordingly, the legal fees are pre-separation debts governed by section 2625 and are community debts or separate debts depending on whether they were "incurred for the benefit of the community." (§ 2625.)
It should be noted that, Section 2627 does not apply to the attorney fees Doug incurred for the defense in the criminal and SEC actions any more than it did to the penalties, fines and disgorgement remedies imposed in those actions. Attorney fees are not "liabilit[ies] … for death or injury to person or property" within the meaning of section 1000, subd. (b) and, by incorporation, section 2627. The attorney fees Doug incurred arose from the contract he entered for counsel to defend him in the criminal and SEC actions. In his supplemental brief, Doug concedes this point.
[18] Where, as here, the "benefit to the community" presents a predominantly legal question, it is subject to de novo review. (See In re Marriage of Nassimi, 3 Cal.App.5th 667, 684, fn. 31, 207 Cal. Rptr.3d 764 (Nassimi); In re Marriage of Rossin (2009) 172 Cal.App.4th 725, 734, 91 Cal.Rptr.3d 427.) Having considered the parties’ briefing on this issue, including the supplemental briefing, we conclude the arguments present no real factual disputes. Rather, their dispute is fundamentally a question of law, namely, the meaning of the statutory language, "incurred for the benefit of the community." That is a legal question subject to de novo review.
Here, the trial court addressed whether the attorney fees and costs, which it found totaled $9.7 million, were "incurred for the benefit of the community." We quote parts of its discussion here.
"[Doug] focuses on the assertedly enormous monetary benefit the community received from his operation of the Whitman entities, including the profits generated by the offenses of which he was convicted. He further argues that [Quin] is not truly an ‘innocent’ spouse, because ‘in the current environment’ the spouse [of] a long-term technology investment manager either knows or should know that the other spouse may eventually be charged with ‘insider type trading’….
"The evidence shows that the community did benefit from [Doug’s] criminal conduct, in the amount of the $935,306 disgorgement that [Doug] was obligated to pay. [Quin] first asserted then abandoned a claim for reimbursement of this amount. In the Court’s view, the evidence also fails to show that [Quin] was aware of [Doug’s] criminal conduct….
[¶] … [¶]
"Respondent’s argument implies that his legitimate investment management activities somehow inevitably led to his conviction of insider trading. In briefing, he devoted attention to distinguishing his conduct from ‘bald faced theft’, and arguing that his conduct was more like the ‘business tort’ situation in Hirsch [In re Marriage of Hirsch (1989) 211 Cal.App.3d 104, 259 Cal.Rptr. 39 (Hirsch)] rather than the ‘theft tort’ of Stitt [In re Marriage of Stitt (1983) 147 Cal.App.3d 579, 195 Cal.Rptr. 172 (Stitt)] and Bell [In re Marriage of Bell (1996) 49 Cal.App.4th 300, 56 Cal.Rptr.2d 623 (Bell)]. The Court views the purported distinction with skepticism and finds this line of reasoning unpersuasive. Insider trading is not an inevitable consequence of being an investment manager. [Doug] was convicted of a crime requiring willful behavior, not a ‘business tort’. His argument attributing ‘tens of millions of dollars’ of community benefit to his conduct vastly overstates the benefit to the community of the criminal conduct that he asks the community to share in the cost of defending. That benefit was determined to be $935,306."
The trial court’s description is apt. Doug argues his operation of the hedge fund in general benefited the community, and there is no question that it did. But section 2625 presents a narrower question. The debts at issue were incurred not by Doug’s overall operation of the hedge fund throughout the course of the parties’ marriage. Rather, they were incurred because Doug violated the securities law by conspiring to commit and committing multiple acts of insider trading. The question is whether the amounts Doug expended on attorney fees to defend himself in the criminal and SEC cases were incurred for the benefit of the community.
Addressing that question requires an understanding of the phrase "incurred for the benefit of the community." Here, the trial court found there was some potential benefit to the community, but it was at most $935,000, the amount of ill-gotten gains the community might have, but ultimately did not, receive had the attorneys succeeded in avoiding liability for disgorgement. As the court also observed, the attorney fees Doug expended to defend against the criminal and SEC actions totaled $9.7 million, which of course dwarfed any potential community benefit. Further, as we shall discuss, the evidence reflects that the primary purposes for which Doug incurred the $9.7 million in fees were not to defend a community asset.
Fundamentally, we do not think the question whether a debt was "incurred" or "not incurred" "for the benefit of the community" within the meaning of section 2625 in all circumstances presents a binary question. As we have said, the Family Code defines "[d]ebt" to mean "an obligation incurred by a married person before or during marriage, whether based on contract, tort, or otherwise." (§ 902.) The ordinary meaning of both "debt" and "obligation," used in the singular, "a debt" or "an obligation," is a duty or commitment to pay a person or entity. Here, the debt we must address is Doug’s contractual obligation to pay the attorneys who defended him in the two cases.
See Merriam-Webster https://www.merriam-webster.com/dictionary/obligation> (as of Dec. 29, 2023) ("a commitment (as by government) to pay a particular sum of money" "an amount owed under such an obligation"); Britannica Dictionary https://www.britannica.com/dictionary/debt> (as of Dec. 29, 2023) ("an amount of money that you owe to a person, bank, company, etc."); Cambridge Dictionary https://dictionary.cambridge.org/us/dictionary/english/debt> (as of Dec. 29, 2023) ("something, especially money, that is owed to someone else"); Dictionary.com https://www.dictionary.com/browse/debt?adobe_mc=MCMID24259494335274820210782707502712756703@MCORGIDAA9D3B6A630E2C2A0A495C4040AdobeOrg@TS1703205150> (as of Dec. 29, 2023) ("something that is owed or that one is bound to pay or perform for another: a debt of $50").)
In some circumstances, a debt may be incurred for multiple purposes some of which are for the benefit of the community and some which are not. For example, funds borrowed on a home equity line of credit used to pay for improvements to the marital home and to cover the college expenses of a child of one spouse from a prior marriage. Family Code section 2556 indicates that unequal allocation of a debt or liability is permissible.
Section 2556 specifically addresses division of unadjudicated assets and debts after a judgment of dissolution. In relevant part, it states, "In these cases, the court shall equally divide the omitted or unadjudicated community estate asset or liability, unless the court finds upon good cause shown that the interests of justice require an unequal division of the asset or liability." There is no reason that this principle cannot apply to a debt that is allocated as part of the dissolution where, because the debt was incurred in part for community and in part separate purposes it would not be in the interest of justice to divide it unequally.
Marriage of Nassimi, supra, 3 Cal. App.5th 667, 207 Cal.Rptr.3d 764 demonstrates that attorney fee debt may be incurred partly for the benefit of the community and partly for non-community purposes. There, the husband incurred attorney fees both to defend himself against claims arising from his operation of a community business during the marriage and to pursue a counterclaim that was his separate property. The court held that while the community was responsible for the fees incurred to defend the claims against the former family business, it was not responsible for the fees incurred to pursue the husband’s separate property counterclaim. (Id. at pp. 694-695, 207 Cal. Rptr.3d 764.) Ultimately, the court declined to require the wife to reimburse the community for any of the fees because the husband failed to meet his burden to establish the amounts of the fees he incurred for each. (Id. at p. 695, 207 Cal.Rptr.3d 764.)
[19] We need not address all circumstances under which an allocation of debt between the community and the spouse who incurred it may be appropriate. We hold only that where, as here, one spouse, expends an extraordinary sum that is out of proportion to any community benefit for purposes that are predominantly for his or her separate benefit, nothing in Family Code section 2625 requires the court to order the other spouse to share equally in that burden. Here, Doug, incurred a huge debt to defend himself against criminal and civil enforcement actions in an effort to avoid being convicted of serious crimes, being subjected to criminal fines, civil penalties and a substantial prison sentence. Those consequences, which he sought to avoid, were the product of criminal acts he knew he had engaged in, and his expenditure of huge sums in an attempt to avoid the consequences served primarily to benefit him, not Quin. Whatever temporary benefit the community may have received from the crimes, the expenditure of more than ten times that amount for attorney fees cannot logically be attributed simply to avoiding repayment of the $935,000 in ill-gotten gains the community had received. The court could infer that the primary reason Doug spent $9.4 million defending himself in the criminal and SEC actions was predominantly to benefit himself, and there is uncontradicted evidence that, far from benefiting the community, Doug’s conduct had both monetary and personal consequences that were exceedingly harmful to the community.
While the trial court did not expressly address the statutory interpretation question, it implicitly understood that the attorney fee issue was not a binary one and ultimately arrived at the right conclusion. Rather than treating the "benefit of the community" question as requiring a yes or no answer, the court appreciated that neither Doug’s conduct, nor the monetary and other consequences that flowed from it, on balance benefited the community, and its allocation reflects that. It allocated the lion’s share of the attorney fees, the $9.4 million Doug expended to defend himself in the criminal action, to Doug as his separate obligation. It allocated a share of the fees expended on the SEC action to the community. While its rationale for that is not altogether clear, we affirm its allocation of $290,000 in fees to the community for reasons we shall explain.
As we have said, the answer to the question whether there was a benefit to the community from Doug’s expenditure of $9.7 million to defend the two actions is, "not for the most part," and "on balance, no." In this situation, the statute permits the trial court to allocate the attorney fees between the community and the spouse who incurred them in reasonable proportion to the value of the community and separate benefits the fees were expended to achieve.
As we shall discuss further below, while the trial court did not clearly articulate the rule we interpret section 2625 to embody, it effectively allocated the attorney fee debt in a manner consistent with this opinion. But before we explain why we so conclude and therefore affirm its allocation of $290,000 in fees to the community, we turn to the case law and explain why it does not support the all-or-nothing result the parties suggest should apply in this case.
2. The Caselaw Does Not Change the Analysis.
The parties cite several cases involving tort liabilities and debts, which we will discuss. We focus first on the three California cases that have addressed the allocation of financial responsibility for debts resulting from one spouse’s criminal misconduct for purposes of property division upon dissolution. (See Bell, supra, 49 Cal. App.4th 300, 56 Cal.Rptr.2d 623; In re Beltran (1986) 183 Cal.App.3d 292, 227 Cal.Rptr. 924 (Beltran); Stitt, supra, 147 Cal.App.3d 579, 195 Cal.Rptr. 172.) Although the cases differ somewhat in their analytical approaches, in two, the innocent spouse was held to have no financial responsibility for the resulting losses. (See Stitt, at pp. 582, 586-588, 195 Cal.Rptr. 172 [wife who embezzled from employer held solely responsible for attorney fees incurred in civil and criminal cases]; Beltran, at pp. 293-295, 227 Cal.Rptr. 924 [convicted child sex abuser held solely financially responsible for military pension benefits the community forfeited due to his crimes].) The third reached a split result, holding the community was responsible only for repaying the victim for the ill-gotten gains to the community and not responsible for any of the resulting legal fees, tax liabilities or penalties. (See Bell, supra, at pp. 308-310, 56 Cal.Rptr.2d 623 [where wife embezzled from her employer, community held responsible only for repaying embezzled funds used to benefit the community and wife held separately responsible for all legal fees incurred to defend civil and criminal cases and for tax liabilities including tax penalties].)
In Stitt, the wife embezzled from her employer. Her obligation to repay her employer for the embezzled funds was not at issue, apparently because the statute governing liabilities of spouses, then Civil Code section 5122, required the employer to look first to the wife’s separate property to satisfy that obligation and it had done so. (Stitt, supra, 147 Cal.App.3d at pp. 582, 583-584, 587-588, 195 Cal.Rptr. 172.) The only issue was whether the wife had to reimburse the husband for attorney fees paid using community assets to defend the wife in the civil and criminal proceedings. (Id. at p. 586, 195 Cal.Rptr. 172.) The court held the attorney fee debts were separate debts of the embezzling wife for which her the community was entitled to reimbursement. (Id. at p. 582, 195 Cal.Rptr. 172.) It based its conclusion on equitable principles, and a "legislative direction" it discerned from section Civil Code 1714, subdivision (a), and subdivision (a) of former section Civil Code 5122 (current Family Code section 1000) that the mere fact of marriage should not change the usual rules of personal responsibility for the consequences of criminal or tortious activity. (Stitt, at p. 588, 195 Cal.Rptr. 172.) It concluded, "No principle of law required the innocent spouse to share the loss created by the other party.… Therefore it was proper for the court to make orders which carried out the law’s intention that only responsible participants in crime or tort bear the loss." (Id. at p. 588, 195 Cal.Rptr. 172.)
Civil Code section 1714, subdivision (a), provides in relevant part, "(a) Everyone is responsible, not only for the result of his or her willful acts, but also for an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property or person, except so far as the latter has, willfully or by want of ordinary care, brought the injury upon himself or herself."
Former section 5122 provided in subdivision (a), "A married person is not liable for any injury or damage caused by the other spouse except in cases where he or she would be liable therefor if the marriage did not exist," (Former Civ. Code, § 5122; Stats. 1984, ch. 1671, § 11, p. 6023.) It then went on in subdivision (b) to address the liabilities of spousal property to victims of a spouse’s torts, requiring that if the liability was based on an act or omission while the tortfeasor spouse "was performing an activity for the benefit of the community," it would first be satisfied from community property and second from the separate property of the tortfeasor spouse, and that if the liability was not based on such an act or omission it would be satisfied first from the separate property of the tortfeasor spouse and second from the community. (Id., subd. (b); see Stitt, supra, 147 Cal.App.3d at p. 587, 195 Cal.Rptr. 172.) Family Code section 1000 retains the same provisions. As the court in Stitt recognized, although section 5122, subdivision (b), exposed the husband’s community property to the tort liability, including apparently, the attorney fees, that section was not determinative of the division of the debt as between the spouses themselves. (See Stitt, at pp. 587-588, 195 Cal.Rptr. 172.)
In Beltran, an army colonel was convicted of lewd and lascivious acts on a child, court-martialed for that crime, "dismissed from the Army and stripped of all military benefits, including his pension and accrued leave." (Beltran, supra, 183 Cal.App.3d at p. 294, 227 Cal.Rptr. 924.) The trial court found the portion of the pension and the leave amounts that accrued during the marriage were community property, charged the husband with constructive receipt of those community assets and then "equalized" the community property by requiring the husband to pay half of the combined amount ($59,230) to his wife. (Ibid.) Relying on Stitt, it reasoned, "husband’s criminal conduct diminished the wife’s share of the community property to which the wife was otherwise entitled upon dissolution. [Citation.] In our view, wife should not be made in effect to share in a penalty imposed upon husband for his criminal conduct. We accordingly conclude as a matter of equity that criminal conduct on the part of husband which directly caused forfeiture of pension benefits justified the trial court’s conclusion that wife was entitled to reimbursement for her share of such lost community property." (Beltran, at p. 295, 227 Cal.Rptr. 924.)
Neither Stitt nor Beltran discussed or expressly applied the statutory provisions governing characterization and division of debts on dissolution that we have cited, because those provisions were not in effect at the time those cases were decided. Both applied equitable principles and principles gleaned from other statutes. (Stitt, 147 Cal.App. 3d at p. 587-588, 195 Cal. Rptr. 172; Beltran, 183 Cal.App.3d at p. 295, 227 Cal.Rptr. 924.) In neither case was the spouse’s criminal conduct shown to have benefited the community at all. And Beltran did not involve a claim of reimbursement for attorney fees. For these reasons, neither Stitt nor Beltran is dispositive.
Stitt cited and discussed former section 5122 of the Civil Code, which has been recodified as section 1000 of the Family Code. (Stats. 1992, ch. 162, § 10.) That section, as the court in Stitt recognized, "spells out the order in which creditors may satisfy tort claims from the property of the spouses, [but] it does not forbid one spouse from later disclaiming responsibility for the tort liability of the other in a dissolution proceeding." (Stitt, supra, 147 Cal.App.3d atp. 588, 195 Cal.Rptr. 172.) It also discussed former Civil Code section 5116, which is a predecessor of current Family Code section 910. (Stitt, at p. 588, 195 Cal.Rptr. 172.) Section 910, on which Doug relies in his combined appellant’s reply and cross-respondent’s brief, likewise addresses the liability of the community estate for debts, not the rights of spouses as between themselves. (See Stitt, at p. 588, 195 Cal.Rptr. 172; §910.)
Family Code section 2623 (post-separation debts) was adopted in 1992 but "continues former Civil Code Section 4800(c)(3) without substantive change." (23 Cal.L.Rev, Comm. Reports 1 (1993), reprinted in West’s Ann. Fam. Code (2023) foll. § 2623, p. 70.) Former section 4800, subdivision (c)(3), was adopted in 1986. (See 1986 Stats., ch. 215, § 1, pp. 1145-1146.)
Family Code section 2625 (pre-separation separate debts) "continues former Civil Code Section 4800(d) without substantive change." (23 Cal.L.Rev. Comm. Reports 1 (1993), reprinted in West’s Ann. Fam. Code (2023) foll. § 2625, p. 74.) Former section 4800, subdivision (d), also was adopted in 1986. (See 1986 Stats., ch. 215, § 1, p. 1146.)
Family Code section 2627 (educational loans, liabilities for death or injury) "continues former Civil Code Section 4800(b)(5) without substantive change" (23 Cal.L.Rev. Comm. Reports 1 (1993), reprinted in West’s Ann. Fam. Code (2023) foll. § 2627, p. 80), which also was adopted in 1986. (See 1986 Stats., ch. 215, § 1, p. 1145.)
In Bell, the wife embezzled funds from her employer, was arrested and subsequently convicted, and in the meanwhile was sued along with her husband by her former employer to recover the embezzled funds. (Bell, supra, 49 Cal.App.4th at pp. 302-303, 56 Cal.Rptr.2d 623.) The parties settled the civil suit for $150,000. (Id. at p. 303, 56 Cal.Rptr.2d 623.) The wife showed she had used the embezzled money for community purposes, including investing in certificates of deposit, depositing them in joint bank accounts and giving her husband a monthly allowance and gifts. (Id. at pp. 303-304, 56 Cal.Rptr.2d 623.) The husband knew nothing of the embezzlement until she was arrested, and he and his wife subsequently separated. (Id. at p. 303, 56 Cal.Rptr.2d 623.)
The trial court had held all the debts resulting from the embezzlement, including the restitution-based settlement with her former employer, were separate debts of the wife. (Bell, supra, 49 Cal.App.4th at p. 307, 56 Cal.Rptr.2d 623.) It focused on the fact that the wife had engaged in criminal, not merely tortious, activity and that "‘in the long run … this didn’t benefit the community. It destroyed it,’" (Id. at p. 306, 56 Cal.Rptr.2d 623.)
The Court of Appeal disagreed with the trial court that the $150,000 restitution-based settlement amount was the separate debt of the wife, because there was "uncontradicted testimony that the community received the benefit of the embezzlement" and "that all the embezzled funds had been put to community, and not separate, use." (Bell, supra, 49 CalApp.4th at p. 310, 56 Cal.Rptr.2d 623.) The court concluded, "directing payment of the settlement by the community would do no more than bring it back to where it had been." (Ibid.)
However, the appellate court in Bell reached a different conclusion regarding "the attorney fees required for [the wife’s] defense in both the civil and the criminal actions" and "the state and federal tax liability arising out of the embezzlement, including interest and penalties." (See Bell, supra, 49 Cal.App.4th at p. 309, 56 Cal. Rptr.2d 623.) It affirmed the trial court’s characterization of those obligations as the wife’s separate debts, reasoning that she had "engaged in intentional tortious and criminal activity and knowingly accepted the risk that she would be caught and would have to face the consequences" and that "Husband, who knew nothing of the risk and could do nothing to avoid it, should not in fairness bear the same burden once it did go wrong." (Ibid.) In so holding, it relied in part on Stitt. (Ibid.)
Bell is consistent with the statutes governing division of debts in that it did not treat all the financial consequences of the wife’s crime as a single debt. Instead, it evaluated each obligation separately. Because there was no evidence that the funds the wife had embezzled were used for anything other than the benefit of the community, it reversed the trial court’s characterization of the debt for repayment of those funds (i.e., the civil settlement) and held the debt was a community obligation. It in essence affirmed the trial court’s conclusion that because wife’s embezzlement overall did not benefit, but destroyed, the community, the expenditures for attorney and accounting fees in defense of the civil or criminal actions and the state and federal tax liability imposed on the wife in the criminal case should be treated as wife’s separate debts.
In this case, we have applied section 2625 and, as the court did in Bell, evaluated the different debts and obligations incurred because of Doug’s crime separately, determining when each was incurred, and for those incurred during the marriage, whether each such debt benefited the community. Because Quin abandoned her contention the forfeiture/disgorgement payment was Doug’s separate obligation, we do not review the trial court’s findings on that issue. (See p. 24 & fn. 10, ante.) However, we note that much as in Bell, the trial court here did not find that the community was benefited significantly from the attorney fees incurred in either the criminal action or the civil enforcement action or by the criminal fine or civil penalties judgment. In that respect, Bell supports Quin’s argument and undermines Doug’s. The only difference between this case and Bell is that here, the trial court implicitly found the attorneys’ fees conferred some benefit on the community, albeit a limited one, because they were incurred in part to defend the community from liability for the ill-gotten gains the community received as a result of Doug’s acts. In light of that, we will not reverse its allocation of a proportionate share of the fees ($290,000) to the community. But for the reasons we have discussed in Part II.C.1 of this opinion, we do not interpret the statute to preclude allocation of the lion’s share of the fees to Doug where outsized fees he incurred were predominantly for his own personal benefit.
Doug relies on Hirsch, supra, 211 Cal. App.3d 104, 259 Cal.Rptr. 39, which criticized Stitt (Hirsch, at p. 110, 259 Cal.Rptr. 39), and on Nassimi supra, 3 Cal.App.5th 667, 207 Cal.Rptr.3d 764. He contends they stand for the proposition that if the criminal activity "substantially benefited the community," then "attorney’s fees and costs incurred in defense are a community obligation."
In Hirsch, the parties had separated and the trial court had entered an interlocutory decree of divorce when the husband was sued for conduct arising from his service, during the marriage, on the board of a bank which had subsequently collapsed. (Hirsch, supra, 211 Cal.App.3d at p. 106, 259 Cal.Rptr. 39.) The suits alleged violations of statute, breach of contract, negligence and intentional misconduct. (Ibid.) The husband settled all three suits and then sought an order in the dissolution case to characterize the settlement amounts he had paid and the defense costs he had incurred as community property and to reimburse him for half those amounts. (Ibid.) The trial court ruled the liabilities were husband’s separate responsibility because his conduct had been tortious. (Id. at p. 108, 259 Cal.Rptr. 39.) The Court of Appeal reversed, concluding the evidence showed the husband’s conduct benefited the community and his exposure to liability arose out of his actions as a director which took place for the most part during the parties’ marriage. (Id. at p. 111, 259 Cal.Rptr. 39.) There was no evidence that his service on the board was to protect his separate property or to further any other separate property interests. (Ibid.)
Hirsch did not treat the liability and the attorney fee obligations as separate debts or analyze each accordingly, and to that extent we disagree with its approach. However, we do not quarrel with the result in that case because there, unlike here, the defense of the litigation was not undertaken to advance any non-community interests. Hirsch did not address the question we address here, in which the defendant engages in criminal conduct that entails huge risk of harming the community and incurs fees disproportionate to any potential community benefit to protect himself from punitive repercussions for which he alone is responsible. Indeed, as Hirsch recognized, "intentional torts and crimes rarely benefit the community." (Hirsch, supra, 211 Cal.App.3d at p. 110, fn. 8, 259 Cal.Rptr. 39.)
Likewise, Doug cites Nassimi supra, 3 Cal.App.5th 667, 207 Cal.Rptr.3d 764. In that case, the husband allegedly defrauded a third party to buy the family business by concealing the fact that its products did not comply with federal regulations. (Id. at pp. 672-673, 676, 693 & fn. 37, 207 Cal. Rptr.3d 764.) After the parties separated, the buyer sued the husband for breach of contract and misrepresentation, seeking to rescind the transaction, and the husband eventually settled the case. (Id. at pp. 676, 677, 207 Cal.Rptr.3d 764.) A rescission would have meant the community had to repay as much as much as $16 million it had already gained in proceeds from the sale, and the husband had spent about $1.1 million on attorney fees and costs and reached a settlement of $2 million. (See id. at 672-673, 679-680, 207 Cal.Rptr.3d 764.) Nassimi held both the settlement payment and the husband’s attorney fees were a community debt because the underlying sale of the business had yielded millions of dollars in profit to the community, which was a benefit to the community. (See id. at pp. 684-687, 693-694, 207 Cal.Rptr.3d 764.) Nassimi cited Hirsh for the proposition that "separated spouses are obliged to share in the costs of defending lawsuits threatening community assets." (Nassimi 3 Cal.App.5th at p. 686, 207 Cal.Rptr.3d 764.) As a general proposition, we do not disagree, but insofar as Doug reads it as advancing a categorical rule that if there is any community benefit there must be an equal division of the spouses’ obligations, no matter how excessive in relation to that benefit, Nassimi no more supports that proposition than Hirsch. Neither involved a situation like this case and Bell, in which the spouse engaged in criminal conduct with a risk of negative repercussions for the community that far outweighed any potential benefit, from either the conduct itself or, in this case, from the expenditure of outsized attorney fees that served, primarily, the interests of that spouse alone.
In short, none of the case law changes our analysis.
3. The Trial Court Exercised Its Discretion in This Case.
While the trial court did not clearly explicate the rules it was applying in allocating the attorney fees and costs, it considered the relevant factors and exercised discretion in an appropriate way by allocating none of the criminal fees, and a relatively small portion of the fees spent on the SEC enforcement action, to the community.
[20] The portion of the SEC enforcement-action fees the trial court allocated to the community were those Doug had demonstrated were "expended on the SEC action separate and apart from the criminal action." It prefaced that by interpreting Nassimi to "suggest[] that it would be appropriate for the community to share in the attorney’s fees and costs for defending the SEC action." (Italics added.) It had already determined that the criminal conduct had benefited the community in the amount of $935,000, the ill-gotten gains Doug was later required to disgorge. It recognized that in "attributing ‘tens of millions of dollars’ of community benefit to his conduct" Doug had "vastly overstate[d] the benefit to the community of the criminal conduct that he asks the community to share in the cost of defending" and reiterated "[t]hat benefit was determined to be $935,306."
The trial court also found that in defending against the criminal and civil actions, Doug spent $9.7 million. It implicitly recognized this was grossly out of proportion to any tangible benefit the community derived. Although the court did not expressly so find, the record also reflected that Doug alone controlled the Whitman entities and the parties’ interests in them and he alone chose to spend $9.7 million to defend the two actions. Based on the facts, the court concluded it was appropriate for the community to "share" in the defense costs of the SEC action in the amount of $290,000. Ultimately, the trial court exercised its discretion in a manner consistent with this opinion by allocating an amount of attorney fees and costs that was proportionate to the limited community benefit at stake in that litigation.
For the foregoing reasons, we affirm the trial court’s characterization of the debts incurred as a result of Doug’s criminal conduct, except to the extent the trial court characterized the SEC penalty as a community obligation. Like the criminal fine, that penalty was incurred after the parties separated, it was not to repay any obligation of the community, and it is Doug’s sole obligation to bear. III.-IV.
See footnote * ,ante.
DISPOSITION
The judgment is reversed insofar as it characterizes the penalty assessed in the SEC action as a community obligation, and the matter is remanded with instructions to characterize the penalty as Doug’s separate obligation and to re-calculate the parties’ respective financial obligations accordingly. In all other respects the judgment is affirmed.
We concur.
MILLER, J.
Judge of the Alameda Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.