Opinion
G052246
05-15-2017
In re Marriage of DEBRA G. and THOMAS P. KIRWAN. DEBRA G. KIRWAN, Respondent, v. THOMAS P. KIRWAN, Appellant.
Thomas P. Kirwan, in pro. per.; Law Offices of Berna Warner Fredman and Berna Lynn Warner, for Appellant. The Law Offices of Saylin & Swisher, Brian G. Saylin, Lindsay L. Swisher and Daniela A. Laakso, for Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 11D004572) OPINION Appeal from a judgment of the Superior Court of Orange County, Ronald P. Kreber, Judge. (Retired judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Reversed in part, affirmed in part, as modified. Thomas P. Kirwan, in pro. per.; Law Offices of Berna Warner Fredman and Berna Lynn Warner, for Appellant. The Law Offices of Saylin & Swisher, Brian G. Saylin, Lindsay L. Swisher and Daniela A. Laakso, for Respondent.
INTRODUCTION
Thomas and Debra Kirwan have been litigating their divorce for a long time and at considerable expense. This is their second trip to our court.
The first appeal, brought by Thomas, was from a partial judgment rendered in 2012 that resolved some issues and reserved others. We affirmed the final portions of the judgment from which Thomas had appealed. The case then went back to the family court for trial in 2014 on the reserved issues. The court entered judgment on them in 2015, and Thomas has once again appealed.
As is customary in family law proceedings, we refer to the parties by their first names, not out of disrespect, but to avoid confusion. (See Rubenstein v. Rubenstein (2000) 81 Cal.App.4th 1131, 1136, fn. 1.)
The issues underlying this appeal are of three kinds. The first is the family court's reliance on a case from this court issued after the 2012 judgment and before the 2014 trial, In re Marriage of Finby (2013) 222 Cal.App.4th 977 (Finby). When it tried the reserved issues, the court relied heavily on Finby to guide it on several of them. On appeal, Thomas has objected to employing Finby for any purpose and to the calculations the court performed based on the case.
The family court also decided the reserved issue of the tax liability for the forgiveness-of-debt income from seven loans Thomas had received from his employer, United Bank of Switzerland (UBS). It held that Thomas had breached his fiduciary duty to Debra by not setting aside funds necessary to pay these taxes. Thomas was therefore liable for all of these taxes, and he could not require Debra to contribute to their payment.
Finally, Thomas appeals from the family court's support order, on the ground the court's calculation included "phantom income," that is, the income imputed to him for the forgiveness of the UBS debt but not actually received. Thomas maintains this income should not have been included when the court determined support.
We reverse in part and affirm in part as modified. We agree with Thomas that the family court misapplied Finby so the awards and calculations based on that case must be redone. The family court's determination of breach of fiduciary duty rests on substantial evidence, so we affirm that portion of the judgment with respect to the tax liability for the first four loans, which were received before separation. Redoing the Finby calculations affects the tax liability for the last two loans, so this portion of the judgment may have to be modified by the trial court. Finally, regarding the support calculation, the court was within its discretion to include the phantom income in the calculation, but abused its discretion by continuing to include the phantom income as part of support after its expiration. This portion of the judgment must also be modified.
FACTS
Thomas and Debra were married in 2000 and separated in May 2011. They have two children, aged 7 years and 5 years at the time of separation. At that time, Thomas was 57 years old; Debra was 54.
In 2012, the family court entered a judgment resolving issues of marital status, custody, the marital standard of living, property division, and temporary support. In addition, the court ordered a community property townhouse to be sold.
In re Marriage of Kirwan (Oct. 15, 2013, G047460) [nonpub. opn.].
One of the reserved issues that has continued to cause difficulty dealt with payments made to Thomas by his employer, UBS. In 2010, before separation, Thomas became a financial advisor at UBS. To persuade him to come aboard, the bank offered him, in addition to his base earnings, a series of seven "loans" that would be "paid back" over the course of nine years. These "loans" were to be forgiven on a pro-rata basis over the nine years, provided Thomas continued to work for UBS, until at the end (2019), he would owe nothing. Thomas received the proceeds of these loans between 2010 and 2013. The 2012 judgment reserved jurisdiction over the division of the debt represented by these loans, except for allocating $4,387 of the debt (the fifth loan) to Thomas.
A promissory note memorialized each loan.
If Thomas left UBS or was fired before the nine years were up, the balances of the loans would accelerate. If he died or became disabled before that time, UBS would pay off the remaining balances. Thomas or his estate would owe taxes on this latter amount.
Thomas appealed the 2012 judgment. He disputed the order to sell the townhouse on several grounds, and he protested the division of the UBS debt. He also raised the issue of phantom income, that is, income that would be taxable because of the forgiveness of part of each UBS loan each year, but that would not be represented by actual cash in hand that year. He complained that the judgment failed to specify that phantom income would not be considered in calculating permanent support.
We affirmed the portions of the judgment that were final - e.g., the order to sell the townhouse. We also observed that the court had not decided some of the issues Thomas raised on appeal - e.g., the division of the UBS debt and the use of phantom income for permanent support. We therefore declined to review these issues; both parties were entitled to the trial court's determination first.
The ex-spouses tried the reserved issues in October 2014. Before trial began, this court issued the Finby opinion. Finby dealt with a financial advisor who, like Thomas, was getting a divorce. Before separation, she left her current employer and went to work for Wells Fargo. In addition to her salary, Wells Fargo paid her several bonuses, all structured as loans to be forgiven over time provided she met certain conditions.
Finby initially came down as an unpublished opinion in December 2013. Its status was changed to published in January 2014.
The Finby spouses separated in February 2010. The main issue in Finby was how to regard the advisor's book of business, that is, the list of clients willing to follow her from firm to firm, and the bonuses. (Finby, supra, 222 Cal.App.4th at pp. 980, 984.)
Thomas' deal with UBS differed in some respects from the Wells Fargo deal in Finby but the idea was the same. UBS arranged seven loans to Thomas between July 2010 and September 2013, all of which would be forgiven by 2019, if he was still employed. The first loan, received in July 2010, shortly after Thomas joined the bank, was an up-front cash payment of $534,605. This loan had a nine-year forgiveness period, with between $76,000 and $61,000 being forgiven each year. The second loan, received in November 2010, was for $233,651. It was calculated as a multiple of net new assets (a defined term) opened at UBS during Thomas' first three months of employment. It had an eight-year forgiveness period, with between $35,000 and $30,000 forgiven each year. Loan number three, received in February 2011, was for $124,046. Again the amount was a multiple of net new assets for the previous three months. It too had an eight-year forgiveness period, with between $19,000 and $15,000 forgiven each year. The fourth loan, received on May 11, 2011, was for $34,879. It was calculated as the lower of a multiple of net new assets or $679,548 minus the amounts of loans two and three. It had an eight-year forgiveness period, with between $5,000 and $4,000 forgiven each year. The total principal amount of the first four loans was $927,181. The loans bore interest at 3 percent. The parties separated on May 16, 2011.
As a result, the amount of each loan forgiven each year was higher than the principal amount divided by the number of years.
Loan number five, in the amount of $4,387, was received on August 10, 2011. Like loan four, it was calculated as the lower of a multiple of net new assets or a fixed sum minus the amounts of the previous loans (except the first loan). It had an eight-year forgiveness period, during which between $700 and $500 were forgiven each year. This debt was allocated to Thomas in the August 2012 judgment.
Loans six and seven were calculated differently. Subject to several conditions, these two loans equaled 50 percent of Thomas' gross commission production for the previous 12 months. Loan number six, for $391,054, received in October 2012, had a seven-year forgiveness period, with between $60,000 and $56,000 forgiven each year. The last loan, number seven, for $527,945, received in October 2013, had a six-year forgiveness period, with between $100,000 and $90,000 forgiven each year. The total principal amount of loans five through seven was $923,386.
Besides continuous employment, the conditions were: (1) a maximum return on assets of 1.2 percent; (2) gross commission production during the best 12 of Thomas' first 14 months of employment equaling or exceeding a benchmark; and (3) equaling or exceeding a benchmark for gross commission production for the previous 12 months.
Thomas and Debra received the money for the first four loans, totaling $927,181, before separation. Trial testimony indicated that they spent this money. Thomas took the proceeds of loans five through seven, which he received after separation. After the 2014 trial, the court ruled this money was entirely community property.
Relying on evidence of the parties' relative financial acumen (very high for Thomas, very low for Debra), the family court found that Thomas had been grossly negligent or reckless by failing to set aside money to pay the taxes on the forgiveness-of-debt income. He was therefore liable for the entire amount of all the taxes on all the loans and could not seek contribution from Debra.
The family court ruled that the book of business had a present value of $1,112,000 and awarded this value to Thomas. This award resulted in a hefty equalization payment to Debra. The court also awarded Debra a Watts credit of $286,562 for Thomas' use of the book of business between the date of separation and the date of trial.
In re Marriage of Watts (1985) 171 Cal.App.3d 366 (Watts).
Finally the family court included the debt-forgiveness (phantom) income in the support calculation and ordered $5,583 per month in child support until the younger child reached 18 or 19 years and spousal support of $8,250 per month until the death of the parties, Debra's remarriage, or further order of the court.
DISCUSSION
Thomas listed eight issues on appeal for which he supplied arguments, which we have grouped into three categories: the book of business, the tax allocation, and support. Although he did not include the issue in his list, Thomas also argued that he was entitled to Epstein credits, which the family court denied.
While Thomas listed nine issues in his opening brief, he failed to provide argument and authority for one of them: whether he presented sufficient evidence to establish a claim for reimbursement under Family Code section 2640. We treat such issues as abandoned. (See Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1169.)
In re Marriage of Epstein (1979) 24 Cal.3d 76 (Epstein), superseded by statute on other grounds.
Before we address the present appeal, we must say a few words about the opinion we issued in October 2013 regarding the August 2012 judgment. Several issues Thomas raised in the first appeal were not reviewable because they were not final. For example, Thomas argued that the prior judgment did not preserve his right to Epstein credits for postseparation payments for expenses of the townhouse occupied by Debra and the children after separation. We observed that the family court had made no ruling on Epstein credits so it was not ready for us to review.
We can review only final judgments and appealable orders. (Code Civ. Proc., § 904.1.) If we say an issue is not ready for review, we mean we have expressed no opinion about its merits at all, other than perhaps it needs further development before we can take it up. It was surprising, then, to find references in the record of this second appeal to the 2013 opinion as if we had weighed in on issues we had explicitly reserved to the trial court. We did not, for example, hold that Thomas was entitled to Epstein credits in some amount to be determined later. What we said was that the family court had not resolved the Epstein credit issue so we were not going to decide it. Likewise, we did not say Thomas was entitled to contribution for taxes from Debra. We said the family court had not yet decided this issue and at the trial of the reserved issues, Thomas could "make his case" for Debra's contribution. We did not imply this effort would or should be successful. I. The Book of Business and Finby
"So far as we can tell, the court has not resolved the issue of Thomas' Epstein credits. . . . After the [townhouse] is sold and the court determines permanent support, the parties and the court can settle up Thomas' Epstein credits, if any.[] As to this aspect of the judgment, there is nothing for us to review." (In re Marriage of Kirwan, supra, G047460, p. 10, italics added.)
Thomas has identified four issues on appeal relating to his book of business. These are: (1) its value, (2) whether he leased it to UBS, (3) the award of future resale value, and (4) the Watts credit for its use between separation and trial. In addition, he contends that the family court should not have consulted Finby at all.
In fact, the judgment entered in May 2015 mentions only the value of the book of business (awarding this amount to Thomas) and the Watts credit. We cannot find an award to Debra for a separate amount for the future resale of the book of business or for its rental value (independent of the Watts credit) or a charge to Thomas for such amounts.
The 2012 judgment reserved jurisdiction over "property not herein divided which may later be determined to be community property." Therefore the family court could consider community property other than that divided by the 2012 judgment. Property division was not conclusively decided in 2012.
A. Value of Book of Business
The court relied heavily on Finby in evaluating Thomas' book of business, so it is worth looking at this case in some detail. One of the Finby spouses was a financial advisor who had a deal with Wells Fargo similar to Thomas' deal with UBS. Upon her arrival at Wells Fargo with her "book of business" in January 2009, she was paid a "transitional bonus" of over $2.8 million. She was also eligible at that time for a "deferred recruitment award bonus" of $186,863, but only if she was still employed at Wells Fargo on January 31, 2016.
The advisor received two additional bonuses. The first was a production bonus based on her total gross production between February 2009 and March 2010. She received this bonus in April 2010. The other was a "'loyalty'" bonus, which she received in mid-2010, and for which she had to perform certain tasks to qualify. The spouses separated in February 2010. (Finby, supra, 222 Cal.App.4th at pp. 980, 981-982.)
All the bonuses except for the deferred recruitment award bonus were structured as loans to be forgiven over a period of years, with the amounts forgiven each year imputed to the advisor for tax purposes. In addition, the advisor had to keep working for Wells Fargo. If she stopped before the forgiveness period was over, the unpaid balances of each loan were due. (Finby, supra, 222 Cal.App.4th at pp. 981-982.)
The family court in Finby held that the advisor's book of business had no value and the other spouse had no interest in it. The court considered as community property only a prorata share of the transitional bonus attributable to the months between January 2009, and the date of separation. (Finby, supra, 222 Cal.App.4th at p. 983.) We reversed, analogizing to cases attributing good will to other types of professional practices, such as medicine and law. (Id. at pp. 984-985.) The matter was returned to the family court for recalculation.
Analogy is not identity. Although a book of business resembles good will, it differs in some significant ways. Business and Professions Code section 14100 provides, "The 'good will' of a business is the expectation of continued public patronage." Thus, family law cases that have considered dividing good will upon dissolution have usually dealt with sole practitioners or very small businesses. (See, e.g., In re Marriage of Lopez (1974) 38 Cal.App.3d 93, 100, disapproved on other grounds in In re Marriage of Morrison (1978) 20 Cal.3d 437 [sole practitioner law practice]; Golden v. Golden (1969) 270 Cal.App.2d 401, 405 [sole practitioner medical practice]; Mueller v. Mueller (1956) 144 Cal.App.2d 245, 250-252 [dental laboratory with five employees].) Thomas, by contrast, is a cog in a very large financial machine, not a business.
The good will analogy breaks down at some point. The outer limits of the analogy were exceeded when the trial court concluded that Thomas had breached his fiduciary duty to Debra by failing to notify her in writing, pursuant to Family Code section 1100, subdivision (d), that he was transferring the book of business to UBS when he began working there in 2010.
But it is important to focus on what the Finby court ordered the family court to determine when the case went back. It was the community's interest in the different bonuses Wells Fargo had offered or granted to the advisor and their nature as community or separate property. This was the only issue addressed and resolved in Finby.
As to the advisor's book of business, Finby did not hold that book of business had any value apart from the transitional bonus paid out when the advisor joined Wells Fargo. That issue was not before the court. "[T]he advisor's] book of business was a valuable asset. The evidence reflects Wells Fargo agreed to pay [the advisor] $2.8 million [the amount of the transitional bonus] for bringing her customers to the firm." (Finby, supra, 222 Cal.App.4th at pp. 986-987.) So, according to Finby, the book of business was worth $2.8 million - the amount of the transitional bonus. "[W]e will remand the matter to the trial court to determine the extent of the community interest or obligation in the transitional bonus and to decide the appropriate option of dividing or appropriating it." (Id. at p. 989, italics added.)
Finby rejected the argument that the other bonuses were compensation for the advisor's book of business, noting that "the consideration for [the advisor's] book of business was the transitional bonus." (Finby, supra, 222 Cal.App.4th at p. 989.)
As for the other two bonuses, both of which were received after the spouses separated, Finby held that "the contractual right to receive each bonus and at least some of the effort necessary to qualify for them occurred before the couple separated." (Id. at p. 990.) The critical question, Finby held, was when the advisor's right to receive the bonuses accrued, not when she received them. (Ibid.)
The deferred recruitment award bonus did not vest until January 31, 2016, provided the advisor was still employed at Wells Fargo and was therefore only an expectancy. (Finby, supra, 222 Cal.App.4th at p. 990.)
The Finby court sent the matter back to determine the extent of the community interest and obligation in the transitional bonus and in the two bonuses received after separation. (Finby, supra, 222 Cal.App.4th at pp. 989, 991.) The family court was also instructed to figure out the best way to handle the possibility that the advisor might not remain employed at Wells Fargo until all the loans were forgiven, thus triggering the loans' acceleration provisions. (Id. at p. 991.)
If Finby is applied to this case, the critical question for property categorization purposes is when Thomas' right to each bonus accrued, not when he received them. (See Finby, supra, 222 Cal.App.4th at p. 990.) Thomas' first loan corresponds to the Finby transitional bonus; it was cash up front at the beginning of employment based on what he brought to the new enterprise. All Thomas had to do to qualify for this bonus was to show up. Under Finby, Thomas' "book of business" would have a value of $534,605, the amount of the first loan for which nothing had to be done except show up. According to trial testimony, the spouses received and spent all this money before separation.
The remaining loans correspond to the Finby production bonuses, in that qualifying for them depended on hitting certain financial targets in addition to being employed. (See Finby, supra, 222 Cal.App.4th at p. 981.) The contractual right to receive all these bonuses occurred before separation. The question, then, was how much of the effort necessary to qualify for these bonuses occurred before the couple separated in May 2011. (See id. at p. 990.)
Thomas qualified for and received the first three production bonuses (loans two through four) before separation, so there is no question regarding their status as community property. He qualified for the fifth and sixth production bonuses (loans six and seven) after separation, in September 2012 and September 2013, respectively. The quantum of effort to qualify for these bonuses that occurred before the couple separated in May 2011 had shrunk by this time.
We are omitting the fourth production bonus, loan five, because the August 2012 judgment, allocated the entire debt for loan five to Thomas. Presumably the proceeds of the loan went with the debt.
The August 2012 judgment did not specifically divide the transitional bonus (the first loan) or the production bonuses (loans two through seven). The court reserved jurisdiction over "dividing the loan" and held only that Thomas was solely responsible for the debt on the fifth loan of $4,387. Presumably what the parties had not already spent of the proceeds of the first four loans was included in the accounts divided in August 2012. The family court need not revisit the division of these loans on remand.
What the family court must determine on remand, in accordance with Finby, is the community's interest in the amounts of the fifth and sixth production bonuses (loans six and seven) based on the effort necessary to qualify for them that occurred before the date of separation in May 2011. This interest will then be allocated between the parties. The remainder is Thomas' separate property. (See Fam. Code, § 771, subd. (a).)
As in Finby, there is a possibility that Thomas may not remain employed at UBS until 2019, thereby causing the unpaid balances on the loans to become due. The family court wisely reserved jurisdiction on this issue so that the debt can be allocated in accordance with the benefit if necessary.
B. Watts Credits
A Watts credit is a "reimbursement to the community for the exclusive use of a community property asset by one spouse." (Watts, supra, 171 Cal.App.3d at p. 373.) The family court directed Thomas to pay Debra $286,562 for use of the book of business between the date of separation and the date of trial.
Charging Thomas for use of a book of business finds no support in Finby. The community received and spent Thomas' transitional bonus, which the Finby court equated to the compensation for the advisor's book of business. To reiterate, Finby did not hold that the book of business had a value independent of the amount of the transitional bonus. Likewise the community in this case received the first three production bonuses (loans two through four). The court allocated loan number five to Thomas in 2012. On remand, as indicated above, the court must determine the community's interest in the last two production bonuses, based on the amount of each bonus attributable to efforts made before separation, and divide that interest equally. (See Finby, supra, 222 Cal.App.4th at p. 991.) Debra will then have received all that she is entitled to receive of the "book of business" under Finby.
To the extent, however, that Thomas appropriated the entire amounts of the last two production bonuses, he had exclusive use of a community property asset - the community portion of each bonus (loans six and seven), whatever that may turn out to be. When the court determines the value of the portions, it will also charge Thomas interest at an appropriate rate for the time between separation and trial that he controlled the community portion of these funds if there is such a portion. The interest will then be divided between the parties, along with the community portion.
Accordingly, we reverse paragraph 5 (Watts credits) and paragraph 9 (value of book of business) of the May 2015 judgment. These paragraphs are to be deleted. The second and third sentences of Paragraph 10 are to be deleted. In their place, the court must determine the community portion of the last two production bonuses (loans six and seven), if any. Thomas will be charged interest for the use of the community portions of these two bonuses, and the community portions and the interest will be divided. Paragraph 13 of the May 15 judgment must be revised to reflect these changes. II. Epstein Credits
The family court declined to award Thomas any amount for Epstein credits for payments of expenses on the townhouse because he had commingled community and separate property funds and could not show he had used separate property funds to pay these expenses. We review the family court's determination for abuse of discretion. (In re Marriage of Hebbring (1989) 207 Cal.App.3d 1260, 1273.) We cannot say the court abused its discretion in refusing Thomas' request for Epstein credits, especially since Thomas presented nothing on appeal to refute the court's conclusion that he had not presented sufficient evidence of separate property payments.
Thomas argued on appeal that a chart prepared by his expert showed the amounts he paid for which he was entitled to credit. The expert's chart shows what he paid, but it does not show how much of these payments came from separate property. At the time he made these payments, Thomas had exclusive control of the proceeds from loans six and seven, some parts of which were probably community property. Thomas presented no evidence he had segregated these funds and paid the townhouse expenses exclusively from his separate property. In fact, he testified he had not segregated these funds and he did not know how much of the townhouse expenses came from the loans and how much from his post-separation earnings. Without evidence that specific payments came from separate property, Thomas was not entitled to Epstein credits. (See In re Marriage of Prentis-Margulis & Margulis (2011) 198 Cal.App.4th 1252, 1280-1281 (Margulis).)
To the extent Thomas showed he used his separate property funds to pay the taxes on the community property portions of loans six and seven after separation, we return the matter to the court to exercise its discretion as to whether he should receive Epstein credits for these payments. If it finds that none of the proceeds of loans six and seven were community property, the court must also exercise its discretion as to whether to award Thomas Epstein credits for the expenses he showed he paid on the townhouse.
III. Tax Issue
Thomas disputes the trial court's finding he breached his fiduciary duty by recklessly failing to set aside money to pay the taxes on the forgiveness-of-debt income generated by the UBS loans. Based on this failure, the court ruled, Debra did not have to contribute to paying the taxes: The 2012 judgment did not determine the allocation of the taxes and reserved jurisdiction over undecided issues.
Family Code section 721 provides that spouses are "subject to the general rules governing fiduciary relationships that 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 . . . ." Corporations Code section 16404, subdivision (c), provides, "A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law." Family Code section 1100, subdivision (e), provides, "Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request." Remedies for breach of this statutory duty are set forth in section 1101, which provides that "[a] spouse has a claim against the other spouse for any breach of the fiduciary duty that results in impairment to the claimant spouse's present undivided one-half interest in the community estate . . . ." (Fam. Code, § 1101, subd. (a).)
Thomas testified that as of the 2015 trial, he had been a financial advisor for 35 years. He had a CPA certificate from the State of New York, an MBA in taxation, securities licenses, and insurance licenses. At his former employment, before UBS, he provided financial services to corporate executives, including income tax planning, tax return preparation, estate and trust planning, insurance policy analysis, and retirement cash flow analysis. He also said that he had been the manager of all the couple's investment funds throughout the marriage and, based on his experience, he could have calculated the approximate tax liability on loans one through four. Thomas stated he created a chart of all seven loans "so that [he] could get a sense, for income tax planning, how much income [he] might need to be looking at for purpose of withholding of taxes, . . . saving funds for additional estimated taxes." He did not, however, save any funds for additional taxes.
For her part, Debra testified that Thomas had total control over the family finances; her role was to sign where she was told to do so. The trial court also noted Thomas' statement that some financial transactions were too complicated for Debra to understand.
The family court found that Thomas had breached his fiduciary duty to Debra by failing to set aside sufficient funds during the marriage to pay the taxes arising on the forgiven debt. Thomas, who had extensive expertise in financial matters, including tax, managed the couple's finances. He was therefore grossly negligent or reckless in allowing the entire $927,000 garnered between July 2010 and May 2011, to be spent, without setting aside some of that money for taxes. As a result, his future income available for support was reduced because he had to pay taxes out of that income. Thomas could therefore not require Debra to contribute to the payment of these taxes. He would be solely responsible for them. Thomas asserts on appeal that Debra should have to contribute half of the tax bill incurred between 2012 and 2019 on loans one through four, and he did not breach his fiduciary duty.
The taxes for 2012 and 2013 have been paid. At trial, Thomas sought to have Debra reimburse him for part of the taxes already paid and for part of the future taxes on loans one through four.
Whether Thomas breached his fiduciary duty to Debra is a question of fact. We affirm the trial court's rulings on such issues if substantial evidence supports them. (Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 503.) Substantial evidence supported the family court's determination Thomas had breached his fiduciary duty to Debra to her detriment and the determination that she was not liable for half of the taxes on the first four loans, the proceeds of which were received before separation. Had Thomas set aside money for taxes as he received each loan, they would have been covered at the time, and he would not now be seeking to reduce Debra's share of the community to pay them off or pleading poverty for support purposes. The taxes were foreseeable from the outset, and, as a tax professional, Thomas was unquestionably qualified to calculate them. By the same token, Debra was not in any position, either by training or by her role in the marriage, to anticipate the tax consequences of the loans and make provisions for them. Having negotiated with UBS to structure his bonuses as loans and then spent all the money without regard to taxes, Thomas must now be responsible for the financial drain resulting from having to pay taxes on forgiveness-of-debt income. (See, e.g., Margulis, supra, 198 Cal.App.4th at p. 1270-1271 [managing spouse must account for disposition of community assets]; In re Marriage of Hokanson (1998) 68 Cal.App.4th 987, 992, 994 [wife breached fiduciary duty by delay in selling house; husband entitled to credit for difference in selling price]; In re Marriage of Quay (1993) 18 Cal.App.4th 961, 971-972 [husband breached fiduciary duty by making risky loan against wife's wishes]
Due to the family court's reliance on Finby to determine other issues, it appears it did not focus on the taxes on loans six and seven, the proceeds of which were received after separation. The family court did not differentiate between these two categories of loans, but ruled all the loans community property.
As we have discussed, the proceeds of these last two loans must be allocated between community and separate property as indicated in Finby. The tax liability for these loans must, in theory at least, be allocated as well. Of course, Thomas must pay the taxes on his separate property portion of these loans, and he is unquestionably responsible for the taxes on half of the community portion if there is one.
The family court must therefore determine whether Thomas breached a fiduciary duty to Debra after separation by failing to set aside sufficient funds from the community portions of loans six and seven (assuming the court finds community portions) to pay the community's part of these taxes. If he did not breach this fiduciary duty, then half of the community's tax liability on these two loans is chargeable to Debra. The court must then determine the tax liability on the community portion.
IV. Support
Thomas' sole remaining objection to the family court's support determination was its inclusion of the so-called phantom income - that is, the income that was imputed to him because of debt forgiveness - in the support calculation. We review the family court's decision about the amount and duration of support for abuse of discretion. (In re Marriage of Ackerman (2006) 146 Cal.App.4th 191, 207 [spousal support]; In re Marriage of Hubner (1988) 205 Cal.App.3d 660, 667 [child support].)
He also asserted that the August 2012 judgment determined his income and could therefore not be changed, and that Debra should have her share of the taxes deducted from the support payments. The August 2012 judgment was for temporary support, based on Thomas' income for the 24 months ending on December 31, 2011. It was not a binding determination of permanent support. (See In re Marriage of Gruen (2011) 191 Cal.App.4th 627, 637.) We have already dealt with taxes.
Thomas' income from debt forgiveness is "phantom" in the sense that it shows up on his pay stub without appearing in his paycheck. It is not "phantom," however, in the sense that he did not get any money. UBS paid him nearly $2 million in bonuses between 2010, when he started working, and 2013.
The court in In re Marriage of Kirk (1990) 217 Cal.App.3d 597 (Kirk), addressed a very similar situation. In Kirk, the spouse liable for support incurred a large debt to his employer corporation, which he repaid by monthly deductions from a yearly bonus, which bonus, probably not coincidentally, amounted to 12 times the monthly deduction. (Id. at pp. 600-601.)
The Kirk court held, "What is presented is a strikingly clear case of contractual shift of income from the control of the earning parent by an automatic payment of it to a creditor. The trial court was correct in its conclusion that under the terms of [the earning parent's] employment contract the monthly sum of $ 4,450 simply was not available to him for use in the payment of child support. The error of the court was in failing to consider that the only rational inference derivable from the paperwork before the court was that this shift was a voluntary diversion of income to pay debt, resulting in deprivation of funds for child support. The law does not permit this. Were we to sanction this sort of transaction we can envision all manner of special contracts, with employers or others who owe money to a supporting parent, which shift funds from available income to utilization for other purposes benefiting the parent (such as savings plans, retirement plans, miscellaneous fringe benefits), resulting in the contention that the support order must be reduced." (Kirk, supra, 217 Cal.App.3d at p. 607; see In re Marriage of Schlafly (2007) 149 Cal.App.4th 747, 754-755 [court imputed income to supporting parent from underperforming assets in stock market portfolio]; In re Marriage of Pearlstein (2006) 137 Cal.App.4th 1361, 1376 [spent proceeds of stock sale may be considered income for support purposes].)
Thomas' situation here is similar to that of the support-paying parent in Kirk. His "special contract" with UBS resulted in shifting funds from available income. Thomas chose to take his bonuses as loans with extended payback periods so that, as we said in In re Marriage of Riddle (2005) 125 Cal.App.4th 1075, 1078, he could "circumvent the progressivity of the tax codes." As we also said in Riddle, "[I]f the tax laws say you have income because of forgiveness-of-debt, you have income, and that forgiveness-of-debt income must go into the calculation of adjusted gross income . . . ." (Id. at p. 1080.)
We cannot say the family court abused its discretion by including the phantom income in the support calculation for as long as it lasts. There is, however, a problem with including the income for longer than that. Assuming Thomas remains employed at UBS, the phantom income terminates in 2019, between two and three years from now. The child support based on that income, however, lasts until the younger child is 18 or 19. The younger child turned 11 in January 2017. Spousal support lasts until one party dies, Debra remarries, or the court issues another order. The phantom income should not have been included in the support calculation past the termination date of the debt forgiveness.
Because this matter must be returned to the family court for other adjustments, in the interest of judicial economy the level of support can also be reconsidered to take into account the expiration of the phantom income in 2019. Resolving or reserving this issue now will also forestall future arguments about whether the end of the phantom income constitutes changed circumstances. (See In re Marriage of Usher (2016) 6 Cal.App.5th 347, 357.)
V. Debra's Motions to Dismiss
Debra has filed three motions to dismiss Thomas' appeal, based on the disentitlement doctrine. This doctrine is a discretionary tool that may be used to dismiss an appeal when appropriate as a sanction. A party may not maintain an appeal while "standing in an attitude of contempt to the legal orders and processes of this state." (Gwartz v. Weilert (2014) 231 Cal.App.4th 750, 758 (Gwartz).) A formal judgment of contempt is not required, and an appeal may be dismissed when an appellant "has willfully disobeyed the lower court's orders or engaged in obstructive tactics." (Ibid.)
Debra has two main complaints in her motions to dismiss. First, Thomas is behind on his support payments. Second, Thomas has not fully complied with the lower court's order of April 1, 2016, to pay Debra $20,000 for her attorney fees on appeal.
Other complaints include the conduct of Thomas' attorney and his violating vacation plan orders regarding the minor children, as well as issues relating back to the 2012 judgment. Debra also raised new issues that are not part of the pending appeal, such as her own entitlement to Epstein credits.
Although a judgment of contempt is not required to trigger the disentitlement doctrine, we think in this case some lower-court action should have preceded these requests for dismissal. (See In re Marriage of Walker (2006) 138 Cal.App.4th 1408, 1413, fn. 4.) Moreover, some issues Debra raised in these motions were or could have been dealt with in the trial court, either after the 2012 judgment, or in connection with the judgment of 2015. Especially with respect to nonpayment of support and attorney fees - Debra's main themes - the question of Thomas' ability to pay must be explored. As a reviewing court, we are not set up to do this.
Debra also failed to inform us that her first motion, filed on April 18, 2016, closely tracked an ex parte application filed on September 3, 2015, in the superior court. The court denied the ex parte application.
The cases in which the disentitlement doctrine has been applied exhibit relatively straightforward examples of blatant disobedience. In Gwartz, for example, judgment debtors appealing a large fraud verdict violated a lower court order forbidding them from transferring assets while the appeal was pending. The appellants did not deny that the transfers had taken place. (Gwartz, supra, 231 Cal.App.4th at p. 752.) In Stoltenberg v. Ampton Investments, Inc. (2013) 215 Cal.App.4th 1225, the appellants refused to produce financial documents in response to a postverdict subpoena, even after being held in contempt for their failure to produce. (Id. at pp. 1228-1229.) The appeal of a former trustee was dismissed after she disobeyed two court orders: one to provide an accounting and the other to quitclaim some real property. (Blumberg v. Minthorne (2015) 233 Cal.App.4th 1384, 1391-1392; see also Ironridge Global IV, Ltd. v. ScripsAmerica, Inc. (2015) 238 Cal.App.4th 259 [appellant refused to issue stock pursuant to settlement agreement and defied lower court order not to transfer stock to third parties].) In each case, the reviewing court did not have to examine reams of exhibits or make calls about credibility in order to decide whether to apply the doctrine. By contrast, Thomas and Debra use up a great deal of paper calling each other liars. Because of the scattershot nature of these motions and in light of the disposition of the appeal, the motions to dismiss are denied.
Debra's third motion to dismiss is at least 200 pages long and includes exhibits A through Z, some with subparts.
DISPOSITION
The judgment of May 12, 2015, is affirmed except for the following particulars:
1. Paragraphs 5 and 9 are deleted.
2. Paragraphs 3 and 4 are to be modified to reflect the termination of the phantom income in 2019. The family court may choose to reserve recalculation of support until that time, provided that a recalculation of support shall not depend on a showing of the termination of the phantom income as changed circumstances. Paragraph 11 is to be modified to reflect the termination of the phantom income in 2019.
3. The family court is to calculate a Watts credit (interest), if any, based on Thomas' control of the community portion of loans six and/or seven between the date of separation and the date of trial, should the court determine the community had an interest in either loan. This credit is to be divided between the parties.
4. Paragraph 6 is to be reconsidered only as to the taxes on the community portion, if any, of loans six and seven.
5. The last two sentences of paragraph 10 are deleted. The court is to calculate the community portion of loans six and seven, if any, based on the method described in Finby and in this opinion. The community portions, if any, are to be divided between the parties.
6. Paragraph 13 is to be modified to reflect an equalization payment, if any, that comports with the rest of the modified judgment.
The court may request additional briefing on the modifications to the judgment and may hold a hearing on these issues alone. The court may request additional evidence on these issues.
Respondent's motions to dismiss are denied. The parties are to bear their own costs on appeal.
BEDSWORTH, J. WE CONCUR: O'LEARY, P. J. ARONSON, J.