Actions arising under the Family Code are Marital Dissolution actions (divorce), Paternity (parentage), and Post-Judgment Modification of child related orders in these actions. Tort damages can be considered and may have implications in any and all of these actions.
In Marital Dissolution actions, there is a rigorous requirement of full disclosure of all income and assets. These requirements are set forth in Family Code section 2100 et seq. As set forth in that section, this mandatory and complete disclosure is "(1) to marshal, preserve, and protect community and quasi-community assets and liabilities ... (2) to ensure fair and sufficient child and spousal support awards, and (3) to achieve a division of community and quasi-community assets and liabilities.....". The section goes on to state that the parties must adequately disclose all assets, liabilities, and income and expenses, regardless of the characterization of such, and parties additionally, have a duty to update the information if it changes, or as more information becomes available. Section 2101 defines an "Asset" as "any real or personal property of any nature, whether tangible or intangible, and whether currently existing or contingent." Liabilities are similarly defined, as including those that are "contingent". Therefore, the expectancy of recovery of damages in any pending tort action, or even an unfiled action for damages, is an asset, or liability that must be part of the mandatory disclosures.
In Paternity actions, section 2100 et seq. does not apply and disclosure of assets and liabilities is not required. However, parties will not be able to avoid disclosure of pending tort actions altogether either. Where support of children is at issue, it will be required by both parties that they complete a mandated Judicial Council Form, the Income and Expense Declaration, FL-150. On this form, there are three innocuous looking spaces on page 2, in which information is required related to "Cash, checking, savings accounts....", "Stocks, bonds...", and "All other property,....".
It is also important to note, when discussing these requirements of disclosure of financial affairs, that in actions arising under the Family Code, attorney fees are based upon need and ability to pay, as well as upon "the extent to which the conduct of each party or attorney furthers or frustrates the policy of the law to promote settlement of litigation" Family Code section 271. It is always helpful for clients to be aware of the expectation of the Family Court when it comes to absolute candor in financial disclosures.
Child Support, and in limited situations Spousal Support, can be modified well after the entry of judgment. The client is therefore, potentially faced again with financial disclosure requirements. At a minimum, a client may be obligated to provide an FL-150 form, as often as once each year if the other party requests it.
In Marital Dissolution actions the obvious issue that arises is one of characterization of the award as separate or community. Family Code section 2603 deals with the specifics of personal injury damages. The rules of characterization set forth in subsection (a), are entirely consistent with property characterization rules found elsewhere in the code. The threshold issue is the time at which the 'interest' arose. Section 2603 tells us that "if the cause of action arose during the marriage" the damage award is "community estate personal injury damages". Family Code section 781 sets forth that the damages from a personal injury action will be the "separate property" of the injured spouse if the cause of action arose "after the entry of a judgment..." or while the injured spouse is "living separate and apart" from the other spouse. Section 781 (b) goes on to set forth the conditions and parameters for reimbursement, and indicates that separate or community property expenditures related to the injury are reimbursable.
Recently in In Re Marriage of Klug (2005) 130 Cal.App.4th 1389, 31 Cal.Rptr.3d 327, the Third District, Court of Appeal addressed this issue of characterization of damages. In that case, Husband, during the marriage, retained an attorney to draft certain trust documents, which Wife cooperated and signed at his behest. Almost immediately after separation, Husband began selling significant assets held by the trust, and deposited the proceeds of the sales into off shore accounts, which had been established with the assistance of the attorney. He placed additional funds into another trust that the same attorney had drafted, and placed other funds into the attorney's trust account. Six months after a status only dissolution judgment was entered, Wife filed a complaint for professional negligence and breach of fiduciary duty against the attorney, alleging that he had caused her to relinquish rights in community assets which she otherwise would not have given up. The parties subsequently entered into a Marital Settlement Agreement on the remaining issues in the Marital Dissolution action. Two years after the full settlement in the dissolution, Wife settled her claim against the attorney. Husband filed a motion, in the dissolution action, per Family Code section 2556, for the determination of an "omitted asset" raising his claim that the settlement Wife received was community property and had not been properly disclosed. The trial court said the cause of action accrued after separation, and was therefore Wife's separate property. The appellate court upheld the trial court, in that per Family Code section 781, personal injury damages are the separate property of the injured spouse if the parties were living separate and apart. The court found that a "cause of action arises when all the elements of it have been established and the plaintiff suffers injury. There was additional discussion about the fact that the malpractice action was tolled until discovery of it, and additionally of Husband's clearly unclean hands. The holding though, clarified that the deciding factor in issues of characterization as community or separate, will turn on the date which the cause of action arose.
Once it is determined that there is a "Community estate personal injury damage" award to be divided, there are then some special directives on how it should be divided, set forth in Section 2603 (b). Basically, it says that the court should make an effort to put the award into the hands of the injured spouse. That really goes to the issue of "in kind" division, and the court is typically inclined to do so. The temptation is to utilize the liquid assets to provide a source for an equalization payment to one spouse or the other. The directive of subsection (b) is really to encourage the court not to treat the personal injury damages as just another asset to be equalized, but as what it is, an award to an injured party who is in need of the financial assistance or security for which it was originally intended. Award of at least one-half to the injured spouse is mandated.
An exception to these rules of characterization is found in Section 781(c) and relates to injuries sustained by one spouse from another. In that instance, the rules of the time of inception of the cause of action, are eliminated. This section anticipates domestic violence injuries, where it is highly likely that the cause of action arose during the marriage, but the rationale is one of "unclean hands". An abusive spouse should not in any way be benefited by his/her own bad conduct. Personal injury damages awarded to one spouse, against another, are the separate property of the injured spouse.
In Paternity actions and post-judgment modifications of support, the issues of characterization of damage awards are eliminated, but consideration of damage awards still exists. Income for purposes of determination of child support is defined in the Family Code consistent with the Internal Revenue Code. In Family Code section 4901 (e) "Income" is defined as earnings or "other entitlements to money, from any source", section 4058 (a) states that income is from "whatever source derived." Modification of spousal support presents special problems in and of itself, but the court has shown an extraordinary willingness to impute income in child support modification cases. On that basis, the discussion herein is limited to determining income for purposes of child support modification.
In a recent case, Marriage of Heiner and Chandler (2006) 136 Cal.App.4th 1514, the trial court was upheld when it found that the unallocated personal injury payout itself, was not income for purposes of calculating child support. Although the general rule that damage awards are not income was reaffirmed in Heiner, the ability of the court to consider the productivity, interest, income, and reduction of expenses resulting from receiving those types of funds is still a very much open issue.
The issue of determining income within the broad definitions of the Family Code, is of course, one the court must wrestle with frequently. In County of Kern v. Castle (1999) 75 CA4th 1442, 89 CR2d 874, the support obligor had received an inheritance, after which of course he quit his job. He inherited several houses as well as $240,000.00 in cash. He had paid off his mortgage and was netting a small profit on the other rentals, all of which, still amounted to less than his prior income. The trial court did not impute any income to Mr. Castle, but considered only than that which he was earning from the rentals. It was overturned. The Fifth District, Court of Appeal, found that the court should have imputed income based upon the mortgage free housing, debt reduction due to the cash inheritance and the interest income that would have been generated if the inheritance had been properly invested and not left in low performing residential rentals. The court based it's rationale in part on Family Code section 4058 (a)(3), which refers specifically to "reduction in living expenses" as a factor in determining what income to use for child support determination.
In a similar case, from the Third District, In re Marriage of Dacumos (1999) 76 CA4th 150, 90 CR2d 159, Mr. Dacumos had been laid off from his job, was unable to work due to a panic disorder, but he had two rentals which he operated at a loss. That court noted that Family Code section §4058(a) broadly defines "income" as "income from whatever source derived," the justices believed that a broader definition of "earning capacity" should include "income that could be derived from income-producing assets." Moreover, they reasoned, a parent should not be allowed to shirk his or her duty to support a child by underutilizing such assets, any more than he or she would be allowed to underutilize employment capacity. Thus, the panel held that the trial court did not err in imputing rental income to the obligor in that case. It is notable that the court additionally imputed employment income to Mr. Dacumos and added income from pension investments as well.
In Re Marriage of Destein (2001) 91 Cal.App4th 1385, 111 CalRptr.2d 487, held that the trial court properly calculated a husband's income by imputing a reasonable rate of return to his non-income producing, separate property assets. This ruling was based upon the "earning capacity" standard as set forth in Family Code section 4058 (b).
Mr. Castle's inheritance is not a far cry from a personal injury award, nor is Mr. Destein's separate property estate. The higher courts have made it clear that the financial obligation that each parent owes to their child is a significant duty, and each parent's efforts will be examined as the standard of the "reasonable investor". Plaintiffs should be aware that their damage awards, and their effective management of these funds, are within the reach and discretion of the child support court.
Family courts are generally inclined to utilize their broad equitable powers. The court may order attorney fees to the support obligee, based upon need or cooperation based Family Code provisions discussed above. The court may also be disinclined to order an installment repayment on a finding of arrears on support, and ordering instead a forthwith payment in full where it is discovered that there has been less than full disclosure, or transparent efforts to shirk child support responsibilities.
It is important for the Tort Lawyer to be aware of the myriad ways that past and future actions in family court may come to bear upon their client's personal injury recoveries. The characterization is certainly the most obvious issue, but with the growing popularity in the "reasonable investor" standard, the relevance of damage awards will become only more pronounced in future child support litigation.
Brenda McCune is a Certified Family Law Specialist with a practice limited to family law issues located in Brea.