Marriage of Chiu CA1/1 ( 2013 )

Filed 3/15/13 Marriage of Chiu CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
In re the Marriage of LEEYUNG P. and
NEWTON P. CHIU.
LEEYUNG P. CHIU,
Respondent,
v. A132290
NEWTON P. CHIU,
(San Francisco County
Appellant. Super. Ct. No. FDI-03-753401)
In this dissolution proceeding, appellant Newton Chiu appeals from the trial
court‟s order imputing to him $450,000 in fictive income based on his alleged failure to
collect sufficient rents from community-owned apartment buildings during a 45-month
period of marital separation. He claims the court relied on an erroneous legal theory in
making this determination. He also contends the court erred in failing to award him
reimbursement for separate property he used to maintain and repair one of the parties‟
buildings.
We conclude the trial court erred in imputing $450,000 in lost rental income to
appellant. We remand the matter to the court for proper determination of the amount of
the parties‟ equalization payment. We also conclude the trial court‟s decision to deny his
reimbursement request is supported by substantial evidence. We therefore reverse the
order in part, and affirm in part.
FACTUAL BACKGROUND AND PROCEEDURAL HISTORY
I. Factual Background and Pretrial Proceedings
The parties have been married twice. They were first married in May 1969 in
China. Appellant emigrated to the United States in 1974 and has been employed by the
Port of Oakland as a janitor since 1977.1 Respondent came to the United States to join
him in 1979. Over time, appellant purchased several inexpensive properties with the goal
of fixing them up in order to rent or sell them. The parties separated for the first time in
March 1987. After the separation, appellant commenced a dissolution proceeding in
Alameda County. A default judgment was filed in December 1988. The judgment
addressed only one of the properties owned by the parties.
Appellant married and divorced another woman between 1989 and 1991. The
parties were again married in December 1992. They separated for the final time in June
1994. By then, they owned four properties in Oakland.
On April 3, 2003, respondent filed a petition for dissolution of the second
marriage.
On May 9, 2005, respondent filed a complaint for joinder as to appellant‟s sister
and brother-in-law. The complaint alleges that appellant, along with his sister and her
husband, had bought a property located at 900 Foothill Boulevard in Oakland in 1985,
two years before he filed for dissolution of the first marriage. The building was not
mentioned in the judgment of dissolution. Respondent claimed appellant‟s interest in the
property was a community property interest subject to division.
On May 11, 2005, the trial court directed that the property at 1710 15th Avenue be
listed for sale. In December 2005, appellant bought out respondent‟s interest in the
property.
On April 18, 2008, the trial court filed a stipulation and order appointing John
Mangini as the court‟s accounting expert under Evidence Code section 730. He was
directed to prepare a written tracing of income, rents, and expenses related to the parties‟
1
Appellant was 74 years old at the time of trial.
2
real estate holdings. The parties were to cooperate in providing him with all necessary
documentation.
On May 26, 2009, the trial court filed an order naming Roxanne Ekhos as its new
accounting expert, in place of Mangini. Appellant was directed to provide her with any
information that Mangini had previously requested.
On January 21, 2010, the trial court filed a judgment determining that 50 percent
of the 900 Foothill Boulevard property was the parties‟ community property.
On September 10, 2010, a status-only divorce judgment was entered. All other
issues were reserved.
On February 24, 2010, the trial court filed an order after settlement conference.
The order sets forth nine issues to be addressed at trial, including whether appellant
breached his fiduciary duty to respondent by mismanaging three of the properties during
periods of marital separation. The order also states that the trial was to address
appellant‟s claims for reimbursement, conditioned on him providing a list of claims and
supporting documentation to Ekhos and respondent‟s counsel at least 60 days prior to
trial.
II. Trial
A. Management of the Parties’ Rental Properties
Matthew Smith testified on behalf of respondent as an expert in real estate
appraisals. The property at 900 Foothill Boulevard has six units. In March 2009, he
estimated $19,000 in repairs were necessary to make the property rentable. Only three of
the units were habitable at that time. He estimated the property‟s market value at
$835,000. By May 2010, the value had dropped to $600,000. The reason for the decline
was lowered rental rates, which lowers the potential income that can be generated. In
May 2010, he estimated the potential monthly rental income for all of the units was
$6,050.
The property at 309 Foothill Boulevard also has six rental units. In March 2009,
Smith estimated it needed about $33,000 in repairs to bring it to market condition. All
the units were habitable, though the building itself needed repairs for problems such as
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termite damage. At that time, he estimated the value of the property was $870,000. By
July 2010, the value had declined to $500,035. The projected potential total rental
income from all the units was $6,500 per month.
The final property is a four-unit building located at 1444 9th Avenue. Smith
deemed all the units to be habitable, though the building needed about $19,000 in repairs.
The estimated value of the property in March 2009 was $500,000. Similar to the other
two properties, the value had declined to $330,000 by July 2010 due to market
conditions. In July 2010, he estimated the total potential rental income for the building at
$3,900 per month. Taking all three properties into account, there were 11 habitable units
that were not being rented out in 2009.2
The rental properties had also been appraised in 2005. At that time, the appraisal
report indicated that the units at 1444 9th Avenue and 309 Foothill Boulevard could have
been made ready for occupancy with only minor repairs. However, seven of the 10 rental
units in these two buildings were vacant at that time. Appellant testified the properties
had water damage that the appraisal report did not take into account. By 2009, there were
a total of 11 vacant units in the three buildings. Appellant testified the empty units were
not habitable.3
Respondent testified she was unhappy with appellant‟s management of their rental
properties. She also submitted a written trial declaration. After the parties formally
separated, the number of units he rented out had decreased. The decrease in tenancy
occurred mainly after 2003. Based on the low occupancy of the parties‟ rental properties
during the time when they were under appellant‟s exclusive management and control, she
requested he be charged with the rents lost due to his failure to ready all units for the
rental market and/or rent those units deemed habitable. In her declaration, she did not
allege that appellant had ever lied to her or withheld information from her concerning the
2
Appellant occupies one of the units at 900 Foothill Boulevard.
3
The report indicated that the three unoccupied units at 900 Foothill Boulevard were in need of
extensive repairs.
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management of the rental properties. Nor did she allege he had ever stolen rents or
managed the properties to benefit only himself.
On cross-examination, respondent conceded that even when she had sufficient
funds she never offered to give appellant money to help manage or improve their
properties. She claimed, however, that he never asked her to do so. After he gave her a
buy-out payment in 2005 for the family residence on 15th Avenue, he prohibited her
from entering the rental properties. He has been solely and exclusively in control of
those properties since the parties separated in 1994.
Appellant testified that beginning in June 30, 1994, there were 14 units available
to be rented among all three properties. He conceded occupancy of the buildings had
declined since 2003. The reason for the decline was that tenants were moving out due to
the deteriorating condition of the properties. He denied the decline had any relationship
to respondent‟s filing of dissolution proceedings that year.
In 2009, appellant hired Victor Jin to manage the three rental properties and
oversee needed repairs. The biggest job was to have the foundation repaired at 1444 9th
Avenue. The job was not done because respondent was not willing to help appellant pay
for it. The initial estimate for that job came in at $25,000, but had increased to $50,000
by November 2009. Jin did not complete all the repair jobs he was slated to do, and
respondent did not help pay for any repairs during that year. However, some painting
was completed.
In calculating lost rental income, Ekhos compared actual rents to the full rental
value as stated in the appraisers‟ reports. As a second method of calculation, she also
considered comparing the actual rents collected from 2005 through 2009 to the maximum
rents ever collected by the properties. Using the first method, for the stated period of 45-
months (July 2005 through March 2009), she estimated the total lost rents were $450,000,
or $10,000 per month. She did not make a calculation using the second method.
B. Appellant’s Reimbursement Claims
Ekhos testified that she has been a certified public accountant since 1999. The
instant case was the first time she had served as a court-appointed expert. She previously
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worked for Mangini, the expert initially appointed by the trial court. She assisted him by
preparing most of the schedules that he would present and testify about in family law
cases. She had accompanied him to about a dozen trial dates and settlement conferences.
A prior settlement conference order required appellant to provide Ekhos with a list
of his claims for separate property reimbursements, along with supporting documents.
She testified that he never provided her with an itemized list of improvements made to
the parties‟ properties. Instead, he gave her boxes of receipts documenting business
expenses he had claimed on his tax returns over several years. The files were organized
by year and by line item of the Schedule E filed with his tax returns. The information
was not compiled in such a manner as to allow her to verify any claims he may have had
for improvements made to the properties during the post-separation period. The
difficulty arose from the tremendous volume of documents that would need to be
individually reviewed and analyzed.
In conducting her analysis, Ekhos sampled the tax documents and did not go
through every piece of paper. In each tax year she found claims made for improvements
that she was unable to verify. In many cases, receipts for personal items were mixed with
files that purportedly contained receipts for building materials. Thus, some of the
receipts did not reflect appropriate deductions for building expenses. Additionally, she
could not determine whether the building expenditures that she was able to verify were
actually used for improvements to the rental properties.
A month or two after she received the tax documents, she asked appellant to
provide further proof of his claims. She received spreadsheets from his accounting
expert, Stuart Weil, reflecting adjustments to the returns. The adjustments showed
business expenditures, but did not indicate whether the expenditures were made for
improvements. They also did not address the receipts for miscellaneous personal
expenses that she had discovered before, so the information was not much more specific
than what she had already received. Weil did set forth a schedule of repairs and
improvements for the period 1994 through 2008 totaling approximately $757,000.
According to Ekhos, actual and theoretical rents collected and potentially collectable
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from tenants would have been sufficient to cover the properties‟ fixed costs as well as the
costs of appellant‟s claimed repairs and improvements.
Weil testified as a rebuttal witness on behalf of appellant. He is licensed as an
attorney as well as a certified public accountant. He has testified as an expert witness in
about 20 cases, the majority of which were family law cases. He read Ekhos‟s report and
found it lacked a conclusion with respect to how much money, if any, appellant was
entitled to as reimbursement. To arrive at an estimate of these costs, Weil‟s employees
examined all the documents in the boxes of appellant‟s tax records.4
Weil‟s analysis showed there was a negative cash flow on the properties, and that
money was spent on improvements that could not have been funded by the properties
themselves. These would represent reimbursable claims, made with his separate property
for the benefit of community assets. Weil‟s initial figure for these costs was $600,534 for
the years 1994 through 2008. However, Weil recommended adjusting the amount,
primarily to compensate for various accounting irregularities in appellant‟s records. Weil
offset the initial amount by $314,271.50, leaving the total amount of estimated expenses
for improvements at $286,262.50.
At the close of respondent‟s case, appellant moved for a directed verdict on her
claim for breach of fiduciary duty. His counsel argued that while she might have been
unhappy with his management skills, his conduct did not amount to a breach of fiduciary
duty. In rebuttal, respondent‟s counsel relied on In re Marriage of Munguia (1983) 146
Cal.App.3d 853 (Munguia), in asserting that the spouse with control over community
property after separation has a duty to maximize its value. The motion was denied.
III. Posttrial Proceedings
At the close of trial, in lieu of closing argument, the parties each submitted a
proposed statement of decision.
On February 2, 2011, the trial court filed its tentative statement of decision.
4
At this point in the proceedings, the trial judge noted that the settlement conference order had
specifically required appellant to have provided Ekhos with a list of all the improvements along
with documentation. This was not provided to her, so therefore she had not gone through the
boxes to categorize the documents and review all the receipts, as that was not her mandate.
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On March 25, 2011, the trial court filed its final statement of decision. The court
found in favor of respondent on her claim of breach of fiduciary duty. In particular, the
court noted that of the 16 units in the three rental properties, 13 were habitable and, of
these, 11 remained vacant. While not directly stating whether Munguia stands for the
proposition that the spouse who controls community property after separation has an
affirmative duty to maximize its value, the court found “The facts adduced in the present
case demonstrate that far from maximizing the properties [sic] values, [appellant] ran
them into the ground. The [appellant] ignored tenants‟ requests to perform repairs and
the quality of the premises disintegrated under his regime. Occupancy declined and
although the appraiser indicated that a significant number of the units were habitable and
ready to be rented, they were not.” The court used Ekhos‟s figure of $450,000, requiring
him to give respondent $225,000 as the measure of her half of the lost community rents.
As to appellant‟s claim for reimbursement, the trial court found it was unable to
determine the amount, if any, that he was entitled to, due to the unreliability of his tax
returns and his failure to comply with the court‟s prior directives. Based on his demeanor
and his testimony, the court also concluded he lacked credibility.
On May 2, 2011, the trial court filed a judgment setting forth its property division
and equalizing the community estate. Respondent was awarded the 1444 9th Avenue
property (valued at $330,000) and $330,632.50 in proceeds from the sale of 309 Foothill
Boulevard, along with a net equalizing payment from respondent of $200,069, which
included her share of the fictive lost rents. Appellant was awarded a one-half interest in
the 900 Foothill Boulevard property (worth $275,000) and a $5,140 insurance check.
Respondent was awarded attorney fees. This appeal followed.
DISCUSSION
I. Standards of Review
We review factual findings of the family court for substantial evidence, examining
the evidence in the light most favorable to the prevailing party. (In re Marriage of
Hokanson (1998) 68 Cal.App.4th 987, 994.) “ „ “In reviewing the evidence on . . . appeal
all conflicts must be resolved in favor of the [prevailing party], and all legitimate and
8
reasonable inferences indulged in [order] to uphold the [finding] if possible.” ‟
[Citation.]” (In re Marriage of Bonds (2000) 24 Cal.4th 1, 31.) We review issues of
statutory interpretation de novo. (Eidsmore v. RBB, Inc. (1994) 25 Cal.App.4th 189,
195.)
II. $450,000 in Fictive Community Income Charged to Appellant
Respondent alleged in her trial declaration that potential community rental income
was improperly lost due to appellant‟s “mismanagement” of the parties‟ rental properties
during a substantial period of separation. This was the basis of her claim for breach of
fiduciary duty. In support of her claim, she relied largely on Smith‟s finding that in
March 2009, 11 habitable units had not been rented out. She requested that appellant “be
charged with the rents lost due to his failure to ready all units for the rental market and/or
rent those units deemed to be habitable.” In her trial brief, she contended he had
“provided no evidence that he tried to rent the habitable units or tried to ready the other
units for rent. In the absence of such evidence, [appellant] breached his fiduciary duty to
[respondent].” She cited to Munguia for the proposition that, like the husband in that
case, appellant “had a fiduciary duty to maximize the value of the properties by trying to
rent them.” The trial court noted appellant‟s contention that this aspect of Munguia was
dicta only, but essentially agreed with it, finding that appellant “ran [the rental business]
into the ground.”
Appellant first claims that the fiduciary duty ruling must be reversed because it is
based on the erroneous legal theory that he had a duty to maximize the value of the
parties‟ community property. He also argues that the trial court erred in adopting
Ekhos‟s calculation of lost rents because the court set a standard that “far exceeded” his
responsibilities under the law. We agree with appellant that the trial court erred in
relying on Munguia in imposing a requirement on him to have maximized the value of
the rental properties.
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Spouses have a duty to manage community property in accordance with “the
general rules governing fiduciary relationships.” (See Family Code, §§ 721, subd. (b)5;
1100, subd. (e)6.) “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.”
(§ 721, subd. (b).) Under section 1101, subdivision (a), “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, including,
but not limited to, a single transaction or a pattern or series of transactions, which
transaction or transactions have caused or will cause a detrimental impact to the claimant
spouse‟s undivided one-half interest in the community estate.”7
5
All statutory references are to the Family Code unless stated otherwise.
Section 721, subdivision (b), provides: “Except as provided in Sections 143, 144, 146, 16040,
and 16047 of the Probate Code, in transactions between themselves, a husband and wife are
subject to the general rules governing fiduciary relationships which control the actions of persons
occupying confidential relations with each other. This confidential relationship imposes a duty of
the highest good faith and fair dealing on each spouse, and neither shall take any unfair
advantage of the other. This confidential relationship is a fiduciary relationship subject to the
same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404,
and 16503 of the Corporations Code, including, but not limited to, the following: [¶] (1)
Providing each spouse access at all times to any books kept regarding a transaction for the
purposes of inspection and copying. [¶] (2) Rendering upon request, true and full information of
all things affecting any transaction which concerns the community property. Nothing in this
section is intended to impose a duty for either spouse to keep detailed books and records of
community property transactions. [¶] (3) Accounting to the spouse, and holding as a trustee, any
benefit or profit derived from any transaction by one spouse without the consent of the other
spouse which concerns the community property.”
6
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.”
7
If a spouse has breached his or her fiduciary duty, but not in a manner displaying fraud, malice,
or oppression within the meaning of Civil Code section 3294, Family Code section 1101,
subdivision (g), governs the applicable remedies. (Fam. Code, § 1101, subds. (g), (h).)
Subdivision (g) provides that these remedies “shall include, but not be limited to, an award to the
other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or
transferred in breach of the fiduciary duty plus attorney‟s fees and court costs.”
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Appellant claims he was under a fiduciary duty that merely required him to
perform to a standard “marginally better than gross negligence.” Under Corporation
Code section 16404, subdivision (c), made applicable here by operation of Family Code
section 721, subdivision (b), “[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.”8 (Italics added.) Relying on this provision, he asserts holding
him culpable for failing to produce the maximum possible rental income is directly
contrary to the law governing spousal fiduciary duties and is unauthorized. We agree.
There is nothing in the relevant statutory language that equates a managing spouses‟
failure to maximize the value of the community‟s property with a breach of fiduciary
duty to the non-managing spouse, and the trial court erred in relying on Munguia to
justify such a finding.
Munguia involved valuation of a community property business that would have
been worth at least 50 percent more if the managing spouse were able to renew the
business‟s lease that was due to expire in eight months. In holding the trial court erred by
choosing a lower value rather than reserving jurisdiction to see whether the lease was
renewed, the appellate court observed in an aside that the spouse could have been under a
“fiduciary duty to maximize the value of the [business] by securing a continuation of the
lease.” (Munguia, supra, 146 Cal.App.3d 853, 859.) This statement is dicta, and we
have not located a published decision citing to it for the proposition that spouses have a
fiduciary duty to maximize community income during periods of separation.
We find informative the appellate court‟s opinion in In re Marriage of Partridge
(1990) 226 Cal.App.3d 120. As the court in Partridge noted, “The central issue in
Munguia was the valuation of a community asset, a bar. The value of the bar was
8
“The theory that there are degrees of negligence has been generally criticized by legal writers,
but a distinction has been made in this state between ordinary and gross negligence. [Citation.]
Gross negligence has been said to mean the want of even scant care or an extreme departure
from the ordinary standard of conduct.” (Van Meter v. Bent Construction Co. (1956) 46 Cal.2d
588, 594.)
11
directly dependent upon the length of its leasehold, a matter that had yet to be determined
as of the time of trial. The appellate court simply held it was error for the trial court to
adjudicate the value of the asset before the length of the leasehold was settled; instead, it
should have reserved jurisdiction to do so once the lease length was determined. In dicta,
the court noted that if the husband, who had sole management and control, were to be
shown to have intentionally mismanaged the lease negotiations to thwart a long-term
lease (thus breaching his fiduciary duty to the community), this could be taken into
consideration in redetermining the value. [Citation.] Other than stating the undisputed
principle that intentional mismanagement is a factor in valuation, the case does not
support wife‟s position as it does not contain any benchmark by which it can be said
husband‟s conduct amounted to intentional mismanagement.” (Id. at p. 125.)
We also note respondent does not allege appellant failed to disclose any financial
information or otherwise acted against her interests to secure any unfair benefit for
himself. Further, he never concealed the lack of rental revenue from her, suggesting that
she could have taken legal action to intervene instead of passively allowing the
apartments to languish unrented. Viewed in that light, the trial court‟s decision to impute
$10,000 per month in lost rental income to him is unsupported as a matter of law, and is
arguably both unfair and unjust. We therefore reverse the portion of the judgment
finding that he breached his fiduciary duty, and remand for the court to recalculate the net
equalizing payment between the parties. This calculation must reflect the community
property interest of the Chius as opposed to the ownership by any third party in the
individual properties. Also, the trial court shall assess the payment obligation according
to the legislative principles contained in Family Code section 721, subdivision (b), and its
references to the legal standards articulated in Corporation Code sections 16403 and
16404, subdivision (c).
III. Reimbursement for Separate Property Contributions
Section 2640 specifies that when dividing community property, a “party‟s
contributions to the acquisition of property in the community property estate” shall be
reimbursed “to the extent the party traces the contributions to a separate property source.”
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(§ 2640, subd. (b).) In the seminal case of In re Marriage of Epstein (1979) 24 Cal.3d
76, superseded by statute on other grounds, our Supreme Court recognized a spouse‟s
right to reimbursement from community property for payment of postseparation
community expenses from the spouse‟s separate funds. The high court adopted the view
expressed in In re Marriage of Smith (1978) 79 Cal.App.3d 725, as follows: “ „[A]s a
general rule, a spouse who, after separation of the parties, uses earnings or other separate
funds to pay preexisting community obligations should be reimbursed therefor out of the
community property upon dissolution.‟ ” (Epstein, supra, at p. 84, quoting Smith, supra,
at p. 747.) Conversely, if the managing spouse uses community money to pay a
community obligation, there is no basis for reimbursing the spouse for that payment.
(See Smith, supra, at p. 744 [judgment reimbursing husband for postseparation payments
on community debts reversed because “there is no showing these payments by husband
were made with his separate funds”; court ordered retrial rather than entry of judgment
for wife because evidence suggested “some of the funds paid came from husband‟s . . .
separate property”].)
On appeal, appellant asserts the trial court erred in denying his reimbursement
claim as to the property located at 1710 15th Avenue. He contends it is undisputed that
he spent over $145,000 in separate property for expenses associated with the property,
expenses that he asserts were documented by cancelled check, lender statement, and
similar corroboration. Respondent does not address the merits of this argument in her
brief. Instead, she contends generally that because he failed to itemize these claimed
expenditures pursuant to the trial court‟s pretrial order he should be precluded from being
reimbursed for any postseparation expenses.
The trial court denied all of appellant‟s claims for reimbursement, finding itself
unable to accept the assumption that his tax returns and receipts were trustworthy. As the
trier of fact, the trial judge is the sole judge of credibility and “may reject any evidence as
unworthy of credence, even uncontradicted testimony.” (In re Marriage of Falcone &
Fyke (2012) 203 Cal.App.4th 964, 979.) It is not the function of this court to reweigh the
13
evidence. Accordingly, we are unable to conclude that the trial court erred in denying
appellant‟s request for reimbursement as to 1710 15th Avenue.
DISPOSITION
The judgment is reversed as to the determination that appellant breached his
fiduciary duty to respondent. The matter is remanded for determination of the parties‟
equalization payment in a manner consistent with this opinion. In all other respects, the
judgment is affirmed. Parties to bear their own costs on appeal.
__________________________________
Dondero, J.
We concur:
__________________________________
Margulies, Acting P. J.
__________________________________
Banke, J.
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