In re Marriage of Nassimi , 207 Cal. Rptr. 3d 764 ( 2016 )

Filed 9/26/16
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
In re Marriage of SHARY NASSIMI B259704 c/w B260574
and ESTHER NASSIMI. (Los Angeles County
Super. Ct. No. BD495672
SHARY NASSIMI,
Appellant,
v.
ESTHER NASSIMI,
Respondent.
APPEAL from orders of the Superior Court of Los Angeles County.
Thomas Lewis, Judge. Reversed in part and affirmed in part and remanded with
directions.
Honey Kessler Amado for Appellant.
Lurie, Zepeda, Schmalz, Hogan & Martin, Kurt L. Schmalz and Shawn M.
Ogle for Respondent.
Appellant Shary Nassimi, formerly married to respondent Esther Nassimi,
contends the trial court erred in concluding that he, alone, was financially
responsible for defending and settling a claim brought by a third party seeking,
among other things, rescission of an agreement to sell the business he owned and
operated during the marriage. We conclude the liability arising from the claim for
rescission and other relief initiated by the third party was a community obligation
omitted from the marital dissolution judgment that divided the couple‟s assets and
obligations, subject to division under Family Code section 2556.1 We find,
therefore, that respondent was obligated to pay half the cost of settling the
litigation and reverse the court‟s order to the extent it denied appellant this relief.
With respect to the costs and attorney fees appellant incurred prior to the
settlement, appellant‟s litigation expenses included the cost of his unsuccessful
pursuit of certain counterclaims. The expense of pursuing those claims was
allocated to him by the judgment, and appellant failed to present sufficient
evidence to enable the trial court to distinguish fees and costs potentially
chargeable to respondent for defense of the third party‟s claims for affirmative
relief from fees and costs incurred in pursuit of appellant‟s counterclaims.
Accordingly, we affirm the court‟s order to the extent it denied appellant‟s request
for reimbursement of attorney fees and costs.
The trial court, having found against appellant on the above issues and on
other issues raised in the underlying family law proceeding that are not part of this
1
Family Code section 2556 provides that in a proceeding for dissolution of
marriage, “the court has continuing jurisdiction to award community estate assets
or community estate liabilities to the parties that have not been previously
adjudicated by a judgment in the proceeding.” Undesignated statutory references
are to the Family Code.
2
appeal, awarded respondent attorney fees as the “prevailing party” pursuant to the
terms of the judgment. We agree the prevailing party provision of the judgment
controlled. However, in view of our partial reversal of the trial court‟s order, we
reverse the attorney fee award in favor of respondent and remand for
reconsideration of the identity of the prevailing party, if any.
FACTUAL AND PROCEDURAL BACKGROUND
Appellant and respondent were married for 21 years. In August 2008, they
separated. Their judgment of dissolution was entered in June 2009.
A. Sale of Appellant’s Business
In July 2007, one year prior to the couple‟s separation, appellant sold
International Electronics, Inc. (IEI), the business he owned and operated during the
marriage, to The Chamberlain Group, Inc. (Chamberlain).2 Under their agreement
(hereafter, “the Purchase Agreement”), Chamberlain agreed to pay $14 million up
front, a $12,000 per month consulting fee for two years, and a percentage of net
sales revenue attributable to IEI products for five years, up to a total of an
additional $10 million.3 One million dollars of the up front payment was held in an
escrow account as a reserve against any claims by Chamberlain against appellant
2
IEI manufactured and sold a number of radio wave-controlled devices,
including wireless intercom systems, walkie-talkies and baby monitors.
Chamberlain is a large manufacturer of radio wave-controlled products.
3
The payments due based on a percentage of net sales are referred to as
“[e]arn-[o]ut” payments.
3
that might arise within 24 months of the sale.4 The Purchase Agreement stated that
“[t]o Seller‟s Knowledge, no event has occurred or circumstance exists that . . .
may cause [IEI] to violate any Law . . . .”5
Although appellant owned all the shares of IEI in his own name and signed
the Purchase Agreement as the sole “Seller,” he has never disputed that IEI was
community property. In July 2007, respondent signed a “Consent of Spouse”
document, consenting to the sale, approving the provisions of the Purchase
Agreement, and acknowledging that IEI and its assets, “including any community
property interest that [she] may have in them,” were subject to the Purchase
Agreement. A substantial portion of the cash proceeds from the sale were spent on
the couple‟s residence on Sea View Drive in Malibu, which they owned free of
mortgage at the time of separation.6
B. Judgment of Dissolution
In June 2009, the parties entered into a stipulated judgment of dissolution,
which included a mediated financial settlement. The judgment incorporated the
parties‟ agreement concerning the division of property, referred to as the marital
4
After the payment into escrow and subtraction of certain closing costs, the
couple received just over $12 million.
5
“„Law‟” was defined to include “any . . . regulation . . . of any Governmental
Body.” “Knowledge” was defined as “the actual knowledge after reasonable
investigation of Seller” and three other employees, including Jim Crider, IEI‟s
chief engineer.
6
The remaining $1.5 million from the sale of IEI was divided by the couple
equally when they separated. The Sea View property was sold in February 2013
for approximately $8.7 million.
4
settlement agreement.7 The couple‟s two residences, including the home on Sea
View, were deemed community property, as was the $12,000 per month consulting
fee due appellant under the Purchase Agreement. Each spouse was awarded 50
percent of these assets.
The 2009 judgment addressed the funds in the escrow account. Paragraph
7(g) of the judgment provided: “All right, title, and interest in the following claims
is awarded to the parties equally: Escrow claim against IEI in the amount of $1
million. The parties shall share in any recovery equally, and shall pay the cost of
pursuing such claim (including attorneys‟ fees) equally.”
The next paragraph, 7(h), dealt with earn-out payments. It provided: “All
right, title, and interest in any claim against Chamberlain arising from conflicting
interpretations of the earn-out provisions of the sale of [IEI] to Chamberlain is
awarded to [appellant]. Respondent shall have no right to share in any recovery,
and no obligation to pay all or any part of the cost of pursing any such claim
(including attorneys‟ fees). [Appellant] shall indemnify and hold respondent
harmless against liability on account of any counter-claim or cross-complaint that
may be filed by Chamberlain against the parties, excluding any claim covered by
paragraph 7.g.i. [sic] of this Judgment.”8
Paragraph 10 dealt with “[c]ommunity [d]ebts.” Paragraph 10(f) stated:
“Except as otherwise provided in this Judgment, any community debt or joint debt
that has not been previously paid or provided for shall be paid by the party who
7
We refer to both the judgment and the incorporated marital settlement
agreement as “the 2009 judgment” or “the judgment.”
8
There is no paragraph 7.g.i. The parties agree the reference is to 7(g).
5
incurred such debt who shall indemnify and hold the other party harmless against
any liability on account thereof.”
Paragraph 13 was entitled “Separate Liabilities.” Subparagraph (a) provided
that appellant “shall pay and discharge as and when due all debts incurred by him
after the date of separation and shall indemnify and hold respondent free and
harmless against any liability on account thereof.” Subparagraph (b) imposed a
similar liability on respondent. Subparagraph (c) provided: “[T]he parties
acknowledge and agree that neither party has an obligation to pay any expense
incurred by the other except as provided in this Judgment. Unless the parties agree
to allocate payment responsibility between themselves for an expense incurred by
one of them, the expense shall be paid by the party who incurred it, who shall
indemnify and hold the other party harmless against liability on account thereof.”
Paragraph 34 contained the parties‟ mutual releases. In paragraphs 34(a)
and (b), appellant and respondent released each other from “any and all rights,
claims, demands, debts, obligations, liabilities, costs, expenses, causes of action,
and judgments, which exist or which [appellant] may claim to exist in favor of
[appellant] and against respondent with regard to or arising out of any transactions
or event[s] that occurred prior to the date of this Judgment.” Paragraph 34(c)
stated: “[T]he parties understand and agree that the released claims are intended to
and do include all claims, known or unknown, suspected or unsuspected, foreseen
or unforeseen, which either [appellant] or respondent ha[s] or may have against the
other arising out of or relating to any transaction or event that occurred prior to the
6
date of this Judgment . . . .” Paragraph 34(c) included a waiver of rights under
section 1542 of the California Civil Code.9
C. Chamberlain Litigation
In April 2008, nine months after the sale and several months before the
parties separated, Chamberlain sent a “Claim Notice of Buyer to Seller and Escrow
Agent,” asserting that there were eight IEI products not in compliance with Federal
Communications Commission (FCC) regulations, as they were “not being
manufactured in accordance with the approved specifications,” and that necessary
certification could not be located for three other products.10 The letter stated:
“Seller‟s failure to disclose that numerous products failed to meet FCC regulations
prior to and as of the closing date of the transaction constitutes a breach of [various
provisions in the Purchase Agreement]. [¶] . . . [¶] Jim Crider [IEI‟s chief engineer]
has admitted . . . that he had actual knowledge of these issues and has admitted . . .
that Seller had actual knowledge of these issues. Indeed, Mr. Crider will testify
that Seller instructed him to make the change to the Transmitter [one of the
products identified as noncompliant] which resulted in noncompliance with FCC
9
Civil Code section 1542 provides: “A general release does not extend to
claims which the creditor does not know or suspect to exist in his favor at the time
of executing the release, which if known by him or her must have materially
affected his or her settlement with the debtor.”
10
The escrow instructions provided that within two years of the date of the
Purchase Agreement, “Buyer may deliver a claim notice . . . to Seller and Escrow
Agent. The Claim Notice will briefly state the factual basis or circumstances for
the Claim, and either (i) specify in reasonable detail . . . the amount of Buyer‟s
Losses, (ii) provide a reasonable estimate of Buyer‟s Losses, or (iii) indicate if
Buyer, in good faith, is unable to specify the amount of Buyer‟s Losses or make a
good faith, reasonable estimate of its Losses.”
7
regulations.” The next month, Chamberlain sent a follow-up letter, in which it
estimated the cost of addressing the product noncompliance identified in the April
letter at approximately $285,000, not including any FCC fines or penalties that
might be imposed.11
In July 2009, Chamberlain filed suit against appellant in the United States
District Court for the Western District of Washington.12 The complaint was based
on the provision in the Purchase Agreement representing that IEI was in
compliance with all applicable laws and regulations. It alleged that Chamberlain
had discovered that “many, if not all” of the devices manufactured by IEI did not
comply with applicable regulations. Chamberlain contended that IEI‟s employees,
acting under appellant‟s direction, modified software coding to make it appear the
devices at issue were transmitting in a low-power range when tested by FCC
laboratories, but thereafter restored the higher power levels for manufacture and
11
During this same period, appellant was in communication by email with an
attorney and the broker who assisted him with the sale of IEI, discussing the
possibility of suing Chamberlain for failing to produce and market IEI products
subject to the earn-out provisions. The emails discussed in detail the IEI products
appellant believed Chamberlain could have sold to produce earn-out payments and
why he believed he had a viable claim under the earn-out provisions. They also
discussed Chamberlain‟s claim on the escrow account. In one email, appellant
stated his belief that Chamberlain intended “to hit [him] for more than [$1
million].” In another, appellant stated he anticipated “a fight” and needed “to start
. . . a strong and robust offense.” The broker urged appellant to “file a
counterclaim” and “sue them in California . . . .”
12
Respondent was not named. Appellant sought to add her as a necessary
party, but the district court rejected the request. In December 2009, appellant and
respondent entered into an agreement that “preserve[d] any claim for contribution
for or indemnity against liability, fees, and costs incurred in the [Chamberlain]
Lawsuit, while avoiding any need to name [respondent] as a party or third-party in
the . . . Lawsuit.”
8
sale. Chamberlain sought to rescind the transaction or, in the alternative, to obtain
monetary damages for breach of contract and misrepresentation.
Appellant filed a counterclaim seeking release of the escrow sums. In
addition, the counterclaim alleged that Chamberlain had breached the Purchase
Agreement by failing to provide earn-out payments. Appellant contended, among
other things, that Chamberlain violated its duty of good faith and fair dealing by
failing to focus any of its resources and sales efforts on IEI products.
In 2010, the district court granted summary adjudication on certain issues
involved in the competing claims. The court granted Chamberlain summary
adjudication in part on its claim for breach of contract, finding that many IEI
devices exceeded the power limits set by the FCC in violation of the express
warranty of the Purchase Agreement, that Chamberlain had established as a matter
of undisputed fact that IEI‟s chief engineer, James Crider, had modified certain IEI
devices for testing in order to create the appearance of compliance with FCC
regulations, and that Crider‟s knowledge bound appellant under the terms of the
Purchase Agreement.13 The court did not resolve whether the breach was
sufficiently material to justify rescission or determine any damage issues, but
indicated that based on the parties‟ experts‟ testimony, damages could range from
hundreds of thousands of dollars to $16 million.
The court granted summary judgment to Chamberlain on appellant‟s
counterclaim seeking the escrow monies, finding that Chamberlain‟s viable breach
of contract claim precluded their immediate release. The court denied
13
With respect to appellant‟s knowledge, the court found that Crider
“discussed with [appellant]” that “at least some of the IEI devices at issue”
exceeded FCC power limits.
9
Chamberlain‟s motion for summary judgment on appellant‟s earn-out
counterclaim, finding that a jury could reasonably conclude Chamberlain‟s failure
to market, develop and sell IEI products in the years following the sale breached
either the Purchase Agreement or Chamberlain‟s duty of good faith and fair
dealing.
In January 2011, a few months after the order of summary adjudication
issued, Chamberlain and appellant settled. Appellant agreed to pay Chamberlain
$1 million from his own funds, and to release the $1 million in the escrow account
to Chamberlain.14
D. Proceedings Below
1. February 2010 Order Finding Chamberlain’s Rescission-
Related Claims to be an Omitted Obligation
In September 2009, prior to the Washington court‟s grant of summary
adjudication and the ensuing settlement, appellant moved in the court below for an
order requiring respondent to share equally in the ongoing costs of the
Chamberlain litigation. Appellant contended that because the Purchase Agreement
was entered into during the marriage and involved community property, the
expenses of the litigation were owed by the community. He further contended that
the claims asserted by Chamberlain were not covered by the provisions of the 2009
judgment, urging the court to treat it as an “unadjudicated debt of the marriage”
14
Appellant did not have the funds on hand to pay the additional $1 million.
Accordingly, he provided Chamberlain a promissory note secured by a deed of
trust on the Sea View property, and Chamberlain was paid with interest when the
property sold in February 2013.
10
subject to section 2556.15 He also sought declaratory relief establishing that
respondent would be responsible for half of any judgment, should Chamberlain
prevail.
Respondent filed opposition, disputing that any part of the Chamberlain
litigation or its associated costs were liabilities omitted from the 2009 judgment.16
She contended: (1) that under paragraph 7(h) of the judgment of dissolution,
appellant was obligated to pay the expenses of litigation between himself and
Chamberlain, without regard to whether appellant or Chamberlain initiated it,
unless the expenses related to a claim on the escrow fund; (2) that paragraph 34
(the parties‟ mutual release of unknown claims) released her from any liability for
the costs of the litigation; (3) that appellant “incurred” the debt for purposes of
paragraph 10(f) (applicable to unknown community debt), as he was “the party to
the contract and the party that allegedly defrauded Chamberlain,” while respondent
“never had any knowledge regarding the operation and business practices of IEI”;
and (4) that the attorney fees and other litigation expenses were “incurred” after the
15
As noted, section 2556 grants the family court continuing jurisdiction to
divide community assets and liabilities not previously accounted for in any
judgment entered in the dissolution proceedings. It further provides: “A party
may file a postjudgment motion or order to show cause in the proceeding in order
to obtain adjudication of any community estate asset or liability omitted or not
adjudicated by the judgment. 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.”
16
Respondent acknowledged in her opposition that pursuant to paragraph 7(g),
she was responsible for one-half of the costs of pursuing a claim to the $1 million
escrow fund. She estimated, however, that claims related to the escrow fund
represented a de minimis percentage of the litigation.
11
date of separation and were appellant‟s separate and sole responsibility under
paragraph 13.17
In February 2010, following a hearing, the court entered an order granting in
part and denying in part appellant‟s petition. The order stated: “The Court finds
that the liability of the parties with respect to the action for rescission and other
related relief filed by [Chamberlain] against [appellant] in the . . . [Chamberlain
litigation] constitutes an undisposed of obligation of the Community Estate of the
parties in this action.” (Italics added.)18 The finding was made “without prejudice
to all claims and defense[s] of the parties under the Judgment of Dissolution of
Marriage,” and the court reserved jurisdiction “to the fullest extent permissible
under the law to make such other further findings and orders concerning the rights
and liabilities of the parties under the Judgment.” The court stated that it was
“satisfied . . . that the parties never contemplated that Chamberlain would sue for
rescission,” rendering the Chamberlain litigation “„an undisposed of [liability].‟”
However, the court explained that it did not intend its order “„to be fully
dispositive of all the rights of [respondent] to claim certain defenses that might be
17
To support her position, respondent filed a declaration in which she stated:
“During . . . negotiations, . . . I told [appellant] that I did not want to be financially
obligated to pay attorney‟s fees, costs or other expenses for litigation between
[appellant] and Chamberlain beyond our making a claim to collect the $1 million
held in an escrow fund from the IEI transaction. . . . I did not want to bankroll
[appellant‟s] fight with Chamberlain over the IEI transaction or [appellant‟s]
purported $10 million „earn-out‟ claim against Chamberlain.”
18
Appellant urged the court to include in its order language indicating that
respondent was responsible for one-half of all attorney fees and costs incurred in
connection with the Chamberlain litigation. Instead, the court order stated only
that the action for “rescission and other related relief filed by Chamberlain”
constituted an omitted obligation of the community.
12
available to her,‟” and stated its intention to conduct an evidentiary hearing “„to
litigate the scope of the liability of the parties.‟”19
2. 2014 Evidentiary Hearing
The evidentiary hearing took place in the first half of 2014. Three witnesses
testified: appellant, respondent and Randall Beighle, one of the attorneys who had
represented appellant in the Chamberlain litigation. Appellant, who was not an
engineer, testified that he had not instructed IEI‟s engineers to design products to
violate FCC requirements. He understood that some products were modified prior
to testing for the convenience of the laboratory: for example, products that were
designed to transmit radio frequencies intermittently were modified to transmit the
frequencies continuously so they could be more easily measured. In addition,
Chamberlain had its own testing facilities, and it was appellant‟s understanding
that Chamberlain had tested IEI‟s products prior to the sale. In any event, he
believed the problems identified by Chamberlain could easily have been mitigated
had Chamberlain desired to manufacture and sell IEI products.
Concerning the circumstances surrounding the execution of the 2009
judgment, appellant testified that at the time, he was aware of Chamberlain‟s claim
seeking reimbursement of a portion of the escrow funds. In addition, he and
respondent had discussions with a Washington attorney about the possibility of
19
Respondent noticed an appeal. By order dated May 9, 2011, this Court
dismissed the appeal as premature, stating: “[T]he written order and the family
court‟s accompanying remarks establish that further proceedings must occur before
the court determines whether and how the cost and liability arising from the
Chamberlain action should be allocated under section 2556. Because the order is
not final for purposes of section 2556, it is not appealable. [Citation.]”
13
pursuing a claim against Chamberlain under the earn-out provisions of the
Purchase Agreement. He denied anticipating that Chamberlain would bring a suit
for rescission of the entire agreement.20
Respondent testified that she knew little about the sale to Chamberlain. She
was not aware when she signed the 2009 judgment that Chamberlain had claimed
that IEI‟s products were not FCC compliant. At the time, her main concern was
the funds in the escrow account.
Concerning the expenses of the Chamberlain litigation, attorney Beighle
testified that appellant paid his firm over $1 million, including fees, costs and
interest -- $322,558.67 during the litigation and $769,375 when the Sea View
property sold. Beighle acknowledged that significant amounts of time were spent
on appellant‟s earn-out counterclaim. He also acknowledged that some of the
work included in the billing was contrary to respondent‟s interests, such as
attempting to have her joined as a necessary party in the litigation and assisting
appellant with the family law dispute.
Although the 2009 judgment assigned to appellant the costs of litigating
claims related to the earn-out provisions of the Purchase Agreement and the court‟s
February 2010 order stated that the omitted obligations were those related to
Chamberlain‟s action for rescission and other affirmative relief, Beighle had made
no attempt to allocate attorney fees between the defense of Chamberlain‟s action
20
The court sustained objections to all questions concerning the parties‟
understanding of the meaning of the provisions of the 2009 judgment, finding it to
be inadmissible parol evidence. The court stated repeatedly that the provisions
were not ambiguous, and during the hearing, issued an order precluding the
attorneys from asking either party about the interpretation of the agreement.
Neither party challenges the court‟s decision to exclude parol evidence.
14
and the pursuit of appellant‟s earn-out counterclaim. He took the position that
appellant‟s counterclaim had been filed defensively and that, in any event, all the
claims and counterclaims were related, eliminating the need to differentiate. He
was not asked by appellant‟s counsel to determine the percentage of attorney time
spent on the earn-out counterclaim. When asked on cross-examination if any
billing entries pertained to “whether or not Chamberlain had a right to obtain the
escrow money,” he replied “probably 50 percent or 75 percent” or “more” based
on his belief that the escrow dispute and Chamberlain‟s general damage claims
were one and the same. He did not explain how he arrived at that percentage or
indicate that he had undertaken any review of the bills.
Appellant, too, initially testified that all the attorney fees and costs billed by
Beighle‟s firm should be divided equally between himself and respondent as, in his
view, the claims and counterclaims were related and the pursuit of the earn-out
counterclaim may have induced Chamberlain into a more favorable settlement. As
the hearing progressed, he made an attempt to allocate the fees for work on
different issues in the litigation, a task rendered difficult by the fact that attorneys
in Beighle‟s firm tended to include work on both the claims and counterclaims in
the same entry.21 Appellant reviewed the bills and prepared an exhibit purporting
21
To illustrate, an entry on one of the bills from Beighle‟s firm stated that an
attorney spent 4.20 hours “draft[ing], edit[ing], and revis[ing] answer, affirmative
defense, and counterclaims for purposes of preparing pleading for filing, and
review amended complaint for purpose of finalizing answer and counterclaims.”
This is a form of “block billing,” which occurs when “a block of time [is assigned]
to multiple tasks rather than itemizing the time spent on each task.” (Heritage
Pacific Financial, LLC v. Monroy (2013) 215 Cal.App.4th 972, 1010; see
Robinson v. City of Edmond (10th Cir. 1998) 160 F.3d 1275, 1285 [“The term
„block billing‟ refers to „the time-keeping method by which each lawyer . . . enters
the total daily time spent working on a case, rather than itemizing the time
(Fn. continued on next page.)
15
to summarize the portion excludable as time spent on the earn-out counterclaim.
He explained that if an entry for a single block of time indicated the attorney had
performed work on multiple issues, one of which was the earn-out counterclaim,
he would divide that block of time by the number of issues to arrive at the
percentage attributable to each. He then multiplied the time in the entry by that
percentage to arrive at the amount to exclude for work on the counterclaim.22 The
court admitted the exhibit into evidence, but stated that appellant‟s formula did not
appear to represent a reasonable approximation of the amount incurred for fees
potentially recoverable from respondent, as it was “just multiply[ing] a gross
number by a formula that [appellant] created.”
After the court questioned his allocation exhibit, appellant tried another
approach. He went through each of the billing statements he had received from
Beighle‟s firm and marked entries for blocks of time that were, in his view,
completely unrelated to his earn-out counterclaim. Many of these entries,
however, reflected attorney time spent in ways that were antithetical to
respondent‟s interests, such as work on the request to join respondent as a
necessary party, or otherwise not specifically related to defending Chamberlain‟s
claims, such as work on a tax issue. Appellant did not summarize these entries or
expended on specific tasks‟”]; In re Tom Carter Enterprises, Inc. (Bankr. C.D. Cal.
1985) 55 B.R. 548, 550 [“[R]ather than breaking out the time spent on each
function on a daily basis, counsel has one charge for each day and then indicates
all the services rendered during that day”].) In addition, multiple entries referred to
work on the “summary judgment” motion without distinguishing between
opposing Chamberlain‟s or preparing appellant‟s. Similarly, references to work on
“discovery” seldom indicated whether the discovery pertained to Chamberlain‟s
claims, appellant‟s counterclaim or both.
22
The exhibit is not in the record, but according to the court‟s order, appellant
estimated that the excludable amounts ranged from $43,424 to $164,307.
16
present the court with a total of the fees they represented.23 Moreover, in the midst
of this testimony, appellant stated that he had changed his mind about a number of
the billing entries he had marked, further confusing the record.
Respondent presented evidence to undermine appellant‟s attempted
allocation. She prepared a spreadsheet summarizing time billed by the attorneys at
Beighle‟s firm for work actively opposed to her interests, work on matters personal
to appellant, and time spent on appellant‟s counterclaims, which she identified by
the presence of the word “counterclaim” in the billing entry. She concluded
$297,410 of the amount billed fell into one of these categories. She did not attempt
to allocate entries that did not include the term “counterclaim” but might have been
related to it, such as work on the “summary judgment” or “discovery.”
3. September 2014 Order Resolving Respondent’s Obligation to
Share in the Costs of the Chamberlain Litigation
After hearing the evidence and reviewing the parties‟ post-hearing
memoranda, the court issued a written order denying appellant‟s request that
respondent share in the settlement costs, attorney fees or other expenses of the
Chamberlain litigation.24 The basis for the court‟s denial was explained in a
detailed written order.
23
The court inquired whether appellant intended to prepare a new exhibit.
Counsel stated proper allocation would be dealt with in closing argument. Instead
of closing argument, the parties filed post-hearing briefs. Appellant‟s post-hearing
brief is not in the record provided by the parties.
24
In the proceedings below, appellant also sought to be compensated for his
time and efforts in maintaining the Sea View property after the parties‟ separation
and prior to its sale. Respondent contended that appellant breached the 2009
judgment and his fiduciary duty to her by transferring her share of the escrow
(Fn. continued on next page.)
17
The order reflected a change in the court‟s previously expressed view that
the expenses of the action for rescission filed by Chamberlain were an undisposed
of community obligation. Noting that paragraph 7(h) said appellant was to
indemnify and hold respondent harmless against liability on account of any
“counter-claim . . . by Chamberlain,” the court concluded that “whether
Chamberlain filed a „complaint‟ against [appellant] alone and not a „cross-
complaint‟ or „counter-claim‟ against „the parties‟” was “immaterial,” and that
“[t]he timing or the technical name of pleadings that resulted in the Chamberlain
Litigation should not control.” The order explained, however, that this analysis
represented a possible “alternative basis for the court‟s ruling,” and that “the court
does not, and need not, determine the cause based on this alternative
consideration.”
The order went on to explain that respondent was clearly not obliged to
share in the cost of matters “not related to the defense of the Chamberlain lawsuit,”
such as attorney work performed in pursuit of appellant‟s earn-out counterclaim.
Nor was she required to share in the expenses of “legal work . . . that was adverse
to [her].” Thus, appellant was required to present credible evidence allocating the
fees and costs. The court found that appellant “failed to carry his burden of proof
to show the amounts he incurred as a result of the Chamberlain litigation are
amounts for which [respondent] should be liable.” Referencing appellant‟s attempt
to untangle the entries in the attorneys‟ bills, the court stated: “Even on direct
account to Chamberlain without her express permission. The court found that
appellant was entitled to no compensation for his efforts in connection with the Sea
View property. It rejected respondent‟s claim that appellant had breached his
fiduciary duty to her in connection with the funds in the escrow account. The
parties do not challenge these findings.
18
examination, [appellant] could not properly establish his arbitrary percentages to
support his calculations for the billing statements of his attorney. Simply because
[he] reconstructed billing statements as a means of supporting his claims, there was
no foundation for the application of these calculations to support his requested
recovery.” The court further found: “[Appellant‟s] case in support of the amount
of the billing cheargeable to [respondent] is nothing more than speculative
recasting of past block billing statements of his attorneys which are buttressed by
his own self-serving conjecture as to a percentage of the work that should be
chargeable to [respondent].” In short, appellant‟s attempts to allocate the fees was
based on “speculative unsubstantiated assumptions,” and devoid of “reliable,
credible evidence.”25
With respect to the cost of settlement, the court ruled that respondent would
not be required to reimburse appellant for a share of the additional $1 million, plus
interest, he paid Chamberlain to settle the litigation. The court concluded that the
interest was appellant‟s responsibility, and that the settlement was not a
“community settlement,” because respondent and the community were not
included in the settlement agreement or the release.
4. November 2014 Order Awarding Respondent Attorney Fees as
the “Prevailing Party” in the Underlying Family Law Proceeding
After the court denied appellant‟s request for reimbursement, both sides
sought an award for the attorney fees and costs of the underlying family law
25
The court also found that the dollar amount of appellant‟s claim was
“padded,” pointing to $140,000 in interest charges and improperly included or
“double count[ed] . . . travel and other expenses.” The court found that excluding
such amounts would reduce the attorney fees to approximately $810,000.
19
proceeding. Appellant based his claim to entitlement on a traditional family law
need-based theory (§ 2030).26 He further contended he was entitled to attorney
fees as sanctions (§ 271).27 Respondent also sought fees under section 271, but
primarily contended she was entitled to fees as the prevailing party under the
attorney fee provision in the 2009 judgment.28
In an order filed November 17, 2014, the court rejected both sides‟ requests
for fees as sanctions under section 271, stating: “The parties had a legitimate
dispute concerning the Chamberl[a]in litigation.” The court found the secondary
claims pursued by the parties “lacked merit,” but “d[id] not conclude that it was
unreasonable for the parties to assert [them].” Concerning appellant‟s need-based
theory, the court stated that “[i]f fees were recoverable under section 2030, it is
26
Subdivision (a)(1) of section 2030 provides: “In a proceeding for
dissolution of marriage, . . . and in any proceeding subsequent to entry of a related
judgment, the court shall ensure that each party has access to legal representation
. . . to preserve each party‟s rights by ordering, if necessary based on the income
and needs assessments, one party . . . to pay to the other party, or to the other
party‟s attorney, whatever amount is reasonably necessary for attorney‟s fees and
for the cost of maintaining or defending the proceeding during the pendency of the
proceeding.”
27
Section 271, subdivision (a), provides: “Notwithstanding any other
provision of this code, the court may base an award of attorney‟s fees and costs on
the extent to which the conduct of each party or attorney furthers or frustrates the
policy of the law to promote settlement of litigation and, where possible, to reduce
the cost of litigation by encouraging cooperation between the parties and
attorneys.”
28
Paragraph 38(b) stated: “If either party files an Order to Show Cause or
other proceeding to interpret or enforce any of the provisions of this Judgment, the
Court shall award the prevailing party his or her actual attorneys‟ fees,
accountants‟ fees, other experts‟ fees, and costs reasonably and necessarily
incurred in connection therewith without regard to need or ability to pay.”
20
arguable that [appellant] might have a basis for recovery” because “[he] had
substantially higher attorney‟s fees and costs associated with the litigation.” It
found, however, that “the parties contracted for a prevailing party standard in lieu
of section 2030” based on paragraph 38(b), citing In re Marriage of Guilardi
(2011) 200 Cal.App.4th 770.
The court then examined the parties‟ entitlement to attorney fees and costs
under the 2009 judgment‟s fee provisions. The court found that each party
prevailed on some issues: respondent prevailed on the issues related to the
expenses of the Chamberlain litigation and appellant‟s claim for compensation for
maintaining the Sea View property, and appellant prevailed on respondent‟s claim
of breach of fiduciary duty. Offsetting the fees attributable to the countervailing
claims, the court awarded respondent $391,915.86.29 Appellant noticed appeals of
the court‟s September 2014 and November 2014 orders. The appeals were
consolidated.
DISCUSSION
A. Status of Chamberlain Litigation Debt
1. Status as Community Debt
Preliminarily, we explain why the expenses of the Chamberlain litigation --
the attorney fees and costs, as well as the settlement incurred -- would be a
community debt in the absence of any alternative arrangement between the
29
Although respondent‟s appeal of the February 2010 order had been
dismissed, the court concluded that the appeal “advance[d] the principal object of
the litigation,” and included the fees expended on the appeal in her award.
21
parties.30 Under California law, “all property . . . acquired by a married person
during the marriage while domiciled in this state is community property” (§ 760),
including the fruits of both spouses‟ “expenditures of time, talent, and labor . . . .”
(In re Marriage of Dekker, supra, 17 Cal.App.4th at p. 850.) Thus, although it was
a sole proprietorship held in appellant‟s name, IEI was community property -- and
the profit derived from the sale of IEI to Chamberlain was community profit. (See
id. at p. 851 [“It is well settled in California that income produced by an asset takes
on the character of the asset from which it flows”].)
As the obligations arising from the sale of IEI to Chamberlain were incurred
during the marriage, the community estate was liable for them. (Lezine v. Security
Pacific Fin. Services, Inc. (1996) 14 Cal.4th 56, 64 (Lezine); § 910, subd. (a)
[community is liable for “a debt incurred by either spouse . . . during marriage,
regardless of which spouse has the management control of the property and
regardless of whether one or both spouses are parties to the debt or to a judgment
for the debt”]; see Century Sur. Co. v. Polisso (2006) 139 Cal.App.4th 922, 942
[where husband entered into contract on behalf of family business, “[wife] with a
community property interest in the business, . . . would be legally obligated to pay
a judgment against him”]; Reynolds and Reynolds v. Universal Forms, Labels
30
Generally, appellate review of a trial court‟s resolution of the character of a
particular item of property as separate or community “is limited to a determination
of whether any substantial evidence supports the finding.” (In re Marriage of
Dekker (1993) 17 Cal.App.4th 842, 849.) Where, as here, the resolution “requires
a critical consideration, in a factual context, of legal principles and their underlying
values,” the determination involves “a mixed question of law and fact that is
predominantly one of law,” and is reviewed de novo. (In re Marriage of Davis
(2004) 120 Cal.App.4th 1007, 1015; accord, In re Marriage of Rossin (2009) 172
Cal.App.4th 725, 734.)
22
(C.D.Cal. 1997) 965 F.Supp. 1392, 1396 [where multiple couples were sued based
on husbands‟ alleged violations of contractual promises of confidentiality, court
dismissed wives, but observed that plaintiff could potentially recover from the
couples‟ community estates].)31
As explained in In re Marriage of Feldner (1995) 40 Cal.App.4th 617, 622-
626 (Feldner), the conclusion that the community is responsible for breaches of
contract committed by either spouse follows from a reading of two related
provisions in the Family Code: (1) section 903, which states that “„a contract . . .
debt‟ is „incurred‟ . . . [when] the contract is „made‟”; and (2) section 910, which
states that “„[e]xcept as otherwise expressly provided by statute, the community
estate is liable for a debt incurred by either spouse . . . during marriage . . . .‟”
(Feldner, supra, 40 Cal.App.4th at p. 622, quoting §§ 903 & 910.) “When
[sections 903 and 910 are] read together . . . , the effect . . . is to characterize
contract debts as community [debts] when the contract is „made‟ . . . during the
marriage.” (40 Cal.App.4th at p. 622; accord, In re Soderling (9th Cir. 1993) 998
F.2d 730, 733 [“Under California law, all community property is liable for debts of
either spouse incurred . . . during marriage. [Citations.] In this context, a „debt‟ is
31
As our Supreme Court explained in Lezine, community property is liable to
third party creditors not only for “debts incurred for the benefit of the community,”
but also for “debts incurred by one spouse alone exclusively for his or her own
personal benefit.” (Lezine, supra, 14 Cal.4th at p. 64.) A spouse who has incurred
debt solely for his or her own benefit “may be required to reimburse the
community for the misuse of community assets . . . .” (Ibid.) However, as is
discussed further in part A(4), infra, the community estate received the entire
benefit of the contract with Chamberlain -- the $12 million Chamberlain paid was
used to pay off loans on the Sea View property, and the remaining cash was
divided equally by the parties after the dissolution. Accordingly, there is no basis
for reimbursement.
23
„an obligation incurred by a married person . . . during marriage, whether based on
contract, tort, or otherwise.‟ [Citation.]”].)
Here, the contractual obligation was incurred during the marriage, but the
suit seeking to enforce the obligation did not commence until after the couple
dissolved the marriage. As the reasoning of the Feldner court makes clear, this
had no bearing on the community status of the liability. In Feldner, the husband, a
contractor, entered into a contract to build -- and essentially completed -- a
structure during the marriage, but failed to perform necessary repair work after the
couple had separated. The husband was sued for breach of contract, and the wife
contended the liability had been “„incurred‟” post separation, when the husband
ceased his repair efforts. (Feldner, supra, 40 Cal.App.4th at pp. 621-622.) The
family court found the “entire liability represented by the suit was community in
character,” subjecting the wife to “half the potential liability from the suit,” and the
appellate court affirmed: “The character of the debt is clearly community because
the contract giving rise to the debt was . . . „made‟ during the marriage. All the
consideration given (the promise to build and, if necessary, do any remedial work
to make the building conform to the agreed plans) and received (the right to a lump
sum payment) was exchanged before separation.” (Feldner, supra, at p. 619,
italics omitted.) Put another way, “[t]he consideration [for the contract] . . . [was]
necessarily exchanged . . . [a]t the time of the exchange of promises . . . .” (Id. at
pp. 623-624.) Because this occurred during the marriage, “there can be no doubt
that the trial court was correct in determining that the character of the potential
liability from the . . . lawsuit . . . was community.” (Id. at p. 625.)
Although Feldner did not specifically address attorney fees or other
litigation costs, the obligation of both spouses to pay their share was implicit in the
court‟s affirmance of the trial court‟s ruling that the “entire liability represented by
24
the suit” was a community obligation. (Feldner, supra, 40 Cal.App.4th at p. 619.)
An explicit holding that separated spouses are obliged to share in the costs of
defending lawsuits threatening community assets can be found in In re Marriage of
Hirsch (1989) 211 Cal.App.3d 104. There, the husband had been a member of the
board of directors of a bank during the marriage, receiving remuneration which
was undisputedly community property. (Id. at p. 106.) After the parties separated,
he was named as a defendant in multiple lawsuits against the board, asserting both
tort and contract claims. (Ibid.) He settled the lawsuits and sought reimbursement
from his estranged wife for one-half the amount expended in settling, including
attorney fees and costs. (Ibid.) The trial court denied reimbursement, finding that
as the litigation was the result of the husband‟s “tortious conduct,” its expenses
should be his separate responsibility. (Id. at p. 108.) The Court of Appeal
reversed, holding that the husband could be denied his claim for one-half the costs
of the litigation only if the court found that his conduct was “intentional” and that
there had been “no benefit to the community.” (Id. at p. 110.) Because “even
criminal or intentionally tortious conduct which results in obtaining substantial ill-
gotten assets for the community creates a shared community debt,” there was “no
legitimate basis to characterize the settlement obligations as [the husband‟s]
separate debt.” (Id. at p. 111.)
The fact that the expenses of the Chamberlain litigation ordinarily would be
a community obligation subject to equal division under the Family Code is,
however, immaterial if such expenses were dealt with in the 2009 judgment. “„“A
property settlement agreement . . . that is not tainted by fraud or compulsion or is
not in violation of the confidential relationship of the parties is valid and binding
on the court”‟” even if it results in a “lopsided division of community property
. . . .” (In re Marriage of Woolsey (2013) 220 Cal.App.4th 881, 897; accord, Mejia
25
v. Reed (2003) 31 Cal.4th 657, 666 [although family court charged with dividing
couple‟s assets and liabilities is generally obliged to divide them equally, no law
requires the couple to do so, “and the court does not scrutinize the [marital
settlement agreement] to ensure that it sets out an equal division”].) Accordingly,
we turn to the issue whether the Chamberlain litigation, or any part of it, was
addressed in the 2009 judgment.
2. Status as an Omitted Debt Under the 2009 Judgment
a. Neither paragraph 7(g) nor 7(h) of the judgment addressed
a lawsuit by Chamberlain for rescission or for claims in excess
of $1 million
Appellant contends that the possibility that Chamberlain would initiate
litigation seeking rescission of the Purchase Agreement or damages in excess of
the $1 million in the escrow account was not contemplated by the parties in June
2009. Thus, no provision addressing this possibility was included in the 2009
judgment, and the amount incurred to settle Chamberlain‟s claims, as well as a
portion of the expenses incurred litigating them, constituted an omitted obligation
subject to division by the court under section 2556. Respondent contends the final
sentence of paragraph 7(h) relieves her of the obligation to share the cost of any
litigation between appellant and Chamberlain, with the exception of litigation over
the $1 million in the escrow account. For the reasons discussed, we agree with
appellant.
“Marital settlement agreements incorporated into a dissolution judgment are
construed under the statutory rules governing the interpretations of contracts
generally.” (In re Marriage of Iberti (1997) 55 Cal.App.4th 1434, 1439.) The
primary object of contract interpretation is to ascertain and carry out the mutual
26
intention of the parties at the time the contract was formed, determined from the
writing alone, if possible. (Civ. Code, §§ 1636, 1639; City of Manhattan Beach v.
Superior Court (1996) 13 Cal.4th 232, 238; Santisas v. Goodin (1998) 17 Cal.4th
599, 608.) When the language of a contract is “clear, explicit, and unequivocal,
and there is no ambiguity, the court will enforce the express language.” (In re
Marriage of Iberti, supra, 55 Cal.App.4th at p. 1440.)32
“The whole of a contract is to be taken together, so as to give effect to every
part, if reasonably practicable, each clause helping to interpret the other.” (Civ.
Code, § 1641.) This means that “[c]ourts must interpret contractual language in a
manner which gives force and effect to every provision” (City of Atascadero v.
Merrill Lynch, Pierce, Fenner & Smith (1998) 68 Cal.App.4th 445, 473, italics
omitted), and avoid constructions which would render any of its provisions or
words “surplusage.” (McCarther v. Pacific Telesis Group (2010) 48 Cal.4th 104,
110.) Put simply, “[a] contract term should not be construed to render some of its
32
If the trial court finds an ambiguity (two or more reasonable interpretations
of contractual language), it may receive parol evidence to aid in determining the
parties‟ intentions. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.) When no
parol evidence is introduced or when the evidence is not conflicting, “construction
of the instrument is a question of law, and the appellate court will independently
construe the writing.” (Id. at p. 1166.) In other words, we defer to the trial court‟s
interpretation of a contract only where an ambiguity exists, parol evidence is
admitted, and the parol evidence is in conflict. (Wolf v. Superior Court (2004) 114
Cal.App.4th 1343, 1351; Morey v. Vannucci (1998) 64 Cal.App.4th 904, 913.)
Here no parol evidence was admitted. Thus, we independently interpret the
parties‟ agreement by applying the relevant principles of contract interpretation.
(California National Bank v. Woodbridge Plaza LLC (2008) 164 Cal.App.4th 137,
143-145.)
27
provisions meaningless or irrelevant.” (Estate of Petersen (1994) 28 Cal.App.4th
1742, 1754.)
We also follow the rule that the language of a provision should be construed
in context, in view of the intended function of the provision and of the contract as a
whole. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265.) This
may require inquiry into the circumstances under which the contract was made.
(Civ. Code, § 1647; Medical Staff of Doctors Medical Center in Modesto v. Kamil
(2005) 132 Cal.App.4th 679, 683.) “„We interpret words in a contract in
accordance with their ordinary and popular sense, unless the words are used in a
technical sense or a special meaning is given to them by usage. [Citation.]‟”
(Starlight Ridge South Homeowners Assn. v. Hunter-Bloor (2009) 177 Cal.App.4th
440, 447.) When possible, courts should “„avoid an interpretation which will make
a contract extraordinary, harsh, unjust, or inequitable.‟” (ASP Properties Group,
L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1269; accord, Barroso v. Ocwen
Loan Servicing, LLC (2012) 208 Cal.App.4th 1001, 1013.)
The two provisions of the 2009 judgment that refer to the prospect of
litigation with Chamberlain are paragraphs 7(g) and 7(h). Neither their plain
language nor the circumstances that prevailed when they were drafted indicate that
they were intended to cover the rescission-related claims Chamberlain pursued in
the Washington District Court. Paragraph 7(g) provided that the right, title and
interest in any claim on the escrow funds was to be divided equally between the
parties, and that the parties “shall pay the cost of pursuing such claim (including
attorneys‟ fees) equally.” The $1 million in escrow funds were part of the sale
price for IEI, set aside to provide compensation to Chamberlain if it discovered a
breach. In the two months preceding the entry of the 2009 judgment, Chamberlain
submitted a formal written claim against the funds, contending a handful of IEI
28
products did not comply with regulations and estimating its damages and the cost
of mitigation to be approximately $300,000. Thus, the parties included paragraph
7(g), covering contemplated litigation with Chamberlain over alleged breaches of
contract, but limiting the scope of damages to the $1 million in the escrow account.
During the same general time frame, appellant became increasingly unhappy
over Chamberlain‟s failure to produce and sell IEI products and generate earn-out
payments. He and respondent held discussions with an attorney about pursuing a
claim against Chamberlain under the earn-out provisions, but respondent wanted
nothing to do with the risks associated with a claim of this type and was willing to
forego any potential benefits. Paragraph 7(h) addressed the possibility that
appellant would pursue a claim under the earn-out provisions of the Purchase
Agreement. The first sentence specified that appellant would own “[a]ll right, title
and interest” in any such claim. The second relieved respondent of any “obligation
to pay all or any part of the cost of pursuing any such claim (including attorneys‟
fees).” The final sentence obligated appellant to “indemnify and hold respondent
harmless against liability on account of any counter-claim or cross-complaint that
may be filed by Chamberlain,” excluding a claim covered by 7(g). Thus, by its
terms, paragraph 7(h) addressed the respective rights and obligations of the parties
if appellant pursued a claim against Chamberlain under the earn-out provisions,
and Chamberlain was provoked into a counterclaim or cross-claim by such suit.
Paragraph 7(h) said nothing about a claim or complaint initiated by Chamberlain,
and did not address the possibility that Chamberlain would sue to rescind the entire
contract and recoup the purchase price.
Respondent argues that the final sentence of paragraph 7(h) should be
interpreted to require appellant to indemnify her for the expenses of any litigation
between appellant and Chamberlain, other than that related to the escrow funds.
29
Such an interpretation effectively eliminates the prefixes in the words “counter-
claim” and “cross-complaint.” Moreover, it ignores the context in which the
sentence appears – a paragraph dealing with the consequences of appellant‟s
potential assertion of a claim against Chamberlain over the earn-out provisions.
Taken in that context, 7(h) can reasonably be read to relieve respondent of liability
only for the consequences of a claim appellant might assert under the earn-out
provisions, and to which Chamberlain might respond with a cross-complaint or
counterclaim. In sum, neither 7(g) nor 7(h) addressed the possibility of an action
by Chamberlain to unwind the multi-million dollar Purchase Agreement.33
b. No Other Provision of the 2009 Judgment Addressed
Chamberlain’s Rescission-related Claims
Respondent argues that the expenses of defending and settling
Chamberlain‟s claims were covered by provisions of the 2009 judgment other than
paragraphs 7(g) and 7(h). First, she raises paragraph 34(a), the paragraph dealing
with claims between appellant and respondent in existence in June 2009, under
which appellant agreed to release respondent from claims “which exist or which
[appellant] may claim to exist in favor of [appellant] and against respondent with
regard to or arising out of any transaction or event that occurred prior to the date of
this Judgment.” She asserts that in paragraph 34(b), appellant released all his
claims for costs or liabilities against respondent arising out of the Purchase
Agreement. We reject this argument, as appellant had no claim against respondent
33
While paragraph 7(g) did not address the costs of an action for rescission or
of defending a multi-million dollar claim for damages, it did manifest the parties‟
intention that any reduction in the purchase price resulting from claims of defective
products would be born equally by the parties.
30
under the Purchase Agreement. Chamberlain and appellant had potential claims
against each other, which had not yet ripened into actual litigation when the 2009
judgment was executed. Appellant‟s claim against respondent for litigation
expenses arose a month later, when Chamberlain filed the lawsuit, and appellant
began paying the expenses of the litigation without contribution from respondent.
Next, respondent contends that appellant is solely responsible for the
expenses of the Chamberlain litigation because under paragraph 10(f), he agreed
that any community debt not provided for in the 2009 judgment would be paid by
“the party who incurred such debt.” As we have seen, the community “incurred”
the debt by virtue of the fact that the contractual obligations arose during the
marriage. (Lezine, supra, 14 Cal.4th at pp. 63-64; Feldner, supra, 40 Cal.App.4th
at p. 619.)
In a similar vein, respondent points out that paragraph 10(g) provides that
“[e]ach party shall pay all debts incurred by such party after the date of
separation,” and claims that all the attorney fees and other expenses incurred
during the Chamberlain litigation fit into this category. It is true that appellant
took the responsibility of hiring attorneys, ensuring they were paid, and settling the
litigation, but this does not mean he alone “incurred” the obligation. A spouse or
former spouse cannot transform a debt incurred by the community into separate
debt by refusing to participate and forcing the other spouse to bear the entire
burden of protecting the community‟s interest. (In re Marriage of Hirsch, supra,
211 Cal.App.3d at pp. 110-111; see also In re Cohen (2014) 522 B.R. 232, 241-
242, 244-245 [where taxes were incurred but not paid during the marriage, fact that
post-separation, husband entered into settlement with IRS without wife‟s
participation or consent did not transform obligation into one “„incurred‟” after the
marriage, or exonerate the community or wife]; Reynolds and Reynolds v.
31
Universal Forms, Labels, supra, 965 F.Supp. at p. 1397 [innocent spouse who
declined to participate in litigation over alleged misconduct that allegedly
benefitted the community “cannot later contest the determinations of liability and
community responsibility made in that spouse‟s absence”].)
Finally, respondent contends that paragraph 13(c) allocates all responsibility
for the Chamberlain litigation to appellant. Paragraph 13 covers “Separate
Liabilities.” Paragraph 13(c) provides that “neither party has an obligation to pay
any expense incurred by the other except as provided in this Judgment,” and that
“[u]nless the parties agree to allocate payment responsibility between themselves
for an expense incurred by one of them, the expense shall be paid by the party who
incurred it, who shall indemnify and hold the other party harmless against liability
on account thereof.” As discussed, the expenses of defending Chamberlain‟s
claims were a community liability, not a separate one, and were incurred by the
community, not by appellant separately. In sum, none of the alternate provisions
raised by respondent to support her contention that appellant is solely responsible
for the costs of defending Chamberlain‟s claims applies.
3. Res Judicata
Respondent contends that principles of res judicata preclude appellant from
pursuing his claim for reimbursement of litigation expenses and settlement costs,
contending the 2009 judgment was binding on issues that “could have been” raised
prior to its entry. As explained in In re Marriage of Thorne & Raccina (2012) 203
Cal.App.4th 492, “once a marital dissolution judgment has become final, the court
loses jurisdiction to modify or alter it. [Citations.] Under the doctrine of res
judicata, „“[i]f a property settlement is incorporated in the divorce decree, the
settlement is merged with the decree and becomes the final judicial determination
32
of the property rights of the parties.”‟” (Id. at p. 499.) However, there are
exceptions, including the one covered by section 2556: the trial court may divide a
community property asset or liability that has not been “„previously adjudicated by
a judgment in the proceeding.‟” (Id. at pp. 500-501, quoting § 2556.)34 “„[T]he
crucial question is whether the [asset or liability was] actually litigated and divided
in the previous proceeding.‟” (Id. at p. 501, quoting Miller v. Miller (1981) 117
Cal.App.3d 366, 371; accord, In re Marriage of Georgiou & Leslie (2013) 218
Cal.App.4th 561, 575.) “The mere mention of an asset in the judgment is not
controlling.” (In re Marriage of Thorne & Raccina, supra, 203 Cal.App.4th at
p. 501.)35
Here, for the reasons discussed, we conclude the obligations deriving from
the Chamberlain-initiated rescission claim were not addressed in the 2009
34
The rule that division of a community asset or liability is not precluded by
collateral estoppel or res judicata merely because it could have been disposed of in
a prior judgment of dissolution predates the enactment of section 2556. (See Henn
v. Henn (1980) 26 Cal.3d 323, 331, fn. 6 [disapproving proposition that “any
judicial division of community property necessarily precluded the subsequent
litigation of community property rights in an asset known to exist at the time of the
earlier proceedings, and which could have been adjudicated at that time”].)
35
In re Marriage of Mason (1996) 46 Cal.App.4th 1025, on which respondent
relies, is inapposite. In Mason, the husband moved to set aside a stipulated
dissolution judgment on the ground of fraud, contending the wife had concealed
the fact that she was planning to reopen a business she had closed prior to the
divorce. After the motion was denied, the husband filed an order to show cause,
contending for the first time that the value of the goodwill of the wife‟s business
was an omitted asset under section 2556. The Court of Appeal held that all issues
pertinent to the wife‟s business should have been raised when the husband first
moved to set aside the judgment. The court did not suggest the dissolution
judgment itself operated as a bar.
33
judgment. Accordingly, the doctrine of res judicata does not preclude appellant‟s
claim for a share of the expense of defending and settling the litigation.
4. Unclean Hands
Section 2556 provides that the court “shall equally divide the omitted or
unadjudicated community estate asset or liability,” unless it “finds upon good
cause that the interests of justice require an unequal division of the asset or
liability.” Respondent contends that she should escape all liability for the expenses
of the Chamberlain litigation under section 2556 because appellant has “„unclean
hands.‟” The facts on which respondent relies, however, would not permit the
court to impose on appellant the entire obligation of defending and settling
Chamberlain‟s claims.
Respondent asserts that she “was not a shareholder, officer, director or
employee of IEI and had no involvement in the business,” that she “did not
participate in the sale or the negotiation of the sale,” that she “did not sign the
[Purchase Agreement],” that she was unaware that appellant “had falsely
represented to Chamberlain [in the Purchase Agreement] that all of IEI‟s products
were compliant with all laws and regulations,” and that appellant “had far more
knowledge about the potential Chamberlain Litigation than [she].” She contends
appellant‟s conduct in “illegally manipulating and selling his products in violation
of FCC regulations . . . is substantial evidence of good cause to support the trial
court‟s finding that all of the Chamberlain Litigation liabilities and expenses
should be allocated to [appellant].”36
36
The court below found that appellant “did not disclose to Chamberl[a]in that
IEI products were not in compliance with federal standards and regulations; and he
(Fn. continued on next page.)
34
The fact that a spouse has intentionally engaged in misconduct that harms a
third party without his or her spouse‟s knowledge does not relieve the community
-- or the innocent spouse‟s share of community assets -- from the obligation to the
third party where the community obtained the benefit of the conduct. (See, e.g., In
re Marriage of Hirsch, supra, 211 Cal.App.3d at p. 111 [criminal or tortious
conduct which results in benefit to the community creates “shared community
debt”]; In re Marriage of Bell (1996) 49 Cal.App.4th 300, 310 [at time of
dissolution and division of community assets, equal share of the cost of
reimbursing victim of wife‟s embezzlement fell on husband, where “there was
uncontradicted testimony that the community received the benefit of the
embezzlement”]; see also In re Marriage of Schultz (1980) 105 Cal.App.3d 846,
855-856 [husband‟s negligent failure to appear in court to defend action brought by
creditor, resulting in default judgment, did not “require[] an unequal division of the
. . . debt”], id. at p. 855; § 910, subd. (a).) Assuming the truth of the allegations
that appellant deliberately misrepresented the status of IEI‟s products, his doing so
necessarily furthered the goal of selling the company to Chamberlain for the
agreed price. Thus, his actions benefitted the community and the obligations that
derived from them cannot be unequally divided by the court on that basis.
Respondent contends we should follow In re Marriage of Stitt (1983) 147
Cal.App.3d 579. Stitt is distinguishable. There, the wife, after being convicted of
embezzlement, was sued for fraud and misappropriation of funds. She paid over
$10,000 in attorney fees to defend herself and to reimburse the wronged party. (Id.
attempted to hide this information from Chamberl[a]in.” The court also found that
appellant “withheld information from [respondent] concerning IEI‟s
noncompliance with federal regulations regarding the radio frequency limitations.”
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at p. 584.) She argued these expenses should be regarded as community debt. (Id.
at p. 586.) However, she presented “no evidence the embezzlement jointly
benefited husband and wife.” (Ibid.) Because the husband did not participate in
the embezzlement and no benefit to the community was shown, the court
concluded “[n]o principle of law required the innocent spouse to share the loss
created by the [other].” (Id. at p. 588.) Here, there was a clear benefit to the
community. Respondent and appellant received over $12 million from the sale of
IEI, the bulk of which went into the Sea View property. They split $1.5 million at
the time of separation, and the Sea View property sold for $8.7 million in 2013.
The principle we follow was set forth in In re Marriage of Bell, where the wife
used the embezzled funds for the benefit of the community: “The community . . .
shared in the benefit and could properly be asked to share in the cost.” (In re
Marriage of Bell, supra, 49 Cal.App.4th at p. 310.)
B. Cost of Settlement
Our conclusion that the liability arising out of Chamberlain‟s claims was a
community obligation omitted from the 2009 judgment requires us to reverse the
court‟s conclusion that respondent had no obligation to contribute her share of the
$2 million settlement. The court‟s finding that respondent was relieved of the
obligation because appellant settled with Chamberlain without including
respondent or the community in the settlement or release misconstrues the effect of
the settlement. Appellant‟s actions were the conduit through which Chamberlain
could assert a claim on community funds, including those held by respondent.
Having settled its claims against appellant and received payment of the amount
due, Chamberlain had no basis to pursue respondent or the community. (See
Reynolds and Reynolds v. Universal Forms, Labels, supra, 965 F.Supp. at
36
pp. 1395-1397 [although judgment against spouse acting for benefit of the
community binds community estate and his separate property, innocent spouse has
no personal liability].)
C. Attorney Fees and Costs
1. Fees in the Chamberlain Litigation
Our conclusion does not, however, resolve respondent‟s obligation to pay a
share of the attorney fees and costs arising from that litigation. Although the court
concluded that paragraph 7(h) assigned all the fees and costs of the Chamberlain
litigation -- including the cost of defending Chamberlain‟s rescission-related
claims -- to appellant, it rejected appellant‟s fee request on an alternative ground.
It found that appellant‟s reimbursable fees and costs could not include the expenses
of pursuing his earn-out counterclaim under any interpretation of the 2009
judgment, and that appellant failed to meet his burden of establishing the amount
of his reimbursable fees and costs. We agree.
Appellant concedes the court was correct to describe the billing entries at
issue as “block billing.” He further concedes that the court “correctly said that
[respondent] would not be responsible for any . . . fees incurred in working against
her interests,” and that appellant‟s own attempt to allocate fees between allowed
and disallowed claims was “too speculative to be valuable . . . .” He contends,
however, that substantial evidence to support his claim for attorney fees can be
derived from (1) Beighle‟s testimony that “probably 50 percent to 75 percent” or
“more” of the billed time was devoted to whether “Chamberlain had a right to
obtain the escrow money”; and (2) respondent‟s spreadsheet, in which she
attempted to identify billing entries reflecting work on issues not pertinent to
defending Chamberlain‟s claims. We disagree.
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Preliminarily, we observe that appellant has directed us to nothing in the
record demonstrating that he urged the trial court to allocate between reimbursable
and unreimbursable fees based on Beighle‟s estimation or respondent‟s
spreadsheet. “„As a general rule, theories not raised in the trial court cannot be
asserted for the first time on appeal; appealing parties must adhere to the theory (or
theories) on which their cases were tried . . . . [I]t would be unfair, both to the trial
court and the opposing litigants, to permit a change of theory on appeal.‟” (P&D
Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1344, quoting
Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group
2009) ¶ 8.229, p. 8-155 (rev. #1, 2009).)
More important, the court‟s conclusion is supported by the principles
governing the scope of evidence necessary to support a fee award, especially where
block billing is involved. “[T]he [party] . . . seeking fees and costs „“bear[s] the
burden of establishing entitlement to an award and documenting the appropriate
hours expended and hourly rates.” [Citation.]‟” (Christian Research Institute v.
Alnor (2008) 165 Cal.App.4th 1315, 1320.) “„To that end, the court may require
[a] defendant[] to produce records sufficient to provide “„a proper basis for
determining how much time was spent on particular claims.‟” [Citation.]‟” (Ibid.)
“The evidence should allow the court to consider whether the case was overstaffed,
how much time the attorneys spent on particular claims, and whether the hours
were reasonably expended. [Citation.]” (Ibid.) “„The court . . . may properly
reduce compensation on account of any failure to maintain appropriate time
records. [Citation.]‟” (Ibid.)
Block billing presents a particular problem for a court seeking to allocate
between reimbursable and unreimbursable fees, and trial courts are granted
discretion “to penalize [block billing] when the practice prevents them from
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discerning which tasks are compensable and which are not.” (Heritage Pacific
Financial, LLC v. Monroy, supra, 215 Cal.App.4th at p. 1010; accord, Welch v.
Metropolitan Life Ins. Co. (9th Cir. 2007) 480 F.3d 942, 948 [“The fee applicant
bears the burden of documenting the appropriate hours expended in the litigation
and must submit evidence in support of those hours worked. [Citation.] It was
reasonable for the district court to conclude that [the applicant] failed to carry her
burden, because block billing makes it more difficult to determine how much time
was spent on particular activities”].) “If counsel cannot . . . define his billing
entries so as to meaningfully enlighten the court of those related to the [fee
claim],” the trial court may “exercise its discretion in assigning a reasonable
percentage to the entries,” or “simply cast them aside.” (Bell v. Vista Unified Sch.
Dist. (2000) 82 Cal.App.4th 672, 689.)
It also is true that when a fee claim is inflated with “a multitude of time
entries” devoted to matters other than reimbursable fees, the claimant‟s credibility
is “undermin[ed],” and the court is “justified . . . in taking a jaundiced view of the
fee request.” (Christian Research Institute v. Alnor, supra, 165 Cal.App.4th at
p. 1325.) “An attorney‟s chief asset in submitting a fee request is his or her
credibility, and where vague, blockbilled time entries inflated with
noncompensable hours destroy an attorney‟s credibility with the trial court, we
have no power on appeal to restore it.” (Id. at pp. 1325-1326.)
In its February 2010 order, the court found that the liabilities of the parties
“with respect to the action for rescission and other related relief” filed by
Chamberlain against appellant in the Washington district court constituted an
undisposed of obligation under the 2009 judgment; it specifically rejected
appellant‟s contention that all the costs of the litigation fell into this category.
Appellant thus had both notice and incentive to come to the evidentiary hearing
39
prepared to address allocation. Instead, he claimed entitlement to one-half of all
the attorney fees he paid to Beighle‟s firm, although Beighle himself
acknowledged substantial time was spent pursuing the earn-out counterclaim.
Moreover, even a cursory look at the bills established that the firm had spent
significant time on matters personal to appellant or contrary to respondent‟s
interests. Appellant undertook at the last minute to fill in the gap in the evidence
by personally reviewing the bills and preparing an exhibit summarizing them, but
the court found his methods questionable and gave no credence to his testimony or
the exhibit he prepared.
On appeal, appellant does not dispute the court‟s conclusion that the
evidence he presented was of little value in resolving the attorney fee allocation
issue. The evidence he now claims the court should have relied on does not fill in
the gaps. With respect to Beighle‟s estimate, “[t]he trial court is not bound by an
attorney‟s evidence in support of his requested fee.” (Vella v. Hudgins (1984) 151
Cal.App.3d 515, 524.) Beighle repeatedly testified to his belief that all fees billed
by his firm should be shared between appellant and respondent. Not only had he
made no effort to identify entries related to the earn-out counterclaim, he failed to
separate out time spent on matters unrelated to the litigation or adverse to
respondent. Nor was there any evidence he had reviewed the bills in preparation
for his testimony or even thought about allocation. Looked at in the context of his
testimony as a whole, his offhand statement that “probably 50 percent or 75
percent” or “more” was spent on “whether or not Chamberlain had a right to obtain
the escrow money” did not represent a reasoned conclusion concerning the amount
of time devoted to defending Chamberlain‟s affirmative claims to which the court
was required to give credence.
40
We also reject appellant‟s alternative contention that the spreadsheet
prepared by respondent was sufficient to support an award. Respondent, a lay
person unfamiliar with the Washington litigation or the billing records, relied on
appellant‟s documents to discredit his claim. Her review of the records attempted
to identify work done on matters adverse to her interest, unrelated to the
Chamberlain litigation or labeled as relating to the counterclaim. Such a review
could not substitute for an adequate breakdown of the time spent on Chamberlain‟s
rescission-related claims. In sum, neither Beighle‟s estimation nor respondent‟s
spreadsheet made up for the shortfall‟s in appellant‟s evidentiary presentation, and
the trial court did not err in rejecting the attorney fees claim for lack of evidence.
2. Fees in the Underlying Proceedings
The trial court determined that the costs of the instant litigation were
governed by paragraph 38(b) of the 2009 judgment, which called for an award of
attorney fees and costs to the prevailing party in any proceeding brought “to
interpret or enforce any of the provisions of this Judgment.” We reject appellant‟s
argument that the proceedings below did not represent an effort to “„interpret or
enforce‟” the judgment because “an omitted debt is outside the Judgment.” His
motion under section 2556 required the court to interpret the 2009 judgment,
particularly paragraphs 7(g) and 7(h), to determine whether the Chamberlain
litigation, or any part of it, fell under its terms. Where the litigation centers on the
proper interpretation of a contract containing an attorney fee provision, a party is
entitled to attorney fees as prevailing party under Civil Code section 1717 “„even
when the party prevails on grounds the contract is inapplicable . . . .‟” (Hsu v.
Abbara (1995) 9 Cal.4th 863, 870.) Moreover, the court found, contrary to
appellant‟s assertion, that fees incurred to pursue his earn-out counterclaim were
41
included in the judgment and therefore were not allocable to respondent.
Accordingly, there is no question that the underlying litigation interpreted and
enforced the judgment, allowing the court discretion to award attorney fees under
the contractual attorney fee provision.
Nevertheless, our conclusion that appellant is entitled to recover from
respondent one-half the additional one million dollars he paid Chamberlain
requires reversal of the court‟s award of attorney fees to respondent under the
attorney fee provision of the 2009 judgment, and to remand for reconsideration of
the identity of the prevailing party, if any. (See Scott Co. v. Blount, Inc. (1999) 20
Cal.4th 1103, 1109 [“If neither party achieves a complete victory on all the
contract claims, it is within the discretion of the trial court to determine which
party prevailed on the contract or whether, on balance, neither party prevailed
sufficiently to justify an award of attorney fees”]; Hsu v. Abbara, supra, 9 Cal.4th
at p. 876 [“[I]n deciding whether there is a „party prevailing on the contract,‟ the
trial court is to compare the relief awarded on the contract claim or claims with the
parties‟ demands on those same claims and their litigation objectives as disclosed
by the pleadings, trial briefs, opening statements, and similar sources. The
prevailing party determination is to be made only upon final resolution of the
contract claims and only by „a comparison of the extent to which each party ha[s]
succeeded and failed to succeed in its contentions‟”].)
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DISPOSITION
The court‟s order of September 10, 2014 is reversed with respect to its
denial of reimbursement for one-half the settlement funds appellant paid
Chamberlain. In all other respects, the order is affirmed. The court‟s order of
November 17, 2014, awarding attorney fees to respondent is reversed. The matter
is remanded for entry of an order requiring respondent to reimburse appellant one-
half the settlement paid to Chamberlain from appellant‟s individual funds, and for
reconsideration of attorney fees in the family court proceeding. Each party is to
bear his or her own costs.
CERTIFIED FOR PUBLICATION
MANELLA, J.
We concur:
EPSTEIN, P. J.
WILLHITE, J.
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