Marriage of DeSouza

Filed 8/10/20; Certified for Publication 8/26/20 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
In re the Marriage of ERICA
and FRANCIS DESOUZA.
ERICA DESOUZA,
Respondent, A156311
v.
(City & County of San
FRANCIS DESOUZA,
Francisco
Appellant. Super. Ct. No.
FDI12778498)
Francis DeSouza appeals from a post-judgment order
finding he breached his fiduciary duty to his former wife Erica
and ordering him to transfer bitcoins and other cryptocurrency to
her pursuant to the parties’ judgment of dissolution and to pay
her attorneys’ fees and costs.1 Francis argues he did not breach
his fiduciary duty because information he withheld about his
cryptocurrency investments was not material and, alternatively,
1 For
clarity, we adopt the parties’ practice of identifying
themselves and other key actors by their first names. We intend
no disrespect by this practice.
1
there was no substantial evidence his breach impaired Erica’s
interest in their community estate. Neither point has merit. We
affirm.
BACKGROUND
I. Francis Invests in Bitcoins
In January 2013 Erica served Francis with a petition for
dissolution of marriage, along with an automatic temporary
restraining order that, among other things, prohibited him from
“[t]ransferring, encumbering, hypothecating, concealing, or in
any way disposing of any property, real or personal, whether
community, quasi-community, or separate, without the written
consent of the other party or an order of the court, except in the
usual course of business or for the necessities of life.”
In April 2013, Francis initiated three bitcoin-related
transactions. On April 9 or 10, he wired $45,000 to Mt. Gox
Company Ltd. (Mt. Gox), a Japanese bitcoin exchange, to
purchase bitcoins. Francis never received any bitcoins for this
money, nor recovered the transferred funds.
On April 10, 2013, Francis arranged for his friend and
colleague Wences Casares to purchase 558.32 bitcoins from Mt.
Gox for $99,451 on his behalf. Wences completed the purchase
and transferred the bitcoins, along with an additional gift of five
bitcoins (jointly, the Wences bitcoins), to Francis’s digital wallet.2
On April 12, Francis had his associate Khaled Hassounah
purchase an additional 498.89 bitcoins from Mt. Gox for $44,940
A digital wallet is a secure storage method that can only
2
be accessed by the holder of a private key.
2
(the Khaled bitcoins) on his behalf. Khaled was to transfer these
bitcoins from his own Mt. Gox account to Francis’s digital wallet.
Although he bought the bitcoins as agreed, Khaled never
completed the transfer and the 498.89 bitcoins remained with Mt.
Gox.
In December 2013 and again in August 2014, Francis
moved the Wences bitcoins from one digital wallet to another. In
2017 he learned that the Wences bitcoins had “forked,” an
automatic process that generates dividends from bitcoin holdings
in the form of new currency, “bitcoin cash” and “bitcoin gold.”
II. The Khaled Bitcoins Are Enmeshed in the Mt. Gox
Bankruptcy
By April 2013, Mt. Gox was having regulatory difficulties
with the U.S. government. On April 11 it briefly suspended
trading. In June 2013 federal agents froze two bank accounts
associated with the exchange and seized millions of dollars for its
alleged failures to comply with federal regulations. Mt. Gox
suspended withdrawals to be processed in U.S. dollars.
By late 2013 or early 2014, Mt. Gox lost hundreds of
thousands of bitcoins to hacking, embezzlement, or both. Bitcoin
expert Dr. Charles Evans testified for Erica that as early as
March 2013, “anyone who was active on the Bitcoin discussion
boards, anyone who was making an effort to get to know the
Bitcoin community, knew that Mt. Gox was having trouble left,
right, and sideways. [¶] And my personal opinion at the time was
only an idiot would leave his Bitcoins on Mt. Gox.” Dr. Evans
reviewed emails between Francis, Khaled and Wences in the
3
spring of 2013. One such email from Wences to Francis advised
him to “[b]uy your Bitcoins on Mt. Gox, then get the Bitcoins off
and put them intoBlockchain.info,” and led Dr. Evans to conclude
Francis was aware of the problems with Mt. Gox when he
arranged his proxy purchases in April 2013.3
Francis discovered by December 2013 that he could not get
the Khaled bitcoins out of Mt. Gox. In February 2014, Mt. Gox
halted all withdrawals and filed for bankruptcy. By May 2014,
Francis knew of the bankruptcy. He hoped the situation would
get resolved but made no effort to recover the Khaled bitcoins or
3 In his written report, Dr. Evans elaborated that “Hack #I
took place beginning as far back as 2011 through the time that
MtGOX ceased operation. According to MtGOX CEO, Mark
Karpeles, hackers siphoned off approximately 750,000 bitcoins
held in reserve for customer accounts along with 100,000 of
MtGOX's own bitcoins. This amounted to between 6% and 7% of
the total number of all the bitcoins in circulation at that time,
worth approximately $7.25 billion at current prices as of the date
of this report.
Whether Hack # I indeed was a hack, in the sense of an
external breach, or it was an 'inside job', remains the subject of
speculation among persons who are interested in the MtGOX
saga. Relevant here is not whether the theft was committed by
external or internal actors, but that it was widely recognized that
MtGOX was an accidental success, and its founder and chief
executive was in over his head, as evidenced by email from
Wences Casares to Francis DeSouza dated 22 March 2013, in
which Casares instructed DeSouza, ‘To buy bitcoin open an
account at mtgox.com . . . To store and use bitcoins open an
account at blockchain.info." . . . [¶]• Hack #2 took place in March
2014, concurrent with MtGOX's bankruptcy filing. In this
instance, the hackers released a file called MtGox2014Leak.zip
that they claimed was a database of MtGOX transaction records,
with users’ personal data intentionally removed.’ ”
4
the initial $45,000 he wired to Mt. Gox, which were tied up in the
bankruptcy. He testified, “[t]here wasn’t much money when they
went bankrupt, so at the point it wasn’t worth chasing them for
little money, and now there’s nobody to chase.” Eventually
Khaled filed a proof of claim in bankruptcy for the 498.8 bitcoins,
which were still in his name, on Francis’s behalf.
Francis filed his preliminary schedule of assets and debts
in the divorce action in February 2014 and his final disclosure in
July 2016. Both schedules disclosed his ownership of 1,062.21
bitcoins.
The parties’ property issues were tried in February 2017.
In September 2017 the court issued a final statement of decision,
found the Wences and Khaled bitcoins to be community property
and ordered them divided evenly in kind between the parties,
along with any derivative cryptocurrency.
After entry of the dissolution judgment on December 8,
2017, Erica sought her half of the community bitcoins. Only then
did Francis disclose that the Khaled bitcoins were tied up in the
Mt. Gox bankruptcy. On December 18, 2017, the day after
bitcoin’s value hit a high of $19,783.06, Francis divulged that he
possessed only 613.53 of the 1062.21 community bitcoins. In a
December 22, 2017 email to his attorney copied to Erica’s counsel,
Francis wrote that “[t]he exchange I was using to buy bitcoins,
Mt Gox, was hacked and then went bankrupt. I was able to take
5
out 613.53 bitcoins.”4 Francis had also failed to inform Erica
prior to the judgment that he used Wences and Khaled as proxies
for his bitcoin purchases, that bitcoin cash and gold had been
generated from the bitcoin investments, and that he transferred
of cryptocurrency between digital wallets.
On December 31, 2017, the price of bitcoin was $13,500.
The Khaled bitcoins had appreciated from their initial purchase
price of approximately $45,000 to around $8 million.
III. Erica Seeks Post-Judgment Relief
In January 2018 Erica moved for an emergency order
compelling Francis to immediately transfer her full interest in
community bitcoins to her and for remedies afforded by the
Family Code for his failure to timely and adequately disclose
information about the bitcoin investments. Following a January
12, 2018 hearing the court ordered Francis to immediately
transfer to Erica half of the 613.53 bitcoins and associated bitcoin
cash and gold he had in his possession, to show cause why he
should not be ordered to transfer an additional 224.34 bitcoins
and proportional cryptocurrency, and to pay Erica’s attorney’s
fees and costs pursuant to Family Code sections 721 and 1100. It
is undisputed that Francis transferred 306.765 bitcoins to Erica
in order to comply with the first part of the court’s order.
Erica’s request for order was tried over four days between
June and August 2018. On October 19 the court issued its final
4 Apparently a “forking” event in August 2017 added 50.205
bitcoins to the bitcoins Wences purchased for Francis, resulting
in the 613.53 figure he reported in December 2017.
6
statement of decision finding that Francis committed a series of
transgressions surrounding his purchase and handling of the
bitcoins. The court found Francis violated the automatic
restraining order and his fiduciary duties when, without Erica’s
knowledge or agreement, he sent $45,000 to Mt. Gox to purchase
bitcoins, committed additional community funds so that Wences
and Khaled could purchase bitcoins on his behalf, and moved the
Wences bitcoins between bitcoin wallets. The court further
found that while Francis possessed documentation of the proxy
purchases since April 2013, he “not only refused to disclose, but
affirmatively hid from [Erica] their involvement until February 9,
2018.”
In addition to concealing his bitcoin purchases and use of
proxies, Francis’s failure to inform Erica about the Mt. Gox
bankruptcy further breached his fiduciary duty. “This was a
material fact he should have disclosed to [Erica]. Had he
disclosed these important facts [Erica] would have had the ability
to object to a division in kind of the bitcoins and/or protect her
interest in the bitcoins by requesting the Court to use its
equitable powers to protect her from [Francis’s] decision to
purchase the bitcoins as he did which tied up a substantial
portion in bankruptcy.” Francis again breached his fiduciary
duty when he failed to list the $45,000 sent to Mt. Gox in either
of his declarations of disclosure, failed to file a bankruptcy claim
for those funds, withheld information about his bitcoin
investments during discovery, failed to produce and falsely
7
denied having documentation related to the bitcoins, and failed to
disclose the cryptocurrency generated by forks.
The court ordered Francis to transfer $22,500 in cash and
249.445 additional bitcoins to Erica, along with the corresponding
bitcoin gold and bitcoin cash. Francis was also ordered to pay
Erica’s attorneys’ fees and costs incurred in bringing her motion.
Francis filed a timely appeal after the court denied his new
trial motion.
DISCUSSION
I. Legal Principles
Family Code section 7215 “recognizes the confidential
relationship held by spouses. That relationship is a fiduciary
5 With exceptions not relevant here, subdivision (b) of
Family Code, section 721 provides that “in transactions between
themselves, spouses are subject to the general rules governing
fiduciary relationships that control the actions of persons
occupying confidential relations with each other. This
confidential relationship imposes a duty of the highest good faith
and fair dealing on each spouse, and neither shall take any unfair
advantage of the other. This confidential relationship is a
fiduciary relationship subject to the same rights and duties of
nonmarital business partners, as provided in Sections
16403, 16404, and 16503 of the Corporations Code, 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 that 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
8
relationship ‘impos[ing] a duty of the highest good faith and fair
dealing on each spouse[.]’ [Citation.] Also within that division,
section 1100 addresses management and control of community
property. Subdivision (e) of section 1100 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.’” (In re
Schleich (2017) 8 Cal.App.5th 267, 276-277 (Schleich).)
This fiduciary duty continues after separation, including
“the accurate and complete disclosure of all assets and liabilities
in which the party has or may have an interest or obligation and
all current earnings, accumulations, and expenses, including an
immediate, full, and accurate update or augmentation to the
extent there have been material changes.” (§ 2012, subd. (a)(1).)
from any transaction by one spouse without the consent of the
other spouse that concerns the community property.
Further statutory citations are to the Family Code.
9
“Taken together, these Family Code provisions impose on a
managing spouse affirmative, wide-ranging duties to disclose and
account for the existence, valuation, and disposition of all
community assets from the date of separation through final
division. These statutes obligate a managing spouse to disclose
soon after separation all the property that belongs or might
belong to the community, and its value, and then to account for
the management of that property, revealing any material
changes in the community estate, such as the transfer or loss of
assets. This strict transparency both discourages unfair dealing
and empowers the nonmanaging spouse to remedy any breach of
fiduciary duty by giving that spouse the ‘information concerning
the [community's] business’ needed for the exercise of his or her
rights [citation], including the right to pursue a claim for
‘impairment to’ his or her interest in the community estate
[citation].” (In re Marriage of Prentis-Margulis &
Margulis (2011) 198 Cal.App.4th 1252, 1270-1271 (Margulis).)
Section 1101 thus affords each spouse a claim against the
other for any breach of fiduciary duty that results in an
impairment to his or her 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 interest in the community estate. (§1101, subd. (a).)
Remedies for a breach of this duty that impairs another spouse’s
interest in the community estate include “an award to the other
spouse of 50 percent, or an amount equal to 50 percent, of any
10
asset undisclosed or transferred in breach of the fiduciary duty
plus attorney’s fees and court costs.” (§1101, subs. (a), (g).)
Our courts have varied in stating the standard of review
that applies when the trier of fact has found a breach of this duty.
(See In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, 144
(Kamgar) [substantial evidence]; Schleich, supra, 8 Cal.App.5th
at pp. 283-284 [abuse of discretion].) The difference in approach
does not matter here. “The abuse of discretion standard is not a
unified standard; the deference it calls for varies according to the
aspect of a trial court's ruling under review. The trial court's
findings of fact are reviewed for substantial evidence, its
conclusions of law are reviewed de novo, and its application of the
law to the facts is reversible only if arbitrary and capricious.”
(Haraguchi v. Superior Court (2008) 43 Cal.4th 706, 711-712.)
“ ‘When a trial court's factual determination is attacked on
the ground that there is no substantial evidence to sustain it, the
power of an appellate court begins and ends with the
determination as to whether, on the entire record, there
is substantial evidence, contradicted or uncontradicted, which
will support the determination, and when two or more inferences
can reasonably be, or deduced from the facts, a reviewing court is
without power to substitute its deductions for those of the trial
court. If such substantial evidence be found, it is of no
consequence that the trial court believing other evidence, or
drawing other reasonable inferences, might have reached a
contrary conclusion.’ ” (In re Marriage of Goodwin-Mitchell &
Mitchell (2019) 40 Cal.App.5th 232, 238-239.)
11
II. Materiality
As noted in Schleich, supra, 8 Cal.App.5th at pp. 276-277,
subdivision (e) of section 1100 requires each spouse to fully
disclose all material facts regarding community assets. Francis
argues his failure to fully inform Erica about the bitcoin
investments was not “material” within the meaning of this
provision because “no evidence suggested Erica’s knowledge of
this information would have affected her decision-making in the
least.” The court’s contrary finding is supported by substantial
evidence and within its discretion.
The court found the suspension and bankruptcy of Mt. Gox
less than a year after Francis used community funds and proxies
to purchase bitcoins from the exchange “substantially impaired
[Erica’s] undivided one-half interest in the community Bitcoin
estate. She was unable to sell or transfer a substantial portion of
her bitcoins. The purchase made by Wences was previously
transferred to [Francis’s] blockchain wallet but Khaled’s
purchase and the $45,000 deposit by [Francis] are subject to the
bankruptcy and are inaccessible and if [Erica] were ever to
receive some or all of her bitcoins or the cash it most likely will be
at a significant loss, or even turn out to be worthless.” The court
further found that Francis’s 2014 and 2015 declarations of
disclosure listed the total amount of his bitcoin purchases, but
failed to disclose that 498 of those 1062.21 bitcoins were (1)
purchased by and still in Khaled’s nominal possession; and (2)
tied up in the Mt. Gox bankruptcy. These facts, the court found,
were material. “Had he disclosed these important facts [Erica]
12
would have had the ability to object to a division in kind of the
[total] bitcoins and/or protect her interest in the bitcoins by
requesting the Court use its equitable powers to protect her from
[Francis’s] unilateral decision to purchase the bitcoins.”
Francis asserts the evidence that Erica generally took no
interest in the couple’s finances during or after their marriage
proved that she would not have done anything to protect her
interest in the bitcoin investments had he informed her about
them. The trial court reasonably disagreed. Erica’s lack of
involvement or interest in the couple’s finances before they
separated is undisputed, but it sheds little if any light on what
she would do to protect her financial interests after retaining
divorce counsel, filing for divorce, and serving Francis with
restraining orders that barred him from making unilateral
decisions involving the community estate. Even Francis
acknowledges in his reply brief the “general validity” of Erica’s
point that “ [a] spouse who may be reliant on and trusting of the
other during marriage, may well exercise independent judgment
and rely on new advisors after separation. Indeed.
Nor did Francis’s evidence compel the court to accept his
view that Erica “continued her indifference to issues surrounding
the community’s investments” after the parties separated. His
support for this characterization consists of his own conclusory
testimony to that effect and one post-separation incident in
which Erica agreed to his request to invest $50,000 of community
funds in a friend’s company. None of this, plainly, compels a
finding that Erica would have done nothing throughout years of
13
divorce litigation to preserve her interest in an investment that
was worth millions of dollars by the time the property judgment
issued.
Francis more specifically asserts that his failure to disclose
his initial purchase of bitcoins is immaterial because “the court
did not base its Family Code section 1101, subdivision (g) award
on a finding that Francis had breached his fiduciary duty by
failing to disclose his investment to Erica beforehand, or for that
matter by keeping the Khaled bitcoins at Mt. Gox or by
employing proxies to purchase bitcoins.” Rather, he maintains,
the findings of breach “[a]t most” “related to [his] failure to tell
Erica at various times well after he purchased the bitcoins about
his use of proxies and the Mt. Gox bankruptcy.” Not so. The
court expressly (and nonexclusively) found that Francis
“breached his fiduciary duties to [Erica] when he purchased the
bitcoins in 2013. . . .” (Italics added.) And it found the Mt. Gox
suspension and bankruptcy “substantially impaired” Erica’s
interest in the Khaled bitcoins by rendering them inaccessible
and potentially worthless. “[T]hese facts were clearly ‘material’
information that should have been made known” to her.
Francis’s distortion of the court’s express findings does not help
him.
Neither does his suggestion he cannot be faulted for failing
to disclose the Mt. Gox bankruptcy because, although he received
a notice of bankruptcy in May 2014, he testified that he was
unaware the Khaled bitcoins were caught up in it before Khaled
told him in December 2017. The trial court expressly disbelieved
14
this testimony. “Given the fact that Khaled testified that he
worked with [Francis’s] brother for a period of at least ten years
and had not only socialized with Francis, but had traveled with
him too, it is more likely than not that [Francis] knew of the loss
of bitcoins to bankruptcy earlier than December 2017.” We will
not second guess the court’s credibility assessment. (Thompson v.
Asimos (2016) 6 Cal.App.5th 970, 981.)
The court’s finding that Francis failed to disclose material
information about his bitcoin investments is supported by
substantial evidence and within its broad discretion.
III. Impairment
Francis argues that, even if he failed to disclose material
information, his disclosure caused no impairment to Erica’s
community interest because, even with the Khaled bitcoins tied
up in the Mt. Gox bankruptcy, the Wences bitcoins “earned
millions of dollars for the community, thereby greatly enriching,
not impairing, the community estate.” Again, the trial court
reasonably disagreed. True, the bitcoins Wences purchased for
Francis and moved out of Mt. Gox before the bankruptcy grew
from an initial value of roughly $100,000 to around $3.45 million
by August 2018.6 But the financial success of one undisclosed
investment does not erase the harm to the community estate, and
Erica, occasioned by a separate undisclosed transaction.
In re Marriage of Feldman (2007) 153 Cal.App.4th 1470,
1483 (Feldman) is instructive. There, a husband contended his
6 Francis does not dispute his liability to the community for
the initial $45,000 wired to Mt. Gox.
15
failure to include a $1 million bond in his financial disclosures in
violation of section 2102, subdivision (a)(1) was excused by his
failure to include the corresponding debt he incurred to finance
the bond’s purchase. The contention was unavailing. As the
appellate court observed, “[t]he statutory policy in favor of
disclosure contains no exception for debts and assets that offset
each other, and [Husband] has cited no authority to support such
a position.” (Ibid.) So too here. Francis attempts to distinguish
Feldman on the ground it addresses sanctions for failures to
comply with financial disclosure obligations under section 2102
rather than spousal liability for fiduciary breaches more
generally, but the distinction is immaterial. As observed in
Margulis, supra, 198 Cal.App.4th at p. 1270, section 2102,
together with sections 721, 1100 and 1101, is part of the
integrated statutory scheme that implements the policy of
fiduciary care by imposing “wide-ranging duties to disclose and
account for the existence, valuation, and disposition of all
community assets from the date of separation through final
division.” (Ibid.) The statutory policy at issue in Feldman,
therefore, is equally compelling here. Alternatively, Francis
insists the Khaled and Wences’ bitcoins were merely two facets of
one unitary investment and, therefore, he cannot be penalized for
one and not credited for the other. But the trial reasonably court
drew a different inference from the evidence, so we will not
disturb it.
Lastly, Francis’s contention that his nondisclosures did not
cause the bankruptcy and resulting devaluation of the Khaled
16
bitcoins largely rests on and reiterates his argument that the
nondisclosures were immaterial. Accordingly, it fails for the same
reasons. In any event, nothing in the trial court’s order suggests
its findings are premised on such an unlikely surmise.
DISPOSITION
The order is affirmed.
17
_________________________
Siggins, P.J.
WE CONCUR:
_________________________
Fujisaki, J.
_________________________
Petrou, J.
DeSouza v. DeSouza, A156311
18
Filed 8/26/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
In re the Marriage of ERICA
and FRANCIS DESOUZA.
ERICA DESOUZA, A156311
Respondent, (City & County of San
v. Francisco
Super. Ct. No.
FRANCIS DESOUZA,
FDI12778498)
Appellant.
BY THE COURT:
The opinion in the above-entitled matter filed on August 10, 2020, was
not certified for publication in the Official Reports. For good cause, the
request for publication filed August 26, 2020 is granted.
Pursuant to California Rules of Court, rules 8.1120 and 8.1105(c)(2),
the opinion in the above-entitled matter is ordered certified for publication
in the Official Reports.
Dated: _______________ ___________________________________P.J.
Trial Court: San Francisco County
Trial Judge: Hon. Richard C. Berra
Attorneys: Philip S. Silvestry, Gregory R. Ellis for Appellant.
Samantha Bley DeJean, Juliana Yanez, Robert A. Olson,
Eleanor S. Ruth for Respondent.