Alternative Dispute Resolution During COVID-19 and Beyond
The cost and inefficiencies of family litigation have only been exacerbated by the ongoing Coronavirus (COVID-19) pandemic. Parties dealing with non-emergency family law matters such as divorces have found their cases brought to a standstill, leading to uncertainty and anxiety. Los Angeles county family courts have backlog tens of thousands of cases deep, and family courts may not resume normal levels of function until 2021.
While frustrations abound, the good news is that there have long existed multiple alternatives to appearing in court, all of which continue to be available while California's current Stay at Home orders are in place. Here, we introduce you to some of these Alternative dispute resolution options and discuss how you can apply them to preserve time, money, and privacy in your ongoing family law matter.
Adjudicatory Alternative dispute resolution Measures
In a recent webinar sponsored by the Beverly Hills Bar Association, retired Los Angeles Superior Court Commissioner Keith M. Clemens discussed several forms of alternative dispute resolution. He subdivided them into three categories: adjudicatory, non-adjudicatory, and hybrid alternatives.
One adjudicatory alternative made possible by the California Rules of Court is the appointment of a privately compensated temporary judge. The private judge is paid for by the parties, rather than by the state of California. There are three main requirements for the use of a private judge. The first is that both parties must agree to use one. The second is that the chosen judge be an active member in good standing with the California Bar. A California licensed attorney is eligible to act as a judge, but in Southern California, most of the private judges are retired members of the bench. The third and final requirement is that the presiding judge of the county in which the parties filed their case (for instance, in the case of Los Angeles County, Judge Riff) authorize the appointment. The advantage of using a private judge is that an order issued by a private judge has the same legal effect as one issued by a sitting judge and, therefore, the parties retain the same rights of appeal and enforcement.
Another adjudicatory alternative is the appointment of a referee, an alternative dispute resolution mechanism made possible under the Califronia Code of Civil Procedure. A referee could be an attorney or retired judicial officer who hears the parties' evidence, makes findings and recommendations, and issues what is called a "statement of decision." Once both parties agree to hire a referee, they file a written copy of said agreement with the court in which their case is pending, which must then be approved by the family law judge assigned to their case. Unlike a private judge, however, the referee does not have the powers of a judge, such as the power to issue subpoenas. And, while subpoenas do not come into play in every family law matter, they can be critical tools for everything from determining the nature and extent of a party's community property, to eliciting testimony from parties and nonparties. Also, the referee's report is not final and binding, and either party may object to it. This means that statements of the decision issued by referees lack the finality of orders made by temporary private judges. Disputes arising from statements of decision are resolved by the judge of the superior court in which the case is pending.
Parties also have the option of stipulating to binding arbitration. Unlike private judges and referees, binding arbitration does not require a judge-type figure at all; it is instead, a matter of contract. As such, the parties must decide on three things: the arbitrator, the scope of the arbitration, and the degree to which an arbitration award is appealable. An arbitration award does not have the same legal power as a court order – and may have to be entered as an order or a judgment before it can be similarly enforced. Therefore, if a party does not like the award and chooses not to adhere to it, it will not automatically have the same legal consequences as an order. An additional caveat to note with this alternative dispute resolution method is that, while it is possible to arbitrate financial and property-related issues, it is less clear whether parties can arbitrate with regard to custody.
Non-Adjudicatory Alternative dispute resolution Measures
There are a number of non-adjudicatory alternative dispute resolution techniques.
Mediation Mediation is the least formal alternative dispute resolution technique and is governed by California Evidence Code. The parties can agree to select a mediator whose job is then to facilitate an agreement between the parties. The third-party neutral mediator listens to what each party has to say and helps each communicate their position to the other until either an agreement is reached or it is clear that agreement is not possible. To encourage candor, the process is confidential, and the mediator is not allowed to disclose any information provided to the mediator by either party without consent. Successful mediations result in settlement agreements, which are then entered as stipulated orders or judgments. Mediation is appealing because its dialogue-based approach is often inherently less adversarial and threatening.
Hybrid Alternative dispute resolution Measures
Parties may opt for a hybrid approach to alternative dispute resolution. There are two hybrid forms of alternative dispute resolution: recommending mediation, and mediation-arbitration. While meditations are confidential, recommending mediations necessitate a waiver of this confidentiality to allow for the neutral of an unsuccessful mediation to make a recommendation to the ultimate decider (such as a civic or private judge or arbitrator or referee). Similarly, in mediation-arbitration, a third-party may act as both a mediator and, in the event the mediation is unsuccessful, an arbitrator. The parties need to agree at the outset whether the confidentiality of the mediation may be waived if they are unable to come to a resolution and need to shift gears to an arbitration. For example, if John and Jill opt for mediation-arbitration to resolve their divorce, they must agree, before they even begin to mediate, whether what they say in the scope of their mediation will remain confidential. If they want it to remain confidential and prove unsuccessful at their mediation, the mediator-turned-arbitrator would then need to ignore what they learned over the course of the mediation, and decide the case only based on the evidence presented to them in the arbitration phase of the alternative dispute resolution.
Concerns Related to Technology and Alternative dispute resolution
In a recent webinar presented by JAMS – an alternative dispute resolution provider, four retired Judges (Hon. Melinda A. Johnson , Hon. Riva Goetz, Hon. Sheila Sonenshine, and Hon. Nancy Wieben Stock) spoke with JAMS manager Ed Cruz about the learning curve.
While all the panelists acknowledged the learning curve inherent in adopting new or unfamiliar forms of technology, many stressed that these challenges are less than they initially anticipated. They reminded viewers that videoconferencing technology has long existed, and has been implemented very successfully to resolve family law disputes.
For those concerned with privacy and security, you aren't alone – 82% of webinar participants indicated similar apprehensions. However, as Mr. Cruz assured webinar viewers, there are many things your attorney or an alternative dispute resolution facilitator such as JAMS can do to ensure the privacy of virtual mediation. For example, if your attorney uses Zoom, they can create a unique ID and password for every session, separate the parties into locked virtual "breakout rooms," and enable the "waiting room" feature to control who is and who is not allowed into the main mediation session. The arbitrator, mediator, referee, or private judge can also disable or restrict the recording and screen-sharing features. According to Mr. Cruz, in the over 1000 virtual mediations hosted by JAMS since Californians began sheltering in place, there have been no instances of security breaches (known as "Zoom bombing") by nonparties to the mediation.
With regard to hearings held virtually by temporary judges, Judge Sonenshine stressed the importance both of advance preparation and a courteous tone. For example, she suggested that each party's experts (such as forensic accountants) meet and confer with one another before the virtual mediation. She also cautioned against submitting briefs that are anything but concise, complete, and respectful, as it can be more difficult to manage heightened emotions or hurt feelings when participants are interacting virtually. Judge Stock observed that the COVID-19 phenomenon might very well change parties' hearts and minds regarding what they want from one another and how they want to go about getting it and that, therefore, it may be opportune to capitalize on that emotional shift by mediating. She also emphasized that emotionally-speaking, virtual mediation is beneficial to her as a temporary judge – it allows her to see witnesses' faces more fully, which allows her to gauge better their responses to the introduction of certain pieces of evidence or particular lines of questioning. She also said that screen-sharing often allowed her a clearer view of the evidence being viewed by a witness.________________________
We have always encouraged our clients to consider alternative dispute resolution, due to its tendency to increase privacy and efficiency while often lowering overall expenses. However, during this challenging time of quarantines and limited judicial function, the intersection of alternative dispute resolution and today's technology has become even more appealing. Alternative dispute resolution decreases the costs of litigation in every sense: in addition to helping us maintain our health through social distancing, the time and expense saved by appearing remotely via third-party platforms like Zoom, Microsoft Teams, and Skype instead of in court lowers costs for attorneys and experts, who are then able to pass those savings along to their clients. JAMS webinar participants seem to appreciate these benefits, with 88% agreeing that, when social distancing comes to an end, it will be more common for at least one party to a mediation to appear by video. Alternative dispute resolution represents a way not only to keep your case moving without the courts, but a way to keep it moving more efficiently (and, therefore, in many cases, more cost-effectively).
For more information about alternative dispute resolution and how it may be effectively used in your case, call us at (310) 948-6461 to schedule a consultation.
Los Angeles County Superior Court Family Law Update
While the situation is fluid and changing on a daily (sometimes, even hourly) basis, we want to provide you with an update on the state of family law in the Los Angeles County superior courts, as of April 28, 2020.
On March 23, 2020, Los Angeles County Presiding Judge Kevin Brazile issued General Order 006, which limited the courts to certain “essential” functions. For purposes of family law, these essential functions relate to ex-parte applications, restraining orders, and international kidnappings. On April 14, 2020, Judge Brazile issued another General Order extending this period of limited court function through Tuesday, May 12, 2020. This window may be extended yet further, as the courts attempt to accommodate local, state, and federal health directives. Currently, the tentative date on which standard court functions are expected to resume is June 22, 2020, although that is subject to change. Should courts resume their full calendars at that time, it is likely that certain behavioral rules will be implemented to allow for social distancing.
The Los Angeles Superior Courts have also adopted a series of Emergency California Rules of Court. Of particular relevance to those of us in the family law space are Rules 3, 8, 11, and 12.
Rule 3 relates to the use of technology for remote appearances and empowers the Court to mandate that judicial proceedings and court operations be conducted electronically. This includes things like mandatory exchange of authentication of documentary evidence and e-filing and e-service. Several counties, including Los Angeles County, have established email addresses at which ex partes may be filed directly. A full list of these emails, arranged by courthouse, can be found here.
Under Rule 8, any restraining or protective order that is set to expire during the state of emergency related to the COVID-19 pandemic may be extended for up to 90 days from the date of expiration so that the protected party may seek a renewal of the order.
According to Rule 11, either party can elect that a deponent appear remotely.
Rule 12 requires that parties represented by counsel who have made an appearance (i.e. filed paperwork with or appeared in front of the court) must accept electronic service of any document or notice that could otherwise be served by mail or fax. It is the responsibility of the serving party to confirm, by phone or email, the appropriate electronic service address for the opposing counsel being served. Electronic service is permissible on a self-represented party only when that party's consent is first obtained in writing.
Rule 13 facilitates changes to existing support orders while the courts are operating in a limited capacity by allowing Judges to backdate support orders, if they so choose, to the date on which the order was served on the opposing party. Prior to the adoption of this emergency rule, such orders could only be backdated to the date on which the modification request was filed with the court. The rule aims to both accommodate any COVID-19-related filing delays and account for income loss nearest the moment of the loss itself.
These Emergency Rules will remain in effect until repealed by the Judicial Council, or, until 90 days following a declaration from Governor Newsom that the current state of emergency is over.
While it may not seem like it now, a return to “normal” is forthcoming. When courts begin hearing non-emergency matters again, they will do so according to the urgency of subject matter. For example, matters involving physical safety, food, and shelter would take precedence. Court staff is currently categorizing all existing and incoming matters. Once they do so, they will notify our office of the new hearing date. It is our understanding from the courts that this categorization and notification process will likely take several weeks.
In this season of spring cleaning, the LA County Courts have introduced two procedural changes to expedite enforcement of existing rules and empower parties throughout the divorce process. Here, we discuss what these changes may mean for clients navigating divorces.
UPDATE #1: Orders to Share Financial Information
As discussed in earlier editions of As It Happens, spouses have a fiduciary duty to provide complete and accurate information regarding any transaction involving their community property upon request. This duty applies both during marriage and divorce - in California, spouses must disclose all separate and community income, expenses, assets, and debts within 60 days of service of their Petition or Response, and are required to continually update this information while the proceedings are pending. Failure to do so can lead to a variety of penalties and sanctions, including forfeiture of some or all of the undisclosed asset(s), and payment of the non-breaching party’s attorney’s fees. Full and timely disclosure of the totality of a party’s financial picture is crucial in determining whether and in what amount the parties will owe support and/or attorney’s fees, and the need for/extent of the discovery required.
Consider the example of Jane and Tom, who have been married for 21 years, and share two minor children. Jane - who was the sole earner in the marriage and exclusively controlled the parties’ finances - files for divorce from Tom. Within days of filing, Jane cuts off Tom’s access to all their shared accounts.
In order to have an accurate understanding of the assets available to him for spousal support, child support, and attorney’s fees, Tom will need to see Jane’s Income and Expense Declaration. Additionally, while Tom knows Jane owned multiple companies and had a large, diversified investment portfolio, he doesn’t have any details about the amount and locations of their community assets. In order to determine the amount of discovery his attorneys have to do, and whether he needs to hire any experts, a forensic accountant for example or a business or real estate appraiser, Tom will need to see Jane’s disclosures. A review of the disclosures will help Tom and his legal team understand what Jane claims their community or their separate estates consist of.
Before mid-May 2018, if Jane failed to meet her 60-day deadline, Tom would have to first submit his own disclosures, then submit a formal request for Jane’s within a certain period of time. If Jane still refused to submit her financial documents, Tom could file a motion with the Court asking it to order Jane to do so, and further request that she be sanctioned for noncompliance. Starting in May 2018, whenever a petition for divorce, legal separation, or nullity of marriage is filed, the Court will issue an Order to Share Financial Information. If a party doesn’t file their financial disclosures within 60 days of filing either their Petition or Response, this new order empowers the Court to sanction them immediately (note: the money collected from such sanctions is payable to the court, not the opposing party). Not only does this new order save the party requesting disclosures time and effort, it acts as an incentive/motivation for both parties to disclose at the outset.
UPDATE #2: Orders to Share Financial Information
The second modification has to do with Requests for Order, more commonly referred to as “RFO”s. Once a proceeding for divorce, separation, or nullification of marriage has been initiated (i.e. once one party has filed a Petition and the other party has filed a Response), either party may file an RFO to request a formal order from the court that will control some aspect of the parties’ relationship for the duration of the legal proceedings between them.
Under the new rule, whenever the first RFO is filed in a family law matter (with the exception of requests for Domestic Violence Restraining Orders), the Court will issue an Order for the parties to participate i a Family-Centered Case Resolution Conference, and schedule said conference for the same date as the hearing for the RFO. Prior to the conference, the parties or their attorneys will be required to discuss the entire case in detail (including settlement proposals) either in person or over the phone. Then, at the Conference, the Court can attempt to facilitate the settlement of the case, or make orders for how the case will proceed. The Court will also provide the parties with a Divorce Checklist, which lists some of the common issues in divorce cases and where to find the information the Court typically wants to see before making decisions on those issues. One of the issues highlighted on the Divorce Checklist is the issue of real property division, one that arises in nearly every divorce case. In addition to pointing out the issue, the Checklist notes that the Court will want to see copies of title papers, the most recent mortgage statements, and an appraisal from a licensed real estate appraiser before making a ruling on division of the property.
To understand the practical effect of this new rule, consider the example of Heidi and Chris: In June, Chris files for divorce from Heidi, and moves out of the family home. The two spend the summer shuttling their young son between summer camp, friends’ houses, Heidi’s house, and Chris’ new residence. However, in August, it occurs to Heidi that it may be useful to have a more concrete schedule in place during the school year, so she files an RFO, requesting a formal determination of custody for the remainder of the pending divorce action. Under the old system, the Court would schedule a hearing during which only the matter of Heidi and Chris’s temporary custody arrangement would be discussed and ruled upon. Now, when Heidi files her RFO, the Court would schedule not only the custody hearing, but the Case Resolution Conference as well. While it may be that in that moment all Heidi and Chris are concerned with is where their son is going to be the first months of school, they’ll now also have to discuss support and division of their community estate, any reimbursement and tracing issues. Heidi and Chris are now required to start collecting information about and discussing every aspect of their divorce case from the outset. Even if all their issues aren’t resolved at the Case Resolution Conference, the door has now been opened for a conversation about their entire divorce. It remains to be seen whether this rule will tend to expedite the divorce process by motivating parties to be informed or will more often increase the cost of litigation by mandating the parties to address all other issues instead of focusing their efforts on the one before the Court.
While these additions and modifications can have a major impact on the cost, strategy, timeframe, and outcome of your divorce. To find out more about how these rules may affect the landscape of your divorce, visit our website at zitserlaw.com, or call us at (310) 948-6461 or (818) 763-5274 to schedule a consultation.
From “honoring and obeying” to taking out the trash, the duties that first come to mind when thinking about marriage are usually not fiduciary ones. Nevertheless, failure to fulfill these obligations of good faith and fair dealing can have serious financial consequences for couples before, during, and after divorce. While fiduciary duties arise in a wide variety of contexts (including between doctors and their patients, lawyers and their clients, and priests and their parishioners), they take on a particular meaning with married couples. Simply put, they compel spouses to deal fairly, responsibility, and transparently with one another regarding the management of their community property. Community property consists of assets acquired between marriage and separation, and includes wages, real property, stocks, businesses, bonds, pension plans, and 401ks. Additionally, a couple can change the character of an asset and agree that assets that are “separate” under the law (like an inheritance received during the marriage and prior to separation, or an asset owned prior to date of marriage), be re-characterized from separate to community.
While California law appears to allow each spouse to manage community property however they want, fiduciary duties exist to check this apparent absolute power of disposition. Family Code §721 dictates that spouses have the same fiduciary relationship as non-married business partners, which, in the context of the marital relationship, means they must do things like share information about transactions affecting their community assets and debts. In California, fiduciary duties exist between spouses so long as their community property remains undivided. For example, a couple who is ordered by the court to sell their former family residence and divide the proceeds may finalize their divorce before the residence has sold, but will continue to have fiduciary duties towards one another vis a vis the house until it sells.
Here, we explore some of the more common scenarios and pitfalls couples experience when confronted with their roles as fiduciaries:
SCENARIO 1 – Providing Access to Records
In the recent case of In re Marriage of Kamgar, the California Court of Appeals addressed whether the undisclosed trading of community stock constitutes a breach of a spousal fiduciary duty. Fred and Moira, a well-to-do couple, decided that Fred – who had developed an interest in options trading – would liquidate $2.5 million worth of community property stock so that he could “try his hand at doing something he [found] interesting.” Unbeknownst to Moira however, Fred in addition to the agreed upon $2.6 million went on to liquidate and invest an additional $8.1 million of the couple’s community stock, ultimately losing all but $409,000 of their $10.6 million community funds. When Moira filed for divorce a year later, Fred argued that the Family Code authorized him to spend the couple’s resources as he would his own, and that requiring him to report to Moira on the minutiae of every investment was untenable given the fast-paced nature of the modern electronic marketplace and the number of financial decisions implicit in the marital relationship. In response, the court highlighted the duty of each spouse to always make available to the other, without asking, any and all information required for the exercise of their rights in the marriage. The court explained that, since each spouse has a right to manage the community property, the withholding of any information that would prevent them from said management is a violation of a spousal fiduciary duty. Ultimately, because each spouse in a marriage has an equal right to manage the community’s property, the court found that Fred’s failure to disclose his additional $8.1 million investment to Moira infringed upon her managerial right and was therefore a violation of his fiduciary duty.
Our firm recently handled a case in which the parties co-owned an international import/export business. After their separation and the husband’s assumption of control of the business, the wife withdrew a large amount of money from the business account. The husband responded to this withdrawal by immediately taking her name off all business accounts and cards and changing all the company’s passwords and login information. The court held both parties accountable for their respective fiduciary breaches: it found that the wife breached her duty by withdrawing such a large sum without the husband’s knowledge or consent, but also required the husband to provide her with monthly reporting of all the business’s financials, and to report any large or otherwise extraordinary transactions.
SCENARIO 2 – Providing Information Upon Request
During both marriage and dissolution, spouses have a duty to disclose to one another “upon request, true and full information of all things affecting any transaction that concerns the community property.” In fact, California even requires divorcing spouses to fully and accurately disclose all separate and community income and expenses at the very beginning of divorce proceedings. For instance, per Family Code § 2104, the spouse who commences the divorce action is required to serve his/her financial declarations (known as Preliminary Declarations of Disclosure) on the opposing party within 60 days of serving the Petition for Dissolution and responding spouse is required to serve his/her Preliminary Declarations of Disclosure within 60 days of service of the Response.
Additionally, spouses have a duty to continually update this information while the proceedings are pending. The 2007 case of In re Marriage of Feldman dealt with a community estate worth in excess of $50 million. Aaron Feldman accumulated assets worth in excess of $50 million. During their divorce proceedings Mr. Feldman failed to disclose significant assets to his wife, including: a $1 million government bond and the loan taken out to purchase it, a multi-million-dollar residential property, a 401k, and the acquisition of several new companies. The court found that by failing to disclose these assets when Ms. Feldman specifically requested this information, Mr. Feldman violated his fiduciary duty to disclose upon request. The court also found that, because Mr. Feldman’s omission was intentional as opposed to inadvertent, his punishment must likewise be more severe.
What about the remedies and consequences available to the respective parties for these breaches? Because the discovery process is an essential tool in achieving equitable division of marital assets, courts deal very seriously with parties who intentionally fail to disclose assets or debts. Family Code § 271, 1101, and 2107 provide a range of remedies in the event one party’s nondisclosure “results in impairment to the claimant spouse’s present undivided one-half interest in the community estate.” These remedies include sanctions “in an amount sufficient to deter repetition of the conduct or comparable conduct”, payment of the opposing party’s attorney’s fees, and exclusion of evidence regarding the undisclosed item. Depending on the degree of deceit it observes in the nondisclosure, the court has the ability to order forfeiture of 50% to 100% of the value of the undisclosed property. Take, for example, a case handled by our firm, in which the husband failed to disclose multiple pieces of real estate. After the proceedings were over and a judgment of dissolution was entered wife discovered that several real properties existed and were purchased by husband with community funds. The husband failed to disclose the existence of these assets during the proceedings. While the parties ended up settling outside of court, the court had the discretion to grant wife 100% of the real estate purchased with community funds and intentionally omitted by husband.
The non-offending party has three years from the time they learned of the breach to seek one or more of these section 1101 remedies from a family law court. As set forth in Feldman, no harm need to result to the nonoffending spouse from the nondisclosure to receive sanctions and attorney’s fees. In the Feldman, Mr. Feldman was ordered to pay $250,000 in sanctions, and wife’s attorney’s fees of $140,000.
It is worth noting that, while these potentially severe penalties can be appropriate in instances where someone intentionally hides information, the courts and the law are aware that sometimes assets are not disclosed by mistake. For example, when parties have so many brokerage accounts between them that they mistakenly fail to address one in the judgment, and it remains undivided. In such a case the parties may go back and ask the court to divide these omitted assets.
Fiduciary duties can come into play at many junctures in marriage and divorce including the expenditure of community funds during marriage, and failing to disclose community assets during divorce. Because of the high stakes associated with spousal fiduciary duties, it is important to retain an attorney that understands them, and what they entail. Decisions made during the marriage and during divorce can have a huge impact on how the court divides assets so find an attorney who can both explain them to you and give you wise advice. If you are planning on or currently navigating a divorce, here at the Law Offices of Diana P. Zitser our team of attorneys and financial experts is here to help.
 Fam. Code §1100, subd. (a) [“[E]ither spouse has the management and control of the community personal property […] with like absolute power of disposition […] as the spouse has to the separate estate of the spouse”, italics added]; (In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, 144 [“[E]ach spouse is mutually entrusted with full individual authority to manage and control community property, including disposing of or otherwise alienating it”, italics added].)
 Fam. Code § 1100, subd. (e) [“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 […] until such time as the assets and liabilities have been divided by the parties or by a court.”]
 Fam. Code § 1100(e) [“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.”]; Fam. Code §721 (b)(1) [“Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.”]; Corp. Code § 16403(c)(1) [“Each partner […] shall furnish to a partner […] without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement[.]”]
 In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, 146 [“Since each spouse has equal management and control rights, it appears they must provide the other ‘without demand, any information concerning the management and control of the community property. The failure to do so would be a breach of his or her fiduciary duty.’”].
 Fam. Code § 721, subd. (b)(2).
 Fam. Code § 2100.
 (Feldman, supra, 153 Cal.App.4th at page 36 [finding that none of the sections of the Family Code addressing remedies for fiduciary duty violation are aimed at redressing harm, but rather, at “reduc[ing] the adversarial nature of marital dissolution and the attendant costs by fostering full disclosure and cooperative discovery”].)
For couples going through divorces, the joy of the holidays and New Year often goes hand in hand with emotional, logistical, and financial challenges. Here are some of the end-of-the-year issues couples should consider when in the process of a divorce or in the midst of a separation:
Year-End Distributions. As anyone familiar with the Griswold family knows, the holiday season often coincides with receipt of annual bonuses, commissions, and other year-end distributuions, all of which can impact the amount of spousal and child support members of a divorcing couple owe one another. While California courts generally use the parties’ base incomes to calculate monthly support payments, they also apply so-called “escalation provisions” when either spouse earns income in addition to their base salaries – for example, from bonuses or commissions. Derived from a series of cases known as Smith-Ostler, these escalation provisions may increase or decrease the amount of child and spousal support owed depending on whether the payor or payee spouse (or both) earns income in addition to their base salary.
Consider the example of Spouse A and Spouse B, who share one minor child: Spouse A earns $475,000/year, and Spouse B earns $45,000/year. For purposes of this example, let’s assume the child resides with Spouse B approximately 75% of the time. After considering all the relevant deductions and credits, let’s say the court determines that Spouse A owes Spouse B $3,700/month in guideline child support and $9,700/month in spousal support for a total monthly support of $18,000. If at the end of the year Spouse A receives an annual Christmas bonus of $400,000, the court, after applying a multi-factor formula that takes both the parties’ base incomes into account, will make what is known as a Smith Ostler order, directing Spouse A to pay a percentage of the bonus to Spouse B as additional child and spousal support.
In the example above, Spouse A may be ordered to pay as much as 6% of $400,000 bonus as additional child spousal and 33% as additional spousal support for a total additional support amount of $156,000. On the other hand, if Spouse B also receives bonuses and/or commission on top of their $45,000 base salary, the amount they are awarded from Spouse A may be proportionately reduced.
If you are going through a divorce and either you or your spouse earn income above and in addition to your base salaries, it is important to consult with an attorney as to what each of your rights and responsibilities with regard to support payments may be.
Date of Separation. Establishing a date of separation is another critical element of any divorce proceeding in community property state like California, because it determines when property transitions from belonging to the community, to belonging to the individual parties. For example, if Spouse A and Spouse B are married in 2010, separate in 2015, and divorce in 2017, generally their wages for the five-year period prior to separation are considered community property. Disputes about separation dates can have a huge financial impact on the ultimate outcome of a divorce.
If there is a subjective disagreement between the parties as to the date of separation, the court will look at many objective factors including how the parties hold themselves out to the rest of society. This can present substantial difficulties for couples navigating a divorce while attempting to keep up appearances during the holidays at family gatherings, religious ceremonies, and holiday office parties.
Consider a case in which our firm represented a wife who decided to separate from her husband but agreed to wait to formally file for divorce and physically separate until their 12-year-old daughter left the family home for college. While they continued to hold themselves out to the rest of society as a married couple (attending family functions and school events together), there was a mutual understanding between themselves that their marriage was over. They slept in separate bedrooms and, other than appearances for the sake of their daughter and the business they ran together, led separate lives. Unfortunately, during this period, the husband also happened to rack up millions of dollars in gambling debt and investment losses. Six years later, when their daughter graduated from high school and left for college, the couple finally filed for divorce. During the proceedings, the husband alleged a date of separation being the date they filed for divorce instead of six years earlier in an attempt to claim the debts he incurred during the six-year period as a community loss not his personal loss. After reviewing the evidence presented at trial, the court found that the date of separation had occurred six years prior – even though the two participated in activities that made them appear like a married couple. It was their subjective understanding (as evidenced by the behavior between them), which proved to the court that they had in fact been separated for six years, and the husband’s debts were awarded to him as his separate liability.
Contrast this with the 1977 case of In re Marriage of Baragry: despite deciding to end their marriage, the husband continued to eat dinner at the family home, brought home laundry, went on vacations with his wife without their children, and sent her Christmas and Birthday cards including the words “I love you”. When the couple formally filed for divorce four years later, the court determined that the filing date was their date of separation because their previous behavior had not demonstrated an intent to permanently terminate the marital relationship.
If you are planning to divorce, wish to retain your current earnings as separate property, but need to attend family events, work functions, and other holiday gatherings with your soon-to-be ex, it is wise to establish a clear understanding between you, maybe even in a writing like an e-mail or text, that, the attendance does not symbolize a reconciliation. The same approach can be taken for gift-giving: establish in writing (for example, in texts, e-mails, or the card accompanying the gift), that the presents you may be exchanging are not an attempt to or indication of a desire to rekindle the marriage, but merely thoughtful gestures.
In re Marriage of Baragry (1977) 73 Cal.App.3d 444
In re Marriage of Manfer (2006) 144 Cal.App.4th 925
In re Marriage of Ostler & Smith (1990) 223 Cal.App.3d 33
Cal. Fam. Code § 771(a)
The final months of 2017 saw Congress pass widely publicized legislation promising broad-based reform of the federal tax system. The final measure – which is due to be signed by the President prior to the upcoming holiday recess – reflects a consensus between sweeping changes proposed by the House and a more moderate counterproposal offered by the Senate. Provisions eliminating the taxation and tax-deductibility of alimony payments and lowering the mortgage interest deduction cap mean the substantial impact predicted for the public and private sectors is likely to also be felt by couples going through divorce. For those of you contemplating or currently pursuing a divorce, here are the two main ways the new legislation may affect you:
Alimony. Under the present system, alimony payments (referred to under California law as spousal support) are treated as taxable income for the recipient spouse, and tax-deductible income for the paying spouse. Take, for example, Spouse A (who earns $500,000 per year) and Spouse B (who earns $0). During their divorce proceedings, the court orders Spouse A to pay Spouse B $175,000 a year in alimony. Spouse A is currently allowed to deduct this $175,000 from their taxable income, while Spouse B has a baseline taxable income of $175,000. Under the new legislation, alimony is neither tax-deductible for the payor, nor taxable for the payee. Because their alimony payments are not considered taxable, Spouse B would receive $175,000 tax-free, while Spouse A would pay $175,000 from their post-tax income. The new legislation will not come into effect until January 1, 2019, so only couples who execute or modify their divorce decrees after December 31, 2018 will be impacted. While the law as currently applied arguably incentivizes an accelerated settlement process by providing a tax break to payors of spousal support, the new law risks creating a disincentive for individuals to settle to spousal support disputes. Since spousal support is a common point of negotiation between divorcing couples, increased contention on this point risks prolonging the settlement process, resulting in a higher emotional and financial costs for the couple, and a negative impact on judicial economy.
Mortgage Interest Deduction. Currently, the tax code allows homeowners to deduct interest on the first $1 million of a new mortgage. Congress has imposed a temporary lowering of this cap to $750,000 through the end of 2025. While this won’t affect divorcing couples who already have a mortgage (current mortgages are grandfathered in to the current $1 million cap), couples who obtain a mortgage after the passage of this new legislation and later decide to get divorced may be impacted. According to the California Family Code, the statewide uniform guide for determining child support takes into consideration the “state and federal income tax liability resulting from the parties’ taxable income […] after considering appropriate filing status, all available exclusions, deductions, and credits.” Spousal support is also a function of the net disposable income of both parties. Therefore, if the deduction cap is lowered, it may result in the payor being able to deduct less from their taxable income under the compromised plan, giving them less net disposable income, and reducing the amount of support received by the payee.
In light of the passage of this new legislation, it is critical to stay on top of the constantly changing legal landscape. Couples undergoing a divorce deserve a law firm with a team of experienced experts to explain how the changing tax code may impact the trajectory of their divorce. At the Law Offices of Diana P. Zitser, our network of brokers, appraisers, forensic accountants, and other tax professionals can provide this invaluable insight. For more information on how current legislative trends could affect your divorce proceeding, schedule a consult with our offices by visiting our website, or calling us at (818) 763-5274.
 Jeanne Sahadi, What’s in the GOP’s Final Tax Plan, CNN Money (Dec. 20, 2017, 8:21 AM), http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details.
 Alexis Leondis, Why You Don’t Have to Rush to Get a Divorce Before 2018, Bloomberg Politics (Dec. 18, 2017, 7:37 AM), https://www.bloomberg.com/news/articles/2017-12-18.
 Mercado, supra note 3.
 Leondis, supra note 2.
 Mercado, supra note 3.
 Cal. Fam. Code, § 4055 et seq.