Marriage of Chiu
Filed 3/15/13 Marriage of Chiu CA1/1
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
ONE
In re the
Marriage of LEEYUNG P. and NEWTON P. CHIU.
LEEYUNG P. CHIU,
Respondent,
v.
NEWTON P.
CHIU,
Appellant.
A132290
(San Francisco County
Super. Ct. No. FDI-03-753401)
In
this dissolution proceeding, appellant Newton Chiu appeals from the trial
court’s order imputing to him $450,000 in fictive income based on his alleged
failure to collect sufficient rents from community-owned apartment buildings
during a 45-month period of marital separation.
He claims the court relied on an erroneous legal theory in making this
determination. He also contends the
court erred in failing to award him reimbursement for separate property he used
to maintain and repair one of the parties’ buildings.
We
conclude the trial court erred in imputing $450,000 in lost rental income to
appellant. We remand the matter to the
court for proper determination of the amount of the parties’ equalization
payment. We also conclude the trial
court’s decision to deny his reimbursement request is supported by
affirm in part.
FACTUAL
BACKGROUND AND PROCEEDURAL HISTORY
The
parties have been married twice. They
were first married in May 1969 in China.
Appellant emigrated to the
States in 1974 and has been employed by the Port of Oakland as a janitor
since 1977.
title="">[1] Respondent came to the United States to join
him in 1979. Over time, appellant
purchased several inexpensive properties with the goal of fixing them up in
order to rent or sell them. The parties
separated for the first time in March 1987.
After the separation, appellant commenced a dissolution proceeding in
Alameda County. A default judgment was
filed in December 1988. The judgment
addressed only one of the properties owned by the parties.
Appellant
married and divorced another woman between 1989 and 1991. The parties were again married in December
1992. They separated for the final time
in June 1994. By then, they owned four
properties in Oakland.
On
April 3, 2003, respondent filed a petition
for dissolution of the second marriage.
On
May 9, 2005, respondent filed a complaint for joinder as to appellant’s sister
and brother-in-law. The complaint
alleges that appellant, along with his sister and her husband, had bought a
property located at 900 Foothill Boulevard in Oakland in 1985, two years before
he filed for dissolution of the first marriage.
The building was not mentioned in the judgment of dissolution. Respondent claimed appellant’s interest in
the property was a community property interest subject to division.
On
May 11, 2005, the trial court directed that the property at 1710 15th Avenue be
listed for sale. In December 2005,
appellant bought out respondent’s interest in the property.
On
April 18, 2008, the trial court filed a stipulation and order appointing John
Mangini as the court’s accounting expert under Evidence Code section 730. He was directed to prepare a written tracing
of income, rents, and expenses related to the parties’ real estate holdings. The parties were to cooperate in providing
him with all necessary documentation.
On
May 26, 2009, the trial court filed an order naming Roxanne Ekhos as its new
accounting expert, in place of Mangini.
Appellant was directed to provide her with any information that Mangini
had previously requested.
On
January 21, 2010, the trial court filed a judgment determining that 50 percent
of the 900 Foothill Boulevard property was the parties’ community property.
On
September 10, 2010, a status-only divorce judgment was entered. All other issues were reserved.
On
February 24, 2010, the trial court filed an order after settlement
conference. The order sets forth nine
issues to be addressed at trial, including whether appellant breached his
fiduciary duty to respondent by mismanaging three of the properties during
periods of marital separation. The order
also states that the trial was to address appellant’s claims for reimbursement,
conditioned on him providing a list of claims and supporting documentation to
Ekhos and respondent’s counsel at least 60 days prior to trial.
Matthew
Smith testified on behalf of respondent as an expert in real estate
appraisals. The property at 900 Foothill
Boulevard has six units. In March 2009,
he estimated $19,000 in repairs were necessary to make the property
rentable. Only three of the units were
habitable at that time. He estimated the
property’s market value at $835,000. By
May 2010, the value had dropped to $600,000.
The reason for the decline was lowered rental rates, which lowers the
potential income that can be generated.
In May 2010, he estimated the potential monthly rental income for all of
the units was $6,050.
The
property at 309 Foothill Boulevard also has six rental units. In March 2009, Smith estimated it needed
about $33,000 in repairs to bring it to market condition. All the units were habitable, though the
building itself needed repairs for problems such as termite damage. At that time, he estimated the value of the
property was $870,000. By July 2010, the
value had declined to $500,035. The
projected potential total rental income from all the units was $6,500 per
month.
The
final property is a four-unit building located at 1444 9th Avenue. Smith deemed all the units to be habitable,
though the building needed about $19,000 in repairs. The estimated value of the property in March
2009 was $500,000. Similar to the other
two properties, the value had declined to $330,000 by July 2010 due to market
conditions. In July 2010, he estimated
the total potential rental income for the building at $3,900 per month. Taking all three properties into account,
there were 11 habitable units that were not being rented out in 2009.
The
rental properties had also been appraised in 2005. At that time, the appraisal report indicated
that the units at 1444 9th Avenue and 309 Foothill Boulevard could have been
made ready for occupancy with only minor repairs. However, seven of the 10 rental units in
these two buildings were vacant at that time.
Appellant testified the properties had water damage that the appraisal
report did not take into account. By
2009, there were a total of 11 vacant units in the three buildings. Appellant testified the empty units were not
habitable.
Respondent
testified she was unhappy with appellant’s management of their rental
properties. She also submitted a written
trial declaration. After the parties
formally separated, the number of units he rented out had decreased. The decrease in tenancy occurred mainly after
2003. Based on the low occupancy of the
parties’ rental properties during the time when they were under appellant’s
exclusive management and control, she requested he be charged with the rents
lost due to his failure to ready all units for the rental market and/or rent
those units deemed habitable. In her
declaration, she did not allege that appellant had ever lied to her or withheld
information from her concerning the management of the rental properties. Nor did she allege he had ever stolen rents or
managed the properties to benefit only himself.
On
cross-examination, respondent conceded that even when she had sufficient funds
she never offered to give appellant money to help manage or improve their
properties. She claimed, however, that
he never asked her to do so. After he
gave her a buy-out payment in 2005 for the family residence on 15th Avenue, he
prohibited her from entering the rental properties. He has been solely and exclusively in control
of those properties since the parties separated in 1994.
Appellant
testified that beginning in June 30, 1994, there were 14 units available to be
rented among all three properties. He
conceded occupancy of the buildings had declined since 2003. The reason for the decline was that tenants
were moving out due to the deteriorating condition of the properties. He denied the decline had any relationship to
respondent’s filing of dissolution proceedings that year.
In
2009, appellant hired Victor Jin to manage the three rental properties and
oversee needed repairs. The biggest job
was to have the foundation repaired at 1444 9th Avenue. The job was not done because respondent was
not willing to help appellant pay for it.
The initial estimate for that job came in at $25,000, but had increased
to $50,000 by November 2009. Jin did not
complete all the repair jobs he was slated to do, and respondent did not help
pay for any repairs during that year.
However, some painting was completed.
In
calculating lost rental income, Ekhos compared actual rents to the full rental
value as stated in the appraisers’ reports.
As a second method of calculation, she also considered comparing the
actual rents collected from 2005 through 2009 to the maximum rents ever
collected by the properties. Using the
first method, for the stated period of 45-months (July 2005 through March
2009), she estimated the total lost rents were $450,000, or $10,000 per
month. She did not make a calculation
using the second method.
B. Appellant’s Reimbursement Claims
Ekhos
testified that she has been a certified public accountant since 1999. The
instant case was the first time she had served as a court-appointed
expert. She previously worked for
Mangini, the expert initially appointed by the trial court. She assisted him by preparing most of the
schedules that he would present and testify about in family law cases. She had accompanied him to about a dozen
trial dates and settlement conferences.
A
prior settlement conference order required appellant to provide Ekhos with a
list of his claims for separate property reimbursements, along with supporting
documents. She testified that he never
provided her with an itemized list of improvements made to the parties’
properties. Instead, he gave her boxes
of receipts documenting business expenses he had claimed on his tax returns
over several years. The files were
organized by year and by line item of the Schedule E filed with his tax
returns. The information was not
compiled in such a manner as to allow her to verify any claims he may have had
for improvements made to the properties during the post-separation period. The difficulty arose from the tremendous
volume of documents that would need to be individually reviewed and analyzed.
In
conducting her analysis, Ekhos sampled the tax documents and did not go through
every piece of paper. In each tax year
she found claims made for improvements that she was unable to verify. In many cases, receipts for personal items
were mixed with files that purportedly contained receipts for building materials. Thus, some of the receipts did not reflect
appropriate deductions for building expenses.
Additionally, she could not determine whether the building expenditures
that she was able to verify were
actually used for improvements to the rental properties.
A
month or two after she received the tax documents, she asked appellant to
provide further proof of his claims. She
received spreadsheets from his accounting expert, Stuart Weil, reflecting
adjustments to the returns. The
adjustments showed business expenditures, but did not indicate whether the
expenditures were made for improvements.
They also did not address the receipts for miscellaneous personal
expenses that she had discovered before, so the information was not much more
specific than what she had already received.
Weil did set forth a schedule of repairs and improvements for the period
1994 through 2008 totaling approximately $757,000. According to Ekhos, actual and theoretical
rents collected and potentially collectable from tenants would have been
sufficient to cover the properties’ fixed costs as well as the costs of
appellant’s claimed repairs and improvements.
Weil
testified as a rebuttal witness on behalf of appellant. He is licensed as an attorney as well as a
certified public accountant. He has
testified as an expert witness in about 20 cases, the majority of which were
family law cases. He read Ekhos’s report
and found it lacked a conclusion with respect to how much money, if any,
appellant was entitled to as reimbursement.
To arrive at an estimate of these costs, Weil’s employees examined all
the documents in the boxes of appellant’s tax records.
Weil’s
analysis showed there was a negative cash flow on the properties, and that
money was spent on improvements that could not have been funded by the
properties themselves. These would
represent reimbursable claims, made with his separate property for the benefit
of community assets. Weil’s initial figure
for these costs was $600,534 for the years 1994 through 2008. However, Weil recommended adjusting the
amount, primarily to compensate for various accounting irregularities in
appellant’s records. Weil offset the
initial amount by $314,271.50, leaving the total amount of estimated expenses
for improvements at $286,262.50.
At
the close of respondent’s case, appellant moved for a directed verdict on her
claim for breach of fiduciary duty. His
counsel argued that while she might have been unhappy with his management
skills, his conduct did not amount to a breach of fiduciary duty. In rebuttal, respondent’s counsel relied on
Cal.App.3d 853 (Munguia), in
asserting that the spouse with control over community property after separation
has a duty to maximize its value. The
motion was denied.
At
the close of trial, in lieu of closing argument, the parties each submitted a
proposed statement of decision.
On
February 2, 2011, the trial court filed its tentative statement of decision.
On
March 25, 2011, the trial court filed its final statement of decision. The court found in favor of respondent on her
claim of breach of fiduciary duty. In
particular, the court noted that of the 16 units in the three rental
properties, 13 were habitable and, of these, 11 remained vacant. While not directly stating whether
the spouse who controls community property after separation has an affirmative
duty to maximize its value, the court found “The facts adduced in the present
case demonstrate that far from maximizing the properties [sic] values, [appellant] ran them into the ground. The [appellant] ignored tenants’ requests to
perform repairs and the quality of the premises disintegrated under his
regime. Occupancy declined and although
the appraiser indicated that a significant number of the units were habitable
and ready to be rented, they were not.â€
The court used Ekhos’s figure of $450,000, requiring him to give
respondent $225,000 as the measure of her half of the lost community rents.
As
to appellant’s claim for reimbursement, the trial court found it was unable to
determine the amount, if any, that he was entitled to, due to the unreliability
of his tax returns and his failure to comply with the court’s prior directives. Based on his demeanor and his testimony, the
court also concluded he lacked credibility.
On
May 2, 2011, the trial court filed a judgment setting forth its property
division and equalizing the community estate.
Respondent was awarded the 1444 9th Avenue property (valued at $330,000)
and $330,632.50 in proceeds from the sale of 309 Foothill Boulevard, along with
a net equalizing payment from respondent of $200,069, which included her share
of the fictive lost rents. Appellant was
awarded a one-half interest in the 900 Foothill Boulevard property (worth
$275,000) and a $5,140 insurance check.
Respondent was awarded attorney fees.
This appeal followed.
DISCUSSION
We
review factual findings of the family court for
evidence in the light most favorable to the prevailing party. (In re
Marriage of Hokanson (1998) 68 Cal.App.4th 987, 994.) “ ‘ “In reviewing the evidence on
. . . appeal all conflicts must be resolved in favor of the
[prevailing party], and all legitimate and reasonable inferences indulged in
[order] to uphold the [finding] if possible.†’ [Citation.]â€
(In re Marriage of Bonds
(2000) 24 Cal.4th 1, 31.) We review
issues of statutory interpretation de novo.
(Eidsmore v. RBB, Inc. (1994)
25 Cal.App.4th 189, 195.)
to Appellant
Respondent
alleged in her trial declaration that potential community rental income was
improperly lost due to appellant’s “mismanagement†of the parties’ rental
properties during a substantial period of separation. This was the basis of her claim for breach of
fiduciary duty. In support of her claim,
she relied largely on Smith’s finding that in March 2009, 11 habitable units had
not been rented out. She requested that
appellant “be charged with the rents lost due to his failure to ready all units
for the rental market and/or rent those units deemed to be habitable.†In her trial brief, she contended he had
“provided no evidence that he tried to rent the habitable units or tried to
ready the other units for rent. In the
absence of such evidence, [appellant] breached his fiduciary duty to
[respondent].†She cited to
the husband in that case, appellant “had a fiduciary duty to maximize the value
of the properties by trying to rent them.â€
The trial court noted appellant’s contention that this aspect of
agreed with it, finding that appellant “ran [the rental business] into the
ground.â€
Appellant
first claims that the fiduciary duty ruling must be reversed because it is
based on the erroneous legal theory that he had a duty to maximize the value of
the parties’ community property. He
also argues that the trial court erred in adopting Ekhos’s calculation of lost
rents because the court set a standard that “far exceeded†his responsibilities
under the law. We agree with appellant
that the trial court erred in relying on Munguia
in imposing a requirement on him to have maximized the value of the rental
properties.
Spouses
have a duty to manage community property in accordance with “the general rules
governing fiduciary relationships.†(See
Family Code, §§ 721, subd. (b)
name="_ftnref5" title="">[5];
1100, subd. (e)
title="">[6].) “This confidential relationship imposes a
duty of the highest good faith and fair dealing on each spouse, and neither
shall take any unfair advantage of the other.â€
(§ 721, subd. (b).) Under section
1101, subdivision (a), “A spouse has a claim against the other spouse for any
breach of the fiduciary duty that results in impairment to the claimant
spouse’s present undivided one-half interest in the community estate,
including, but not limited to, a single transaction or a pattern or series of
transactions, which transaction or transactions have caused or will cause a
detrimental impact to the claimant spouse’s undivided one-half interest in the
community estate.â€
title="">[7]
Appellant
claims he was under a fiduciary duty that merely required him to perform to a
standard “marginally better than gross negligence.†Under Corporation Code section 16404,
subdivision (c), made applicable here by operation of Family Code section 721,
subdivision (b), “[a] partner’s duty of care to the partnership and the other
partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.â€
him culpable for failing to produce the maximum possible rental income is
directly contrary to the law governing spousal fiduciary duties and is
unauthorized. We agree. There is nothing in the relevant statutory
language that equates a managing spouses’ failure to maximize the value of the
community’s property with a breach of fiduciary duty to the non-managing
spouse, and the trial court erred in relying on Munguia to justify such a finding.
community property business that would have been worth at least 50 percent more
if the managing spouse were able to renew the business’s lease that was due to
expire in eight months. In holding the
trial court erred by choosing a lower value rather than reserving jurisdiction
to see whether the lease was renewed, the appellate court observed in an aside
that the spouse could have been under a “fiduciary duty to maximize the value
of the [business] by securing a continuation of the lease.†(Munguia,
supra, 146 Cal.App.3d 853, 859.)
This statement is dicta, and we have not located a published decision
citing to it for the proposition that spouses have a fiduciary duty to maximize
community income during periods of separation.
We
find informative the appellate court’s opinion in In re Marriage of Partridge (1990) 226 Cal.App.3d 120. As the court in Partridge noted, “The central issue in Munguia was the valuation of a community asset, a bar. The value of the bar was directly dependent
upon the length of its leasehold, a matter that had yet to be determined as of
the time of trial. The appellate court
simply held it was error for the trial court to adjudicate the value of the
asset before the length of the leasehold was settled; instead, it should have
reserved jurisdiction to do so once the lease length was determined. In dicta, the court noted that if the
husband, who had sole management and control, were to be shown to have
intentionally mismanaged the lease negotiations to thwart a long-term lease (thus
breaching his fiduciary duty to the community), this could be taken into
consideration in redetermining the value.
[Citation.] Other than stating
the undisputed principle that intentional mismanagement is a factor in
valuation, the case does not support wife’s position as it does not contain any
benchmark by which it can be said husband’s conduct amounted to intentional
mismanagement.†(Id. at p. 125.)
We
also note respondent does not allege appellant failed to disclose any financial
information or otherwise acted against her interests to secure any unfair
benefit for himself. Further, he never
concealed the lack of rental revenue from her, suggesting that she could have
taken legal action to intervene instead of passively allowing the apartments to
languish unrented. Viewed in that light,
the trial court’s decision to impute $10,000 per month in lost rental income to
him is unsupported as a matter of law, and is arguably both unfair and
unjust. We therefore reverse the portion
of the judgment finding that he breached his fiduciary duty, and remand for the
court to recalculate the net equalizing payment between the parties. This calculation must reflect the community
property interest of the Chius as opposed to the ownership by any third party in
the individual properties. Also, the trial
court shall assess the payment obligation according to the legislative
principles contained in Family Code section 721, subdivision (b), and its
references to the legal standards articulated in Corporation Code sections
16403 and 16404, subdivision (c).
Contributions
Section
2640 specifies that when dividing community property, a “party’s contributions
to the acquisition of property in the community property estate†shall be
reimbursed “to the extent the party traces the contributions to a separate
property source.†(§ 2640, subd.
(b).) In the seminal case of
Cal.3d 76, superseded by statute on other grounds, our Supreme Court recognized
a spouse’s right to reimbursement from community property for payment of
postseparation community expenses from the spouse’s separate funds. The high court adopted the view expressed in
Cal.App.3d 725, as follows: “ ‘[A]s a general rule, a spouse who, after
separation of the parties, uses earnings or other separate funds to pay
preexisting community obligations should be reimbursed therefor out of the
community property upon dissolution.’ â€
(Epstein, supra, at p. 84,
quoting Smith, supra, at p.
747.) Conversely, if the managing spouse
uses community money to pay a community obligation, there is no basis for
reimbursing the spouse for that payment.
(See Smith, supra, at p. 744
[judgment reimbursing husband for postseparation payments on community debts reversed
because “there is no showing these payments by husband were made with his
separate fundsâ€; court ordered retrial rather than entry of judgment for wife
because evidence suggested “some of the funds paid came from husband’s
. . . separate propertyâ€].)
On
appeal, appellant asserts the trial court erred in denying his reimbursement
claim as to the property located at 1710 15th Avenue. He contends it is undisputed that he spent
over $145,000 in separate property for expenses associated with the property,
expenses that he asserts were documented by cancelled check, lender statement,
and similar corroboration. Respondent
does not address the merits of this argument in her brief. Instead, she contends generally that because
he failed to itemize these claimed expenditures pursuant to the trial court’s
pretrial order he should be precluded from being reimbursed for any
postseparation expenses.
The
trial court denied all of appellant’s claims for reimbursement, finding itself
unable to accept the assumption that his tax returns and receipts were
trustworthy. As the trier of fact, the
trial judge is the sole judge of credibility and “may reject any evidence as
unworthy of credence, even uncontradicted
testimony.†(In re Marriage of Falcone & Fyke (2012) 203 Cal.App.4th 964,
979.) It is not the function of this
court to reweigh the evidence.
Accordingly, we are unable to conclude that the trial court erred in
denying appellant’s request for reimbursement as to 1710 15th Avenue.
DISPOSITION
The
judgment is reversed as to the determination that appellant breached his
fiduciary duty to respondent. The matter
is remanded for determination of the parties’ equalization payment in a manner
consistent with this opinion. In all
other respects, the judgment is affirmed.
Parties to bear their own costs on appeal.
__________________________________
Dondero,
J.
We
concur:
__________________________________
Margulies,
Acting P. J.
__________________________________
Banke,
J.
name="_ftn1" title="">[1] Appellant was 74 years old at the time of trial.
name="_ftn2" title="">[2] Appellant occupies one of the units at 900 Foothill
Boulevard.
