Happy New Year from the Law Offices of Andy Cook!
However, for a husband in San Mateo County, California going through a divorce, it wasn’t a very happy new year. That is because on December 29, 2023, just as the three-day holiday weekend was beginning, the California Court of Appeal upheld a lower court’s judgment that the husband (“Doug”) was solely responsible for $9.7 million dollars in attorney fees he incurred fighting an insider trading criminal case and a companion civil action brought by the Securities and Exchange Commission (“SEC”). This was the ruling even though the general rule, under Family Code sections 2620 through 2624, is that the community estate is liable for a debt incurred by either spouse during the marriage.
The case where all of this took place is called Marriage of Whitman (2024) 2024 DJDAR 108. This was a blockbuster case that involved many issues other than the attorney fee allocation. This might explain why the trial took place for 30 days and resulted in a 133-page statement of decision by the trial judge. Even the Court of Appeal’s decision had thirty-three footnotes.
The easiest way to explain the appellate court’s decision is that there are exceptions regarding splitting marital debts equally. One of those exceptions involves a debt that was “not incurred for the benefit of community.” Under Family Code section 2625, that type of debt must be assigned to the person who incurred the debt without offset.
Common sense would indicate that if someone has to hire a criminal attorney, the other spouse should not be responsible. But this case was more complicated than that. Doug argued that as a result of his criminal activity, the community estate benefited by getting money for a hedge fund that Doug ran. He also argued that the wife (“Quin”), having been involved in a long-term marriage (they had gotten married in 1992), should have known – “because of the current environment” and as a spouse of a long-term technology investment manager – that her husband could have been charged with insider type trading.
The benefit to the community was indeed real. Apparently, the criminal conduct netted Doug’s business $935,306.00. But he was ordered to disgorge that amount as part of a settlement he reached with the SEC. (In the companion criminal case against him, Doug was ordered to serve two years in prison, pay a $250,000.00 fine, and forfeit $935,306.00.)
The family law judge found that the evidence failed to show that Quin was aware of Doug’s criminal conduct. Moreover, the judge stated “[i]nsider trading is not an inevitable consequence of being an investment manager.” Meanwhile, the appeals justices rejected Doug’s argument that he should not be solely liable for the attorney fees because his operation of the hedge fund benefited the community. The justices agreed that indeed the operation in general did benefit the community but the debts at issue were not the result of Doug’s overall operation of the business but instead “because Doug violated the securities law by conspiring to commit and committing multiple acts of insider trading.”
Again, the ultimate question was whether the amounts Doug spent on attorney fees to defend himself were incurred for the benefit of the community. The trial court noted that the attorney fees Doug expended totaled $9.7 million. This “dwarfed any potential community benefit.” And according to the Court of Appeal, the primary purpose of spending the $9.7 million was not to preserve a community asset but –to be quite blunt about it – to avoid punishment like prison.
At the end of the day, the justices unanimously held that when “one spouse expends an extraordinary sum that is out of proportion to any community benefit for purposes that are predominantly for his or her separate benefit, nothing in Family Code section 2625 requires the court to order the other spouse to share equally in that burden”.
But all was not lost for Doug. The trial judge made the community, and not Doug himself, responsible for an additional $290,000.00 in legal fees Doug incurred in the SEC case against him. The Court of Appeal said that this was perfectly fine because the question of whether a debt was incurred or not incurred for the benefit of the community is not always a “binary question.” Although not entirely clear, it appears the trial judge – and then the appellate justices—saw the $9.7 million dollars as totally out of proportion to any benefit, but the $290,000.00 related to the attempt – albeit it unsuccessful—for Doug to hold on to the $935,306.00.
By the way, this case has a long history. The criminal charges were brought back in 2012, and two months later, Quin filed the family law case. The family law case –the 30-day trial – took place between March 2017 and January 2018.
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