Reuben Raucher & Blum attorneys Timothy D. Reuben, Stephen L. Raucher, and Stephanie I. Blum are named as Southern California “Super Lawyers” for the 2018 edition of Southern California Super Lawyers magazine.
Monthly Archives: January 2018
Recent Developments in Family Law: A Spouse’s Disclosure Obligations as a Fiduciary Depend on Their Agreement
The California Court of Appeal recently published a case regarding a spouse’s fiduciary duty in the marriage partnership. In In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, the Fourth Appellate District, Division Three affirmed the trial court’s award to the wife after finding her husband breached his fiduciary duty to her.
In Kamgar, the wife gave her husband permission to deposit $2.5 million in community funds into an account to be used for options trading. He did not disclose that he risked an additional $8,188,605 million more than the initial $2.5 million to which his wife had agreed. The trial court found that the wife did not authorize this additional investment. The husband did not diversify his investments, instead keeping all of the money in Apple options. In total, $10,618,605 in community funds was at issue, of which $3,805,000 was withdrawn and $6,404,113 was lost in trading activities.
The trial court awarded the wife $1,952,056.50. The court reached this number by attributing a $6,404,113 loss to the community and subtracting the $2.5 million that the wife had authorized for trading. This equals $3,904,113 in unauthorized losses. Half of $3,904,113 is $1,952,056.50, the amount the husband was ordered to pay. The Appeals Court affirmed. It did not accept the husband’s argument that the trial court’s decision imposed on him an “overly rigorous duty of disclosure” when it found that he breached his duty to his wife. Instead, the court held that a party’s disclosure obligations as a fiduciary in a marriage partnership depend on the couple’s partnership agreement. It upheld the trial court’s conclusion that the husband and wife’s agreement concerning options trading was limited to investing $2.5 million in community funds.
Recent Developments in Family Law: Bad Faith Transfer of Business Interests Will Not Allow for Termination of Spousal Support
In In re Marriage of Berman (2017) 15 Cal.App.5th 914, the Second Appellate District, Division Eight found that the trial court did not abuse its discretion in holding that support obligations cannot be terminated after a bad faith business transfer.
In In re Marriage of Berman, the husband requested termination of spousal support after he retired at age 65 and transferred his business to his new wife as her separate property for no consideration. The only evidence that the transfer was in good faith was the husband’s own declarations, stating that he had decided to retire and that he was no longer involved in operating the business. He declared that his new wife had learned the trade and ran the business full time. The husband filed a request for an order terminating further spousal support to his ex-wife. He argued that the business would not continue to generate income as it did when he worked there, and that the court should not impute income from the business to him. But the trial court did not agree. It found that the transfer was not in good faith and that income should be imputed to the husband not as salary and wages, but as income produced from an asset. The trial court reduced spousal support slightly to reflect the husband’s loss of $50,000 in salary upon retirement.
On appeal, the husband first argued that the trial court’s order violated Reynolds, which held that “no one may be compelled to work after the usual retirement age of 65 in order to pay the same level of spousal support as when he was employed.” In re Marriage of Reynolds (1998) 63 Cal.App.4th 1373, 1378. The Court of Appeal did not accept this argument. It found that the husband’s declarations were not sufficient evidence to establish how much of the business’s income was attributable to the husband’s labor as opposed to other sources. The court clarified that it was not holding that “a supporting party may not transfer a business to a relative (even a spouse), just that the supporting party may still be held to his or her obligations if there is a finding, supported by substantial evidence, that the transfer was in bad faith and the supporting party still has access to the business income.” Berman, supra, 15 Cal.App.5th at 923-924.
Court of Appeal Clarifies Anti-SLAPP Applicability to Homeowner Associations as Quasi-Government Entities
On January 12, 2018, the California Court of Appeal, Fourth District, Division One issued its opinion in Golden Eagle Land Investment v. Rancho Santa Fe Assn. (2018 Cal. App. LEXIS 27). In Golden Eagle, the two plaintiffs sought approval from the homeowners association to develop their property into a higher density project than was typical in the community. When the plan was denied, they claimed damages against the homeowners association for nine causes of action, ranging from breach of fiduciary duties, to fraud and business interference, to violations of the Common Interest Development Open Meeting Act. The HOA filed a special motion to strike under the anti-SLAPP statute. The trial court granted the motion as to eight of the nine causes of action, holding that one cause of action, the alleged violation of the Open Meeting Act, was not based on protected conduct.
The Court of Appeal affirmed the trial court’s application of the anti-SLAPP statute to the eight causes of action, but it reversed and extended the motion to strike to include the alleged violation of the Open Meeting Act. First, the Court of Appeal determined that the anti-SLAPP statute applied to HOAs because of their quasi-governmental functions. Specifically, the Court applied C.C.P. section 425.16 subdivision (e)(4), i.e. “public interest” coverage, because a homeowners association impacts communities similar to a governmental entity. The Court then determined that the conduct that plaintiffs alleged, sending letters and emails, setting agendas, and holding meetings, were all in furtherance of the HOA’s function of administering its quasi-governmental responsibilities and thus was protected conduct. A “public issue” or an “issue of public interest” is a term of art. While the application here is not terribly surprising, the precedent may apply to more unconventional “entities.” The Court was also quick to reiterate and follow the California Supreme Court decision in Baral v. Schnitt (2016) 1 Cal.5th 376, to assess the underlying conduct and strike it, if protected, even if it is intertwined with unprotected conduct.
Of course, the plaintiffs could have prevailed if they showed there was a probability of prevailing on the merits. They were never members of the HOA. Without having been a member, the HOA owed them no fiduciary duty. Additionally, the fraud and business interference claims failed because there they failed to show justifiable reliance and the third-party interference that plaintiffs alleged was with their own consultants.
Court of Appeal Clarifies Wage and Hour Class Action Expert Qualification
The California Court of Appeal continues to favor class certification in the recent ABM Industries Overtime Cases ___Cal.App.5th___ [2017 Cal. App. LEXIS 1165] coming out of the First District, Division Four, published January 10, 2018. This trend will continue to be costly for businesses to defend class action claims.
In ABM Industries, the Court of Appeal held that the trial court abused its discretion when it excluded plaintiffs’ proposed expert witness. The trial court’s mistake was that it focused on how the proposed expert failed to show he had any formal training or degrees to qualify him to review the vast timekeeping and payroll data at issue in the case. The Court of Appeal focused more on his actual work experience, which included the maintenance and analysis of complex transactions and data, and that he had previously qualified as an expert in two other cases. This is consistent with the case Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747, where the California Supreme Court held that a trial court must act as a “gatekeeper” to exclude “clearly invalid and unreliable” expert opinion. But once the expert passes the threshold showing of expertise, i.e. gets past the “gatekeeper”, the actual extent of the expert’s qualifications go to the weight of the evidence, not the admissibility of the expert. Thus, while a lack of formal training or degrees may ultimately affect the expert’s credibility with the fact finder, it does not by itself prevent the admissibility if he demonstrates his expertise with his prior work experience.
The ABM Industries Court went on to hold that the exclusion of the expert ultimately prejudiced the plaintiffs’ class certification motion because without the expert’s extensive data analysis, plaintiffs could not prove that common issues predominated the class. The Court also found that the class was ascertainable because there were reasonable means of identifying potential class members by objective characteristics and common transactional facts.
Arbitrators Lack Power to Compel Pre-Hearing Third Party Document Production Under the FAA
In a decision that falls in line with the majority of other circuits to have considered the question, the Ninth Circuit recently held that the Federal Arbitration Act (FAA) does not grant arbitrators the power to compel the production of documents from third parties prior to a hearing as part of pre-hearing discovery. Vividus v. Express Scripts, 2017 U.S. App. LEXIS 26233, *2 (9th Cir. 2017).
In Vividus, an arbitration panel issued a subpoena to Express Scripts, which was not a party to the arbitration in question. The subpoena directed Express Scripts to produce certain documents before an arbitration hearing. Express Scripts did not respond to the subpoena, and Vividus attempted to enforce it in federal court in Arizona. Based on 9 U.S.C. Section 7, the Arizona federal district court held that the FAA does not give arbitrators the power to compel the production of documents from third parties outside of a hearing, and Vividus appealed.
The Ninth Circuit began by evaluating the plain language of the statute in order to determine whether Section 7 of the FAA allows an arbitrator to order a third party to produce documents as part of pre-hearing discovery. Section 7 is entitled “Witnesses before arbitrators; fees; compelling attendance” and, in relevant part, states:
The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case . . . if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.
(Emphasis added). The court reasoned that, based on the plain language of the statute, the FAA gives arbitrators two powers: (1) the power to compel the attendance of a person as a witness, and (2) the power to compel the person to bring relevant documents. If the person does not comply, however, the district court can compel attendance. The court concluded that Section 7 only permits an arbitrator to order third parties to produce documents at a hearing.
The Third, Second, and Fourth Circuits have similarly interpreted Section 7. The Eighth Circuit, however, reached a different result. The Eighth Circuit held that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” In re Security Life Ins. Co. of America, 228 F.3d 865, 870-71 (8th Cir. 2000). The Eighth Circuit reasoned that this approach facilitates the efficient resolution of disputes by allowing parties to “review and digest” documents before hearings. Id. at 870. The Ninth Circuit disagreed, stating that third parties should not be subjected to pre-hearing document production because they did not agree to the arbitrator’s jurisdiction. Therefore, the court argued that restricting third party disclosures to a hearing would lessen the burden on non-parties, as well as discourage fishing expeditions. This circuit split, however, makes the issue ripe for Supreme Court review.
What about under California state law? California Code of Civil Procedure Section 1282.6 is analogous to 9 U.S.C. Section 7. Section 1282.6 is entitled “Attendance of witnesses and production of evidence; Subpoenas” and, in relevant part, reads:
(a) A subpoena requiring the attendance of witnesses, and a subpoena duces tecum for the production of books, records, documents and other evidence, at an arbitration proceeding or a deposition under Section 1283, and if Section 1283.05 is applicable, for the purposes of discovery, shall be issued as provided in this section…
Unlike Section 7, Section 1282.6 specifically contemplates pre-hearing document production by third parties, at least in certain circumstances. But how are such subpoenas enforced?
The California Supreme Court honed in on a third party’s lack of consent to an arbitration agreement in Berglund v. Arthroscopic & Laser Center of San Diego, L.P. The question in this case was whether arbitration discovery orders to nonparties should be subject to full judicial review under the California Arbitration Act. Berglund v. Arthroscopic & Laser Center of San Diego, L.P., 44 Cal.4th 528, 532 (2008). The court held that while the dispute must first be submitted to the arbitrator for resolution, the nonparty is entitled to full judicial review of the order. The reasoning in this case relied heavily on the fact that third parties never consented to the jurisdiction of the arbitrator, who is free to not follow the law if he or she chooses and is only subjected to judicial review in narrow circumstances. Id. at 538. Thus, unlike federal law, an arbitrator’s subpoena can be judicially enforced under the California Arbitration Act.