Marriage of Leininger CA1/4
A159386
| Cal. Ct. App. | Jan 19, 2022Background
- Carol and Paul married in 1992; Paul founded ABX Engineering (an S corporation) before marriage and remained its sole shareholder; ABX was later confirmed as Paul’s separate property.
- The couple purchased several commercial and residential community properties; ABX paid substantial sums to improve three commercial properties between 1998–2018.
- The parties separated in November 2012. An August 2013 court order designated Carol to manage rental income but required deposits to a community account; Carol instead deposited substantial community rents into a personal account and used community funds for the family home.
- A December 2015 stipulation required Paul to give Carol matching distributions for any ABX distributions above his base salary; in October 2018 Paul bought out Carol’s ABX interest for $875,000 and ABX was confirmed as his separate property.
- After a 2019 bench trial, the court awarded Paul over $4 million in separate-property reimbursements under Fam. Code § 2640 for ABX contributions to community property, $252,541 in Watts charges for Carol’s exclusive use of the family home, and $726,450 (including $36,400) for Carol’s breach of fiduciary duties; Carol appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Paul could be reimbursed under Fam. Code § 2640 for ABX payments to community property | Carol: ABX is a separate corporate person; distributions/payments by ABX are not Paul’s separate property for § 2640 and thus not reimbursable | Paul: ABX is an S corp whose income and distributions pass through to him as sole shareholder; funds used by ABX benefited the community and are traceable to his separate property | Court: Reimbursement under § 2640 proper; ABX payments traceable to Paul as sole S‑corp shareholder and benefited community property; § 2640 applies |
| Whether Watts charges for exclusive use of community residence were improper or punitive | Carol: She maintained the house and paid the mortgage; charging full Watts rent is unfair and amounts to a sanction for other conduct | Paul: Carol used substantial community rents to occupy the home and received far more community income; Watts charge is equitable compensation | Court: Watts charges discretionary; court considered circumstances and did not abuse discretion in awarding $252,541 |
| Whether Carol breached fiduciary duties by undercharging rent on a community rental property | Carol: Her decisions were business judgments and imprudent but not a fiduciary breach | Paul: Carol ignored his demands to raise rent and diverted community income, amounting to grossly negligent/knowing misconduct | Court: Substantial evidence supports breach finding; award of $36,400 for undercharged rent and broader fiduciary damages affirmed |
| Whether the court erred by not enforcing the December 2015 matching distributions order | Carol: Paul made distributions from ABX after June 2015 and did not give matching amounts as ordered | Paul: Issue was waived/forfeited and Carol later relinquished claims via the 2018 buyout stipulation | Court: Carol’s claim was forfeited by timing (should have been raised earlier and before ABX buyout); omission not reversible error |
Key Cases Cited
- In re Marriage of Walrath, 17 Cal.4th 907 (1998) (explains § 2640 purpose to allow reimbursement for separate‑property contributions to community)
- In re Marriage of Watts, 171 Cal.App.3d 366 (1985) (establishes right to compensation for exclusive use of community property)
- Valentino v. Franchise Tax Bd., 87 Cal.App.4th 1284 (2001) (discusses pass‑through taxation and character of S corporation income)
- Heller v. Franchise Tax Bd., 21 Cal.App.4th 1730 (1994) (contrasts C and S corporations; S corp items pass through to shareholders)
- In re Marriage of Koester, 73 Cal.App.4th 1032 (1999) (addresses § 2640 in context of separate‑property businesses and transmutation)
- In re Marriage of Falcone & Fyke, 203 Cal.App.4th 964 (2012) (Watts charge standards and requirement to account for circumstances)
- In re Marriage of Feldman, 153 Cal.App.4th 1470 (2007) (scope and purpose of sanctions in family law to deter noncompliance)