In re Marriage of Whitman

1

In re the Marriage of QUIN WHITMAN and DOUGLAS F. WHITMAN.

QUIN WHITMAN, Appellant, v. DOUGLAS F. WHITMAN, Appellant.

A157055

California Court of Appeals, First District, Second Division

December 29, 2023

CERTIFIED FOR PARTIAL PUBLICATION^[*]

Order Filed Date 1/26/24

San Mateo County Superior Court No. FAM0117304 Hon. Elizabeth M Hill Trial Judge:

California Appellate Law Group, Complex Appellate Litigation Group, Charles Kagay, Robert A. Roth, and Kelly A. Woodruff for Defendant and Appellant.

McManis Faulkner, James McManis, William Faulkner, Brandon Rose, and Beverly Bergstrom, for Plaintiff and Respondent.

ORDER MODIFYING OPINION AND DENYING REHEARING

BY THE COURT:

The Petition for Rehearing filed by appellant Douglas F. Whitman is denied. New factual or legal arguments will not be entertained for the first time in a petition for rehearing. (Reynolds v. Bement (2005) 36 Cal.4th 1075, 1092; accord, In re Foster (2022) 85 Cal.App.5th 499, 512, fn. 8.)

It is ordered that the opinion filed herein on December 29, 2023, be modified as follows: On page 15, the reference to "July 3" in the first sentence of the second paragraph under the heading "1. Background" is changed to "July 12" so that the sentence, as modified, states: "The evidence showed that nine days later, on July 12, 1995, the parties bought a home for $1.45 million financed with a $1 million mortgage and a $450,000 down payment."

There is no change in the judgment.

STEWART, P.J.

Douglas F. Whitman (Doug), the founder of a once highly successful hedge fund, and Quin Whitman (Quin) each appeal from a judgment entered after a lengthy court trial in their contested divorce.

We affirm the judgment in all respects but one. We conclude:

(1) The trial court did not err in ruling that Doug failed to prove he retained any separate property interest in the hedge fund at the time of dissolution, despite an initial $300,000 capital investment of his own separate funds.

(2) The community is not financially responsible for any of the legal fees Doug incurred to defend against criminal charges brought against him for insider trading or the $250,000 fine imposed on him in that case. The trial court thus did not err in characterizing those as Doug's separate debts. It erred in holding the community responsible for the $935,000 penalty the Securities and Exchange Commission (SEC) imposed on Doug in the parallel enforcement action for engaging in illegal insider trading while running the hedge fund during the marriage. It did not err in holding the community responsible for $290,000 in legal fees Doug incurred in that parallel SEC enforcement case.

(3) Quin has not demonstrated the court erred in holding the community responsible for legal fees expended by the hedge fund when it intervened as a third party into these proceedings.

(4) The court did not err in concluding Quin failed to prove her claim that Doug breached his fiduciary duty in connection with the sale of the couple's luxury home.

BACKGROUND

Quin and Doug married in 1992. By then, Doug had spent nearly a decade working as a highly compensated financial analyst at several investment firms and had amassed substantial separate property savings. During the first two years of their marriage, the couple lived frugally, while Doug continued to work in the financial sector and earn a high income. In 1994, Doug was terminated from his position at the investment bank where he had been working and decided to form his own investment fund (or "hedge fund").

To launch the hedge fund and attract outside investors, Doug invested $900,000 of capital in three rounds of funding during 1994. A major contested issue at trial was whether any portion of that capital infusion was Doug's separate property and, if so, whether it could be adequately traced decades later at the time of dissolution. We will discuss that subject in greater detail below in the unpublished portion of this decision.

By the end of 2011, the hedge fund had proved a tremendous success, having grown cumulatively 2118.7 percent from its inception. At its peak, it had more than 60 outside investors and nearly $300 million in assets.

But in February 2012, the U.S. Attorney in the Southern District of New York charged Doug with crimes and the SEC filed an enforcement action against him and Whitman Capital for insider trading.^[1] Within months, by the end of March 2012, all the outside investors had withdrawn from the hedge fund, leaving only about $29 million in equity belonging to Doug (effectively). The following year, in January 2013, Doug was convicted of four counts of insider trading, sentenced to 24 months in prison, assessed a $250,000 criminal fine and ordered to forfeit $935,306. Then in March 2013 Doug settled the SEC action and paid a $935,306 civil penalty.

Over time, the hedge fund had earned handsome profits and Doug was extremely well compensated. During their marriage, Doug reinvested all of his annual compensation back into the fund, and the parties withdrew more than $88 million from the fund.

On April 11, 2012, two months after the civil and criminal charges were filed, Quin filed a petition for legal separation that was later amended to a petition for dissolution. The following year, in June 2013, the hedge fund was granted leave to intervene in the case after Quin sought the appointment of a receiver to wind it down. Her efforts in that regard were ultimately not successful, and we discuss in greater detail below (in the unpublished portion of this opinion) the trial court's ruling concerning the legal fees the hedge fund incurred to appear in the case.

The case proceeded to 30-day bench trial between March 2017 and January 2018 on the characterization and division of numerous marital assets. The court issued a 133-page statement of decision, entered judgment and denied the parties' new trial motions. Both parties then timely appealed.

DISCUSSION

I. Characterization of the Parties' Interests in the Hedge Fund

The largest marital asset at issue in the contested trial was the parties' interest in the hedge fund, which by the time of trial was valued at approximately $31.6 million. Doug testified he started the fund with separate funds specifically, a capital investment of $900,000 of savings he had accumulated before the marriage. He testified he made three separate deposits in 1994: a $500,000 investment in July, a $300,000 investment on October 1 and another $100,000 on November 25.

It is undisputed that after the initial investment, Doug continued to invest into the hedge fund capital account the compensation he earned from managing the hedge fund. Since he concedes that the compensation was community property, this resulted in the capital account being a commingled account. Doug does not dispute that those subsequent investments of community property funds and the growth associated with them are community property.

The source of the initial $900,000 capital contribution was a major contested issue at trial. Doug asserted that the bulk of the hedge fund's value was traceable to his initial $900,000 separate property investment and its associated gains, a separate property interest he now values at nearly $18 million.

In a portion of the statement of decision encompassing 20 pages, the trial court concluded the entirety of the parties' remaining interest in the hedge fund is community property, subject to equal division. First, it found Doug had proved only that the $300,000 portion of the $900,000 initial capital investment was traceable to his separate property. Second, it found that Doug's withdrawal of $900,000 on July 3, 1995, less than a year after the initial investment was made, exhausted any separate property interest he had in the fund from that date forward.

On appeal, Doug argues the court erred by rejecting his contention that July 1994 investment of $500,000 and the November 2024 investment of $100,000 into the hedge fund capital account were traceable to his premarital separate property. He also challenges the trial court's conclusion that the $900,000 withdrawal depleted his separate property interest in the fund. In addition to asserting there was no error, Quin argues that even if any traceable separate property remained in the account, the gains attributable to community efforts must be allocated to the community. It is unnecessary to address the latter issue because we will affirm the court's characterization of the entire fund as community property.

A. Legal Principles

Property acquired during marriage is presumed to be community property (Fam. Code, § 760)^2] a principle that" 'is perhaps the most fundamental . . . of California's community property law.'" (In re Brace (2020) 9 Cal.5th 903, 914.) On the other hand, property owned by a spouse before marriage is that spouse's separate property, including all of the "rents, issues, and profits" of such property. (§ 770, subds. (a)(1), (a)(3); Brace, at p. 914.) Thus, "a spouse may rebut the Family Code section 760 presumption by tracing the source of funds used to acquire property [during the marriage] to separate property." (Brace, at p. 914.)" 'Separate funds do not lose their character as such when commingled with community funds in a bank account so long as the amount thereof can be ascertained.'" (In re Marriage of Mix (1975) 14 Cal.3d 604, 612 (Mix).) But it is the spouse who asserts a separate property interest in property acquired during marriage who bears the burden to prove it. (Estate of Murphy (1976) 15 Cal.3d 907, 917 (Murphy).)

When separate property is commingled in an account with community property, as it was here, tracing is a factual issue for the trial court." 'Whether separate funds so deposited...