In re Marriage of Klug, C045571.

CourtCalifornia Court of Appeals
Citation31 Cal.Rptr.3d 327,130 Cal.App.4th 1389
Docket NumberNo. C045571.,C045571.
PartiesIn re the MARRIAGE OF Donald and Lynn KLUG. Donald Klug, Appellant, v. Lynn Klug, Respondent.
Decision Date07 July 2005
31 Cal.Rptr.3d 327
130 Cal.App.4th 1389
In re the MARRIAGE OF Donald and Lynn KLUG.
Donald Klug, Appellant,
Lynn Klug, Respondent.
No. C045571.
Court of Appeal, Third District.
July 7, 2005.

[31 Cal.Rptr.3d 329]

Jay-Allen Eisen and C. Athena Roussos, Sacramento; Law Office of Larry Lawson and Larry Lawson, Roseville, for Appellant.

Kimball J.P. Sargeant, Davis; Karen Pedersen Stevens, Sacramento, for Respondent.


130 Cal.App.4th 1393

Donald Klug (Donald) appeals from a postjudgment order denying his motion for division of a community asset omitted from the marital termination agreement (MTA) — specifically, the $346,000 awarded to respondent Lynn Klug (Lynn) in settlement of her legal malpractice lawsuit against the couple's former attorney. Donald contends the court erred in ruling that the settlement proceeds were Lynn's separate property. He argues that the malpractice cause of action accrued during the marriage and the settlement proceeds were a community asset.

The trial court ruled that the $346,000 settlement was Lynn's separate property and not subject to division as an omitted asset because "the cause of action for the malpractice case against Mr. Christensen accrued after separation." (Italics added.) A trial court decision will be upheld even where it is based on an incorrect rule of law, as long as a sound basis for the decision exists. "`In short, we will affirm a judgment or order if it is correct on any theory of law applicable to the case, even if it is right for the wrong reasons.' [Citation.]" (Conservatorship of Davidson (2003) 113 Cal.App.4th 1035, 1056, 6 Cal.

31 Cal.Rptr.3d 330

Rptr.3d 702; see Davey v. Southern Pac. Co. (1897) 116 Cal. 325, 329, 48 P. 117.) Because the trial court's factual findings also support the finding that Lynn's cause of action for legal malpractice arose after separation, we shall affirm the order.

130 Cal.App.4th 1394

A. Events During the Marriage:

The parties were married on June 16, 1979. In January 1994, Donald engaged the services of attorney Craig Christensen (Christensen) to set up a limited partnership to protect the couple's assets from possible litigation involving Donald's medical practice. Christensen prepared documentation for the Klug Family Limited Partnership (KFLP) under which Donald was the sole general partner and Lynn the sole limited partner. Lynn signed the documents creating the KFLP without meeting or speaking with Christensen.

In December 1996, approximately one month before the parties' separation, Donald, as general partner of the KFLP, withdrew $506,000 from the community brokerage account. He personally carried the funds to England and deposited them in a new "Fortis" (hereafter referred to as Garnick) trust account under his control on the Isle of Man. Earlier, Lynn had told Donald that she did not want the funds transferred overseas.

B. Events After Separation:

Donald and Lynn separated on January 13, 1997. At the time of separation, they had a 50 percent community property interest in two businesses known as Sierra Hemodialysis, Inc. (SHI) and Sierra Dialysis Services (SDS). The other 50 percent was owned by Donald's business partner.

Donald filed a petition for dissolution of the marriage on December 28, 1998. In late December 1998 or early January 1999, Donald sold their community interest in SHI and SDS, netting $2.528 million. In March 1999, Donald placed the proceeds of the sale in Christensen's corporate trust account before transferring $1.572 million into a charitable remainder trust in Donald's name in Lichtenstein. Donald also transferred $388,000 into a second charitable remainder trust in Lynn's name in Roseville, California. Christensen prepared the documents that created the charitable remainder trusts.

Also in March 1999, Donald transferred $350,000 of community funds to an account under his control on the Isle of Guernsey. Christensen prepared the documentation used to transfer this money.

130 Cal.App.4th 1395

On June 25, 1999, in the family law proceedings the court entered a bifurcated judgment of dissolution as to status only. In October 1999, Donald transferred $400,000 of community funds overseas to purchase an insurance policy to protect him against damages he anticipated in a pending lawsuit.

On December 28, 1999, Lynn filed a complaint for professional negligence and breach of fiduciary duty against Christensen, Donald, and others involved in the management, transfer and valuation of the community property. Lynn alleged Christensen "negligently and carelessly represented, advised and counseled her and failed to protect her rights and interests in the preparation of the KFLP." She further alleged that Christensen "failed to advise [her] of the probable and/or actual conflict of interest that existed in the preparation of the KFLP" and thereby caused her "to give up legal rights and interest in community assets that she would not have otherwise relinquished." She did not list the lawsuit in the MTA, nor did she inform Donald of the lawsuit or serve the complaint on him during negotiations for division

31 Cal.Rptr.3d 331

of property in the dissolution proceedings. Lynn eventually dismissed Donald from the malpractice action.

In May 2000, Donald and Lynn entered into a stipulated judgment and MTA which purported to list and divide all community property assets and liabilities of the parties. The parties disagree on whether the MTA resulted in an equal division of the community assets.

In May 2002, Lynn settled her malpractice lawsuit against Christensen for $346,000. Donald filed his motion for division of the "omitted asset" four months later. He stated that he would not have signed the MTA had he known about the lawsuit.

C. The Trial Court's Decision:

After reviewing the "extensive" pleadings filed by Donald and Lynn and hearing oral argument, the trial court issued its written decision denying Donald's motion on October 3, 2003. The court began by framing the issues in terminology associated with the characterization of personal injury damages under the Family Code: "It all comes down to one question. Did the cause of action arise during marriage or post-separation? Did the cause of action arise by the mere drafting of the estate planning documents or when they were acted upon in derogation to Ms. Klug's rights?" (Italics added.) Later in the written decision, the court shifted to the statute of limitation terminology, stating that "[t]he general rule in a legal malpractice suit is that

130 Cal.App.4th 1396

the cause of action accrues when the negligent conduct causes damage." (Italics added.) Citing Budd v. Nixen (1971) 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433 (Budd) and Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421 (Neel), the court explained that a cause of action for legal malpractice accrues when the negligent conduct causes damage and the client discovers, or should discover, the facts that establish the cause of action. The court described the post-separation 1998 and 1999 offshore transfers of funds by Donald and Christensen as the basis for the malpractice suit, and found that the cause of action against Christensen did not accrue until after the parties separated. The court ruled that "[s]uch a finding makes the $346,000 recovery Ms. Klug's sole and separate property and not subject to division as an omitted asset."

Characterization of Tort Damages as Community or Separate Property

Family Code section 2556, which authorizes a motion to divide an omitted asset, is applicable to either community estate assets or community estate liabilities.1 The operable term is "community." If the allegedly omitted asset is the separate property of one of the parties, it is not subject to

31 Cal.Rptr.3d 332

division under section 2556.2 For purposes of applying section 2556, the characterization of tort damages as separate or community property turns on when the cause of action arose.

The Family Code defines "community property" and "separate property" for purposes of characterization and division. Section 760 states the general rule: "Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property."

130 Cal.App.4th 1397

"A cause of action to recover money damages, as well as the money recovered is a chose in action and therefore a form of personal property." (Vick v. Dacorsi (2003) 110 Cal.App.4th 206, 212, fn. 35, 1 Cal.Rptr.3d 626; see Parker v. Walker (1992) 5 Cal.App.4th 1173, 1182-1183, 6 Cal.Rptr.2d 908; see also Civ.Code, § 663 ["Every kind of property that is not real is personal"].) To determine whether a particular cause of action is separate or community property, we look to sections 781 and 2603 which guide courts in the characterization and division of personal injury damages.

Section 781, an exception to section 780 which characterizes personal injury damages as community property, reads in relevant part: "Money or other property received or to be received by a married person in satisfaction of a judgment for damages for personal injuries, or pursuant to an agreement for the settlement or compromise of a claim for those damages, is the separate property of the injured person if the cause of action for the damages arose as follows: [¶] ... [¶] (2) While either spouse, if he or she is the injured person, is living separate from the other spouse."3 (Italics added.)

Section 2603 provides additional guidance on what constitutes community estate personal injury damages and how to divide them on dissolution.

"(a) `Community estate personal injury damages' as used in this section means all money or other property received or to be received by a person in satisfaction of a judgment for damages for the person's personal...

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