Case of the Month Archive

Freeze and Seize Law has its own innocent-spouse provisions . . .

In writ proceedings, Fourth District finds that trial court needs to clarify whether order that awarded community funds to corporation after wife’s embezzlement represented full restitution; if it didn’t, court must allow wife’s former and current spouses to show that their interests in remaining funds were acquired through legitimate activity

Azita Mahdavi married Reza Mahallaty in 1985; they separated in 1993. When they were divorced in 1997, their disso judgment confirmed their house in Trabuco Canyon to both of them as tenants-in-common. Between 1995 and 1998, Azita, who was employed by Q-Soft, Inc. “to take care of its financial records,” embezzled “substantial sums” from the corporation; she also failed to pay corporate taxes and destroyed financial records. Meanwhile, in 1997, Azita married John Cummings. The couple took title to their residence in Dove Canyon as “ ‘Azita Mahdavi Cummings, a married woman and John R. Cummings, a married man.’ ”

Azita was arrested in 1999 and charged with multiple counts of grand theft, forgery, and aggravated white-collar crime. The trial court promptly issued an order under PC §186.11 [Freeze and Seize Law], freezing Azita’s bank accounts and both homes. At a preliminary hearing in 2000, Azita signed a plea form on which she admitted embezzling over $250,000 from Q-Soft; that plea was later withdrawn. In 2002, a court-appointed receiver sold both properties, netting $155,330 on the Trabuco Canyon house, and $538,201 on the Dove Canyon residence; the proceeds were placed in an interest-bearing account. At trial in February 2004, no evidence was presented that either Reza or John knew anything about Azita’s crimes. Azita was convicted and sentenced to four years in prison.

In March 2004, Q-Soft, the Franchise Tax Board, Reza, and John submitted claims under PC §186.11. On April 2, 2004, the receiver filed a report calculating the restitution owed to Q-Soft at $360,529 (including interest, attorneys’ fees, and collection costs), and that owed to the FTB at $59,312. Q-Soft objected, asserting that restitution should include the $261,876 that Azita had admitted stealing on her withdrawn plea form. After a hearing, the court found that Reza and John were innocent spouses under §186.11, declined to consider the amount on Azita’s withdrawn plea form, adopted the restitution plan suggested by the receiver, and directed the preparation of an order after hearing. On May 13, 2004, the court issued an order awarding restitution of $231,221 to Q-Soft, and a separate order awarding $59,312 to the FTB. The board’s attorneys promptly applied for an abstract of judgment.

In July 2004, the receiver submitted an additional report, calculating the restitution owed to Q-Soft at $366,976, including interest. The receiver proposed that Q-Soft and Reza each receive $77,665 from the proceeds of the Trabuco Canyon house, and that Q-Soft and John each receive $269,100 from the proceeds of the Dove Canyon property. On August 3, 2004, the court, acting on Q-Soft’s request, stayed distribution of funds to Reza or John, pending a hearing on whether Azita’s embezzlement benefited the community, but ordered distribution of $346,765 to Q-Soft. After additional briefing and hearings, the court issued a further order re distribution on July 26, 2005. Finding that Azita had commingled funds with John, but not with Reza, the court ordered that the remaining proceeds of the Trabuco Canyon sale be distributed to Reza, and that Q-Soft be paid an additional $49,573 from the proceeds of the Dove Canyon sale, with the balance going to John.

Q-Soft appealed from the July 26 order the following month. In 2006, the Fourth District dismissed the appeal without prejudice after Q-Soft promptly petitioned for a writ of mandate. After issuing a temporary stay and an OSC, the Fourth District issued the writ.

Rules for restitution . . .
The justices explained that, per PC §186.11(e)(1), the trial court may preserve the assets or property of a person charged with an aggravated whitecollar-crime enhancement in order to pay fines or restitution; the seized assets are not limited to those that are traceable to, or the product of, the criminal activity. If the defendant is convicted, the panel continued, the trial court must make a finding regarding what part of the frozen assets or property may be available to pay fines or restitution. However, under PC §1202.4(f), victims are entitled to full reimbursement for their losses; thus, §1202.4(f)(3)(A) requires the trial court to make a restitution order that is sufficient to make such reimbursement.

What’s yours is mine . . .
Q-Soft contended that the restitution it had been awarded left it more than $200,000 short of the $588,378 that it claimed as full restitution. John countered that Q-Soft had already received full restitution. The justices noted that the trial court had rejected Q-Soft’s claim to all the remaining funds, but its reasons for doing so were not entirely clear. Still, it was obvious to the panel that the lower court had refused to rely on the amount in Azita’s withdrawn plea form to determine Q-Soft’s restitution, and Q-Soft had not challenged the $366,976 restitution order. The justices were not certain that the trial court had based its restitution order on a finding that John was an innocent spouse under PC §186.11, since the court had subsequently ordered him to pay Q-Soft an additional $49,573 from his share of the Dove Canyon proceeds. Summing up, the justices found that the restitution order did not clearly determine the amount of restitution to which Q-Soft was entitled, and they refused to substitute their judgment for that of the trial court.

The meaning of innocence . . .
“No one disagrees,” the panel noted, that Reza and John are innocent spouses who had not been involved in or knew about Azita’s criminal activity. However, the justices said, “there are additional elements of proof” that must be considered; the trial court must also find that the spouse’s interest in the property to be used for restitution was “ ‘legitimately acquired’ ” and was not the product of the illegal activity or otherwise owned by the convicted spouse. These provisions, the justices explained, are intended to ensure that victims are adequately reimbursed and that innocent spouses don’t receive a “ ‘windfall at the expense of the victim.’ ” Nonetheless, Reza and John were entitled to present proof to the court that their interests in the proceeds had been legitimately acquired. Such proof would not be needed, however, if the trial court’s order represented full reimbursement for Q-Soft’s loss; the trial court needed to decide that on remand.

Odds and ends . . .
The justices gave short shrift to the contention that the FTB was also entitled to additional restitution, finding that the board had received a restitution judgment and had not objected to the subsequent orders for distribution of funds. As for Q-Soft’s request for a release of funds to pay a separate default judgment against Azita, the panel reminded the corporation that Reza and John were not parties to that action; therefore, the enforceability of the default judgment was an issue to be pursued in a separate action. Accordingly, the justices issued a writ of mandate, directing the trial court to determine whether its prior orders provided Q-Soft with full restitution, and, if they did, to issue a new order stating that finding and distributing all remaining frozen funds to Reza and John, as appropriate. If the trial court determines that Q-Soft was not fully compensated, then it must permit Reza and John to show that their interests in the frozen assets were not acquired through Azita’s fraud before it issues a further restitution order.