California Family Law Report

Case of the Month Archive

Justices rely on amicus brief for their decision . . .

In reversal, California Supreme Court holds that trial court erred by finding that community acquired pro tanto interest in pension component of husband’s retirement benefits by funding redeposited member contributions to annuity component of those benefits; community interest applies only to member-funded annuity

Gordon Sonne was hired as a deputy sheriff for Monterey County in March 1971. As such, he became a member of the California Public Employees’ Retirement System (PERS), whose vested members are entitled to a monthly retirement allowance from a defined benefit retirement plan comprised of an annuity, funded by member contributions, and a pension, funded by employer contributions. The total amount of the retirement allowance Gordon would receive was calculated by a formula, but the employer-funded pension component was required to be enough to give the retiree the full benefit when it was added to the annuity component. When Gordon’s first marriage ended in divorce in 1991, the disso judgment awarded his PERS pension and retirement rights to him, and obligated him to make an equalizing payment to his soon-to-be ex, Dalia.

Gordon married Theressa Lynn on November 12, 1994. By 1995, he was unable to continue making the equalizing payments to Dalia. Instead, he transferred to her one-half of the PERS service credit he earned during their marriage. PERS set up a non-member account for Dalia in the amount of $42,555, which represented 8.677 years of service credit, plus Gordon’s contributions and interest. Dalia then took a lump-sum distribution of the accumulated contributions and waived her right to any further interest in Gordon’s retirement benefits or service credits. After that, Gordon exercised his statutory right to redeposit those contributions, funding them through monthly payroll deductions. After he retired in December 2002, he made the payments from his monthly retirement allowance.

Gordon and Theressa later separated and he filed for divorce in January 2004. At the time of trial, the actuarial present value of Gordon’s retirement benefits was more than $2 million, which included total member contributions and interest of $238,064. Deductions taken during his marriage to Theressa totaled $31,938. At trial, the parties argued about the characterization of the redeposited member contributions and reacquired service credits. Gordon’s expert, Ronald Reddell, contended that the service credit was Gordon’s separate property and that the community was entitled to reimbursement of the community funds used for the redeposit. Reddell expressed no opinion about whether the community had a pro tanto share in the appreciation of the funds, preferring to “ ‘leave that to the lawyers.’ ” Theressa’s expert, George McCauslan, submitted a posttrial letter, opining that the service credit should be allocated between separate property and community property in the same proportion as each had contributed to the redeposit. McCauslan calculated that community funds represented 70.67% of those contributions and concluded that the community was entitled to an additional 6.132 years of service credit. Adding the additional credit to the service credit earned during marriage, McCauslan pegged the community share of Gordon’s retirement allowance at 41.22%. In response, Reddell submitted a posttrial letter, which assigned an additional 0.47% years of service credit. The trial court determined that community funds contributed to the redeposited contributions totaled $31,938 or 70.83% of the total contributions; thus, the community share of the service credits was 70.83%. After adding the service credit earned during marriage, the trial court concluded that the community share of Gordon’s retirement allowance was 41.22%, and awarded half of that to Theressa.

Gordon appealed, but the Sixth District affirmed, albeit on different grounds. The panel found that Gordon had a separate property interest in the premarital service credits, but that interest and the community interest were fatally commingled. Since Gordon failed to trace the separate portion of the service credit, the justices determined that the redeposited funds were community property. They declined to follow Gordon’s suggestion that the community contributions should be reimbursed in lieu of awarding a community interest in the retirement allowance. The California Supreme Court granted review and affirmed in part, reversed in part, and remanded.

A good beginning . . .
The justices reasoned that a trial court may use any appropriate method of apportioning employee retirement benefits between the spouses in a disso proceeding, but the chosen method must produce a reasonable and fair allocation. That hadn’t happened here, they said. In calculating the community share of the redeposited contributions, the trial court had treated them as the purchase price for acquiring the service credits. In fact, the panel continued, redeposited member contributions are not payment for service credits, but rather a condition precedent to receiving credit for service that Gordon previously rendered. Moreover, the justices pointed out, the trial court ignored the fact that the services were rendered during Gordon’s marriage to Dalia, not during his marriage to Theressa. When Gordon and Dalia were divorced, those service credits were awarded to him as his separate property; the right to repurchase them remained his separate property. It was not, as Theressa contended, an investment opportunity for the community to which the interspousal fiduciary duty applied. Therefore, the panel concluded, the Sixth District correctly determined that the service credits were Gordon’s separate property. The rest of the appellate court’s analysis, the justices said, was “problematic.”

Parsing the parts . . .
The panel believed that the appellate court went off track by starting from the faulty assumption that Gordon’s retirement benefits were one “unitary and indivisible asset.” Not so, the justices said. Relying heavily on the amicus brief of Barbara DiFranza, CFLS, the panel noted that Gordon’s retirement allowance had two distinct components, the annuity and the pension. The payments made as part of reacquiring service credits applied only to the annuity portion, which was member-funded, not to the pension portion, which was employer-funded. Therefore, the justices concluded, the community had acquired a pro tanto interest only in the annuity portion, not in the pension component. Theressa contended that Gordon forfeited his right to raise this issue by failing to present evidence concerning apportionment at trial. The justices pointed out, however, that Theressa herself failed to present any such evidence; the issue hadn’t been raised until Reddell did so in his posttrial letter and McCauslan replied in his. Besides, the panel said, neither the trial court nor the appellate court found that Gordon had waived his right to raise the issue; they were not inclined “to interpose a procedural bar for the first time here.” Returning to the bigger issue, the panel found that both the trial court and the appellate court erred by assuming that the redeposited member contributions gave the community a pro tanto interest in the entire retirement allowance. That, the justices concluded, was an abuse of discretion requiring reversal.

One more time . . .
The justices next considered what methods might produce an appropriate result. Gordon touted the method used by Reddell, dividing the community redeposit by the total actuarial present value of the service credit for those years to arrive at the community share of the applicable service years. The panel noted that DiFranza proposed that the community redeposit of member contributions be divided by the actuarial present value of the total retirement allowance. Another option, the justices said, would be to trace the community’s contributions, plus accumulated interest, in the annuity portion of the allowance. The trial court, the panel reiterated, had broad discretion to choose an appropriate method of calculation and should be given the opportunity to do so. Accordingly, the justices reversed the Sixth District as to its affirmance of the trial court’s apportionment of the service credit and remanded for the Sixth District to remand to the trial court to take evidence and make an appropriate apportionment. The justices affirmed the rest of the Sixth District’s opinion.