Depletion of the Asset Pool (Powerpoint)

Report
Paul Fildes
BEc LLB DipFamLaw
Accredited Family Law Specialist (LIV)
Partner | Taussig Cherrie Fildes
Research by:
Justine Clark
BA LLB (Hons)
Associate | Taussig Cherrie Fildes
13 September 2013
1

In property settlement proceedings pursuant to section 79 or 90SM a party may:◦
receive or expend joint assets or assets held in a party’s name prior to separation or the adjustment of the legal and
equitable property interests as between the parties

◦
intentionally, recklessly or negligently deplete, reduce, minimise or diminish the legal and equitable interests in property
◦
expend joint assets or assets held post separation on legal fees
In certain circumstances such sums can be notionally added back to the property pool for division in
accordance with the overall exercise of discretion pursuant to section 79 or 90SM

Recent decisions of the trial division of the Family Court of Australia following the decision in Stanford &
Stanford [2012] HCA 52 suggest that add backs may not constitute a legal or equitable interest in
property and may not be added back dollar for dollar. The law is presently unsettled as there is no
authoritative Full Court decision.

Practitioners should be aware of the recent decisions of the trial division following Stanford.
13 September 2013
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
Pursuant to section 79 and 90SM the Court is required to identify the legal and
equitable property interests of the parties as at the date of the final hearing.

Add backs are an exception to this rule where property is notionally added back.
In several circumstances, well identified by the cases, this first step often involves
including in the “pool of assets” items which no longer exist but which in order to do justice
and equity to the parties need to be notionally considered in determining what a fair share
of the existing pool of assets should be...Frequently this involves a notional consideration
of assets which have been in the possession of one of the parties at some time after
separation but which have been dispersed for that party’s own use.
(Milankov & Milankov [2002] FamCA 195 at paragraph 113)
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
Decided prior to the decision in Stanford, see paragraphs 72 to 81:-
Financial losses incurred by the parties or either of them during the course of the marriage should be
shared by them, although not necessarily equally (In the Marriage of Kowaliw (1981) FLC 91-092 at 76,643 –
76,644 per Baker J). Adding back to the pool is the exception, not the rule. An exception can exist where
one party has embarked upon a course of conduct designed to reduce or minimise the effective value or
worth of matrimonial assets; or where one of the parties has acted recklessly, negligently or wantonly with
matrimonial assets, the effect of which has reduced or minimised their value or the pool of assets
(Kowaliw).
…
The Full Court in Omacini and Omacini ([2005] FamCA 195; (2005) FLC 93-218 at paragraph 30) noted that
circumstances in which it is appropriate to notionally add back to the pool of assets fall into “three clear
categories”: where the parties have expended money on legal fees; where there has been a premature
distribution of matrimonial assets; and in the circumstances outlined in Kowaliw referred to above.
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Furthermore, that Court rejected the notion that “the mere fact that a party has expended money
realised from the disposition of assets that existed as at the date of separation, will result in that
expenditure being added back ...” as being unduly simplistic (Omacini at paragraph 39).
What is crucial, is an assessment of the reasonableness or otherwise of the expenditure:
There seems to be no appropriate basis for notionally adding back moneys that existed at
separation, but which have been subsequently spent on meeting reasonably incurred,
necessary living expenses. Neither the Family Law Act nor the case law require that
parties go into a state of suspended economic animation once their marriage breaks down
pending the resolution of their financial arrangements. Parties are entitled to continue to
provide for their own support. Whether any expenditure so incurred is reasonable or
extravagant is a matter that can be determined by the trial judge (M v M [1998] FamCA 42
at paragraph 2.11).
13 September 2013
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
Three main categories of add backs have developed, as detailed by
Murphy J above and identified in Omacini & Omacini at paragraph 30,
and arise in circumstances where:◦ there has been a premature distribution of “matrimonial assets” (Townsend);
◦ the parties have expended money on legal fees (DJM v JLM [1998] FamCA 97);
◦ a party has embarked on a course of conduct that has negligently or recklessly
diminished or wasted assets (Kowaliw).

6
Add Backs are the exception rather than the rule…

Nicholson CJ, with Fogarty and Jordan JJ agreeing, reasoned at 81,654 that:In my view, what occurred in this case, as I said during the course of argument was, in fact, a
premature distribution of a proportion of the matrimonial assets. What the husband did was to
distribute to himself an asset in which the wife had a legitimate interest. In such circumstances I
consider that it would be unjust in the extreme to simply treat such conduct by the
husband as a matter to which regard should be had under section 75(2). It seems to me
that the husband has had the benefit of that money. Had he retained, for example, the taxi
licence instead of selling it, that would have been brought into account as an item of property
which would have been dealt with in the same way as the remaining items of property in this
case. Accordingly, I am of the view that the correct way in which to deal with the husband’s
receipt of those moneys is to bring them into the pool of assets on a notional basis and
make a distribution accordingly.
See Clives & Clives [2008] FamCAFC 172; Essex & Essex [2009] FamCAFC 236.
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
Baker J reasoned at 76,644:
As a statement of general principle, I am firmly of the view that financial losses incurred by
parties or either of them in the course of a marriage whether such losses result from a joint or
several liability, should be shared by them (although not necessarily equally) except in the
following circumstances:
(a) where one of the parties has embarked upon a course of conduct designed to
reduce or minimise the effective value or worth or matrimonial assets,
(b) where one of the parties has acted recklessly, negligently or wantonly with
matrimonial assets, the overall effect of which has reduced or minimised their value.
Conduct of the kind referred to in para (a) and (b) above having economic consequences is
clearly in my view relevant under s 75(2)(o) to applications for settlement of property instituted
under the provisions of s 79.
Court must assess the evidence of the parties relating to the expenditure to determine if it is reasonable: M &
M and C & C.
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
Paragraph 11.6 of DJM v JLM:-
For reasons set out in Farnell, s 117 provides that each party to proceedings under
the Family Law Act shall bear their own costs unless the Court otherwise orders.
Failing to add back monies expended by parties on costs frequently has the
effect of defeating the policy of s 117 by permitting the pool of available assets
for distribution between the parties to be diminished by any monies that either
of the parties have managed to spend on their costs up to the date of trial. We
are of the view that the normal approach ought be to add costs already paid back
into the pool. Whilst there may be cases where that approach is inappropriate, the
reasons why it is not taken ought normally be spelt out.
13 September 2013
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
Paragraphs 57 to 60 of Chorn & Hopkins :If the funds used existed at separation, and are such that both parties can be seen as having an
interest in them (on account, for example, of contributions) then such funds should be added
back as a notional asset of the party, who has had the benefit of them.
If funds used to pay legal fees had been generated by a party post-separation from his or her
own endeavours or received in his or her own right (for example, by way of gift or inheritance),
they would generally not be added back as a notional asset;...Funds generated from assets or
businesses to which the other party had made a significant contribution or has an actual legal
entitlement may need to be looked at different from other post-separation income or
acquisitions.
Outstanding legal fees themselves are generally not taken into account as a liability.
If in the exercise of discretion, it is determined that legal fees already paid should be taken into
account as a notional asset, then normally any liability associated with the acquisition of the
monies used to pay the legal fees should also be taken into account.
13 September 2013
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
Mayne & Mayne [2011] FamCAFC 192 (Faulks DCJ, May
and Strickland JJ)
◦ Discussed Shimizu and Kouper & Kouper.

Kouper & Kouper (No. 3) [2009] FamCA 1080 (Murphy J)
at paragraphs 106 to 108.

Shimizu & Tanner [2011] FamCA 271 at paragraph 74
Bryant CJ agreed with the approach of Murphy J above in
Kouper.
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
The Wife contended that the trial judge erred in adding
back approximately $173,841 and erred in the application
of the principles in Kowaliw & Kowaliw (1981) FLC 91-092.

The sum was received by the Wife as an inheritance from
her late aunt during the marriage and expended by her
during the marriage.

The Wife was unable to account for a significant proportion
of the expenditure.
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Faulks DCJ:◦
did not agree that the add back should have been allowed at first instance
as the premature
distribution and expenditure occurred during the marriage as opposed to after separation;
◦
considered the decision of Bryant CJ in Shimizu and Her Honour’s application of Kouper;
◦
determined that the Federal Magistrate should have made an adjustment pursuant to section 75(2)(o)
rather than an add back.
May J:◦
concluded that the Wife’s expenditure constituted reckless expenditure or the reduction of
matrimonial assets per Kowaliw;
◦
concluded that the Federal Magistrate had erred in adding back the sum and considering the Wife’s
conduct pursuant to section 75(2)(o).
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Strickland J:◦
concluded that the Federal Magistrate was entitled to add back the inheritance expended by the Wife
pursuant to Kowaliw;
◦
concluded the Federal Magistrate erred in adding back the sum and taking into account the Wife’s
conduct under section 75(2)(o);
◦
concluded that the funds did not need to be expended by the Wife after separation to be added back
to the pool;
◦
did not apply Shimizu and Kouper & Kouper.
13 September 2013
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
The pre-Stanford decisions identify that if Kowaliw is not applicable then an
adjustment can be made pursuant to section 75(2)(o).

In Lovine & Connor [2012] FamCAFC 168 at paragraph 96 the Full Court suggested
that financial conduct can be considered in the exercise of discretion pursuant to
section 79 and 90SM if it falls short of the conduct described in Kowaliw:Before turning to the balance of the challenges contained within these grounds,
we note
that in Polonius & York [2010] FamCAFC 228, the Full Court of this Court endorsed
several approaches to the way in which relevant financial conduct or financial behaviour
can legitimately be taken into account in the s 79 process. Those approaches include, first,
including a notional asset in the divisible pool; second, by taking it into account when
assessing contributions; and third, in considering s 75(2) factors.
13 September 2013
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
See paragraphs 35 to 41 of the plurality of the High Court (French CJ, Hayne,
Kiefel and Bell JJ).

Of particular importance is the High Court’s emphasis on the existing legal and
equitable interests of the parties in property and the identification of those
interests according to common law and equitable principles.

An add back does not constitute a legal or equitable interest or right pursuant to
common law or equitable principles and therefore cannot form part of the
property of the parties in section 79 or 90SM proceedings.

The position is not clear in relation to legal fees.
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Murphy J considered add backs at paragraphs 27 to 35:-
Where, but for the disposal of money or other property by one party, legal or equitable interests in it would have been part of
those existing at trial, it may be possible to assert, in the particular circumstances of a case, that the money or property is
nevertheless to be considered as part of the existing legal or equitable interests of the disposing party (sham transactions and
circumstances where it can be established that the property is held, for example, on trust by another for the disposing party are
examples). The investigation of issues of that type might be seen to be part of the establishment of the existing legal and
equitable interests at trial – a task which the majority of the High Court in Stanford (at [37]) said should be the first step in
considering, pursuant to s 79(2) (cf s 90SM(3)), whether it is just and equitable to make an order.
In many other cases, for example those which come within the convenient rubrics of “waste” (see Kowaliw & Kowaliw (1981)
FLC 91-092) or “premature distribution” (see, for example, Townsend), legal and equitable title to the money or property will
have passed. It could not be said that the money or property is part of the “existing legal or equitable interests” of a
party or the parties. The notion that such money or property should be treated as a “notional asset” or “notional
property” appears to run contrary to the thrust of the decision in Stanford: at issue is the consideration of two separate
questions, the first of which is whether existing legal or equitable interests should be altered.
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Where the Court has determined that it is just and equitable to make an order pursuant to s 79(2) or s 90SM(3) and there is clear
evidence that one party has engaged in conduct and, but for that conduct, the legal and equitable interests of a party or the
parties (or the value of those interests) would have been significantly greater, justice and equity may require recognition of the
unfairness inherent in those circumstances in the terms of the orders to be made.
How might that be recognised? First, consistent with existing authority, it can be recognised pursuant to s 75(2)(o) (cf s
90SF(3)(r)) (see, for example, Omacini & Omacini [2005] FamCA 195; (2005) FLC 93-218, Browne & Green [1999] FamCA
1483; (1999) FLC 92-873 and Cerini). Secondly, it might be contended that it might be recognised within the assessment of
contributions. This Court has long eschewed the notion of “negative contributions” (see, for example, Antmann & Antmann
(1980) FLC 90-908). Nevertheless, it might be argued that the “non-dissipating party” can be seen to have made a
disproportionally greater indirect contribution to the existing legal and equitable interests (for example to their
preservation) if it is established that, but for the other party’s unilateral dissipation, those existing legal and equitable
interests would have been greater or had a greater value.
The assessment of the circumstance under discussion is, ultimately, a matter of discretion (see, for example, Cerini at [46] and
Townsend at 81,654)…
13 September 2013
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
What arises from Murphy J’s reasoning above is that:◦
following Stanford add backs may no longer be applicable
◦
where a party has engaged in negligent or reckless wastage instead of providing for a notional dollar
for dollar add back of the expended funds such conduct may form the basis of an adjustment in
favour of the other party pursuant to section 75(2)(o) and section 90SF(3)(r) or be considered in the
assessment of the respective parties contributions with the non-dissipating party being credited with a
greater indirect contribution to the acquisition, conservation or improvement and preservation of the
legal and equitable interest in property held by the parties
◦
It is significant that Murphy J does not deal with add backs relating to legal fees in paragraph 34 of
the decision and states “It may be that aspects of the erstwhile treatment of legal fees preStanford (see for example Chorn & Hopkins…) will require further consideration in an
appropriate case”.

See also Bateman & Bowe [2013] FamCA 253, Baglio & Baglio [2013] FamCA 105, Toft &
Royce [2013] FamCA 372 and Sebastian & Sebastian (No. 5) [2013] FamCA 191.
13 September 2013
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Cronin J dealt with an application for a partial property settlement. At paragraph 14 His Honour
commented that:
The High Court directed in Stanford that the first step in the consideration of whether to exercise
the power under s 79 is to identify, according to ordinary legal and equitable principles, the
existing legal and equitable interests of each of the parties in the property in dispute (at [37]). The
practice of creating notional “add-backs” for assets that have been dissipated has no place in this
assessment; however, it does not follow that unilateral behaviours resulting in the dissipation of
property or premature distributions are no longer relevant – in appropriate circumstances they
may affect the final order by virtue of s 75(2)(o). (See for example Omacini & Omacini [2005]
FamCA 195; (2005) FLC 93-218, Browne & Green [1999] FamCA 1483; (1999) FLC 92-873, and
the discussion of Murphy J in Watson & Ling [2013] FamCA 57).
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
In view of the recent decisions of the trial division following Stanford
practitioners should in the first instance seek add backs pending an
authoritative decision of the Full Court and ensure that in the alternative
the arguments in respect of their client’s contribution based entitlement
and adjustment pursuant to section 75(2) address:◦ the contribution based entitlement if the add backs are allowed;
◦ the contribution based entitlement if the add backs are not allowed;
◦ the section 75(2) adjustment if the add backs are allowed;
◦ the section 75(2) adjustment considering section 75(2)(o) if the add backs are not
allowed.
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Thank you for your attention…
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