Does Commercial Property Insurance Cover Losses from COVID-19?

An unanimous recent decision in Another Planet Entertainment, LLC v. Vigilant Insurance Company, the California Supreme Court ruled that commercial property insurance does not cover losses from COVID-19.

At the outset of the COVID-19 pandemic, and for some time thereafter, many businesses were forced to curtail their operations or close entirely. Some of these businesses sought coverage for their financial losses from their commercial property insurers under conventional first-party “all risk” or “open peril” insurance policies. 

 

These policies generally predicate coverage on “direct physical loss or damage” to the insured property or nearby property. 

 

State and federal courts across the country have considered whether conventional property insurance policies provide coverage for pandemic- related losses, including whether the COVID-19 virus satisfies the threshold requirement of direct physical loss or damage to property. 

 

California courts have reached different conclusions on this issue, and in this case the Supreme Court accepted a request by the United States Court of Appeals for the Ninth Circuit to clarify California law in this area. 

 

The Ninth Circuit posed the following question: “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?” 

 

The question arose in the context of a civil lawsuit filed by Another Planet Entertainment, LLC (Another Planet) against its property insurer, Vigilant Insurance Company (Vigilant). Another Planet operates venues for live entertainment. It suffered pandemic-related business losses when its venues closed, and Vigilant denied Another Planet’s subsequent claim for insurance coverage. 

 

Another Planet filed suit in federal district court, alleging that the actual or potential presence of the COVID-19 virus at its venues or nearby properties caused direct physical loss or damage to property and triggered coverage under its insurance policy. 

 

The district court granted Vigilant’s motion to dismiss for failure to state a claim, and Another Planet appealed. According to the Ninth Circuit, the issue on appeal is whether Another Planet’s allegations, if taken as true, were sufficient to show "direct physical loss or damage to property" as defined by California law.

 

The Supreme Court concluded, consistent with the vast majority of courts nationwide, that allegations of the actual or potential presence of COVID-19 on an insured’s premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy. 

 

Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property. 

 

The factual allegations of Another Planet’s complaint did not satisfy this standard. 

 

While Another Planet alleged that the COVID-19 virus alters property by bonding or interacting with it on a microscopic level, Another Planet does not allege that any such alteration results in injury to or impairment of the property itself. Its relevant physical characteristics are unaffected by the presence of the COVID-19 virus. 

 

Another Planet focuses on the virus’s risk to humans, and it alleges that the actual or potential presence of the virus rendered its properties unfit for their intended use. 

 

But the mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property. 

 

Similarly, the fact that a business was forced to curtail its operations, in whole or in part, based on pandemic- related government public health orders is likewise insufficient. The restrictions of a government public health order are legal, i.e., intangible, in nature. They do not constitute direct physical loss or damage to property. 

 

In rare situations, a property may suffer direct physical loss where it is not damaged in a conventional sense, including where a chemical contaminant or noxious odor infiltrates the property and renders it effectively unusable or uninhabitable. 

 

In such a case, the contaminant or odor may cause direct physical loss, but only where the source of the property’s unusability or uninhabitability is sufficiently connected to the property itself. 

 

This situation may arise when the effect of the contaminant or odor is so lasting and persistent that the risk of harm is inextricably linked or connected to the property. Another Planet’s allegations regarding the effect of the COVID- 19 virus on property failed to meet this standard as well. 

 

While the Supreme Court concluded Another Planet’s allegations were insufficient, and it appeared that such allegations represented the most common allegations in support of pandemic-related property insurance coverage, it did not in the proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property. 

 

Contemplation of the virus and the affected property is necessarily limited by Another Planet’s factual allegations. 

 

Nonetheless, given the prevalence of similar circumstances, the Supreme Court answered the Ninth Circuit’s question as follows: No, the actual or potential presence of COVID-19 on an insured’s premises generally does not constitute direct physical loss or damage to property within the meaning of a commercial property insurance policy under California law. 

 

Another Planet is an independent operator and promoter of live entertainment (including concerts, festivals, and events) at several venues in California and Nevada. It purchased a commercial property insurance policy from Vigilant. The policy provided for two main categories of coverage: (1) building and personal property coverage and (2) business income and extra expense coverage.  

 

In early 2020, the COVID-19 virus became a widespread concern in the United States. The virus — technically SARS- CoV-2, which causes the COVID-19 respiratory illness — is highly contagious and potentially fatal. The virus is a physical substance. It primarily spreads from person to person via airborne respiratory droplets or aerosols containing the virus. 

 

In May 2020, Another Planet submitted an insurance claim to Vigilant for direct physical loss or damage to its properties and consequent economic losses. Vigilant denied coverage. It maintained that Another Planet had not shown “physical loss or damage that would implicate coverage in this matter.” 

 

As a leading treatise explains, the fundamental principle of a property insurance contract is to indemnify the owner against loss; that is to place the owner in the same position in which he or she would have been had no accident occurred. 

 

Property insurance is an agreement, a contract, in which the insurer agrees to indemnify the insured in the event that the insured property suffers a covered loss. Coverage, in turn, is commonly provided by reference to causation, e.g., loss caused by certain enumerated perils. 

 

Alternatively, the coverage grant may cover all perils not specifically excepted or excluded, as in an “all risks” policy.

 

The term “perils” in traditional property insurance parlance refers to fortuitous, active, physical forces such as lightning, wind, and explosion, which bring about the loss.

 

As with any insurance, property insurance coverage is "triggered" by some threshold concept of injury to the insured property. Under narrow coverages like theft, the theft is itself the trigger. 

 

Under most coverages, however, the policy specifically ties the insurer’s liability to the covered peril having some specific effect on the property. In modern policies, especially of the all-risk type, this trigger is frequently ‘physical loss or damage. 

 

The longstanding California view that direct physical loss to property requires a distinct, demonstrable, physical alteration of property is correct. 

 

The Supreme Court agreed that an invisible substance or biological agent may, in some cases, be sufficiently harmful and persistent to cause a distinct, demonstrable, physical alteration to property. 

 

The Ninth Circuit asked, “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?” 

 

As noted, while the Supreme Court cannot and did not decide whether the COVID-19 virus can ever constitute direct physical loss or damage to property, it concluded Another Planet’s allegations are insufficient to meet the definition of direct physical loss or damage to property under California law. 

 

Moreover, Another Planet’s allegations regarding the COVID-19 virus and its effects appear typical of the allegations offered by many insureds in similar situations. 

 

For the reasons stated, the Supreme Court answered the Ninth Circuit’s question as follows: No, the actual or potential presence of the COVID-19 virus on an insured’s premises generally does not constitute “direct physical loss or damage to property” for purposes of coverage under a commercial property insurance policy. 

 

LESSONS:

 

1.         Allegations of the actual or potential presence of COVID-19 on an insured’s premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy. 

 

2.         Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property. 

 

3.         The fundamental principle of a property insurance contract is to indemnify the owner against loss; that is to place the owner in the same position in which he or she would have been had no accident occurred.

What Constitutes a Valid Electronic Signature in California?

This issue was discussed in the recent decision in Park v. NMSI, Inc., where at the request of plaintiffs Julie Park and Danny Chung, the trial court issued prejudgment right to attach orders (RTAO) in the aggregate amount of $7,192,607.16 against their former employer, NMSI, Inc. 

Appealing the orders NMSI contended Park and Chung failed to establish the probable validity of their claims because, contrary to the allegations in their first amended complaint, the agreements underlying their breach of contract causes of action had been modified through an exchange of emails with electronic signatures, as well as by the parties’ subsequent conduct. 

 

The court of appeal rejected these contentions, and affirmed the trial court's ruling.

 

NMSI is a residential mortgage lender licensed in 26 states.  NMSI funded loans exceeding $5.5 billion in 2020 and $5.6 billion in 2021.

 

A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument entitles the lender to reach some asset of the debtor if the note is not paid. 

 

In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.

 

Park and Chung were both employed in NMSI’s Brea office. Chung was the company’s chief marketing officer; Park was the executive vice president. 

 

In January 2019 Chung and Park entered into branch manager/sales manager employment agreements with NMSI (2019 agreements). 

 

Pursuant to their 2019 agreements, Park and Chung were both responsible for the operation of the branch, including hiring and paying operating expenses. In consideration Park and Chung were jointly entitled to 75 percent of the net revenue generated by loans originated by their branch office provided the net revenue of the office was greater than $90,000. 

 

The 2019 agreements were fully integrated and provided they could be modified only by the written agreement of the parties. 

 

In September 2019 Jae Chong, NMSI’s chief executive officer, first proposed a change to the compensation structure in the 2019 agreements. 

 

According to Chong, Chung orally agreed to the terms of the modifications, which were then confirmed in an email Chong sent Chung on October 22, 2019.  

 

Beginning in January 2020 NMSI paid Park and Chung according to the October 2019 sliding scale model. 

 

Chung promptly notified NMSI’s accounting department that neither he nor Park had agreed to modify their compensation structure. 

 

Nevertheless, the reduced compensation continued; and, as Park and Chung alleged in their lawsuit, NMSI reduced their compensation even further by refusing to share revenues generated by loan servicing and the sales of servicing rights. 

 

Later, Park and Chung were advised that NMSI was terminating their employment. 

 

Park, Chung, Koh and Kim sued NMSI and Chong and filed a verified amended complaint on January 7, 2022, alleging causes of action for breach of contract, failure to pay wages, breach of fiduciary duty, accounting and violation of California’s unfair competition law.

 

Park filed ex parte applications for writ of attachment. Park’s application included a declaration describing NMSI’s breach of the 2019 revenue sharing agreements and asserted that she and Chung were owed past compensation totaling $9,624,329.39. 

 

They argued that NMSI breached Plaintiffs’ branch manager agreements by failing to apply the proper compensation formula to the net revenues generated in 2020 and 2021, as well as by failing to pay any share of other revenues that were excluded from the profit and loss statements. 

 

The trial court found Park and Chung had established the probable validity of their breach of contract claims and issued right to attach orders and authorized writs of attachment on behalf of Park and Chung for $3,596,303.58 each (a combined total of $7,192,607.16). 

 

The court concluded (using the probable validity standard) the 2019 agreements had not been modified as argued by NSMI, finding that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email”.

 

In addition, Chung did not have authority to enter into any modification agreement on behalf of Park. The court also found the 2019 agreements had not been modified by the subsequent conduct of Park and Chung. 

 

NMSI contended the trial court misinterpreted the law regarding electronic signatures when finding the email exchange between Chong and Chung did not effect a modification of the 2019 agreements. 

 

According to NMSI, Chung’s email which included his full name, title, address, two phone numbers, email address, and webpage URL, was all that was needed to satisfy the electronic signature requirement of the Uniform Electronic Transactions Act.

 

Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civil Code, § 1633.7, subd. (a).)

 

A signature may not be denied legal effect or enforceability solely because it is in electronic form.

 

But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record.

 

Thus, although Chung’s name was at the bottom of his October 23, 2019, email, more was required to establish he electronically signed the email with the intent to modify his (let alone Park’s) revenue sharing agreement. 

 

Attributing the name on an e-mail to a particular person and determining that the printed name is the act of this person is a necessary prerequisite but is insufficient, by itself, to establish that it is an electronic signature.

 

NMSI’s contention the UETA does not require evidence of an intent to sign unless the authenticity of an electronic signature has been called into question—and that the trial court, therefore, erred in finding no modification of the 2019 agreement had occurred—finds support in neither statutory language nor pertinent case law. 

 

The UETA only applies to a transaction between parties each of which has agreed to conduct the transaction by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct. 

 

Based on the evidence it received regarding the October 2019 emails, the trial court found that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email because the body of the emails appears to document a discussion or thoughts about a revised compensation structure.

 

In the October 23 email, Chung asked a follow-up question to Chong, which suggests that the parties were still discussing potential terms of a modification, not that they were executing a final modified agreement.

 

There similarly was no merit to NMSI’s argument challenging the trial court’s probable validity finding directed to NMSI’s contention the 2019 agreements were modified by the subsequent conduct of Park and Chung. 

 

A written contract that expressly precludes oral modification may nonetheless be modified by an oral agreement to the extent that the oral agreement is executed by the parties. (Civ. Code, § 1698, subd. (b).)

 

Where, as here, a written agreement prohibits oral modifications, an oral modification nevertheless is enforceable to the extent it has been executed by the parties.

 

Moreover, even if not modified by an executed oral agreement, the parties may, by their words or conduct, waive contractual rights. 

 

The parties may, by their conduct, waive a no oral modification provision where evidence shows that was their intent. 

 

The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.

 

Waiver is ordinarily a question of fact unless there are no disputed facts and only one reasonable inference may be drawn.

 

Substantial evidence supported the trial court’s finding that the November 3, 2020 email does not show that both Chung and Park personally supervised the calculations of the Brea branch profit and loss figures which reflected the modified profit- sharing model, which they then sent to and confirmed with NMSI’s accounting team.

 

Substantial evidence also supported the further finding that the email did not confirm the modified revenue sharing agreement because it failed to include the attachment with the cover email, so it cannot be determined from the November 2020 email what Plaintiffs were confirming. 

 

LESSONS:

 

1.         Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civ. Code, § 1633.7, subd. (a). )

 

2.         A signature may not be denied legal effect or enforceability solely because it is in electronic form.

 

3.         But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record. 

 

4.         The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.

Is Compliance with Statute Excused by Good Faith, but Erroneous, Belief?

In the recent unanimous California Supreme Court decision in the case of Naranjo v. Spectrum Security Services, Inc., considered the California statute that requires employers to provide their employees with written wage statements listing gross and net wages earned, hourly pay rates, hours worked, and other employment-related information. (Lab. Code, § 226.)  

If a claimant demonstrates that an employer has failed to comply with this requirement, the claimant is entitled to an injunction compelling compliance and an award of costs and reasonable attorney’s fees. 

 

But in the case of a “knowing and intentional failure . . . to comply,” the law provides for statutory penalties of up to $4,000 or the employee’s actual damages, should the employee’s damages exceed the statutory penalties. 

 

The question presented was whether an employer has knowingly and intentionally failed to comply with section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance. 

 

The law requires employers to treat certain amounts— premium pay awarded for the deprivation of a lawful meal or rest break — as wages earned for purposes of provisions penalizing the willful failure to timely pay wages to former employees (Lab. Code, § 203), and the knowing and intentional failure to report wages earned in compliance with Labor Code section 226. 

 

Defendant Spectrum Security Services, Inc. (Spectrum) provides secure custodial services to federal agencies. Spectrum transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities. 

 

Plaintiff Gustavo Naranjo worked as a guard for Spectrum. Naranjo was suspended and later fired after leaving his post to take a meal break, in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks. 

 

Naranjo filed a putative class action on behalf of Spectrum employees, alleging, among other things, that Spectrum had violated state regulations governing meal breaks. 

 

The complaint sought an additional hour of pay — known as “premium pay” — for each day on which Spectrum failed to provide employees a legally compliant meal break. 

 

The complaint further alleged that Spectrum had violated Labor Code section 226 by failing to report the premium pay it owed as wages on employees’ wage statements. 

 

In 1984, the California Legislature added Labor Code section 226.6, that makes the knowing and intentional violation of section 226 a misdemeanor offense.

 

The statute does not define what constitutes a “knowing and intentional” violation. 

 

But in 2012, the Legislature added a provision specifying what a “knowing and intentional” violation is not: “For purposes of this subdivision, a ‘knowing and intentional failure’ does not include an isolated and unintentional payroll error due to a clerical or inadvertent mistake. In reviewing for compliance with this section, the factfinder may consider as a relevant factor whether the employer, prior to an alleged violation, has adopted and is in compliance with a set of policies, procedures, and practices that fully comply with this section. 

 

The question presented in this appeal concerns only the circumstances under which a plaintiff is entitled to statutory penalties in addition to these other forms of relief, based on a knowing and intentional failure by an employer to comply with section 226.  

 

On its face, the statute might appear to answer the question: It is the “failure to comply” with the law that must be knowing and intentional — not simply the act of issuing a wage statement that omits certain information that the law, properly interpreted, requires to be included. 

 

The wording of the penalty provision, which connects the employer’s culpable state of mind to a violation of the law, is reasonably read to excuse intentional acts or omissions that are based on a reasonable, good faith mistake about what compliance with the law requires. 

 

The context caused the Supreme Court to conclude that section 226, subdivision (e)(1) is best read to allow for a defense based on good faith belief in compliance. 

 

The operative “knowing and intentional” language does not appear in a liability provision, but in a penalty provision. In other words, the purpose of asking whether the employer has knowingly and intentionally failed to comply with the requirements of section 226 is not to determine whether or not the employer has, in fact, violated the statute. 

 

There is no doubt that an employer who issues incomplete wage statements is not complying with the statute, and an employee who can so demonstrate in court is entitled to remedies consisting of injunctive relief, costs, and reasonable attorney’s fees. 

 

The question is only whether the employee is also entitled to an additional monetary remedy in the nature of penalties for knowing and intentional noncompliance. 

 

As a general rule, courts refuse to impose civil penalties against a party who acted with a good faith and reasonable belief in the legality of his or her actions. 

 

That is because the purpose of imposing civil penalties is typically, as with punitive damages, not primarily to compensate, but to deter and punish. 

 

Those who proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred from repeating their mistake, nor do they reflect the sort of disregard of the requirements of the law and respect for others’ rights that penalty provisions are frequently designed to punish. 

 

LESSONS:

 

1.         If possible, act with a good faith and reasonable belief in the legality of the actions. 

 

2.         The law requires employers to treat certain amounts— premium pay awarded for the deprivation of a lawful meal or rest break — as wages earned for purposes of provisions penalizing the willful failure to timely pay wages to former employees (Lab. Code, § 203), and the knowing and intentional failure to report wages earned in compliance with Labor Code section 226. 

 

3.         Those who proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred from repeating their mistake, nor do they reflect the sort of disregard of the requirements of the law and respect for others’ rights that penalty provisions are frequently designed to punish. 

What are the Tracing Methods in a California Marriage Dissolution?

The tracing methods in a california marriage dissolution action was addressed in the recent decision in the Marriage of Simonis, wherein Jennifer and Alan Simonis were married for 27 years and separated in September 2015. 

While married the parties ran a farm where they grew crops, and they raised cattle. 

 

Evidence presented at trial suggested Jennifer bore some recordkeeping responsibility for the farm operations during the parties’ initial period of separation, and Alan maintained Jennifer was in control of accounting for marital assets for at least a month after the parties separated. 

 

But other than this early period of control over accounting records, between the date of separation and the date of trial on reserved issues to divide the community estate approximately five years later, Alan retained control of the three main non-real estate assets that belonged to the community: cash on hand, crop income from 2015 crops, and a herd of cattle refered to as the TCB Herd. 

 

In the time during which Alan controlled the assets, he commingled the cattle, cash, and income with his separate property. Alan also made payments on various community debts using commingled funds. 

 

At trial in 2020, the trial court looked to long-established precedent regarding the tracing of commingled assets during marriage, found that Alan had failed to meet his burden to trace his separate property interest in the cattle or his use of separate property to pay down community debts, and divided the bulk of the community estate accordingly. 

 

The court made no specific order regarding the value of the cash on hand or the 2015 crop income, but it noted the court’s continuing jurisdiction over unadjudicated assets and liabilities under Family Code section 2556 when ruling on posttrial motions. 

 

On appeal, Alan argued the trial court incorrectly interpreted and applied case law regarding how to characterize the separate and community interests in commingled assets and payments on community debts. 

 

He argued that an aggregate tracing analysis—where the court would total up all cash derived from the three non-real estate assets and compare that to the total he paid on community debts to identify his separate property payments on debts without regard to when debts were paid—is an appropriate tracing analysis here. 

 

Additionally, Alan argued that the trial court ought to have determined the value of the non-real estate community assets at the date of separation. 

 

He argued that the court contributed to its own inability to calculate a value for those assets at the date of separation in how it managed the admission of evidence about the value of community assets during the trial, be that in its questioning of Alan or in its treatment of possible documentary evidence in possession of both parties. 

 

The trial court stated that when community and separate property are commingled, each type of property will retain its character so long as the components of the commingled assets can be adequately traced to their community and separate sources. 

 

Payments may be traced to a separate property source by showing community income at the time of the payments or purchase was exhausted by family expense, so that the payments or purchase necessarily must have been made with separate property funds. 

 

Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California is community property.

 

Statutory exceptions include property acquired by gift, bequest or devise, or descent; and rent, issues, or profits from separate property earned during the marriage. 

 

When a married person commingles their separate property with community property, the mere commingling of separate property and community property does not change the status of the property interests. 

 

However, if the separate property and community property interests have been commingled in such a manner that the respective contributions cannot be traced and identified, the entire commingled fund will be deemed community property pursuant to the general community property presumption.

 

California case law has long held that the community property presumption applies to property acquired during the marriage from an account or fund in which the spouse has commingled their separate funds with community funds, but if the funds used to purchase the property at issue can be traced to separate property the purchased property will be deemed separate property.

 

The burden of proving separate funds were used to acquire the property—in order to overcome the community property presumption—is on the spouse asserting the acquired property’s separate status. 

 

As recognized by the trial court, California courts generally recognize two methods for tracing separate and community property interests in comingled funds: “direct tracing” or “family living expense tracing,” which is also called the “recapitulation” method.

 

“Direct tracing” requires specific records reconstructing each separate and community property deposit, and each separate and community property payment as it occurs. 

 

The “recapitulation” method requires showing that community income was exhausted by family expenses at the time the purchase or payment at issue was made.  

 

The recapitulation must be sufficiently exhaustive to establish not only that separate property funds were available to make the payments, but that they were actually used. 

 

As with direct tracing, the record must demonstrate that community income was depleted at the time the particular asset was acquired. 

 

In In re Marriage of Epstein, the California Supreme Court recognized that, as a general rule, a spouse who, after separation of the parties, uses earnings or other separate funds to pay preexisting community obligations should be reimbursed therefor out of the community property upon dissolution. (i.e., "Epstein Credits")

 

The trial court did not err in finding an aggregate analysis could not meet Alan’s tracing burden. 

 

LESSONS:

 

1.         Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California is community property.

 

2.         Statutory exceptions include property acquired by gift, bequest or devise, or descent; and rent, issues, or profits from separate property earned during the marriage. 

 

3          When a married person commingles their separate property with community property, the mere commingling of separate property and community property does not change the status of the property interests. 

 

4.         When community and separate property are commingled, each type of property will retain its character so long as the components of the commingled assets can be adequately traced to their community and separate sources.

 

5.         California courts generally recognize two methods for tracing separate and community property interests in comingled funds: “direct tracing” or “family living expense tracing,” which is also called the “recapitulation” method. 

Can Extrinsic Evidence be Considered in Evaluating Probate of a Will?

This issue was addressed in the recent decision in the California case of Estate of Berger, and suggests the value of the alternative estate plan including a revocable living trust and pour-over will. 

In Berger, the appellate court recognized that the California Probate Code mandates that a document will be considered a “will” capable of being probated in court only if the document is in writing, signed (or authorized) by the testator, and signed by two people who witnessed the testator sign or acknowledge her signature. 

 

However, the code will overlook a failure to comply with the two-witness requirement if the party seeking to probate the document as a will establishes by clear and convincing evidence (i.e., higher than more likely true than not (civil cases) and less than beyond a reasonable doubt (criminal cases)), that, at the time the testator signed the document, the testator intended the document to constitute the testator’s will.

 

The appeal presented two questions: 

(1) In evaluating the testator’s intent, may a probate court consider extrinsic evidence of the circumstances surrounding the document’s execution if the intent expressed by the document’s terms is unambiguous, and 

(2) Do the facts of tes case compel, as a matter of law, a finding by clear and convincing evidence that the drafter of the document at issue intended the document to make a revocable disposition of property that takes effect upon her death?

 

The appellate court concluded that the answer to both questions was “yes.”

 

Melanie Berger (Melanie) started dating Maria Coronado (Maria) in the spring of 2002. At that time, Maria was in the midst of a divorce and had three daughters who were then 15, 11, and 10 years old. Melanie had met the daughters a few times prior to August 2002. 

 

In early August 2002, Maria proposed marriage to Melanie with a diamond solitaire ring and the two became engaged. 

 

Melanie was assigned male at birth.  After living as a woman and wearing female clothing for a year as her doctor ordered, Melanie arranged to have gender reassignment surgery in late August 2002. That surgery entailed the surgical alteration of her sex organs. 

 

After proposing to Melanie but before Melanie had her surgery, Maria traveled to Spain with her daughters to visit family. While Maria was in Spain, Melanie and Maria corresponded through email using a variety of different email accounts. 

 

Specifically, Maria sent Melanie an email on the day she arrived in Spain. 

 

The letter starts with the date “8-16-02”; lists Melanie’s full name, address, and social security number; and begins with the salutation “To whom it may concern.” The letter then reads as follows: “I, Melanie Perry Berger, with sound mind and excellent health, name Maria L. [Coronado], [lists Maria’s then-current address], as my sole beneficiary in the event of my death. She will take ownership of all my personal possessions and property located at [address of Melanie’s house in Pasadena]. 

 

She will make the sole determinations as to what she will keep, and what personal belongings that may, or may not, be distributed to any inquiring family members. She will also receive, and have full discretion of: 1. My [Pasadena] home located at [listing address]. 2. My retirement Thrift Savings. 3. My 1984 Mercedes Benz 300 CD, license [listing number]. 4. My Washington Mutual checking account [listing number]. 5. Any and all wages paid to my account, post mortem. 

 

It should be noted that I would prefer to have some of the above Thrift assets set aside for the education of [Maria’s] three daughters, [naming each]. This is, however, only a suggestion, and Maria . . . shall have the final decision on these matters.” 

 

The letter closes with “Sign[ed] and dated 8-16-02 in Pasadena, California,” and beneath it, Melanie’s signature. 

 

No one witnessed Melanie sign the letter. 

 

On the very same day as the letter is dated, Melanie sent Maria an email informing her that Melanie “decided” to “leave the house, all the belongings, [her] record collection and [her] car” to Maria and also would “leave [her] retirement savings in [Maria’s] name to be used for the three girls[’] college education in the event of [her] death.” 

 

Melanie explained that she would “leave these documents on [Maria’s] desk” “chair” “before [Melanie] leaves” for her gender reassignment surgery. 

 

When Maria returned home from Spain, she found a copy of the letter on her desk chair.

 

Although Melanie and Maria continued dating for another six months after Melanie’s surgery and Maria’s return from Spain, the two did not discuss the letter at any point thereafter. Neither Melanie nor Maria mentioned the letter to Maria’s daughters. 

 

Melanie did not file the paperwork to designate Maria as the beneficiary on her retirement account. 

 

Melanie and Maria ended their romantic relationship in the spring of 2003, and ceased all contact with one another. 

 

Melanie became somewhat of a recluse and “hardly ever left the house.” 

 

In 2020, Melanie became increasingly religious and told neighbors that she wanted to leave her assets “to the church.” There is no evidence Melanie ever memorialized her new intention. 

Melanie passed away on November 30, 2020.

As the pastor of Melanie’s church was going through Melanie’s personal effects in her home, he found the letter at the bottom of one of the drawers of Melanie’s desk. The pastor gave a copy to Melanie’s sister and called Maria to inform her of Melanie’s death. 

 

By this point in time, Maria had lost the copy of the letter Melanie had left on her desk chair 18 years earlier.

On February 4, 2021, Maria filed a petition seeking to have the letter probated as Melanie’s will. Melanie’s sister, who was otherwise Melanie’s sole heir at law, opposed the petition. 

 

The probate court held a two-day evidentiary hearing in 2021. Maria, Melanie’s sister and a handwriting expert testified. The court admitted the letter as well as several of the August 2002 emails between Melanie and Maria. 

 

At the conclusion of the second day, the probate court denied Maria’s petition. 

 

Because the letter did not comply with the general requirements for a will under the Probate Code, the court viewed its “threshold” task—before reaching any questions of fraud or undue influence—as “ascertain[ing]” “whether” Maria had proven, by clear and convincing evidence, that Melanie intended the letter to be her will. The court expressed that it “ha[d] doubts about the letter and its context,” explaining that “perhaps” Melanie meant to benefit Maria or “perhaps, she had forgotten” about the letter in the intervening years.

 

Maria filed a timely appeal. 

 

In California, “[t]he right to dispose of property by will is entirely statutory.” 

 

The Probate Code prescribes that a document is effective as a will only if it is 

(1) “in writing”; 

(2) “signed” (a) by the testator, (b) by someone else, but in the testator’s name, in the testator’s presence, and by the testator’s direction, or (c) by a conservator acting pursuant to a court order; and 

(3) witnessed by at least two persons who (a) at the same time witnessed the testator sign the document or acknowledge her signature or the document, and (b) sign the document during the testator’s lifetime while understanding that the instrument they sign is the testator’s will. 

 

Requiring a testator to adhere to such formalities serves three functions—namely, 

(1) an evidentiary function by furnishing reliable evidence about the testator’s intent that prevents fraudulent dispositions of the testator's properties; 

(2) a protective function by reducing the possibility of interference with the process of execution; and 

(3) a cautionary or ritual function to help ensure that the will reflects a considered decision. 

 

But these prescribed procedures are not without exception. Specifically, the code will overlook a testator’s noncompliance with the two-witness requirement:

(1) if the material provisions of the document are in the handwriting of the testator (in which case it is called a “holographic will”), or 

(2) if the party seeking to have the probate court recognize the document as a will establishes by clear and convincing evidence that, at the time the testator signed the document, the testator intended the document to constitute the testator’s will.

 

These relaxed procedures are designed to give effect to a drafter’s clear intent to dispose of property through a proffered document, even when that document has procedural deficiencies or mistakes that cause it to fall short of fully complying with the Probate Code’s procedures. 

 

In assessing whether an instrument was intended to be testamentary, the probate court is to look to (1) the words in the document itself, and (2) the “circumstances” “surrounding” its creation and execution. 

 

When it comes to the words used, no particular words are necessary to show a testamentary intent, but words referring to the drafter’s potential death tend to indicate such an intent. 

 

When it comes to the surrounding circumstances, courts may examine, among other things, (1) whether the document was drafted at a time when death was near (or nearer than usual) or whether other “extreme circumstances” exist, as persons drafting documents at such times are more likely to be acting with testamentary intent; and (2) whether the drafter has retained the document, as persons are more likely to retain documents that were meant to have lasting effect.

 

Although courts as a general matter may not resort to extrinsic evidence in interpreting the meaning of a document (including a will) when the document’s terms are unambiguous, this principle does not apply here. 

 

That is because the probate court’s task here is not to assess the meaning of the words in a document, but instead to assess the meaning of the document itself—namely, was that document intended to be a will? 

 

In this particular context, an unbroken line of precedent squarely establishes that extrinsic evidence is always admissible on the question of the drafter’s intent. 

 

Taken together, the words in the letter itself and the circumstances surrounding its creation and execution compel the finding, as a matter of law, that Melanie intended her letter to have testamentary effect. 

 

The substance of the letter names Maria as Melanie’s “sole beneficiary" in the event of her death as well as the person who has “full discretion” to dispose of all of her personal possessions and property; lists four of Melanie’s most significant assets (namely, her house, her retirement account, her car, and her checking account); and even contemplates that “inquiring family members” might seek some of her belongings, but leaves it to Maria to decide which “personal belongings” to give them. 

 

The format of the letter also evinces a level of formality consistent with a document meant to have enduring effect: 

Melanie drafted the letter on her work stationery; recited her full name, address, and social security number; addressed it “[t]o whom it may concern”; 

started the letter with a recitation of her “sound mind and excellent health”; and 

concluded the letter with a recitation of the date and location of signing as well as her signature.

 

The surrounding circumstances further conclusively confirm Melanie’s intent to make a revocable disposition of her property to take effect upon her death.” 

 

Melanie told Maria—the “sole beneficiary” and effective executor of the will—that Melanie was executing a “will” and Melanie did so in an email sent on the very same day she created and executed the letter. 

 

What is more, Melanie on that date was days away from having major surgery, and hence wrote the letter at a moment in time when she was more acutely facing her own mortality. 

 

Melanie also treated the letter like a will insofar as she gave Maria (again, the sole beneficiary and executor of the will) a copy of the letter and kept the original for herself in a place where it was likely to be found—and was, indeed, found—decades later. 

 

None of the reasons cited by the probate court or proffered by Melanie’s sister negated this conclusion. 

 

LESSONS:

 

1.         A document will be considered a “will” capable of being probated in court only if the document is in writing, signed (or authorized) by the testator, and signed by two people who witnessed the testator sign or acknowledge her signature. 

 

2.         The code will overlook a failure to comply with the two-witness requirement if the party seeking to probate the document as a will “establishes by clear and convincing evidence that, at the time the testator signed the [document], the testator intended the [document] to constitute the testator’s will.”

 

3.         An unbroken line of precedent squarely establishes that extrinsic evidence is always admissible on the question of the drafter’s intent.