Gonzalez v. Arrellano

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

In re the Matter of:

NORA M. GONZALEZ, Petitioner/Appellee,

v.

FERNANDO VAZQUEZ ARRELLANO, Respondent/Appellant.

No. 1 CA-CV 23-0572 FC
FILED 05-30-2024

Appeal from the Superior Court in Maricopa County
No. FC2022-002329
The Honorable Monica Edelstein, Judge

VACATED IN PART

COUNSEL

Michael L. Gertell LLC., Phoenix
By Michael L. Gertell, Esq.
Counsel for Petitioner/Appellee

The Valley Law Group, PLLC, Phoenix
By Ryan M. Reppucci
Counsel for Respondent/Appellant
 GONZALEZ v. ARRELLANO
Decision of the Court

MEMORANDUM DECISION

Presiding Judge Anni Hill Foster delivered the decision of the Court, in
which Judge Brian Y. Furuya and Vice Chief Judge Randall M. Howe
joined.

F O S T E R, Judge:

¶1 Appellant Fernando Arrellano (“Husband”) appeals the
superior court’s decree of dissolution (“Decree”) allocating half of his
workers’ compensation settlement to Nora Gonzalez (“Wife”) as
community property. Husband contends that the trial court erred in finding
that the proceeds from the workers’ compensation settlement awarded to
him were community property. For the reasons below, this Court vacates a
portion of the Decree, finding error in the superior court’s determination
that Husband’s workers’ compensation settlement proceeds were
community property.

FACTS AND PROCEDURAL HISTORY

¶2 Husband and Wife married on April 3, 1995. In 2018,
Husband suffered a workplace injury, prompting him to file a workers’
compensation lawsuit. Husband had surgery for his injury and retained
counsel. Under a contingency agreement, Husband’s legal counsel received
a monthly fee deducted from Husband’s Social Security Disability
payments and was to receive a portion of any eventual award. Despite
being entitled to $1,050 in monthly disability following the injury, Husband
received a monthly check of $850 directly from his attorney, which was
utilized to cover household expenses and bills of the community before
separation.

¶3 On April 13, 2022, Wife filed a petition for dissolution seeking
a portion of any workers’ compensation award. The petition was served on
Husband on July 5, 2022. Subsequently, in March 2023, the workers’
compensation lawsuit was settled for a lump sum payment of $160,000. The
settlement stated that the amount was for future benefits and anticipated
future medical expenses. Pursuant to the settlement statement, Husband’s
legal counsel was entitled to 25% of the settlement, totaling $40,000, in
accordance with the fee agreement. The remaining $120,000 was designated
for Husband. Wife was not a party to any of the agreements.

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Decision of the Court

¶4 An evidentiary hearing was held on June 22, 2023, and shortly
thereafter, the court issued the Decree dissolving the marriage without
granting spousal maintenance because Husband lacked financial resources.
Within the Decree, the court determined that neither party established any
identifiable assets apart from the settlement award stemming from
Husband’s workers’ compensation lawsuit. The superior court deemed the
workers’ compensation award a community asset and divided it equally.

¶5 The court reasoned that by committing the community
through the retainer agreement, which required a portion of Husband’s
social security funds for payment, Husband effectively established a
community debt associated with the lawsuit. Therefore, until the case
settled, this “debt” remained a community obligation.

¶6 Furthermore, the court emphasized that the remaining
$120,000 of the award, after satisfying the community debt, retained its
characterization as a community asset, regardless of when it was acquired
after the date of service. Consequently, the court awarded Wife half of the
proceeds, deducting $1,000.00 as an equalization for the tax refund.

¶7 Husband moved to alter or amend the judgment, and the
court denied the motion. Husband timely appealed and this Court has
jurisdiction under Article 6, Section 9, of the Arizona Constitution,
A.R.S. § 12-120.21(A)(1), A.R.S. § 12-2101(A).

DISCUSSION

¶8 Husband argues the trial court erred by not awarding
Husband 100% of the workers’ compensation settlement proceeds, claiming
it is his sole and separate property. Wife contends that Husband obligated
the community through the retainer agreement, thereby creating a
community debt. “[This Court] appl[ies] an abuse of discretion standard
when reviewing the superior court’s division of property, but review[s] the
court’s characterization of property de novo.” Helland v. Helland, 236 Ariz.
197, 199, ¶ 8 (App. 2014).

A. The Workers’ Compensation Settlement Proceeds Were Separate
Property.

¶9 Workers’ compensation is granted to an injured employee as
a substitute for lost wages, calculated based on the individual’s diminished
earning capacity throughout the period of disability. Bugh v. Bugh, 125 Ariz.
190, 192 (App. 1980). Husband argues that the award was for the future and
was not compensation for past earnings.

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Decision of the Court

¶10 “Property that is acquired by a spouse after service of a
petition for dissolution” that results in a dissolution is that spouse’s
separate property. A.R.S. § 25-213(B). But “service of a petition for
dissolution of marriage . . . does not . . . [a]lter the status of preexisting
community property.” A.R.S. § 25-211(B). As a result, payments received
post-petition are not necessarily separate property. DeFrancesco v.
DeFrancesco, 248 Ariz. 23, 24, ¶ 5 (App. 2019).

¶11 Husband cites In re marriage of Cupp, 152 Ariz. 161 (App. 1986)
to support his argument that the award is his separate property. This Court
held in that case that worker’s compensation awards, when commuted to a
lump-sum payment during the marriage, constitute separate property for
the employee spouse to the extent that it represents loss of earning capacity
post-divorce. Cupp, 152 Ariz. at 163. Importantly though, in Cupp, a portion
of the lump sum payment was intended to compensate for lost wages
during the marriage and was therefore considered community property. Id.
The remaining portion, allocated for future lost wages beyond the marriage,
was regarded as separate property. Id.

¶12 Wife argues that Husband’s workers’ compensation benefits,
including the settlement, were community assets to which she was entitled.
But Wife does not provide any support for this position, only arguing that
a decision to the contrary would result in gamesmanship. Workers’
compensation is not assignable. A.R.S. § 23-1068(A); see also Bugh, 125 Ariz.
at 193 (stating that workers’ compensation benefits paid after the
dissolution of a marriage for injuries incurred during the marriage are
deemed the separate property of the worker after dissolution). For this and
other reasons explained herein, Wife’s argument fails.

¶13 Here, Husband received the lump sum settlement following
the service of dissolution. The calculation of the settlement was forward
looking from March 2023 onward; it was not for past wages because the
workers’ compensation settlement aimed to address Husband’s projected
lost earnings in the future. Husband had already been compensated for any
loss in past wages. For these reasons, the resulting proceeds should have
been classified as Husband’s sole and separate property.

¶14 Thus, the court’s ruling that the proceeds from the workers’
compensation settlement were community property was erroneous.

B. The Retainer Contract Was Not a Community Debt

¶15 Wife argues that Husband obligated the community through
the retainer agreement by using his disability funds. Under Arizona law,

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Decision of the Court

property acquired during the marriage is typically presumed to be
community property, while property acquired after the service of a petition
for dissolution is presumed to be separate property. A.R.S. § 25–211(A). But
this Court previously rejected the argument that the source of disability
benefits establishes its nature:

Although the entitlement to [government disability]
benefit[s] may be attributed to employment and thus have a
community origin, the money so expended does not produce
a community asset subject to division at dissolution. What it
produces is coverage for the individual spouse against the
risk of disability and loss of future earning ability. . . . [P]ost-
dissolution disability benefits are separate property.

In re Marriage of Kosko, 125 Ariz. 517, 518 (App. 1980). And contrary to the
superior court’s conclusion, Social Security disability payments received by
Husband and utilized to retain counsel are Husband’s separate property.
See McNeel v. McNeel, 169 Ariz. 213, 214 (App. 1991) (“Disability benefits are
the separate property of the spouse suffering the disability. This rule results
from conceptualizing the disabled spouse’s body as his or her separate
property, brought to the marriage by that spouse.” (internal citations
omitted)); Luna v. Luna, 125 Ariz. 120, 123 (App. 1979) (“[T]he Social
Security disability benefits received by petitioner are his separate property
and no offsetting award can be made to respondent/appellee.”).

¶16 Husband’s separate property—his disability payments—
were used to pay for the retainer agreement, which did not create a debt to
the community. And regardless of how Husband secured his disability
settlement, it is personal to him because it results from his own injuries and
the payment entirely represents post-dissolution wages and medical
expenses.

¶17 Though the superior court cited In re Marriage of Flower, 223
Ariz. 531, 537–38, ¶¶ 24–29 (App. 2010), which held unequal division of
property was appropriate because the parties incurred substantial
community debt to benefit one spouse’s separate property, that case is
irrelevant here. That case applies only to dividing community assets. As
noted, Husband’s disability settlement—which is comprised of funds to
settle Husband’s workers’ compensation claim for injuries personal to him
and intended to cover medical expenses and lost wages that are entirely
prospective, post-dissolution—is Husband’s separate property. See Kosko,
125 Ariz. at 518. Thus, Husband’s disability settlement is not subject to
equitable division at all, and In re Marriage of Flower is inapposite.

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Decision of the Court

¶18 Wife’s contention that Husband obligated the community
through the retainer agreement, necessitating a portion of the social security
funds, parallels the misconceptions addressed in Helland. In Helland, the
court clarified the nature of a disability policy, emphasizing that while
contractual, such policies lack the characteristics of traditional investments
due to the contingent nature of disability benefits. 236 Ariz. at 200, ¶ 12.
Consequently, the community does not acquire rights to future disability
benefit payments upon policy purchase. Id.

¶19 Although Helland focused on disability policy acquisition, the
analysis is consistent with a contract that uses social security disability
payments for retaining counsel, as in the present case. Here, Husband
secured legal representation for his workers’ compensation suit through
use of his monthly disability benefits. Wife was neither bound by the
contract, which was entered using separate funds, nor did she contribute
funds to support the endeavor. Furthermore, no guaranteed return existed,
given the ongoing negotiations regarding the workers’ compensation claim
and Husband’s obligation to demonstrate eligibility for payment.
Therefore, the court erred by finding that the retainer contract created a
community debt thereby creating a community asset from the workers’
compensation settlement proceeds.

CONCLUSION

¶20 The portion of the decree that held Husband’s workers’
compensation settlement was community property is vacated. Both parties
request attorneys’ fees and costs under Arizona Rule of Civil Appellate
Procedure 21 (“Rule 21”) and A.R.S. § 25-324. After considering the
financial resources of both parties, the requests for attorneys’ fees are
denied. A.R.S. § 25-324(A). Pursuant to A.R.S. § 12-341, Husband is
awarded his costs following compliance with Rule 21.

AMY M. WOOD • Clerk of the Court
FILED: AGFV

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