Can Money Expended on Legal Fees be Added Back to the Asset Pool?

Can money expended on legal fees be added back to the asset pool? A question considered in the matter of Trevi & Trevi, determined in the Full Court of the Family Court of Australia in Melbourne on 8 September 2018 by DCJ Alstregran, Murphy J and Kent J, an appeal from Orders made by Justice Thornton on 18 May 2017 in the Family Court of Australia.

The Matter

The matter concerned a property settlement between parties of a long marriage who had three older children at the time of the trial. The Husband was a successful lawyer earning approximately $30,000 per week and the Wife was a stay at home mother and homemaker. The total value of the asset pool was approximately $9.5 million.

A 13 day property trial was conducted over a period of 12 months from 2016 to 2017 and Orders finally made 8.5 years after separation. At trial, Justice Thornton assessed the parties’ contributions as equal and made a 10% adjustment in the Wife’s favour on account of Section 75(2) (“future needs”) factors. The ultimate division of assets was a 60/40 division in the Wife’s favour which saw the Wife receiving $5.7 million and the Husband receiving $3.8 million of the total value of the asset pool.

The Wife had spent approximately $437,000 in legal fees which she had paid from an interim property settlement received from the proceeds of sale of the parties’ former matrimonial home. The Husband had spent only $142,000 in legal fees, due to the fact that most of the legal work on his matter had been conducted in house at the firm at which he worked. The majority of his legal fees comprised payments to Counsel. The Husband had paid these monies from his income.

The Husband appealed the trial Judgment on numerous points, one of which included that the Trial Judge had failed to add back the Wife’s expenditure on legal fees. It was the Husband’s case that the Wife had already had the benefit of the $437,000 she had expended and this sum should therefore be deducted from her overall entitlement to a share of  the asset pool.

On appeal, the Full Court found that whilst the husband’s other appeal points failed, the Trial Judge had erred in failing to add back as against the Wife $437,000 expended by her on her legal fees.

Judgement of Omacini & Omacini

In their Judgment they refer to the Judgment of Omacini & Omacini which established that addbacks fell into three particular categories, namely legal fees, interim property distributions and waste or reckless dissipation of assets. The first was relevant in this case.

They reiterated that Omacini had established that addbacks were a discretionary exercise which only occurred in exceptional circumstances if the particular circumstances of a case meant that justice and equity required it.

The Full Court also referred to the Judgment in the matter of Chorn & Hopkins in which it was held that where legal fees were paid from funds which existed at separation such that both parties had an interest in them, those funds should be added back to the asset pool. In the Wife’s case, she had used the proceeds of sale from the former matrimonial home which existed at separation and which both parties had an interest in, to pay her legal fees.

This was to be contrasted with the payment of legal fees from funds generated by a party post separation from his or her own endeavours or received in his or her own right (by way of gift or inheritance), which should not be added back. In this case, the Husband had paid his legal fees from income generated through his employment.

The Full Court made Orders to add back the $437,000 expended by her on legal fees.

In light of this decision and the other relevant judgements referred to above, the source of funds from which a client pays their legal fees in an important and significant consideration, particularly in lengthy and adversarial family law litigation.