Financial Disclosure Rules Shift the Burden of Discovery in Family Law

By Mark E. Minyard, CFLS

 

Traditionally, in family law matters the spouse who did not have access to the key documents and/or did not operate the business (the "out-spouse") had to ask the right questions and demand the key documents and information necessary to determine the extent, nature and value of the community estate.

This burden placed the "in-spouse" in a very advantageous position. Frequently the "out spouse" did not know what to ask, failed to aggressively require production of the records, could not afford to fight a discovery war, etc., etc.

In 2007, the Court of Appeal decided the case of In Re Marriage of Feldman (2007) 153 Cal.App.4th 1470, 64 Cal.Rptr.3d 29 (4th District).

The Feldman court seems to have changed the rules or at a minimum has signaled the beginning of new thinking regarding the production of documents and disclosure.

The standards and burdens have changed several times in California, but fiduciary duties and disclosure requirements have existed for decades. The standards today are set forth in Family Code §§721(b), 1100(e) and 2100(c).

The Feldman court stated that under Family Code §721(b), "in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other." 153 Cal.App.4th at 1476.

Family Code §1100(e) requires each spouse to act with respect to the other consistent with the general rules governing fiduciary relationships until the assets and liabilities have been divided by the parties. The duty clearly includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization and valuation of assets that are or may be community property.

Family Code §2100(c) requires a full and accurate disclosure of all assets and liabilities in which the parties have or may have an interest. The disclosure must be made in the early stages of the proceeding.

The Feldman case involved a husband who, during the divorce, failed to disclose to his wife the existence of assets and income. He demonstrated a pattern of non-disclosure, showing he had no intention of complying with the disclosure rules, thus warranting sanctions. 153 Cal.App.4th 1485, 1488.  The family law court ordered him to pay the wife financial sanctions and fees in the amount of $390,000.

Of particular significance was the fact that the sanctions were not ordered pursuant to the California Code of Civil Procedure but rather under the fiduciary duty related Family Law Code sections (Family Code §§271, 2107).

The sanctions were ordered in this divorce even though there was no economic damage to the wife. Ms. Feldman learned of the non-disclosed assets prior to the family law trial and thus was able to do the necessary investigation to receive her share of the assets. The court held that the wife need not prove damage. The court stated that the sanctions were designed to deter repetition of non-disclosure and to encourage disclosure during a divorce.

The court stated that the husband had the duty to:

  • Disclose material facts to the wife in writing;
  • Supplement and augment the discovery continually; and
  • Disclose material data immediately and before a new project.

The Feldman court cited In Re Marriage of Brewer & Federici (2001) 93 Cal.App.4th 1334, 1348, which stated: "a spouse who is in a superior position to obtain records or information from which an asset can be valued and can reasonably do so must acquire and disclose such information to the other spouse." 153 Cal.App.4th 1487-88.

The court rejected Mr. Feldman's argument that the non-disclosure was not intentional. It held that the fact that the non-disclosed assets were insignificant in relation to the entire estate did not excuse the failure to disclose. The court also rejected the husband's argument that his non-disclosure of new companies was excused because their formation was simply part of his "standard business transactions."

The court made it clear that "hide the ball" and delay tactics in a family law matter were not acceptable.

Of significance also is the fact that the duty to disclose continues until the assets are divided. This means that the duty to disclose will continue after the family law Judgment has been entered until the assets are distributed between the parties.

In order to avoid significant financial sanctions, it appears that a divorcing spouse must proactively provide his/her spouse with information sufficient to allow that spouse to determine the extent, nature, character and value of the community estate. The court was attempting to level the playing field in divorce discovery in matters.

This ruling should provide a motivation, in a divorce, to managing spouses to disclose fully, early and often. This in turn, should make many discovery battles unnecessary and thus reduce the cost of family law litigation.

On the other hand, it will likely increase the fees to the business operator. The owner will need to determine what is "material." Time and money will certainly be spent attempting to determine what needs to be disclosed to avoid sanctions and/or a potential "set aside" of the family law Judgment after its entry.

There will be real questions as to what level of disclosure is enough.

It will be up to the spouse with superior access to documents and knowledge to determine the level of disclosure that is required. This spouse will be at risk if the disclosure is insufficient.

The Feldman court held that responding to discovery accurately does not necessarily prevent a party from being guilty of non-disclosure. The duty to disclose requires disclosure to be made early in the proceedings. If the event in question is not the subject of early discovery, a party is not excused from the duty to inform his/her spouse of the events, facts, and/or information. Disclosure should be a part of family law strategic planning from before the date of separation.

Significant time, attention and analysis should be given to these disclosure requirements in order to avoid financial sanctions and/or a Judgment set aside months after the entry of the Judgment. Obviously, no one wants to go through a divorce twice with the same spouse.