Financial Disclosure Rules Shift the Burden of Discovery in Divorce

By Mark E. Minyard, CFLS

 

Traditionally, in divorces, the spouse who did not have access to key documents and/or did not operate the business ("out-spouse") had to ask the right questions and demand the key documents to determine the extent, nature, and value of the community estate.  This burden placed the "in-spouse" in an advantageous position. Frequently the "out-spouse" did not know what to ask, failed to aggressively seek records, could not afford to fight a discovery war, etc.

In the landmark divorce Feldman, the Court of Appeal seemingly changed the rules in divorce litigation, or at a minimum, signaled the beginning of new thinking regarding the production of documents and disclosure.  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.)

In a divorce, Family Code section 1100(e) requires each party 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 obligates to make spouses full disclosures 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.

In a divorce, Family Code section 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.

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

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

The sanctions were ordered even though there was no economic damage to the wife. Wife 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 family law 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 found 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 Marriage of Brewer & Federici (93 Cal.App.4th 1334, 1348 (2001)), 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 Ms. Feldman's argument that the non-disclosure was unintentional. The court 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 family law 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 unacceptable.

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 judgment is entered until the assets are distributed between the parties.

To avoid significant financial sanctions in a divorce, a divorcing spouse must proactively provide the other spouse with sufficient information to allow the other 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.

This ruling motivates the managing spouses to disclose fully, early, and often. In turn, discovery battles should be unnecessary, resulting in reduced fees.  On the other hand, it will likely increase the fees incurred by operator-spouse. The operator-spouse needs 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 divorce judgment.  There will be real questions as to what level of disclosure is enough.  In a divorce, the spouse with superior access to documents and knowledge must determine the level of disclosure required. This spouse will be at-risk if the disclosures are insufficient.

In Marriage of Feldman, the Court of Appeal held that responding to divorce discovery accurately does not necessarily prevent a party from being guilty of non-disclosure. The duty to disclose, in a divorce, requires disclosure to be made early in the divorce. If the event in question is not subject to early discovery, a party is not excused from the duty to inform the other spouse of the events, facts, and/or information. Disclosure should be a part of divorce strategic planning from before the date of separation. Although not the within scope of this article, the duty to disclose exists during the marriage.

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