FIDUCIARY DUTIES OF DISCLOSURE IN FAMILY LAW CASES

The California Family Code imposes fiduciary disclosure duties on spouses who are dissolving their marriage. All persons involved in dissolution of marriage, legal separation or modification cases must be aware of the fiduciary duties that have been established in the law. These duties require each party to disclose information and documents that are material to the case - without being requested. In transactions between themselves, spouses are “subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other,” which “imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.” This duty does not end when the final Judgment of Dissolution of Marriage is filed with the court. As discussed below, the fiduciary duties continue even after the end of the marriage.

THE LAW

Fiduciary duties that are imposed on divorcing spouses are found in several section of the California Family Code:

Family Code §721 (b):

Spouses are under fiduciary disclosure duties "including, but not limited, to the following:

(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.

(2) Rendering upon request, true and full information of all things affecting any transaction which concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transaction.

(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concern the community property."

They are also obligated to provide the other spouse with:

(1) Without demand, any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties under the partnership agreement or this chapter; and

(2) On demand, any other information concerning the partnership's business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances."

Family Code §1100(e):

The interspousal fiduciary duties set forth in Family Code §721(b) in the management and control of community assets continue "until such time as the assets and liabilities have been divided by the parties or by a court."

Family Code §2100:

This section sets forth what the intent was of the California Legislature in creating the fiduciary disclosure duties. This record of legislative intent helps us understand why the concept of the fiduciary duty owed between divorcing couples is taken as seriously as it is. In general, in creating these detailed rules, the Legislature intended to:

● To marshal, preserve and protect community property.

● To ensure fair and sufficient child and spousal support awards.

● To achieve a division of community and quasi-community assets and liabilities on the dissolution or nullity of marriage or legal separation of the parties as provided under California law.

Family Code §2102(a):

The parties are subject to "the standards provided in Section 721, as to all activities that affect the assets and liabilities of the other party," including those stated in the section, "from the date of separation to the date of the distribution of the community or quasi-community property asset or liability in question."

Family Code §2102(b):

As to assets and liabilities, the fiduciary duties continue until the asset or liability has been divided between the parties. Thus, even if an asset is divided months or years after the end of the family law case, the parties continue to have the duty to fulfill their respective fiduciary duties with respect to that asset.

Family Code §2102(c):

The parties are "subject to the standards provided in Section 721 as to all issues relating to the support and fees, including immediate, full, and accurate disclosure of all material facts and information regarding the income or expenses of the party" "(f)rom the date of separation to the date of a valid, enforceable, and binding resolution of all issues relating child or spousal support and professional fees.

Family Code §§ 2103 - 2107:

To implement the rules establishing the fiduciary duties between spouse, the law requires parties to family law cases to exchange their preliminary declarations of disclosure and final declarations of disclosure. These disclosures consist of the following:

● Detailed schedules of assets and debts

● Reporting of any important developments that might affect the marital assets and debts

● Completed income and expense declarations on court-mandated forms.

The Court cannot file a judgement resolving the parties’ property rights until the declarations of disclosure have been exchanged. However, the final declarations of disclosure do not have to be exchanged if the parties have agreed in writing to dispense with that requirement. If a party has not complied with the requirements regarding preliminary and final declarations of disclosure, the aggrieved spouse can ask the judge to order the defaulting party to comply. In extreme cases the judge can impose the sanctions discussed below.

CONSEQUENCES ARISING FROM FAILURE TO COMPLY WITH FIDUCIARY DUTIES

The consequences of not complying with the legally-imposed fiduciary duties can be severe. If a party to a family law case is found to have violated his/her fiduciary duties, the judge can do any or all of the following:

● Impose monetary sanctions. In Marriage of Feldman - a recent appellate court decision - the husband was ordered to pay sanctions in the amount of $250,000 and attorney fees of $140,000 because of his failure to fulfill his fiduciary duties of disclosure.

● Make that party pay the other party’s attorneys fees, court costs and other litigation expenses.

● Award all - not just one-half - of an asset a spouse has concealed to the other spouse. (In Marriage of Rossi, a noted case, the husband was awarded all - not just half - of the $3 million in California lottery winnings that the wife did not disclose to the husband. )

● Prevent the offending spouse from presenting his or her case in court.

● Set-aside (void) a court order or judgment that was entered as the result of a party’s failure to comply with the disclosure statutes.

The Family Code further provides that, when deciding what sanctions are appropriate, the judge is to order sanctions that will effectuate compliance with the above statutes. This means that sanctions can be ordered even if the other spouse did not suffer any actual financial damage or loss.

THE BOTTOM LINE

The days of hide- the-ball divorce litigation, where one or both of the spouses would conceal important information and documents from the other spouse, are clearly a thing of the past. Now, each spouse must actively engage in complete and ongoing disclosures at all times.

Our office takes very seriously the concept of fiduciary duties. As the legal advisors of our clients, we make it our mission to ensure that our clients comply with their fiduciary duties in every way. Moreover, where the other party appears not to take the fiduciary disclosure rules seriously, we take steps to obtain either that party’s full cooperation or the court’s imposition of sanctions.

RECOMMENDATIONS

There are various steps that husband and wives must take to avoid being held to have not complied with the disclosure rules.

● They should familiarize themselves with the rules that are outlined in this article.

● At all times, a divorcing spouse must remember that he/she has the affirmative duty to disclose material information and documents. The duty to disclose arises even if the other party has not requested disclosure.

● Each spouse should carefully read the Standard Restraining Orders that are on the back of the Family Law Summons. Among other things, these orders restrain both spouses from disposing, transferring, borrowing against or liquidating any community property or separate property asset.

● Where appropriate, a spouse should make copies of all documents that have any bearing on assets and income. This includes bank statements, cancelled checks, credit card statements, tax returns (personal and business), deeds, titles, escrow documents, w-2 forms, 1099 forms, and payroll check stubs.

● If either spouse is entitled to receive child support or spousal support from the other, any increases in income must be reported to the other spouse.

● Whenever an event or development that might impact and asset or debt occurs, it must be disclosed to the other spouse. No event is too small to disclose. The following is a list of the types of disclosures that are commonly seen in family law cases. Because the types of disclosures that are required are limitless, it is impossible to list every occurrence that triggers a disclosure.

Real Estate: Offers to purchase, contemplated sales, change in tenancy, major repairs that are required, notices or documents received from any governmental agency, notices received from any co-owner, lawsuits that have been filed that in any way pertain to the property.

Businesses: Offers to purchase, contemplated sales, lawsuits, tax issues, loss or acquisition of major customers or clients, loss of significant employees, preparation of financial documents, new partners or major shareholders,

Employment: Changes in status of employment, raises, receipt of bonuses or commissions, exercise or granting of stock options, changes to retirement or 401 k plans, retirement.

Investments: Any significant change in value, receipt of statements, maturity of certificates of deposit, notification of any lawsuits.