Recent Posts in Declarations of Disclosure Category
| December 30, 2011 |
| Attorney Michael C. Peterson Speaks About FINANCIAL TRANSPARENCY (Before and Once Divorce Happens) |
| Posted By Michael C. Peterson |
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Advice for Couples in 2012, Including
How to Balance Power in Your Marriage!
One of the most common problems I see arising in (and sometimes leading to) any divorce action is a lack of financial transparency between the spouses or partners. Often, over time, and for various personal, practical and familial and historical reasons, one party has assumed a dominant or exclusive role in the management of community assets, including depository accounts, real estate, investments, and small businesses.That role effectively puts a managing spouse in a position to have vastly superior information about the family finances, and the power to act on such information in the context of divorce to the detriment of the non-managing spouse. This may wind up prejudicing one party if the relationship ends.
It has been my repeated experience that, in anticipation of a divorce action, an unethical or abusive spouse will take strategic steps to hide assets and obfuscate the methods used to hide them. The ramifications to the non-managing spouse can include not only an unfair disbursement of community assets upon resolution of the case, but also manifest into reduced calculations of temporary and permanent spousal support and child support.
California family law attempts to minimize the potential for financial fraud during the life of a divorce action. For example, it creates rules for mandatory disclosures of assets. It creates fiduciary duties for managing spouses. It creates methods for discovery of financial and asset information (but only in the context of a legal action, after the relationship has broken down). It creates pre-judgment and post-judgment penalties for non-disclosure.
In a perfect world such legal tools alone would fully prevent the potential for financial dishonestly between separating spouses. But the reality is that the law routinely fails to protect the financial interests of the non-managing spouse in this regard, and the root cause of that failure occurs because non-managing spouses don't take steps to equalize the playing field when it comes to information about family finances during the course of the marriage. Stated another way, individual non-managing spouses are often unable to utilize the tools that the law provides to ensure they receive a just and equitable share of the fruits of the community's efforts during the course of the marriage because they lack the information necessary to have their lawyer fully protect their interests. Too many non-managing spouses wait until the time of separation to learn about the family finances. By then, non-managing spouses and their attorney are playing catch up, and not always winning. As such, it is of paramount importance that a non-managing spouse be proactive in learning as much information about the family finances as possible, and do so not only on the eve of a divorce, but also during the entire course of the marriage itself. In this day and age, knowledge is the coin of the realm.
Economists recognize that one source of market failure (i.e. inefficient allocation of resources) is caused by a phenomenon called asymmetric information. Asymmetric information affects decisions in transactions where one party has more or better information than the other. In adverse selection models, the ignorant party lacks information while negotiating a contract to the transaction. Common examples of information asymmetry include 'insider' trading in the stock market, or buying a 'lemon' used car. Understanding and combating asymmetric information is crucial to economists because market failure leads to net losses for society as a whole. Understanding and combating asymmetric information should be equally important to the non-managing spouse and his/her attorney because of its strong potential to lead to inequitable settlements or trial results. In the economic sense, asymmetric information between spouses about the family finances is a form of market failure. To be sure, if you are contemplating or undergoing a divorce action, you will (in most cases) effectively be negotiating a transaction that will bind you and impact your financial future.
The best way overall way to combat a managing spouse 's tendency to commit acts of misfeasance or non-disclosure regarding financial interests is to equalize the flow of financial information from the very outset of the marriage, with information parity being a non-managing spouse's goal.
Hand-in-hand with the goal of information parity is a mindset that fosters such parity being present throughout the marriage. That mindset is, simply stated, one of equality and mutual appreciation. Two people will divide labor in a marriage so as to maximize their relative strengths and weaknesses, and in so doing the synergy benefits the martial community as a whole to a greater extent than either person could do individually. Economists refer to this phenomenon as comparative advantage, and recognize that such a situation is optimal in the context of maximizing social utility. So too is comparative advantage optimal for managing a household.
As a simple 'traditional' example, assume Chris and Pat are married. Chris has a greater income earning potential due to holding a doctorate degree and having a good network of people to whom Chris is favorably known in the locale. Pat has greater domestic abilities due to having a bachelors degree in nutrition a work background in home decor. Based on these comparative strengths, Chris and Pat decide that Chris will work full-time and Pat will take care of the home full-time. Pat's excellent meals keep Chris energized and in good health. Pat's superior aesthetic tastes keep Chris in style with cool cloths. Chris's boss comes over for dinner and is impressed by the feng shui of the domicile. Over time Chris gets promoted and raises. Chris uses the additional income to make financial investments, go on vacations with Pat, and purchase a better home. By Chris and Pat each doing what they are relatively strong at, they, both individually and as a whole, are made economically better off. But more to the point, it is their interdependence that necessarily caused the mutual gain. The law recognizes this fundamental principal in the context of divorce by creating the concept of community property; that regardless of whether it was Chris's paycheck that allowed for the growth of assets, Pat's contributions to Chris's earned income are equally important and therefore necessitate equal division should Pat and Chris's relationship end. So as to a non-managing spouse's mindset, I strongly encourage all such people who are contemplating marriage, married, contemplating divorce, or involved in a divorce have one that recognizes their contributions to the community and requires takes a role.
On the practical side of things, here is a list of information parity objectives that I believe healthy marital relationships should achieve:
- Spouses should store copies of written financial documents in a safe place and where the other spouse doesn't have access.
- Spouses should have all depository, investment, retirement, and debt account numbers written down in an asset ledger. Annual inventories of all assets with a value over $500.00 should be maintained and signed off on by spouses and kept in the asset ledger.
- Spouses should keep copies of income information, including payroll stubs and other documents showing income such as rental checks from investment property or brokerage statements from securities dealers.
- Spouses should copy and store all financial account information from banks savings and loans, credit unions, particularly monthly statements. Spouses should also copy and store other banking information such as passbooks, check registers, and deposit slips.
- Spouses should agreed to have all financial information statements should be sent to each spouse individually, directly from the applicable financial institution, and be received only at that spouses primary residential address (and not, for example, at a business). If one spouse insists on receiving their financial information from home or stops receiving financial information mail at the residence, it is often a red flag.
- Spouses should maintain copies of tax documents, including personal tax returns and business tax returns, and attached forms, for the preceding five years.
- Spouses should receive and keep business financial statements, including net worth and income statements, in the case of a small business.
- Spouses should keep copies of all wills and trusts, and attachments thereto (such as a grant deed that has been recorded in favor of a trust for the benefit of the spouses).
- Spouses should keep copies of all life insurance policies.
- Spouses should keep copies of all outstanding debts incurred during the marriage that are in either spouses name.
- Spouses should keep a list of all personal and real property owned prior to the marriage.
- Spouses should keep a list of all safe deposit boxes and their contents.
Other tips you should know about and red flags you should watch out for to protect you from an unscrupulous spouse:
- Don't wait until things are going badly in the relationship to achieve financial information parity. Work towards that goal from the outset.
- Conduct asset searches of your spouse's biographical information by professional third-parties on an annual basis.
- Be aware that there is a statistically higher incidence of spouses hiding money in their second, third, or later marriages.
- Its best to have only a certified public accountant prepare the spouses' tax returns (as opposed to 'bookkeepers' of other unlicensed persons acting as pseudo-accountants), as they are subject to professional conflict of interest rules. Do not sign any document seeking your informed consent to waive any conflict of interest rules with respect to accountants without consulting an attorney.
- Particularly in the case of a small business, become knowledgeable about the business's employees, its normal income, its normal expenses, and how it accounts for them. A small business in particular is breeding grounds for accounting tricks to make it appear less valuable. I have seen this occur by the managing spouse: favor/incentivize cash payments from customers, funnel personal expenses as payments from the business, creating and paying fake employees (including the spouses' own children) and then voiding the uncashed checks after the divorce is final, or delaying new long-term business opportunities (i.e. taking new customer orders, signing new clients, or receiving transfers from escrow-like accounts such as paypal.com). It's important to be familiar with the inner-workings of a small business so you can note when something is amiss. Carefully review and copy customer/client payment agreements and accounts where a small business operates on a largely cash basis.
- Review financial statements on a regular basis. It is easier to access and digest three months of recent transactions than five years of relatively distant transactions. Look out for large or out-of-the ordinary deposits or withdrawals, and try to trace the source/end-point of the transaction to the best of your ability.
- Be aware that municipal bonds and certain savings bonds, because they are tax-free, are not reported to the IRS and therefore can be a vehicle for asset hiding because they do not need to be disclosed on tax returns. Look out for large investments in these assets.
- Non-managing spouses should be careful about signing joint tax returns that claim large deductions for various expenses, particularly in the case where a small business is involved. Although it might mean a larger tax burden in a particular year, in the context of a divorce it often results in lower spousal support and a lower business valuation, with attestation proof presented to a judge in the form of your signature.
- Big changes to the administration of finances can be a red flag: applying for large new loans, the closing of a bank account or change to an investment portfolio, particularly without the input of the non-managing spouse, might give opportunity to hide money.
- Know your spouse's boss well, and make sure they like you. I have experienced collusion between employers and employee so as to show short-run decreases (bonus or raise deferral) to income agreed on increases after the divorce is complete. If you separate from your spouse, let your spouse's boss know that event has occurred in writing.
- Do not sign deeds or other papers concerning real estate papers without consulting an attorney.
- Watch out for bank accounts opened in the name of spouse's children, as they do not get listed on that spouse's tax statements they can be a method of hiding community assets.
- Also watch out for overpayments on taxes. A managing spouse may try to receive a tax return later after the divorce is final by overpayment now, or alternatively filing amended taxes.
- Avoid 'loans' to friends or family.
- Be a Missourian, i.e. don't take your spouse's word. Have the managing spouse show you with the documents that corroborate what they tell you about the family finances.
- Don't allow fear of ruining the relationship, cultural values, or laziness prevent your pro-activity in becoming astute in the family finances. Defensive responses to your inquiries and requirements for financial information parity by the managing spouse may indicate diversion of community assets.
- Always remember that the burden of proof rests on the accuser, not the accused, to prove diverted assets to a court. Take all actions to protect your interests with this rule in mind.
These are my thoughts at the end of 2011 - I wish each of you, and each of us, a Happy New Year in 2012, and I hope that we all strive to be transparent and ethical during the coming year!
Michael C. Peterson, Esq. - Indio and Coachella Valley Divorce Attorney |
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| August 15, 2011 |
| IRMO MARGULIS - Managing Spouse Has BURDEN OF PROOF To Explain MISSING ASSETS |
| Posted By Thurman W. Arnold, C.F.L.S. |
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Marriage of Margulis (8/11/2011) 198 Cal.App.4th 277
Part One
I am always pleased to report cutting edge rulings by our appellate courts, and this is one of the most important decisions in recent years affecting who has the burden of proof to explain what happens to assets that disappear after marriage partners separate, and what the consequences are for managing "in-spouses" who cannot explain what happened to liquid (or other assets) that existed at separation but seem to have evaporated in the meantime. While upon reflection it is hard to imagine how this decision could be news because it makes such perfect sense, the Fourth Appellate District's pronouncements (by the Honorable J. Aronson) are indeed a new extension of existing law - which is why the trial court in this case was reversed.
Special kudos to Attorneys Stephen Temko and Dawn Gray on behalf of the Association of Certified Law Specialists (an organization serving the public interest that I am proud to be a member of) for weighing in with amicus curiae briefs that probably helped to inform the appellate justices in positive ways.
Because this case is important I am going to help it be digested in two gulps - this is Part I.
The root holding of IRMO Margulis is this: Once a nonmanaging spouse makes a prima facie showing concerning the existence and value of community assets in the control of the other spouse postseparation, the burden of proof shifts to the managing spouse to rebut the showing or prove the proper disposition or lesser value of these assets. It is now clear that managing spouses have the burden of proof to account for missing assets that they controlled.
Family Code section 1100 states that "either spouse has the [right of] management and control of the community personal property, ..., as the spouse has of the separate estate of the spouse."
But when parties separate the more empowered partner often grabs or already manages all the marbles, and then enjoys the advantage of continuing to carry those marbles around and even spending them down until the community property pot is ultimately divided. Without accountability this frequently led to abuses and misappropriations that - in the absence of this new rule - favored that party and facilitates their practical ability to defraud the community property estate, notwithstanding a legal duty per Family Code section 721(b) to account for what went where. Until now. The
Margulis rule is necessary to protect the rights of an "out-spouse" as a matter of basic fiduciary protections.
The facts of the case as set forth in the appellate decision are these (and are reminiscent of the facts of the Davenport decision): Alan and Elaine separated after 33 years of marriage in August, 1996. Alan moved out of the parties' Irvine home and moved to Chicago to start a new job. Elaine remained in the family residence. They owned a home in Palm Desert, California.The marriage yielded two children who are now adults.
During the marriage Alan was the sole working spouse and exercised "complete control" of the couple's finances - sound familiar? This included retirement, bank, and investment account personal property assets. Although Alan moved out in 1996, Elaine did not file for divorce for another six years - in 2002. Five more years passed before Alan even filed a response in those proceedings. Throughout this period Alan paid Elaine just enough, evidently, for her to be satisfied with the financial status quo so that she undertook no steps to move the divorce towards a conclusion. I can only speculate what psychological and emotional dynamics were at play in these people's lives, but infer that Elaine trusted Alan enough that she did not perceive that she needed to take vigorous steps to protect herself. Which gave him free reign for a long, long time.
Once the case did begin to move forward, as often happens when there is a significant power imbalance in relationship, it began to move quickly and that pace certainly further advantaged the husband. Commonly it is the in-spouse who is rushing the case to trial while the out-spouse plays catch-up and the parties, or the in-spouse, play discovery games and hide and seek with assets, disclosures, and backup. Bank accounts are easily susceptible to this type of abuse because they are document intensive, and expensive to evaluate. In and out transactions (deposits in, transfers out) must each be traced in order for forensic experts and the court to know how to characterize and characterize transactions and the flow of cash. Here Alan filed his Response to Elaine's 2002 Petition on February 21, 2007, and the parties found themselves in a pre-trial Mandatory Settlement Conference only six months later. This means that Elaine's team had very little time to prepare since Alan knew where the marbles were but elected not to share their identity and location.
There was a single "smoking gun" in the case which consisted of what became at trial "Exhibit 18." This was a two-page document that was entitled "confidential personal financial statement" for "Alan/Elaine Margulis," dated February 1, 1999. It reflected total assets of $1,305,500. The liquid (i.e., cash) portion amounted to more than half of that number.
At trial Elaine testified that, as the nonmanaging spouse, she had no personal knowledge or records of the value of the accounts at any time. This was the sole extent of her evidence at trial about the status of the assets near the date of separation, and essentially Alan's attorneys argued that this proved nothing. Elaine's attorney responded insightfully that the effect of this document was to shift the burden of proof to Alan to explain and show that he had properly disposed of those assets, or that the stock holdings lost their value as a result of market conditions - as opposed to them having been withdrawn or mismanaged by him or for his sole benefit. But the trial judge disagreed, which set up this reversal in favor of Elaine.
The trial court explained "I don't believe it supports, standing alone [that] your assets listed did, in fact, exist." Wife had no other evidence to prove that they did - hence, without the rule established by Justice Aronson in this case, she would be out of luck. Her proof would have failed on the contested issues, and it did fail at the trial court level. Before this decision the trial court's perspective was a bit shallow but not surprising. It takes bold judges with considerable family law experience to read the sub-text.
Who has the burden of proof on a topic is often key to which party wins or loses on a given issue. This is why Marulis is important to control of asset cases.
Shifting the Burden of Proof
There are two common principles linked to the concept of the "burden of proof." One is the burden of persuasion and the other is the burden of producing evidence. Often if a party cannot produce evidence on a subject that the law imposes a burden upon them to produce in order to prevail, they lose. Irmo Margulis has implications beyond family law.
The Margulis decision observes: "the trial court concluded that Elaine, the nonmanaging spouse who lacked both personal knowledge and records concerning the assets listed on exhibit 18, failed to meet the difficult burden of proving these now missing assets had existed....
The trial court's failure to place the burden of the duty on Alan relieved him of the duty to account for his postseparation management of these assets. Thus, Alan did not have to prove the
amounts
that had been in these accounts or that he had properly disposed of those sums. This lack of accountability poses a risk of abuse and runs afoul of the statutory scheme imposing broad fiduciary duties of disclosure and accounting on a managing spouse." [Emphasis added].
It continued: "Given that 'bedrock concerns' of 'policy and fairness' drive the analysis [citation omitted]
, it is not surprising that a common trigger for burden-shifting is 'when the parties have unequal access to evidence necessary to prove a disputed issue. 'Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim.'....
Concerns over 'unequal access to evidence' [citations omitted]
are particularly pressing in the context of a marital dissolution where financial records can be crucial to ensuring the equal division of property required by Family Code section 2550.... Undoubtedly, in marriages and separations like the Margulis's where one spouse exercised exclusive control over community property, the parties will have vastly
unequal
access to evidence concerning the disposition of that property. When this occurs, fairness requires shifting to the managing spouse the burden of proof on missing assets. Moreover, ..., the statutory fiduciary duties of disclosure and accounting owed between spouses further justify that result."
The Appellate Court goes on to explain why this result is fair in light of the fiduciary obligations between spouses that I have written about so much over the past few years. I will separately blog that portion of the decision.
But as I have been trumpeting now for many months, the appellate courts are working overtime to save the existing California scheme of family law to ensure transparency - it is my opinion long overdue but much appreciated!
For those in-spouses who do act in good faith after separation and the pendency of the marital proceedings, Margulis is a cautionary tale - managing spouses had better keep records of transactions affecting the community property estate and make all required disclosures or find themselves assuming the risk of loss or diminution of the value of those assets.
Please note that the appellate Court's initial decision of August 11, 2011, was modified on August 26 and September 9, 2011. The citation to the modified opinion is Marriage of Prentis-Margulis v. Margulis (2011) 198 Cal.App.4th 1252. I have yet compare the differences in the two decisions.
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| July 30, 2011 |
| Can I CONTINUE My DIVORCE TRIAL? |
| Posted By Thurman Arnold, C.F.L.S. |
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Q. My divorce trial is scheduled for next month. I want to change attorneys - will the case be continued to give a new attorney enough time to prepare my case correctly?
A. Trial continuances are disfavored under the law. Any application to continue a family law trial must be made pursuant to Cal.Rules of Court, Rule 3.1332. It allows for "ex parte" requests to continue trials as well as such applications on noticed motions upon a showing of good cause and in the interests of justice, and lists some examples of what a trial court might properly consider to be "good cause." Subsection (c)(4) includes substitution of trial counsel as a ground
"but only where there is an affirmative showing that the substitution is required in the interests of justice." Courts are highly unlikely to permit more than one continuance without a really good reason, so I hope this is your first request.
Usually when you file this kind of ex parte you should also ask the court, "in the alternative", for "an order shortening time" (OST) for the hearing on the motion" since judges are feeling pressured from the "Elkins" changes in the law and are stretched in their abilities to read ex parte paperwork (usually received by the court the day before or the morning of) at the last moment. Indeed, ex parte applications on all matters except the direst emergencies are being increasingly denied - and they irritate judges. In fact, some judges may sanction a party or their attorney for a clearly improper one.
Whether you seek an OST also depends upon where you are in the procedural timeline - for instance, if the discovery cut-off (including the exchange of any designation of experts per the Code) has not yet occurred but would toll between the date of an ex parte hearing and the date of a hearing on shortened notice per your applicable local rules or by statute, then be sure in your ex parte to include a request that the discovery clock be switched off until the court issues its ruling on the continuance. Otherwise you or your new attorney will need to file a motion to reopen discovery once the case is continued - assuming that important things remained undone - usually the case when parties are switching attorneys on the eve of trial.
In fact, I have seen cases where parties want to change attorneys because the offer that is on the table is at a substantial discount for how much or what agreements the case should reasonably be settled for, but because the weaker party's attorneys messed up the case that party is now at such a disadvantage that they must seriously consider taking the offer or doing worse at trial. Strong, aggressive counsel for a powerful party (usually the "in-spouse") will vigorously try to push the case to its conclusion before you, the "out-spouse," can catch your balance. This is a recipe for disaster. By the way, having good competent divorce counsel from the beginning greatly enhances the likelihood that your case will be fairly settled and that it will not go to trial - that is the goal for any sensible person.
Here are my suggestions:
- See whether the side has done everything the law requires of them in formulating your grounds for "good cause" under Rule 3.1332. If they have and your attorney failed to also comply, this is not good. If neither side did what is required to avoid irregularities, then that is better. If your side did comply but the side did not, that is best and you should point this out in your papers and in oral argument.
- Did the other side comply with all applicable Local Rules regarding trial? For instance, in Riverside County we have local Rule 5.0053 which mandates that a Trial Readiness Conference be set before trial, and at least in Indio that you (or your attorney) sign a form that you understood and will comply with what those rules require. Here is a link to Title 5 of the Riverside County Local Rules for Family Law cases. There may be similar rules in your jurisdiction. Rule 5.0065 discusses ex parte procedures in Riverside County, which generally includes the family law divisions in downtown Riverside, Hemet, Indio and Blythe.
- Draft a declaration that establishes good cause for your request - one that speaks to both justice and procedural issues. Anticipate what prejudice the other side will claim in opposition to your continuance request. Offer to ameliorate it if you can, in advance of the hearing on the ex parte.
- Rule 3.1332(d)(10) permits the court to impose "conditions" if it grants a continuance. These need to be reasonable of course. A frequent condition "no more continuances." Unreasonable requests may be that you are asked to waive a fundamental right that is a key issue in the case itself, i.e., a waiver of spousal support or an agreement that the court will have retroactive jurisdiction at the trial when it does occur to reach back and modify support to the first trial date. Offering to contribute to the other side's attorney fees incurred surrounding the rescheduling may be appropriate under certain facts.
- Before you file your ex parte, be sure to attempt to "meet and confer" with the other side in an effort to obtain a stipulation to continue instead, and in order to discuss how you might minimize their inconvenience and prejudice and to discuss possible reasonable conditions in advance of the hearing that would address those issues. Attach any confirming letters as an exhibit.
- Make your motion as short as possible and author it to read fast - not more than 10 pages including declarations, points and authorities, and exhibits. Judges have no time to read long winded stories.
- Be sure to notice all the parties for the ex parte. For instance, if there has been a Borson motion by either side that attorney (the former, Borson attorney) must also get notice of the hearing and the paperwork at the time you set the hearing.
- Hire your new attorney first and have them make the motion (which is costly in terms of the amount of the retainer they will reasonably require, since if the motion is denied that attorney knows he may be going into a trial that will take immediate emergency hours to come up to speed on).
- If you haven't retained counsel yet and just want to continue a trial "to get counsel," you have a problem. While this excuse might work at the first hearing on an OSC or regular motion, it is unlikely to convince a judge who is managing his trial calender.
Good luck with your new attorney! |
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| March 05, 2011 |
| SANCTIONS For Failure to Complete the FINAL DECLARATION OF DISCLOSURE |
| Posted By Thurman Arnold |
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The Preliminary Declaration of Disclosure
I've recently blogged the importance of complying with Family Code section 2103 and
section 2104, which obligate both parties to a pending dissolution, legal separation, or annulment proceeding to exchange a preliminary declaration of disclosure using Judicial Council Forms FL-140, FL-141 and FL-142 (please see our Form Library for the PDF's]. Its purpose is to ensure a "full and accurate disclosure of all assets and liabilities in which one or both parties may have an interest" and it is a prerequisite to successfully performing one's fiduciary obligations in the course of such proceedings. The exchange is supposed to occur "early on" in the proceedings, whatever that means.
No case can be settled and a marital termination agreement or stipulated judgment cannot be accepted by the court clerk for filing or transmittal to a judge for signature unless both parties have exchanged their PDD's. There is a single exception where the other party does not appear in the action (i.e., file a Response and pay the fees) and so the case is resolved by way of a "default judgment." Moreover, where both litigants have formally appeared and either wants to move the case to a trial status so that it can finally be resolved (where for instance agreement is not occurring), a settlement conference or trial date will not be set by the court unless both parties have each complied with the preliminary declaration exchange and have first filed proof of that with the court.
However, beyond simply concluding your case, there are other extremely important consequences for failing to do your half of the heavy lifting in terms of identifying and attempting to value all community and separate property assets by way of PDD. In my practice I find that many client's resent the work that completing these documents entails, and yet there is no way around it. Inadequate or inaccurate disclosure declarations can create grounds for the other party to attempt months or even years later to set aside a judgment or settlement agreement. They can form the basis for breach of fiduciary duty claims. They must be dealt with in good faith. They are critical documents that must not be treated casually.
The Final Declaration of Disclosure
However, there is an arguably greater obligation that is addressed by what is called the Final Declaration of Disclosure. This is a second and final disclosure that is required in all dissolution or similar proceedings, assuming it is not waived by both parties by agreement (not a good idea for reasons I will separately blog). Where the case winds its way to trial on any aspect of it, the Final Declaration cannot be waived and it must be served prior to trial. Family Code section 2105 governs what it must contain and when it can be avoided. It is even more burdensome to fill out and comply with because supporting documents must be attached and it has to bring current all of the information regarding community and separate property not just as of the date of separation or at the time the PDD was filed, but also up to the date that it is prepared.
Based upon an Second District appellate decision issued March 3, 2011 entitled Marriage of Fong, other consequences for disclosure noncompliance are now apparent. The Fongs are one of those unfortunate couples where one or both parties seem conflicted enough that they will litigate on for years that exceed the entire length of their marriage.
Family Code section 2107 authorizes courts to award monetary sanctions for failing to comply with the disclosure obligations. It is often used in conjunction with a request for attorney fee sanctions under
Family Code section 271.
In the Fong case the trial court hit the husband with $200,000 in non attorney fee sanctions under section 2107(c) for "breach of fiduciary duties" relating to nondisclosures in the property declarations, among other things, and heaped on an additional $100,000 in fees and costs per section 271 because it concluded that his side engaged in discovery gamesmanship. Wife had contended that Husband had failed to comply with his statutory disclosure obligations regarding his assets, that he failed to respond to formal discovery, and that at trial he surprised her with documents he'd failed to earlier provide despite requests for them. Husband's alleged behavior is not unusual in high conflict divorce litigation, and so it is important that an aggrieved party, possibly like the Wife in this case, have a meaningful remedy.
Unfortunately, Wife had waited three years from the date the action was filed to serve her Preliminary Declaration of Disclosure, and at the time of the trial that led to these sanctions against the Husband (seven years after the case began) she still had not prepared and served her Final Declaration of Disclosure. Lawyers for "out-spouses" sometimes delay completing the FDD because they fear that they lack sufficient information to do them properly and so are reluctant to have those documents completed and so held against their clients as "judicial admissions" (statements under oath in the pleading files) until later in the proceedings - after they've first gotten the disclosures from the "in-spouse" who probably controls all the information.
In the first reported California appellate decision squarely construing compliance with FC section 2105 together with 2107 sanction's requests, the Second District reversed the trial court's award under section 2107. I can only guess that Wife's efforts cost she and her attorneys between $500,000 and $1,000,000 in attorney fees.
The appellate court did uphold the sanctions award per Family Code section 271 for the $100,000. That part of the ruling is also important, but this blog will be way too long if I cover it here so I will write about it separately.
The Court determined that Wife's failure to have first served her Final Declaration of Disclosure before seeking sanctions by way of motion against the Husband, on the theory that he was himself out of compliance, deprived her of the right to complain. It interpreted section 2107(a) as permitting only a "complying party" to seek the sanction remedies. By the time of a trial on a motion for a sanctions for alleged disclosure misconduct, a party is not in compliance IF she has only served their PDD and therefore not entitled to maintain a sanctions' request.
This case reminds lawyers and parties that the California disclosure statutes mean what they say. It provides useful guidance to attorneys representing the disadvantaged spouse in terms of what they must do in getting their ducks in a row before going off half-cocked. IMHO. Both sides in a California family law case have equal burdens to meet their fiduciary duties. Please take them seriously.
Here is a link to Marriage of Fong.
Thurman W. Arnold, III, CFLS
www.PeacemakingDivorce.com
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| September 08, 2010 |
| What do I do if my spouse or domestic partner does not complete their DECLARATION OF DISCLOSURE? |
| Posted By Thurman Arnold |
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Q. What do I do if the other party to a divorce or dissolution of domestic partnership proceeding refuses to file their Preliminary Declaration of Disclosure?
A. Declarations of Disclosure must be exchanged in all California proceedings for dissolution of marriage or domestic partnership, for legal separations, and for annulments. They do not need to be served in any other form of family law proceeding.
There are two forms of Declarations of Disclosure: Preliminary Declarations of Disclosure (PDD's) and Final Declarations of Disclosure (FDD's). PDD's are governed by Family Code section 2103 and FC section 2104. FDD's are governed by Family Code section 2105. While parties to a dissolution or legal separation action can waive the exchange of the FDD in writing (although it is not a good idea to do so for reasons discussed in my blogs about fiduciary duties), they cannot waive exchanging the Preliminary Declarations with one exception: Where a dissolution or legal separation judgment is obtained by default, the defaulting party need not provide the PDD to the other party. Family Code section 2110.
Note that I used the words "exchange" and "serve." This is because the forms themselves are not required to be filed with the Court itself - instead, the proof of service upon the other party to the proceeding is what is to be filed. Judicial Council Form FL-141 is what you file with the clerk's office. In practice many people do file the actual schedules with the clerk, which can be a good idea because whether these forms were really exchanged and their contents can have a big impact on future set aside motions.
Here is the California Judicial Council Form FL-140 cover sheet that accompanies the PDD or the FDD. As you can see, it is the same form but different boxes are checked for each. A form FL-150 Income and Expense Declaration must accompany both, in addition to the FL-142 Schedule of Assets and Debts and the FL-160 Property Declaration.
The FDD is supposed to have much more detailed information, including supporting attachments, then is expected in the PDD.
Where the proceedings do not conclude by way of a default Judgment, the problem you have where the other party fails or refuses to exchange at least their PDD and thereupon to file the FL-141 proof of service is that the clerk cannot (a) set the matter for trial or (b) cannot accept for submittal to a judge and later filing a Stipulated Judgment or Marital Termination Agreement. This can make it impossible to conclude a case even by way of settlement where both parties are in perfect agreement, or to obtain a trial date where they are not. One party can hold up the entire process, and it is true that this often happens intentionally.
There is no set time for when parties must complete and exchange their preliminary declarations. Family Code section 2104 states in part that "after or concurrently with service of the petition for dissolution or nullity of marriage or legal separation of the parties, each party shall serve on the other party a preliminary declaration of disclosure...." The problem with this language is the word "after." The expectation is that this will be done within a reasonable time not usually exceeding 60 days from the date a party appears in the action by filing a Petition or a Response, but the statute does not explicitly say that.
The only remedy you have is file a notice of motion (or OSC application) pursuant to Family Code section 2107 asking that the court order the other party to serve their PDD and file the proof of service within a given number of days, not usually exceeding thirty. That motion should request an order that the other party's Petition or Response be stricken if they then fail to do so in a timely manner, so that your matter may effectively proceed by default hearing.
Expect the Court to give the other side one or two opportunities to get themselves into compliance with their fiduciary obligations to provide this exchange.
Thurman W. Arnold III
http://www.DesertDivorceandFamilyLawyer.com
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| January 17, 2010 |
| What are interspousal FIDUCIARY DUTIES? |
| Posted By Thurman Arnold |
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Q. I keep hearing the phrase "interspousal fiduciary duties". What does it mean?
A. Few areas of California divorce and family law is changing as rapidly, or is having as great an impact upon property division and support obligations, as is interspousal fiduciary duties.
Until the mid-1970s lesser "good faith" standards were imposed upon married persons which had consequences to usually only in extreme situations of self-dealing by one spouse or domestic partner. These standards have since morphed into much higher level "confidential duty" and "fiduciary duty" standards.
On January 1, 1994 Family Code section 721 became operative. That was revolutionary, but widely not understand, for the next 10 years. Section 721 has since been revised, extended, and expanded by statutory amendments and judicial decisions, and this continues.
The penalties for violating a fiduciary duty can be severe. Many attorneys, and some judges, are behind the curve in understanding the nuances of the obligations imposed by FC section 721 and related statutes. This ignorance places clients at financial risk in the course of dissolution or legal separation litigation. Indeed, it opens the door to the litigation continuing or re-emerging long after Judgment if breaches of fiduciary duty are discovered or alleged downstream. Having a lawyer who understands this developing area of the law will make or break some litigants, today and for years to come.
Fiduciary duty rules help to balance economic power in marriage and divorce. One reason people roll our eyes when the topic of "divorce" comes up is who doesn't know someone who out cheated, or got cheated by the other spouse, in matters of support or property division? There are lawyers who pander to clients who want to cheat their spouse or domestic partner. Americans share a cultural mythology that these attorneys charge the highest fees and if they can out-cheat the other spouse and their attorney, they deserve them.
The accountability that the law of fiduciary duties add to the dissolution mix is a useful tool for combating marriage fraud by the other spouse. If society favors the party with more money or power over the weaker party, it will become increasingly unglued.
Fiduciary Duties Described
In financial and property transactions with third parties and each other, spouses owe one another important statutory duties that create huge responsibilities and pitfalls. As 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. "This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other." Family Code section 721(b).
The essence of the "fiduciary relationship" is that the parties are treated under the law as though they do not deal with each other on equal terms because one person (typically the managing spouse) in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert influence over the dependent party. A presumption of undue influence arises whenever either party benefits from the transaction over the other, however innocuous the circumstances may seem. Breach of fiduciary duty is to some extent a strict liability offense, meaning if it occurs consequences may be set in motion that run the course to an expensive end.
In 2002 Family Code section 721 was amended to expand this confidential fiduciary relationship and impose the same rights and duties as applies to nonmarital business partners under the California Corporations Code, and includes but is not limited to:
(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.
(3) Accounting to the spouse, and holding as trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property (i.e., all property acquired by a married person during the marriage).
While Section 721 does not mention Registered Domestic Partners, it applies to them as well.
One major consequence is that transactions which benefit only one spouse may be set aside by the other, either before or during a divorce proceedings.
As a practical matter for divorcing couples, this means:
a) If one party has benefited over the other in a transaction involving money or property and thereby gained an advantage during the course of the marriage, the law presumes the advantage was gained through undue influence exerted on the part of the benefited party, and the transaction is presumed invalid and can be set-aside;
b) The burden of convincing a Court that a set-aside should not occur then shifts to the advantaged spouse;
c) All this can occur without regard to good or bad intent on the part of the advantaged spouse (i.e., actually intending to defraud as opposed to merely being sloppy). Either way the law declares the transaction to be the result of "constructive fraud". Once the Court finds constructive fraud the transactions can be set aside, the benefited party can be ordered to pay restitution to the other and to disgorge any profits they alone received, title may be reformed to include both parties' names, or the property may be held in trust for both on a present and go-forward basis rather than in the name of the one alone. If there is an actual fraudulent intent, the remedies to the injured spouse are more severe.
The fact that parties have separated or that a dissolution or legal separation is pending does not end the parties' fiduciary responsibilities. Family Code section 1100(e) continues those same duties "until such time as the assets and liabilities have been divided by the parties or by a court."
Remedies for breach of the fiduciary duty as described in Family Code section 721, and section 1100, include an amount equal to one-half of the value of any asset undisclosed or transferred in breach of fiduciary duty, plus attorneys fees. This includes inadvertent or unintentional violations. Family Code section 1101(g). Where a court comes to believe a spouse acted intentionally to defraud the other spouse, the Court "shall" award 100% of the value of what should have been disclosed, or what should not have been transferred, to the innocent spouse! FC section 1101(h).
If you have a business, or investments in real estate or simply a family residence, and certain transactions have occurred, you may have a problem. If you are a dependent spouse, regardless whether the other party intended to cheat you, you may have important entitlements and remedies.
This is one of the most complicated, emerging areas of California family law. Do not go it alone! In every dissolution and legal separation case, regardless whether either party has an attorney, each party must exchange a Preliminary Declaration of Disclosure, and unless expressly waived, a Final Declaration of Disclosure. If these documents contain errors, misinformation, or are incomplete the consequences can be financially devastating because an entire settlement or judgment may later be set aside. These documents sit as leverage tools and landmines for years to come.
TWA
http://www.ThurmanArnold.com
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