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Recent Posts in Preliminary Declaration of Disclosure Category
| 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 16, 2010 |
| How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation? |
| Posted By Thurman Arnold |
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Q. My Wife removed all the money from our joint savings account immediately before filing for divorce. Some of that money included an inheritance from my grandmother. What are my rights to recover any of it?
A. When there is a joint bank account in the names of parties who are married, their net contributions to the account is presumed under the law to be and remain their community funds. This applies regardless whether the deposit agreement with the institution describes them as married. Probate Code section 5305(a).
Affected "accounts" mean a contract for deposit of funds between a depositor and a financial institution and includes a checking or savings account, a certificate of deposit, share account, and similar arrangements. Probate Code section 5122(a).
However, this presumption can be rebutted - as in the case of your inheritance contributions to the account if you can meet your burden of proof by either of the following:
- If some or all of the funds on deposit you contend are your separate property can be traced from separate property (i.e., the inheritance) they will be confirmed to you unless your wife can establish you made a written agreement that expressed a clear intent that those sums would become community property (a transmutation)
- If the two of you made a written agreement, separate from the deposit agreement itself, that expressly provided that the deposited sums that are claimed not to be community property were in fact not to be community property then you will not be reimbursed.
Hence, you need the paper trail for the receipt of the inheritance monies into this joint account in order to establish they still belong to you as separate property. As long as you do trace these funds, your wife's argument that you gifted the monies to her or the both of you by verbal agreement or by your conduct will not succeed.
However, when monies are commingled over time this tracing becomes more difficult. Particularly in checking accounts, money comes in from other sources (like community earnings) and goes out (often to pay community expenses). The question becomes which money is applied to what outflows?
The law presumes that money that goes out of a commingled account is spent first on the community needs and expenses, meaning that what remains is more likely to be considered separate. The law expects the community to pay community expenses, not that you first use your separate property - as long as their are sufficient community funds on hand. If these community funds become exhausted then withdrawals of what is your separate remaining monies may be lost to the community.
In your situation you have a reimbursement claim for what she took and you should receive a credit on the marital balance sheet. She may owe you 100% of the inheritance and 50% of the balance. Your worst case is that she owes you half of what she took. Immediately begin to collect the needed bank and inheritance records to prove your claims.
Maintaining records during and after marriage is the most important thing you can do to preserve and protect your interests. Unfortunately, few people realize this until after the horse has left the barn.
Thurman W. Arnold III
www.DesertFamilyMediationServices.com
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| May 17, 2010 |
| My husband was HOSPITALIZED after we SEPARATED; am I liable for the bill? |
| Posted By Thurman Arnold |
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Q. After my husband and I separated, he was hospitalized and incurred $28,000 in medical bills. The creditor is threatening to sue me. Am I liable? Is there anything I should do?
A. In a recent appellate decision out of San Diego County (CMRE Financial Services, Inc. v. Parton), the wife called police after an incident of domestic violence and shortly thereafter filed for DV restraining orders. A week later the parties separated, and the husband was admitted to Tri-City Medical Center for treatment for a severe emotional illness. He incurred substantial medical bills.
The wife filed a dissolution action three months after that. In her Schedule of Assets and Debts she listed the debt as owed by her husband. A judgment for dissolution came to be entered several months later, and it did not assign the hospital obligation to the wife. It appears to have been a default judgment against the husband.
CMRE, the assignee of Tri-City Hospital, sued both the husband and wife to collect the money for husband's treatment; by then husband had disappeared and was never served with the lawsuit. Wife responded by denying liability, and with a cross-complaint that alleged that by sending her collection notices CMRE had violated the provisions of the Fair Debt Collection Practices Act (Title 15, United States Code section 1692 et seq.), and that she should obtain damages against them.
CMRE filed a motion to toss out the cross-complaint, relying on the language of Family Code section 914(a)(2), which states that spouses are liable for debts incurred by the other when separated if these are for "necessaries of life."
The trial court agreed with CMRE, and the matter proceeded to a judgment against the wife for the full amount plus interest. Wife appealed.
The appellate court ruled in favor of wife, and reversed the trial court. Wife would have been liable for these medical costs IF a dissolution including property division had not been granted, or if the dissolution judgment had assigned the debt to her, or if she had agreed to support her estranged husband while they were separated. For instance, if the parties had reconciled and if CMRE had sued the wife and obtained a money judgment against her, she would have been on the hook. But once a dissolution judgment was entered that did not assign the debt to the wife she was protected. Family Code section 916.
The appellate court also noted that an independent basis for holding wife free of the debt included Family Code section 4302 which states that a person is not liable for the support of their spouse when the person is living separate from the spouse by agreement, unless the agreement calls for support. The court reasoned that while the starting point is that spouses are liable for the other's necessaries while living separately that rule will not apply where they are separated by agreement (apparently the agreement can be verbal or implied from conduct), unless the agreement includes a promise to support the other.
This appellate decision seems confusing because the language of the statutes themselves conflict. The court continued by noting that the legislature has declared that one spouse's liability for the other spouse's post-separation necessaries is entirely derivative of the fact of marriage and not the same as a debt personally incurred by the supporting spouse. This means that "the liability imposed by section 914 can be avoided by the simple expedient of entering into a separation agreement which does not provide for support."
The only exception might be where a creditor alleges a marital settlement agreement violates the Uniform Fraudulent Transfer Act. CMRE did not allege any fraud between these spouses.
This is landmark case because up to this point most lawyers and judges believed that spouses were liable for the necessaries of life of the other, even after separating, and that this was a special exception to the general rule that once spouses separate liability for debt ends.
Now we know that you have at least two ways to avoid this debt: (1) Obtain a Judgment for Dissolution before the creditor obtains a civil judgment against you, but be sure that the debt is assigned to the other spouse; and (2) be sure that you don't have an agreement to support the other spouse in place, at least at the time the debt is incurred. The judgment can be based upon a marital termination agreement.
If you pretend to separate, or separate just to avoid the debt, and if the creditor claims you did this fraudulently to avoid liability, the outcome might be different.
One additional point of information: Under the circumstances of this case, CMRE was found to have in fact violated the federal Fair Debt Collection Practices Act just by sending threatening letters, and of course by filing suit. Knowledge of this case can be used to back off creditors who are harassing you.
Thurman W. Arnold III
http://www.thurmanarnold.com
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| February 08, 2010 |
| PRELIMINARY DECLARATION OF DISCLOSURE in California (PDD's) |
| Posted By Thurman Arnold |
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California Family Law Disclosure Forms
Whether you are representing yourself in your divorce, or a pro per family law litigant, you need to know about and understand the Declarations of Disclosure that are required in California before a Judgment of Dissolution may be entered.
Getting it wrong can have serious consequences.
In my experience, paralegal firms or non-lawyer mediators do not know how to properly assist clients in meeting these obligations, and even seasoned divorce attorneys get these disclosure forms wrong.
You need to understand that these disclosure forms are not simply another document that needs to be prepared in a sloppy fashion in order to complete your divorce, but rather they are the proof that you have complied with important spousal fiduciary duties after your physical separation.
You can’t get even a default divorce and marital termination agreement past the family court clerk without a least a
Preliminary Declaration of Disclosure (PDD) and when the other side has appeared in the action, you cannot obtain a Divorce Judgment without both parties have exchanged for waived the
Final Declaration of Disclosure (FDD).
Even if the documents have been exchanged, if they are incomplete or inaccurate the other party may be able to set all or parts of your divorce judgment or divorce settlement for up to several years after a judgment is filed.
These rules and requirements apply equally to domestic partnerships, annulments, and legal separations.
This article covers the Preliminary Declaration of Disclosure.
California Family Code sections 2100 to 2113 cover declarations of disclosure for California divorces.
FC section 2100(a) declares it is the policy of the State of California to “(1) marshal, preserve, and protect community, and quasi-community assets and liabilities that exist at the date of separation so as to avoid dissipation of the community estate before distribution, (2) to ensure fair and sufficient child and spousal support awards, and (3) 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 by California law.”
FC section 2100(c) states that in order to promote this policy “a full and accurate disclosure of all assets and liabilities in which one or both parties have or may have an interest must be made in the early stages of a proceeding for dissolution of marriage or legal separation of the parties, regardless of the characterization as community or separate, together with a disclosure of all income and expenses of the parties.”
This bears emphasis:
- There must be a full disclosure
- It must be accurate
- It includes all assets
- It includes all liabilities
- It applies to assets or liabilities one has or may have
- The disclosure must be made early on in the proceedings, although there is no specific time rule
- It doesn’t matter whether you think the asset or debt is a separate property item, you still must disclose
- You must also fully and accurately disclose all income and expenses
- Although the statute doesn’t say it, you may see why these are forms that you do not want to lose – since, as mentioned below, the disclosures themselves are not filed with the court.
FC section 2100(c) does not, however, stop there.
The statute continues “Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent that there have been any material changes so that at the time the parties enter into an agreement for the resolution of any of these issues, or at the time of trial on these issues, each party will have a full and complete knowledge of the underlying facts.”
Family Code section 2102 sets forth the rules governing interspousal fiduciary duties, including the operation and management of community or part community businesses.
I will discuss this section elsewhere and link back to it when that article is finished.
Family Code section 2104 describes the Preliminary declaration of disclosure.
It must be completed as set forth in this Judicial Council Form.
It does not get filed with the Court, but a declaration stating it has been exchanged must be filed with the Court.
If, as commonly occurs where parties have negotiated and signed an agreement and the Dissolution Judgment proceeds by default with a Marital Settlement Agreement signed by both being submitted, no final disclosure needs to be exchanged between the parties but the Petitioner still must himself or herself complete and serve the Preliminary declaration; the defaulting Respondent is relieved of that obligation.
Family Code sections 2120 to 2129 describe when a judgment for dissolution, or a property settlement or a support settlement, may be set aside for defects in the Preliminary declaration of disclosure and for other reasons.
You can find the actual
California Judicial Council forms here.
Again, I will write an article about that and link back once it is completed so please check back with us.
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