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SANCTIONS For Failure to Complete the FINAL DECLARATION OF DISCLOSURE

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 (the Declaration of Disclosure cover sheet for either the preliminary and final disclosures), FL-141 (Declaration Regarding Service) and FL-142 (Schedule of Assets and Debts). The only document that is supposed to be filed with the Court is the FL-141.

The exchange of Preliminary Declarations of Disclosure (PDDs) is intended ensure a "full and accurate disclosure of all assets and liabilities in which one or both parties may have an interest." Exchange is a prerequisite to successfully meeting one's fiduciary obligations. Effective January 1, 2013, this exchange must occur within 60 days of the appearance of each party. FC section 2104(f).

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 where the case is resolved by way of a "default judgment." Family Code section 2110. This is common in amicable divorces where a settlement agreement is executed and submitted to the Court, but the responding party chooses not to pay the first-appearance filing fees that amount to almost $500 and so does not file a Response.

In contested cases, when either wants to move the case to a trial status so that it can finally be adjudicated, in many venues 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. I find that many family law litigants 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 under Family Code section 1101 for monetary sanctions that can arise many months and sometimes even years later. The PDD is a critical document that must not be treated casually.


The Final Declaration of Disclosure

A preliminary declaration of disclosure is just that - preliminary. Parties are not required to attach supporting documentation to the PDD, but at my office we always do submit the backup for reasons discussed next.

There is a greater obligation that is addressed by what is called the Final Declaration of Disclosure. This is a second disclosure that is required in all dissolution or similar proceedings, assuming it is not waived by either party (not a good idea).

Where the case winds its way to trial on any aspect, 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. Assuming that a party elected not to attach backup to their PDD, compliance with the FDD obligation tends to feel more burdensome; even if a party did attach documents to their PDD, they have 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 on which the FDD 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 more years then they were married.

Family Code section 2107 authorizes courts to award monetary sanctions for failing to comply with any of the disclosure obligations. It is often used in conjunction with a request for attorney fee sanctions under Family Code section 271. Also, failure to comply with the rules is a basis for mandatory set aside of any settlement agreement or judgment - even a judgment after a litigated trial (subdivision (d) states "[e]xcept as otherwise provided in this subdivision, if a court enters a judgment when the parties have failed to comply with all disclosure requirements of this chapter, the court shall set aside the judgment. The failure to comply with the disclosure requirements does not constitute harmless error.")


Application of Marriage of Fong

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 own Preliminary Declaration of Disclosure. At the time of the sanctions award against the Husband (seven years after the case began), she still had not served her FDD. 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 held against their clients as "judicial admissions" (statements under oath in the pleadingS) until later - i.e., 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 in favor of Wife. I can only guess that Wife's efforts cost she and her attorneys between $500,000 and $1,000,000 in attorney fees, but as a result of the decision not only was she shut out of her recovery against Husband she had to eat all of her own fees.

The appellate court did uphold the sanctions award per Family Code section 271 for the $100,000.

The Court determined that Wife's failure to have first served her Final Declaration of Disclosure before seeking sanctions, 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 but not her FDD and therefore is 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. 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 for those who wish to read the decision itself.

Thurman W. Arnold, III, CFLS


Comments

Thanks for fleshing this out, Gary.

For those who wish a more detailed understanding of the Fong decision and a glimpse of what it feels like, in terms of the lost time, money, and the frustration of becoming enmeshed in a high conflict divorce (at least from the perspective of one side), please follow Gary's link - above. I appreciate sharing this rare personal description of a litigant's experiences.

This dispute is a cautionary tale for both sides since no matter how court rulings ultimately shake out, the monies the parties expend in battle will likely never be recovered. As I write on my 'Practice Philosophy' page, "the high conflict divorce is [indeed] expensive and destructive beyond reason". Seek out a different path if you can.
Hi from the appellant. I have written a bit more detail about our side of the situation in my blog post at: http://garyfong1.xanga.com/742659643/landmark-court-decision-in-our-favor/ Casey Olsen was my lawyer and he did a great job. This case was not only an outlier in terms of the fact that the appeal got lost because my ex-spouse's counsel didn't file the forms, but for many many other reasons. This case, which was tremendous in fees - (your estimate is correct) is remarkable because of the outcome. My ex was seeking millions for my business, she got less than $3,000. She sought permanent spousal support of over $10,000 a month, and she was awarded zero. The fees got so gnarly because of their unreasonable settlement position (not my opinion - that was the ruling from the judge). This case was impossible to settle because of the predatory nature of spouse and counsel. Please do read my blog post, and feel free to post questions or comments. I'd love to help other parties avoid our ridiculous sit