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SANCTIONS for Failure to Disclose SEPARATE PROPERTY As Breach of Fiduciary Duty - Marriage of Simmons

Marriage of Simmons (April 18, 2013) 215 Cal.App.4th 584

Q. Does a spouse have the obligation to disclose separate property assets in the course of a dissolution proceeding and, if so, what are the remedies for nondisclosure?

A. Perhaps somewhat surprisingly to spouses and registered domestic partners who believe that fiduciary duties are, and need to be, the bedrock of disclosure responsibilities in divorce and family law litigation in order to keep the players honest, the answer recently given by the Fourth Appellate District in California is that spouses do have such an obligation but that the remedies for nondisclosure differ from those that become available where a party hides interests in what may be community property from the other.


Marriage of Rossi - Family Code Section 1101 Sanctions for Hiding the Community Ball

Family Code section 1101 creates severe consequences for dissolution litigants who hide the community ball, consisting of an award of at least one-half the value of the undisclosed asset, or in cases where the evidence is clear and convincing that a party has been guilty of "oppression, fraud, or malice" within the meaning of Civil Code section 3294 in concealing an asset, 100% of that ball - and in either case reasonable attorneys fees. Marriage of Rossi (2001) 90 Cal.App.4th 34 is the poster child for the judicial response available for this type of breach of fiduciary duty, involving a wife who hid from her husband the fact that she'd won the California lottery and then filed for divorce shortly after she learned of her great good fortune (he only learned of it by accident later, when he received a notice addressed to her from the State Lottery Commission). The trial court snatched all of the wife's winnings as the ultimate sanction for her fraud.

Section 1101(g) reads:

Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs.

The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.

Subsection (h), upon which the Rossi sanctions were based, adds:

Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty.


Just Because You Say Your Property is Separate Doesn't Make it So

Many family law litigants and their attorneys arrogantly refuse to disclose their separate property interests because, after all, they don't feel they should have to disclose anything. Ultimately, when characterization is disputed, it is up to the trial court to declare whether property claimed to be separate is indeed separate and the labels that the parties attach to their assets are not determinative. Still, many litigants think that if they call the property in question "separate", they have no resulting fiduciary duties as to such assets. If they are correct, it is true that the other party has no interest in the asset and a party can do what they want with it - but that doesn't mean they can avoid disclosing it in the declarations of disclosure or Income and Expense Declarations. The existence of separate property is always relevant to issues regarding cash available for support, as with separate property business or investment interests that generate income, and as to attorney fees in terms of the disparity of assets or earnings that justifies a fee award in order to level the playing field, or even attorney fees that are payable from separate property assets pursuant to Family Code section 2032. There needs to be consequences for this failure to disclose that party's true financial condition, especially because often the reason why a party decides not to disclose liquid assets is exactly to avoid being 'taxed' for them in the form of fees or support.


Enter Marriage of Simmons

In the case of Marriage of Simmons, Justice Haller of the Fourth District Court of Appeal (San Diego) recently authored a decision that limits the scope of remedies that can be imposed upon parties who conceal the existence of separate property. That decision holds that FC section 1101 remedies are only available for nondisclosures of community property, but the good news is that the court affirmed that Family Code section 271 and section 2107(c) sanctions remain available, and are the appropriate remedy.

The parties had been married only one year before they separated. They had one child born almost exactly nine months after the parties married. The wife, Tracy, filed the disso petition, commencing what became a classic high-conflict game of cat and mouse. As the court's decision describes it, "[w]hat followed was an astoundingly lengthy, circuitous, and expensive course of litigation, particularly that both parties had substantial financial assets and were married for a very brief time." Tracy managed to run up $800,000 in attorney fees and costs by the time the case came to be resolved. Seen through the eyes of the family court judge, the protracted litigation was largely due to the husband's (Keith) "questionable litigation tactics" which included hiring and firing a series of attorneys, refusing to comply with the most basic financial disclosures, filing misleading and delayed disclosures, failing to fully disclose his assets, misusing Tracy's computer to disseminate her emails to third parties, failing to respond to discovery requests, failing to appear for deposition, and generally acting intentionally and in bad faith. As a consequence, the trial court awarded $150,000 in sanctions against Keith under Family Code section 2107 for breach of his fiduciary duties of disclosure, $250,000 in sanctions under Family Code section 271 for uncooperative conduct, and most relevantly to this appeal, applied Family Code section 1101(h) to award Tracy $245,850.24 for Keith's failure of an undisclosed separate property savings account.

On appeal Keith offered little to show that he had not repeatedly breach his fiduciary duties. Instead, he took the position that the $150,000 in FC section 2107 and 271 sanctions were excessive and beyond his ability to pay, and that the trial court had no authority to impose $245,850.24 in section 1101(h) remedies for his failure to report his separate property. He found traction on that argument.

Keith stated in an Income and Expense declaration that he had $44,350 in his bank accounts without, as the decision notes, specifying any of the accounts themselves. In fact he had $245,850.24 in a Wells Fargo savings account that he hadn't admitted. Tracy's attorneys suspected the account existed but it took many months and much wrangling for Tracy to obtain the proof in the form of the actual monthly statements. Hence, the record was clear that when he said he had only $44,350, Keith lied and the inference was that he concealed the monies in part to bolster his own request for need based fees as against Tracy. Tracy sought sanctions and the trial court was upset and frustrated enough with Keith, in light of all his other avoidant and uncooperative conduct, that it awarded the total value of the nondisclosed Wells Fargo account to Tracy per section 1101(h). This, turned out to be reversible error. The remaining sanctions were upheld.


Family Code Section 1101 Remedies Don't Apply to Nondisclosed Separate Property

Justice Haller declared that Family Code section 1101 provides no remedy whatsoever for nondisclosure of separate property during the course of dissolution proceedings - in this case, under these facts given the very short marriage, Tracy evidently had no colorable claim that the Wells Fargo monies had a CP origin. I can imagine a longer term marriage where such a characterization would not be obvious and clear, but one year doesn't give rise to much by way of CP except for the ubber-wealthy. Therefore, the Court reasoned, the trial court could not impose 1101 sanctions for this type of concealment. The decision is instructive in terms of the appellate review of Family Code section 721 (creating a broad fiduciary relationship between spouses in interspousal transactions, which this clearly did not result from) and Family Code section 1100, which speaks to full disclosure involving community property and omits any reference to separate property disclosures.

Family Code section 2100 et seq. address the obligations to disclose the existence of income, assets, and debts generally. Section 2100(c) makes it clear that not merely community property assets and earnings must be disclosed - all income sources and property must be disclosed "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. Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent 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 relevant underlying facts."

However, the Simmons Court concluded that the legislature did not intend that 1101 sanctions could be applied to breaches of the disclosure obligations set forth in 2100 through 2107. Specifically, the Court found that (1) 1101 is found in a portion of the Family Code that only addresses community property; (2) because 1101(f) permits the parties to pursue sanctions even when there is no family law proceeding pending, the remedy was not intended to extend to separate property which is generally not subject to the control of then nonowner spouse and only becomes relevant upon the filing of a dissolution action; (3) the Legislature had enacted remedies made specifically applicable to separate property, including section 271 for uncooperative conduct in divorce proceedings and section 2107 for nondisclosure of either marital or separate property; and (4) a fundamental principle of family law is that each spouse has a one-half interest in community property (only), and the fiduciary duties with regard to such property is intended to preserve and protect that interest. Since section 1101 speaks a potential award of one-half or more of that interest, and given that separate property is not subject to equal ownership or a division of that interest, the Legislature could not have intended that separate property be divided as this form of sanction.


Failing to Disclose Separate Property Assets Is Sanctionable; Just Not Under FC Section 1101

Accordingly, the 1101(h) award to Tracy of $245,850.24 was reversed. The good news is that the case was ordered remanded to the trial court to re-evaluate sanctions for the failure to disclose the separate funds in the Wells Fargo account, but only under authority of sections 271 and 2107. Since the trial court had already awarded $150,000 under those sections, it must now decide whether it would have ordered a larger number had it known that 1101 sanctions were unavailable. 2107(c) states "If a party fails to comply with any provision of this chapter, the court shall, in addition to any other remedy provided by law, impose money sanctions against the noncomplying party. Sanctions shall be in an amount sufficient to deter repetition of the conduct or comparable conduct, and shall include reasonable attorney's fees, costs incurred, or both, unless the court finds that the noncomplying party acted with substantial justification or that other circumstances make the imposition of the sanction unjust."

This is the first reported case dealing exclusively with what sanctions are available for nondisclosures of separate property interests, in terms of property division. The decision does make sense, although it removes from the fiduciary duty breach quiver a powerful tool for corralling wayward litigants, given that the amount of sanctions will often be less than one-half the value of the nondisclosed asset. It stands for the proposition that nondisclosures of separate property, importantly including within a party's Income and Expense, should be sanctioned.

Also, keep in mind, that in this case the nondisclosed bank account was not contested as separate property - the result should be different in cases where characterization is contested, as where the account is a hybrid commingled mix or CP and SP funds, or where the funds trace to a marital source or marital opportunity but only if it does turn out that the property had CP attributes (which may have to await the final trial - otherwise, these sanctions are available at any stage of the proceedings). Given the very short marriage, that claim evidently did not exist here.

The husband in this case is not off the hook, and the undisclosed SP may be a source from which to pay the former spouse attorney fees and 271 sanctions upon remand.

Good luck out there!

TWA


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