The Fiduciary Duty of Disclosure in Divorce: Why You Must Comply

A common issue that arises in many divorce cases involves the disclosure of documents or information pertaining to assets or liabilities. In California, and many other states, spouses owe fiduciary duties to one another. These duties are similar to the types of duties that one business partner owes another. One of the most important duties is the fiduciary duty of disclosure.

What does this mean? At a minimum, it means that a spouse involved in a dissolution of marriage action must disclose all relevant, non-privileged documents to the other spouse that relate to assets, liabilities, income, or expenses. This includes both joint/community property assets and debts along with separate property assets and debts. This often bothers people, particularly when they do not feel comfortable producing documents that may contain sensitive financial information or other information that may not have been known to the spouse prior to the case.

Not only does the fiduciary duty of disclosure require disclosure in response to a discovery request, but it also is an affirmative “sua sponte” disclosure obligation. This means that a spouse must take it upon him or herself to provide material financial information to the other spouse.

How States Aid Divorcing Parties in Complying

To aid parties in complying with their fiduciary duties of disclosure, many states have created judicial council standardized forms. In California, these forms comprise the “Declaration of Disclosure”, which consists of a Schedule of Assets and Debts (essentially a personal balance sheet), an Income and Expense Declaration (a personal profit and loss statement), and other forms which require production of tax returns as well as explanation regarding facts and circumstances pertaining to valuation of assets, debts, and information pertaining to any income-producing or investment opportunities in which either party may have an interest.

Consequences of Not Disclosing Financial Information

There can be serious consequences for failure to comply with fiduciary duties of disclosure. For example, many states permit the Family Law Court to impose a penalty of monetary sanctions to compensate and reimburse the other party for the attorney’s fees and costs that he or she incurred as a result of the failure to comply with the disclosure obligations. In other instances, the Family Law Court has the ability to award half the value of the undisclosed asset to the other party. Furthermore, in instances where the failure to disclose rises to the level of fraudulent misrepresentation, the Court can even award the entire value of the asset to the other party.

Some parties may feel it is “worth the risk” not to disclose information about an asset in the hope that they do not get caught and the matter is finalized without any information being disclosed and without the asset being awarded to either party in the judgment. However, California provides the Family Law Court with authority to reserve jurisdiction over the case to adjudicate any assets or debts which are not addressed in the divorce judgment and allocated to either party.

A Case Example

A rather interesting and cautionary tale is presented in the case of In re Marriage of Rossi (2001) 90 Cal.App.4^th 34.   In this case, the wife had participated in a lottery pool that hit the jackpot. Her share of the winnings was $1,336,000. Shortly after the jackpot was won, she filed for divorce. She never told her husband about the lottery winnings and did not identify them on any of the disclosure forms. She even went so far as to consult with lottery officials about how to prevent her husband from learning about the prize. Judgment was entered in the case which did not address the lottery winnings since they had not been disclosed to the husband or the Court. Two years later, the husband inadvertently received a letter which caused him to discover the winnings. He returned to Court in a post-judgment action and the Court found that the wife’s conduct constituted fraud, malice, and oppression. As a result, the Court awarded the husband 100% of the lottery winnings!

The Rossi case provides a great example of the importance of complying with fiduciary duties of disclosure and disclosing all assets, liabilities, income, and expenses. So, if you ever ask the question of “Should I disclose this?” remember that the answer almost always is an affirmative “Yes!”.