Duty of Disclosure
The operative word in any divorce case in California is “disclosure”. Divorcing spouses have an affirmative duty to each other to promptly and fully disclose all assets and liabilities in which one or both of the parties may have an interest during the dissolution proceeding. Disclosure requirements are mandatory and not dependent upon the other party seeking information through discovery. This obligation is a continuing obligation that starts at the commencement of the dissolution proceeding and terminates only when the assets are divided.
In Family Code Section 2100, the California Legislature has specifically referred to this disclosure requirement as paramount, not only for divorcing parties, but for the State as well, in order to ensure fairness in the divorcing process.
The statutory scheme for these disclosure responsibilities and obligations between spouses was laid out by the legislature in the early 1990’s. Family Code Section 721 defines the relationship between the spouses as a fiduciary one akin to individuals in a confidential relationship with the highest duty of good faith and fair dealing between them.
In a dissolution proceeding, this fiduciary relationship between spouses is implemented in part through Family Code Section 2103, which requires the parties to make full, accurate and complete disclosure of all assets and liabilities that may impact the other party from date of separation until the assets are distributed.
The mechanism in which these disclosures are made are through the preliminary Declaration of Disclosure (PDD–Family Code Section 2104) and the final Declaration of Disclosure (FDD– Family Code 2105). This disclosure obligation is ,per Family Code Section 2100, an ongoing obligation that requires the party to update and augment their disclosure.
Until 1992, Civil Code §5125(e) characterized the standard of care between husband and wife as to their management and control of community property during marriage, and separation, in less than clear terms.
It had been described as somewhat above the good faith dealings of a confidential relationship but not quite as high a level of care as a fiduciary relationship. (See In re Marriage of Reuling (1994) 23 Cal.App.4th 1428, 28 Cal.Rptr. 272.) The pre-1992 version of Civil Code §5125(e) stated that the duty of good faith was to be “in accordance with the general rules that control the actions of persons having a relationship of personal confidence as specified in Civil Code §5103, until such time as the property has been divided by the parties or by a Court”.
There was a statutory change effective January 1, 1992 with current Family Code §721 and §1100(e) essentially replacing Civil Code §5125. A fiduciary standard replaced that of the good faith standard previously enunciated by the code. The case of In re Marriage of Varner (1997) 55 Cal.App.4th 128 at page 141, the Court noted as follows:
“Section 721 provides, in relevant part, that “in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relationships with each other …”. This standard has been applicable to spouses during a marriage and prior to separation; by the various statutory amendments in 1991 and 1992 this standard has been extended to apply to spouses between the times the parties separate and the time the marital property is divided.”
The recent case of In re Marriage of Palmer and Hokanson 98 D.A.R. 12967, while discussing the issue of attorneys fees is most interesting for what appears to be an implied approval of the use of Family Code §1101 in post-Judgment situations, and if so, is a significant expansion of the law.
Palmer appears to confirm the unwritten assumptions that extend this concept of fiduciary relationship even past the time that the parties are no longer husband and wife.
In Palmer, a judgment of dissolution of marriage was entered on December 20, 1994. The judgment provided that the family residence was to be “sold as expeditiously as possible and for the best price reasonably obtainable”. The wife continued to occupy the residence. In January, 1995 a broker contacted by the wife recommended listing the property for $499,000. Wife, however, insisted that the property not be listed until June, 1995 and then at the amount of $529,000.
The house ultimately was not sold until June, 1996 and during which time wife took the property off the market several times, refused a lock box and listed the house at a price above that which the broker suggested was appropriate. In April, 1996 husband filed an ex parte application asking that the house be put up for sale at $454,000. Husband alleged that per Family Code §1101.1, by delaying the sale of the home his ex-spouse had breached her fiduciary duty toward him and that same resulted in an impairment of his community property interest in the home. Husband sought damages and an award of attorneys fees. The house ultimately sold for $430,000.
The Court determined, after hearing, that the provisions of Family Code §1101 applied, and further found that the wife’s post-judgment dilatory tactics did in fact fall within the breach of the fiduciary duty concept of Family Code §1101. The Appellate Court noted that Family Code §1101(g) makes an award of attorneys fees mandatory where the moving spouse successfully shows that the other spouse has breached their fiduciary duty.
The fact pattern presented by Palmer is commonplace: after a judgment ordering an immediate sale of the family home the “in-spouse” drags his or her feet in marketing the residence, perhaps to hang on to the last vestiges of the marriage or perhaps for economic reasons; meanwhile, the “out-spouse” has lost, at least for a time, the use of his or her share of the equity in the residence.
However, the Palmer court does not inform how Family Code §1101 applies to this fact pattern, and does not even pose the question: Does the Court retain jurisdiction to order payment of damages under §1101 after judgment has been entered characterizing and dividing the parties’ property?
Family Code §1100 states that the fiduciary duty continues “until such time as the assets and liabilities have been divided by the parties or by a court.” Since following entry of judgment ordering immediate sale of the residence, the parties’ ownership converted to tenants-in-common by operation of law (In re Marriage of Dorries (1984) 16 Cal.App.3d 1208; 207 Cal.Rptr. 160), hadn’t the property “been divided” so that the parties no longer had a fiduciary duty toward one another?
The Palmer case thus raises the question of just how far “beyond the break-up” this fiduciary duty extends with regard to the sale of a family home or other asset? One must remember that the fiduciary duty is being applied towards two individuals who are no longer husband and wife, and who may in fact have remarried.
The Palmer case involved a judgment that ordered a “forthwith sale” (the family home was ordered to be sold as expeditiously as possible). However, Family Code §3802 gives a judge discretion to order a deferral of the sale of the family residence until the youngest child reaches the age of 18, or graduates high school and is not yet 19, whichever first occurs. (In re Marriage of Horowitz (I) (1984) 159 Cal.App.3d 368 held that the Court cannot defer the sale of a family residence, as a form of additional child support, beyond the age when the youngest child reaches the age of majority.)
During the period of time that the family residence is subject to a deferred sale order, Family Code §3809 grants to the family law court jurisdiction to determine any issues that arise with respect to the deferred sale of the home, including but not limited to the maintenance of the home and the tax consequences as to each party.
Now, Palmer extends that jurisdiction far beyond enforcement and implementation, to include a potential for imposition of sanctions of up to 100% of the asset many years after the dissolution is otherwise final (Family Code §1101(g)(h)).
Does the failure of the “in-house spouse” to inform the “out-house spouse” of the existence of termites constitute a breach of the fiduciary obligation? Is the failure to promptly replace the hot water heater with the top of the line brand, as opposed to a less expensive model, result in a breach of the fiduciary duty? And what if the “in-house spouse” (and probably teenage children, in the case of a deferred sale of the home) are sloppy, so the house does not “show” well to potential buyers?
The order between the parties with regard to the deferred sale should specify the respective parties’ responsibilities for the payment of the cost of routine maintenance and capital improvements (Family Code §3806 provides for same). While Family Code §3809 reserves jurisdiction to determine any issues that arise with respect to the deferred sale of the home including but not limited to the maintenance of the home and the tax consequence of each party, it would appear that Family Code §1101 adds an additional avenue for redress.
Formerly, these omissions by the “in-house spouse” and their economic impact on the “out-house spouse” might simply have amounted to a credit and offset issue between the parties, which clearly falls within the contemplated reserve jurisdiction of Family Code §3809. The stakes however, now appear to have been raised, as these omissions may constitute a breach of the fiduciary duty under Family Code §1101 allowing for additional remedies (Family Code §1101(g)(h)).
blog attorney note: with real property, holding a property too long could have basically two outcomes: the market climbs sharply, or possibly declines sharply. Post judgment/order, failure to sell while the market is LOW will likely not result in loss of equity--but failure to sell when the market is doing well (assuming one could have done so) --may be a problem. Out of spite, it is possible that some clients would purposely cause the spouse to lose equity, even while the other spouse loses out as well.
In truly cringeworthy cases, some spouses will do anything to get back at the other spouse, even if it includes causing financial harm to oneself.