To disclose or to withhold? Full and accurate disclosures of a couple’s assets, liabilities, and financial circumstances are a vital and mandatory aspect of a dissolution or legal separation matter. Disclosures are standard forms created by the California Legislature – think of a form that lists an inventory of your assets and debts. These disclosures must be made in the early stages of a dissolution and legal separation proceeding and at the very end. The California Legislature has enacted these rules in order to ensure an accurate division of the community estate.[1]
Why do these rules matter? California is a community property state. There is a presumption that all property acquired during the course of a marriage is community property[2]. This includes assets and liabilities. While this presumption can be rebutted[3], the preparation and exchange of complete and accurate disclosures by each party must still be done before a final judgment can be entered[4]. These rules ensure the protection of both parties’ interest in a dissolution or legal separation matter.
Preliminary and Final Disclosures:
Preliminary financial disclosures must be completed and served by the petitioner either concurrently with the petition for dissolution or legal separation, or within 60 days of filing the petition. Similarly, the respondent must serve his/her preliminary declaration of disclosure either concurrently with the response to the petition, or within 60 days of filing the response.[5] These deadlines can be extended upon agreement by both parties.
The preliminary financial disclosures include the Income and Expense Declaration (FL-150) and the Schedule of Assets and Debts (FL-142). The sum of the two will identify all separate property, community property, income, assets, and debts alike. The parties must also exchange two years’ worth of income tax returns along with any statements identifying the liabilities, appraisals, and values of the community estate.
Similar to the preliminary disclosures, final financial disclosures must be exchanged at the end of the case, using the same forms as those used for the preliminary disclosures. However, unlike preliminary financial disclosures, final disclosures are not mandatory and the parties can agree to waive the exchange of final disclosures upon stipulation[6].
Do I Need to Disclose Everything?
The short answer is yes. California law imposes a fiduciary duty upon both spouses to act in the highest good faith[7]. This means that one spouse cannot take unfair advantage of the other spouse; particularly during the divorce or legal separation proceedings. This duty extends to the disclosures and any conduct that the parties engage in until the divorce or legal separation has finalized. This fiduciary duty includes the duty to disclose all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest in and any debts for which the community is or may be liable for. In other words, the fiduciary obligations imposed on the parties requires them to provide equal access to all information, records, and books that pertain to the value and character of their assets and debts.
The duty and responsibility can be likened to that of non-marital business partners. Similarly, business partners are held to a higher standard to not take unfair advantage of each other and to act in the highest faith and mutual fair dealing towards each other. In the seminal case of In re: Marriage of Feldman (2007) 153 Cal.App.4th 1470, the California Court of Appeal set groundbreaking rules related to disclosures in a dissolution proceeding. The Feldman court stated that not only are spouses bound by their fiduciary obligations to one another to make a full disclosure of all material facts and information regarding the characterization and valuation for which the community has or may have an interest in, but they also have a duty to update or augment that information to the extent that there are any material changes to their assets and liabilities. (Id. at 1490-1491.) An intentional failure to abide by these rules or an attempt to circumvent the disclosure process can be grounds for setting aside a judgment and/or the court ordering sanctions against the non-disclosing party.
What if the parties disagree about the characterization of an asset? The disclosure forms will allow the parties to identify the characterization of an asset: whether community or separate in nature. It is always best to err on the side of caution and be overinclusive.
Significant time, attention, and analysis should be given to these disclosure requirements to avoid setting aside a judgment, financial sanctions, or having to relitigate issues in the dissolution or legal separation proceedings. It is always best to confer with an experienced family law attorney to help you navigate through these proceedings.
[1] Cal. Fam. Code §§ 2100 (a), (b), and (c) and 2120 (a).
[2] Cal. Fam. Code §§ 760(a).
[3] Cal. Fam. Code §§ 2581 and 770.
[4] Cal. Fam. Code § 2103.
[5] Cal. Fam. Code § 2104 (f).
[6] FL-144; Cal. Fam. Code § 2105.
[7] Cal. Fam. Code §§ 721(b) and 1100(e).