Divorce and Fraudulent Concealment: Understanding Fiduciary Duties & Penalties

California family law cases often present a microcosm of the issues that arise in commercial fraud, securities and money laundering cases. Similar to the standards that apply between business partners and securities investors, spouses owe fiduciary duties to each other that include a duty of the highest good faith and fair dealing. This applies not only to the community property of both spouses, but to the separate property of one spouse alone. Each party’s fiduciary duties exist during the marriage and continue after separation until the property at issue has been distributed.

A spouse’s fiduciary duty requires full and accurate disclosure of complete and accurate information about community property. This disclosure obligation presents the substantive legal basis for the parties’ mandatory disclosure obligations, for which violations can result in dissolution judgments being set aside.

Additionally, the Family Code imposes heightened disclosure obligations when one or both spouses anticipates dissolution of the marriage. From the date of separation until the distribution of the property issue, each spouse has a duty to accurately and fully disclose all assets and liabilities that he or she may have an interest or obligation, as well as all current earnings, accumulations and expenses. As the court explained in Schnabel v. Superior Court, each spouse is entitled to complete disclosure of all relevant information to allow an independent review of the marital property and financial status of the spouses. The other spouse’s ability to obtain the same information upon inquiry does not excuse a failure to meet this disclosure obligation. The spouse in a superior position to make the disclosure must obtain and disclose the relevant information.

A spouse who violates this disclosure obligation may be liable for breach of fiduciary duty. Section 1101 of the Family Code provides specific remedies available to the non-breaching spouse. First, the court may order an accounting and may decide the rights of ownership over the disputed property. Second, under section 1101(g), the court shall impose a penalty of 50% of the value of the undisclosed asset, plus attorney’s fees and costs incurred to prove the breach. The 50% penalty is based on the asset’s value at the date of the breach, the date of its sale or disposition, or the date of the court award, whichever is highest. Third, under section 1101(h), this penalty is increased to 100% of the undisclosed asset’s value where the non-breaching spouse proves that the breaching spouse acted with oppression, fraud or malice.

This disclosure obligation was at issue in Marriage of Rossi. In that case, Denise Rossi won $1.3 million in an office lottery pool. The lottery winnings were to be paid out in 20 annual payments of $66,800 less taxes. Denise went to the Lottery Commission office and told them she was married but contemplating divorce. They suggested that she file for divorce before she got her first check. Denise promptly filed for divorce, and never disclosed to her husband Thomas that she had won the lottery.

Thomas learned of Denise’s lottery winnings two years later, when a letter from the Lottery Commission was misaddressed to him. He moved to set aside the divorce judgment for breach of fiduciary duty and sought the award of 100% of the lottery winnings under section 1101(h). The family law court ruled in his favor, finding that Denise’s failure to disclose the lottery winnings constituted oppression, fraud and malice within the statutory meaning.

The Court of Appeal affirmed, holding that the family law court’s ruling was supported by clear and convincing evidence (as required for proof of oppression, fraud or malice). The appellate court reasoned:

This case presents precisely the circumstance that section 1101, subdivision (h) is intended to address. Here, one spouse intentionally concealed a significant community property asset. She intentionally consulted with the Lottery Commission as to how to deprive Thomas of a share of the prize; used her mother’s address for all communications with the lottery; and did not disclose the winnings in the dissolution proceedings. This supports a finding of fraud within the meaning of Civil Code section 3294.

Given these high stakes, it is not surprising that disputes over alleged concealment of marital property are highly contested. It is common in marital dissolution cases for a spouse to be concerned over possible concealment of marital assets. If he or she can prove that the non-disclosing spouse acted with oppression, fraud or malice, the non-breaching spouse can be awarded a penalty of 100% of the value of the concealed asset, plus a discretionary award of attorney’s fees (which is mandatory with the 50% penalty under section 1101(g)).

Litigation counsel should be familiar with the full range of discovery procedures available to identify any concealed assets in a marital dissolution case. This includes the use of subpoenas on financial institutions, accountants and business partners; comprehensive written discovery and document discovery from the other spouse; multi-jurisdictional practice where needed; depositions of the other spouse and third-party witnesses; and private investigations and asset searches when warranted. Counsel familiar with offshore financial discovery and international money laundering investigations can also rely on the discovery and investigative procedures available to locate high-value assets outside the United States.

The stakes are high in fraudulent concealment cases, both during and after the marital dissolution case is pending. Vigorous attorney advocacy and thorough discovery are often good investments and, as in the Rossi case, can profoundly affect the client’s financial fortunes.