The Impact of Fiduciary Duty during Divorce Proceedings

Like a corporate partnership, marriage creates a financial relationship in which each spouse owes a fiduciary duty to the other. This requires the highest good faith and fair dealing when financial transactions are concerned. This also includes the obligation to make full disclosure to the other spouse of material facts concerning assets and liabilities (and a variety of additional information) in which both spouses share an interest.

When it comes to divorce, that fiduciary duty continues throughout legal proceedings, until all assets and liabilities have been divided by the court. As an affirmative duty, everything must be disclosed, whether or not the other spouse has sufficient awareness to request information. The idea is to require mutual transparency on the issues affecting the finances of the parties in hopes that the entire process will become less of a "hide the ball" adventure and more of an honest exchange of information that will facilitate an equitable resolution of issues between adults. During the proceedings this takes the form of a Declaration of Disclosure each party must serve on the other spouse. That declaration must provide an accurate and complete list of all assets and liabilities, whether or not they might be separate property.

By failing to disclose this information a spouse fails to meet that fiduciary duty. Since the State of California takes the duty to disclose very seriously, the consequence of concealing or misrepresenting the existence of an asset or liability can result in substantial penalties, including (in extreme cases) an award to the other spouse of the full value of the omitted asset.

Accurate reporting is essential. A spousal fiduciary duty requires notification of all of the known assets and liabilities, including not only the obvious items (house, car, business interests, etc.) but also things such as deferred payments, retirement funds and pension plans, business income, investment income, real estate, fine art and collections, in addition to material changes to property such as promotions and bonuses. When assets are high, the risk of inaccurate reporting can be enormous. A diligent approach to disclosure will ensure a more timely and cost-effective divorce.

Mistakes in the disclosure are often inadvertent, but they do occur, and when that happens that opens the door for the other spouse to re-open an action to obtain a more beneficial apportionment of assets if the facts so warrant. An unintentional error can still involve the payment of court costs and attorney's fees for the spouse previously denied a fair share of assets, so the parties are encouraged to take these duties seriously and to respect their obligation to be fair, honest and transparent in their reporting in this context.

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