Public Policy Concerns Arising Out of Failure to Exchange Final Declarations of Disclosure

All dissolution of marriage, nullity, and legal separation actions filed since January 1, 1993, are subject to the disclosure requirements of Family Code §§ 2100-2129. Among other things, the parties must exchange preliminary declarations of disclosure (Family Code § 2104) and, subject to certain exceptions, final declarations of disclosure (Family Code § 2105).

Family Code § 2107(d), as amended in 2001, seems to provide unambiguously that a Judgment of Dissolution must be set aside if the parties failed to comply with the disclosure requirements. That subdivision states:

(d) If a court enters a judgment when the parties have failed to comply with all disclosure requirements of this chapter, the court shall set aside the judgment. The failure to comply with the disclosure requirements does not constitute harmless error.

This provision comprises a portion of AB 583, which amended a number of the disclosure statutes by stiffening the parties’ duties to fully disclose and to update their declarations of disclosure and apparently removing the trial court’s discretion to enter a judgment of dissolution, even in the absence of final declarations of disclosure (unless waived or excused for good cause). The Legislature enacted Family Code § 2107(d) in response to two earlier decisions, In re Marriage of Jones (1998) 60 Cal.App.4th 685, and In re Marriage of McLaughlin (2000) 82 Cal.Ap.4th 327, which had held that in order to set aside a judgment on the ground of failure to serve or waive a final declaration of disclosure, a party must show some prejudice as a result of the nondisclosure.

However, as the Fourth District Court of Appeal recently held in In re Marriage of Steiner and Hosseini (4/5/04) 117 Cal.App.4th 519, 2002 DJDAR 4199, the ostensibly plain and unequivocal language of Section 2107(d) cannot be interpreted as requiring the court to set aside every judgment of dissolution entered without exchange or waiver of final declarations of disclosure. A party seeking to set aside a judgment on that ground must still establish that the failure to serve a final declaration of disclosure resulted in prejudice.

At time of trial between Tahereh Hosseini and William Steiner, neither party had served a final declaration of disclosure pursuant to Family Code § 2105, but neither party objected to the absence of such declaration.

A proposed judgment was not submitted until well over a year after the trial ended. After judgment was entered, Hosseini submitted objections to the judgment and a notice of intention to move for a new trial. Hosseini mentioned the failure to serve final declarations of disclosure but did not specify any way in which she had been prejudiced by that failure. The trial court denied Hosseini’s motion, and Hosseini appealed.

The Steiner and Hosseini Court ruled that, despite the wording of Family Code § 2107(d), a motion to set aside a judgment may be denied if the court determines that the failure to serve a final declaration of disclosure was “harmless error.”

First, the Court ruled that Section 2107(d) must be read in consonance with California Constitution, Article VI, section 13, which provides, in pertinent part:

No judgment shall be set aside, or new trial granted, in any cause,  . . .  for any error as to any matter of procedure, unless, after an examination of the entire cause, including the evidence the court shall be of the opinion that the error complained of has resulted in a miscarriage of justice.

Writing for a unanimous Court, and citing legal precepts nearly as old as this nation, Justice David G. Sills explained:

The California Constitution trumps any conflicting provision of the Family Code. (Associated Home Builders etc., Inc. v. City of Livermore (1976) 18 Cal.3d 582, 595; see generally Marbury v. Madison (1803) 5 U.S. 137.) [117 Cal.App.4th at 529]

The earlier Jones and McLaughlin decisions, cited above, relied not only on statutory interpretation, but also on the quoted constitutional provision. Jones, supra, 60 Cal.App.4th at 693; McLaughlin, supra, 82 Cal.App.4th at 335.

Moreover, a literal interpretation of Section 2107(d), eliminating the requirement of prejudice, would bring that subdivision into inherent conflict with other provisions of the disclosure statutes, including Family Code §§ 2105(d) and 2107(a), as well as other statutes.

Family Code § 2105(c) provides:

In making an order setting aside a judgment for failure to comply with this section, the court may limit the set aside to those portions of the judgment materially affected by the nondisclosure.

This subdivision was retained and renumbered as part of the 2001 passage of AB 583. Not only is it an established principle of statutory construction that statutes must be construed, if possible, to render them constitutional, the Court observed, but statutory schemes must also be construed as a whole, harmonizing their provisions.

Similarly, the literal reading of Section 2107(d) would be inconsistent with Section 2107(a). As elucidated by Justice Sills, that reading causes a “perverse anomaly,” which arises because only parties who comply with the disclosure requirements can compel noncomplying parties to comply. Elden v. Superior Court (1997) 53 Cal.App.4th 1497, 1510-11. Any other interpretation would create a situation in which a party could deliberately fail to serve a final declaration of disclosure, say nothing about the other party’s noncompliance, and then, if dissatisfied with the judgment, automatically obtain a set-aside of the judgment by “pulling the non-disclosure card out of his or her sleeve on appeal or new trial motion.” 117 Cal.App.4th at 527-28.

Thus, the Court of Appeal held, in order to harmonize Family Code § 2107(d) with both the California Constitution and Family Code §§ 2105(c) and 2107(a):

[W]e are forced to conclude that before section 2107, subdivision (d) can be the basis of reversal on appeal or a ground to compel the granting of a new trial, a noncomplying litigant must identify some portion of the judgment materially affected by the nondisclosure. … The bottom line is that the statement in section 2107, subdivision (d) that a failure to comply with the final disclosure requirements is not “harmless error” must give way to the Constitution and the balance of the legislative scheme. [117 Cal.App.4th at 528 (emphasis in original)]

The result and reasoning of Steiner and Hosseini conflict with the earlier opinion of In re Marriage of Fell (1997) 55 Cal.App.4th 1058. In Fell, the parties entered into a written marital settlement agreement without exchanging either preliminary or final declarations of disclosure. They later waived final declarations of disclosure, and, on the same day, a judgment of dissolution was entered. The trial court later granted wife’s set-aside motion, finding that the waiver of final declarations of disclosure was invalid as a matter of law (the parties had not exchanged preliminary declarations of disclosure as required for the waiver pursuant to Family Code § 2105(c) (now Section 2105(d)).

The Fell Court held that, as a matter of law and public policy, where the parties do not comply with Family Code § 2104(a) by exchanging preliminary declarations of disclosure, and do not comply with the requirements of Family Code § 2105(a) by either exchanging final declarations of disclosure, waiving that exchange, or obtaining a court order for good cause dispensing with the final declarations of disclosure, any Marital Settlement Agreement which the parties enter into may be set aside. The Court of Appeal based its holding on the public policy behind the disclosure statutes:

“Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” [citations] So it is here. [55 Cal.App.4th at 1063]

The Fell Court directly stated that such agreements are unenforceable:

Agreements whose object, directly or indirectly, is to exempt its parties from violation of the law are against public policy and may not be enforced. (See Civ. Code, § 1668.) [55 Cal.App.4th at 1064]

As in Steiner and Hosseini, the husband in Fell argued that relief for noncompliance with the disclosure requirements is limited to a motion to compel compliance, fees and sanctions. The Fell Court analyzed this issue in the same way as the Steiner and Hosseini Court, i.e., that those remedies were available to a complying party. Where both parties fail to comply with the disclosure requirements, on the other hand, “the court is expressly authorized to decide whether the judgment should be set aside.” [55 Cal.App.4th at 1066]

Since Fell was decided, the Legislature enacted AB 583 and strengthened the disclosure requirements by adding a requirement that disclosures include “an immediate, full, and accurate update or augmentation to the extent there have been any material changes.” Family Code § 2102(a)(1). The 2001 amendments expressly recognize that the disclosure requirements arise out of the parties’ continuing fiduciary duties toward one another, pursuant to Family Code § 721. See Family Code §§ 2102(b) and (c).

Yet, the Steiner and Hosseini Court did not examine the public policy clearly reiterated by the Legislature at the same time it amended Family Code § 2107(d) by adding, “[t]he failure to comply with the disclosure requirements does not constitute harmless error.” The court looked only to the public policy favoring finality of judgments, not the public policy which “favors the reduction of the adversarial nature of marital dissolution and the attendant costs by fostering full disclosure and cooperative discovery.” Family Code § 2100(b).

Since a party seeking to set aside a judgment on the ground that there was no disclosure will not have had the opportunity to conduct discovery between the time the judgment is entered and the time the set-aside motion is heard, as a practical matter it is often impossible to establish prejudice unless and until the judgment is set aside. Therefore, it seems that a balancing of the competing public policies mandates, where there has been no disclosure (as opposed to incomplete or inaccurate disclosure), that the conflict be resolved in favor of the policy supporting disclosure, and there should be no showing of prejudice required.

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