This blog post is part of a Continuing Legal Education (CLE) Presentation by Brian King.
Divorce is never easy and most often stimulates a world of emotions such as fear, resentment, or anger. Some spouses attempt to cope with these emotions by hiding their assets. A spouse may undervalue items when listing them for equitable distribution purposes. Other common strategies include: Buying valuable items temporarily that may not seem valuable (such as artwork, antiques, guns, etc.), writing checks to nonexistent employees or to friends or family as a “gift”, creating false loans to family or friends, failing to report income correctly on tax forms, transferring money to hidden accounts or a child, friend, or other family member’s accounts, storing cash in a private safe, delaying a promotion or bonus at work, enrolling in educational classes only to drop out and have tuition refunded later, or reassigning money to traveler’s checks.
In order to prevent this all-too-common act and receive all that you are entitled to, spouses should be aware of and understand their finances and assets throughout the entire marriage. Often times a spouse may hide assets over a period of time which makes proving this in court a difficult or even impossible task. Encourage clients to keep their own financial records. In addition, inform clients of these beneficial steps on how to locate hidden assets:
- Depose or just call your spouse’s direct boss or payroll supervisor. When I was an IVD attorney, I was always shocked how easy it was to simply call or write for information.
- Check your spouse’s workplace for any expensive newly purchased items for his or her office.
- Analyze monthly billing statements and consider whether your spouse’s lifestyle is excessive and out of the ordinary based on usual income. Look at the costs of all travel, clothes, hobbies, cars, leisure activities, household goods, etc. and determine if an unusual amount of money is being spent.
If the benefit or potential financial gain exceeds the cost, hire a forensic accountant or private investigator. I have one that I use for essentially every complicated case I have. He gives me not only information I need, but a list of questions to ask at deposition.
Be sure to consider all personal identification information of your spouse. Legal name, nicknames, variations of the name such as abbreviations or spelling distinctions, and addresses are essential. The names and addresses of close family members or friends and their social security numbers and dates of birth are also beneficial.
Examine the following information:
- Income tax returns (in extreme detail) – both underreporting on tax forms and overpaying taxes that will later be refunded give rise to red flags.
- Deposits and withdrawals from all accounts.
- Checking account statements and all valid or canceled checks.
- Cash flow procedures if spouse owns his or her own business.
- Bank account transactions, credit card statements, credit reports, and insurance statements.
- Passport – see where your spouse has traveled to perhaps find accounts.
- Any loan applications.
- Public records including court records, deeds, and motor vehicle information.
Relevant Statutes in Family Law Discovery
General Statutes Section 50-21(a)
Plaintiff’s Inventory Affidavit
Within 90 days after service of a claim for equitable distribution, the party who first asserts the claim shall prepare and serve upon the opposing party an equitable distribution inventory affidavit listing all property claimed by the party to be marital property and all property claimed by the party to be separate property, and the estimated date-of-separation fair market value of each item of marital and separate property.
Defendant’s Inventory Affidavit
Within 30 days after service of the inventory affidavit, the party upon whom service is made shall prepare and serve an inventory affidavit upon the other party.
The inventory affidavits prepared and served pursuant to this subsection shall be subject to amendment and shall not be binding at trial as to completeness or value.
Because the initial inventory affidavits are subject to later amendment, it is unwise to place too much reliance upon them. By the time the case is tried, the facts may be materially different from what was stated in the initial inventory affidavits.
In particular, note that the opposing party’s financial affidavit does not constitute a binding admission as to the classification or value of any property owned by the parties.
A party’s own financial affidavit is likewise not binding, especially where relevant information is withheld by the other side. See Franks v. Franks, 153 N.C. App. 793, 571 S.E.2d 276 (2002) (profit-sharing plan was marital property even though not listed in pretrial order, where the husband did not disclose the plan until the actual hearing).
Time for Filing
While the plaintiff’s affidavit is due 90 days after service of the claim for equitable distribution, and the defendant’s affidavit is due 30 days after the plaintiff’s affidavit, “[t]he court may extend the time limits in this subsection for good cause shown.” N.C.G.S. § 50-21(a).
Effect and Nature of Affidavits
The affidavits are subject to the requirements of General Statutes section 1A-1, Rule 11, and are deemed to be in the nature of answers to interrogatories propounded to the parties. Any party failing to supply the information required by this subsection in the affidavit is subject to N.C.G.S. § 1A-1, Rules 26, 33, and 37.
Rule 11(a) provides:
The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law[.]
N.C.G.S. § 1A-1, Rule 11(a). In the context of invention affidavits, the affidavit must be signed by counsel, and counsel’s signature is representation to the court that (1) the attorney has made “reasonable inquiry” into the facts, (2) the affidavit is “well-grounded in fact,” and (3) the affidavit complies with existing law.
If these representations prove untrue, the attorney and/or the attorney’s client are subject to sanctions:
If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney’s fee.
Effect on Traditional Discovery
During the pendency of the action for equitable distribution, discovery may proceed[.]
The inventory affidavits are therefore intended to supplement traditional discovery, not to replace it. Discovery begins with the inventory affidavits, but it does not end there. “[F]ormal discovery procedures as provided by the North Carolina Rules of Civil Procedure are available to the parties in an equitable distribution action to gather the information needed for the parties to prepare and for the trial court to make its determination.” Coleman v. Coleman, 182 N.C. App. 25, 29, 641 S.E.2d 332, 336 (2007).
Note in particular that the opposing party’s inventory affidavit may well contain good-faith misstatements, inadvertent errors, or even outright lies. The inventory affidavit is no more likely to be correct than a response to an interrogatory or a statement made in a deposition.
It is therefore essential to use the traditional discovery process, to the maximum extent possible, to double-check all statements made on the opposing party’s inventory affidavit. To take a very simple answer, if the other party owns a business, do not rely on the value stated on the inventory affidavit. Use the normal discovery process to obtain financial information about the business, and retain an expert to evaluate that information and determine whether the value stated on the affidavit is correct.
As a general rule, the inventory affidavits are more useful for identifying marital property than for classifying or valuing it.
Within 120 days after the filing of the initial pleading or motion in the cause for equitable distribution, the party first serving the pleading or application shall apply to the court to conduct a scheduling and discovery conference. If that party fails to make application, then the other party may do so.
Purpose of Conference
At the conference the court shall determine a schedule of discovery as well as consider and rule upon any motions for appointment of expert witnesses, or other applications, including applications to determine the date of separation, and shall set a date for the disclosure of expert witnesses and a date on or before which an initial pretrial conference shall be held.
Initial Pretrial Conference
At the initial pretrial conference the court shall make inquiry as to the status of the case and shall enter a date for the completion of discovery, the completion of a mediated settlement conference, if applicable, and the filing and service of motions, and shall determine a date on or after which a final pretrial conference shall be held and a date on or after which the case shall proceed to trial.
The initial pretrial conference gives the court a chance to hurry the discovery process along, in the interest of getting the case resolved as quickly as possible.
Final Pretrial Conference
The final pretrial conference shall be conducted pursuant to the Rules of Civil Procedure and the General Rules of Practice in the applicable district or superior court, adopted pursuant to G.S. 7A-34. The court shall rule upon any matters reasonably necessary to effect a fair and prompt disposition of the case in the interests of justice.
General Statutes Section 50-21(e)
Penalties for Delay
Upon motion of either party or upon the court’s own initiative, the court shall impose an appropriate sanction on a party when the court finds that:
(1) The party has willfully obstructed or unreasonably delayed, or has attempted to obstruct or unreasonably delay, discovery proceedings, including failure to make discovery pursuant to G.S. 1A-1, Rule 37, or has willfully obstructed or unreasonably delayed or attempted to obstruct or unreasonably delay any pending equitable distribution proceeding, and
(2) The willful obstruction or unreasonable delay of the proceedings is or would be prejudicial to the interests of the opposing party.
Delay consented to by the parties is not grounds for sanctions. The sanction may include an order to pay the other party the amount of the reasonable expenses and damages incurred because of the willful obstruction or unreasonable delay, including a reasonable attorneys’ fee, and including appointment by the court, at the offending party’s expense, of an accountant, appraiser, or other expert whose services the court finds are necessary to secure in order for the discovery or other equitable distribution proceeding to be timely conducted.
The clear lesson here is: Don’t delay discovery without very good reasons. Lengthy discovery, especially in equitable distribution cases, is a serious problem, and the statute gives the court broad power to sanction parties who delay discovery unnecessarily.
The statute also provides a weapon when the opposing party delays discovery unnecessarily. Discovery sanctions are built into the Rules of Civil Procedure, but section 50-21(e) provides special authority for discovery sanctions in equitable distribution cases. In effect, it is a legislative direction that discovery sanctions are especially important in such cases. When seeking discovery sanctions in equitable distribution cases, consider citing section 50-21(e) and the policy behind it as additional supporting authority.
North Carolina Rules Of Civil Procedure
As noted above, the general rules and procedures of pretrial discovery apply in family law litigation. The parties can, therefore, make full use of normal discovery methods:
- Depositions (Rules 27-32)
- Interrogatories (Rule 33)
- Requests for Production (Rule 34)
- Requests for Physical and Mental Examination (Rule 35)
- Requests for Admission (Rule 36)
Relevant Case Law
Ross v. Ross
A request for protection asked the husband to produce [a]ny and all documents upon which you have relied, or intend to rely, to support your contention that the land and/or the residential building at 7018 Ocean Drive, Emerald Isle, North Carolina is your separate property, including but not limited to any evidence of source of funds used in acquiring said alleged marital property. The husband ignored the request for a considerable period of time, and then responded:
Any and all documents that I have to support my contention that the land and/or residential building at 7018 Ocean Drive, Emerald Isle, North Carolina is my separate property, is [sic] proprietary at this time. This evidence will be presented and reveled [sic] in court at the ED hearing(s) when necessary. I have always contended the Emerald Isle property is my separate property from the beginning. (Refer to Plaintiff’s Interrogatories, June 14, 2002, items 5 and 6.
The broad claim that the requested information was “proprietary” was essentially a complete failure to respond to discovery. The husband “was claiming that he is the owner of his documents and he will not reveal them to anyone unless and until he wants to; this is not a valid or reasonable response to a discovery request.”
The trial court imposed a very harsh sanction—it struck the husband’s equitable distribution claim and barred him from testifying at trial. But the Court of Appeals held the sanction justified by the husband’s complete and long-standing failure to comply with discovery:
Plaintiff has no right to keep his “proprietary” information which he has been required by court order to produce in discovery a secret until he deems it necessary to reveal it at the equitable distribution hearing. Plaintiff does not have the prerogative to decide what information he will produce in discovery after the trial court has ordered this production. Thanks to plaintiff’s intransigence, the trial court has not yet had the opportunity to reconsider the classification and valuation of the marital and separate interests in the Emerald Isle property and to enter an order as directed by our prior opinion. The trial court’s sanctions order barring plaintiff’s equitable distribution claim and presentation of evidence does not prevent the trial court from entering an order as to classification and valuation of the separate and marital property but affects only the evidence which will be available at the hearing which will someday, we trust, be held on this issue.
Striking of claims as a discovery sanction is rare, but it is justified when there has been a complete and long-standing failure to comply with discovery.
The Dead Mouse Case
Harrison v. Harrison, 180 N.C. App. 452, 637 S.E.2d 284 (2006)
In an equitable distribution action, the husband served upon the wife a set of interrogatories. The wife did not respond for eight months, and the husband filed a motion to compel. On January 25, the court ordered the wife to respond by February 17. In late February, the wife “delivered thirteen boxes of miscellaneous disorganized documents to [the husband’s] attorney’s office. A strong and unpleasant odor was traced to the boxes, and ultimately, to a dead mouse inside one of them.” 180 N.C. App. at 453, 637 S.E.2d at 285-86. Not surprisingly, the husband’s attorney refused to accept the boxes.
An order was entered on March 10 imposing a $50-per-day fine until the interrogatories were answered. The wife finally answered on April 22, but her response simply stated that the answers to the questions were available in her attorney’s office. The wife’s counsel withdrew, and the husband filed an order to show cause. The trial court held the wife contempt, struck her answer and counterclaim, and awarded attorney’s fees.
The Court of Appeals affirmed. Dismissal is not appropriate as a discovery sanction unless the trial court expressly finds that lesser remedies are not sufficient. Goss v. Battle, 111 N.C. App. 173, 432 S.E.2d 156 (1993). The trial court failed to consider lesser remedies:[T]he trial court did not impose the $50 per diem penalty which had been provided for in the earlier order to compel. In addition, the Show Cause Order specifically requested criminal contempt as an option, but the trial court did not impose that remedy.
However, neither of these two sanctions were considered by the District Court at the contempt hearing. Instead, the court asked plaintiff’s counsel the measures the latter was seeking and awarded them in toto. These facts do not show the trial court considered lesser sanctions as required by Goss prior to striking the defendant’s counterclaim. For this reason, we must vacate the contempt order and remand the case to the Lenoir County District Court for consideration of sanctions in light of the principles set forth in Goss.
The appellate court stressed that the husband’s conduct was unacceptable. “Our ruling does not indicate in any way an approval by this Court of dilatory tactics such as those employed by the defendant.” Id., 637 S.E.2d at 688. But the trial court cannot use dismissal as a sanction without making an express finding that lesser remedies are insufficient.
Despite the reversal, it still seems safe to conclude that tolerating the presence of a dead mouse in one’s discovery responses is not ideal trial court practice.
Note that the trial court in Ross did consider lesser remedies and concluded that they were insufficient. Dismissal is an appropriate sanction for major violations—so long as lesser sanctions are expressly considered first.
Laura W. Morgan, Marital Cybertorts: The Limits of Privacy in the Family Computer, 20 J. Am. Acad. Matrim. Law. 231 (2007)