The perils of inaccurate (or no) financial declarations in family court

Posted Thursday, February 25th, 2010 by Gregory Forman
Filed under Alimony/Spousal Support, Child Support, Family Court Procedure, Litigation Strategy, Of Interest to Family Court Litigants, Of Interest to Family Law Attorneys, South Carolina Specific

For any family court trial involving alimony or attorney’s fees, and for most trials involving child support or support enforcement, an accurate financial declaration is the most vital document in the family court practitioner’s arsenal.  A financial declaration requires a party to list current income, expenses, assets and debts under oath.  An inaccurate financial declaration can be devastating to one’s claim or defense.  An incomplete or inaccurate financial declaration can lead the court to deny a party relief, award incomplete relief, or award more relief than would be justified if the court had accurate financial declarations.  It is amazing how often financial declarations fail to be filed when the rules of Family Court require it.  It is appalling how many inaccurate or deliberately false financial declarations continue to be filed.

South Carolina Family Court Rule 20, titled FINANCIAL DECLARATIONS reads in full:

(a) When Required. In any domestic relations action in which the financial condition of a party is relevant or is an issue to be considered by the court, a current financial declaration in the form prescribed by the Supreme Court shall be served and filed by all parties.

(b) Filing and Service. Financial declarations shall be filed and served prior to or at the first hearing, or no later than 45 days after the complaint is served, whichever occurs first.

(c) Effect of Default. If the defendant fails to timely answer or otherwise plead, the plaintiff shall not be required to serve a financial declaration on the defendant prior to the final hearing.

(d) Sanctions. Reasonable sanctions may be imposed upon an attorney or a party for willful noncompliance with this rule.

These instructions are very explicit: File a current financial declaration whenever the financial condition of a party is relevant or an issue to be considered by the court.  File it prior to or at the first hearing, or no later than 45 days after the complaint is served, whichever occurs first.  Failure to file it may result in sanctions against the party or that party’s attorney.  These rules are clear yet often ignored.

Defend a rule to show cause [enforcement action] in which the client’s inability to pay is a defense and an updated financial declaration is required.  Prosecute a rule to show cause in which the other party raises inability to pay as a defense but doesn’t file an updated financial declaration and one can object to that party’s failure to comply with SCRFC 20(a) and either prevent that party from raising inability to pay as a defense or require that party to fill out financial declarations before proceeding further.  Except for the prosecution of rules to show cause, in which the court can award attorney’s fees under a compensatory contempt theory, in seeking attorney’s fees, or defending a claim for attorney’s fees, one needs to present evidence of “each party’s ability to pay his or her own fees… and the effect of the fee on the parties’ standards of living.” LaFrance v. LaFrance, 370 S.C. 622, 658, 647, 636 S.E.2d 3, 22 (Ct.App.2006).  Unless one provides the court current financial declarations of both parties the court lacks the ability to make these factual findings.  While I don’t have clients file new financial declarations for every hearing, I suggest updating them whenever their financial situation is at issue and has changed since the previous financial declaration was filed.

Further, if financial declarations are not filed at the time the court approves a separation agreement or child support agreement, the court will have a harder time determining whether there’s been a change of circumstances when either party seeks a subsequent modification of the agreement.  The South Carolina Supreme Court has noted the difficulties that arise in analyzing a claimed change of circumstances when no financial declarations were filed in the previous action. Upchurch v. Upchurch, 367 S.C. 16, 26, 624 S.E.2d 643, 648 (2006).  Yet numerous such family court agreements continue to be approved without financial declarations having been filed.  I won’t even begin preparing or mediating separation agreements without financial declarations from both parties because, without these documents, one cannot be sure that all the parties’ assets and debts are being considered in negotiating an agreement.

It’s not just the failure to file financial declarations that has ruined many a family court claim or defense; failure to file accurate ones can be equally devastating.  The footnotes on page five of the current financial declaration form, available here, explain how to fill one out.  The first footnote states. “A recent paystub should be attached to the Financial Declaration.”  I frequently see parties file financial declarations without the required attached proof of income and, almost as frequently, see the family court deny relief because that proof wasn’t provided.  These footnotes further explain how net and gross income is to be calculated:

1. To compute Principal Earnings from Employment, first determine whether you are paid semi-monthly, biweekly, or weekly. If you are paid semi-monthly, multiply the gross amount of your pay check by two. If you are paid biweekly, multiply the gross amount of your pay check by 26 and then divide by 12. If you are paid weekly, multiply the amount of your paycheck by 52 and divide by twelve. Round to the nearest whole dollar.

2. To compute Overtime, Tips, Commission, and/or Bonuses, take an average of your monthly earnings from overtime, tips, commission, bonuses, etc. from the past three years or the length of employment if employed less than three years (including this year).

3. To compute State, Local, and Social Security Tax deductions, use the same formula used to compute principal earnings in endnote 1 above, or consult or have your attorney consult an accountant.

4. Net monthly Income is equal to Total Gross Monthly Income minus Total Monthly Deductions.

5. Do not include any expense in the Monthly Expenses section that has already been included in the Deductions from Gross Monthly Income on page one of the Declaration.

Each of these rules are frequently ignored or disobeyed.  Yet the financial declarations are signed under oath and subject a party to perjury if they are knowingly false.  Cross examination that shows a party’s financial declaration is inaccurate on an important issue is highly damaging; showing such inaccuracies are deliberate is devastating.  Yet financial declarations continue to be filed that fail to include second jobs, overtimes or bonuses.   Financial declarations continue to be filed in which claimed net monthly income fails to equal gross monthly income minus total monthly deductions.  Financial declarations continue to be filed that list deductions in the expense section that were already included in the deductions from gross monthly income section.

As for alimony claims, both the ability to pay and the need for alimony will, to a great extent, be determined from a comparison of the income listed on page one of the financial declaration to the expenses listed on page two.  A supported spouse who understates expenses can lead the court to decide that spouse doesn’t need alimony or needs less alimony.  A supporting spouse who understates expenses can lead the court to determine that spouse has a greater ability to pay alimony than her or she actually does.  However overstating expenses (or understating income) can be even more devastating if the court determines that a supported spouse has inflated expenses or hidden income to inflate an alimony claim or that a supporting spouse has inflated expenses or hidden income to reduce an alimony claim.

In handling alimony claims, carefully review both parties’ financial declarations to make sure one’s client’s testimony on the other parties’ expenses isn’t undermined by the client’s own financial declaration.  More than once I have heard a supporting spouse complain about the other party’s particular expense being “unreasonably high” when that own spouse’s financial declaration showed an even greater amount for that same expense.  Cross examination on such “unreasonably high” expenses make the complaining party look foolish.  In alimony cases, whenever my client’s listed expense is lower than the other party’s listed expense, I try to get the other party to concede that my client’s listed expense is reasonable.  A careful comparison of which listed expenses are substantially different from the other’s listed expenses can lead to fruitful testimony to support or defend alimony requests.  Further, in examining the financial declarations of self-employed persons, be careful to consider which listed expenses might actually be paid through the business and whether accelerated depreciations is creating an imbalance between taxable income and cash flow.

Given these concerns, I always fill out or do a line item review of the income section (page one) of a client’s financial declaration and make sure it accurately reflects the attached pay information.  Further, whenever alimony, property division or attorney’s fees are at issue, I take substantial time reviewing the whole financial declaration with my clients before they execute it [when only child support is at issue focusing my attention strictly on the income section and the day care and health insurance expenses is acceptable].  The financial declarations that I have forced some parties to prepare in the midst of trial–because they raised their financial condition as a defense but failed to have a current financial declaration documenting that claim–are often debilitating in future proceedings because I can show them to be inaccurate.

As a final caution against knowingly allowing one’s clients to file inaccurate financial declarations, I would point to the example of my former law school family law instructor, Norman Perlberger.  Years after I graduated, he was sued by an ex-wife in Federal Court for violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  The basic claim is that he and his attorneys used the wires and mail in a repeated pattern to provide false financial information as part of his divorce proceedings in order to conceal the true amount of his income and that, as a result, his obligations for child support and alimony were less than they would have been if the court had known his true income.  The Federal Court repeatedly held that such allegations made a valid claim for RICO and that his ex-wife’s lawsuit could proceed to trial. Perlberger v. Perlberger, 1999 WL 79503 (E.D.Pa.)

A party may bring a Civil RICO claim in any appropriate United States district court.  A successful claim entitles party to recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee. 18 U.S.C. § 1964(c).  As Perlberger notes, a pattern of using the wires to fax or e-mail or using the mail to send knowingly false financial information as part of a family court proceeding, with the intent of influencing the resolution of the proceedings through such false information, can lead to Civil RICO liability.  Attorneys who assist their clients in preparing and sending through the mails and wires false financial declarations risk being made defendants in a Federal Court Civil RICO claim.