Do I Have to Disclose All My Assets in Negotiating a Separation Agreement?

Through a series of cases and case law in North Carolina, the North Carolina Court of Appeals and Supreme Court has laid out specific circumstances in which an individual must disclose assets to his or her spouse regarding the construction of a Separation Agreement.

Through this evolution of case law, Courts in North Carolina have rationed that there is a confidential relationship in existence between a husband and wife during marriage, which creates a fiduciary duty toward the other; requiring disclosure of all assets. In Link v. Link, 278 N.C. 181 (1971) the court even held this confidential relationship to be extended for a short period after a spouse has left the marital residence. Later in 1988 the North Carolina Supreme Court in Avriett v. Avriett, 322 N.C. 468 held that under normal circumstances, when one spouse hires an Attorney, the fiduciary duty to disclose ends. Ten years later in 1998 the North Carolina Court of Appeals reviewed a similar issue again and held in Daughtry v. Daughtry, 128 N.C. App. 737 that if both spouses are represented by separate counsel, a confidential relationship cannot exist, and there is no duty to disclose whatsoever. However, Harroff v. Harroff held that if an single Attorney represents both individuals, the fiduciary duty has not ended and full disclosure is required. With this being said, it is important to understand that your Attorney may not be representing you if both you and your spouse retain the Attorney together.

It is further important to remember that a Separation Agreement and/or a Property Settlement Agreement will be dividing an entire estate that you may have worked years to create. Approximately 70% of the clients who retain us have an unrepresented spouse, which puts the opposing side at a great disadvantage. Regardless of education, intellectual capacity or current employment, a non-Attorney is at a huge disadvantage in the negotiation and preparation of a Separation and Property Settlement Agreement.

If you believe that you and your spouse may be separating, it is imperative that you at least consult with an Attorney regarding your rights prior to entering into any Agreement in North Carolina. At the Law Offices of David P. Sheehan we regularly meet with clients prior to separation to assist them with pre Divorce planning.

Where the duty exists, it is a duty to disclose material facts rather than to file an inventory

In North Carolina the obligation that arises from a confidential relationship between spouses is a duty to disclose all material facts, not an automatic obligation to produce a schedule of everything owned. The Court of Appeals said so expressly in Daughtry v. Daughtry, rejecting the argument that every spouse who signs a separation or property settlement agreement must make a full and accurate disclosure of assets and debts. Later decisions have described the duty in broader terms, and the difference between those formulations is usually decided on the facts of the particular negotiation.

That distinction matters because the question in litigation is rarely whether a spouse handed over a complete list. It is whether a particular asset was material, whether the spouses were still in a confidential relationship when the agreement was negotiated, and whether the other spouse asked, waived or accepted.

There is no bright line marking the end of the confidential relationship

North Carolina appellate decisions have located the end of the fiduciary relationship at several different points, and in every case by reference to what the spouses were actually doing rather than to a single triggering event. In Lancaster v. Lancaster it had ended: the wife had moved out, the husband had retained a lawyer, and the two were arguing through counsel over an alimony clause — adversaries by then, not confidants. Other decisions treat the relationship as over once each spouse is negotiating through his or her own lawyer with the other treated as an opponent. In Searcy v. Searcy the court took an agreement’s stated effective date as the end point.

It does not end automatically. Harroff v. Harroff, following Link v. Link, holds that the confidential relationship can continue after one spouse has left the marital home; moving out is evidence that it is over, but it does not decide the question. Nor does it end where a lawyer functions merely as a scrivener recording an arrangement the spouses reached while still in that relationship. And in Searcy the relationship was still intact when the spouses exchanged lists of assets and liabilities, before either separated or retained counsel. Separation, retained counsel and adversarial negotiation are each evidence pointing one way; none of them is a rule, and a court weighs them against what the spouses were doing when the agreement was made.

When the agreement itself addresses disclosure, the agreement governs

The most reliable source of a disclosure obligation in North Carolina is the document. In Lee v. Lee an agreement obliged each spouse to disclose assets above a stated value, and the husband’s failure to disclose a substantial loan he had made to a corporation in which he was the majority shareholder was a material breach. In Daughtry the agreement recited that each party had disclosed the information the other had requested and waived further disclosure, and the court held the parties obliged to disclose only what had been asked for.

The same drafting choice runs in both directions. A representation and warranty of complete disclosure creates a contractual obligation enforceable on its own terms, independent of any fiduciary question, and a mutual waiver of further disclosure forecloses the argument later.

The right to disclosure can be waived by language, by conduct or by ratification

North Carolina courts have found waiver in all three forms. Daughtry v. Daughtry is the language case. Sidden v. Mailman is the conduct case: the wife was held to have waived any duty the husband had to disclose the value of his retirement account by signing without legal advice and without asking about the account, when the agreement awarded all retirement accounts to him, and by refusing to look at what he attempted to disclose.

Ratification is the third route. In Honeycutt v. Honeycutt the plaintiff learned of the alleged non-disclosure shortly after execution but went on accepting substantial benefits under the agreement for nearly two years, and was held to have ratified it by accepting and retaining that property with full understanding of where it came from and without duress.

Non-disclosure is attacked as fraud, constructive fraud or unconscionability, each with its own test

In North Carolina a constructive fraud claim depends on the existence of a fiduciary relationship at the relevant time, which is why the cases about when that relationship ends do so much of the work. Actual fraud requires the ordinary elements and carries a three-year limitation period under G.S. 1-52(9), which by the terms of that subdivision does not accrue until the discovery by the aggrieved party of the facts constituting the fraud. Where the claim is raised as a counterclaim to an action on a sealed instrument, Crogan v. Crogan applies the ten-year period of G.S. 1-47(2) to both, the subdivision itself allowing a counterclaim arising out of the same transaction although a shorter period would otherwise apply to it.

Unconscionability has two halves and both must be present. Procedural unconscionability concerns how the bargain was made; substantive unconscionability concerns the bargain itself, and King v. King sets a demanding standard: the inequality must be “so manifest as to shock the judgment of a person of common sense, and … the terms … so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.”

A North Carolina court examines how the agreement was made rather than whether it was a good deal

This is the settled position and it shapes everything above. The Court of Appeals has held that a trial court is not required to make an independent determination of the fairness of the substantive terms of a separation agreement so long as the circumstances of execution were fair, and in Knight v. Knight described such an agreement as one to be viewed like any other bargained-for exchange between parties presumably on equal footing. At the same time the courts have described spousal contracts as special agreements to which a cloak of protection attaches, and will see that they are arrived at fairly.

The practical consequence is that a challenge based on non-disclosure succeeds or fails on the process — the relationship between the spouses at the time, what was asked, what was said, what was signed — rather than on the size of the disparity in what each ended up with.

The equitable distribution alternative comes with compelled disclosure built in

Where the spouses do not contract, North Carolina supplies a statutory process that does not depend on voluntary candor. Under G.S. 50-21(a) a claim for equitable distribution may be filed at any time after the spouses begin to live separate and apart, and the same subsection puts disclosure on a timetable. Within 90 days after service of the claim, the party who first asserted it must prepare and serve an equitable distribution inventory affidavit listing all property claimed to be marital and all property claimed to be separate, with an estimated date-of-separation fair market value for each item; the other spouse must serve an affidavit in reply within 30 days.

Those affidavits may be amended and are not binding at trial as to completeness or value, and the court may extend either period for good cause. What they are not is optional: the statute deems them to be in the nature of answers to interrogatories, so a spouse who fails to supply the required information is subject to Rules 26, 33 and 37 of the Rules of Civil Procedure. G.S. 50-21(d) then requires the party who filed to apply within 120 days for a scheduling and discovery conference, at which the court sets discovery deadlines and dates for pretrial conference and trial.

The statutory presumptions also favor the spouse who knows less. G.S. 50-20(b)(1) presumes that all property acquired after the date of marriage and before the date of separation is marital property except property that is separate property, and the presumption is rebutted only by the greater weight of the evidence. Property is valued as of the date of separation under G.S. 50-21(b), and G.S. 50-20(c) begins from an equal division of net marital and divisible property unless the court determines an equal division is not equitable.

The equitable distribution route has a deadline that the divorce judgment enforces

In North Carolina an absolute divorce obtained within the State destroys the right of a spouse to equitable distribution under G.S. 50-20 unless the right is asserted prior to the judgment of absolute divorce, under G.S. 50-11(e). The exception is narrow and it is timed: where service of process was by publication and the defendant failed to appear in the divorce action, the defendant may bring an action or file a motion in the cause for equitable distribution within six months from the date of the judgment. G.S. 50-11(f) allows the same six months after entry where the court that granted the divorce lacked personal jurisdiction over the absent spouse or lacked jurisdiction to dispose of the property.

The practical effect for a spouse who suspects incomplete disclosure is that two clocks run at once. A spouse who signs in reliance on incomplete information and then allows a divorce judgment to be entered with no equitable distribution claim on file is generally left with contract remedies alone — an action to rescind the agreement or for damages, brought on the agreement itself and subject to its own limitation period.

Common questions

Written for North Carolina law and reviewed by David P. Sheehan, attorney, Charlotte. General information, not legal advice — see the disclaimer.

Related questions

• Can I Change the Terms of a Separation Agreement in North Carolina After it is Signed?
• Is a Separation Agreement Right for Me?
• What Happens if Someone Doesn’t Follow the Separation Agreement?