Tustin Divorce Creates Landmark Access to Business Records : Litigation: The California Supreme Court compels a divorcing husband to disclose the tax records of his privately held corporation.

It was just another divorce in a state that logs more than 100,000 a year. After 25 years of marriage and two children, now grown, Terry and Marilyn Schnabel decided to part ways.

Then Marilyn Schnabel asked for the tax records of her husband’s business--information historically revered as highly private. She said the numbers would help determine the company’s true value and, consequently, her slice of the community property.

That request ultimately propelled an otherwise routine divorce case all the way to the California Supreme Court. And when the dust settled late last month--two years and three hearings after the Tustin couple filed for divorce--Marilyn Schnabel emerged the victor in what family law experts hail as a landmark decision.

“I don’t know of any other case in recent years as significant as this one,” said Benson Shaffer, a retired family law commissioner in Los Angeles Superior Court.

The Supreme Court unanimously ruled that Terry Schnabel must hand over his company’s detailed financial records, including income tax returns. Affirming lower court rulings, the justices said the wife “has at least as great a right of discovery from the corporation as any shareholder.”

While the decision may clarify some longstanding questions about spousal rights, it also could cause headaches for privately held companies reluctant to reveal financial matters to outside eyes.

“It is the first crack in the wall concerning the confidentiality of corporate tax records,” said Terry Schnabel’s attorney, John P. Pringle of Roquemore, Pringle & Moore in Los Angeles.

But in family law, the decision did more than crack a wall--it knocked down what is perhaps the final barrier to full disclosure in California divorces.

“The time was ripe for this decision,” said Shaffer, who now teaches in the Department of Social Ecology at UC Irvine. “It is a further extension of what the trend has been over the past two decades.”

Another indicator of that trend was at the start of this year, when a new state law went into effect requiring a husband and a wife to list all assets and liabilities--whether separate or community property--in the early stages of divorce. The Supreme Court cited that statute as a factor in its decision on the Schnabel case.

“Laws have had to change to keep up with the changes in society,” said Marjorie Fuller, an appeals attorney in Fullerton and the co-chair of the Orange County Bar Assn.’s Gender Equity Committee. “Women today take an active role in home finances. We’ve gotten away from the paternalistic pat on the knee--’Honey, I’ll take care of the money matters.’ ”

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Marilyn Schnabel’s demand was hardly unheard of.

Her husband owns 30% of Orange Container Inc., a Santa Ana company that he co-founded in 1981. The company, which has about 40 employees and annual revenue of $7 million, makes cardboard shipping boxes.

To ascertain fair alimony payments and her half of the community property, Marilyn Schnabel reasoned, she needed to study the company’s business ledgers. Orange Container turned over general financial documents but refused to give her its tax returns, arguing that their release would constitute a violation of privacy.

None of that was out of the ordinary, said Pringle, who specializes in both family and corporate law.

“These are very normal people in a very common situation,” Pringle said. “It isn’t unusual for the court to grant a spouse’s request for some corporate records. What’s different about this case is that, for whatever reason, the lower courts ordered a broad disclosure of tax returns, and the company felt strongly enough about the issue to challenge that order.”

Why did this particular divorce case finally persuade the California justice system to overturn a 1981 decision that sided with a company in a similar divorce suit?

“You never know when the law is going to change and what case is going to change it,” Fuller said. “All you can do, when the court makes the right decision, is say, ‘Whew, let’s move on from here.’ ”

In this case, Pringle noted, the court had the new state law to lean on. However, he sees the relationship between his case and the statute as flimsy.

“My argument with that reading is (the statute) mandates full disclosure between spouses, not between a spouse and a third party,” he said. Fuller counters that, before the statute, divorcing spouses frequently provided incomplete accounts of their assets.

“Then it was sort of ‘catch me if you can’--and if you don’t ask me the right questions, you won’t get the right answers,” she said.

More than in any other type of civil litigation, Fuller said, people undergoing the trauma of divorce need stringent rules to protect them from themselves and each other.

“A divorce, at best, is an adversarial situation, magnified by the fact that the people involved have tremendous anger--much more so than in a corporate dispute, where money is the only thing at issue,” she said. “There is immense disappointment, and a horrible sense of failure, when love turns to hate. Divorce tends to make people vengeful; you can’t always assume they will do the right thing.”

Marilyn Schnabel would agree that divorce is a grueling ordeal--especially when it drags on for two years.

“It’s been really hard--not knowing when it’s going to end, not being able to plan the future,” she said. “I never thought it would take this long.”

Her husband would not comment other than to offer a bit of advice gleaned from experience: “Are you married? Work on that marriage every single day of your life.”

The Schnabels, both 46 years old, wed young and quickly set about having children. Theirs was a traditional marriage; Marilyn Schnabel stayed home and raised the kids while Terry Schnabel earned his family’s keep.

Since separating from her husband, Marilyn Schnabel has taken a job as a salesclerk at Nordstrom. She still lives in the house that she and her husband bought 10 years ago, but said that finances aren’t easy.

“There’s no way I could keep this home on my salary,” she said, “because I never developed a career for myself.” Her portion of the community property and alimony payments will be her “lifeline,” she said. “I can’t afford not to get my fair share.”

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While Marilyn Schnabel and others in her position have reason to celebrate the high court’s decision, privately held companies will suffer its consequences, Pringle says.

“I can imagine a situation where a company learns a person’s marriage is on the rocks and forces them out as a shareholder,” he said. “Companies are very possessive of their business records.”

Orange Container has only two shareholders--Terry Schnabel and his business partner, Hal Bankhead, who owns the remaining 70% of the company. But, Pringle asks, what would happen in a case where the spouse of a minor shareholder petitioned for access to corporate tax returns?

“Clearly, there are lines to be drawn,” said Donald Morrow, a corporate attorney in Costa Mesa. “If someone owns one or two shares in a private company worth half a billion dollars, it’s not a case where you give a spouse access to all the company records.”

James Booth, who represents Marilyn Schnabel, dismisses the notion that the court’s decision could lead to gross invasion of privacy.

“In a company that is not publicly traded, you cannot look at the New York Stock Exchange to find out the value of the stock,” he said. “Looking at tax records is the only way we can evaluate the worth of the company to make sure Mrs. Schnabel will get fair spousal support and 50% of the community property. To verify the accuracy of in-house records, we need comparison records--and a tax return filed under penalty of perjury is one of the better sources.”

The justices noted in their decision that the ruling does not apply to public corporations “whose shares have a readily ascertainable market value.”

Booth points out that tax information seldom would go beyond chamber doors. Participants can request that such material be perused “in camera”--viewed by only the judge, the attorneys and their clients--and be omitted from the public record.

But Pringle argues that even that procedure has risks. “Once information is put into someone else’s hands, things can snowball,” he said. “Someone tells a friend about it in confidence, that person tells someone else, and so on.”

Corporate attorney Morrow’s clients have included one of the largest privately held concerns in Orange County--the Irvine Co. Nonetheless, he says he can see the court’s point.

“Sometimes I think people overemphasize the confidentiality of things,” he said. “In these kinds of cases, it’s not as though the spouse is asking for the formula to Jack’s secret sauce.”