FIDUCIARY DUTIES IN DIVORCE AND LEGAL SEPARATION CASES
FIDUCIARY DUTIES IN DIVORCE AND LEGAL SEPARATION CASES
If you are contemplating an end to your marital status in California, you should become acquainted with the California Family Code sections regarding Fiduciary Duties. There are several different duties that spouses owe each other. Lack of understanding and compliance with these duties may have serious and costly consequences. Below is a brief overview of the fiduciary duties in a marital relationship, when these duties come into existence in the relationship, the spouses’ obligations and, the consequences for breach of a spouse’s fiduciary duties.
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WHAT IS A “FIDUCIARY RELATIONSHIP”?
The relationship of husband and wife mandates the highest duty of “good faith” and “fair dealing”. Neither spouse is permitted to take “unfair advantage of the other” when dealing with the other, or when either spouse engages in the management and control of community property or of the other spouse’s separate property. The standard imposed on spouses is similar to that imposed on business partners and how they must deal with each other in management, transactions, and control of partnership assets.
WHEN DOES THE FIDUCIARY DUTY COME INTO EXISTENCE?
When two people marry, they enter into a fiduciary relationship and each spouse owes a fiduciary duty to the other to protect and preserve the assets of the marriage and not to dispose of them without the consent of the other. Unless the spouses agree in writing otherwise, upon marriage, they also enter into a financial relationship. Since California is a community property state, in the event of a divorce or legal separation, the marital estate must be divided equally. In an instance where one spouse has more control of the community assets and money, that spouse could easily take advantage of his or her position and retain a greater portion of the assets. The fiduciary duty owed to by spouse to his or her spouse prevents a spouse from taking unfair disadvantage of the other.
HOW LONG DOES THE FIDUCIARY DUTY LAST?
The fiduciary duty applies to the parties until the property (asset or debt) is distributed or divided in a Judgment. The purpose of the fiduciary duties is to protect assets, especially when the control and management of the community’s assets have been handled primarily by one spouse. Therefore, the various fiduciary duties set out in the Family Code are particularly important after the parties’ separation in order to allow a fair and equitable distribution of community assets and liabilities.
WHAT FIDUCIARY DUTIES APPLY IN A DIVORCE OR LEGAL SEPARTATION CASE?
The California Family Code imposes the following fiduciary duties on parties to a divorce action or legal separation proceeding:
The law requires spouses to exchange any information, without demand, about the marital estate and its’ affairs that is reasonably required for the proper exercise of the spouse’s rights and duties. Further, on demand, a spouse must disclose any other information regarding the marital estate, unless the demands are unreasonable or improper given the circumstances.
The following code sections of the California Family Code further identify the fiduciary relationship and duties owed by each spouse to the other:
- Family Code §721 (b):
Section 721 states that “a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other.” By virtue of this “confidential relationship”, a “duty of the highest good faith and fair dealing” is imposed on each spouse and “neither shall take any unfair advantage of the other.” The confidential relationship created under this section of the Family Code is a “fiduciary relationship subject to same rights and duties of non-marital business partners”. The fiduciary relationship requires spouses to disclose “including but not limited to the other” as follows:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
(2) Rendering upon request, true and full information of all things affecting any transaction which concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transaction.
(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concern the community property.”
- Family Code §1100(e):
Regarding the management and control of community assets, the fiduciary duties set forth in Family Code §721(b) continue “until such time as the assets and liabilities have been divided by the parties or by a court.”
- Family Code §2100:
The intent of the California Legislature in creating the fiduciary disclosure duties is set forth in this statute. This statute allows for a uniformed method of determining a fair and equitable distribution of the martial estate as follows:
To marshal, preserve and protect community property.
To ensure fair and sufficient child and spousal support awards.
To achieve a division of community and quasi-community assets and liabilities on the dissolution or nullity of marriage or legal separation of the parties as provided under California law.
- Family Code §2102(a):
This section explicitly states when the fiduciary duty starts, and pursuant to Section 721 extends “as to all activities that affect the assets and liabilities of the other party,” including “from the date of separation to the date of the distribution of the community or quasi-community property asset or liability in question.”
- Family Code §2102(b):
The fiduciary duties continue until the asset or liability has been divided between the parties. As such, even if an asset is divided years after the end of the family law case, the parties continue to have the duty to fulfill their fiduciary duties with respect to each undivided or non-awarded asset or debt.
- Family Code §2102(c):
This section requires that “[f]rom the date of separation to the date of a valid, enforceable, and binding resolution” of issues related to “child or spousal support and professional fees, each party is subject to the standards provided in Section 721 as to all issues relating to the support and fees”, including immediate, full, and accurate disclosure of all material facts and information regarding the income or expenses of the party”
- Family Code §§ 2103 – 2105:
The fiduciary duties also mandates that each spouse in a divorce action and legal separation proceeding provide “full and accurate disclosure of all assets and debts and other liabilities “in which one of both parties may have an interest” through the exchange of their preliminary declarations of disclosure (§2104) and final declarations of disclosure (§2105) unless the final declaration is waived. The disclosures include a current income and expense declaration with supporting documentation, a schedule of assets and debts with supporting documentation and a declaration regarding any significant changes that may materially affect the community assets and debts.
WHAT MATERIAL INFORMATION AM I REQUIRED TO DISCLOSE?
Throughout the course of a dissolution or legal separation case, each spouse has an affirmative duty to disclose material information, including documents to the other spouse. This is a mandatory duty even if the other party has not requested any disclosures. The best way to avoid a breach of your fiduciary duties is to keep in mind that no development that impacts the marital estate is too big or too small. Better to disclose than be sorry later on. A brief example (which is not all inclusive) of “material information” includes:
- any change in your employment status including, increase salary, bonuses, commissions;
- offers to purchase any real property owned by the parties, major repairs, lawsuits involving the property, notices from any governmental agency, tax issues;
- offers to purchase community business, major investments, lawsuits involving the business, notices from any governmental agency, tax issues, change in board of directors, new partners, key employees, shareholders;
- changes to retirement or investment plans, exercise or granting of stock options, maturity of CDs, investment opportunities presented to the community;
- offers to purchase art, collectibles, car collections, or other investments
WHAT ARE THE CONSEQUENCES WHEN THE FIDUCIARY DUTY IS BREACHED?
Breach of the fiduciary duties can have harsh consequences. Failure to comply with The California Family Code, can lead to imposition of the following
- monetary sanctions (Marriage of Feldman – $250,000 in sanctions plus $140,000 in attorney fees for breach of fiduciary duty of disclosure);
- payment of the other party’s attorney fees and costs;
- 50% of the value of an intentionally undisclosed asset
- 100% of an undisclosed asset if the court finds it was done with malice, oppression or fraud (Marriage of Rossi, husband was awarded 100% of the $3 million in California lottery winnings not disclosed by wife to the husband);
- Prevent the non-compliant spouse from presenting evidence regarding the omitted asset in his or her case in court.
- Set-aside of a judgment that was entered as the result of a party’s failure to comply with the disclosure statutes or intentionally omitted an asset.
The law has evolved over the past several years and it requires full and complete disclosure of marital and separate property assets. Even if an asset is inadvertently undisclosed, sanctions can still be imposed. Each spouse has an affirmative duty to ongoing disclosure and doing so without a request from the other spouse. Our office is ready to assist you in complying with your fiduciary duties in your divorce case. Call today: 714-505-3000