Recent Posts in Bank (Deposit) Accounts Category

"Family Code provisions detailing the fiduciary obligations between spouses provide strong support for shifting the burden of proof to the managing spouse when determining the value and disposition of missing assets. The starting point is section 721, which provides that accountability for the management of community assets is a fundamental aspect of the fiduciary duties owed between spouses.

Section 721, subdivision (b), states, in relevant part: between themselves, 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. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following: ¶(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 transactions. ¶(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 concerns the community property.

Section 721's specific incorporation of the same rights and duties of nonmarital business partners, as provided in• section 16403 of the Corporations Code, makes clear that the duty to disclose relevant information concerning transactions affecting the community property is an affirmative and broad obligation. Corporations Code section 16403 requires each partner to furnish to a partner ... [¶] (1) Without demand, any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties under the partnership agreement or this chapter.... (Corp. Code, § 16403, subd. (c), italics added.)

Section 1100 further delineates the scope of a managing spouse's accountability. That statute not only prohibits a spouse from engaging in certain conduct, such as making a unilateral gift of community personal property or disposing of it for less than fair and reasonable value, without the written consent of the other spouse (§ 1100, subd. (b)), but it also requires each spouse to act as a fiduciary toward the other in the management of community assets in accordance with the general rules governing fiduciary relationships ... as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest.... (§ 1100, subd. (e).)

Importantly, section 1101 creates a right of action and specific remedies for the breach of fiduciary duty between spouses. Subdivision (a) of section 1101 gives each spouse a claim against the other spouse for any breach of the fiduciary duty that results in impairment to the claimant spouse's present undivided one-half interest in the community estate.... The statutory remedies for a breach of fiduciary duty, specifically including a breach of those [duties] set out in Sections 721 and 1100, include a mandatory award of 50 percent of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs.... (§ 1101, subd. (g).)

If the nondisclosure or wrongful disposition of community property falls within the ambit of Civil Code section 3294 (punitive damages upon clear and convincing evidence of oppression, fraud or malice), the court must award to injured spouse the entire value of
the asset (§ 1101, subd. (h)).

Finally, section 2100 makes clear that these fiduciary obligations of disclosure and accounting continue to bind spouses after separation until final distribution of assets. Section 2100 states: [A] full and accurate disclosure of all assets and liabilities in which one or both parties have or may have an interest must be made in the early stages of a proceeding for dissolution of marriage or legal separation of the parties.... Moreover, each party has a continuing duty to immediately, fully, and accurately update and augment that disclosure to the extent there have been any material changes so that at the time the parties enter into an agreement for the resolution of any of these issues, or at the time of trial on these issues, each party will have a full and complete knowledge of the relevant underlying facts. (§ 2100, subd. (c), italics added; see also § 2102, subd. (a)(1) [from date of separation to date community assets are distributed, spouses are subject to § 721's fiduciary duty to disclose assets and update material changes].)

Taken together, these statutes impose on a managing spouse affirmative, wide-ranging duties to disclose and account for the existence, valuation, and disposition of all community assets from the date of separation through final property division. Simply put, these statutes require the spouse to account for his or her management of the property. The managing spouse must reveal if the community property changes value, ceases to exist, or is transferred for less than its worth, thereby depriving the nonmanaging spouse of his or her half-interest. Because of the fiduciary relationship between spouses, the managing spouse must reveal any self-dealing or other conduct that impaired the value of the property and entitles the other spouse to compensation.

Applying these statutes to the facts of this case, a trial court could conclude Alan breached his fiduciary duties of disclosure and accounting. A court could find he breached his duty to provide full and accurate disclosure of all community assets when in pretrial exchanges he failed to inform Elaine that $20,000 was in the Charles Schwab IRA's, asserting that the only existing community property was the Sycamore house. A trial court similarly could find Alan breached his duty to disclose immediately and fully any material changes in the community property (§ 2100, subd. (c)), by failing to tell Elaine until just before trial that all the community investment and checking accounts he had managed were virtually empty. Additionally, by refusing to provide Elaine with any documentary or other corroborating proof of what actually happened to the money that had once been in those accounts, Alan may have breached his duty to furnish to Elaine any information concerning the [community's] business and affairs reasonably required for the proper exercise of [her] rights (Corp. Code, § 16403, subd. (c)(1); § 721, subd. (b)), which included her right to pursue a claim against Alan for impairment to [her] ... one-half interest in the community estate (§ 1101, subds. (a), (g) & (h)).

The trial court, however, found a single, narrow breach of duty by Alan: a breach of the duty to keep and provide adequate records. In so ruling, the trial court impliedly found Alan did not owe broader fiduciary duties of disclosure and accounting. The trial court's erroneous finding on the scope of Alan's duties led it to apply the wrong remedy. Instead of awarding Elaine at least 50 percent of the value of undisclosed or wrongfully transferred assets (§ 1101, subds. (g) [50 percent], (h) [100 percent upon proof of oppression, fraud or malice]), the trial court ordered Alan to pay Elaine $20,000 as sanctions, plus attorney fees.

The trial court's failure to find Alan breached his broader fiduciary duties of disclosure and accounting stemmed from the court's denial of Elaine's request to charge Alan with the exhibit 18 asset values unless he disproved those values or proved he properly disposed of those assets. Although the trial court found that Elaine had satisfied the requisite foundation to admit the exhibit, it accorded the document little or no weight because Elaine had not prepared it and had no evidence to support it. Consequently, according to the trial court, Elaine failed to carry her burden of proving the accounts itemized in exhibit 18 ever had the values listed in that document, and Alan could not be charged with wrongfully disposing of assets he never possessed. But, as discussed above, the trial court misapplied the burden of proof.

Elaine's introduction of exhibit 18, which Alan conceded he prepared, satisfied her initial burden. The statutory fiduciary duties of disclosure and accounting then effectively shifted the burden to Alan to rebut the presumption he should be charged with the assets listed on exhibit 18, a document that was prima facie evidence of the account values it stated."

Based upon the foregoing the case was reversed and remanded to the trial court. The sanctions award of $20,000 plus $30,000 was also reversed "so that the court may revisit the question of the appropriate remedy should the evidence establish Alan's breach of fiduciary duty" - in other words, the appellate court is directing the trial court to hit Alan harder than was amounted to a slap on the wrist. As Justice Aronson wryly directs:
 
"Alan's cross-appeal merits little discussion. His challenge to the trial court's finding that he breached his fiduciary duties to Elaine is meritless. Likewise, his additional challenges to the award against him for sanctions and attorney fees fails, given the clear statutory authorization for both awards in light of Alan's breach of duty.... Nevertheless, we reverse the attorney fees and sanctions award so the court may revisit the question of the appropriate remedy should the evidence established Alan's breach of duty." Elaine is to be awarded her attorney fees and costs for this appeal.

Margulis also contains an excellent discussion regarding Epstein credits, debt payment in lieu of support, and tracing issues. I will endeavor to blog that portion of the decision in Part III.

Shifting the Burden of Proof