Q. I keep hearing the phrase "interspousal fiduciary duties".
What does it mean?
A. Few areas of California divorce and family law is changing as rapidly,
or is having as great an impact upon property division and support obligations,
as is interspousal fiduciary duties.
Until the mid-1970s lesser "good faith" standards were imposed
upon married persons which had consequences to usually only in extreme
situations of self-dealing by one spouse or domestic partner. These standards
have since morphed into much higher level "confidential duty"
and "fiduciary duty" standards.
On January 1, 1994
Family Code section 721 became operative. That was revolutionary, but widely not understand, for
the next 10 years.
Section 721 has since been revised, extended, and expanded by statutory amendments
and judicial decisions, and this continues.
The penalties for violating a fiduciary duty can be severe. Many attorneys,
and some judges, are behind the curve in understanding the nuances of
the obligations imposed by FC section 721 and related statutes. This ignorance
places clients at financial risk in the course of dissolution or legal
separation litigation. Indeed, it opens the door to the litigation continuing
or re-emerging long after Judgment if breaches of fiduciary duty are discovered
or alleged downstream. Having a lawyer who understands this developing
area of the law will make or break some litigants, today and for years to come.
The accountability that the law of fiduciary duties add to the dissolution
mix is a useful tool for combating marriage fraud by the other spouse.
If society favors the party with more money or power over the weaker party,
it will become increasingly unglued.
Fiduciary Duties Explained
In financial and property transactions with third parties and each other,
spouses owe one another important statutory duties that create huge responsibilities
and pitfalls. As 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."
Family Code section 721(b).
The essence of the "fiduciary relationship" is that the parties
are treated under the law as though they do not deal with each other on
equal terms because one person (typically the managing spouse) in whom
trust and confidence is reposed and who accepts the trust and confidence
is in a superior position to exert influence over the dependent party.
A presumption of undue influence arises whenever either party benefits
from the transaction over the other, however innocuous the circumstances
may seem. Breach of fiduciary duty is to some extent a strict liability
offense, meaning if it occurs consequences may be set in motion that run
the course to an expensive end.
Family Code section 721 was amended to expand this confidential fiduciary relationship and impose
the same rights and duties as applies to nonmarital business partners
under the California Corporations Code, and includes but is not limited to:
(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.
(3) Accounting to the spouse, and holding as trustee, any benefit or profit
derived from any transaction by one spouse without the consent of the
other spouse which concerns the community property (i.e., all property
acquired by a married person during the marriage).
Section 721 does not mention Registered Domestic Partners, it applies to them as well.
One major consequence is that transactions which benefit only one spouse
may be set aside by the other, either before or during a divorce proceedings.
As a practical matter for divorcing couples, this means:
a) If one party has benefited over the other in a transaction involving
money or property and thereby gained an advantage during the course of
the marriage, the law presumes the advantage was gained through undue
influence exerted on the part of the benefited party, and the transaction
is presumed invalid and can be set-aside;
b) The burden of convincing a Court that a set-aside should not occur
then shifts to the advantaged spouse;
c) All this can occur without regard to good or bad intent on the part
of the advantaged spouse (i.e., actually intending to defraud as opposed
to merely being sloppy). Either way the law declares the transaction to
be the result of "constructive fraud". Once the Court finds
constructive fraud the transactions can be set aside, the benefited party
can be ordered to pay restitution to the other and to disgorge any profits
they alone received, title may be reformed to include both parties'
names, or the property may be held in trust for both on a present and
go-forward basis rather than in the name of the one alone. If there is
an actual fraudulent intent, the remedies to the injured spouse are more severe.
The fact that parties have separated or that a dissolution or legal separation
is pending does not end the parties' fiduciary responsibilities.
Family Code section 1100(e) continues those same duties "until such time as the assets and liabilities
have been divided by the parties or by a court."
Remedies for breach of the fiduciary duty as described in
Family Code section 721, and section 1100, include an amount equal to one-half of the value of
any asset undisclosed or transferred in breach of fiduciary duty, plus
attorney fees. This includes inadvertent or unintentional violations.
Family Code section 1101(g). Where a court comes to believe a spouse acted intentionally to defraud
the other spouse, the Court "shall" award 100% of the value
of what should have been disclosed, or what should not have been transferred,
to the innocent spouse!
FC section 1101(h).
If you have a business, or investments in real estate or simply a family
residence, and certain transactions have occurred, you may have a problem.
If you are a dependent spouse, regardless whether the other party intended
to cheat you, you may have important entitlements and remedies.
This is one of the most complicated, emerging areas of California family
law. Do not go it alone! In every dissolution and legal separation case,
regardless whether either party has an attorney, each party must exchange
a Preliminary Declaration of Disclosure, and unless expressly waived,
a Final Declaration of Disclosure. If these documents contain errors,
misinformation, or are incomplete the consequences can be financially
devastating because an entire settlement or judgment may later be set
aside. These documents sit as leverage tools and land mines for years to come.
Author: T.W. Arnold, III, CFLS