Marriage of Margulis, Part 2 - Duties of Managing Spouses
Please see Part I of my evaluation of
IRMO Margulis as the launching point for understanding the appellate court's outline
of interspousal fiduciary duties, and the facts of the case.
The Margulis rule states that once a nonmanaging spouse makes a prima
facie showing concerning the existence and value of community assets in
the control of the other spouse post-separation, the burden of proof shifts
to the managing spouse to rebut the showing or prove the proper disposition
or lesser value of these assets.
The rule is justified by examining the scope of fiduciary duties imposed
by the California Family Code. Oddly, given the facts, the trial court
had found that the Husband (Alan) had breached his fiduciary duties to
Wife (Elaine) "to maintain proper records of all community assets
which he had exclusive control and management over...." Yet, other
than imposing $20,000 in sanctions and assessing $30,000 in attorney fees
against Alan, the trial court did not believe Elaine had produced sufficient
evidence to explain what had really happened to the deposit accounts that
were at issue beyond Exhibit 18, 'the smoking gun'. $50,000 in
sanctions was a cheap price to pay relative to the disappearance of hundreds
of thousands of dollars. It was accordingly reversed for applying too
narrow a breach of fiduciary duty analysis and for applying the wrong remedy.
I am sorry to bore you with a lengthy quotation, but since
Margulis itself contains a great explanation of how statutory fiduciary duties operate
I quote the decision as follows (this is a great recap for self-represented
parties trying to understand the interplay between the various applicable
Family Code statutes):
"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,.... 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.... ¶(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 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
..., 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
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 ..., which
included her right to pursue a claim against Alan for impairment to [her]
... one-half interest in the community estate [citation omitted].
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."
Based upon the foregoing the case was reversed and remanded to the trial
court. The sanctions award of $20,000 plus $30,000 was 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 what amounted to a slap on the wrist.
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
Thurman W. Arnold III, C.F.L.S.