What Are the Key California Fiduciary Duty Statutes, and How Are They Applied?
Part I - Introduction to Fiduciary Duties
Given the large number of reversals of fiduciary duty claims at the trial
court level within the past ten years, I thought it might be helpful to
provide the readers of the
EnlightenedDivorceBlog™ a summary analysis and quick reference to what the most important Family
Code statutes are, and what they mean. It is hoped that this information
will allow you and your attorney to better set up your own breach of FD
claims - because, it is just a fact, many spouses, attorneys, and family
court bench officers operate as if these rules didn't exist.
Here is a list of the statutes discussed in this Blog in Parts 1 and 2:
These for me are the biggies, and they cover many different situations.
If you feel I've omitted an important fiduciary duty statute, please
weigh in with a Comment to this Blog.
My goal is to help popularize and make available to non-attorneys a usable
framework for understanding something of the complex areas that comprise
the body of California fiduciary duty laws, and not to rip off the scholars.
For instance, I had the great good fortune to ry a case against fiduciary
duty luminary Steven James Wagner involving a particularly stubborn wife's
earlier breaches of fiduciary duty relating to a transmutation agreement
she engineered the husband into signing before they separated. All of
which purportedly thereby became hers. I've attended his lectures
and he is reallly, really smart. He and his publisher deserve all the
royalties for their excellent LexisNexis treatise entitled "Complex Issues in California Family Law", Vol. A (2006 Ed. Newark, New Jersey), by Dawn Gray and Mr. Wagner.
I'd rather speak to you, the lay reader, and to endeavor to contribute
an original thought here and there - as I hope I manage to do when I review
recent appellate court decisions - so that you can understand your lawyer's
"speak," and possibly to help you to gain a little insight into
your rights and obligations about disclosures, discovery, and the management
and control of community property whether you are represented or self-represented.
I have come to find that some family court trial judges still don't
understand the importance of fiduciary duties in California matrimonial
law, which is one reason why a number of courts have been reversed by
appellate justices in the published decisions in recent years - and every
time the appellate justices have emphasized the importance of fiduciary
duties as the bedrock of marital dissolution cases. Still, there are limits
on breach of fiduciary duty claims, the most commonly seen with parties
who cut deals they later regret when they come to believe that they were
cheated out of their fair share of an asset. These cases involve strict
statutes of limitation for filing set-aside motions, which I've written
about previously, or whether a party or their attorneys should have known
that they were getting only a part of the picture at the time the case
settled. A good example is the
Georgiou decision, released last week out of the San Diego appellate district.
As Gray and Wagner point out, the concept of fiduciary duties have been
around in California since statehood in 1849. In the bad old days, the
husband had the sole management of the community property and control
of his wife's separate property, except that the original California
Constitution at Article XI, section 14 provided that "All property,
both real and personal, of the wife, owned or claimed by marriage, and
that acquired afterwards by gift, devise, or descent, shall be her separate
property; and laws shall be passed more clearly defining the rights of
the wife, in relation as well to her separate property as to that held
in common with her husband. Laws shall also be passed providing for the
registration of the wife's separate property." Apparently at
our state's Constitutional convention there was much interest in attracting
women with means to the State of California (it was the days of the Gold
Rush, after all), given their very low proportion of the population.
Unfortunately, a year later, the California Legislature enacted a statute
that contravened this Constitutional guarantee, which stated in effect
that the husband 'had management and control even of the wife's
separate property, although he could not sell or encumber the property
without the wife's consent made in writing and confirmed outside the
presence of the husband.' It wasn't until 1891 that new statutes
were enacted which began to chip away the husband's powers over the
management and control of property in which the wife held an interest.
But the first big change required much longer - it wasn't until 1975
that female marital partners became statutorily entitled to rights of
equal management and control of the community property. Nice theory, eh?
Anyway, I'll let someone else tell you about the legislative history
since then but will describe the Family Law Act (FLA) as it exists today
on the subject of FD's.
The California Legislature would continue to tinker with the rules relating
to fiduciary duties into the 1980's, 1990's, and 2001 and 2002
sometimes to overrule an appellate decision with a new statute or amendment
to an existing statute. A case that discusses those changes up to 1984 is
IRMO Stevenot (1984) 154 Cal.App.3d 1051, at 1068.
What Are Fiduciary Duties?
It is important to understand that when people live together romantically,
whether or not they marry, a "confidential relationship" arises
between them. In this sense it may be both
de facto (established by the fact of the relationship) or
de jure (imposed by law). As Grey and Wagner point out, "A confidential relationship
arises when one person reposes trust and confidence in another and the
other voluntarily accepts the trust and confidence." For married
persons, this relationship is
de jure and arises as a consequence stemming from the legally recognized nature
of matrimony. The same can't necessarily be said for unmarried cohabitants;
yet, a confidential relationship may nonetheless create certain important
legal obligations, although they may be of lesser import and value than
those that spring from a true fiduciary relationship. If there is a fiduciary
obligation there will be a confidential relationship, but a confidential
relationship isn't the equivalent of a fiduciary relationship because
the key attribute in marital fiduciary duties is the control by one spouse
over property that they other has an interest in (of course, you can have
fiduciary duties without marriage, where such control is offered and accepted).
This has important consequences in terms of legal presumptions and who
has the burden of proof on a question, and whether that burden of proof
is by a mere preponderance of the evidence or by a much tougher burden
called by "clear and convincing evidence." I've written
blogs about this subject, so try my on-board search engine for more information
about burdens of proof and how they operate.
A good case to read if you have pre-marital or non-marital partner dispute
and want more clarity about confidential relationships verses fiduciary
Vai v. Bank of America (1961) 56 Cal.2d 329. However,
Vai is not otherwise necessarily good authority today.
Vai was helpful for me last year with a case where I represented one of two
same-sex female partners,
where the girlfriend talked my client into putting her onto title to three rentals before they become registered domestic partners, in terms of establishing
that the confidential relationship was thereby abused.
A very significant question that arises in these cases is the nature of
the duty that is owed between parties to a confidential relationship,
or as between fiduciaries. The answer depends to some extent upon where
a married couple is in the divorce process, and whether the parties'
community property has been distributed or not. For instance, when parties
separate there often is no longer any expectation of a confidential relationship
- they are at war with each other, and no trust is being reposed in either
any longer. But the fiduciary duties continue as long as the parties'
property has yet to be distributed by way of settlement or per a judge's decree.
Family Code section 1100(e).
Interspousal duties have evolved over the years in terms of what they encompass
and include. They typically involve a duty of loyalty, a duty of care,
and a duty of disclosure as to interspousal transactions. The nature of
the duty may change after separation, depending upon whether management
and control of assets continues. Family Code section 721 is the starting
place in an intact marriage. Subsection (b) states "This confidential
relationship is a fiduciary relationship subject to the same rights and
duties as non-marital business partners...," as set forth in the
Corporations Code. It "imposes a duty of the highest good faith and
fair dealing on each spouse, and neither shall take any unfair advantage
of the other." Section 721(b)(1) entitles each spouse access to the
marital books, so to speak; subsection (b)(2) rendering upon request a
truth accounting about "all things affecting any transaction which
concerns the community property estate; and subsection (b)(3) requires
spouses and domestic partners to account to each other any benefit or
profit derived from "any transaction by one spouse without the consent
of the other spouse which concerns the community property" and to
hold as trustee (constructive trust) any such benefit.
A breach of fiduciary duty is a consequence of actual or constructive (i.e.,
implied) fraud. Traditional remedies in the non-marital context include
the imposition of a constructive trust, essentially a finding that some
item of property that was obtained by constructive fraud is being held
for the benefit of the other party too.
Constructive breaches of fiduciary duties are way more common than you
might imagine. Essentially, whenever the separate property interests of
one spouse are enriched and improved to the detriment of the community
estate or the other's spouses separate property, in the absence of
an express waiver or consent of the harmed party, a breach of fiduciary
duty has occurred.
Common Breach of Fiduciary Duty Situations
Fiduciary duty battles most commonly arise in the following circumstances:
- with premarital agreements where one party seeks to set aside limiting
terms in a prenup (keeping in mind that the parties may not truly be in
a fiduciary relationship prior to marriage, but certainly could be in
a confidential relationship if living together)
- once a couple marries, and one party uses community funds to pay separate
property obligations or to aggrandize their separate property interests
- over the management and control of community property, including investments
decisions that may not have been prudent
- interspousal transactions involving, for instance, transmutation agreements
or transactions that are deemed to be transmutations (commonly, one party
signs a Quitclaim or other Transfer Deed when a residence or rental property
when parties undertake discovery in a disputed case and information is
not provided (see my article from yesterday on
Marriage of Kahn)
- where joint marital opportunities are ignored in favor of the improving
of the separate property of one spouse or the other
- after separation, but before the distribution of the community and separate
property estates when parties hide assets or misrepresent their value,
or transfer them to straw men, girlfriends, and family members
- during litigation when a party fails to comply with their disclosure duties
that materially affect the value or status of assets, or fail to submit
full and complete preliminary and/or final declarations of disclosure.
Not all fiduciary duty breaches are created equally. Some are barely viral,
while others are quite viral. For instance, when one party signs a deed
transferring their interest in community property to the other party as
separate property, a presumption arises that the benefited spouse gained
the other party's signature by way of undue influence. This presumption
may be rebutted by a preponderance of the evidence proving a knowing waiver
(i.e., the party could not qualify for the loan because of bad credit
and so signed off). That is a tiny breach. More egregious misconduct occurs
when a party secrets, diverts or misappropriates assets.
Fiduciary Duties Involving Management and Control of Community Property
Family Code section 1100(e) elaborates upon the duties established by section 721, and directly addresses
spousal fiduciary duties in the management and control of community property
before the assets have been divided by agreement or by the court. "This
duty includes the obligation to make full disclosure ... 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 and debts
for which the community is or may be liable...." Family law attorneys
refer to this as "MFI's" - material facts and information.
Section 1100(d) permits one spouse as the primary managing partner to
"act alone in all transactions" but requires that he or she
give prior written notice of any "sale, lease, exchange, encumbrance,
or other disposition" of personal property used in the operation
of a business.
An excellent case that discusses breach of management and control fiduciary
duties in practical terms is
IRMO Margulis (2011) 198 Cal.App.4th 277, which I've previously blogged. There the
parties were married for 33 years, with the husband controlling everything
and claiming that assets had disappeared by time of trial. There was evidence
of what the assets had consisted of at one point in time after a lengthy
separation spanning some eleven years, consisting of a document that came
to light listing the parties' assets as worth $1,305,500 that was
dated three years after the husband moved out. This was introduced into
evidence at trial, and the key holding of the
Margulis decision is that given Husband's sole management of assets, the burden
shifted to him to explain where these assets went per Family Code sections
721(b)(1)-(3), 1100(e) and 2100(c) - all of which address disclosure obligations.
Mr. Margulis had explained nothing, despite the language of 2100(c) "that
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." Note that this is a "sua sponte" duty, i.e., it
arises by operation of law and no request needs to be made of that status
of property or assets, although that is always a good idea if you suspect
a FD breach and are setting up such a claim.
To be continued in Part II
T.W. Arnold, III California Certified Family Law Specialist