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 of assets....
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 tracing issues.
Thurman W. Arnold III, C.F.L.S.
