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:
- Family Code section 721 - outlining the fundamental fiduciary duties of spouses as the equivalent of non-marital business partners
- Family Code section 1100 - delineating management and control rules and disclosure responsibilities
- Family Code section 1101 - setting forth the remedies for breach of fiduciary duty (50 to 100% of value of property, plus attorney fees)
- Family Code section 1102 - limiting the rights to convey, lease or encumber real property
- Family Code section 1103 - involving FDs in conservatorship or lack of capacity (i.e., dementia) situations
- Family Code section 2040 - setting forth the automatic restraining orders that go into effect once a disso or legal separation case is filed
- Family Code section 2100 - stating the legislative policy to protect community assets and ensure fair spousal support and child support awards, and to update information without request
- Family Code section 2102 - length and scope of fiduciary duties after separation to resolution of the case
- Family Code section 2103 - creating the requirement for accurate declarations of disclosure
- Family Code section 2104 - contents of preliminary declarations of disclosure and when to serve it
- Family Code section 2105 - contents of final declarations of disclosure and requirement for mutual waivers of this "FDD"
- Family Code section 2107 - noncomplying declarations of disclosure and remedies
- Family Code section 2120 - policies affecting requests to set aside agreements or trial court awards
- Family Code section 2121 - authority of courts to provide set aside relief more than six months after settlement or award
- Family Code section 2122 - time limits for set aside motions
- Family Code section 2602 - remedies for deliberately misappropriated property
- Family Code section 271 - recovery of attorneys fees as sanction for bad litigation conduct
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 duties is 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 is refinanced)
- 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