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No Romance Without Finance: A Discussion of Fiduciary Duties During Marriage and Divorce

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From “honoring and obeying” to taking out the trash, the duties that first come to mind when thinking about marriage are usually not fiduciary ones.  Nevertheless, failure to fulfill these obligations of good faith and fair dealing can have serious financial consequences for couples before, during, and after divorce.  While fiduciary duties arise in a wide variety of contexts (including between doctors and their patients, lawyers and their clients, and priests and their parishioners), they take on a particular meaning with married couples.  Simply put, they compel spouses to deal fairly, responsibility, and transparently with one another regarding the management of their community property.   Community property consists of assets acquired between marriage and separation, and includes wages, real property, stocks, businesses, bonds, pension plans, and 401ks.   Additionally, a couple can change the character of an asset and agree that assets that are “separate” under the law (like an inheritance received during the marriage and prior to separation, or an asset owned prior to date of marriage), be re-characterized from separate to community.

While California law appears to allow each spouse to manage community property however they want,[1] fiduciary duties exist to check this apparent absolute power of disposition.  Family Code §721 dictates that spouses have the same fiduciary relationship as non-married business partners, which, in the context of the marital relationship, means they must do things like share information about transactions affecting their community assets and debts.  In California, fiduciary duties exist between spouses so long as their community property remains undivided.[2]  For example, a couple who is ordered by the court to sell their former family residence and divide the proceeds may finalize their divorce before the residence has sold, but will continue to have fiduciary duties towards one another vis a vis the house until it sells.

Here, we explore some of the more common scenarios and pitfalls couples experience when confronted with their roles as fiduciaries:

SCENARIO 1 – Providing Access to Records

              In the recent case of In re Marriage of Kamgar, the California Court of Appeals addressed whether the undisclosed trading of community stock constitutes a breach of a spousal fiduciary duty.   Fred and Moira, a well-to-do couple, decided that Fred – who had developed an interest in options trading – would liquidate $2.5 million worth of community property stock so that he could “try his hand at doing something he [found] interesting.”   Unbeknownst to Moira however, Fred in addition to the agreed upon $2.6 million went on to liquidate and invest an additional $8.1 million of the couple’s community stock, ultimately losing all but $409,000 of their $10.6 million community funds.   When Moira filed for divorce a year later, Fred argued that the Family Code authorized him to spend the couple’s resources as he would his own, and that requiring him to report to Moira on the minutiae of every investment was untenable given the fast-paced nature of the modern electronic marketplace and the number of financial decisions implicit in the marital relationship.  In response, the court highlighted the duty of each spouse to always make available to the other, without asking, any and all information required for the exercise of their rights in the marriage.[3]   The court explained that, since each spouse has a right to manage the community property, the withholding of any information that would prevent them from said management is a violation of a spousal fiduciary duty.[4]   Ultimately, because each spouse in a marriage has an equal right to manage the community’s property, the court found that Fred’s failure to disclose his additional $8.1 million investment to Moira infringed upon her managerial right and was therefore a violation of his fiduciary duty.   

              Our firm recently handled a case in which the parties co-owned an international import/export business.   After their separation and the husband’s assumption of control of the business, the wife withdrew a large amount of money from the business account.  The husband responded to this withdrawal by immediately taking her name off all business accounts and cards and changing all the company’s passwords and login information.  The court held both parties accountable for their respective fiduciary breaches: it found that the wife breached her duty by withdrawing such a large sum without the husband’s knowledge or consent, but also required the husband to provide her with monthly reporting of all the business’s financials, and to report any large or otherwise extraordinary transactions.

SCENARIO 2 – Providing Information Upon Request

During both marriage and dissolution, spouses have a duty to disclose to one another “upon request, true and full information of all things affecting any transaction that concerns the community property.”[5]  In fact, California even requires divorcing spouses to fully and accurately disclose all separate and community income and expenses at the very beginning of divorce proceedings.  For instance, per Family Code § 2104, the spouse who commences the divorce action is required to serve his/her financial declarations (known as Preliminary Declarations of Disclosure) on the opposing party within 60 days of serving the Petition for Dissolution and responding spouse is required to serve his/her Preliminary Declarations of Disclosure within 60 days of service of the Response.    

Additionally, spouses have a duty to continually update this information while the proceedings are pending.[6]  The 2007 case of In re Marriage of Feldman dealt with a community estate worth in excess of $50 million. Aaron Feldman accumulated assets worth in excess of $50 million.  During their divorce proceedings Mr. Feldman failed to disclose significant assets to his wife, including: a $1 million government bond and the loan taken out to purchase it, a multi-million-dollar residential property, a 401k, and the acquisition of several new companies.  The court found that by failing to disclose these assets when Ms. Feldman specifically requested this information, Mr. Feldman violated his fiduciary duty to disclose upon request.   The court also found that, because Mr. Feldman’s omission was intentional as opposed to inadvertent, his punishment must likewise be more severe. 

CONSEQUENCES

What about the remedies and consequences available to the respective parties for these breaches?  Because the discovery process is an essential tool in achieving equitable division of marital assets, courts deal very seriously with parties who intentionally fail to disclose assets or debts.  Family Code § 271, 1101, and 2107 provide a range of remedies in the event one party’s nondisclosure “results in impairment to the claimant spouse’s present undivided one-half interest in the community estate.”  These remedies include sanctions “in an amount sufficient to deter repetition of the conduct or comparable conduct”, payment of the opposing party’s attorney’s fees, and exclusion of evidence regarding the undisclosed item.  Depending on the degree of deceit it observes in the nondisclosure, the court has the ability to order forfeiture of 50% to 100% of the value of the undisclosed property.  Take, for example, a case handled by our firm, in which the husband failed to disclose multiple pieces of real estate.  After the proceedings were over and a judgment of dissolution was entered wife discovered that several real properties existed and were purchased by husband with community funds.  The husband failed to disclose the existence of these assets during the proceedings.   While the parties ended up settling outside of court, the court had the discretion to grant wife 100% of the real estate purchased with community funds and intentionally omitted by husband.   

The non-offending party has three years from the time they learned of the breach to seek one or more of these section 1101 remedies from a family law court.  As set forth in Feldman, no harm need to result to the nonoffending spouse from the nondisclosure to receive sanctions and attorney’s fees.[7]   In the Feldman, Mr. Feldman was ordered to pay $250,000 in sanctions, and wife’s attorney’s fees of $140,000.   

It is worth noting that, while these potentially severe penalties can be appropriate in instances where someone intentionally hides information, the courts and the law are aware that sometimes assets are not disclosed by mistake. For example, when parties have so many brokerage accounts between them that they mistakenly fail to address one in the judgment, and it remains undivided.  In such a case the parties may go back and ask the court to divide these omitted assets.

CONCLUSION

Fiduciary duties can come into play at many junctures in marriage and divorce including the expenditure of community funds during marriage, and failing to disclose community assets during divorce.  Because of the high stakes associated with spousal fiduciary duties, it is important to retain an attorney that understands them, and what they entail.  Decisions made during the marriage and during divorce can have a huge impact on how the court divides assets so find an attorney who can both explain them to you and give you wise advice.  If you are planning on or currently navigating a divorce, here at the Law Offices of Diana P. Zitser our team of attorneys and financial experts is here to help. 

 

[1] Fam. Code §1100, subd. (a) [“[E]ither spouse has the management and control of the community personal property […] with like absolute power of disposition […] as the spouse has to the separate estate of the spouse”, italics added]; (In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, 144 [“[E]ach spouse is mutually entrusted with full individual authority to manage and control community property, including disposing of or otherwise alienating it”, italics added].)

[2] Fam. Code § 1100, subd. (e) [“Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities 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.”] 

[3] Fam. Code § 1100(e) [“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 and debts for which the community is or may be liable.”];  Fam. Code §721 (b)(1) [“Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.”]; Corp. Code § 16403(c)(1) [“Each partner […] shall furnish to a partner […] without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement[.]”]

[4] In re Marriage of Kamgar (2017) 18 Cal.App.5th 136, 146 [“Since each spouse has equal management and control rights, it appears they must provide the other ‘without demand, any information concerning the management and control of the community property.  The failure to do so would be a breach of his or her fiduciary duty.’”].

[5] Fam. Code § 721, subd. (b)(2).

[6] Fam. Code § 2100.

[7] (Feldman, supra, 153 Cal.App.4th at page 36 [finding that none of the sections of the Family Code addressing remedies for fiduciary duty violation are aimed at redressing harm, but rather, at “reduc[ing] the adversarial nature of marital dissolution and the attendant costs by fostering full disclosure and cooperative discovery”].) 

10.0Diana Pamela Zitser

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Phone: (310) 948-6461

diana@zitserlaw.com