The issue of fiduciary duties and responsibilities often arises in divorce, legal separation and nullity cases in Orange County Family Court. Generally speaking, fiduciary duties obligations mean that spouses must treat each other with the highest standards and honesty. Spouses may not take advantage of the other. The law pertaining to fiduciary duties and how those fiduciary rights and obligations may affect property division spousal support, attorney fees and other issues in a divorce case can be extremely complex. This page is intended to provide an overview of fiduciary rights and obligations between spouses, both during marriage and after separation.
What happens if one spouse is hiding assets?
There are very serious repercussions for a spouse that hides or intentionally misrepresents on their Declarations of Disclosure the assets or debts that they control. As discussed below, the court has a multitude of ways to punish a family court litigant for failing to disclose assets, which generally include ordering the entire asset be placed with the other spouse and monetary sanctions. The law is stringent in this regard to ensure that family law litigants don’t think twice about trying to conceal assets during the dissolution of marriage process.
What does a “fiduciary duty” mean in divorce cases?
In simple terms, a “fiduciary duty” is an obligation created by the law that one person must comply with respect to another person. A fiduciary duty really means that when two people have a relationship requiring a high level of trust, a party to the relationship cannot take advantage of the other party. Married persons have the highest level of fiduciary duties as there is no other relationship built more on trust. Business partners are entrusted with similar fiduciary duties as married persons.
Family Code Section 721- the General Fiduciary Duty Statute
Section 721 of the California family code is an extremely important statute. The statute begins by identifying that either husband or wife may enter into any transaction with the other, or with third parties, relating to property rights as if they were unmarried. However, in entering into such transactions spouses are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with the other. In layman’s terms, spouses are like business partners. The statute goes on to say that the confidential relationship that spouses share imposes a duty of the highest good faith and fair dealing, and neither spouse is allowed to take unfair advantage of the other.
Section 721 requires that each spouse have access at all times to any books regarding a transaction for the purposes of inspection and copying. One party may not This includes bank account statements, checks, contracts, and so forth. A spouse may not hidehigh documents or refuse to allow inspection and copying. Further, if one spouse requests further information, the spouse and control of the information must provide true and full information of all things affecting any transaction which concerns the community property, if such information and documents exists. Spouses are not required to keep detailed books and records, although it is advisable. Finally, upon request a spouse is required to provide an accounting of any profit derived from any transaction where the other spouse did not join in or consent to the activity.
Which Party is allowed to have Management and Control of Marital Property?
Family Code section 1100 states that either spouse may have the management and control of the community personal property. A spouse may not make a gift of community personal property or otherwise dispose of or get rid of property, for less than fair and reasonable value. This means that a spouse may not start gifting community property to their family or friends in order to divest the other spouse of that property. The exception for this rule is where a spouse provides written consent of such a gift, or where parties mutually provide a gift.
Specific Rules Relating to Management and Control of a Business
Family Code section 1100(d) provides a detailed rule with regard to management and control of a business that is “all or substantially all community”. The section states that the person who is operating or managing such a business is designated as the “primary” manager and controller of the business or interest. This means that the spouse who is primarily managing may act alone in all transactions, but he or she is required to provide prior written notice to the other spouse of any sale, lease, exchange, encumbrance, or other disposition of all or substantially all of the personal property used in the operation of the business.
When the primary managing spouse of a community, or substantially all community, business is not acting in the best interest of the community, the other party may bring an action (called a Request for Order) in the divorce case for the appointment of a receiver or other similar relief. A receiver is a person or entity appointed by the court to manage and control a business. Experienced Family Court judges will always be hesitant to appoint a receiver because the hassle and problems that may result from such an appointment could far outweigh the potential damage that may be caused by the operating spouse. Usually, operations of a business require specific knowledge of that business and when an inexperienced third-party attempts to operate it, the entire community may suffer financially.
There may be significant remedies available to a spouse who has been harmed by the other spouses’ failure to appropriately manage and operate a community business. When a breach of fiduciary duty occurs, the court may award damages and attorney fees to the aggrieved spouse. Ultimately, the business may even be awarded to the non-operating spouse.
When do the Rules for Disclosure of Information Relating to Community Property End?
Family Code 1100 (e) states:
- “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 which control the actions of persons having relationships of personal confidence as specified in Section 721, 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 and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.”
This means that once community property has been divided, either by the parties’ agreement or by a court order, the fiduciary duties described in sections 1100 and 721 terminate. Many family law litigants in Orange County believe that once a divorce case has been filed, they no longer have an obligation to the other spouse and their community property assets. This is, of course, untrue.
Remedies for Breach of Fiduciary Duty
As mentioned briefly above, a spouse has a claim against the other spouse for a breach of any fiduciary duty that results in harm to that spouse. A fiduciary duty breach could be the result of one transaction or a series of transactions over time. If a court finds that a spouse has breached a fiduciary duty, the court may order any or all of the following:
- The court may order an accounting of the property and obligations and it may determine the rights of ownership in, enjoyment of, or access to community property. The court may also characterize property as community, separate, or mixed.
- The court may order that the aggrieved spouse’s name be added to an asset, or that the aggrieved spouse’s name alone shall be the holder of title for a particular asset.
- The court may award 50%, or an amount equal to 50%, of any asset undisclosed or transferred property in breach of a fiduciary duty plus attorney fees and costs.
- When a breach of fiduciary duty falls within the gambit of section 3294 of the Civil Code, the penalties for the offending spouse are extreme. The penalty for a violation of this section could mean that the entirety of an asset would be awarded to the aggrieved spouse. Section 3294 of the Civil Code states that where it is proven by clear and convincing evidence that a spouse has been guilty of oppression, fraud, or malice in the breach of a fiduciary duty to the other spouse, the entirety of the asset could be awarded to the other party. “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship. “Malice” means conduct which is intended by the offending spouse to cause injury to the other spouse. “Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the offending spouse with the intention on their part to thereby deprive the spouse of property or legal rights and thereby the other party suffers damages. In practice, this rule is applicable where a spouse attempts to hide property from the other spouse, attempts to intentionally divest the other spouse in property by gifting away assets, and so forth. We have litigated the invocation of this rule.
These rules provide for a very broad discretion for the court to limit a spouse’s management and control or use of an asset or business. The court may also modify the character of a property. This is important in practice when you think about the power of the court to reclassify an asset as partially community, for example, to entirely community property. The result could be minimal or the result could affect millions of dollars.
There is a statute of limitations contained within Family Code 1100, which states that actions for breaches of fiduciary duty must be brought within three years of the date the petitioning spouse had actual knowledge of the breaching transaction or transactions. Importantly, the defense of “laches” may be used by the offending spouse when a breach of fiduciary duty claim is brought. The defense of laches is used when a person who knows they have a claim unnecessarily drag their feet in pursuing that claim for too long.
It should be noted that Family Code 1100(f) allows for the filing of a breach of fiduciary duty complaint without there being an underlying action for divorce, legal separation, or nullity. Such complaints would be extremely rare and as a result, we have only described in this page breach of fiduciary duty actions with an underlying case.
For more information about fiduciary duties, contact our office today for a free, private consultation. We offer free parking and we are centrally located in Irvine, California.