What is a Breach of Fiduciary Duty in Divorces?
Breach of fiduciary duty may take center stage in a divorce. Does it apply to you?
What is a breach of fiduciary duty in a divorce and how may it apply to your case?
"You breached your fiduciary duty to me." How often do spouses say these words to each other during their marriage? Probably not much, if ever. All of that changes in a divorce. Each spouse's fiduciary duties take center stage.
- What is a fiduciary duty between spouses?
- Why is it important in a marriage and in divorce cases?
- How does a spouse breach his or her fiduciary duties?
- What can a spouse faced with a breach of fiduciary duty breach do about it?
This comprehensive article on fiduciary duties between spouses will answer these questions and more.
We will get into some technical aspects of breach of fiduciary duties in a divorce. Please do not try to handle such issues in your divorce without highly experienced family law representation.
How do breach of fiduciary duty claims come up in a divorce?
Before we get into the law and procedure, we will discuss common acts a spouse takes that may be a breach of his/her fiduciary duties.
The most common acts involve at least one of the following: selling, fraudulently transferring, gifting or concealing community assets.
Another common example, is one spouse taking financial advantage of the other spouse in a transaction between them. Assets include real property (most common examples are residential or commercial real estate or vacant land) and personal property (which is everything that is not real property).
Examples of actions that may be a breach of fiduciary duty
- Selling refers to selling an asset without the other spouse's consent. The asset may be real or personal property.
- Fraudulently transferring means transferring an asset to another person without receiving the asset's fair market value in return. This occurs when one spouse transfers an asset to a family member or members, or close friend to hide the existence of the asset or falsely claim later the asset is not community property-an asset of the spouses' marital estate.
- Gifting is similar to fraudulent transferring, but the gifting spouse does not have fraudulent intent. It involves a spouse giving away an asset to another person. This is also common by a spouse to a family member or friend.
- Concealing means hiding an asset. This happens when a spouse takes title (formal ownership) to an asset in his or her name, and the other spouse does not know the asset even exists.
What transactions between spouses during a marriage may cause a breach of fiduciary duty claim during a divorce?
One example is where one spouse asks the other spouse to sign a deed removing the other spouse from title to the home even though the home is community property. The asking spouse does this by lying to the other spouse about the reason for the transfer. This lie causes the other spouse not to suspect malicious intent.
Breaches of fiduciary duty are not limited to assets
A spouse may encumber or borrow against community property without the consent of the other spouse.
Like almost everything else in family law, the rules are not always so clear. Not everything we listed is automatically a breach of fiduciary duty. Specific facts, for a specific situation, control. That is why nothing you read in this article is a substitute for legal advice about your specific situation.
Family Code sections that talk about fiduciary duties
The five most common Family Code sections that talk about fiduciary duties are sections 720, 721, 1100, 1101, and 1102. Do not worry. There will not be a test later. You will not have to remember these code sections.
Let us dive into each code section. When you read this, you will better understand what the law expects between spouses regarding their fiduciary duties to each other.
Family Code 720 mandates mutual respect, fidelity and support
Here is the code section.
Spouses contract toward each other obligations of mutual respect, fidelity, and support.
- Family Code 720
It is a short code section but packs a lot in that sentence.
Family Code 721 states each spouse's fiduciary duties in transactions with each other
Family Code 721 states spouses can enter into transactions with each other or with any other person regarding property as if they were not married. There are exceptions. It then states the spouses are subject to "the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other."
That means spouses owe each other "the highest" duty of good faith and fair dealing. Spouses cannot take financial advantage of each other. The code section then gives an analogy and states the fiduciary relationship is the same rights and duties, of business partners that are not married. It provides a list that includes, but is not limited to, three directives. Might as well quote it for you.
(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 that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
(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 that concerns the community property.
- Family Code 721
These three directives are not limitations. These are just some of the examples of fiduciary duties spouses owe to each other.
Family Code 1100 states the fiduciary duties in community property transactions with others
That brings us to Family Code 1100. Here is what section 1100 tells us.
First, it carves out exceptions for Trusts and Conservatorship matters. We are not going to get into those matters.
Second, it states spouses cannot gift "community personal property" or dispose of it for less than "fair and reasonable value" without getting the other spouse's written consent. This does not apply to gifts both spouses gave to someone else or gifts spouses give to each other. The words "community personal property" is interesting.
There is a difference between personal property and real property. You may know what real property is. Think of a home, commercial real estate, and vacant land as the most common examples. Personal property is everything else that is not real property. Does that mean spouses do not owe a fiduciary duty to each other regarding real property? No. Real property falls under the general fiduciary duties spouses owe to each other and section 1102.
The section next states a spouse cannot sell, convey, or encumber community personal property used as the family dwelling, or the furniture, furnishings, fittings, "clothing or wearing apparel" without the other spouse's written consent.
Family Code 1100 states the fiduciary duties when managing or operating a business
The fourth section states a spouse who manages or operates a business or an interest in the business that is all or mostly community personal property primarily manages and controls that business or the interest in the business.
This gives the spouse the ability to act alone in transactions related to the business, but that spouse must give 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 business operation, regardless of whether title to that property is only in one spouse's name.
This written notice rule exists unless prohibited by law (insider-trading laws being one potential example). Remember personal property is everything that is not real property, so we are literally talking about everything other than real estate.
This fourth section asks you to look at section 1101 for the consequences that result from a spouse's failure to give prior written notice. However, it also states that failure to give notice does not "adversely affect the validity of a transaction nor of any interest transferred." In other words, the actual transaction may not be reversible. There may be exceptions to this.
Family Code 1100 states the fiduciary relationship in management and control of community assets and liabilities
Finally, this code section states each spouse has a fiduciary relationship which controls each of their actions related to "management and control of the community assets and liabilities."
This is where the code section goes beyond just personal property. Community assets and liabilities are community property and community debts, regardless of whether those assets are personal properties or real properties. This code section also gets into the duty of full disclosure regarding community assets and liabilities.
Understanding Family Code 1100 is not the end of the analysis. Appellate and Supreme Court cases have interpreted section 1100 and the other fiduciary duty code sections. A family law attorney like those at our firm can explain to you how statutory and case law applies to your specific situation.
Family Code 1101 is all about the punishment for breach of fiduciary duty violations
Family Code 1101 is the fiduciary duty code that sets forth some of the punishments if one spouse breaches his or her fiduciary duty to the other spouse.
Part one states a spouse has a claim for breach of fiduciary duty against the other spouse, if the other spouse's conduct results in "impairment" in the spouse's "undivided one half interest in the community estate."
Part two states the court may order an accounting of the property and obligations of the spouses and may determine "the rights of ownership in, the beneficial enjoyment of, or access to, community property, and the classification of all property of the parties to a marriage."
Part three gives the court the power to order a spouse's name added to community property held in the name of the other spouse. The court has the power to reform title so title reflects the property is community property.
There are exceptions, and this code section lists them
- The first is a partnership interest where the other spouse is a general partner.
- The second is an interest in a professional corporation or professional association.
- The third is an unincorporated business' asset if the spouse accused of breaching his or her fiduciary duty is the only spouse involved in the operation and management of the business.
- The fourth is any other property, "if the revision would adversely affect the rights of a third person."
These exceptions do not mean the victim spouse is out of luck. This only deals with adding the name of the other spouse to title or reforming title.
Part four deals with the time limitations a spouse has to bring an action under code 1101. The time limitation is "within three years of the date a petitioning spouse had actual knowledge that the transaction or event for which the remedy is being sought occurred."
That time limitation does not apply "under this section upon the death of a spouse or in conjunction with an action for legal separation, dissolution of marriage, or nullity." For our purposes (since we are writing about divorce), this means a spouse may bring this action during a divorce, legal separation or annulment regardless of that time limitation.
However, the code section does allow a "defense of laches" to the person accused of breaching his or her fiduciary duty. That is a discussion beyond the scope of this article. In general, "laches" deals with unreasonable delays.
This code section has an interesting limitation regarding transactions or events occurring on or after July 1, 1987. We will not get into this issue here. Legislatures have such rules when they come up with these laws but do not want to make them retroactive before a certain date since it may unbalance prior transactions already completed.
Part five is important for the person being accused of breaching his or her fiduciary duty. What happens if one spouse refuses to provide his or her consent regarding a transaction that affects community property and the law requires both spouses to consent to that transaction? The court has the power to remove the consent requirement if the spouse can show the following.
(1) The proposed transaction is in the best interest of the community.
(2) Consent has been arbitrarily refused or cannot be obtained due to the physical incapacity, mental incapacity, or prolonged absence of the nonconsenting spouse.
- Family Code 1101
Part six states a victim spouse can bring a breach of fiduciary duty action without filing for divorce, legal separation or annulment. The victim spouse can also bring the action "in conjunction with the action or upon the death of a spouse."
Parts seven and eight, which are subsection (g) and (h), are the hammers to this code section. I will quote them for you.
(g) Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney s fees and court costs. The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.
(h) Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty.
- Family Code 1101
Ouch. That is severe but also justified when you consider the law takes fiduciary duties seriously and wants to discourage spouses from breaching that fiduciary duty.
Family Code 1102 deals with real property in the context of fiduciary duties
The California legislature modified it effective January 1, 2020.
With the exceptions of certain situations that involve Trusts and Conservatorships (just like Family Code 1100), each spouse has management and control of real property that is community property. Both spouses must join in executing an instrument by which community real property or an interest in community real property is "leased for a longer period than one year, or is sold, conveyed, or encumbered."
Think of selling the family residence, transferring title to someone else, a second mortgage or home equity line of credit taken out, or leasing rental property for more than one year. These are common examples, but not all of them.
Section (b) of this code does not apply to certain transactions between the spouses. However, as we will discuss later, that does not give a spouse free reign to take advantage of the other spouse in transactions between themselves. Regardless of section (b), the code tells us:
(c) Notwithstanding subdivision (b), both of the following shall apply:
(1) The sole lease, contract, mortgage, or deed of the husband, holding the record title to community real property, to a lessee, purchaser, or encumbrancer, in good faith without knowledge of the marriage relation, shall be presumed to be valid if executed prior to January 1, 1975.
(2) The sole lease, contract, mortgage, or deed of either spouse, holding the record title to community real property to a lessee, purchaser, or encumbrancer, in good faith without knowledge of the marriage relation, shall be presumed to be valid if executed on or after January 1, 1975.
- Family Code 1102
Isn't it interesting the first part only refers to "husbands" and to transactions before January 1, 1975 but after that date, the code refers to "either spouse."
Sections (d) and (e) state:
(d) An action to avoid an instrument mentioned in this section, affecting any property standing of record in the name of either spouse alone, executed by the spouse alone, shall not be commenced after the expiration of one year from the filing for record of that instrument in the recorder's office in the county in which the land is situated.
(e) This section does not preclude either spouse from encumbering that spouse's interest in community real property, as provided in Section 2033, to pay reasonable attorney's fees in order to retain or maintain legal counsel in a proceeding for dissolution of marriage, for nullity of marriage, or for legal separation of the parties.
- Family Code 1102
We hope you enjoyed this article on breach of fiduciary duties in a divorce
Our family law firm is experienced in handling complex or high conflict divorces, including those that involve breach of fiduciary duty claims. If your situation involves a potential breach of fiduciary duty, let's talk. We are available for an affordable strategy session. We have offices in Los Angeles, Orange County and San Diego.
We look forward to speaking with you.