Fiduciary Duties
“Fiduciary duty” is a term most often heard regarding business partners or agents. Typically, the fiduciary duty business partners have to one another is one of the highest good faith to do what’s best for the partnership and not put one’s own financial interest before the partnership. However, in California, the moment two people marry, they also are both bound by a very similar fiduciary duty to each other.
1. I’m not in business with my spouse, why do fiduciary duties apply to me?
Some may contend, “I’m not in business with my spouse, she’s not a business partner of mine, surely fiduciary duties don’t apply to me, right?” This assumption couldn’t be farther from the truth, California Family Code § 721 clearly states as follows:
“...spouses are subject to the general rules governing fiduciary relationships that 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...”
California Family Code § 721 makes it crystal clear that spouses are bound by this same duty that is often heard in the news as applying to CEOs, partners, and board members of large companies. The requirements that the spouses have “a duty of the highest good faith and fair dealing on [each other]” and that “neither [spouse] shall take any unfair advantage of the other” are very important here.
2. We’re married so we have this fiduciary duty to each other, but what does it all mean? How does this fiduciary duty apply to me?
Once a married person realizes that the concept of fiduciary duty applies to them, understanding the extent of how these fiduciary duties apply throughout the marriage and how a court will interpret any actions according to the duties can become tricky. Some may say “Even though we may have this fiduciary duty, it’s not as bad or as strict as between business partners and big Fortune 500 businesses, right?” This an incorrect assumption and dangerous sentiment to take.
California Family Code § 721 continues describing these fiduciary duties between spouses; it explicitly states that the extent of these duties can be found in California Corporations Code §§ 16403, 16404, and 16503. These sections of the Corporations Code are the same exact sections that govern the relationships between business partners.
Here are some of the requirements pursuant to the fiduciary duty between spouses:
- Give your spouse access to any books/records at all times (Family Code §721(b)(1) ).
- Give your spouse true and full information of anything that concerns any community property (Family Code §721(b)(2) ).
- Account to your spouse any benefit or profit in which you obtained without the consent of your spouse if it concerns community property. (Family Code §721(b)(3) ).
- Prevent you from giving a gift to a third party without your spouse’s consent. (Family Code §1100(b) ).
- Prevent you from selling clothes, furniture, or other things in the home that your spouse or minor children use without your spouse’s consent. (Family Code §1100(b) ).
- Keep all books and records in clearly legible form and allow access to all books and records relating to the marriage (Corporations Code §16403(a) & (b) )
- Keep all books and records in clear legible form (Corporations Code §16403(a) ).
3. Alright, the fiduciary duty seems very extensive, are there any other duties that apply to me?
While it is now apparent that the fiduciary duty between spouses is a very serious and extensive duty, the California Family Code and Corporations Code state that there are other duties that are considered part of the fiduciary duty. Spouses must also adhere to these duties; these duties include but are not limited to the duty of loyalty, and the duty of care.
The duty of loyalty is described in California Corporations Code § 16404(b) as follows:
- You must account to your spouse any benefit or profit resulting from the marriage or community property including the appropriation of a partnership opportunity (Corporations Code §16403(b)(1) ).
- You are prevented from dealing in a manner adverse to the marriage and community (Corporations Code §16403(b)(2) ).
- You are prevented from competing with your spouse or the community (Corporations Code §16403(b)(2) ).
This duty of loyalty is typically manifested in a manner similar to the following hypothetical. Wife owned a large bank account before marriage and has established that this large bank account is her separate property. During the marriage, Wife is presented with the opportunity to invest in a company’s initial public offering of stock. Wife uses a significant portion of her large separate property bank account to invest in this company’s initial public offering. Years later, this initial public offering stock grows substantially. At the divorce trial, if Husband is successful in establishing that the community bank account had sufficient money to invest in this initial public offering of stock, and Wife never gave Husband the opportunity to decide if he was interested in using the community property bank account to invest in these shares, he may prevail in demonstrating that Wife breached her duty of loyalty; she competed against the interests of the community by prioritizing her separate interests of separate property gain.
The final duty applicable to marriages is the duty of care. This duty is described in California Corporations Code § 16404(c) as follows:
- Spouses are not liable to each other for mistakes made in the exercise of honest business judgment for losses incurred in good faith performance of their duties whey they used such care as an ordinary prudent person would use; conduct that is grossly negligent or reckless, intentional misconduct, or known violation of the law with regards to the marriage will result in liability due to a breach of the duty of care.
4. Let’s say that my spouse violated her fiduciary duties towards me, but it was just an accident, now what?
Even if a breach of fiduciary duty is simply an accident, the punishment imposed by a court for such a breach can still be significant.
California Family Code § 1101(g) describes this punishment as follows:
“ Remedies ... 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.”
If your spouse breached her fiduciary duties towards you, then you are entitled to the attorney’s fees and court costs required to litigate this breach as well as at least 50% of the value of the asset/breach. The “value” selected by the court in making the award for a breach is the highest value the asset had among the following three dates:
1. Date of the breach
2. Date of the sale of the asset
3. Date that the court makes its award
5. What if my spouse’s breach of fiduciary duties was done intentionally?
If a breach of fiduciary duties was done with oppression, fraud, or malice (proven by clear and convincing evidence under California Civil Code § 3294) then California Family Code § 1101(h) describes an even greater punishment than simply 50% of the asset; the award will be a 100% value of the asset:
“Remedies ... [for a breach due to oppression, fraud, or malice] 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.”
Under such a breach by your spouse, you would be entitled to the heightened value of 100% of the asset (not just half). To be entitled to the entire value of the asset, your spouse’s breach of her fiduciary duties must be connected to one of the following:
1. Oppression - Despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights (California Civil Code § 3294(c)(2) ).
2. Fraud - Intentional misrepresentation, deceit, or concealment of a material fact known with the intention of thereby depriving a person of property or legal rights or otherwise causing injury (California Civil Code § 3294(c)(3) ).
3. Malice - Intended to cause injury or despicable conduct with a willful and conscious disregard of the rights or safety of others (California Civil Code § 3294(c)(1) ).
Under California Civil Code § 3294, there may even be an opportunity to obtain additional damages “by way of punishing the [breaching spouse].”
6. When do these fiduciary duties end?
While it’s clear that these duties are created upon marriage, many people think that after the date of separation, the duties end. This is not only untrue, but there are many circumstances in which the duties continue even past the day the divorce is final.
California Family Code § 2102 clearly states that “from the date of separation to the date of the distribution of the community or quasi-community asset or liability in question, each party is subject to the [fiduciary duties imposed on them]... Once a particular asset or liability has been distributed, the [fiduciary duties] shall end as to that asset or liability.”
It is imperative that parties in a divorce realize that fiduciary duties do not end at separation and do not even end the date the divorce is final. It is not until all the assets and liabilities are finally distributed that the fiduciary duties end.
7. This sounds complicated, can Hughes & Hughes, LLP help me through these complexities?
Fiduciary duties can get very complex and the punishment for their violation can be incredibly severe.
The following are some examples of breaches of fiduciary duties:
- Changing the character of property from community to separate or separate to community (called a “transmutation”)
- Mismanagement of community assets
- Using community funds to pay separate debt brought into marriage when separate property existed
- Hiding the true value of assets on mandatory disclosures
- Withholding discovery without a valid legal reason to do so
Our firm has earned the respect of colleagues and judges due to our legal expertise and specialization. Your legal team at Hughes & Hughes, LLP will be by your side with their extensive experience litigating fiduciary duty issues.