Know Your Fiduciary Duty in Divorce or Legal Separation
They say that marriage is a partnership, much like a business partnership in which individuals have certain responsibilities towards one another. In marriage, spouses continue to be bound by spousal fiduciary duty long after they have made the decision to end their partnership, particularly if they had kids together.
The California Family Code includes sections on fiduciary duties that will impact on you at the end of your marriage or legal separation. Compliance to your fiduciary duty is crucial, and lack of understanding of your duties and responsibilities in this regard can lead to serious legal and financial consequences. However, not everyone always adheres to their legal and moral responsibilities – either by choice or through ignorance. If you have been injured financially or emotionally by a breach of spousal fiduciary duty through your partner’s actions or inactions, you may have grounds for seeking compensation.
In this article, we will outline the most important aspects relating to fiduciary duty, but it is important that you consult with a San Diego divorce lawyer regarding issues pertaining specifically to your case and individual circumstances. You have the right to protect your assets and those in which you have a fiduciary share during and after marriage.
Your Fiduciary Relationship
When you marry your spouse, you enter into a fiduciary relationship (financial partnership) by default, unless you sign a prenuptial agreement that states otherwise. A prenuptial agreement can help protect your personal assets during marriage and in the event of a separation. California family courts apply the highest level of fiduciary duty on married people, as a marriage is built on - and therefore requires - the utmost trust.
Spousal fiduciary duty not only applies to a couple's community property, but also to separate property that belongs to the other spouse. For instance, if you manage or control your spouse's personal property, you are obliged to treat it with the same care that your spouse would.
As man and wife, you and your partner share a fiduciary relationship that mandates fair dealing and good faith with regard to shared assets and debts. Spousal fiduciary duty comes into effect when a couple marries and remains in effect until all assets are divided, should the marriage end. The legal standard imposed on spouses is similar to the way business partners are required to handle the management of finances and partnership assets. Spouses may not take unfair advantage of one another, or of their shared possessions and community property.
In a marriage, California law requires that spouses preserve and protect their marital assets in the best interest of their spouses. Neither spouse is permitted to dispose of common property without the other person's consent. Fiduciary duty is in place to prevent the spouse from taking unfair advantage of his or her former spouse.
When a couple divorces, all money and community assets have to be divided up equally. If they are unable to agree on the best way to fairly divide their assets, they may ask the court to assist with the process. Unfortunately, negotiations often become complex and spouses go to great lengths for financial gain, or simply to hurt their ex-spouse financially. Oftentimes, one spouse has more control over the assets and money than the other, which puts that spouse in a position where he or she can retain more than their fair share. For that reason, spouses remain bound by fiduciary duty until all the property has been distributed in a judgment.
Spousal Fiduciary Duty in Estate Planning
Spousal fiduciary duty also applies to estate planning. If one spouse is incapacitated, the other spouse may act alone in managing community property, however he or she will still need authority under the Trust or Power of Attorney of the incapacitated spouse.
Fiduciary duty prohibits spouses from using undue influence to coerce the other person to transmute separate duty into community property during estate planning. A spouse also may not coerce the other spouse into executing estate plans that do not truly reflect his or her own wishes.
Spousal fiduciary duty often overlaps with other laws that prohibit wrongful behavior, such as undue influence or elder abuse.
Spousal Fiduciary Duties Applicable to Legal Separation or Divorce
During divorce proceedings or legal separation action, spouses are required to share any reasonably required information regarding the marital estate without demand. A spouse must also disclose reasonable and proper information upon demand.
Spouses are required to:
- Provide their spouse with access to any records of transactions for inspection purposes or to make copies.
- Render truthful, complete information regarding anything that affects the value of or transactions concerning community property.
- Account to the spouse and act as a trustee for any profit or benefit derived from community property.
Family Code section 2100 sets out standards for fiduciary disclosure in the event of a divorce, thus creating a uniformed guideline for the fair distribution of the marital estate. It serves to protect and marshal community property and to ensure fair, sufficient spousal and child support awards.
During divorce, you are obliged to share any documents and material information pertaining to your spouse, including:
- changes in your employment status and earnings – including promotions, salary raises, bonuses;
- financial issues relating to property or businesses owned by both spouses, including offers to purchase, lawsuits, tax issues, notices from government agencies, major repairs, etc;
- changes to any investment or retirement plans.
Your spouse is entitled to full and complete disclosure of all information relating to shared assets and separate property and failing to provide it can result in serious penalties when it comes to dividing assets.
Breach of Spousal Fiduciary Duty
If one spouse's omissions or actions result in loss or impairment of the other spouse's interest in the community property, the court may find that spousal fiduciary duty has been breached. Sanctions may even be imposed in the event that a party inadvertently failed to disclose it. That gives the injured spouse cause for instituting a claim against the one who breached fiduciary duty by hiding information or failing to disclose pertinent facts regarding community property.
San Diego family courts view breach of fiduciary duty as a serious offense and they may award compensation to the injured spouse. An injured spouse is entitled to court costs and attorney fees, as well as a minimum of fifty percent of the value or the asset or breach. In many cases, California courts award one hundred percent of shared assets to an injured spouse.
When calculating the value of an asset, the court awards the highest value of the asset had on either of the date of the alleged breach, the date on which the asset was sold, or the date on which the court awards damages.
Serious Consequences for Breach of Fiduciary Duty
It is not uncommon for the court to enforce more serious consequences when spouses breach fiduciary duty by intentionally misrepresenting debts or assets under their control on Declarations of Disclosure. It is not unheard of for parties to be awarded 100% of a higher value asset while the offending party received nothing. This is especially common in cases where the fiduciary duty was breached intentionally through malice, oppression, or fraud.
The court may impose harsh consequences for failure to comply with the Family Code, including monetary sanctions, payment of legal fees, and a bigger share of the community property. It may also prevent the spouse who is in breach of fiduciary duty from presenting evidence pertaining to the omitted asset in court and it may set aside a judgment entered due to the intentional omission of an asset of failure to comply with disclosure statutes.
For the court to find that one is entitled to the full value of an asset, it must find that a spouse's fiduciary duty was breached through:
- Malice - The conscious, intentional, and willful disregard of others' safety and rights with the intention to cause injury.
- Oppression - A conscious and cruel disregard of another person's rights which subjects him or her to unjust hardship.
- Fraud - The intentional of misrepresenting or concealing a known material fact in order to deprive a person of legal rights or property, or to cause injury.
Fiduciary duty is a complex part of relationships and the law alike. Examples of spousal fiduciary duty breaches include:
- mismanagement of community assets;
- paying for separate debt using community funds;
- withholding important discovery without valid cause;
- failing to disclose the true value of an asset on a mandatory disclosure;
- transmutation - modifying the character of community property to separate, or vice versa.
Some spouses will give away community assets during divorce proceedings in order to deprive an ex spouse of having any share of it. However, one spouse may not sell, give away or otherwise get rid of community property for less than fair price or reasonable value in order to deprive the other spouse of such property without written consent from the latter. This action is considered a breach of fiduciary duty.
End of Fiduciary Duty
Fiduciary duty may continue to remain in effect long after the dissolution of the marriage has reached its conclusion and even after the assets have been divided. Divorced spouses may reach an agreement or may be given a judgment by which they are legally bound to abide until a future date. It may contain orders regarding spousal or child support obligations that will stay in effect until spousal support is terminated or for as long as the children are minors.
Parties paying or receiving spousal or child support may request updated financial information from the other party once a year, according to section 3664 of the California Family Code. However, the courts agree that fiduciary duties end upon final settlement agreement or judgment of dissolution. As such, parties are not necessarily obliged to disclose significant financial changes to one another, unless a spouse specifically requests such information.
Spousal fiduciary duty also remains in effect when ex-spouses decide to retain a business or investment as community property after the divorce. If it makes financial sense to them, a couple may, for instance, decide to keep their family home until the children move out on their own; or, if they have run a family business together, they may wish to remain business partners after the marriage has ended and that is their prerogative. It is important to obtain legal advice on the best way forward and to find out exactly how fiduciary duty is applicable to your unique circumstances. It is a good idea to have an agreement drawn up that outlines each individual’s rights and responsibilities.
The laws regarding spousal fiduciary duty give the court significant discretion in terms of limiting the way an individual controls, manages, or uses a community asset. It is within the court's right to reclassify the character of a property; it may change a shared property to a separate property, or modify a separate property to partially community property. The result could be menial, but it could also change the outcome of the divorce settlement and support payments by millions of dollars. That’s another good reason to retain the services of a highly experienced San Diego divorce lawyer.
California Family Code section 1100 contains a statute of limitations that requires a petitioning spouse to bring actions for breaches of fiduciary duty within three years from the date of becoming aware of such a breach. The defense may well use the "laches" defense if they feel that the other party unnecessarily drags their feet in pursuing the claim.
Although it is possible to file a breach of spousal fiduciary duty complaint if you are not getting a legal separation, nullity or divorce, those cases tend to be rare. However, our San Diego divorce lawyer will be able to inform you on your rights and file on your behalf if you have a strong case.
If you need assistance with a breach of fiduciary duty complaint, contact our experienced San Diego Divorce Attorney now at 858-529-5150.