California views marriage as a partnership, specifically as it relates to management and control of community assets; this partnership carries rights and obligations which are similar to those in a standard business partnership. So, what are your financial obligations to your spouse? Chief among these obligations is what is known as the “fiduciary duty”, which requires the highest degree of good faith and fair dealing between the parties.
As such, a spouse is obligated to disclose all relevant information, and refrain from damaging the marital partnership’s financial well-being. These disclosure requirements continue until the fiduciary duty has ceased to exist, which is either when a community asset is distributed, or in the case of assets affecting support, when a binding Court order is entered. In short, if one spouse is taking advantage of community assets for their own benefit, they have likely violated their obligations to their spouse.
Beginning in the mid-1970s, California’s concept of a spouse’s duties and obligations in relation to “management and control of community property” has shifted from the concept of “good faith”, to “confidential duty”, to the now controlling “fiduciary duty” standard; today, California uniformly utilizes the “fiduciary duty.” See IRMO Duffy (2001) 91 CA4th 923, 935-939 (providing a comprehensive discussion of the evolution on California’s law regarding management and control of community property). This standard, as applied to management and control of community property, requires the highest duties of good faith and fair dealing; it prohibits one spouse from taking unfair advantage of the other regarding the use of community assets. In short, the fiduciary duty between spouses is identical to the fiduciary duties between non-married business partners; this is because California views marriage as an economic partnership when it comes to their joint assets (which is analogous to a business account). Marriage of Georgiou & Leslie (2013) 218 CA4th 561. It is important to note that while this article focuses on a spouse’s fiduciary duties relating to management and control of community property, that fiduciary duty also applies to one spouse’s separate property. Marriage of Walker (2006) 138 CA4th 1408, 1419 (dictum).
Family Code §721(b)(1) –(3) sets forth a non-exhaustive list of the rights and duties of spouses’ as it relates to community property, and ostensibly separate property, which includes:
- Allowing each spouse to access any books which are kept for the purpose of recording transactions, and further allowing that spouse to inspect and copy those records; this right can be exercised at any time;
- On the request of one spouse, the other spouse is obligated to provide full and accurate information regarding any transactions concerning community property;
- NOTE: This does not mean that spouses must keep a detailed record of transactions. However, if records are being kept, then either spouse has unfettered right to inspect, copy, and receive full and accurate information about those records.
- If one spouse suspects that the other spouse has utilized community property for their sole benefit, without the first spouse’s consent, that spouse has a right to an accounting; any profits or benefits derived from the unapproved community property transaction will be held in trust for the benefit of the community (in most cases); and
- A spouse has an obligation to preserve the value of community property real estate in anticipation of divorce. IRMO Hixson (2003) 111 CA4th 1116, 1125.
These fiduciary duties exist from the start of marriage, through separation prior to divorce, and ceases to exist on the date the community asset, or liability, at issue is distributed. IRMO Kochan (2011) 193 CA4th 420, 431-433. However, the fiduciary duty runs longer where the particular asset has a bearing on spousal support, child support, or attorney’s fees; in this situation, the fiduciary duty ceases to exist the moment there is a final binding resolution regarding those assets. IRMO Sorge (2012) 202 CA4th 626, 654-655.
While the fiduciary duty requires disclosures in anticipation of dissolution, those same duties have a profound impact on the management and control of community property during marriage. Family Code 1100, et seq., provides the general fiduciary duties of spouses to each other during marriage, in relation to management and control of community property.
As a general rule, both spouses are presumed to share equal management and control of community property, “with like absolute power of disposition, other than testamentary,” as if they were exercising control over their own separate property. Barnett v. First Nat’l Ins. Co. of America (2010) 184 CA4th 1454, 1460. Keeping in line with this default position that spouses share equal management and control of community property, California has developed numerous specific obligations.
Acting in concert with the general rule that both spouses share equal management and control over community property, California requires that each spouse “shall act with respect to the other spouse” in accordance with the general fiduciary relationship standards specified in Family Code 721. IRMO Feldman (2007) 153 CA4th 1470, 1475-1476. As noted above, California views a marriage as a partnership, and therefore applies the same obligations to management and control of community assets as is applied to non-married business partners under Corporations Code §§ 16403, 16404, and 16503. The duty of loyalty and care, as set forth in Corporations Code §16404 is an area where many spouses breach their fiduciary duties. In short, whichever spouse is exercising management and control over community assets is prohibited from “engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.” Id. While spouses are not bound by the “Prudent Investor Rule”, poor community property investments may constitute a breach of fiduciary duty if that investment amounts to “grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.” IRMO Kamgar (2017) 18 CA5th 136, 149. However, one spouse exercising “bad business judgement” alone, without more, represents negligence; ordinary negligence is insufficient to constitute a breach of fiduciary duty. In a “bad business judgement” situation, the acting spouse cannot be held accountable for an investment that went sour.
Another aspect of fiduciary duty, that is frequently litigated, is a spouse’s obligation to disclose relevant information concerning transactions utilizing community property; the Courts have determined that this disclosure requirement is an “affirmative and broad obligation.” IRMO Margulis (2011) 198 CA4th 1252, 1269. These disclosure obligations were briefly discussed above and must make those disclosures to their spouses even when no formal request for that information is made. IRMO Walker (2006) 138 CA4th 1408, 1422-1423.
Like most general rules, the equal management and control default position has exceptions; particularly as it relates to a business that is properly classified as community property. When one spouse is operating a community property business, which is entirely or mostly community property, the operating spouse has “primary” management and control over that specific community asset (rather than “primary” management and control of all community assets). Family Code §1100(d). “Primary” management and control, in the context of operating a community property business, means “the managing spouse may act alone in all transactions but shall 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 operation of the business … whether or not title to that property is held in the name of only one spouse.” Id. The notice requirement is diametrically opposed to the general consent requirement for the transfer of community personal property used as clothing, furniture, furnishings, or family dwellings as set forth in Family Code §1100(b) & (c). Similarly, “primary” management and control of the business does not obviate the need to comply with the requirements of Family Code §1102, as it relates to the transfer of real property, which requires both spouses join in the execution of any instrument designed to transfer real property.
As noted above, during marriage, spouses have a duty to provide the other spouse with full and accurate information regarding community property transactions; when the spouses separate in anticipation of dissolution (e.g., prior to the end of the spouses’ fiduciary duties to each other), additional fiduciary duties are triggered. These duties “arise without reference to any wrongdoing” and require the spouses to disclose all assets and liabilities regardless of their nature as community property or separate property, which either party may have an interest or obligation in; this includes earnings, expenses, and accumulations. IRMO Brewer & Federici (2001) 93 CA4th 1470, 1475-1476. The duration of fiduciary duties has a direct impact on the disclosure requirements for divorce; as long as the fiduciary duty continues, both spouses have an obligation to supplement the disclosures discussed above.
As long as the spouses have a fiduciary duty to each other (e.g., until an asset is distributed, if it has no impact on support or attorney’s fees, or until there is a binding Court order if the asset does impact support or attorney’s fees), they have an obligation to “immediately, fully, and accurately update and augment” their disclosures to the extent that there is a material change in the nature of the asset previously disclosed. Id.
EXAMPLE: Harry, in anticipation of dissolution, disclosed the existence of numerous securities to Wendy. During the pendency of dissolution, but prior to the end of Harry’s fiduciary duties, Harry did not update his disclosures to reflect the changing values of those securities. The Court held that these changes were not a material change in the nature of the disclosed asset, and that Wendy was fully capable of tracking the value of those previously disclosed securities through publicly available information; therefore, Harry did not breach his fiduciary duty to supplement his disclosures to Wendy. IRMO Heggie (2002) 99 CA4th 28, 35.
Ultimately, family law is a set of laws designed to promote equity. If you or a loved one believes their spouse has misappropriated community assets for their own personal gain, it is imperative that you contact a competent attorney immediately. The attorneys at Maple’s Family Law have extensive experience litigating complex family law issues and will vigorously advocate on your behalf.