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Breach of Fiduciary Duty in Divorce

Most people have heard of an attorney's fiduciary duty to clients yet spouses in California also have a fiduciary duty to one another. If a spouse breaches this duty of care, there will be consequences. It is especially damaging to breach one's fiduciary duty amidst a divorce. Such duties extend to one another concerning matters relating to the family estate, finances and beyond.

Spousal Fiduciary Relationship in the State of California

The relationship between a married couple has the highest duty known by law. This is the fiduciary duty. California's family law states when a married couple enters into transactions with one another or engages in the management or control of community property, they must act as a fiduciary. Such a relationship requires the highest duty in terms of fair dealing as well as good faith. Neither the husband or the wife is allowed to take unfair advantage of one another. This relationship is similar to how those who are business partners have to act toward one another when managing the partnership's assets. The bottom line is every spouse must be aware of fiduciary duty laws as they pertain to married couples in the state of California. Our matrimonial attorneys are here to help ensure you uphold your fiduciary duty to your spouse and protect your interests throughout the divorce process. 

Breach of Fiduciary Duty in the Context of Property

The state of California's fiduciary duty laws are applicable to community property as well as the other spouse's distinct property. This separate property is often overlooked yet it is quite important. If a spouse controls or manages the other spouse's distinct property, the managing/controlling spouse must treat the property with the same level of care provided by a fiduciary.

The Length of Fiduciary Duties Between Spouses

The fiduciary duty that exists between spouses does not last forever. It commences when the marriage is made official and ends when the couple legally separates. Specifically, the fiduciary duty of marriage stops at the point in time when assets, debt or liabilities that were divided are distributed. The fiduciary duty extends to this point after the separation to protect assets during the period of dissolution or annulment.

As soon as division occurs, the ex-spouses will have full control over the property designated as theirs. The actual division of property occurs when the divorce is officially finalized. However, there are some situations in which the divorce judgment does not divide everything. If the spouses decide to divide up specific pieces of community property at a date in the future, the fiduciary duties will still apply. These duties are applicable until the property, asset, liability or debt is officially divided.

The Matter of Disclosures

Fiduciary duties have disclosures. In fact, the state's Family Code mandates accurate, full and prompt disclosures. California's law has nuanced rules relating to the exchange of initial and final disclosure declarations. A schedule of one's assets as well as debts must be made. A declaration of income sources an expenses must also be made. Disclosure laws are intentionally broad to the point that the thoughts or beliefs of a spouse do not matter. Even if he or she thinks something is his or her distinct property, all separate property and community property will have to be officially disclosed. Furthermore, disclosure laws mandate spouses update disclosures as soon as soon as material changes occur.

Breach of Fiduciary Duty

If a spouse breaches his or her fiduciary duty, the penalty will hinge on the severity of the breach. Breaching one's fiduciary duty to a spouse can lead to required monetary sanctions including attorneys fees and costs. If the spouse destroyed, wasted or failed to disclose an asset, the punishment will be as extensive as paying an amount equal to the asset's value to the spouse who is the victim. If the breach in question is a failure to disclose an asset, noncompliance will be analyzed aside from the judgment.

Why Fiduciary Duty is so Important in the Context of Marriage

The expected level of care provided between spouses in the state of California stems from the state's public policy that defines marriage as an equal partnership. California law states each spouse owes the other the highest duties provided to all parties involved in a fiduciary relationship. Spouses have the highest duty of good faith as well as fair dealing. These parties are not expected to take unfair advantage of one another at any point in the relationship. 

Familial Duties in the State of California

It was only 15 years ago when California's legislature changed the definition of spouses' fiduciary relationships to one another. The new definition includes the duties provided by non-marital business partners. Such confidential fiduciary duties include providing access to books pertaining to transactions for purposes of inspecting/copying and providing accurate information about transactions pertaining to community property. The duties also include accounting to/serving as a trustee for the other party when transactions related to community property occur without the other party's consent.

If a transaction between a wife and husband is exclusively beneficial to a single spouse, the law states the transaction has been impacted by undue influence. The spouse enjoying the advantage has the burden of proof to show the transaction was consented to without coercion, with complete knowledge of the facts and a comprehensive understanding of the transfer's effect.

Remedies for Breach of Duty

Spouses have the power to file a civil action through their attorney. This action is filed against the spouse for abusing his or her fiduciary duty. In most cases, one of the spouses ends up filing for divorce. In instances in which a spouse does not act in full accordance with his or her fiduciary duty, it is best to consult with a matrimonial attorney to determine which statutory remedy is ideal. If a spouse's undivided half-stake in the community estate is altered by the other spouse's actions, a court order might be necessary for an accounting of the property to occur.

Assets that are undisclosed or transferred as a breach of fiduciary duty can spur a penalty between 50 and 100 percent. Remedies might also include an award of upwards of 50 percent of the asset along with court costs and attorney's fees to boot. If the breach arises from fraud, oppression or malice, remedies can include awards to the other spouse of upward of 100 percent of the undisclosed asset.

An Example of the Duty of Loyalty

In the context of marriage, the duty of loyalty typically manifests in a situation like the following. Imagine a husband who has an abundance of money in a bank account prior to marrying. This bank account has been established as his private property. Once married, the husband is provided with the opportunity to invest in a business's initial public offering of stock. He uses a large portion of his distinct property bank account to buy several hundred shares of stock during the initial public offering. The stock soars in value in the subsequent years. The couple decides to divorce.

If the wife's attorney can successfully argue the community bank account had enough money to invest in the initial public offering and the husband never gave the wife the opportunity to determine if she was interested in using the community bank account for the investment, it can be demonstrated a breach of the duty of loyalty has occurred. The bottom line is if an attorney can argue a spouse has competed against the community's interest (the couple's interest) by prioritizing one's own interests for property gain, the judge might determine the duty of loyalty has been compromised.

A Married Couples' Duty of Care

According to California's Corporations Code, the duty of care in the context of marriage states spouses are not liable to one another for mistakes made when exercising honest judgment. Nor is there liability for losses incurred during the marriage that were in good faith performance of one's duties and when exercising the same level of care as an ordinary person. There is a liability due to the breach of the duty of care when one spouse engages in conduct that is classified as intentional misconduct, egregiously negligent, reckless or in violation of the law in regard to the marriage.

Common Examples of Breach of Fiduciary Duty

If a spouse mismanages the couple's assets, known as the community assets, a judge can rule he or she is guilty of breaching fiduciary duty. Even hiding the actual value of one's assets during mandatory disclosures qualifies as manipulation that meets the standards for a breach of fiduciary duty in the context of marriage. Altering the character of property with what is referred to as a transmutation, also qualifies as a breach of fiduciary duty. Even using the couple's savings to pay the debt a spouse brought into the marriage can persuade a judge to rule a breach of fiduciary duty has occurred. Finally, withholding discovery materials without valid legal grounds is another example of a breach of of fiduciary duty.

Why Breach of Fiduciary Duties Matters in the Context of Marriage

In the context of family law, a breach of fiduciary duty qualifies as a tort. Such a breach is important especially in marriages that are headed toward divorce or in the midst of divorce. The division of marital assets is at the core of every divorce. One's breach of fiduciary duty can be asserted in the petition for divorce. As an example, a spouse who undervalues his or her business in the midst of a divorce will have violated his or her fiduciary duty. Transferring money outside of the community estate can also qualify as a breach.

If it is determined one of the spouses committed fraud, it will undoubtedly impact the divorce proceedings. Aside from fraud, personal conduct can qualify as a breach of fiduciary duty. However, it is much more common for fiduciary duties to hold up in regard to a married couple's community property rather than personal behaviors.

A Spouse's Accidental Violation of Fiduciary Duties

The unfortunate truth is it does not matter if the violation of fiduciary duty was intentional or an accident. The court's punishment for this breach will likely be significant regardless of whether it was an accident. According to California's Family Code, the punishment can include but is not limited to 50 percent of the asset's value along with attorney's fees and court costs. The asset's value can be determined to be highest on the date on which the fiduciary duty was breached, the date of the asset's sale or the date the court determines the award.

A Spouse's Intentional Breach of Fiduciary Duty

If a spouse breaches his or her fiduciary duty in an oppressive manner or a manner involving malice or fraud, there is the potential for a punishment in excess of 50 percent of the asset's value. In such an instance, the award is the full value of the asset that went undisclosed or was transferred in violation of a spouse's breach of fiduciary duty. When such a breach occurs, one is entitled to this extra value as long as the spouse's breach of fiduciary duty is linked to legitimate fraud, malice or oppression.

California's Civil Code defines oppression as conduct that is cruel and unjust toward another person with disregard for his or her rights. Fraud is defined as an intentional misrepresentation of material facts to deprive an individual of legal rights or property and/or cause harm. Malice is the intent to injure another. California's Civil Code also states there might be a way to obtain even more damages through the punishing of the breaching party who is guilty of malice. 

San Diego Family Law Attorney are here to help

If you are thinking of divorcing or if you are concerned about possibly breaching your fiduciary duty, you need a proven attorney on your side. Reach out to our San Diego Family Law Attorney legal team today to learn about how we can help. Give us a call at 619-610-7425to schedule an initial consultation.

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