Fiduciary duties are obligations each spouse owes to the other both during marriage and after separation. The rules are complex, and courts take them seriously. We are fully prepared to guide you. This provides a general overview.
Fiduciary Duties Imposed by Family Code sections 721 and 1100:
During your case, you and your spouse continue to owe each other the fiduciary duties that arose the minute you married. This means, among other things, that each of you must act in the highest good faith and may never take any unfair advantage of the other. Fiduciary duties include without limitation the obligation to disclose all material facts and information regarding the existence, characterization, and valuation of all assets in which the Community has or may have an interest and debts for which the Community is or may be liable.1 They include without limitation the obligation to disclose all material facts and information regarding income and expenses, too.
Fiduciary Duties Imposed by Family Code section 2102:
The additional fiduciary duty requirements of section 2102 are far-reaching. A summary follows:
- Commencement: These additional duties commence at the date of separation, as opposed to the date an attorney is hired or the date of filing a petition for dissolution or legal separation. Our family law overview correspondence, which this accompanies, discusses the concept of and factual considerations regarding the “date of separation.” As you may
1 All property acquired during the marriage is legally presumed to be “community” in character. This is just a presumption and not an absolute rule. Parties can still establish separate property claims in various ways.
If you have already separated, you or your spouse may already have inadvertently violated fiduciary duties. These mistakes are not unusual, and we could work to rectify them.
- Requirements: Both parties are obligated to act in the highest good faith and may never take any unfair advantage of the other as it relates to “all activities that affect the assets and liabilities of the other party” and as to “all issues relating to support and fees.” These duties include without limitation the full, timely, accurate, and complete disclosure of the following:
“All assets and liabilities in which the party has or may have an interest or obligation,” regardless of which party owns the asset or owes the liability and regardless of whether the asset is community or separate property; - All current earnings, accumulations, and expenses and “all material facts and information regarding income or expense of the party.”
- The written disclosure of investment/business/income-producing opportunities “in sufficient time for the other spouse to make an informed decision as to whether he or she desires to participate in the … opportunity, and for the court to resolve any dispute regarding the right of the other spouse to participate in the opportunity.”
- The operation or management of a business, regardless of whether it is community or separate property; and
The “immediate, full and accurate update or augmentation [of the previously disclosed information] to the extent there have been any material changes.”
Affirmative Nature: Each spouse is obligated to meet these obligations even though the other spouse may not have asked for the particular information or documentation.
Cessation: These duties continue “until the asset or liability has actually been distributed.” Thus, these duties exist even after you have signed a settlement agreement as it relates to assets and liabilities remaining under your control, but subject to future distribution. As to issues of child and spousal support and professional fees, these fiduciary duties continue “to the date of a valid, enforceable and binding resolution of all issues relating to child or spousal support and professional fees.” This normally occurs when the case is settled.
- Violations: A violation, whether intentional or unintentional, can have far-reaching effects. They can include mandatory financial sanctions, orders to pay the fees of the non- violating spouse and, in exceptional cases, the award of 100% of a community property asset or account to the non-violating spouse without offset. Exceptions exist for cases where the court finds that the non-complying party acted with substantial justification or that other circumstances make the imposition of sanctions unjust, but the best strategy is to avoid coming anywhere close to making any violation.
Duties Imposed by the Corporations Code
The Family Code also incorporates by reference certain sections of the Corporations Code that address business partnerships. In the following manners, these statutes treat spouses like
Business partners, establishing the following:
- A “Duty of Loyalty” requires a spouse to “account” to the other and “hold as a trustee” profits made during the marriage and the “winding up” (dissolution or legal separation) of the marriage. Courts could read this as also prohibiting spouses from competing with the Community in investment opportunities — even after separation. This concept of “usurping” a community opportunity usually arises when one spouse has an investment or similar income-producing opportunity and takes advantage of it with his or her own separate funds rather than community funds. Violations could result in the court’s deeming such an investment as being community property, rather than as the investing spouse’s own separate property.
- The “Duty of Care” is to refrain from engaging in “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” Essentially, this applies to the management and control of community property, including making investments and operating a business. It would appear that “mere negligent” conduct in the management and control of the community estate is not a violation of the duty. Although spouses must do their best in making investment decisions, one generally is not liable to the other if a community investment does not do well. Exceptions might exist, for example, if a spouse fails to disclose to the other a conflict of interest or engages in other deceptive conduct.
- The Duty of Good Faith and Fair Dealing means that all actions taken with respect to the community estate must be done fairly and with the other spouse’s rights and interests in mind. Among other things, this can provide footing for claims arising from extramarital affairs involving the expenditure of community funds. This is a controversial concept in the supposedly “no-fault” world of California family law. We are uniquely experienced in pursuing and defending against such allegations.
- The Duty to Provide Information requires a spouse to provide without demand “any information” concerning the Community’s business affairs that are reasonably required for the proper exercise of the spouse’s rights and duties. Either spouse has the right to manage and control community property, but they must exercise those powers consistent with his or her fiduciary duties. On-demand, he or she must provide any other information concerning the Community’s business and affairs unless the request is somehow improper or unreasonable.
Setting-Aside a Settlement Agreement for Breach of Duty
Any settlement agreement that you may enter into with your spouse may be set aside (i.e., undone or canceled) because of the failure to comply with all the disclosure requirements. An action to set aside an agreement must be filed within one year from the time a party knows, or should have known, of the failure of the other spouse to comply with the disclosure statute. This may well be less than a year from the date of the settlement agreement. (This is just one of many rules governing potential “set-aside” actions.)
Declarations of Disclosure
In any dissolution or legal separation case, each spouse must provide the other with a Preliminary Declaration of Disclosure (“PDD”) and Final Declaration of Disclosure (“FDD”). The disclosure work is facilitated by the Income and Expense Declaration forms and Schedule of Assets and Debts forms we will shortly discuss with you (if we might not already have done so).
These obligations are far-reaching. Thus, we will be asking you for detailed financial and asset information and supporting documents toward assisting you in complying. Once you have provided the information, you must let us know if anything, including w it h o u t l i m it a t io n your income, changes so that we can assist you in complying with your obligation to update while your case continues. Experience teaches that it is better to err on the safe side of making and maintaining full disclosures.
Perjury
Perjury includes not only a declaration that states as true and material matter that a person knows to be false but also “(a)n unqualified statement of that which one does not know to be true is equivalent to a statement of that which one knows to be false.” You are required to state before the settlement or trial of your case, under the penalty of perjury, that you have disclosed “all material facts and information.” If the statement is made and you either know it is a false statement or do not know whether “all” material facts and information have been disclosed you could be committing perjury.
Interim Conclusion
Please let us know if you have any questions regarding your obligations, or questions or insights concerning whether either you or your spouse may have breached any of these duties before or after separation.