The Fiduciary Duty between Spouses

Family Code Section 721 generally provides that Husband and Wife are subject to the rules governing fiduciary relationships and that the marital relationship imposes a duty of the highest good faith and fair dealing on each spouse. That same law further contemplates that neither spouse shall take any “unfair advantage” of the other. This fiduciary duty continues to be in effect during the pendency of any divorce case until a final Judgment is entered. In a contested divorce, this duty is forgotten and/or ignored, which can have serious consequences on the case.

Family Code Section 1101(h) contemplates remedies for a breach of a fiduciary duty that is the product of fraud, malice, or oppression. Those remedies include the mandatory award to the non-breaching spouse of 100%, or a value equal thereto, of the asset disposed of or transferred in breach of that fiduciary duty. In the alternative, if the conduct by the breaching spouse is not fraudulent, malicious, or oppressive, the remedy falls under Family Code Section 1101(g). That law awards the non-breaching spouse 50%, instead of 100%, of the value of the asset and mandatory attorney’s fees and costs related to the pursuit of the breach.

One of the landmark cases for a breach of fiduciary duty is Marriage of Rossi, (2001) 90 Cal. App. 4th 34. In that case, Wife won the California lottery prior to filing for divorce. Wife concealed the fact that she won the lottery during the entirety of the divorce proceeding. Husband and Wife eventually signed a Marital Settlement Agreement which contained a provision that all known assets had been disclosed for purposes of the divorce. After the divorce was complete, Husband learned that his former Wife won the lottery and he brought her back to Court. During the ensuing Court proceedings, it was revealed that the Wife took affirmative steps to hide her lottery winnings. Wife consulted lottery personnel about how to avoid sharing the jackpot with her Husband and also gave her mother’s address to the lottery commission to avoid Husband’s detection of her winnings. The trial Court held, and the Appellate Court affirmed, a ruling that Husband was entitled to all of the lottery winnings under Family Code Section 1100(h) because Wife’s actions constituted fraud.

Another important consideration present in Family Code Section 721(a) is that subject to the fiduciary duties noted above, spouses can enter into any transaction with the other respecting property, which either might if unmarried. However, this ability to “enter into any transaction” with one another is curtailed by the fact that any interspousal transmutation of property is scrutinized by the Courts. For example, in Marriage of Haines, (1995) 39 Cal. Rptr. 2d 673, the Court held that whenever a transaction advantages one spouse, while disadvantaging the other, a rebuttable presumption of undue influence arises. If the presumption cannot be overcome, the transaction must be set aside.

In Haines, the Court was confronted with a cunning wife who managed to persuade her husband to sign over his sole and separate property acquired prior to marriage, to a joint ownership form with wife. The Court found that the husband had cognitive impairments, and as a consequence, had entrusted all marital financial and legal matters to wife. Wife, on the other hand, had extensive experience in legal and financial matters and had personal experience in her previous marriage with transmutation of separate property to joint tenancy. Husband signed documents conveying his separate interest in the property to himself and wife in joint tenancy without questioning wife’s instruction that it was necessary to do so to obtain a loan to finance a remodel to the property. Of course, there was no necessity to have the property held jointly and the Court set aside the transaction because wife could not overcome the presumption of undue influence.

The policy behind the imposition of fiduciary duties between spouses is clear. The California State Legislature understood that a fair and accurate division of community property could only take place if the spouses were obligated to be truthful and open with each other, notwithstanding the fact that their marriage was over. The harsh penalties that follow for a breach of fiduciary duty are usually enough motivation for each spouse to facilitate an open, honest, and fair dissolution proceeding.