by Indy Colbath
Under California law, spouses owe each other certain duties both during the marriage, and after separation before the property is divided. These duties are fiduciary in nature, and held to the same standard as those between business partners. Family Code section 721(b) states in pertinent part that: “…This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners…included but not limited to the following: 1. Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying; 2. Rendering upon request, true and full information of all things affecting any transaction which concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions, and 3. Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property.”
The California Legislature passed this statute with the recognition that married couples commingle finances and place confidence in the other that the financial well-being of the community is being properly managed. Frequently, one spouse is tasked with managing community property, and is oftentimes required to make quick decisions, thus not being afforded the opportunity to have long discussions with the non-manager spouse regarding the potential risks and rewards of a certain financial course of action. This statute was also passed with the recognition that there are some bad actors who amidst divorce would seek to take advantage of the confidential relationship, and purposefully try and defraud their former spouse.
One fiduciary duty imposed upon each spouse by section 721 is the duty of managing community and separate property. (For a crash course on the difference between community and separate property, click here.) The strictest duty applies to a spouse managing the separate property of another spouse, while lesser duties are imposed for the management of the community property, or the manager spouse’s own separate property. This article discusses the law governing the management of community property only.
So what is considered mismanagement of community property under California family law? The seminal case on this issue is Marriage of Duffy, (2001) 91 Cal.App. 4th 926. In this case, the trial court awarded Wife damages of $400,684 due to Husband’s investments of community monies held in an IRA that led to the community sustaining losses. The trial court considered the evidence before it and determined that Wife had asked Husband about investments, and Husband was “dismissive” in his answers. The record also demonstrated that Wife had been aware of Husband’s investments, and even signed purchase agreements. On appeal, the court found that Husband had not violated his fiduciary duties. In reaching this result, the court analyzed the legislative history of enforced duties between spouses, and concluded that the legislative intent was not to impose the “prudent investor rule” upon spouses when managing community property. In other words, spouses owe a duty of loyalty and good faith when managing community property, but do not owe a duty of care.
Family Code section 721 defines the duty owed between spouses as the same as owed between business partners, and specifically references California Corporations code section 16404. Subsection (c) states that “a partner’s duty of care…in the conduct of…partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.”(Emphasis added). The rule in Duffy, Family Code section 721 and California Corporations Code section 16404 enables spouses to make investment decisions in managing community property, so long as the decisions are not grossly negligent, reckless, or knowingly violate the law. Simply losing money in an investment by itself does not amount to a breach of fiduciary duty.
While the law somewhat relieves the managing spouse from the strict application of the prudent investor rule, it’s always a good idea to consult with a family law attorney prior to making any major decisions regarding the management of community property, particularly post-separation and prior to the division of the community assets and debts. The attorney’s advice may vary, depending on the facts of the case.
[It should be noted that the fiduciary duty of management of community assets is dictated by different rules than the fiduciary duty of disclosure. For a discussion of the importance of full and accurate disclosures in divorce, click here.]