California Family Codes Sections 721 1101 1102 and 1103 Financial Duties of Spouses

Wife (W) and Husband (H) married in 1990 and had four children together.  During the first ten years of their marriage, W stayed home with the children while H successfully created numerous businesses.  In fact, he was so successful, that after ten years, he too, was able to stay home and together they lived a very affluent life style.  Their money was managed by a professional money management company - except for their day-to-day expenses.  Those were managed by H from an office he rented.  W had rarely seen any asset/debt documentation in their entire marriage.  She trusted H and their management company to handle their finances.

In 2010, H began researching information for options trading.  He took classes on the stock market and began reading publications.  He convinced W (who thought it would give H something to do) to allow him to invest some of their portfolio in the stock market.  W agreed to allow H to invest $2.5 million of their Apple Stock in TD Ameritrade.  She thought that amount was a “sliver” of their true net worth.  H did extremely well with his investments increasing the portfolio at one point up to $18 million.  What H didn’t tell W, however, was that he had fired the management firm and he was investing all of their money in this high-risk portfolio.  Ultimately, by the couple’s separation in 2013, the portfolio was worth $498.000.  H never informed W how well or poorly their financial investments were doing.

In their divorce, W contended that H breached his fiduciary duty to W by investing more money than she had agreed to and investing their finances extremely recklessly.  H argued that the loss of their finances wasn’t his fault, but the decline of the stock market in general.  Further, he had the right to control the community assets, even if he made mistakes.  The court agreed with W and awarded her $1.95 million as her portion of the community funds.

H appealed and the Appellate Court agreed with the trial court.

Each spouse owes the other spouse the utmost care when handling community property.  This is known as a fiduciary duty.  And, the other spouse has no obligation to question how the managing spouse is handling the community property.  The non-managing spouse can trust the managing spouse completely.

Here, the Appellate Court agreed with the trial court that H was extremely reckless.

California Family Code section 1100 says that each spouse is mutually entrusted with full individual authority to manage and control community property

Family Code section 721 states that “in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other.  This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other…”

Section 721 also states: “(1) [E]ach spouse [must provide] 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 that 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.  (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 that concerns the community property.”

Failure to maintain one’s fiduciary responsibilities will result in a loss of that spouse’s portion of the community property.  (See California Family Code sections 1101, 1102, and 1103.)

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