When a Gift is Not a Gift. What Every Married Person Needs to Know About Fiduciary Duty
By Frieda Gordon, Esq.
Community property law in California can be very confusing and complicated. What seems logical and fair as the law is written may turn out to be unfair in its application to particular facts. Recently, several cases have been decided which have rendered community property law even more difficult to understand and apply in any particular case, especially in the area of fiduciary duty concerning jointly owned property. Family Code Section 721 states in part that “in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which 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. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners... ”
Therefore, with respect to all property transactions, married couples are subject to the same standards of disclosure toward each other applicable to any confidential fiduciary relationship and a presumption arises that any such transaction was the result of undue influence if it advantages one spouse over the other. This presumption was articulated in In re Marriage of Haines, 33 Cal.App.4th 277,287,293-4, 301-2, 39 Cal.Rptr.2d 673 (1995) and In re Marriage of Bonds, 24 Cal.4th 1, 27, 99 Cal.Rptr.2d 252(2000). In a more recent case, In re Marriage of Delaney, 111 Cal. App.4th 991, 4 Cal.Rptr.3d 378 (2003), the wife argued that the judge should have used the presumptions under Evidence Code Section 662 to require her spouse to rebut by clear and convincing evidence the presumption that record title to the property was held in joint tenancy or the presumption under Family Code Section 2581 that property the is community property because it was acquired by the parties during the marriage in joint title. This results in conflicting presumptions, one regarding the presumption of undue influence and the one regarding the presumption of record title.
The acquisition of property during a marriage by purchase or gift is clearly different from an interspousal transmutation of property already owned by one or both spouses. A transmutation is “an interspousal transaction or agreement which works a change in the character of the property.” The Delaney case ultimately held that the Family Code Section 721 applies whenever it is in conflict with Evidence Code Section 662 and Family Code Section 2581. [the presumption of undue influence trumps the presumption of record title.] And, incidentally, the wife in Delaney failed to overcome the presumption.
The law as it stands now requires that the party receiving the benefit must bear the burden to overcome the presumption by showing that the transaction was fair and equitable and that the other party was fully informed as to all matters relative to the transaction. Furthermore, the benefited party must show that the other party acted voluntarily and with full knowledge of the facts and a complete understanding of the effect of the transaction. The benefiting party shall have given adequate consideration for the transfer of a property interest to her or him. Finally, the transaction must be fair, be done in good faith, be mutually advantageous, and the other party must be at no time hindered from exercising his or her own free will or from making his or her own decisions with reference to the disposition of the property. This new law is not going to be applied retroactively. This means that it will only apply to transmutations which occurred after January 1, 2004.
Another quirky result of this Delaney case is that there is now a split of authority among the Courts of Appeal on the issue of whether the term “acquisition” means “purchase.” A trial court can go either way on this, since some courts have held that they do not mean the same thing. In the line of cases which hold that they do not mean the same thing, the issue usually arose where one spouse made a transfer of separate property to joint tenancy in order to secure a home equity loan. The Delaney court found the presumption of under influence applied in a refinance situation. It also found that the presumption applies regardless of the which party had the stronger bargaining power.
Fortunately, if a party benefiting by a transfer into joint title during a marriage is successful in overcoming the presumption of undue influence, the transferring spouse retains her or his right of reimbursement under Family Code Section 2640. And if a party asserting the validity of an interspousal transmutation is not able to rebut the presumption of undue influence and the transaction is set aside, then there is a possibility that the community can recover its ownership interest acquired during the marriage during the years of ownership as a result of payments made on the principal loan paydown using one of several versions of the Moore/Marsden formula.
Another issue that may arise if the presumption is not overcome is whether there is a presumption of a gift from the community for improvements made to a spouse’s separate property. Three recent cases explicitly discarded the gift presumption for improvements, holding that any application of community property funds to improve one spouse’s separate property requires reimbursement, regardless of consent. Trial courts are free to choose whether to follow this holding in Marriage of Wolfe, 91 Cal.App.4th 962, 110 Cal.Rptr.2d 921 (2001), Marriage of Allen, 96 Cal.App.4th 497, 116 Cal.Rptr.2d 887 (2002) and Bono v. Clark, 103 Cal.App.4th 1409, 128 Cal.Rptr.2d 31 (2002) or the holdings in Marriage of Frick, 181 Cal.App.3d337, 226 Cal.Rptr.766 (1986) and Marriage of Camire, 105 Cal.App.3d 859, 164 Cal.Rptr.667 (1980) [reimbursement only if unconsented-to use of community funds]. Wolf, Allen and Bono also held that the community may be entitled to an interest in the property itself to the extent that the capital improvements increased the value of the property.
Marriage of Feldman, 153 Cal.App.4th 1470, 64 Cal.Rptr.3d 29 is the latest and most important case on the issue of full disclosure, as it relates to fiduciary duty. Family Code § 1100(e) requires spouses "to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization and valuation of all assets in which the community has or may have an interest." This includes a duty to give "an immediate, full, and accurate update or augmentation [to any prior disclosures] to the extent there have been any material changes" and requires a spouse to provide upon request, "true and full information affecting any transaction which concerns the community property." Furthermore, while a spouse is not required by this duty to disclose to constantly update every insignificant occurrence in the operation of a business, there is no "ordinary course of business" exception to a spouse's duty to disclose and it is no defense that an asset and liability offset each other. Sanctions may be awarded for nondisclosure of financial information in dissolution proceedings both under Family Code Section 271 (frustrating policy promoting settlement) and Family Code Section 2107 (fiduciary duty of disclosure in dissolution proceedings.) No showing of harm to a Party is required before a Court can impose such sanctions.
All of these cases, their holdings and the formulas developed to determine the correct division of community property assets are quite complicated, even for seasoned family law attorneys. You will definitely need an attorney very familiar with these cases and their applications in order to fairly settle or litigate your dissolution of marriage action. Please let the attorney you hire know right away that you might have such a situation in your divorce or probate case.