August 2003

Breach of Fiduciary Duty: Applying the Theory in Equitable Distribution States

Laura W. Morgan

A well-developed body of legal literature explores the analogy between partnership and the intimate relationship of husband and wife, suggesting that partnership doctrine offers a way to remedy inequalities within marriage. Partnership has provided a new metaphor, replacing ideas such as coverture, to understanding the marital relationship. Model statutes such as the Uniform Marriage and Divorce Act (“UMDA”) apply partnership models to domestic relations law. The UMDA adopted the partnership theory of marriage to justify its alteration of the rules governing asset distribution upon divorce. “Uniform Marriage and Divorce Act,” prefatory note, 9A U.L.A. 161 (1998) (“The distribution of property upon the termination of a marriage should be treated, as nearly as possible, like the distribution of assets incident to the dissolution of a partnership.”). Moreover, the UMDA refers to termination of a marriage as dissolution, a term borrowed from partnership law.

The Uniform Probate Code also applies partnership models to domestic relations law. The revised code assumes that a longer marriage creates the full partnership interest in half of a decedent’s estate, while a shorter marriage may not justify such a large share. “Uniform Probate Code” § 2-202 comment (amended 1993), 8 U.L.A. 103 (1998). See generally Sanford N. Katz, Propter Honoris Respectum: Marriage as Partnership, 73 Notre Dame L. Rev. 1251 (1998).

As a general matter, partnership law imposes a fiduciary duty on partners to treat one another fairly. Partners are not acting at arms length, but are held to “something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). See generally Larry E. Ribstein, Unincorporated Business Entities 143 (1996). Specifically, a partner is held to a duty of loyalty (accounting to the partnership for benefits derived from partnership property, refraining from adversarial dealings with the partnership, or competing with the partnership), as well as a duty of care (refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing legal violation). “Revised Uniform Partnership Act” § 21-404 (1997), 6 U.L.A. 79 (Supp. 2000). Without these duties, partners could misrepresent facts or appropriate partnership property. With the duties in place, a socially or economically weak is able to protect his or her interests.

Based on this “partnership model,” the law has, in certain circumstances, imposed on the spouses fiduciary duties akin to those imposed on partners. Fiduciary duties include the duty to act for the beneficiary’s benefit, the duty to forego profit accrued at the beneficiary’s expense, and the duty to avoid self-dealing and self-preference. Restatement (Third) of Trusts § 2 comment b (Tentative Draft No. 1, 1996). These duties, applied to the marital relationship, protect the socially and economically weak partner throughout the relationship, including the time when the relationship is breaking down. See generally, Martha M. Ertman, Marriage as a Trade: Bridging the Private/Private Distinction, 36 Harv. C.R.-C.L. L. Rev. 79 (2001).

Historically, courts held that husbands owe their wives fiduciary duties stemming from the husbands’ exclusive right to control and manage community property only. Contemporary husbands and wives both have the right to manage community property, and each spouse is a fiduciary in relation to the other regarding property management. See Cal. Fam. Code §§ 1100(e), 1101 (West 1994). In particular, these provisions require spouses to (1) provide one another access to books and records; (2) give accurate information about transactions affecting the community; and (3) account for and share any profits or benefits derived from community transactions undertaken without the other spouse’s consent. Such duties parallel those imposed on business partners, making California’s importation of partnership law into family law among the most explicit.

A spouse also has a fiduciary duty as a tenant in common or as a tenant by the entireties. Spouses who are tenants in common with each other are required to account to their co-tenant for their share of any rent received from the common property and reimburse them one-half of the rents and profits. The co-tenant spouse is also entitled to damages if he disposed or excluded from possession by the other co-tenant. This is consistent with the general principle that tenants in common have a quasi-fiduciary obligation to each other and are required to “be true to each other and protect the rights of each other in the property.” Furthermore, the tenant in common spouse has a claim for waste. Spouses holding title as tenants by the entireties would have the same quasi-fiduciary obligation to each other and would have access to the same type of claims available to tenants in common. Edward K. Green, A Spouse’s Right to Control Assets During Marriage: Is North Carolina Living in the Middle Ages?, 18 Campbell L. Rev. 203 (1996).

As noted above, a fiduciary duty to marital property most often arises in community property states. See J. Thomas Oldham, Management of the Community Property Estate During the Intact Marriage, 56 Law & Contemp. Probs. 99, 157 (Spring 1993); Janet Mary Riley, Women’s Rights in the Louisiana Matrimonial Regime, 50 Tul. L. Rev. 557, 570 (1976) (manager spouse considered as fiduciary and held to same standard as trustee).

It can be argued, however, that with the adoption of the equitable distribution statutes, the common law states established the partnership principle, not only for the distribution of assets at the time of divorce, but also the management of marital property during the marriage. To hold otherwise would establish competing systems, one based on partnership principles at divorce, and one based on title theory during marriage and before separation. The latter system can only work to undermine the former.

The Uniform Marital Property Act provides, “Each spouse shall act in good faith with respect to the other spouse in matters involving marital property or other property of the other spouse.” Uniform Marital Property Act § 2(a), 9A Part I U.L.A. 114 (1998). Nonetheless, almost uniformly, the idea of a fiduciary duty during marriage has been rejected in equitable distribution states. E.g., Dietter v. Dietter, 54 Conn. App. 481, 737 A.2d 926 (1999); Smith v. Smith, 113 N.C. App 410, 413, 438 S.E.2d 457, 459 (1994, cert. denied 336 N.C. 74, 445 S.E.2d 37 (1994) (Court of Appeals rejected the argument that spouses have a fiduciary duty to each other similar to the duty partners own to each other). See Alexandria Streich, Spousal Fiduciaries in the Marital Partnership: Marriage Means Business but the Sharks Do Not Have a Code of Conduct, 34 Idaho L. Rev. 367 (1997). Rather, only seven jurisdictions recognize a fiduciary duty between managing spouses: California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington, all community property states. Cal. Fam. Code 1100(e) (West 1994); Compton v. Compton, 101 Idaho 328, 336, 612 P.2d 1175, 1183 (1980); Queenan v. Queenan, 492 So. 2d 902, 912 (La. Ct. App. 1986); Williams v. Waldman, 836 P.2d 614, 618 (Nev. 1992); Kueffer v. Kueffer, 791 P.2d 461, 464 (N.M. 1990); Fanning v. Fanning, 828 S.W.2d 135, 147 (Tex. App. 1992); In re Marriage of Sievers, 897 P.2d 388, 400 (Wash. Ct. App.1995).)

In equitable distribution states, the idea of a “fiduciary relationship” between spouses has been applied only in the context of disclosing assets during the negotiation of antenuptial or property settlement agreements. E.g., Manes v. Manes, 277 A.D.2d 359, 717 N.Y.S.2d 185 (2d Dept. 2000). This application of the principle of fiduciary relationship only at the time of negotiating premarital or separation agreements creates, as noted above, a dual system of obligations, one during the marriage, and one outside the marriage.

There are, however, a few scattered exceptions, cases in which the court was willing to apply the theory of fiduciary duty. In Dunkin v. Dunkin, 162 Or. App. 500, 986 P.2d 706 (1999), the court held that the spouses has a fiduciary duty to one another, and the husband had breached that duty in the management of the parties’ assets. Similarly, in Despain v. Despain, 682 P.2d 849 (1984), the court held that the ex-wife’s action against her ex-husband arising from his alleged fraudulent conveyances of real estate was not precluded, under doctrine of res judicata, by their prior divorce proceeding, despite the fact that the wife’s proposed second amended complaint specifically alleged fraud in breach of fiduciary duty. The court held that the motion to allow such amended complaint was denied and its allegations were never litigated, and since the wrongful conveyances alleged in current action occurred after such complaint. Clearly, the court is recognizing a breach of fiduciary duty claim.

Since the new model of marriage is that of partnership, there is no reason to deny breach of fiduciary claims that arise from a breach of the partnership duties.