Be Prepared to Account for Assets in Your Control After Separation From Your Spouse

Over the past decade, the issue of a spouse’s fiduciary duties in a marriage as well as after separation, through the disposition of community property, has been a growing and contested area of the law. Many people believed that the spouse claiming a breach of fiduciary duty in the use or management of financial assets had the burden to prove this claim. Yet, proof was often difficult because the evidence was in control of the other spouse who could fail to cooperate with discovery, lie, destroy records or otherwise make it impossible to prove the existence or non-existence of facts concerning possible financial misconduct. The recent case of Marriage of Margulis (August, 2011), has hopefully cured this problem.

The Not So Uncommon Facts

The facts in Marriage of Margulis illustrate a common situation.  After the husband and wife separated, the husband continued to be responsible for managing the financial accounts that were indisputably community property. By the time the parties got to trial to finalize their divorce, virtually all of the financial accounts were depleted. The wife was able to prove the value of these financial accounts at some point after the couple separated but had no records or information as to what happened thereafter.  The husband simply testified (without any documentary proof) that the money had been spent on community expenses and the wife’s living expenses, adding that some had been lost in the stock market.  The wife wanted her husband to pay her for one-half of the value of the financial accounts as of the date she could prove they had value; the husband wanted to pay her for one-half of their current value, which was nominal.

The Law

The Court of Appeal agreed with the wife.  The Court stated that when the wife (the non-managing spouse for the assets) has some evidence that community assets of a certain value have disappeared while in the control of the husband (the managing spouse) after they have separated, that husband  should have the burden to provide proof and account for the missing assets as the managing spouse.  In Marriage of Margulis, the husband was unable or unwilling to account for what had happened to the money which was under his management and control.  As a result, the Court found the husband breached his fiduciary duty.

In California, spouses owe a fiduciary duty to each other which includes wide-ranging responsibility to disclose and account for the existence, valuation and disposition of all community assets from the date of separation through final property division.  This means, a spouse must account for his or her management of the property including but not limited to revealing changes in value as well as when assets cease to exist or are transferred for less than they’re worth.

Public Policy

Because the managing spouse is in the best, and often only, position to provide information about the disposition of the assets under their control, it would be grossly unfair to expect the non-managing spouse to prove what in fact occurred with the assets.  To require this would be similar to the game we played as children, “Go Fish.”  The Court of Appeal succinctly stated that when one spouse exercises exclusive control over community property, the parties will have vastly unequal access to evidence concerning the disposition of that property and therefore fairness requires shifting to the managing spouse the burden of proof on missing assets.

Lesson To Be Learned

It is important to get documentation supporting the value of all assets as near as possible to the date of separation.  If you are the spouse in management and control of the assets, keep detailed records of the disposition of assets and keep your spouse informed of any changes in the existence, valuation and disposition of those assets.  To do otherwise could be costly in terms of the property division, accounting fees and attorneys fees.