Divorcing and Own a Business or Manage Community Assets? – Beware Your Fiduciary Duties

In California, when parties file for divorce, both spouses are required uphold the highest good faith and fair dealings. This fiduciary duty, which you owe your spouse throughout your divorce proceedings, involves the highest duties of loyalty and care recognized by law, and applies to transactions regarding any item of community property including but not limited to investments and business organizations. Therefore, if you are considering or actively divorcing and own a business or manage community assts it’s essential to avoid violating your fiduciary duty.

The Consequences of Violating Fiduciary Duties in Family Law

In the event a party violates their fiduciary duties, family law courts can order harsh penalties which can include but are not limited to awarding the other spouse a larger percentage of an undisclosed asset, valuing the community property prior to the breach of fiduciary duty (if the community property is now less valuable), as well as attorney’s fees and costs. It’s important to note that any party can claim their spouse breached a fiduciary duty prior to or after filing for divorce.

However, there are limitations to what constitutes a breach of fiduciary duty. In 2015, a wife claimed that her husband breached his fiduciary under the community opportunity doctrine, when he purchased shares in a company with his separate property rather than community property post-separation, but during the marriage. This community opportunity doctrine imposes a “fiduciary relationship in transactions between spouses… subject to the same rights and duties as nonmarital business partners…” Yet, the court found that there is no breach of fiduciary duty by a spouse when “purchasing property with his separate funds, and not using available community funds.”

Business Owners’ Fiduciary Duty in Divorce

If you own a business, are essential to its operations, and are contemplating a divorce, beware that you can be held solely responsible for any decrease in value of the business post-separation. Upon request , the Court can value your business at the Date of Separation, for reasons including lack of effort post-separation. If the business decreased in value post-separation, your spouse’s share in the present value of the business can exceed fifty (50) percent of the actual present value of the business. One of the best ways to insulate yourself from liability should things go awry, is to document the informed consent of your spouse to a large investment or business decision involving community property.

Protect Yourself When Divorcing and Own a Business

Because a breach of fiduciary duty can have devastating consequences in a divorce, and the full scope of a spouse’s fiduciary duties are still being litigated in the Courts, it is best to consult with an experienced family law practitioner prior to making any significant investment or business decisions involving community property during your divorce. Contact The Reape-Rickett Law Firm at (888) 851-1611 or Contact Us Today to speak with an experienced attorney. Our divorce lawyers can help you navigate the complexities of community property and protecting your fiduciary duties.