Good Faith Between Spouses

In California married
persons owe each other, “a duty of the highest good faith and fair dealing” (section 721 of California’s Family Code).  This duty of
“good faith and fair dealing” is likened to a trustee’s duty to a beneficiary.  How does that lofty duty apply to the conduct
of married persons?

It applies
to both inter-spousal transactions (i.e., transfers) and to the management of
community property.  Specifically, “each
spouse must provide the other spouse access to books at all times regarding any
inter spousal transaction”, and “upon request provide true
and full information of all things affecting any transaction which concerns the
community property”. 

 The duty is most commonly relevant in the
context of community property assets. “… [A]ll property, real or personal,
wherever situated, acquired by a married person during the marriage while
domiciled in this state which is [presumed to be] community property.”  Marital earnings and anything purchased with
marital earnings is community property.

Thus, a
participant spouse’s retirement account, to the extent of contributions from
marital earnings, is community property, even though the account is titled
solely in the name of the participant spouse.
Any change of death beneficiaries requires the written consent of the
non participant spouse in order to be effective with respect to one hundred
percent of the community property retirement account.

Accordingly,
if a participant spouse withdraws money from his or her 401(k) retirement
account, which included marital earnings, for his or her sole pleasure or
benefit and without the non-participant spouse’s knowledge and consent then
such conduct would likely violate the duty.

Next, the duty also
applies to transactions between spouses, such as when one spouse transfers his
or her one-half interest in a community property – like the family home — to
the other spouse to make the asset the other spouse’s sole and separate
property.  

A statutory presumption
then applies that that the recipient spouse used undue influence over the
transferring spouse to make the other spouse transfer title.  An inter-spousal transfer of a family
residence can be set aside by a court unless the presumption is overcome.

What
happens when the duty is violated?  A
claim arises and, “a court may order an accounting of the
property and obligations of the parties to a marriage and may determine the
rights of ownership in, the beneficial enjoyment of, or access to, community
property, and the classification of all property of the parties to a
marriage.” 

Moreover, even if the
spouse who breached the duty subsequently files for bankruptcy the aggrieved innocent
spouse’s claim against the bankruptcy estate over the violation may not be
discharged.  This is because California’s
inter spousal duty of fair dealing creates a trustee relationship between the
spouses and a violation of such a duty is non dischargeable if the spouse has,
“a culpable state of mind involving knowledge of, or gross recklessness”
regarding such duty.

In sum, spouses are
each other’s trustees when it comes to how they conduct themselves with respect
to any dealings between themselves and the management of community property
assets.  Anyone seeking guidance with
respect to particular facts should consult an attorney.