California law imposes what’s called a “fiduciary duty” on spouses, which mandates the highest duty of good faith and fair dealing in their interactions with each other and to not take advantage of each other through fraud or other means. As the state’s Third District Court of Appeals recently explained, however, the duty no longer exists once the spouses divorce.
Husband and Wife were divorced in December 2010, after 14 years of marriage. They entered into a marital settlement agreement, under which the former spouses agreed that their individual stock ownership stakes in two different companies (OMI and Lifekind) would be considered each spouse’s separate property. They also pledged to “cooperate” in efforts to sell both companies.
Wife went back to court about a year later, seeking to force Husband to cooperate in selling both companies. She alleged that he had diluted her interest in OMI by obtaining a stock option agreement to give him a majority interest in the company, that he had obstructed the sale of Lifekind and OMI, and that he had breached his fiduciary duties related to the businesses. She asked a trial court to rescind Husband’s stock options deal and to issue sanctions against him for breaching the duty. The trial court ultimately declined, however, finding that Husband didn’t owe Wife an ongoing fiduciary duty after they divorced. The judge also found that the question of whether Husband owed Wife or other company shareholders a separate fiduciary duty based on his positions and ownership interests in the companies was beyond the family court’s jurisdiction.
Affirming the decision on appeal, the Third District agreed that Husband no longer owed a fiduciary duty to Wife based on their marital relationship after the former spouses divorced. It said the stock at issue in the case became separate property when the spouses signed the settlement agreement. “At that point, the fiduciary obligations…arising from [Husband] and [Wife]’s former marital relationship no longer applied,” the Court concluded. The Court also found that the trial court couldn’t force Husband to sell either business because Wife had yet to prove that he didn’t live up to his responsibility under the agreement to “cooperate” in sales efforts.
This case is just one example of how complicated a divorce can become when one or both spouses own a business during the course of the marriage. The good news is there are alternatives to traditional divorce that can help spouses reach a mutually agreeable solution, while avoiding the cost and stress of full-blown legal proceedings.
With offices throughout the Bay Area, California divorce lawyer Lorna Jaynes approaches divorce cases as a problem to be solved collaboratively, not a battle to be won. She handles each case personally, taking the time to understand each individual client’s needs and interests and explaining the various options for resolving these matters. Call us at (510) 795-6304 or contact us online to set up an appointment.
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