Fiduciary Duty

During the last few years the relationship, nature and scope and obligations that spouses have to each other has evolved. Currently, in California, spouses hold the duty of a fiduciary to the other. This fiduciary duty between spouses can create conflicts with presumptions that arise from other areas of law. One area in which the relationship between spouses becomes significant is the issue of deed transactions.

Evidence Code 662 creates a presumption that “the owner of the legal title to property is presumed to be the owner of the full beneficial title. The presumption may be rebutted only by clear and convincing proof.”

That Code section, when coupled with Family Code Section 2581, which provides that all property held jointly, or in joint form for dissolution purposes is considered to be community property, and subject to the equal division rule, creates a double presumption. A spouse could argue that a deed in both parties’ names should presumptively be treated as community property and subject to the equal division rule.

However, these Code sections can be interpreted to be in conflict with Family Code Section 721 which provides that ” … in transactions between themselves, a husband and wife are subject to general rules governing fiduciary relationships which control the actions of persons occupying confidential relationships with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing by each spouse, and neither shall take any unfair advantage of the other.”

If a deed was created by some type of transaction between the spouses (i.e., a transmutation), the deed itself and the underlying transaction creating the deed would be scrutinized from the standpoint of a transaction between two people who have the highest duty (fiduciary) between each other. Such a deed might not be subject to a presumptive equal division mandated by Family Code Section 2581. This conflict between these three Code sections can turn what appears to be a relatively straightforward transaction into a very complicated one.

In the recent case of In Re Marriage of Delaney (2003), 111 Cal.App.4th 591; 4 Cal.Rptr.3d 378 the court addresses these conflicting presumptions.

In Delaney, the husband had acquired a residence prior to marriage through inheritance. Subsequent to marriage, in order to add some additions to the residence in contemplation of the birth of the parties’ second child, the husband transferred the property to both parties in connection with the refinancing. There was some testimony as to the husband’s learning disability which precluded him from being able to read fully and also the fact that because wife had worked as a legal assistant, the husband relied upon her for all legal and financial matters. There was also testimony that husband did not, by signing the deed, intend to transfer one-half of the ownership of the property to his wife.

At the trial, the husband objected to wife’s assertion that that the property had been transmuted to joint tenancy, and the trial court agreed with him. In the trial court’s statement of decision, the Court indicated that:

(1) wife had not given husband sufficient consideration for her interest in the property; (2) As fiduciary, she bore the burden of establishing that the transfer of the property was not because of any undue influence, and (3) She had failed to meet that burden, and as such the deed was void.

Wife appealed the decision to the appellate court which sustained the underlying trial court’s decision.

The trial court, in relying upon In re Marriage of Haines (1995) 33 Cal.App.4th 277, found that the presumptions arising from Evidence Code Section 662 and Family Code Section 2581 were trumped by the fiduciary presumptions of Family Code Section 721. As the court in Delaney stated, on page 382, describing the reasoning of the court in Haines, “the court included that in every such instance, the presumption based on the confidential fiduciary relationship between spouses must prevail over the presumption based on recorded title. … The reasoning of Haines is clearly applicable here. In cases such as this, involving interspousal property transactions, the “irreconcilable conflict” between the two presumptions established by Family Code Section 721 and Evidence Code Section 662 has been resolved in favor of Section 721 based on the intent of the legislature in enacting fiduciary protection for interspousal transactions … ”

The court stated, that to find otherwise, specifically that if the presumption in Family Code Section 2581 (equal division rule) applied to a transmutation of separate property to joint tenancy, all of the protections in Section 721 would be abrogated. Although the case of Haines involved a property jointly acquired by the parties, and then transferred to separate property by way of an interspousal transfer deed (essentially the reverse of Delaney), the Delaney court found that Haines was not limited to that factual pattern and that the reasoning used in Haines applied to all transactions of whatever nature between spouses whether from separate to joint or joint to separate. As the Delaney case pointed out, the burden of proving the transaction did not involve undue influence falls upon the party who benefited from the transaction. This burden coupled with the finding in Haines that “any creditable evidence” would sustain a finding of undue influence, makes the situation problematic for the party seeking the benefit of the quitclaim deed.

The Delaney case, in dicta, also poses an interesting question. The court states, on page 383,

“the acquisition of property during marriage by purchase or gift is clearly different from interspousal transmutation of property already owned by one or both spouses.”

As such, Delaney suggests that when a quitclaim deed by one of the spouses is executed in connection with the original acquisition of a such a gifted property, the Haines/Delaney rationale may not apply.

Real estate transactions involving deeds between married parties appear to be something that needs to be handled with the utmost formality. Both parties should be represented by independent counsel, memorialization the extent of their understanding of the fiduciary obligation between each other.

Are spouses, in a deed transaction, standing in a posture of fiduciary responsibility toward each other required to disclose to each other the full nature and extent of all community and separate property? Or, would the parties have to indicate only their awareness and understanding of the fiduciary relationship and how the transmutation affects same? Questions, such as these, are only suggested by the Delaney case which indicates that real property transactions between spouses will be held to the highest scrutiny.

Contact Us for a consultation