California law on the nature of spouses’ rights and obligations with respect to management and control of community property has evolved over the last thirty years from less stringent “good faith” standards to heightened “confidential duty” and “fiduciary duty’ standards. Under current law, the duties owed between spouses in transactions between themselves are the same highest duties owed by parties to a fiduciary relationship.
The heightened standard with regard to transactions between spouses is codified in Family Code Sec. 721(b). The section provides that “in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.”
Incidental to this fiduciary relationship is a rebuttable presumption of undue influence when one spouse obtains an advantage over the other in a community property transaction–i.e. when one spouse improves his/her position, obtains a favorable opportunity, or otherwise gains, benefits or profits in a community property transaction to the exclusion of the other. Marriage of Haines (1995) 33 CA4th 277, 297, 39 CR2d 673, 686. This presumption arises in connection with any interspousal property transaction in which one spouse obtained an advantage over the other. It is important to note that the presumption arises even if the transaction at issue did not result from fraud, deceit or coercion. Marriage of Mathews (2005) 133 CA4th 624, 629-630, 35 CR3d 1, 4.
The spouse favored by such a transaction has the burden of rebutting the presumption of undue influence. To rebut the presumption, he/she must show that the other spouse entered into the transaction freely and voluntarily, with full knowledge of all the facts, and with a complete understanding of its effect. Marriage of Delaney (2003) 111 CA4th 991, 996-997, 4 CR3d 378, 382. If the spouse who benefited from the transaction fails to demonstrate the foregoing, the transaction may be ignored.
A classic example of this situation is when a husband executes a quitclaim deed in favor of his wife as her separate property. Generally that fully executed Quit Claim would have the effect of changing the character of the property from community to his wife’s separate property based on another presumption called “presumption of title” under evidence code section 662 and the under a the theory of “transmutation” pursuant to family code section 852., Evidence Code Section 662 presumption of title states that “the owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof. However, because of the presumption of undue influence under family code section 721(b), the wife has the burden to overcome the presumption in order to effect a change in the character of the property from community to separate. If the wife does not meet the burden, then the court can set aside the quit claim deed based on a presumption that such transfer was made with undue influence.
Each spouse’s fiduciary obligations toward the other spouse under Family Code Sec. 721(b) continue after separation in anticipation of dissolution, nullity or legal separation until the date of distribution of the community asset or liability in question. Family Code Sec. 2102(a) and (b). Accordingly, if you have made an interspousal transaction benefiting your spouse during the marriage such as executing a quit claim and you are contemplating filing a divorce, it is advised that you consult with an experienced attorney to determine what avenues of relief you may take to set aside the transaction.
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Attorney Kenneth Ursua Reyes was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 700, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail [email protected]; Website kenreyeslaw.com.
