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Husband Breached His Fiduciary Duty When He Lent $1,000,000 After Separation

Steven and Judy were married for 18 years. Steven formed a company to research and develop the class of drugs known as magnetic resonance imaging (MRI) contrast agents. Steven incorporated a business called Salutar, Inc. (Salutar) for this purpose. Salutar was eventually sold to a Norwegian corporation.

After Steven retained a divorce lawyer to file for divorce, he continued to manage the community’s assets. He controlled the proceeds from the sale of Salutar stock, approximately $7.5 million. While Steven was managing the Salutar proceeds, the account was under restraining orders from the divorce court. Despite these restraining orders, Steven lent almost a million dollars to a friend’s company, Forbes Manufacturing, Inc. (Forbes). Forbes defaulted and Steven attempted to collect on the note. Judy’s divorce attorney moved in the divorce action to have the entire note assigned to Steven, while Steven’s divorce lawyer requested an in-kind division. In the trial, the divorce court assigned the note to Steven. On appeal, Steven’s divorce lawyer contended that the court used the wrong standard — fiduciary duty — rather than the duty of good faith. Furthermore, alleged Steven’s divorce lawyer, there was insufficient evidence to support the finding that he breached that duty. Steven also asserted that the circumstances of this case did not meet either of the two recognized exceptions to in-kind division. The appellate court wholly disagreed with Steven’s divorce lawyer.

At the time Steven lent the money, each spouse owed the other spouse a duty of good faith in the management of the community’s property. The managing spouse’s duty extended up until the property was divided by the parties or by a divorce court. (The statute had since been amended to provide for a fiduciary duty on the part of one spouse toward the other.)

In this case, the divorce court recognized that the statute had been amended to impose the higher standard of fiduciary duty. The divorce court reasoned, however, that because of the unique circumstances of the case, the fiduciary standard applied. These circumstances were that the divorce court allowed Steven to manage the funds over Judy’s objection, and that the account was under restraining orders from the divorce court. Steven knew that Judy did not want to lend money to Forbes. The parties were in adverse positions, and the right to manage the property was being litigated in the divorce court. Under these circumstances, the divorce court did not err in applying the fiduciary duty standard.

Considerable discretion is vested in the divorce court in terms of its division of community property. When circumstances warrant, the divorce court may assign a risky investment wholly to one spouse rather than dividing it by in-kind division. The Appellate Court agreed with wife’s divorce attorney and did not find that the family law court abused its discretion in assigning the investment in Forbes entirely to Steven.

Finally, substantial evidence supported the finding by the divorce court that Steven breached his fiduciary duty. Knowing Judy did not want to lend money to Forbes, Steven did so without regard to her wishes. The Court wrote: “Taking 20 percent of one’s capital and tying it up in an illiquid investment and making a loan… to a company whose financial situation was uncertain are not the hallmarks of a prudent fiduciary.” The account had been frozen by the divorce court, and a prior order required Steven to get Judy’s written consent before disbursing funds. The Court of Appeal agreed with wife’s divorce attorney and held that Steven violated those divorce court orders when he made the Forbes loan.

In re Marriage of Quay (1993) 18 Cal.App.4th 961