A managing spouse may generally continue to enter into transactions and run the community business without the need for spousal consent. However, the managing spouse must provide advanced written notice of any transaction affecting (e.g. encumbering, selling, leasing, transferring) “all or substantially all of the personal property” in the community business. The managing spouse may also be required to provide advanced written notice of any discovered “income-producing opportunity” which is “outside [of] the ordinary course of business” to the non-managing spouse.
Any transaction affecting real property of the community, or personal property “used as the family dwelling” requires written spousal consent to avoid the risk of a set-aside, as does any transaction of community personal property for less than “fair and reasonable consideration.” Finally, because of the fiduciary duty between spouses, a managing spouse is prohibited from usurping a corporate opportunity of the community property business without consent.
Fiduciary Duty of Management and Control During Divorce Proceedings
The need for spousal consents stem from the parties’ fiduciary duties. Spouses owe each other a fiduciary duty “as to the management and control of community property.” This fiduciary duty requires a spouse to deal fairly and in good faith in managing both the community property and the other spouse’s separate property. The duty explicitly includes “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law.”
The duty of management and control is ongoing in dissolution proceedings and continues past the date of separation and until the date of the distribution of the community asset or liability in question.
The family code specifically governs spousal management and control of community property. The statute generally provides for equal management and control of community property, however the statute carves out an exception for a spouse who is operating or managing a business or interest therein which is all or substantially all community personal property. If a spouse has “primary” management of the community property business:
“the managing spouse may act alone in all transactions but shall give prior written notice to the other spouse of any sale, lease, exchange, encumbrance, or other disposition of all or substantially all of the personal property used in the operation of the business . . . whether or not title to that property is held in the name of only one spouse.”
Generally, therefore, under the Family Code a managing spouse may continue to run the family business without the need for written spousal consent, but must simply provide prior written notice of any transaction affecting “all or substantially all of the personal property used in the operation of the business.”
The written notice normally required the code is not compulsory when “prohibited by the law otherwise applicable to the transaction.” For instance, federal securities law may prohibit a managing spouse’s disclosures that would effectively allow the other spouse to trade community property stock on “inside” information.
Failure to Give Prior Written Notice Under The Family Code
The aggrieved spouse’s remedy for a failure to give notice is for a breach of fiduciary duty under the Family Code. However, failure to give prior written notice to the non-managing spouse cannot itself adversely affect the validity of the managing spouse’s transaction or any interest transferred.
Written Spousal Consent Required in Certain Circumstances
The “primary management and control” rules set forth above are subject to the Family Code limitations on transfers of community property, which require written spousal consent in:
- Transactions disposing of community property for less than “fair and reasonable value.”
- Transactions affecting community personal property used as the family dwelling, furniture, furnishings, clothing;
- Transactions affecting community real property
Additionally, managing spouses need to be aware that the corporate opportunity doctrine bars them from “usurping” an opportunity of the community property business. Specifically, due to amendments to the Family Code §721 (b) to include the current Corporations Code sections, the fiduciary (corporate) opportunity doctrine applies to spouses in managing community assets during separation prior to dissolution. Generally, if the opportunity arises in the normal course of the community property business and is within the scope of the corporation’s normal activities, before a fiduciary can take advantage of it for himself, he must first offer it to the business.
Parallel to this duty is the postseparation “income-producing opportunity” disclosure requirement. This requires “accurate and complete written disclosure of any investment opportunity, business opportunity, or other income-producing opportunity” presenting itself after the date of separation that “results from any investment, significant business activity outside the ordinary course of business, or other income-producing opportunity of either spouse from the date of marriage to the date of separation.” “This written disclosure must be made in sufficient time for the other spouse to make an informed decision as to whether he or she desires to participate in the . . . opportunity, and for the court to resolve any dispute regarding the right of the other spouse to participate in the opportunity.” Id.
Ordinary “course of normal business” transactions do not require advanced written notice, but these are not necessarily exempt from the general disclosure requirements imposed by the Family Code.
A spouse wishing to consummate a community property transaction for which the consent of both spouses is required, but who is unable to obtain the requisite consent, may do so without risking breach of fiduciary duty claim only by first obtaining leave of Court. Exceptions include family law attorney’s property lien, non-probate CP transfer effective upon death, leases of community realty for term of less than one year, transactions affecting CP held in a revocable trust, involuntary conveyances and encumbrances (e.g. a mechanic’s lien) agency situations where one spouse has actual or implied authority to sign for the other in encumbering or conveying the property. The Court may dispense with the consent requirement if it is established that
- the proposed transaction is in the best interest of the community and
- consent has been “arbitrarily refused” or because of incapacity/prolonged absence.
Failure to Obtain Written Spousal Consent
If the sale or other disposition of the business personal property would require the non-managing spouse’s consent, the failure to obtain that consent is a breach of fiduciary duty which may entitle the non-managing spouse to avoid the transaction.
Unclear Standard on “Fair and Reasonable Value”
There is not yet a clear standard for determining whether a business transaction involves less than “fair and reasonable value” for the community, such that it requires written spousal consent under the Family Code.
Case law has held that the prudent investor standard did not apply to the fiduciary duty of management and control of community property. The legislature attempted to abrogate the ruling of with a revision to the Family Code, but did not then adopt the prudent investor standard despite an opportunity to do so. Notably, the current statute adopts the California Corporations Code which mandates “refraining from engaging in grossly negligent or reckless conduct.” This has led some to conclude that gross negligence requires spousal consent whereas ordinary negligence does not. Leading commentary on the issue indicates that the consideration should be of “substantially equal value,” disposing of the “lower ‘good faith’ standard of care” which was applied previously.