Archive for June, 2014

California Divorce Blog–Gambling Spouse and Community Property Reimbursement

June 14, 2014

From time to time I am presented with an issue where one spouse has gambled away a substantial portion of the community property assets.  I have researched the issue of Gambling with community property as it applies to Fiduciary Duties owed between spouses during marriage. Fair warning, this post involves more “Legalise” than my prior posts.

Cases discussing gambling issues in divorce proceedings and community property division are few and none discuss the issue in depth.   Basically, winnings gained with separate property are considered separate property. (In re Marriage of Wall (1972) 29 Cal.App.3d 76.) Likewise gambling winnings with community property are deemed community property, and also because gambling is not considered a game of skill, winnings from gambling with community property, even after separation, are deemed community property. (In re Marriage of Shelton (1981) 118 Cal.App.3d 811.)

However, gambling losses using community property assets without the consent of the spouse is considered a breach of one’s fiduciary duty to the other spouse.   Where gambling losses result in a debt obligation by the community estate, the court assigns to the gambling spouse the debt amount as a separate obligation. Where the gambling losses without consent involve the depletion of community property assets without incurring debt obligations, the conduct is deemed not beneficial to the community and require the gambling spouse to reimburse the non-gambling the one-half share of the losses with an offsetting share of the gambler’s share of community property assets. Because the gambling spouse often hides the activity from the other spouse and evidence of proof, the court can shift the burden of proof to the gambling spouse when the other makes a prima facie claim of breach of fiduciary duty.

Judicial treatment of gambling losses with community property assets without the consent of the other spouse rests upon the Family Code provisions that establish a mutual fiduciary duty as to any transaction involving community property assets.    Family Code §721 and Family Code §1100 in tandem define the fiduciary duties between spouses in a marriage over community property.

Section 721 of the Family Code mandates in the marriage relationship a fiduciary duty which requires the highest good faith and fair dealing as to each other’s interest, the same as that required in a non-marital business partnership. The duty entails not taking unfair advantage of the other, including providing access to transactional books, rendering of true and full information of all things relating to transactions involving community property, and accounting to the other any benefits derived from transactions involving community property where consent was not obtained. (In re the Marriage Of Simmons (2013) 215 Cal.App.4th 584, 590.)

The section incorporates certain provisions of the Corporations Code that echo the duties set forth in Section 721.   At one time these incorporated Corporations Code sections set forth in Section 721 required that a request for information or an inquiry be made regarding transactions as a prerequisite to a finding of breach of fiduciary duty against a partner.

Recent amendments to Family Code §721 along with revised Corporation Code references incorporated within removed the requirement that a prerequisite demand for information be made to establish breach of fiduciary duty against the other spouse.   In summary, an automatic duty of disclosure is now imposed on partners to furnish each other without demand “any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties….” In re Marriage of Walker (2006) 138 Cal.App.4th 1408, 1427.

However, the duties are limited to providing access, information and an accounting and are not all embracing of those contained in the Corporations Code such as duties and obligations of corporate officers or directors as in the corporate opportunity doctrine. (In re Marriage of Leni (2006) 144 Cal.App.4th 1087, 1092-1093.)

Within the marital relationship, Family Code §1100 provides that either spouse has the right to management and control of community personal property subject to defined restrictions, including gifting and disposing for less than fair and reasonable value without consent of the other party. Other restrictions include selling, conveying or encumbering property associated with the home dwelling and clothing of the spouse and children without consent as well as property used in a community business interest.   These duties run until the court orders the division of the community estate and requires the full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.

Family Code §1101 and Family Code §§2602 and 2625 set forth the remedies attending the breach of duties toward community property management and control.

Family Code §1101 states that a spouse may make a claim for breach of fiduciary duty where one spouse impairs the other spouse’s present undivided one-half interests in the community estate in a single transaction or in a series of transactions where there is a detrimental impact to that interest.  Specified remedies include accounting, determination of rights of ownership, adding the name of a spouse to title of the community property with some noted exceptions.   It provides that these remedies can be sought apart from a marital dissolution action but also in a separate civil action with a three year statute of limitations after discovery of breach. No time limitation is set within a marital separation or dissolution action.

The general remedy for a breach of fiduciary duty is one-half of the value of the undisclosed or transferred asset plus attorney fees and costs.  Subsection (h) of the statute provides a punitive remedy when the breach falls within the requirements under Civil Code 3294 where the conduct amounts to “fraud, oppression and malice” toward the other party. Under such circumstances, the court is empowered to award 100% of the undisclosed or transferred asset.

The remedy set forth in Family Code §2602 authorizes the court to award or offset against existing property, an amount determined to have been deliberately misappropriated by a party where the other party was not involved.  This would apply to the situation where a spouse gambled away significant cash assets of the marriage without consent of the other party. In this circumstance, no debt is created but community property is lost. If $100,000 in savings was gambled away by a spouse, the court could award $50,000 to the other spouse from the gambling spouse’s interest in other community property.

The remedy set forth in Family Code §2625 authorizes the court to assign as separate debt any obligation incurred by the spouse during marriage and before date of separation that were “not incurred for the benefit of the community.”

The main case dealing with gambling issues is In re Marriage of Cairo (1988) 204 Cal.App.3d 1255 where the court assigned a balance on a credit card to the husband who incurred the debt because of gambling.   The gambling and resulting debt was deemed to have not been incurred for the benefit of the community. Once characterized as a separate debt, it does not factor into the equal division of community property.

Please contact Attorney Keith Simpson today to discuss your important legal issue at (310) 297-9090. The Law Offices of Keith F. Simpson, A Professional Corporation, are located in Manhattan Beach, California. You may also review our website at http://www.simpsonlaw.net for a free consultation.

 

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