CLAIMS AND REMEDIES FOR VIOLATION OF FIDUCIARY DUTY
© 2003 National Legal Research Group, Inc.
This presentation presents an overview and analysis of the law and strategy related to violation of fiduciary duty in the marital and divorce context. It will summarize: (1) Definitions and contours of fiduciary duty; (2) Parameters and scope of fiduciary duty; (3) A panoply of cases illustrating violations of fiduciary duty; and (4) Causes of action and remedies.
1. FIDUCIARY DUTY: AN OVERVIEW
In the English common law, husbands had the right to command, and wives had the duty to obey. Holding in common law that husbands and wives were one person, courts for over six hundred years went on to decree that the "one person" was the husband acting alone even over the wife's objection. Beginning in the twentieth century, however, this notion gave way to the doctrine that "a married couple is not a single entity, but separate individuals, both of whom have the right to control their lives, associations, finances, and affairs generally." 41 C.J.S. Husbands and Wives 304. Once the law discovered that marriage involved two people rather than one, it went on to define the nature of the duties and obligations that each owes to the other party. The modern doctrine is that the marital relationship imposes an "attendant fiduciary or confidential relationship, involving confidence and trust, until termination of the marriage. The relationship entails the highest trust and confidence and justifies [the husband's and wife's] mutual reliance." Id.
Due to the law's traditional refusal to recognize mutual duties in marriage, the concept of fiduciary duty originated outside the arena of domestic relations. The classic fiduciary relationships are those "between attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder." U.S. v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991) (citing other authorities). Such fiduciary relationships were characterized as relationships of the utmost trust and reliance. The fiduciary relationship "exists when confidence is reposed on one side and there is resulting superiority and influence on the other." In a fiduciary relationship "one person depends on another the fiduciary to serve his interests." Id. One party therefore acts as a fiduciary to another when a party acts "for the benefit of another person, as to whom he stands in a relation implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part." Id. (quoting Black's Law Dictionary 564 (5th ed. 1979)). A fiduciary is typically entrusted with control over property and finances and is almost invariably subject to a duty of confidentiality with respect to information acquired in the course of the fiduciary relationship. The terms "confidential relationship" and "fiduciary relationship" are used synonymously.
Equitable Division vs. Community Property Jurisdictions
In the domestic relations context, application of the concept of fiduciary duty varies most tellingly according to whether the jurisdiction is an equitable distribution jurisdiction or a community property jurisdiction. In equitable distribution jurisdictions, courts do not necessarily impose fiduciary duties on spouses by the automatic operation of law: recall that the husband-wife relationship was not one of the seminal fiduciary relationships at common law. Rather, equitable division jurisdictions take one of two approaches. They either (1) undertake a fact-based inquiry to determine whether additional facts above and beyond the mere fact of marriage justify the imposition of a fiduciary duty, or (2) presume or impose a fiduciary duty.
In equitable distribution jurisdictions, courts are divided as to whether the existence of fiduciary duty arises generally (but not automatically) from the marital relationship or is a fact-based inquiry. In line with the former approach, a North Dakota court stated categorically that "Marriage involves a confidential relationship, and the law should not permit one marital partner to take 'unconscientious advantage' over the other through the trust which is part of that relationship." Crawford v. Crawford, 524 N.W.2d 833, 836 (N.D. 1994). West Virginia, another equitable distribution jurisdiction, has assumed "a fiduciary relationship between husband and wife with regard to dealing with each other's property." Charlton v. Charlton, 413 S.E.2d 911, 916 (W. Va. 1991). The West Virginia court pointed out that this principle was announced even before West Virginia transformed itself into an equitable distribution jurisdiction.
In contrast, the Michigan Court of Appeals stated: "Although a fiduciary relationship may exist between husband and wife . . . [citation omitted], a fiduciary relationship does not necessarily exist whenever the parties are related." Nederlander v. Nederlander, 517 N.W.2d 768, 771 (Mich. App. 1994). Among the factors considered in whether a confidential/fiduciary relationship exists between spouses are "the age, mental condition, education, business experience, state of health, and degree of independence of the spouse in question." 41 C.J.S. Husbands and Wives 304. The Illinois Court of Appeals enumerated typical factors which can superimpose an inter-spousal fiduciary relationship on the marital relationship: an executed power of attorney, Wife's "near total" dependence on Husband, the long duration of the marriage, Wife's "diminished physical and mental capabilities," and the trust Wife placed in Husband. Simon v. Wilson, 684 N.E.2d 791, 797 (Ill. App. 1 Dist. 1997); see also McClung v. Smith, 870 F. Supp. 1384, 1400 (E.D. Va. 1994) (factors determining whether husband had fiduciary duty include Husband's exclusive handling of complex financial matters, Wife's impairment, Wife's reliance on husband to handle specific transaction, and Wife's lack of knowledge concerning the transactions in question).
In equitable distribution jurisdictions, courts have identified a wide range of events as engendering the requisite degree of trust and confidence to impose a fiduciary duty: entering into a contract during the marriage (Id. at 1399); entering into a special relationship above and beyond the marital relationship (Id. at 1400); and repeated disclosure of business secrets between family members. Chestman, 947 F.2d at 569. However, a fiduciary duty cannot be imposed unilaterally merely by entrusting a spouse with confidential information. Id. at 567.
The community property system was not recognized in the common law. Rather, it is a creation of statute based on a distinct legal heritage: the civil law tradition inherited from Spain and Mexico. In the community property system, the marital community is "essentially a business concern." 41 C.J.S. Husband and Wife 122. The community represents an implied contract between the parties, which determines the parties' rights and obligations. Id. In community property jurisdictions, the fiduciary relationship "arises from the fact of the marriage itself." Williams v. Waldman, 836 P.2d 614, 618 (Nev. 1992); see also Zieba v. Martin, 928 S.W.2d 782 (Tex. App. Houston [14th Dist.] 1996).
The community property system presupposes that "each spouse will act in the best interest of both spouses in managing community property" during the marriage. Gibson v. Gibson, 692 So. 2d 708, 710 (La. App. 3 Cir. 1997). In Texas, courts have created the concept of "fraud on the community" to denote violations of the fiduciary relationship. Zieba, 928 S.W.2d at 789. The court in Zieba explains that breach of inter-spousal fiduciary duty is designated fraud on the community because, "although not actually fraudulent, it has all the consequences and legal effects of actual fraud in that such conduct tends to deceive the other spouse or violate confidences that exist as a result of the marriage." Id. California went so far as to incorporate the marital fiduciary obligation into its statutes. See In re Marriage of Reuling, 28 Cal. Rptr. 2d 726, 732 (Cal. App. 1 Dist. 1994) (court finds that legislature intended to impose the higher standard of fiduciary duty when it replaced previous amorphous statutory "good faith" language with "fiduciary duty" language).
2. PARAMETERS AND SCOPE OF MARITAL FIDUCIARY DUTY
Once a fiduciary relationship is determined, its scope is exceedingly broad and flexible. The fiduciary relationship is characterized by the "boundless nature of relations of trust and confidence." U.S. v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991). The court in Chestman cites approvingly a scholar's observation that:
Equity has never bound itself by any hard and fast definition of the phrase "confidential relation" and has not listed all the necessary elements of such a relation, but has reserved discretion to apply the doctrine whenever it believes that a suitable occasion has arisen.
Id. (quoting G.G. Bogert, The Law of Trusts and Trustees, 482, at 284-86 (rev. ed. 1978)).
Due to the breadth of the fiduciary duty relationship, courts have used equitable concepts and have undertaken detailed fact-based inquiries to protect a spouse who has been victimized by a breach of fiduciary duty.
Following up on this general breadth and flexibility, domestic relations courts have imposed a fiduciary duty on virtually every type of financial transaction that a husband and wife can enter into, including contracts, estate planning, conveyances of personal and real property, business dealings, stocks and investments, commercial transactions, management of real property, corporate decisions, and payment of college expenses for children. One notable exception is the filing of bankruptcy due to the extension of protections to debtors in the bankruptcy code.
The beginning and ending of fiduciary duty in domestic relations cases vary according to the jurisdiction (equitable distribution, community property), the nature of the asset involved, and the highly specific facts of the case. Courts have imposed a fiduciary duty throughout marriage, during the divorce process, and for a year or more following divorce. In all jurisdictions, because imposition of the duty is a matter for equity, courts have wide latitude to ascertain and impose beginning and ending parameters.
Generally, the marital fiduciary relationship extends from the beginning to the end of the marriage. Equity can impose an earlier starting date in the case of pre-nuptial understandings and negotiations. In addition, the execution of a pre-nuptial agreement gives rise to independent duties of disclosure. A pre-nuptial agreement may significantly limit the scope of fiduciary duty by express terms concerning management of property and assets, or through designating property as the asset of one party.
Courts have struggled with the question of when fiduciary duty ends and have developed varying rules to achieve equity. The duty does not necessarily end with the filing of separation or divorce papers. In community property states, although the duty generally extends from beginning of the marriage to dissolution, the definition of when dissolution has occurred may vary. In Arizona, a community property state, Husband who, according to the trial court had fraudulently transferred marital assets after filing of the divorce petition contended that the fiduciary duty ended upon notice of intent to dissolve the marriage. Gerow v. Covill, 960 P.2d 55, 63 (Ariz. App. Div. 1 1998). In disposing of the issue, the court first cited a previous Arizona case in which a fiduciary duty had not been imposed when the parties continued to reside together while conducting amicable settlement negotiations. See Applebaum v. Applebaum, 98 Nev. 382, 566 P.2d 85, 87 (1977). The court distinguished the Applebaum case from Gerow and cited approvingly cases from Idaho and California which imposed the duty until termination of the marriage (Idaho) and to the date when dissolution and property distribution were complete (California). See Smith v. Smith, 860 P.2d 634, 643 (Idaho 1988); In re Marriage of Modnick, 663 P.2d 187, 191 (Cal. 1983). Following such precedents, the Arizona court in Gerow went on to hold that the fiduciary duty extended until the end of the marriage. Gerow, 960 P.2d at 63.
In Louisiana, another community property state, the court addressed the question of whether a fiduciary duty could extend after dissolution of marriage in the management of former community property. See Gibson v. Gibson, 692 So. 2d 708 (La. App. 3 Cir. 1997). In Gibson, during the marriage, Husband had invested community funds into retirement and investment plans with his employer. After the marriage, when he terminated his employment, he withdrew all the funds without the knowledge or consent of Wife, thereby subjecting Wife to taxes. The trial court refused to order reimbursement or sanctions on the basis that there was no evidence of bad faith. The trial court explained its decision by holding that Wife would have had to pay taxes in any case, and that Wife had failed to show that Husband had not acted as a prudent administrator. Id. at 709. Louisiana's court of appeals overruled this decision based on a statute overlooked by the trial court. Louisiana's statute imposed an affirmative duty extending to after the marriage on a party controlling former community property. The court reasoned that the statute imposes "a higher standard of care in managing and maintaining such former community property than the standard imposed during the marriage for managing community property." Id. The imposition of this higher standard is based on the fact that after the divorce, the law will no longer assume that a former spouse controlling former community property "will act in the best interest of both spouses in managing it." Id. at 710.
In equitable distribution jurisdictions, the date of termination of the fiduciary duty as in the date of initiation of the duty is a fact-based inquiry, focused on the central question of whether there exists at the relevant time a requisite reposing of faith and trust. Nederlander v. Nederlander, 517 N.W.2d 768, 770 (Mich. App. 1994). The Court of Appeals in North Carolina addressed the question of date of termination of fiduciary duty after a separation agreement had been signed. See Lancaster v. Lancaster, 530 S.E.2d 82 (N.C. App. 2000). In Lancaster, after physical separation, the parties met with an attorney to discuss executing a separation agreement. Although the attorney advised Wife that she did not represent her and she should seek legal advice, Wife did not do so. A year and a half later, Husband filed for divorce, seeking to incorporate the terms of the separation agreement. Ultimately, the trial court granted a divorce, incorporating the separation agreement into its judgment. Wife then appealed the judgment on the grounds that Husband still had fiduciary responsibilities to her after the separation, which he violated through fraudulent representations during negotiations. Id. at 84. The court declined to find the continued existence of a fiduciary relationship, reasoning that the fiduciary relationship ends when the parties become adversaries. Id. at 85. The court further pointed out that "It is well established that when one party to a marriage hires an attorney to begin divorce proceedings, the confidential relationship is usually over . . . although the mere involvement of an attorney does not automatically end the confidential relationship." Id. The court based its decision first on the fact that the attorney was Husband's attorney only. More significantly, the Court held that amicable negotiations do not necessarily end the fiduciary relationship but, rather, can indicate the continued existence of the relationship. Id. However, in this specific set of facts, the fiduciary relationship had ended because the parties "did not amicably agree to all of the [settlement] agreement's terms, but rather argued over such things as the amount of alimony." Id.
West Virginia addressed the question of fiduciary duty in the on-again, off-again divorce. See Marshall v. Marshall, 166 W. Va. 304, 278 S.E.2d 360 (1980). In Marshall, Wife who was depressed sought a reconciliation after separation. Husband insisted that she turn over investments to him as a condition of reconciliation. One year after she transferred the investments to him, the parties separated again and filed a divorce action. The trial court found the transfer to be a valid gift, but the Supreme Court reversed on the basis that there was still a fiduciary relationship even after separation which necessitated an inquiry to determine whether the transaction was executed in good faith or whether Husband had violated his fiduciary duty to Wife.
3. VIOLATIONS OF FIDUCIARY DUTY: A SMORGASBORD TO WHET THE APPETITE
Varieties of violations of fiduciary duty are limited only by the human imagination. Case law demonstrates that divorcing husbands and wives continue to devise imaginative ways of harming, interfering with, and disposing of each other's property and assets. This section will illustrate a sampling of the factual situations in which courts have found or parties have alleged that a violation of fiduciary duty has occurred.
The Improvident Loan
In California, Husband continued to manage the community's financial assets after the petition for dissolution was filed. Significantly, the court had denied Wife's motion for joint management of the assets. Having an extra $7,500,000 from the sale of stock, Husband and Wife were a ripe target for investment schemes by marital friends. Initially, the friends approached Wife for a loan of $100,000 to start up their company. When her financial advisor cautioned her against the investment, Wife refused. The marital friends approached Husband for a loan no longer of $100,000 but now in the amount of $986,714. Undeterred by prior court restraining orders imposed on the account and by his knowledge that Wife had previously refused the loan, Husband nevertheless decided it would be a wise investment and made the loan without Wife's knowledge or consent. The marital friend defaulted and the parties were left to seek a remedy for their loss. Wife moved the trial court to have the note assigned to Husband. The trial court assigned the note to Husband, holding that Husband had violated his fiduciary duty to Wife. At the time of the transfer, the standard in California had been good faith. After the transfer but during the trial, the statute had been amended to impose the higher standard of fiduciary duty. However, the trial court had reasoned that the fiduciary standard applied in any case because the trial court had allowed Husband to manage the funds over Wife's objections. See In re Marriage of Quay, 22 Cal. Rptr. 2d 537 (Cal. App. 6 Dist. 1993).
Again in California, Wife charged that Husband violated his fiduciary duty to her when he refused to reveal to her insider stock information that would have allowed her to dispose of the stock investment before the stock plummeted in value. The court held that federal law overrode any duty that Husband might otherwise have to Wife and commended Husband for acting scrupulously in accordance with federal securities regulations. The court also pointed out that, had Husband violated federal regulations, the community assets and the parties personally would have been in jeopardy. The court stated: "Good faith neither requires parties to expose themselves to criminal prosecution through the violation of a penal statute, nor to incur the civil liability attendant to violation of the federal securities laws." In re Marriage of Reuling, 23 Cal. Rptr. 2d 726, 731 (Cal. App. 1 Dist. 1994).
Gifts to an Adulteress
In Texas, Husband had maintained a twenty-year affair with his mistress. During the affair he had transferred deposits in excess of $300,000 to his paramour. The court held the mistress liable for a fraud on the community, stating that "a third person who knowingly participates in the breach of a fiduciary duty may also be liable for that fraud . . . even in the absence of intent." Osuna v. Quintana, 993 S.W.2d 201, 208 (Tex. App. Corpus Christi 1999). Reaffirming the Texas tradition of taking "a dim view toward gifts by the husband to 'strangers' of the marriage, particularly of the female variety," [citation omitted], the court held that community money spent on another woman during marriage necessitates an accounting. Id. at 209.
Execution of Settlement Agreement
In North Dakota, the Supreme Court held that Husband's misrepresentation of facts, including a representation that the parties might lose the marital residence if Wife did not allow him to take possession of the house and live in it with the children, was a violation of his fiduciary duty. The court set aside, under Rule 60(B), an unjust settlement agreement negotiated by the parties on the basis that "Marriage involves a confidential relationship, and the law should not permit one marital partner to take 'unconscientious advantage' over the other through the trust which is part of that relationship." Crawford v. Crawford, 524 N.W.2d 833 (N.D. 1994).
In Missouri, Husband made fraudulent representations to Wife that caused her to transfer her interest in marital real property to a corporation formed by Husband. The court, holding that the corporation was the alter ego of the Husband, imposed a constructive trust. Rajanna v. KRR Investments, Inc., 810 S.W.2d 548 (Mo. App. 1991).
College Expenses During Marriage
The Washington Court of Appeals held in 1996 that Wife did not violate her fiduciary duty when, during the marriage, she spent community funds on college expenses for her child (his step-child), even though Husband disapproved of some or all of the expenditures. The court held that "Where the facts show that husband and wife simply disagree on a matter involving the management of community property, the decision of the acting spouse is controlling." Schweitzer v. Schweitzer, 915 P.2d 575, 580 (Wash. App. Div. 1 1996).
Post-Divorce Withdrawal of Retirement Funds
In Louisiana, the court held that Husband had violated his fiduciary duty to Wife when, after the divorce, he unilaterally withdrew community funds from his company's retirement plan. The court stated that the law must protect a former spouse's interests in post-divorce assets from predation by the former spouse. Gibson v. Gibson, 692 So. 2d 708 (La. App. 3 Cir. 1997).
Designation of an Insurance Beneficiary
In New Mexico, Husband named his son by a prior marriage as beneficiary to a community-acquired life insurance policy. Needless to say, he did not inform his wife of this change. Husband additionally committed numerous fraudulent acts, including stock transfers and transfers of personal property. Husband and Wife were still married at the time of Husband's death. After his death, Wife sued the estate, the son, and the business in order to reclaim her interest in community property. With respect to the life insurance policy, the court first held that payment of policy premiums with community funds gives rise to a community property interest in the proceeds. Roselli v. Rio Community Serv. Station, Inc., 787 P.2d 428, 432 (N.M. 1990). The court then went on to point out that community property jurisdictions such as Washington, Texas, Idaho, and California had imposed a fiduciary duty on spouses in the management of community property. In its holding, the court stated that:
"(1) each spouse has the power to manage and dispose of the community's personal property; (2) subject to a fiduciary duty to the other spouse; and (3) absent intervening equities, a gift of substantial community property to a third person [in this case designation of a beneficiary in a life insurance policy] without the other spouse's consent may be revoked and set aside for the benefit of the aggrieved spouse."
Id. at 433.
Wide Variety of Fiduciary Duty Factual Circumstances
These few examples show the variety of factual circumstances under which courts have found, and not found, a violation of fiduciary duty. It is imperative that the attorney closely examine the facts of each case before the court to assess whether a violation of fiduciary duty has occurred.
4. CAUSES OF ACTION AND REMEDIES
The remedies for violation of fiduciary duty in domestic relations cases are varied, ranging from contract remedies through procedural remedies and remedies in equity. In most cases, remedies are fashioned in equity to achieve an outcome that is just under the circumstances. Available remedies can be considered as: (1) Remedies arising out of domestic relations laws, rules, and procedures; (2) Contract remedies; (3) Judgment-related remedies; and (4) Equitable remedies.
Remedies Arising Under Domestic Relations Laws, Rules, and Procedures
Domestic relations courts fashion remedies based on state and local statutes and state case law and rules. The specific nature of these remedies varies from jurisdiction to jurisdiction. The remedy of reimbursement provides an illustration. In states where reimbursement is allowed, courts have held reimbursement to be appropriate when a spouse commits a fraud on the other party or on the community resulting in financial detriment. Under the doctrine of reimbursement, the court orders the party at fault to compensate the innocent spouse for all related damages. In Texas, reimbursement is a prevalent remedy. In Osuna v. Quintana, 993 S.W.2d 201 (Tex. App. Corpus Christi 1999), Husband, in the course of a twenty-three-year adulterous relationship, had gifted substantial community property over $300,000 to his mistress. The court ordered him to reimburse Wife for the full amount of the gifts. The court also held the mistress liable for reimbursing the wronged spouse.
Some states do not recognize a right of reimbursement. In Dorbin v. Dorbin, the New Mexico Court of Appeals disallowed reimbursement in the absence of the acquisition of an asset with the expended funds. Dorbin v. Dorbin, 731 P.2d 959 (N.M. Ct. App. 1986). The court stated, "When community money is spent to the benefit of separate property, without the acquisition of an asset, for example, when money is paid for interest, taxes and insurance, neither New Mexico statute nor case law authorizes reimbursement." Id. at 968. The court went on to state that the rationale for denial of reimbursement is to avoid "litigation for accountings between spouses to determine who paid for the least significant thing." Id. A New Mexico court, under the appropriate factual circumstances, would presumably approve a remedy in a case such as Osuna: transfer by the court of an asset from the transgressing party to the aggrieved party. A New Mexico court could also set aside a gift to a third party. Roselli, 787 P.2d at 434. Courts have pointed out that, when a violation of fiduciary duty has occurred, unequal distribution of property, even when it is community property, is a potential remedy. In McClung v. Smith, 870 F. Supp. 1384 (E.D. Va. 1994), the court rejected Husband's argument that in an equitable distribution state, the only remedy for misappropriation of property may be to award a larger share of the remaining property to the victim. Id. at 1402. In Osuna, the court pointed out that in a divorce action involving community property, the "entire community estate is 'up for grabs,' with the trial court empowered to make any division of the community property that is just and right[.]" Osuna, 993 S.W.2d at 209. In Osuna, the court used its authority to require the adulterous husband to repay the entire amount of the transfer of a life insurance policy to the aggrieved spouse, even though Husband had a one-half interest in the community life insurance policy that was fraudulently transferred.
Awarding of alimony is a useful and flexible remedy, especially in states where reimbursement is not allowed. Alimony is based on need and ability to pay. Courts have determined need when one spouse is impoverished or loses assets due to the fraudulent or improvident behavior of the other spouse. Alimony awards as a remedy for violation of fiduciary duty have the additional advantage that they generally may be modified or extended to adapt to changing circumstances, for example, continuing violations of fiduciary duty and resulting changes in the financial conditions of the victimized former spouse. Awarding alimony is a flexible remedy, in which the court has wide discretion to protect the victim.
Even where alimony is not awarded, if a court determines the existence of an undisclosed, undivided asset, the court may divide it after divorce upon motion of a party. Marital settlement agreements should provide for mutual warranties that all assets have been identified and allocated. Even in the absence of such a clause, however, courts may re-open a case to divide an undisclosed asset. Remedies for undivided assets typically extend even after the deadline for a Rule 60(B) motion has passed.
In certain circumstances, an aggrieved spouse can remedy a breach of fiduciary duty arising from a contract entered into during the marriage. In a Virginia case, Klotz v. Klotz, 202 Va. 393, 117 S.E.2d 650 (1961), Husband and Wife had entered into a partnership agreement. The court, in enforcing the contract, held that
the obligations of a business contract deliberately and fairly made between husband and wife are binding on them in the same manner as contractual obligations assumed by other contracting parties. They may not be disregarded by one against the will of the other. Nor may their terms be changed at the whim or caprice of one of the parties, or by courts on a theory that different terms would now be more equitable. The relationship of partners is of a fiduciary character and imposes upon them the obligation to exercise good faith and integrity in their dealings with one another in the partnership affairs.
Id. at 655. Thus, Husband and Wife can sue for breach of contract, giving rise to the entire range of contractual, quasi-contractual, and equitable remedies (and defenses).
Breaches of fiduciary duty can lead to actions to set aside judgments under Rule 60(B) of the Federal Rules of Civil Procedure, or identical or similar rules as adopted by the states. In Crawford v. Crawford, 524 N.W.2d 833 (N.D. 1994), the court set aside a stipulated agreement entered into after Wife had fired her attorney. Prior to the agreement, Husband had misleadingly advised her that the marital residence was in jeopardy. This deception led to the execution of an agreement that the appeals court held to be unfair to Wife. The court pointed out that Rule 60(B) "provides the ultimate safety valve to avoid enforcement by vacating a judgment 'to accomplish justice.'" (Citation omitted.) Id. at 836. Rule 60(B) motions to set aside judgments are generally limited to one year after entry of the agreement. In Nederlander v. Nederlander, 517 N.W.2d 768 (Mich. App. 1994), the court refused to allow an independent fraud action after the one-year post-divorce period had elapsed, at which time a Rule 60(B) motion was no longer permitted. In this case, Husband had allegedly misrepresented the value of his interest in a business asset. The court, in granting summary judgment to Husband, held that allowing an independent fraud action so long after the judgment and after Wife had had ample opportunity to conduct discovery, was "contrary to the public policy behind the finality of judgments." Id. at 770. However, it is possible to extend the time frame for a Rule 60(B) motion by mutual agreement of the parties as reflected in a marital settlement agreement.
Corresponding to the breadth and flexibility of the duties imposed under the principle of fiduciary duty is the range of equitable remedies available to the damaged spouse. Two will be discussed here: accounting actions and constructive or resulting trusts.
An accounting is a fundamental equitable remedy. See McClung v. Smith, 870 F. Supp. 1384, 1400 (E.D. Va. 1994). The accounting process consists of two stages. First is the stating of the account, i.e., the determination of "who owes what." Second is the settlement of the account: the payment of the money found owing. Id. In an accounting the burden is on the fiduciary to establish that he has not violated his fiduciary duties. In McClung, Husband attempted to argue that an accounting between a husband and wife was impermissible because it "would have a disastrous effect on marital harmony." Id. at 1401. The Virginia federal district court rejected this argument on the basis that there was a special relationship between husband and wife which "classically yields" a fiduciary duty. Id. Further, the court pointed out that no authority was cited and the court found no authority that would exempt from a fiduciary duty a spouse who had misapplied funds that had been entrusted to him by his wife. The court as a matter of policy refused to create such an exemption, and formally recognized the remedy of an accounting involving a husband and wife. Id.
Constructive Trust and Resulting Trust
A constructive trust is a "method or formula used by a court of equity as a means of effecting restitution or rectifying a situation where, as a result of a violation of a confidence or faith reposed in another, the party who seeks the aid of equity has been wrongfully deprived of or lost some title." Rajanna v. KRR Investments, Inc., 810 S.W.2d 548, 550 (Mo. App. 1991). A constructive trust is designed to prevent unjust enrichment resulting from the wrongful appropriation of property. A. Scott & W. Fratcher, The Law of Trusts 404.1 (4th ed. 1989), quoted in Aragon v. Rio Costilla Coop. Livestock Ass'n, 812 P.2d 1300, 1304 (N.M. 1991). In Rajanna, the trial court had imposed a constructive trust whereby it transferred title to the former community business to Wife following Husband's fraudulent conveyance of the business to outside parties. During the marriage, Husband and Wife had acquired thirty-six pieces of real estate in both of their names. In 1975, over ten years before the divorce action and the action against the corporation, Husband fraudulently induced Wife to transfer the properties to KRR, a corporation formed by Husband. The trial court ordered KRR to transfer its interest in the property to Wife, because KRR had acquired the property fraudulently in that Wife allowed the transfer based on Husband's assurance that the transfer was necessary to protect their marital assets and that the transfer would have no practical effect on their ownership interests. Id. at 550. Husband argued to the appeals court that the ten-year statute of limitations prevented Wife from obtaining equitable relief and left the trial court with no power to impose a constructive trust. Rejecting this argument, the court of appeals held that a breach of fiduciary duty on the part of Husband was sufficient to permit the imposition of a constructive trust between Wife and the corporation. This constructive trust imposition resulted in the transfer of all of KRR's interest in the property to Wife. Id. at 549.
In Osuna v. Quintana, 993 S.W.2d 201 (Tex. App. Corpus Christi 1999), the court imposed a resulting trust for the benefit of the community estate, rather than a merely constructive trust. A resulting trust arises when someone disposes of property "under circumstances which raise an inference that such person does not intend that the party taking or holding the property should also have the beneficial interest therein, and where the inference is not rebutted and the beneficial interest is not otherwise disposed of. Restatement (Second) of Trusts 404 (1957), quoted in Aragon, id. at 1297. In Osuna, during the course of his fifteen-year affair with his paramour, husband had given excessive and unreasonable gifts to her. In addition, he had paid over $300,000 from community funds to make down payments and mortgage payments for the house inhabited by the other woman. Husband was not able to prove that the gift was not unreasonable.
The court found that a special type of resulting trust a purchase money resulting trust had arisen from the payment of the purchase price of the house from community funds. A purchase money resulting trust is implied by the court when someone other than the nominal titleholder pays the purchase price of the property. Under a purchase money resulting trust, the parties who have paid the purchase money are equitable owners and the party who officially holds title is only a trustee holding for the benefit of the parties who had made the payments. In Osuna, the Texas court upheld the imposition of the resulting trust by the trial court and granted equitable title to the community at the expense of the "other woman," who was deemed by the court not to be "the natural object of a person's bounty." Id. at 210, 211.
Pointing to the "boundless nature of relations of trust and confidence, U.S. v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991), courts in both equitable division and community property jurisdictions have imposed fiduciary duties on husbands and wives during and after marriage. Courts have used broad equitable concepts and powers to compensate aggrieved spouses in a wide variety of factual contexts. Determining the bounds of this broad remedy can and should be a fertile field for exploration and clarification of duties in increasingly varied types of relationships and unusual factual situations. The attorney may also use violations of fiduciary duty strategically to assist the client in accomplishing goals through negotiation and alternative dispute resolution. There is nothing like the allegation of a substantiated charge of violation of fiduciary duty to bring a reluctant party around to the aggrieved spouse's point of view. Finally, using the principle of fiduciary duty allows the courts to fashion equitable remedies with flexibility and the possibility of gaining expeditious and effective practical results.
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