Fiduciary Duty During Divorce
It’s incredible what spite can make people do. We have seen people quit six-figure jobs to reduce their monthly child support payment by a few hundred dollars. We have seen spouses let the marital residence go into foreclosure just to ensure the other spouse gets nothing. I have seen spouses torpedo the other spouse’s business as a means of pay back. — But here’s the thing about spite—it’s never free. In fact, the spiteful often find their actions to be very expensive. Spite is a bad legal strategy.
To protect people going through a divorce, the law has a requirement called a “fiduciary duty.” Essentially, it requires spouses who are divorcing to take care of the property in their control until it is divided in the Divorce Decree. This provision essentially holds accountable those spouses who quit jobs, stop paying mortgages, or destroy property. It requires both spouses to look out for each other during the divorce.
The leading case on this in Arizona is Gerow v. Covill, 192 Ariz. 9 (App. 1998). While the divorce was pending, the husband shut down his consulting business and began working for his sister-in-law. The new business did essentially what his old business did with his old clients serving as the new business’s major clients. The trial court saw this move “as an attempt to remove the business and its asset from the marital community.” Id. at ¶ 10. The Court awarded Wife one-half of whatever shares Husband was awarded from the business and sent the parties to civil court to determine ownership between the parties and the sister-in-law.
On appeal, Husband argued that his fiduciary duty to Wife ended upon the filing of divorce papers. Not so, said the Court of Appeals, your fiduciary duty lasts until the marriage is dissolved. Id. at ¶¶ 39-40. See also in re Marriage of Modnick, 663 P.2d 187 (Cal. 1983) (holding by the California Supreme Court that the fiduciary duty is breached when a spouse conceals assets).
The litigation costs alone make his scheme unprofitable. Because of Husband’s action in transferring his business to his sister-in-law, the parties had to go through an expensive trial and an expensive appeal. They were not even done yet, as they now had to go through an expensive civil case, in which Husband’s sister-in-law would also be a party. My guess is that Husband’s actions likely increased the combined amount of attorney’s fees for all parties by six or seven-fold. Now, that’s one expensive divorce.
In an unpublished case (i.e., this case did not set precedent), Bekele v. Abreha, the couple owned a medical practice. Husband was the physician; wife, the office manager. The office for the medical practice was at risk of being foreclosed. Husband found an investor who would pay the liabilities and allow the couple to sell the office at fair market value. Wife refused to sign the paperwork. The bank foreclosed on the office a month later. Wife, in her capacity as office manager, also refused to renew medical contracts, including the practice’s contract with Medicare, which led to the demise of the business.
In the divorce proceedings, Wife requested $5,000.00 per month in spousal maintenance. The Court found she was eligible for support, but because she was responsible for the decline of the business, the Court refused to reward her any spousal maintenance. By my calculation, her decisions likely cost her $100,000.00 or more in the foreclosure and approximately another $300,000.00 in spousal maintenance.
Although an Idaho case, Smith v. Smith, 860 P.2d 431 (Idaho 1993), is instructive here as well. In that case, Husband agreed to take $40,000.00 from a client who owed him $94,000.00. The Idaho Supreme Court held Husband breached his fiduciary duty to wife and required Husband to pay her the $40,000.00 plus an additional $7,000.00 to ensure she received her half of the account receivable.
Spite might feel good in the moment, but it’s going to hurt you in the long run. The higher road is always the better road. You’re much better off protecting the community’s assets and getting through the divorce rather than playing games that will drive up costs and get you nowhere.
Related Pages and Posts:
High-Asset Divorce Lawyers in Scottsdale, Arizona (state48law.com)
Bobrow Claims and Reimbursement for Bills Paid During Divorce (state48law.com)
Refinancing the Marital Residence When Spousal Maintenance is in Play (state48law.com)
