Chapter 25 FIDUCIARY RELATIONSHIPS AMONG SPOUSES AND AFFIANCED COUPLES

• Jurisdiction: New York

Chapter Twenty-Five

Fiduciary Relationships Among Spouses and Affianced Couples

I. Fiduciary Relationship Between Spouses—Origin of Fiduciary Duty³⁶⁵¹

The term "fiduciary relationship" is broad.³⁶⁵² A fiduciary is a person who is required to act for the benefit of an other person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence, and candor or one who must exercise a high standard of care in managing another's money or property.³⁶⁵³ A fiduciary relationship may exist where one party reposes confidence in another and reasonably relies on the other's superior expertise or knowledge but an arm's-length business relationship does not give rise to a fiduciary obligation.³⁶⁵⁴ Broadly stated, "[a] fiduciary relationship is 'founded upon trust or confidence reposed by one person in the integrity and fidelity of another. It is said that the relationship exists in all cases in which influence has been acquired and abused, in which confidence has been reposed and betrayed. The rule embraces both technical fiduciary relations and those informal relations which exist whenever one man trusts in, and relies upon, another.' "³⁶⁵⁵

In EBC I, Inc. v. Goldman Sachs & Co.,³⁶⁵⁶ the Court of Appeals explained the nature of the fiduciary relationship:

A fiduciary relationship "exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation" (Restatement [Second] of Torts § 874, Comment a). Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions (Northeast Gen. Corp. v. Wellington Adv., 82 N.Y.2d 158, 162, 604 N.Y.S.2d 1, 624 N.E.2d 129 [1993]). Generally, where parties have entered into a contract, courts look to that agreement "to discover . . . the nexus of [the parties'] relationship and the particular contractual expression establishing the parties' interdependency" (citations omitted). "If the parties . . . do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them" (citations omitted). However, it is fundamental that fiduciary "liability is not dependent solely upon an agreement or contractual relation between the fiduciary and the beneficiary but results from the relation" (Restatement [Second] of Torts § 874, Comment b).

The body of law regarding fiduciaries derives largely from surrogate and commercial settings wherein the trustee is the fiduciary.³⁶⁵⁷ It is well settled that a fiduciary, as an executor or trustee, is obligated to account for his or her decisions and actions in administering an estate or trust.³⁶⁵⁸ The right to an accounting arises from the "mere existence of a fiduciary relationship," as distinguished from a claim for an accounting in which there is no fiduciary relationship. The presence of the fiduciary relationship eliminates the requirement of a showing that there is no adequate remedy at law. It is automatic and springs from the fiduciary relationship itself.³⁶⁵⁹

The law initially examines whether the trustee (fiduciary) has placed itself in a position where its interest was or might be in conflict with its duty after which time the law does not examine the fairness of the transaction.³⁶⁶⁰

The value of the rule depends in part upon its rigorous and inflexible enforcement. If a corporate fiduciary has placed itself in a position where its interest or the interests of its stockholders may conflict with the interests of the cestui, the law "stops the inquiry when the relation is disclosed, and sets aside the transaction, or refuses to enforce it, at the instance of the party whom the fiduciary undertook to represent, without undertaking to deal with the question of abstract justice in the particular case." ³⁶⁶¹

Partners, whether business or professional, are bound by a fiduciary duty requiring the punctilio of an honor the most sensitive.³⁶⁶² This is significant because the Court of Appeals has equated marriage to an economic partnership upon which the foundation of property distribution rests.³⁶⁶³

II. Interspousal Dealings Require Utmost Good Faith, Confidential Relationship

In re Booth's Will³⁶⁶⁴ described the reach of equity in the broad range of fiduciary relationships:

A court of equity interposes its benign jurisdiction to set aside instruments executed between persons standing in relations of parent and child, guardian and ward, physician and patient, solicitor and client, and in various other relations in which one party is so situate as to exercise a controlling influence over the will and conduct and interests of another; and this power will be exercised unless the instrument is satisfactorily shown to be fair and free from improper influence by the party seeking its benefit, the burden of which rest upon him.

In Christian v. Christian,³⁶⁶⁵ the Court of Appeals emphasized the fiduciary relationship between spouses³⁶⁶⁶ as a sentinel of equity to monitor interspousal agreements. Its preamble would become among the most oft-repeated language in interspousal settlement dispute literature:

[W]hen there has been full disclosure between the parties, not only of all relevant facts but also of their contextual significance, and there has been an absence of inequitable conduct or other infirmity which might vitiate the execution of the agreement, courts should not intrude so as to redesign the bargain arrived at by the parties on the ground that judicial wisdom in retrospect would view one or more of the specific provisions as improvident or one-sided. If voidable, such an agreement may be set aside under principles of equity in an action in which such relief is sought in a cause of action or by way of affirmative defense. . . . Agreements between spouses, unlike ordinary business contracts, involve a fiduciary relationship requiring the utmost of good faith. There is a strict surveillance of all transactions between married persons, especially separation agreements. Equity is so zealous in this respect that a separation agreement may be set aside on grounds that would be insufficient to vitiate an ordinary contract. These principles in mind, courts have thrown their cloak of protection about separation agreements and made it their business, when confronted, to see to it that they are arrived at fairly and equitably, in a manner so as to be free from the taint of fraud and duress, and to set aside or refuse to enforce those born of and subsisting in inequity. To warrant equity's intervention, no actual fraud need be shown, for relief will be granted if the settlement is manifestly unfair to a spouse because of the other's overreaching. In determining whether a separation agreement is invalid, courts may look at the terms of the agreement to see if there is an inference, or even a negative inference, of overreaching in its execution. If the execution of the agreement, however, be fair, no further inquiry will be made. ³⁶⁶⁷

The fiduciary relationship and the obligation of the utmost of good faith between spouses is not a theory novel to the latter half of the 20th century. More than a century before Christian, courts and legal scholars had already posted a sentry of equity at the portals of the marital exit by casting spouses as being in a confidential relationship—a slight difference in phrasing. It is not insignificant that "confidential" and "fiduciary" have the same Latin root: "to trust." A confidential relationship is one that is "of such a character as to render it certain that [the parties] do not deal on terms of equality. Such inequality may occur from either one party's "superior knowledge of the matter derived from a fiduciary relation, or from an overmastering influence" or from the other's "weakness, dependence, or trust justifiably reposed" on the stronger party.³⁶⁶⁸ A familial relationship is not necessarily a confidential relationship³⁶⁶⁹—conversely, the Court of Appeals held in Sharp v. Kosmalski,³⁶⁷⁰ "Although no marital or other family relationship is present in this case, such is not essential for the existence of a confidential relation." In determining whether a confidential relationship exists, the existence of a family relationship does not, per se, create a presumption of undue influence; there must be evidence of other facts or circumstances showing inequality or controlling influence. The existence of such a relationship will ordinarily be a question of fact.³⁶⁷¹

In 1878, in Boyd v. De La Montagnie,³⁶⁷² an early ancestor of Christian, the Court of Appeals emphasized the unique relationship between husband and wife. The language reads, familiarly:

A court of equity will interpose its jurisdiction to set aside instruments between persons occupying relations in which one party may naturally exercise an influence over the conduct of another. A husband occupies such a relation to the wife, and the equitable principles referred to would apply to them in respect to gratuitous transfers by the wife to the husband, however it might be in ordinary business transactions, which the wife may legally engage in. When this relation exists the person obtaining the benefit must show, by the clearest evidence, that the gift was freely and deliberately made. The burden is upon the person taking the gift to show that the transaction was fair and proper.

Boyd quoted Joseph Story,³⁶⁷³ with respect to the confidential relationship between spouses:

Hence, the law, with a wise providence, not only watches over all the transactions of parties in this predicament, but it often interposes to declare transactions void, which, between other persons, would not be held objectionable. It does not so much consider the bearing or hardship of its doctrine, upon particular cases, as

...