Separate Property and Fiduciary Duties: Is There Really a Community Opportunity Doctrine?

• Publication year: 2020
• Author: Dawn Gray, CFLS

Separate Property and Fiduciary Duties: Is There Really a Community Opportunity Doctrine?

Dawn Gray, CFLS

Dawn Gray has practiced family law for 35 years and has been a Certified Specialist in Family Law for 28 years. Since 1994, her practice has been dedicated to research and writing projects for family law and civil attorneys. She works with many family law attorneys throughout the state on their cases, doing research, drafting pleadings and appellate briefs. She is a past president of ACFLS and is currently on its Amicus committee. She is also a past member of FLEXCOM, serving as the Executive Editor of the Family Law News. She gives frequent presentations and continuing education classes on family law issues. Dawn is also the principal author of the 11-volume series "Complex Issues in California Family Law." She is a member of the editorial board of the California Family Law Monthly and a frequent contributor to family law publications throughout the state.

For the past decade or so, creative family law attorneys carefully considering California's fiduciary duty statutes argued that the spouse controlling the community's financial affairs during marriage were subject to something called the "community opportunity doctrine." They asserted that the managing spouse had a duty to use community property before separate property when taking advantage of an investment opportunity. They based this argument on Family Code section 721(b), which incorporate a Corporations Code statute that expressly forbids a partner from taking advantage of an opportunity that rightly belongs to the partnership.

However logical these arguments may have been, the judiciary did not necessarily receive them enthusiastically, nor have they been successful. This article will explore the history of the fiduciary opportunity doctrine that became the so-called community opportunity doctrine, its elements and policy underpinnings, countervailing policies, and the cases and statutes that bear on the issue of whether such a doctrine exists in reality or only in the hopes of good advocates. Stay with me, fair reader, and decide for yourself whether the community opportunity doctrine is a phantom or a realistic basis for a remedy.

The Origins of the Doctrine

The concept of a duty to others in taking advantage of an opportunity arises from the obligations of a fiduciary, i.e., someone entrusted with management of another's property. When one person voluntarily undertakes to manage someone else's property, he obligates himself to do so in accordance with the highest fiduciary standards known to law. This applies in every context, not just family law; a "fiduciary" is a person who is under certain types of duties to another that the law imposes because of the nature of the relationship and potential for its abuse. In Vai v. Bank of America National Trust & Savings Ass'n., the California Supreme Court said that:

(t)he key factor in the existence of a fiduciary relationship lies in control by a person over the property of another. ... (I)f an individual continues to control property of the other he is held to the duties of a fiduciary as long as he retains such control, notwithstanding the termination of the confidential relationship.¹

Fiduciary duties are imposed on anyone in the kind of relationship with another that has the potential for abuse. "The essence of a fiduciary or confidential relationship is that the parties do not deal on equal terms, because the person in whom trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert unique influence over the dependent party."² For example, the fiduciary duties of a voluntary trustee arise from the establishment of a trust in property and the resulting control of the beneficiary's property. Such duties are intended to protect the beneficial owner from the loss of the property by the trustee. The parties to such an arrangement are called the "trustee" and "beneficiary," but the type of relationship is termed a "fiduciary" relationship, the trustee being a fiduciary for the beneficiary. "A trust is a fiduciary relationship with respect to property in which the person holding legal title to the property-the trustee-has an equitable obligation to manage the property for the benefit of another-the beneficiary."³

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Business associates are also in relationships in which one can take advantage of control over another's property. Recognizing this, partnership law has long imposed fiduciary obligations on partners to protect them from losses occasioned by one partner's abuse of control over partnership property. "It requires the citation of no authority, however, that a fiduciary relationship exists between members of a partnership...."⁴ In Jewel v. Boxer,⁵ the First District Court of Appeal said that in the winding up of a partnership,

undue hardship should be prevented by two basic fiduciary duties owed between the former partners. First, each former partner has a duty to wind up and complete the unfinished business of the dissolved partnership. This would prevent a partner from refusing to furnish any work and imposing this obligation totally on the other partners, thus unfairly benefiting from their efforts while putting forth none of his or her own. Second, no former partner may take any action with respect to unfinished business which leads to purely personal gain.⁶

This is the essence of a fiduciary duty: not to abuse the trust reposed for personal gain. The obligation of a partner not to appropriate a partnership opportunity, which is one aspect of that duty, has a long legal history.

Where parties enter into an agreement of partnership or association for the purchase of property for the common benefit, each partner or associate occupies a fiduciary relationship to the others in all matters pertaining to the partnership enterprise. In the purchase of the property for the partnership or association each one of the partners or associates is precluded from making any secret separate profit out of the transaction, and, when one of them does make such a secret profit, it constitutes a fraud upon the others, and he is accountable in a suit at law or in equity, as the transaction requires, for such profits.⁷

The fiduciary duties imposed on partners have also been imposed on those engaging in a joint venture, whether or not their "adventure" is formalized as a partnership. "The tendency of the modern decisions is to regard the right of joint adventurers, as between themselves, as governed practically by the same rules that govern the relations of partners. [Citation.] The relation between joint adventurers is fiduciary in its character."⁸

The members of a joint adventure sustain a fiduciary relationship toward each other. Each is bound to the highest degree of good faith in his conduct and participation in the enterprise, and may not retain secret profits the receipt of which are undisclosed to his associates. The rights and liabilities of joint adventurers, as between themselves, are governed by the same principles which apply to a partnership.⁹

The same rule applies to the duties owed by corporate officers and directors to the company.

While it has been applied so generally in corporation cases as to have become known as the doctrine of corporate opportunity, it is founded in the doctrine of loyalty in business which applies in all situations in which trust is reposed. The fiduciary is held to the utmost measure of loyalty and accordingly he may not use a trust opportunity for personal advantage.¹⁰

In Industrial Indem. Co. v. Golden State Co.,¹¹ the First District elaborated:

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Since the leading case of Guth v. Loft, 23 Del.Ch. 255 [5 A.2d 503], it has been generally accepted that a corporate officer or director may not seize for himself to the detriment of his company business opportunities in the company's line of activities which the company has an interest and prior claim to obtain, and that if he seizes them in violation of his fiduciary duty the corporation may claim for itself all benefits so obtained by him. The doctrine was applied in this state to joint venturers in MacIsaac v. Pozzo, 81 Cal.App.2d 278 [183 P.2d 910] and is equally applicable in all situations in which a person manages or transacts business for another or for others to whom he stands in a fiduciary relation without being trustee of an express trust. The position of the attorney-in-fact of a reciprocal insurance exchange, who manages the business of the exchange under powers of attorney of the subscribers, who provide the means for the reciprocal insurance enterprise, is fiduciary in character to the same extent as that of the management of an incorporated mutual insurance company, although neither is a real trustee, see Caminetti v. State Mut. Life Ins. Co., 52 Cal.App.2d 321, 323, 126 P.2d 165, and the doctrine of corporate opportunities is equally applicable.
However this doctrine does not exclude the fiduciary from all business activity of his own in the field in which he works for others. 'Generally, it is held that the directors or officers of a corporation are not, by reason of the fiduciary relationship they bear towards the corporation and the stockholders thereof, precluded from entering into and engaging in a business enterprise independent from, though similar to, that conducted by the corporation itself, provided in doing so they act in good faith and do not interfere with the business enjoyed by the corporation. The directors or officers of a going, solvent corporation cannot, however, engage in a competing business to the detriment of the corporation which they represent.' 13 Am.Jur. 953, Corporations, § 999. To the same effect 19 C.J.S., Corporations, §785, p. 160; 3 Fletcher, Corporations (1947 revision) 214-215, § 856; Ballantine on Corporations (1946 ed.) 203 et seq., § 79. The latter points out (p. 205) that the basis of the doctrine must be found 'in

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