Pursuant to California Family Code section 721 spouses have fiduciary duties when entering a transaction with each other. This includes “a duty of the highest good faith and fair dealing,” and neither spouse “shall take any unfair advantage of the other.” When one spouse gains an advantage over the other in an interspousal transaction, a presumption of undue influence arises. It is up to the advantaged spouse to show the court that the other spouse was not unduly influenced in the transaction.
A classic example of this is where Spouse 1 executes a Quitclaim Deed to change the character of a house from community property to Spouse 2’s separate property. Here, the presumption of undue influence arises because Spouse 2 obtained an advantage over Spouse 1 in the interspousal transaction. Spouse 2 received the house. Spouse 2, the advantaged spouse, must rebut this presumption otherwise the court can set aside the transaction on the presumption that it was made with undue influence.
To rebut the presumption of undue influence, the advantaged spouse must show the court by a “preponderance of the evidence” that the interspousal transaction was (1) “freely and voluntarily made,” (2) “with full knowledge of all the facts,” and (3) “with a complete understanding of the effect of the transfer.” In re Marriage of Haines (1995) 33 Cal.App.4th 277, 301.
An “advantaged spouse” is one whose “position is improved,” or who “obtains a favorable opportunity, or otherwise gains, benefits, or profits” from an interspousal transaction to the exclusion of the other spouse. In re Marriage of Matthews (2005) 133 Cal.App.4th 624, 629. If both spouses obtain “mutual advantages,” the presumption of undue influence does not arise. This occurred in In re Marriage of Burkle (2006) 139 Cal.App.4th 712. Here, Husband and Wife executed a post-marital agreement. Wife received financial security without risk of loss and Husband received financial freedom to make investments that could generate high returns. Husband and Wife each retained certified family law specialists to assist in the execution of the agreement. The court found nothing unfair with the transaction – both were represented by experienced family law specialists and both received advantages.
Freely and Voluntarily Made
An interspousal transaction is not “freely and voluntarily made” if there were constant threats, verbal and physical abuse, and pressure to enter the transaction. See In re Marriage of Haines (1995) 33 Cal.App.4th 277 (Husband constantly argued with Wife, pulled her hair and threw water on her face); see also In re Marriage of Balcof (2006) 141 Cal.App.4th 1509 (Wife physically struck Husband and screamed at him for 45 minutes immediately preceding the execution of the interspousal transaction. The screaming included threats of divorce and obstructing Husband’s relationship with the children). Further, interspousal transactions cannot be freely and voluntarily made if the non-advantaged spouse has a learning disability. See In re Marriage of Delaney (2003) 111 Cal.App.4th 991 (Husband had a learning disability that severely limited his reading comprehension. He relied on Wife throughout the marriage to handle all legal and financial affairs).
Full Knowledge of all the Facts
A non-advantaged spouse does not enter into an interspousal transaction with “full knowledge of all the facts” if there is an unfulfilled promise. For instance, in In re Marriage of Fossum (2011) 192 Cal.App.4th 336, Husband promised to restore Wife’s title on the marital home as he had done before. However, he did not do so even though Wife asked him several times to do it. Wife would not have entered the agreement had she known he never intended to restore her title. Further, a non-advantaged spouse has “full knowledge of all the facts” where s/he fluently speaks the agreement’s language and frequently asked questions before entering the transaction. See In re Marriage of Matthews (2005) 133 Cal.App.4th 624.
Complete Understanding of the Effect of the Transfer
A non-advantaged spouse does not have a “complete understanding of the effect of the transfer” if s/he was unable to seek legal advice because s/he was under a lot of pressure from the advantaged spouse. See In re Marriage of Balcof (2006) 141 Cal.App.4th 1509. A non-advantaged spouse has a “complete understanding of the effect of the transfer” if s/he is advised by experience attorneys. See In re Marriage of Burkle (2006) 139 Cal.App.4th 712. Further, the court will also find a “complete understanding of the effect of the transfer” if there is a recital in the agreement that states the non-advantaged spouse understands the legal effect of the transfer or if the non-advantaged spouse has had prior experience with similar transmutations. See In re Marriage of Burkle (2006) 139 Cal.App.4th 712.