Hubby’s “hobby” proved costly, not amusing . . .
In affirmance, Fourth District holds that trial court did not err in concluding that husband had breached his fiduciary duty to wife by transferring funds in excess of the amount she agreed to into his trading account without her knowledge, and then losing several million dollars in unsuccessful trades; amount of asset to which breach applies is measured by its value at the time of the breach (not its highest value during the breach)
In re Marriage of Kamgar
(November 17, 2017; ordered published December 8, 2017)
California Court of Appeal 4 Civil G052024 (Div 3) 18 Cal.App.5 th 136, 226 Cal.Rptr.3d 234, 2017 FA 1818, per Aronson, J (Moore, Acting PJ and Fybel, J, concurring). Orange County: Murphy, Temp J, affirmed. For appellant husband: Marjorie Fuller, (714) 449-9100. For appellant wife: Garrett Dailey, CFLS, (510) 465-3920. CFLP §§J.184.108.40.206.15, J.220.127.116.11, J.18.104.22.168.
Moira and Fred Kamgar were married in May 1990; they later had four children. During their marriage, Moira, who had a joint juris doctor and master’s degree in taxation, worked at Depository Trust Company and at another time, for a well-known law firm. Fred, who had a BS in electrical engineering and computer science from USC and an MBA from UCLA, ran various businesses that he subsequently sold for substantial sums. As a result, he was able to stop working in January 2003. The couple separated in January 2013, by which time Moira had not worked outside the home in 20 years.
Beginning in 1999, Fred and Moira had their substantial liquid assets managed by a series of professional managers at JP Morgan, Merrill Lynch, and Bessemer Trust. Those managers were instructed to pursue conservative investment strategies that would preserve the couple’s assets. Moira left the basic management and control of those assets to Fred, who made all of their investment decisions, but didn’t always consult her before making them.
In 2010, Fred got interested in options trading, and began doing research, attending investment classes, reading trade publications on the topic, and talking to other investors. By that time, he had been investing community funds in Apple, Inc. stock for about 7 years. When he discussed opening a self-directed trading account with Moira, she consented to it. She agreed that Fred could deposit $2.5 million of their Apple stock into the account so that Fred could “‘try his hand at doing something that he would find interesting or amusing.’” Moira believed that this sum was just a “‘sliver’ of their net worth” and Fred figured that he could lose that much without detrimentally affecting their lifestyle.
In December 2011, Fred transferred 6,000 shares of Apple stock into a newly opened TD Ameritrade account, then applied for an upgrade that would allow him to engage in enhanced margin trading. Ameritrade required both Fred and Moira to demonstrate their financial knowledge and awareness of trading risks before it would authorize the enhancement, which would increase the potential return on his trades, but also increase the risk of loss. Fred claimed that Moira was “not interested,” signed her name on the upgrade application, took the test in her place, and falsely represented that she had extensive trading experience. He listed the couple’s goals as “growth, income, and conservation of capital, but not speculation.” He later changed the terms of the account to eliminate the need for Moira’s signature to make withdrawals or transfers to the account. During the ensuing 13 months, Fred converted the Apple securities to cash, and deposited more than $8 million in community funds into the trading account, along with almost all of the community funds under professional management. He then assumed full control of their community assets.
The value of the Ameritrade account went up and down between December 2011 and January 2013, when Fred stopped trading. By that time, there was only $409,000 left in the account, which had reached a high of $19 million at one point, before Fred withdrew more than $3 million. Meanwhile, Fred kept telling Moira that the account was doing fine. However, neither the account nor their marriage was doing fine. The couple had been living in separate houses and seeing a marriage counselor for several months. When Moira told the counselor that she knew nothing about the couple’s finances, the counselor advised her to start asking questions.
In January 2013, Fred texted Moira that they needed to meet face to face to discuss “financial ‘challenges.’” Moira didn’t want to meet in person and told Fred to conduct the discussion by text messages. Fred finally texted her with the distressing news that they were running out of money, due to investment losses and high expenses, and urged her to sign the documents to permit the sale of their property at Emerald Bay. Outraged, Moira replied that this was a “‘disaster’” about which Fred had not told her and reminded him of his assurances that he was being “‘prudent’” in his option trading. The couple then formally separated and began disso proceedings.
At the disso trial, Moira’s expert opined that Fred’s option trading “was so highly speculative, particularly for lack of diversification, that it amounted to gambling.” Fred’s expert countered that Fred had relied on other analysts who had predicted a rise in Apple’s stock value and denied that Fred’s investment strategy was grossly negligent. In a detailed statement of decision, the trial court found that Fred had breached his fiduciary duty to Moira by failing to disclose investment transactions he made in the Ameritrade account between December 2011 and January 2013, that Moira had agreed to only the initial $2.5 million deposit to that account, and that Fred had additionally breached his fiduciary duty by his grossly negligent mismanagement of the community’s assets in the trading account. The court awarded Moira $1,952,056 as her community share of the funds that Fred lost through “undisclosed and reckless trading.”
Fred appealed the trial court’s conclusion that he violated his fiduciary duty, while Moira appealed the amount of the trial court’s award for his breach. However, the Fourth District affirmed the trial court’s judgment.
Parsing the provisions . . .
Fred contended that the lower court had erred in finding that he had breached his fiduciary duty because it was based on the misconception that he “was required to continuously update Moira on the daily performance of their investments and on each transaction in their investment account, at or near the time it occurred.” As Fred saw it, “the purported duty” of continual updates and obtaining express permission for each trade was both impractical in today’s electronic markets and contrary to statutory provisions that give each spouse management and control over the community assets. The justices noted that per Fam C §1100(e), spouses owe each other a fiduciary duty that requires full disclosure of all material facts and information regarding the existence, characterization, and valuation of the community’s assets and debts. Moreover, other spousal fiduciary duties are set forth in Fam C §721(b), which also include provisions of the Corporations Code dealing with the disclosure duties of partners where there has been no demand for disclosure. Fam C §721 lists some, but not all of the fiduciary duties spouses owe each other, such as providing access to any books concerning transactions for copying and inspection, and rendering an accounting upon request. However, the statute also cautions that it does not require spouses to keep detailed books and records of community property transactions. In addition, the Corporations Code provisions applicable to spouses’ fiduciary duties require spouses to give each other any information concerning the management and control their community property, even if no request has been made.
Fred grasps at straws . . .
The justices found that Fred’s repeated references to a duty to continuously update the other spouse created “a straw man,” since nothing in the trial court’s statement of decision imposed such a duty on Fred. Indeed, they did not believe that any of the applicable statutes imposed such a duty. The panel reasoned that Fred’s breach of fiduciary duty occurred not because he failed to continuously update Moira, but when he risked more than the $2.5 million that Moira had agreed to, without her knowledge or consent. They pointed out that Corporations Code §16403(c)(1) describes spousal disclosure requirements as governed by the parties’ agreement in the same way that such requirements pertain to business partners. Fred and Moira agreed that he could place $2.5 million into a trading account; when he crossed that line by risking an additional $8 million, the breach occurred.
Moira grasps for more . . .
In her appeal, Moira contended that the trial court had not awarded her a large enough share of the funds that Fred lost. She argued that she was entitled to half of the highest value that the account attained, not the amount that Fred lost in addition to the initial deposit. The panel noted, however, that Fam C §1101(g) requires the value of the undisclosed or wrongfully transferred asset to be its highest value at the time of the breach, the date of sale, or the date of the award by the court. Moira urged the justices to find that the date of the breach was “a continuing period” covering the time that Fred “engaged in his risky strategy.” That interpretation, the justices found, ran afoul of the legislative history of the statute, which showed that the solons had considered and rejected it while the bill was pending. Its current language, they concluded, provided protection against fluctuating markets and avoided undue speculation. Summing up, the panel concluded that the trial court had not erred in calculating Moira’s award.
We’re glad to see that this case went from unpublished to published because it contains a lot of important information about fiduciary duties, the interplay between the Family Code and the Corporations Code re fiduciary duties, and the extent of the continuing duty to disclose. The latter has long been a subject of debate; does the duty require almost daily disclosures, as Fred contended, or is it less onerous? What are its limits when one spouse makes no effort to be informed? Those questions and others are answered here; keep this opinion in your ready reference file.