Clients often inquire about investment losses that occur during the marriage. They want to know whether the spouse controlling that investment can be held liable and charged with the loss at the time of dissolution of the marriage based upon a theory of fiduciary breach. In most circumstances, the answer is no. The community as a whole and not the individual will bear this loss. Spouses are not subject to the Prudent Investor Rule (which applies to trustees with regard to trust property) in managing and investing community property. [Fam.C. § 721(b) (excepting Prob.C. § 16047 from interspousal fiduciary duties)]
Even so, pursuant to Fam.C. § 721(b), as set forth above, a spouse’s improvident community property investments can amount to a breach of fiduciary duty if they rise to the level of “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” (Corps.C. § 16404(c) . This is an extremely high standard not easily met when the spouse simply makes bad (even very bad) business decisions.
The law is quite clear, a spouse’s “bad business judgment” in making community property investments, to the extent it amounts only to ordinary negligence, is not a breach of fiduciary duty; and the managing spouse, in such circumstances, cannot be held responsible to the other spouse for an investment that has gone bad.