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Separation Agreements: The Fiduciary Relationship Between Spouses

Searcy v. Searcy, No. COA11-11 (N.C. Ct. App. 2011)

In North Carolina, settlement and distribution of marital property can be addressed in a separation agreement. Such an agreement is essentially a contract between the parties. A unique term, “fiduciary,” is sometimes used to describe a relationship between spouses that can be distilled to mean trust. As in contract law, there must be full and truthful disclosure of facts surrounding terms and provisions in a contract between parties who are fiduciaries to each other. Failing to disclose a certain fact can render the contract invalid. But in divorce proceedings, when does the fiduciary relationship end? In the case below, we see that there is no bright line.

  • Facts: Husband and Wife were married and acquired marital property, including a home and adjacent parcels of land. In 2004, the spouses sold both parcels to a development company; in exchange they acquired purchase money notes. Later, the spouses sought divorce and met with an attorney for mediation in order to divide up their assets. However, at mediation, Husband did not disclose the purchase money notes. After separation in 2005, Husband received checks correlating with those notes. Wife, only realizing much later, filed claims for constructive fraud. Trial court granted Husband’s summary judgment motion and Wife appealed.

 

  • Issue: Did a fiduciary relationship exist when Husband failed to disclose the purchase money notes?

 

  • Holding: Yes

 

  • Rationale: Each party in a fiduciary relationship has a duty to disclose all relevant facts to a transaction. Spouses are each other’s fiduciaries, in that they both rely on each other’s trust and confidence to prosper.[1] This relationship is obviously present during the marriage; however, once parties become adversarial in legal proceedings, there exists a time when spouses sever the fiduciary relationship. Representation by counsel for divorce proceedings is another factor in determining if a confidential relationship has ended. Another factor is the actual date of separation, that being when one spouse leaves the marital home (or, in a separation agreement, the agreed upon date in effect). The husband and wife in this case seemed to have started adversarial proceedings, but neither retained their own attorney. Furthermore, the failure by Husband to disclose was before the effective date of the separation agreement. Wife testified that she did not think at that time that she needed her own attorney, that Husband was still active in the relationship by helping buying furnishings for a new condo, and that the parties were still cordial. Therefore, the Court held that even in mediation to divide their assets, the spouses still retained a fiduciary relationship.

 

  • Lessons and Observations:
  1. One cannot draw a bright line rule for when a fiduciary relationship ends. We only have factors: did the spouses retain separate counsel; did they initiate adversarial proceedings; did they physically separate; was there anything else that required trust and confidence between the parties as to elevate their status to something more than mere strangers in an arm’s-length negotiation?
  2. This case was more than just a discussion on the fiduciary relationship between spouses, but our discussion has been limited to such.

 

[1] The relationship between husband and wife is the most confidential of all relationships, and transactions between them, to be valid, must be fair and reasonable. Eubanks v. Eubanks, 273 N.C. 189 (1968).