Is A Spouse Required To Give Prior Notice When A Business Sells All Or Substantially All Of Its Assets?


Keith Paul Bishop

Section 1100 (d) of the California Family Code provides that, subject to two exceptions, “a spouse who is operating or managing a business or an interest in a business that is all or substantially all community personal property has the primary management and control of the business or interest” which means that “the managing spouse may act alone in all transactions”.  However, the statute continues: “but shall give prior written notice to the other spouse of any sale, lease, exchange, encumbrance, or other disposition of all or substantially all of the personal property used in the operation of the business (including personal property used for agricultural purposes), whether or not title to that property is held in the name of only one spouse”.

From a corporate law perspective, I find the statute to be decidedly odd in several respects.  First, what does it mean to operate or manage an interest in a business that is all or substantially all community personal property”?  If the business is an entity such as a corporation, limited liability company or limited partnership, the spouse’s interest in the business (e.g., the shares, membership interests, or limited partnership interests) may be personal community property, but presumably the business itself would not be.  Second, the reference to “operating or managing” an interest in a business is inapt when referring to the ownership of shares or other interests in a business.  Presumably, the legislature meant operating or managing the business itself.  However, this interpretation does not seem entirely appropriate either.  For example, a spouse may own as personal community property an 80% interest in a business but have no involvement in its operations or management.  Another spouse may hold as community personal property the same percentage  interest in a business and be actively involved in its operations and management.  If the statute refers to the operation or management of the business, it would apply to the latter, but not the former, case.  Third, there is no statutory exception for for sales in the usual and regular course of the business, c.f., Cal. Corp. Code § 1001(a).  Fourth, the statute is triggered only by dispositions of personal property.  Assume, for example, that a business owns  $10,000 in personal property and $10 million in real property.   Notice would be required (assuming the statute otherwise applied) if the business sells all or substantially all of the personal property but not if the business sells the real property.

Fortunately, the statute includes a “savings” clause:  “A failure to give prior written notice shall not adversely affect the validity of a transaction nor of any interest transferred”.  However, a spouse is not left without remedies for the failure of a managing spouse to give prior written notice.  Those remedies are set forth in Section 1101 of the Family Code.

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