Capricious and Excessive

Fraud on the Community and the Reconstituted Estate

DIVORCE IN TEXAS

FINANCIAL ISSUES IN

DIVORCE

FINANCIAL ISSUES

1.What Are the Marital Assets?

What exists as of the date of marriage

What existed prior to the filing

Forensic Accounting

FINANCIAL ISSUES

2.Who Do They Belong To?

Presumption of community property

What is separate property?

Everything else is community property

FINANCIAL ISSUES

3. What are They Worth?

FINANCIAL ISSUES

4. How Do We Divide Them?

WHAT ARE THE MARITAL ASSETS?

1. What exists now?

2. What has historically existed?

3. Why has it changed?

Community Fraud

Reconstituted Estate

BY THE NUMBERS? US divorces granted per year: 1.1 million

Texas: 31st highest divorce rate in the country = roughly 40%

Number of divorced people in Texas: 1.55 million

Number of divorced people in US: 19.8 million

Amount spent annually on divorce: $31 Billion

Source: U.S. Census Bureau

BY THE NUMBERS?

For nearly 40% of all married Texans, divorce represents their single largest financial transaction

BY THE NUMBERS?

Can impact:

Friends, family, employees, even self

Employee benefits (even if not transferable)

Business entities owned by the parties

1. Corporate relationship: duty to shareholders of corporation collectively

2. Partnership relationships: breach of partnership agreement; not fiduciary

3. Agency Relationships: power of attorney

4. Attorney-Client Relationship: same duty as other clients

5. Relationships of Trust and Confidence

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FIDUCIARY AND OTHER OBLIGATIONS BETWEEN SPOUSES:

HISTORY OF MARITAL FRAUD

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1. Common Law - Doctrine of Interspousal Tort Immunity

Upon marriage, husband and wife become one person in law

Married women lose capacity to sue or be sued without joinder of husband

Wife’s personal and property rights and legal existence

suspended during marriage

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INTERSPOUSAL IMMUNITY

2. Public Policy

At one time adopted by almost all jurisdictions

“Nothing could so complete that severance of the marriage relationship and degradation, as to throw open litigation to the parties. The maddest advocate for woman's rights, and for the abolition on earth of all divine institutions,  could wish for no more decisive blow from the courts than this. The flames which litigation would kindle on the domestic hearth would consume in an instant the conjugal bond, and bring on a new era indeed -- an era of universal discord, of unchastity, of bastardy, of dissoluteness, of violence, cruelty, and murders”. Ritter v. Ritter, 31 Pa. 396 (1858)

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1886

Nickerson and Matson v. Nickerson, 65 Tex. 281 (1886) Torts inflicted upon the wife by her husband give no right of

action to the wife Focus on public policy argument

1965

Turner v. Turner, 385 S.W.2d 230 (Tex. 1965) Nickerson re-examined Rules of law had never been questioned Supreme Court refused to abolish doctrine of interspousal

immunity17

INTERSPOUSAL IMMUNITY IN TEXAS

1965 – 1977 Changes to Texas Family Code

Wife’s recovery for personal injuries (not loss of earning capacity) is part of her separate estate

Spouse can sue and be sued without joinder of the other spouse

Wife has sole management and control of her separate estate

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INTERSPOUSAL IMMUNITY IN TEXAS

1977

Bounds v. Caudle, 560 S.W.2d 925 (Tex. 1977)

Children sued stepfather for wrongful death of mother

Changes to Texas Family Code invalidated common law rationale

Court again considered public policy arguments19

INTERSPOUSAL IMMUNITY ABOLISHED

Suits for willful or  intentional torts would not disrupt domestic tranquility since "the peace and harmony of a home" which had "been strained to the point where an intentional physical attack could take place" could not be further impaired by allowing a suit to recover damages.

Nickerson abolished to the extent it barred claims for willful or intentional torts

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INTERSPOUSAL IMMUNITY ABOLISHED

1987

Price v. Price, 732 S.W.2d 316 (Tex. 1987)

Wife sued husband for negligence in motorcycle accident

“We now abolish that doctrine completely as to any cause of action.”

Immunity abolished for intentional and negligent torts21

INTERSPOUSAL IMMUNITY ABOLISHED

1993

Twyman v. Twyman, 855 S.W.2d 619 (Tex. 1993)

Wife sued husband for emotional damages

Court adopted tort of intentional infliction of emotional distress

Claims extended to physical and emotional torts

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INTERSPOUSAL IMMUNITY ABOLISHED

1984

Belz v. Belz, 667 S.W.2d 240 (Tex. Civ. App. - Dallas)

Acknowledged fraud was an intentional tort

Distinguished Bounds

Fraud was perpetrated on wife’s interest in community estate, not separate estate resulting from personal injuries

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TORTS INVOLVING THE COMMUNITY ESTATE

1994

In re Marriage of Moore, 890 S.W.2d 821 (Tex. App. - Amarillo)

Trial court awarded damages in excess of value of community property conveyed by husband

COA found award to be independent cause of action for fraud on community

COA held money judgment for damages okay but only as a means to recoup community property lost

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TORTS INVOLVING THE COMMUNITY ESTATE

1998

Schlueter v. Schlueter, 929 S.W.2d 94 (Tex. App. - Austin)

Jury found actual and constructive fraud, fraudulent transfer and civil conspiracy

Trial court awarded actual and exemplary damages

COA affirmed based upon Bounds, Price and Twyman

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TORTS INVOLVING THE COMMUNITY ESTATE

Writ granted in Schlueter

Bounds, Price, and Twyman distinguished

Prior cases involved personal injury tort claims

Recovery for personal injuries is separate property of spouse

Does not involve community estate26

SUPREME COURT RESOLVES ISSUE

Remedy for fraud on the community is just and right property division

No independent cause of action between spouses for damages to community estate

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SUPREME COURT RESOLVES ISSUE

THE RECONSTITUTED ESTATE

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New to Texas Family Code

Culmination of 100 years of case law

Wrongful acts between spouses

Not a measure of damages 29

RECONSTITUTED ESTATE

the total value of the community estate that would exist if an actual or constructive fraud on the community had not occurred.

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§ 7.009(a)

Reconstituted Estate Defined

(b) if the trier of fact determines that a spouse has committed actual or constructive fraud on the community, the court shall:

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§ 7.009(b) If Fraud, then

Calculate and Divide

In making a just and right division of the reconstituted estate under Section 7.001, the court may grant any legal or equitable relief necessary to accomplish a just and right division, including awarding a wronged spouse a money judgment and/or an appropriate share of the community estate. 32

§ 7.009(c) Remedy to Wronged Spouse =

Just and Right Division of Reconstituted Estate

(1) calculate the value by which the community estate was depleted as a result of the fraud on the community and calculate the amount of the reconstituted estate; and

(2) divide the value of the reconstituted estate between the parties in a manner the court deems just and right.

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§ 7.009(b) If Fraud, then

Calculate and Divide

WHAT IS FRAUD ON THE COMMUNITY?

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In common law jurisdictions, a tort is a civil wrong causing someone to suffer harm or loss resulting in legal liability.

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LAW OF TORTS

1. Duty of care

2. Breach of duty

3. Causation

4. Damages

5. Proximate cause

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ELEMENTS OF A TORT

Spouses are burdened with reciprocal fiduciary duties in the management, control and disposition of community property.

There is also a fiduciary duty owed by one spouse to the other in the reasonable management and control of a spouse’s special community property.

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DUTY OF CARE IN FAMILY LAW

During marriage each spouse has the sole management, control, and disposition of the community property that the spouse would have owned if single, including:

Personal earnings Revenue from separate property Recoveries from personal injuries Increases and mutations of, and the revenue

from, all property subject to the spouse’s sole management, control, and disposition

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SPECIAL COMMUNITY PROPERTY

Managing spouse need not obtain approval or consent for dispositions of special community property, disposition must be fair to the other spouse.

Managing spouse carries the burden of establishing that the disposition was fair.

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BREACH OF DUTY

A presumption of constructive fraud arises when one spouse disposes of the other spouse’s interest in community property without the other’s knowledge or consent.

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BREACH OF DUTY

Remedy does not reside in tort

Judicially created concept

Based upon theory of constructive fraud

Applied when breach of duty arising out of marriage relationship

May be actual or constructive

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FRAUD ON THE COMMUNITY

Gifts to paramours

Excessive or arbitrary gifts or transfers

Wasting of community assets

Excessive attorney’s fees

Funds that cannot be accounted for42

EXAMPLES OF FRAUD ON THE COMMUNITY

Simply spending money or losing money in business or investment is not waste.

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NOT FRAUD

PHANTOM ASSETS

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A forensic analysis of banking and investment accounts reveals the following activity by husband:

1. Wire transfers to an offshore betting account.

2. Stock transfers to husband’s father.

3. Transfers made to an unknown source.

4. Loans made to separate property LLC

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PHANTOM ASSETS

As of the date of divorce, the community estate is valued at $1,175,000.00.

Assuming a 50/50 division of the community estate, Wife would receive assets totaling $587,500.00.

NOTE: A 50/50 division of the community estate is not required under Texas law. The court will divide the estate in a “just and right” manner. 46

PHANTOM ASSETS

Assume that the total value of the fraud on the community is $450,000.

This amounts is awarded to husband as a “phantom asset.”

Assuming a 50/50 division of the community estate, Wife would receive assets totaling $812,500.00.

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PHANTOM ASSETS

Community Assets to Assets to

Estate Husband % Wife %

Existing Assets 1,175,000 362,500 30.9%812,500 69.1%

Phantom Assets 450,000 450,000 0

Reconstituted Estate 1,625,000 812,500 50.00%

812,500 50.0% 48

PHANTOM ASSETS