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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
13
FIDUCIARY AND OTHER OBLIGATIONS BETWEEN SPOUSES:
HISTORY OF MARITAL FRAUD
14
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
15
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)
16
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
18
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
20
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
22
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
23
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
24
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
25
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
27
SUPREME COURT RESOLVES ISSUE
THE RECONSTITUTED ESTATE
28
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.
30
§ 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:
31
§ 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.
33
§ 7.009(b) If Fraud, then
Calculate and Divide
WHAT IS FRAUD ON THE COMMUNITY?
34
In common law jurisdictions, a tort is a civil wrong causing someone to suffer harm or loss resulting in legal liability.
35
LAW OF TORTS
1. Duty of care
2. Breach of duty
3. Causation
4. Damages
5. Proximate cause
36
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.
37
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
38
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.
39
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.
40
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
41
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.
43
NOT FRAUD
PHANTOM ASSETS
44
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
45
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.
47
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