Digital and virtual assets as part of the marital estate and division of property

Our lives are becoming more and more connected to technology. Without even thinking about it, spouses may have digital or virtual assets with value to the community estate that should be considered in the division at divorce. 

Chris Meuse's article on the Dallas Bar Association website sheds light on how to address digital and virtual assets in divorce.

The first step, according to Meuse, is to identify whether the parties have any valuable digital or virtual assets. 

Digital assets are intangibles that only exist in a digital form (i.e. data in the form of binary digits). Such assets may include: e-mail and social network accounts; websites; domain names; digital media, such as pictures, music, e-books, movies, and video; blogs; reward points; digital storefronts; artwork; and data storage accounts. These assets, although intangible, are marital property and are subject to characterization, valuation and division, during divorce.

Two examples of digital assets that most people getting a divorce in Dallas, Texas own are the iTunes music library and the Kindle digital book collection. Virtual media libraries, such as Apple’s iTunes and Amazon’s Kindle libraries, are the modern way to store a media collection. Music, movies, and books are now able to be stored on applications such as iTunes on an individual’s computer, cell phone, or any other supportable device.  In addition to adding media already owned, a user can download content; in the context of iTunes, the iTunes Store allows easy access to purchase a variety of media with a simple click. When the company provides their software to individuals, the individual receives a license to use or rent the software, not to own it. So an individual using iTunes really owns a legal right to use the product, not outright ownership of the product. The registered user is also the only individual actually allowed to use the product – not the individual’s significant other or family members -- making division in divorce difficult.

Virtual assets are intangibles used in virtual worlds or massively multiplayer online role-playing games (“MMORPGs” for short). Popular, online communities, such as World of Warcraft, Second Life, and Entropia, draw millions of users worldwide, who spend billions of dollars each year within these virtual realms. In 2009, 3.8 billion dollars were spent on MMORPGs, with over $100 million going towards virtual assets in these online communities. These assets range from virtual pets; avatars; accessories for those avatars (clothing, weapons, etc.); prizes; virtual real estate; to virtual currency. The popularity of these virtual worlds and games is only growing, and family law attorneys must realize these assets are out there and should start asking if they are a part of marital estates.

Once such assets are identified, the next step, as with the analysis of any asset of a marriage, is to determine whether the asset was acquired during the marriage, making it community property subject to division in the divorce, or whether the asset was owned prior to the marriage and is therefore separate property and outside the reach of the divorce court. This analysis is no different with digital or virtual assets than it is with a tangible asset. The example given by Meuse involves an income-producing blog.  If a blog was started during the marriage, it should be considered community property. If a blog were started before the marriage, but it was monetized and produced income during the marriage, that income would likely be considered community property. And, if the spouse who did not come into the marriage with that blog contributed to it by posting to it, editing it, or advancing it in any way, the community estate may have a reimbursement claim against the other spouse’s separate property estate for increase in value to that blog.  

Next, the value of the digital or virtual asset must be determined.  This is the difficult part of the analysis. Many personal, digital assets, such as photos or videos, have little to no market value but have great sentimental value to parties. Other digital assets, such as websites, personal blogs, or domain names can have great value. For instance, the most expensive domain name ever sold, vacation rentals [dot] com went for $35 million in 2007.  Many web-based services are available to value digital assets, and many of those same services can be used to sell such assets. The value of virtual assets can often be determined in the virtual marketplace.  Thousands of transactions take place daily for virtual goods, and like digital assets, the value of virtual goods should not be underestimated. In 2010, for example, a virtual nightclub, Club Neverdie, ran by Jon Jacobs in the virtual Entropia Universe (a virtual world with a real-cash economy) sold for $635,000.00.  

After digital or virtual assets are identified and character and value determined, parties must still figure out how to assign or divide that assets. Some digital assets, such as airline miles or membership points, can be transferred. Other digital assets, like digital photos or videos can be copied. But some assets, like e-books or other digital media files cannot be transferred. When parties own digital or virtual assets that cannot be transferred or copied, practitioners must value such assets, award them to one party, and provide value to the other party, in lieu of those digital/virtual assets.

 

Rule 11 agreements are revocable before judgment is rendered

A point of confusion for many in the family law context is the viability of a rule 11 agreement to settle an issue or a whole case. 

Rule 11 of the Texas Rules of Civil Procedure provides that an agreement between lawyers in a case is enforceable as long as the agreement is in writing and filed in the papers of the court or read into the record of the court.  However, rule 11 agreements are revocable at any time until judgment is rendered. A court may not enter an order upon a rule 11 agreement when one of the parties to the agreement has revoked his or her consent.

The recent case of  Woody v. Woody, __SW3d__, No. 14-12-00762-CV, 2014 WL 1512395 (Tex. App.—Houston [14th Dist.], 2014, no. pet. h.) (04/17/2014), illustrates this point.  In this case, the parties had very contentious litigation over child support.  In the end, they reached a rule 11 agreement read into the record, but before judgment could be rendered by the court, the father revoked his consent.  The trial court entered judgment anyway, which the Houston 14th Court found to be error. 

Parties can enter into an enforceable Rule 11 agreement if it is made in open court and entered of record. If a party revokes its consent to a Rule 11 agreement at any time before the trial court renders judgment in the case, the agreement can no longer simply be “approved” by the court; instead, the enforcement mechanism is through a separate breach of contract action. Here, although the parties entered into an agreement in open court, Father subsequently requested a reduction in child support. Therefore, Father clearly withdrew his consent to that agreement before the trial court rendered judgment. Accordingly, the trial court erred by incorporating the child support agreement into the final judgment.

 

Becoming a Partner -- Ownership Interest in Divorce

I was asked recently about whether becoming a partner in a professional company creates community or separate property.  The Husband worked for a firm prior to marriage and shortly before the marriage was offered a partnership interest in the firm.  He and the firm signed the partnership agreement a few months prior to the marriage.  After the marriage, he began receiving the benefits of the partnership agreement.  Now, he and his wife are headed for divorce and he wonders if she is going to be entitled to part of his partnership interest.

Starting at the beginning of the analysis, community property is anything that the spouses gathered together during the marriage.  It is presumed that everything the spouses own at the time of divorce is community property.  Community property is divisible upon divorce. 

On the other hand, separate property are those assets that were acquired before the marriage or through gift or inheritance.  Separate property assets are not divisible upon divorce. 


The inception of title doctrine governs the timing of whether an asset is separate or community property.  In other words, when was the first moment that the spouse was entitled to claim ownership of the asset? Was that moment during the marriage (community) or before (separate)? It is the origin of the right to title, not the actual acquisition of final title that determines the character as either community or separate.


Here, the documents securing the interest in the partnership were signed prior to the marriage.  Thus, the right to the ownership interest accrued before the marriage, making the partnership interest separate property and not subject to division upon divorce.

 

Strategy in Asset Divisions - Do's and Don'ts

One asset does not always equal another asset, even if the values are identical. One reason for this may be based on the personal situation of each spouse.  For example, one spouse may have a greater need for cash in the short run, where the other spouse may place higher need on retirement assets. Personal preference or short-term and long-term financial needs may be only part of the equation. Tax consequences of a property division can impact the long-term financial future of divorcing spouses. 

Deborah Nason with CNBC pointed out the not-so-obvious effects of a divorce property division in her article Not always a rose: Avoiding thorny asset-liquidation issues in divorce. For example, she points out, “if the wife keeps a house with $500,000 equity, this asset generally has a gain exclusion; if the husband keeps a 401(k) worth $500,000, he will sustain an unavoidable tax liability—one-third of it could go to taxes.”  However, a judge will view these assets equally based solely on valuation at the time of the divorce. 

But, keep in mind, liquidation is not the best answer either because liquidation creates a taxable event.  Dividing assets between spouses during a divorce is generally not a taxable event. Nason’s article points out, “…because transferring assets between spouses is a nontaxable event, it becomes a great motivator to trade assets back and forth”. 

Nason suggests the following Do’s and Don’ts in considering asset liquidation as part of a divorce: 

Asset liquidation dos and dont's 

Do:

—Understand the cost basis of investable assets.

—Make sure you know the purchase price of a real estate asset and quantify all improvements made.

—Understand what the capital gain will look like for the sale of a home.

—Make sure to obtain good business valuation (on equipment, buildings/real estate, goodwill, customer lists, customer base, etc.).

—Get an appraisal for collectibles.

 Don't:

—Liquidate a 401(k) if at all possible.

—Sell something that will result in the biggest capital gain.

—Forget to be aware of the change in capital gain exclusion from $500,000 to $250,000 when the proceeds of a house sale are split.

—Sell an asset without getting a fair price.

 

Michelle May O'Neil joins Godwin Lewis, P.C.

I am very excited to announce that effective today, July 1, 2014, I am joining the firm Godwin Lewis, P.C. in downtown Dallas as a shareholder. After 20+ total years of practice, and 10+ years with O'Neil & Attorneys, I am excited for the new opportunities ahead of me. As a firm owner, I have always tried to provide high quality representation in a personal atmosphere.


I believe that joining Godwin Lewis will help me to do a better job by focusing all of my efforts on my clients' best interest, eliminating the administrative tasks involved with owning and running a law firm. Godwin Lewis has offices in Dallas, Houston, and Plano, allowing me to expand my family law litigation and appellate practice beyond the Dallas area, to a statewide focus. The new firm also has lawyers that practice at the top of their field in 39 practice areas, providing depth to the services that I can provide to my clients. From business litigation to tax law, from immigration to estate planning, Godwin Lewis can cover just about every need that my clients may have. Built on a foundation of preparedness, out-of-the-box thinking, creativity and exceptional trial skills, Godwin Lewis PC is a mid-size trial and appellate law firm which has earned a national reputation for handling complex, high-stakes litigation and gaining desired outcomes. By joining forces with the Godwin Lewis team I can enhance the foundation of service to my clients.


I will continue to blog here at www.dallastxdivorce.com, providing readers with updates and insight into family and divorce law as it affects the Dallas, Texas area.


New contact information:


Michelle May O'Neil, Shareholder
Godwin Lewis, P.C.
1201 Elm Street, Suite 1700
Dallas, Texas 75270
Direct: 214-939-4427
Direct fax: 214-527-3123
Main: 214-939-4400
Email: Michelle.Oneil@GodwinLewis.com
website: www.GodwinLewis.com


What Child Support Covers - And Does NOT Cover

I read an interesting article by Natalie Gregg in Huff Post What Child Support Does Not Cover. It is an all-too-common complaint by the parent paying child support that the other parent “spends the money on him/herself”.  Many paying parents want to put restrictions on what child support can be spent on, to prevent the other parent from personally using the money. While it may seem like child support is being mismanaged to some – and maybe in some cases it is being mismanaged -- Texas law does not support placing restrictions on how child support is spent.  Judges do not want to micro-manage child support expenditures.  That would simply take too much time.  Instead, child support goes “into the pot” so to speak.  Child support obviously covers the child’s direct expenditures, such as clothing, food, and daycare.  But, it also goes to cover a portion of the house the child lives in and the car the parent drives the child around in.

Child support may not actually cover the “extras” for the child, like dance lessons and tutoring.  As a child gets older, she points out, the expenses grow into items like cars and car insurance.  Further, Texas law has no provision for a child’s college expenses, so either a parent has to save for that, or the child will have to bear those costs on his or her own.

Ms. Gregg makes a good point that, when faced with a daughter who wants a new prom dress, a dad isn’t (or shouldn’t) say “that’s what I pay your mom child support for”.  Sometimes children, like a lot of things in life, cost more than you anticipate.

 

Trust distributions - community or separate property?

Another complex issue that can arise in family law cases involves the characterization of trust distributions received by a spouse during the marriage. The San Antonio court of appeals recently considered a case regarding the characterization of trust distributions.  Husband receives monthly distributions from a family trust that was established before the beginning of the marriage. Wife demanded to receive one-half of the distributions based on the notion that such distributions were community property. The trial court held the distributions were husband’s separate property and denied wife’s claim to one-half of the money.  The court of appeals affirmed, relying on the case of Sharma v. Routh. Trust distributions to a married beneficiary are separate property if the beneficiary has no present, possessory right to the trust corpus. Here, the trust was irrevocable and the terms that allowed for its amendment did not in fact then make it revocable.  Further, husband had no present, possessory rights to the corpus because the terms of the trust entitled him only to income distributions.

Benavides v. Mathis , ___ S.W.3d ___ 2014 WL 547904, 04-13-00186-CV (Tex. App.—San Antonio 2014, no pet. h.) (02-12-14)

 

Lump-sum payment of child support can still be modified in the future

Occasionally I have parents who have the ability to pay the child support obligation in advance in a lump-sum payment.  I always admonish the client very carefully who wishes to do this because any orders regarding a child, including an agreement to accept future child support payments in lump-sum fashion, remain modifiable in the future until the child turns 18.  The Houston 1st court of appeals recently decided a case that illustrates this point.

There, Father agreed upon the birth of child 1 to pay a lump sum amount of child support.  Mother agreed to this arrangement and the trial court approved. However, a few years later, a second child was born to the parties and mother sought to modify the child support arrangement.  The trial court ordered husband to pay monthly child support over and above the lump-sum payment previously made. The court of appeals held that since the circumstances of the parties had materially and substantially changed since the entry of the prior order, modification was permissible and the trial court did not abuse its discretion in entering a new child support order.

Luckman v. Zamora, 01-13-00001-CV, 2014 WL 554630 (Tex. App.—Houston [1st Dist.] 2014, no pet. h.) (mem. op.) (2/11/14).

 

Can a child testify in a family law suit?

It is most often discouraged to have children serve as witnesses in a family law suit between the child’s parents. However, the Amarillo court of appeals recent decided a case that discusses the standards for securing pretrial testimony of a child for admission during a family law trial. There, the father filed a suit for modification and sought a court-order permitted him to take recorded testimony of the child for use at trial.  The trial court permitted the recorded testimony.  However, when the father sought to use and admit the recorded testimony, the trial court refused admission. Before a child’s recorded statement may be admitted into evidence, there must be a showing of competence at the time the testimony is given and a showing that an oath was given or some discussion had with the child about the issue of truthfulness. Father’s attorney failed to establish that the child knew to tell the truth and therefore the attorney failed to show the child is a competent witness. Thus, the court of appeals affirmed the trial court’s denial of admission of the child’s testimony. 

Nichol v. Nichol, ___ S.W.3d ___, 2014 WL 199652 (Tex. App.—Amarillo 2014, no pet. h.) (mem. op.) (1/15/14).

 

4-day delay in entering written contempt and commitment order renders enforcement void

Child support enforcement is akin to a criminal prosecution and must be handled with the utmost eye toward the due process rights of the accused.  It is a well-settled and obvious rule that, in order to hold someone in jail on an enforcement case, such as for nonpayment of child support, both the contempt order and the commitment order must be in writing and signed by the judge immediately following the commitment.  Failure to do both of these things renders the commitment void. 

The Houston 1st District Court of Appeals decided a case illustrating this point recently.  There, the mother sued the father for enforcement of child support and medical support payments he failed to make.  The trial court found against father and held him in contempt with a sentence of 180 days confinement for each violation to run concurrently. The sentence was initially suspended pending compliance, but father failed to comply and revocation was heard.  The court revoked the sentence orally and committed father to jail for 180 sentence. Four days later, the trial court entered its revocation and commitment order.

Father sought habeas corpus, which was granted.  The court of appeals held that 4 days is too long between commitment and entry of the order according to due process. A person may not be imprisoned for contempt without a written order of commitment. An arrest for contempt without a written commitment order is an illegal restraint from which a prisoner is entitled to habeas relief. However, a trial court may cause a contemnor to be detained by the sheriff for a short and reasonable time while the judgment of contempt and order of commitment are prepared for the judge’s signature. Less than twenty-four hours to prepare a commitment order is a short and reasonable time. Two or three days between oral rendition of commitment and the signing of the written order of commitment, however, has been held to constitute an unduly delay that necessitates habeas relief. Because the trial court did not sign a written commitment order until four days after the oral rendition of commitment, Father’s due process rights were violated and that the commitment order is void.

In re Linan, ___ S.W.3d ___, 2013 WL 6504766 (Tex. App.—Houston [1st Dist.] 2013, orig. proceeding) (12/12/13)