Undisclosed assets after divorce

What happens if, after the divorce is final, a party discovers that the other party failed to disclose certain assets in the divorce proceedings?

The recent case of In re Ford out of the Texarkana Court of Appeals is instructive in this situation. In Ford, the parties had been married for 31 years and separated for 3 years.  Two months after the divorce was final, the Wife filed a new lawsuit complaining that Husband failed to disclose certain retirement income received while the divorce was pending.  Wife sought division of the undisclosed income. Husband testified that the money was spent on community expenses during the divorce, including support of the Wife.  Wife failed to show the existence of the money at the time of divorce. The trial court denied Wife's request because she failed to show that the income existed at the time of divorce.

A suit to divide undivided property after divorce is governed by Texas Family Code sections 9.201 and 9.203.  The only assets divisible upon divorce are those in existence at that time. Assets that have been disposed of at a time prior to the divorce are not divisible unless a spouse is found to have committed fraud is the disposition of the assets and the marital estate is "reconstituted" to fictionally include the disposed assets. Thus, it is critical to a suit to divide undivided assets post-divorce to prove that the assets were in existence at the time of divorce.

The Texarkana Court of Appeals in Ford found that the Wife made allegations about the receipt of money by Husband, but she failed to carry her proof forward to the final step in the analysis -- where was the money at the time of the divorce? She could have shown the existence of the money by tracing it to an undisclosed account that existed at the time of divorce, for that matter, undisclosed cash in the mattress. Because Wife failed to show the required proof, the Texarkana Court of Appeals affirmed the trial court's denial of Wife's lawsuit.

Most of the time in divorce lawsuits the parties exchange sworn inventories which detail each party's position under oath regarding the existence and value of the marital assets, including each person's position as to the characterization of the asset as community property or separate property. The point of preparing these sworn inventories is to have proof of the assets being divided in the divorce.  This would also be a good starting point in looking at the viability of a case for undisclosed assets post-divorce.  Was the asset listed in the party's inventory during the divorce?

The second place to look in evaluating a post-divorce claim for undivided assets would be in the divorce decree entered by the Judge.  Are there general division provisions contained in the decree? It is common to use general language for the award of money on hand, bank accounts, retirement accounts, and even bonuses not yet received, such that a party is awarded "the accounts in his or her name".  This type of general language can block a lawsuit for post-divorce division of assets.

A third consideration in looking at a post-divorce division of undisclosed assets is to look at the discovery that was completed during the divorce.  Was a request for production sent seeking copies of all documents pertaining to the assets? If one was sent, did the opposing party respond fully to the request? If not, did the party seeking discovery seek enforcement remedies from the divorce judge to compel the document production? If the party failed to exhaust all available discovery options, it could cause waiver of the post-divorce suit claiming undisclosed assets. If the assets could have been discovered through diligence but the party complaining about the failure of disclosure did not exercise such diligence, then the post-divorce suit is waived.

Overall, it is very difficult to maintain a suit for post-divorce division of undisclosed assets and the Ford case is one example illustrating the difficulties.

Texas divorce FAQ: I have some cash that I don't want to tell my spouse about. Can my lawyer help me hide it?

You and your lawyer have an ethical responsibility to be honest, truthful, and fully disclose issues related to the case.  In fact, at some point during your divorce, you will likely have to swear under oath as to all of the assets and debts that you are aware of. If you knowingly hide assets and your attorney finds out, the attorney will be obligated to withdraw from representing you if you refuse to tell the truth.

 

Texas divorce FAQ: How do I prove that my spouse is hiding money?

 

Allegations of hidden assets occur often in divorce proceedings. It is standard procedure in a contested Texas divorce for spouses to each be required to file a sworn disclosure of the assets and debts, including financial accounts, of the marriage. Additionally, bank statements and other written documentation can be requested from the spouse or obtained from the bank or other company, that may shed light on the existence of the assets. A forensic CPA can be hired to analyze the financial transactions to search for irregularities that would indicate hidden assets.

 

What's Ours Is Mine: Signs Your Spouse Might Be Hiding Money

 

Divorce can bring out the worst in people or uncover bad behavior that has been there all along. Unfortunately, some people try to hide money from their spouse in a divorce. Other people have hidden money throughout the entire marriage. Clients often sense that something is just not right. This is the time to take action and seek legal advice. 

Often it is hard for people to put their finger on exactly what sets off the alarm bells for them. To help, here are the top 5 signs that your spouse is hiding money from Nancy Van Tine of Burns & Levinson, LLP:

1. No transparency.  This can be a problem from the beginning of the marriage.  You don't have joint accounts.  There is no openness about finances and no real economic partnership.  This makes it super easy to hide money!  Every spouse should understand the family finances and be aware of what you have and how it is held, always.  It just makes it too easy for a spouse to transfer funds and hide cash if you don't know how it all fits together.

2.  A change in behavior.  Instead of mail coming to the house, it goes to a spouse's office or he/she gets a post office box.  The spouse opens new bank accounts and you don't see the statements.  He/she gets new credit cards, and the bills don't come to the home.  He/she has more than one cell phone, and you don't see the bills.  The extra phone can indicate a lover, and that often means money is leaving the marriage.

3. A sudden decrease in income.  One of my favorite quotes (and I have used it for so long I can't remember the source, other than it was another divorce lawyer) is, "once again, the magic alchemy of divorce turns yet another prince into a pauper." This can happen more often with the self-employed, as it is much easier to finagle finances in your own business than if you are a W-2 employee. If it occurs in conjunction with #2 above, watch out!

4. New and unusual economic behavior. This tends to be more on the spending side.  The spouse is buying stuff which depreciates, i.e. a fancy car, a new motorcycle, boat or jet ski -- basically wild spending on toys.  If your spouse starts running up large debts or cleaning out accounts to pay for new acquisitions, watch out!

5. Rushed and controlling. When tax returns need to be signed, you get the return on the day due and there is no time to read it, nor is there a copy for you to keep.  Estate planning is rushed and/or unexpected, and you don't get to discuss the plans and their meaning with the lawyer.  These and other areas where speed and lack of clarity can really hurt you are considerable.”

If any of these five signs set off alarm bells in your own relationship, or more importantly if your instinct tells you that something is just not right about your spouse’s behavior lately, consult a good divorce attorney immediately. An experienced divorce attorney can inform you of your legal rights and can explain the steps you need to take to better understand your financial situation. 

Above all else, the most important thing you can do is to become knowledgeable about your finances – review your tax returns, meet with your CPA, learn about your spouse’s business. This investment will pay off for you by allowing you to be an engaged and active participant in your divorce and empowering you to manage your own finances once your divorce is final.

 

 

Alter Ego and Piercing the Corporate Veil in the Context of Divorce

Businesses can pose special challenges upon divorce. As Dallas divorce attorneys, we deal with these issues in many of our cases, with businesses acquired during the marriage and also businesses owned by one spouse before marriage.

Texas law typically treats corporations, partnerships, and other types of businesses as a separate legal entity – existing apart from shareholders and partners. Because these businesses are separate legal entities, only the spouse’s interest in the corporation, partnership or other business is up for division by the divorce court. This means that specific corporate assets are often off-limits in a divorce action. But, there is an exception to this rule when alter ego can be established.

If the business is found to be the “alter ego” of a spouse, divorce courts can “pierce the corporate veil” to move assets out of the corporation and divide them between the parties as part of the shareholder's community estate. A finding of alter ego sufficient to justify piercing in the divorce context requires the trial court to find:

 

 (1)       unity between the corporation and the spouse such that the separateness of the corporation has ceased to exist, and

 

(2)        the spouse's improper use of the corporation damaged the community estate beyond that which might be remedied by a claim for reimbursement.

 

The concepts of alter ego and piercing are applied in divorce cases to achieve an equitable result, that is, a just and right division of the marital estate. Generally, the divorce court will pierce to avoid leaving the community estate with virtually no property.

 

Whether you are a business owner, spouse of the business owner, or the attorney representing either party, when a business interest is part of the community estate, or owned by one spouse during the marriage, keep the equitable principles of alter ego and piercing the corporate veil in mind when evaluating the strategy for a divorce proceeding.

Hidden Assets in Divorce

Frequently we are asked what recourse is available when one spouse attempts to hide assets of the marital estate during a divorce.  Not only is such conduct highly unethical, it is fraudulent as well.  Typically a forensic accountant is called in to help search for hidden assets.  In our experiences, here are some reoccurring methods used to hide assets:

  • Purchasing lavish antiques, artwork or hobby equipment.  Often times property such as this is overlooked and undervalued;
  • Collusion with an employer to delay the payment of bonuses, stock options or raises;
  • Setting up a custodial account in the name of a child;
  • Repaying a "debt" to a family member or friend when such payments were no previously made;
  • Salary paid to a non-existent employee if the spouse is a business owner;
  • Money paid to close friends or family members for "business" services not actually rendered; and
  • Investment in municipal bonds or Series EE Savings Bonds for which no interest is reported on tax returns.

If you suspect you spouse is hiding assets it is a good idea to review all financial records prior to filing for divorce.  If you are responding to a divorce we suggest you retain the services of a qualified forensic accountant.