1. Capricious and Excessive Fraud on the Community and the Reconstituted Estate

2. DIVORCE IN TEXAS

3. FINANCIAL ISSUES IN DIVORCE

4. FINANCIAL ISSUES 1.What Are the Marital Assets?  What exists as of the date of marriage  What existed prior to the filing  Forensic Accounting

5. FINANCIAL ISSUES 2.Who Do They Belong To?  Presumption of community property  What is separate property?  Everything else is community property

6. FINANCIAL ISSUES 3.What are They Worth?

7. FINANCIAL ISSUES 4.How Do We Divide Them?

8. WHAT ARE THE MARITAL ASSETS? 1. What exists now? 2.What has historically existed? 3.Why has it changed?  Community Fraud  Reconstituted Estate

10. 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

11. BY THE NUMBERS? For nearly 40% of all married Texans, divorce represents their single largest financial transaction

12. BY THE NUMBERS? Can impact:  Friends, family, employees, even self  Employee benefits (even if not transferable)  Business entities owned by the parties

13. 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:

14. HISTORY OF MARITAL FRAUD 14

15. 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

16. 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

17. 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 immunity 17

18. 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

19. 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 arguments 19

20.  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

21. 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 torts 21

22. 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

23. 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

24. 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

25. 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

26. 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 estate 26

27.  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

28. THE RECONSTITUTED ESTATE 28

29.  New to Texas Family Code  Culmination of 100 years of case law  Wrongful acts between spouses  Not a measure of damages 29

30.  the total value of the community estate that would exist if an actual or constructive fraud on the community had not occurred. 30

31.  (b) if the trier of fact determines that a spouse has committed actual or constructive fraud on the community, the court shall: 31

32.  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

33.  ( 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

34. WHAT IS FRAUD ON THE COMMUNITY? 34

35.  In common law jurisdictions, a tort is a civil wrong causing someone to suffer harm or loss resulting in legal liability. 35

36. 1.Duty of care 2.Breach of duty 3.Causation 4.Damages 5.Proximate cause 36

37.  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

38. 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

39.  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

40. 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

41. 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

42.  Gifts to paramours  Excessive or arbitrary gifts or transfers  Wasting of community assets  Excessive attorney’s fees  Funds that cannot be accounted for 42

43.  Simply spending money or losing money in business or investment is not waste. 43

44. PHANTOM ASSETS 44

45.  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

46.  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

47.  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

48. Community Assets to Assets to Estate Husband% Wife% Existing Assets 1,175,000362,50030.9%812,50069.1% Phantom Assets 450,000450,000 0 Reconstituted Estate 1,625,000812,50050.00%812,50050.0% 48