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Waste, Dissipation, or Wrongful Disposition of Community Assets in a Texas Divorce

Waste, Dissipation, or Wr…

When a couple with substantial assets gets divorced in Texas, there is often a danger that one spouse will attempt to conceal assets, or even dispose of assets for the sole purpose of depriving the other spouse of them. This can affect not only the division of property in the divorce, but also the availability of resources for child support and other obligations. It is therefore crucially important to take inventory of all marital assets as quickly as possible. Texas law provides mechanisms to prevent waste or dissipation of assets once a divorce has been filed. It also provides remedies for the spouse who has been deprived of marital property by the other spouse’s wasteful or fraudulent actions.

The Community Marital Estate

The property owned by a couple at the time they file for divorce is classified as either separate or marital property. Separate property includes any property owned by a spouse before the marriage, or acquired by the at any time as a gift or through inheritance. Marital property, also known as community property, includes anything acquired during the marriage that cannot otherwise be classified as separate property. The spouses jointly own all marital assets, which are collectively known as the “community marital estate,” or just the “marital estate.”

Division of the Marital Estate

Texas law directs courts to divide the marital estate “in a manner that the court deems just and right.” A “just and right” division does not have to mean an equal division between the spouses. Courts can take a wide range of factors into account when determining how to divide marital assets, including fraud or other misconduct by one spouse at the other’s expense.

Fraud on the Community

The term “fraud on the community” generally refers to actions:

  1. With intent to defraud the other spouse (actual fraud); or
  2. Without the other spouse’s consent (constructive fraud).

This often involves concealing or disposing of assets. An extreme example, reported several years ago, involved a husband who hid around $400 million worth of assets from his wife through a system of shell companies and offshore accounts.

Texas courts have held that spouses owe fiduciary duties to one another with regard to marital property. A fiduciary duty is a duty of loyalty to another person or entity, such as the duty of loyalty owed by an attorney to a client, or a corporate director to the corporation. A person who owes a fiduciary duty is expected to put the other person’s interests before their own. A corporate director who comes across a business opportunity that would directly benefit the corporation, for example, has a duty to take the opportunity to the corporation before acting on it themselves.

The Texas Legislature passed a law in 2011 that specifically deals with actual and constructive fraud on the community. Constructive fraud claims are more common in Texas divorces, in part because actual fraud is much harder to prove in court.

Constructive Fraud on the Community

In 2013, a court in Houston held that constructive fraud on the community may occur when one spouse disposes of the other spouse’s share of community property “without the other's knowledge or consent.” This could be a breach of the spouse’s fiduciary duty to safeguard the other spouse’s community interest in the property, and not to dispose of it to their own benefit. Suppose, for example, that a couple has a significant amount of assets in a brokerage account that is in both spouses’ names, but under one spouse’s control. That spouse cannot dispose of all or most of the assets in that account, such as by transferring them to someone else, without their spouse’s permission.

A court will presume that constructive fraud has occurred if the spouse who was deprived of the property demonstrates that they neither knew about nor consented to its disposition. The deprived spouse does not have to prove intent to defraud. The other spouse must then produce evidence showing that their actions were justified somehow.

Actual Fraud on the Community

The term “fraud” can refer to an entire category of criminal offenses. It can also refer to a range of acts that can lead to civil liability for damages, or that can lead to punitive damages. In this context, it could be defined as wrongfully concealing or disposing of community property, with deceptive intent.

Proving actual fraud requires evidence of “dishonesty of purpose or intent to deceive,” according to another Houston court ruling. In that case, one spouse claimed that the other spouse gave community property away as gifts “with the primary purpose of depriving her from having the use and enjoyment of the assets comprising the gifts.” The court held that the spouse making this allegation has the burden of proving it. This is a much higher burden than a claim for constructive fraud.

How to Prevent Fraud on the Community Once a Divorce Has Been Filed

Some Texas counties have standing orders in place that take effect in every divorce case the moment it is filed. Harris and Galveston Counties are not among them, though, so a person filing for divorce here who is concerned that their spouse might commit fraud on the community must seek a temporary restraining order (TRO) from the court.

A TRO prohibits both parties from taking various actions that cover the range of unfortunate behavior that can occur in acrimonious divorces. This includes “intentionally or knowingly damaging or destroying” community property or the other spouse’s separate property, and selling or otherwise disposing of community property without the court’s permission. The court must hold a hearing soon after the divorce papers are served on the other spouse. At that hearing, the court must decide whether to convert the TRO to temporary orders that remain in effect until the divorce is finalized.

Remedies for Fraud on the Community

The available remedies for fraud on the community depend on whether a TRO or temporary orders are in place, and then whether the fraud occurred before or during the divorce. If a spouse committed fraud on the community in violation of a TRO or temporary orders, they could be held in contempt of court, which might involve monetary fines or even jail time. This might not, however, directly benefit the wronged spouse.

The 2011 law dealing with fraud on the community provides remedies for the wronged spouse. It directs the court to calculate the value of the marital estate had the fraud not occurred, and then to divide that value between the spouses in a “just and right” manner. The court can compensate the wronged spouse by:

  1. Awarding that spouse a share of the marital estate that accounts for losses caused by the fraud;
  2. Awarding that spouse a money judgment, to be paid by the other spouse; or
  3. A combination of both.

Stacey Valdez is a board-certified family attorney who practices in the greater Houston, Texas area. As a client of Stacey Valdez & Associates, you and your family will always be a top priority for our firm. Family law disputes, such as divorce and child custody cases, are among the most difficult ordeals many people face. We are committed to guiding our clients through the process with compassion, support, and tireless advocacy. Please contact us online, or give us a call at (713) 294-7072 today to schedule a confidential consultation to discuss your case. Your first meeting with us is free in most situations.

Categories: Property Division