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The Tholstrup Law Firm, L.P.
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E-Mail: tholstru@sbcglobal.net
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COMPLEX PROPERTY DIVISIONFor more detail on the following, simply click on the issue
1. Relevant Texas Family Code Sections & Leading Case Law I. Torts/Fraud II. Goodwill III. Retirement IV. Property/Characterization/Reimbursement V. Trusts VI. Partnerships VII. Premarital Agreements 2. How is property divided upon divorce? 1. Relevant Texas Family Code Sections & Leading Case Law To access the Index of the Texas Family Code to read the statutes directly (provided by the State of Texas, so beware there may be delay in updates from legislative changes, go to www.capitol.state.tx.us/statutes/fatoc.html, find the relevant section, and click on the statute to go to that section. See particularly, Title 1, Subtitle B of the Texas Family Code, §§ 3.001-9.302. DeVine, 869 SW2d 415; Fraud on community/sleeping with developer case; As between spouses, six traditional elements of actual fraud need not be shown; Presumption of constructive fraud arises where one spouse disposes of other spouses interest in community property without other’s knowledge or consent; Evidence should show fair compensation for community estate. Osuna, 993 S.W.2d 201; Fraud on community/mistress case; Have to have evidence that money came from wrongful spouse re deposit by mistress; Cause of action for fraudulent transfer is based on the fiduciary relationship that exists between spouses as to the CP controlled by each spouse; Breach of legal or equitable duty is termed fraud on the community, a judicially created concept based on the theory of constructive fraud; A third person who knowingly participates in the breach may also be liable for the fraud; The aggrieved spouse has right of recourse first against the property or estate of the disposing spouse, and, if that proves to be of no avail, then the aggrieved spouse may pursue the proceeds to the extent of her community interest in the hands of the party to whom the proceeds have been conveyed; A spouse may make moderate gifts for just cause outside the community, but a gift of CP that is capricious, excessive or arbitrary may be set aside as a constructive fraud on the other spouse; A purchase money resulting trust is implied in law when someone, other than the person in whose name title is taken, pays the purchase price of the property. Schlueter, 975 S.W.2d 584; Fraud on the community/reimbursement; Because a wronged spouse has an adequate remedy for fraud on the community through the just and right property division upon divorce, we hold that there is no independent tort cause of action for damages to the community estate (different if to the wronged spouse’s SP); Bounds (wrongful death), Price (negligence - motorcycle accident) & Twyman (IIED) - all PI cases - Pain and suffering is SP!; Contains Vickery reference. Nail, 486 SW2d 761; Division of personal goodwill; Accrued goodwill of husband’s medical practice did not constitute property subject to division as part of parties’ estate. Rathmell, 732 SW2d 6; Objection to goodwill expert; Trial Ct valuing Community-owned insurance agencies for division upon divorce should have excluded value attributable to personal goodwill of husband–time, toil, and talent of husband to be expended following divorce. Smith, 836 SW2d 688; Personal/Professional goodwill; Appraisal of H’s respiratory care business by W’s expert should not have been admitted since it did not exclude good will and since it concerned H’s personal future earning capacity rather than valuation of business. Baw, 949 SW2d 764; Formulas for division of retirement benefits; Defined Contribution/Profit sharing = value at divorce - value at marriage; A party cannot appeal from a judgment to which it has consented or agreed absent an allegation and proof of fraud, collusion or misrepresentation; Objection on record gives rise to not explicitly and unmistakably giving consent; Fractional apportionment formula on rights not vested at divorce or divided in decree. Taggart, 552 SW2d 422; Retirement benefits are subject to division as vested contingent CP rights even though the present right has not fully matured; CP interest in contingent rights is the fractional interest calculated by number of months married divided by total number of months employed. Grier, 731 SW2d 931; Military retirement; In apportioning military retirement benefits upon dissolution, valuation of community interest in such benefits is based on retirement pay which corresponds to rank actually held on date of divorce; FSPA does not limit amount of military retirement pay which may be characterized and apportioned as community asset–Act’s provisions are intended only as a limit on amount of pay which may be garnished and paid out directly to non-service spouse in court order. Mansell v. Mansell, 490 U.S. 581; Military disability accruing to service person during marriage is not divisible upon divorce for purposes of payment to non-military spouse under USFSPA–only disposable retired pay; The Act does not grant state courts the power to treat as property divisible upon divorce military retirement pay waived by the retiree in order to receive veterans’ disability benefits; McCarty-state courts could not treat military retirement as CP. Property/Characterization/Reimbursement Butler v. Butler, 975 S.W.2d 765, 769; Liability of spouses for debt; Income after divorce is not property acquired during the marriage; Reimbursement for child support payments that begin during the marriage can be distinguished from child support/alimony obligations from a prior marriage that the new wife had full knowledge of; To warrant reversal of a trial court’s division of community property, an appellant must show that the division was so disproportionate as to be manifestly unfair, and that the trial court probably would have made a different division of the property if it had been properly characterized; If the judge intends to divide CP 60/40 and the actual division because of miscalculation is 75/25, the division is manifestly unfair. Cameron, 641 SW2d 210 (1982); Quasi Community Property; Property spouses acquired during marriage, except by gift, devise or descent, should be divided upon divorce in Texas in same manner as community property, irrespective of domicile of spouses when they acquire the property. Eggemeyer, 582 SW2d 137; Separate/Community property-TC gave W SP farm interest of H; TFC does not authorize divestiture of one’s title to SP; Rents, revenues and income from SP may be set aside for the support of minor children; Court could have set over the father’s SP interest in the farm to the mother for the support of the children during their minority; The nature of property is fixed by the Texas Constitution, not by what is “just and right”; It is no breach of Constitution to decree the use of property, for some period, for the use in support of the minor children. Heggen v. Pemelton, 836 SW2d 145; Liens against S/P; When dividing marital property upon divorce, trial courts may impose equitable liens on one spouse’s separate real property to secure other spouse’s right of reimbursement for community improvements to that property, but not to ensure a just and right division of marital estate; Equitable lien on wife’s separate property homestead could be imposed to secure H’s right of reimbursement for improvements made with community funds provided H’s reimbursement claim satisfied constitutional provision providing foreclosure protection for homestead. Jensen v. Jensen, 665 SW2d 107; Reimbursement to community for time, toil, talent, & effort to enhance separate estate; The supreme Ct adopted the reimbursement theory rather than a community ownership theory regarding increases in value of SP during marriage, with the effect that community is to be reimbursed for value of time and effort expended by either or both spouses to enhance separate estate of either, other than that reasonably necessary to manage and preserve separate estate, less remuneration received for that time and effort in form of salary, bonus, dividends, and other fringe benefits, those items being community property when received; Stock owned before marriage remained SP, subject only to right of reimbursement, if any, for value of former H’s time and effort in producing the increase in value, should it be determined that former H and thus, the community had not been adequately compensated therefor during the marriage; Lien was not to attach to former H’s separate property shares but, rather money judgment could be awarded. Jones, 890 SW2d 471; Characterization of borrowed funds; Debts contracted during marriage are presumed to be on credit of community and thus are joint community obligations, unless it is shown that the creditor agreed to look solely to separate estate of contracting spouse; Using SP to pay off community debt creates prima facie right of reimbursement; When SP not been commingled or identity can be traced, statutory presumption of CP is dispelled–remains SP even if undergoes mutations or changes; Clear and convincing evidence required to overcome presumption. Lewis, 944 SW2d 630; Characterization of workers comp benefits; Workers comp settlement paid during marriage is not CP if the claimant’s disability occurred prior to marriage...in this case, not further loss of earning capacity from the injury occurred during the marriage. Norris v. Vaughn, 260 SW 676; Characterization of oil and gas; Follows the title to the land; Separate funds spent for community living expenses should be deemed a gift to the community for its well-being and standard of living; prior to Uniform Partnership Act - change to entity. Penick, 783 SW2d 194; Tracing SP: Tax benefits received by community estate through depreciation of former H’s separate estate are an offset against reimbursement sought by community estate against H’s prenuptial debt on separate property. Thomas, 738 SW2d 342; Corporate retained earnings; Unless a corporation is a spouse’s alter ego, court upon divorce may not divest a spouse of separate property corporate stock; Retained earnings of Sub S corporation, stock of which was SP of H, were not marital property subject to division in divorce action, even though Community had paid federal income tax on retained earnings during marriage. Vallone, 644 SW2d 455; (“Tony’s”)Right of reimbursement of separate or community estate arises when funds or assets of one estate are used to benefit and enhance another estate without itself receiving some benefit; In absence of pleadings either specifically for or referable to reimbursement of community or separate estate premised on uncompensated time, talent, or labor, such recovery is waived and failure of tiral court to consider matter does not constitute error; TC in granting divorce found H’s business to worth $1,000,000, found 47% his traceable SP, set aside proportionate share of stock, awarded W 70% of remainder and ordered repurchase of W’s stock by corp and H, and secured by all stock, did not abuse discretion. Welder, 794 SW 429 (1990); Inception of title case; Inherited properties and royalty interests ($200k/mo); If SP and CP have been so commingled as to defy re-segregation and identification, the statutory presumption prevails... when SP has not been commingled or its identity as such can be traced, the statutory presumption is dispelled; A showing that CP and SP were deposited in the same account does not divest the SP of their identity and establish the entire amount as CP when the SP may be traced; General rule is that royalties paid for oil and gas produced from the SP of a spouse are payment for the extraction or waste of the separate estate, and therefore, remain that spouse’s SP; Community out first presumption to expenditures from the account; Legally and factually sufficient evidence to accurately determine without surmise or speculation, SP interests; Property is entirely CP when purchased with community debt; The intention of the lender to look solely to the property of one spouse is an evidentiary factor of prime importance in showing by clear and convincing evidence that spouses intended to hold the property as one spouse’s SP; Facts or data upon which an expert relies in a particular case need not be admissible in evidence if they are of a type reasonably relied upon by experts in a particular field in forming opinions or inferences upon the subject; The doctrine of judicial estoppel bars a party who successfully maintained a position in a prior judicial proceeding from afterward adopting an inconsistent position, in the absence of a showing that the prior statement was made inadvertently or as a result of mistake, fraud or duress. Burns, 573 S.W.2d 555; Characterization of trust property and income; The undistributed income of non “discretionary” trusts (distributable at trustee’s sole discretion) and estates which was earned during the marriage is CP and the T/C errors if it fails to consider such undistributed income as CP in arriving at property division; Undistributed trust income is not CP where trustee had the right to withhold...beneficiary has no more than an expectancy interest in the corpus...must have a present or past right to require distribution (constructive acquisition) for undistributed to be CP. Cleaver, 935 S.W.2d 491; Corporate and trust income characterization issues; Discretionary trusts; 1961 Partnership act...gave rise to the Texas “entity” theory, partnership property is owned by the partnership itself, and such earnings are neither CP nor SP of the individual partners before distribution to those partners; Where wife has a present possessory interest in funds that should have been, but had not been timely distributed to her by the trust is properly characterized as CP; No fiduciary duty exists between H & W as to her handling of her SP; No conflict of interest of trustee if he received no personal benefit arising out of his service as trustee of trust. Ridgell, 960 SW2d 144; Characterization of trust distributions; Income received by a married beneficiary on the trust corpus to which the beneficiary is entitled, or becomes entitled, is CP; If property is acquired on the basis of separate credit or SP, the acquired property would be SP...if notes paid from trust income, community estate may be entitled to reimbursement. Harris, 765 SW2d 798; Partnership property-H’s former law firm; H’s partnership interest in his former law firm and his interest in that firm’s contingent fee arrangement for its representation of a case is SP/prior to marriage acquisition; Partnership property is owned by the partnership entity, not the individual partners; Partnership interest is subject to SP or CP; Distribution of partner’s share of profits and surplus received during marriage are CP even if partner’s interest in partnership is SP; It may be possible in some cases to show that an increase in value of a SP asset was based on some CP factor; Amendments to partnership agreement during marriage do not make increase in value CP; To be CP, additional interest acquired during marriage cannot be analogous to stock splits and increases... mutations and increases in SP remain SP. Beck, 814 S.W.2d 745; Premarital agreement/both represented/he dies after a few years/his heirs want to get at her SP; 1980 Amendment to Constitution provided that persons about to marry and spouses may by written instrument partition between them all or part of their property, then existing or to be acquired or exchange community interests; By passing a Constitutional Amendment that specifically refers to the invalid statute, the legislature can expressly validate not only the statute, but all actions taken in reliance on the validity of the statute. 2. How is property divided upon divorce? A court will divide the community estate of the parties in a manner that the court deems just and right, with due regard for the rights of each party and any children of the marriage. In Texas, property division is largely a substitute for alimony which is ordered in other states. As discussed below, there are a number of factors the court can take into account in making this division something other than a 50/50 split. Separate property is all property owned or claimed by a spouse before marriage; the property acquired by a spouse during marriage by gift, devise, or descent; and the recovery for personal injuries sustained by a spouse during marriage, except any recovery for loss of earning capacity during marriage. 4. What is community property? Community property is all property, other than separate property, that is acquired by either spouse during the marriage. There is a heavy presumption that all property is community property, and the burden of proof (by clear and convincing evidence) to disprove this presumption is on the party trying to prove that the property is separate property. 5. What factors contribute to the complexity of property division upon divorce? Likely the greatest factor contributing to complexity of property division upon divorce is that during most of the marriage, there is not the anticipation of divorce, so separate and community property are co-mingled without any thought that there might need to be a rigorous analysis to separate the estates at some point. A secondary factor is that the law provides that income from separate property is community property. As a result, separate property principal is co-mingled with the community property income from that separate property. Add to these poor record keeping over the years and the product is complexity. 6. What does the term “reimbursement” mean in property division in a divorce? A claim for reimbursement in a divorce includes payment by one marital estate of the unsecured liabilities of another marital estate, and inadequate compensation to the community estate for the time, toil, talent and effort of a spouse by a business entity under the control and direction of that spouse. A claim for reimbursement may not be made for payment of child support, alimony, living expenses of a child or spouse or a student loan owed by a spouse. Benefits for the use and enjoyment of property may be offset against a claim for reimbursement. 7. What does the term “economic contribution” mean in property division in a divorce? Economic contribution in terms of the Texas Family Code is the dollar amount of the reduction of the principal amount, during the marriage, of a debt secured by a lien on separate property or for capital improvements made to separate property during the marriage from community property funds. Economic contribution does not include expenditures for ordinary maintenance and repair, or taxes, interest or insurance paid during the marriage for the benefit of a spouse’s separate property. 8. What is “tracing”? Will an expert witness be required? Tracing is the process of developing competent evidence to track separate property through one or more co-minglings with community property to be able to identify separate property on the date of divorce by clear and convincing evidence. Expert witnesses are often necessary in division of property on divorce to testify to the tracing evidence or to provide value determinations for the property involved. 9. Are community assets and liabilities divided 50/50 upon divorce? Only if a 50/50 division is found to be just and right by the court (judge). Property division cannot be tried to a jury. Property characterization (community versus separate) can be tried to a jury. 10. What are the factors a court can consider in a just and right division of community property? The factors in a just and right division include:
a. fault in the breakup of the marriage; The inception of title controls the characterization of property. In this example the house is the separate property of the purchaser. The contributing spouse may be due reimbusement or have an economic contribution claim against the separate property of the non-contributing spouse’s separate property, but they cannot get possession of the house on divorce. Yes, a claim for reimbursement to the community estate may be made for the under compensation of time, toil and talent. As a practical matter, the under compensation has to be substantial enough to warrant the pursuit. Goodwill is the reputation of the person or business in the community which results in repeat or future business. Personal goodwill is not divisible upon divorce, only commercial, or business good will, is divisible upon divorce. Personal goodwill is separate property. 14. How is trust property treated in divorce? A beneficial interest in a trust is separate property and cannot be divided upon divorce. Undistributed income that should have been distributed during the marriage may be community property, divisible upon divorce. 15. How are partnership interests divided? Partnership property is the property of the partnership and not the individual partners to be divided upon divorce of one of the partners. The character of a partner’s interest in the partnership may be separate property or community property. If the interest is community property, it is divisible upon divorce according any restrictions placed upon such division by the partnership agreement. 16. How are retirement benefits treated in the division of community property? There are two types of retirement benefits. First is the “defined contribution plan” and the second is the “defined benefit plan”. A defined contribution plan involves contribution by the employee, such as a 401k, 403b, or IRA, and has a determinable value on the date of marriage and on the date of divorce. The defined benefit plan is provided by the employer and the value of the benefit ultimately depends on the years of service, age of the employee and earnings at the time of retirement so that there is not a determinable value on the date of marriage and on the date of divorce. The community property value of the defined contribution plan is the value at the date of divorce less the value on the date of marriage. The community property value of the defined benefit plan is determined by a fraction whose numerator is the number of months of the marriage and the denominator is the total number of months worked (there can be variations to this formula with military retirement pay). After the community interest is determined, the court divides the community interest on a just and right basis. 17. After the divorce is finalized, how is property division enforced? A court has several options when enforcing property division. The court may reduce a property award in the decree to a money judgment for the damages caused by failure to comply if the delivery of property is no longer an adequate remedy. The court may enforce by contempt an order requiring delivery of specific property or an award of a right to future property.
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