Monday, October 10, 2016

Show Me the Money -- Divorce and Constructive Fraud in Texas

By Claire James

One of the objectives in any divorce is to determine the value of the community estate – the value of what the spouses own, and what they owe.

But what happens if one spouse has taken assets out of the estate in a community property state like Texas without the knowledge or consent of the other spouse? In these instances, a claim for constructive fraud (sometimes referred to as “waste” or “breach of fiduciary duty” claims) may arise.

In Texas, a fiduciary duty exists between a husband and a wife as to the couple’s community property.  If one spouse has disposed of community property during the marriage without the other spouse’s knowledge or consent, a presumption of constructive fraud arises . See Puntarelli v. Peterson, 405 S.W.3d 131, 138 (Tex. App.--Houston [1st Dist.] 2013, no pet.); Ricks v. Ricks, 169 S.W.3d 523, 526 (Tex. App.--Dallas 2005, no pet.).
Such constructive fraud may arise, for example, when one spouse transfers funds or gives excessive gifts to a third party (a situation that sometimes arises when a spouse has an extra-marital romantic relationship) or when one spouse uses community property to benefit his or her separate estate. See In re Marriage of Notash, 118 S.W.3d 868, 873 (Tex. App.--Texarkana 2003, no pet.). The spouse alleging constructive fraud is not required to prove intent to deceive. Puntarelli, 405 S.W.3d at 138.

Once the transfer is established, the spouse accused of constructive fraud has the burden to prove the transfer was “fair.” Wright v. Wright, 280 S.W.3d 901, 911-12 (Tex. App.--Eastland 2009, no pet.) To determine whether or not a transfer was fair, courts can consider:

  1. the relationship between the spouse and the recipient;
  2. the size of the gift or transfer in relation to the total size of the community estate;
  3. the adequacy of the estate remaining to support the other spouse in spite of the gift or the transfer; and
  4. any special justifying factors for the gift or transfer.

Massey v. Massey, 807 S.W.2d 391, 402 (Tex. App.--Houston [1st Dist.] 1991), writ denied, 867 S.W.2d 766 (Tex. 1993) (per curiam).

Once it has been established, remedies for constructive fraud include a money judgment entered in favor of the defrauded spouse or a disproportionate division of the community estate.

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