Characterization of Personal Injury Recovery in Texas Divorce Cases

iStock-178756342-300x199Under Texas family law, property acquired by a spouse during the marriage is community property, unless it meets the requirements of separate property.  Pursuant to Tex. Fam. Code § 3.001, personal injury recoveries are the separate property of the injured spouse, but recovery for lost earning capacity is community property.  Property possessed by a spouse during or on dissolution is presumed to be community property, so a spouse claiming a personal injury recovery is their separate property must prove by clear and convincing evidence what portion is separate.  A wife recently challenged the property division in her Texas divorce after the court concluded monthly payments from a personal injury settlement were the husband’s separate property.

According to the appeals court’s opinion, the wife had primarily been a homemaker during the marriage, but she sometimes worked part-time.

The husband was seriously injured at work in 2006.  He was found to be incapacitated and the wife acted as his guardian in the resulting lawsuit.  In the personal injury settlement agreement, the wife agreed, on behalf of her husband and herself, to release all claims against the defendants.  The defendants’ insurance companies agreed to immediate cash payments and monthly payments for the rest of the husband’s life.  The settlement provided that $1,150,000 of the cash payments was for the husband’s benefit and $50,000 would go to the wife. The settlement agreement also stated the monthly payments were for the husband’s benefit.  The monthly payments were secured through the purchase of an annuity pursuant to the settlement agreement. The agreement also stated that funds were “damages on account of personal physical injuries or sickness” pursuant to the Internal Revenue Code. It also provided that the husband and wife were responsible for paying their attorney’s fees, court costs and case expenses, and any medical bills and liens.

The wife filed for divorce in 2020.  The parties agreed on the division of all property other than the settlement proceeds.  The wife also requested spousal maintenance for ten years if she was not awarded at least 50% of the monthly payments.

Following a bench trial, the trial court found the monthly payments were funded by a personal injury award to the husband.  In the decree, the trial court confirmed the monthly annuity payments were the husband’s separate property and ordered him to pay $1,500 in monthly spousal maintenance for two years.

Characterization of Settlement Proceeds

The wife appealed, arguing the trial court erred when it characterized the monthly payments as the husband’s separate property.

The husband argued the remaining settlement proceeds were all his separate property.

Although the settlement designated $50,000 of the cash to the wife and $1,150,000 of the cash and the monthly payments to the husband’s benefit, it did break down how the funds were allocated for specific damages.  The court concluded that “for the benefit [of the husband]” did not indicate the proceeds were the husband’s separate property.  The proceeds could be for his benefit if they were intended to compensate him for lost wages, medical expenses, or pain and suffering.  The parties testified they used the payments during the marriage for both of their benefits.

The husband pointed out the settlement agreement required payment of community property obligations, including fees, the workers’ compensation lien, and medical expenses, from the cash payments.  He argued this treatment showed the monthly payments were for his separate property damages.  The appeals court disagreed that the language in the settlement required payment of those obligations from the cash payments.  The appeals court noted that the agreement only required those obligations to be satisfied “from this settlement,” and did not specify the cash portion.

The trial court in the tort case ordered the wife, as the husband’s guardian to satisfy the fees, expenses, and liens from the portion of the cash payment allocated for the husband’s benefit.  The appeals court pointed out nothing in the settlement agreement or the final judgment in the personal injury case indicated the monthly payments did not include compensation for lost wages.  The husband testified he remained incapacitated for about ten years and that he was still 60-70% disabled at the time of the divorce trial.

He also pointed to the language stating that the sums in the settlement agreement “constitute damages on account of personal physical injuries or sickness. . .” He argued the language showed that the settlement proceeds were intended to compensate him for physical injuries and not community property damages.

The appeals court pointed out that this position was incongruent with the husband’s argument the settlement required community obligations to be paid from the cash payments. More importantly, however, the U.S. Supreme Court has held that the “damages . . . on account of” language in the Internal Revenue Code includes medical expenses and lost wages. O’Gilvie v. United States. The use of that language in the settlement agreement therefore did not support the husband’s argument that the proceeds were all his separate property.

The appeals court found the settlement agreement did not support the husband’s argument that the monthly payments were his separate property and he offered no other evidence supporting his argument.  The trial court erred in characterizing the monthly annuity payments as separate property. The monthly payments were a substantial asset and therefore the mischaracterization affected the just and right property division.

Spousal Maintenance

The wife also argued the trial court erred in limiting her spousal maintenance award to two years rather than allowing it to continue definitely.  Courts are required to limit spousal maintenance to the shortest reasonable time for the spouse to earn sufficient income for their minimum reasonable needs, unless their ability to provide for their needs is substantially diminished due to physical disability.  Tex. Fam. Code § 8.054.

The wife had testified she was permanently disabled, but she had only asked for spousal support for ten years. She did not provide a percentage of disability and stated that she had worked in the past.  There was testimony that she could likely work again with limitations.  Additionally, the wife asked for spousal maintenance only if she was not awarded 50% of the monthly payments.  Furthermore, she would not be entitled to maintenance under Tex. Fam. Code § 8.051 if she received sufficient property to provide for her minimum reasonable needs.

The appeals court reversed portions of the final decree and remanded the case for a new property division including the monthly payments and a new determination on the wife’s request for spousal maintenance.

Contact a Skilled Texas Divorce Attorney

As this case shows, the characterization of personal injury recoveries is not always clear.  If you or your spouse have personal injury proceeds or other complex assets, the experienced Texas divorce attorneys at McClure Law Group can advise you.  Schedule a consultation at 214.692.8200.



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