Characterization of Personal Injury Recovery in Texas Divorce

The characterization of funds received for personal injuries can be a complex issue in a Texas divorce.  Texas family law presumes that property possessed by a spouse during or on dissolution of the marriage is community property.  When a spouse claims certain property is separate, that spouse must prove by clear and convincing evidence that the property is separate.  Tex. Fam. Code § 3.003.  Pursuant to Tex. Fam. Code 3.001, recovery for personal injuries sustained during the marriage is separate property.  There is an exception, however, for recovery for lost earning capacity during the marriage.  Because a spouse claiming separate property has the burden of proof, that spouse must show by clear and convincing evidence what part of a personal injury settlement is separate property.  Recently, a husband appealed the trial court’s ruling which characterized his personal injury recovery as community property.

Personal Injury Settlement

According to the appeals court, the husband and wife married in 1994 and lived separately at various times during the marriage. In December 2014, husband was injured as the result of an automobile accident in the scope of his employment.  The parties were separated when the accident occurred, but subsequently reconciled.

The husband settled for the other driver’s policy limits of $30,000.  He also received net proceeds of $710,724.25 from a settlement with his employer’s under-insured motorist coverage.  Thereafter, his attorneys transferred those funds into the parties’ joint checking account on October 8, 2019.  The parties then separated that month and the wife filed a divorce petition on November 1.

At trial, the husband testified that the settlement proceeds were “[his] money.” Further, he testified that the proceeds were deposited into a joint account and that he did not tell the wife to refrain from spending those funds. Additionally, husband responded affirmatively when asked whether the money was “to pay bills and do whatever you wanted to do. . .” and whether it was his intent to use those funds for retirement and to take care of his wife.

The husband executed the first settlement agreement in August 2019 at the time of the uninsured motorist claim mediation.  That agreement did not allocate the funds to specific elements of damages.  However, it did indicate that the terms and conditions would be reduced to a formal settlement agreement.

The second settlement agreement was signed after the proceeds were received, after the wife’s divorce petition was filed, and after the settlement proceeds were withdrawn from the joint checking account.  The wife withdrew $330,000 on the day the parties last separated, and the husband withdrew a similar amount that same day. Subsequently, the husband bought a home in February 2020 with the funds he withdrew.

The second settlement agreement stated the consideration was “for personal injury damages consisting of mental anguish.” Moreover, it provided that it was “for personal injury damages and only personal injury damages.”

The trial court found that the husband failed to meet his burden of proof, and specifically failed to establish that the net settlement proceeds were his separate property.  The husband appealed.

The Husband’s Appeal

On appeal, the husband argued that the trial court erred in determining that the proceeds from the uninsured motorist settlement were community property.  Specifically, the husband argued that the second settlement agreement showed that the settlement was for his non-economic damages.

The appeals court pointed out that the second agreement was signed several months after the parties had received and withdrawn funds.  Consequently, the appeals court concluded that the terms of the second agreement did not affect the characterization of the funds.  Still, the appeals court acknowledged that the first agreement contemplated the execution of another agreement, but noted that it did not affect the characterization of the proceeds as between the spouses.  The appeals court noted that the second agreement took additional time to finalize due to the husband’s workers’ compensation claim with the same insurance company, but declined to conclude an agreement executed months after receipt and withdrawal of the net proceeds altered the characterization of the proceeds with regard to marital property rights.

Due to this conclusion, the appeals court focused on the terms of the first agreement.  This agreement did not allocate the funds to particular elements of damage.  Instead, it recited that the funds would be provided “in exchange for a complete release of all claims.” The then-current live pleading in the case asserted claims including past and future medical expenses, loss of earnings, loss of earning capacity, physical pain, mental anguish, impairment, disfigurement and a number of additional claims. Pursuant to the first settlement agreement, the husband released all claims, including community claims for medical expenses and lost earnings.  As a result, the husband possessed the burden of proving which part of the proceeds were separate property.

Ultimately, the appeals court found that the trial court did not err by determining that the husband had failed to meet his burden in proving his separate property claim.  The first settlement agreement did not establish that the proceeds were the husband’s separate property because it broadly released all claims and did not allocate the proceeds to specific damages.  Further, the appeals court concluded that the husband’s testimony did not successfully rebut the community property presumption.

Finally, the appeals court rejected the husband’s argument that the home he purchased was separate property because he failed to prove that the settlement proceeds were his separate property.

Consult with an Experienced Dallas Divorce Lawyer

Although personal injury recoveries are generally characterized as separate property, some aspects of personal injury damages, including lost earning capacity during the marriage, belong to the community.  If you are considering a divorce after receiving or while anticipating a personal injury recovery, a skilled Texas divorce attorney can advise you on your rights. Call 214.692.8200 to set up a consultation with McClure Law Group.

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