Texas Divorce Attorney Blog
Certain assets, especially stocks or assets related to a business, may be held in the name of just one spouse, even if they are community property. In a Texas divorce, a court may impose a constructive trust requiring the spouse to transfer property to the other spouse. Tex. Fam Code 9.011 provides that receipt by one spouse of certain installment or lump-sum payments that were awarded to the other spouse in a divorce decree gives rise to a fiduciary obligation and imposes a constructive trust on the property.
In a recent case, a former husband challenged the divorce decree that imposed a constructive trust on future payments to him as stockholder in a corporation, arguing that part of the payments should be considered his separate property.
The husband was an oncologist who was involved in the development of a drug to treat breast cancer. A corporation owned the patent rights for the drug and the husband acquired stocks equaling 30.33% ownership of the corporation with community funds.
The corporation entered into a licensing agreement with a company that would result in payment to the corporation at certain milestones in the development, manufacture, and commercialization of the drug. The corporation’s bylaws provided it would pay dividends or distributions to its stockholders.
According to the appeals court, the wife petitioned for divorce after learning the husband had committed adultery. She sought a disproportionate share of the community estate and child support greater than the default statutory guidelines.
The court granted the divorce based on adultery and awarded the 60% beneficial ownership in the community-property stock in the corporation. Future payments from the corporation to the husband were to be placed in a constructive trust. The court also awarded the wife child support in an amount greater than the statutory guidelines.
Characterization of the Stock
The husband appealed, arguing the court abused its discretion with regard to the future payments from the corporation. He argued the court had mischaracterized potential future payments as community property.
In its findings of fact and conclusions of law, the court ruled the husband was named as owner of stock that constituted 30.33% ownership of the corporation. The court also ruled that the stock was community property. The court awarded the husband an undivided 40% beneficial interest and the wife an undivided 60% beneficial interest in the stock.
The constructive trust required the husband to “exercise reasonable prudence and care in the management of the wife’s share. . .” It also required him to transfer her share of any distributions into an account she designated within five business days of the later of his receipt of the distributions or her designation of an account.
The husband argued that the constructive trust relied on a mischaracterization of “Milestone Payments” that were governed by the corporation’s licensing agreement with the company. He argued that any future milestones would only be met because of his labor. He therefore argued the Milestone Payments were at least partially separate property based on the proportion of his labor contributed after the end of the marriage.
The husband testified the first milestone was still in progress. He also testified it would take between 10 to 15 years for all of the milestones to be completed. He further stated his employment with the corporation was essential for the corporation to complete its obligations under the licensing agreement.
The appeals court concluded there was no abuse of discretion in how the trial court treated dividends and distributions from the company based on the stock ownership. The husband had not challenged the split of the beneficial ownership of the stock. Based on the split, any distributions or dividends paid to the stockholders should be paid to the wife in the proportion of her ownership of the stock. The constructive trust functioned to ensure she received her share since the stock was in the husband’s name.
The appeals court distinguished the dividends and distributions to stockholders from other types of assets, such as salaries, retirement benefits, and severance pay.
The husband testified that the Milestones could not occur without his ongoing labor as an employee of the company. The trial court, however, found the husband’s testimony that the Milestones could not occur without his ongoing labor as an employee of the corporation was not credible.
The husband also argued that the corporation’s licensing agreement required it to transfer Know-How to the company and that his role in the creation and transfer of that Know-How meant some of the funds resulting from the Milestone Payments should be characterized as separate property. The appeals court also rejected that argument, pointing out that the husband only received the dividends and distributions due to his stock ownership, regardless of what actions had to occur for the company to make Milestone Payments to the corporation. The appeals court reached the same conclusion with regard to the husband’s obligations under the Joint Steering Committee provision in the agreement between the company and the corporation. The agreement required the corporation and company to establish a Joint Steering Committee that would provide a forum of the exchange of information regarding the strategic development of the products licensed under the agreement. Any obligations of the corporation or the husband under this provision did not change the fact that the company paid the Milestone Payments to the corporation, and any funds paid to the husband would be solely because of his stock ownership.
The appeals court found no abuse of discretion in how the trial court addressed the payment or in its establishing a constructive trust.
The appeals court also found no abuse of discretion in the trial court’s child support award.
The appeals court affirmed the judgment.
Call a Dallas Divorce Lawyer
In this case, although the husband’s work may help achieve the Milestones that will trigger payments from the company licensing the drug to the corporation, the payments he is to receive from the corporation are based on his status as a stockholder. If you are facing the end of your high net worth marriage, a skilled Texas family law attorney can advise you on your rights regarding stocks, business interests, and other marital assets, and help you fight for a favorable outcome. Set up a consultation with McClure Law Group at 214.692.8200.