Texas Divorce Attorney Blog
Property division in a Texas divorce can be complicated when there is a business involved. In a recent case, a former husband challenged a property division that divided assets belonging to his business entities.
According to the appeals court, the husband formed two businesses before the marriage. He said he purchased property, including rental houses in Florida and vacant lots in Texas, to be used by the businesses with money he brought when he moved from Puerto Rico. The wife worked at one or more of the husband’s businesses during the marriage.
The husband and both businesses bought and sold multiple commercial vehicles and trailers while the parties were married.
During the marriage, the husband formed a third company that bought real property resulting in about $15,000 per month in rent.
The husband petitioned for divorce in March 2021.
The wife testified the husband had owned some property before they got married. She did not know how he purchased the property or what funds were used to create the first two companies. She said he did not have $2 million before they got married and thought he had hidden property by transferring it to other people, including his ex-wife.
The husband said he had a construction business in Puerto Rico before he moved to the mainland. He said he had about $2 million when he moved from Puerto Rico, and he used those funds to purchase the rental houses in Florida and the lots in Texas he developed into parking lots. He subsequently sold the parking lot properties and bought other property with the proceeds. He agreed the wife had worked for the businesses and kept the books.
He said he formed the first company in 2006 or 2007 and sold it to purchase houses. He created the second company, an S-corporation, in 2012 and sold its assets to buy more property.
He did not dispute that he formed the other business during the marriage. That business owned 13 rental properties and he agreed the total value of the properties could possibly be $3,320,560. He disputed that they earned $15,000 per month in total rental income, but did not know how much they actually generated. He had a property manager who handled them.
The husband also had a fourth company, but he did not know when he formed it.
The husband sold properties owned by himself of three of the businesses while the divorce was pending. Four properties, identified by the appeals court as the “Jackson Street” properties, sold for $1.7 million. A million dollars of that amount went into the husband’s investment annuity account. He said he told the wife when he sold them.
He bought a property and gifted it to a third party. He said one property was bought in the name of the company formed during the marriage and gifted to a company owned by his ex-wife. The husband denied disposing of 11 properties while the divorce was pending.
The bank statements for the company formed during the marriage reflected a balance of $630,000 in January 2022 and $0 the following June.
The trial court ruled that the company formed during the marriage was community property. The court also ruled that the 13 properties the wife identified as belonging to that company were community property. The court ordered that the highest-valued property be sold and equally split. The court awarded the wife 50% of all other community property, including the investment account in Puerto Rico. The court also awarded each party a house and their own vehicle. The other businesses and the trucks were awarded to the husband, although the court did not address two of the entities that did not have any value. The husband was also ordered to pay the wife’s legal fees.
In its findings of fact and conclusions of law, the trial court found that the total value of the properties owned by the company formed during the marriage was $3,310,570. The court also found their aggregate monthly income was $15,350.
The court characterized the property the husband gifted to the third party as community property. It also characterized certain financial accounts of three of the businesses as community property to be split equally.
Division of Company Assets
The husband appealed.
The trial court had included assets of three companies in the property division. The court found that one of those entities was community property and likewise characterized the thirteen real properties and bank account it held as community property.
The court did not make any findings regarding the ownership of the other two companies, but characterized bank accounts they owned as community property and ordered them to be divided. The appeals court determined the trial court abused its discretion in dividing assets belonging to the companies.
The appeals court acknowledged that the company formed during the marriage was community property, but noted its assets were not subject to division. Instead, the court must divide the parties’ interest in the company. The court could also not just divide the assets of the other two companies, even if it had determined those companies were also community property.
Alter Ego
The wife argued the court could properly find the companies’ assets were community property under the theory the husband was the alter ego of the companies.
A party in a divorce case seeking to pierce the corporate veil with a finding of alter ego must show that there is such unity between the corporation and the spouse that they are no longer separate and that the spouse’s improper use of the corporation damaged the community estate to an extent that it cannot be remedied through reimbursement. Young v. Young.
The wife, however, failed to plead this theory. It was not tried by consent. The trial court did not rule on it or make any findings of fact or conclusions of law on the issue. The husband had requested additional findings specifically regarding alter ego as to the companies, but the court did not make any additional findings or conclusions. A finding cannot be presumed when it was requested and refused by the court. The appeals court therefore could not uphold the property division based on a theory of alter ego.
Material Error
The trial court had valued the community estate at about $5,400,640. The property held by the company formed during the marriage was valued at a total of $3,310,570. Division of the parties’ interest in the companies would probably require the court to determine the specific value of each of them. The error, therefore, materially affected the property division, so it remanded to the trial court for a new property division.
The appeals court also determined the error could have affected whether the award for attorneys’ fees was just and right and reversed that part of the decree. The appeals court remanded to the trial court for a new division of the community estate and reconsideration of the fee award.
Contact a Knowledgeable Texas Family Law Attorney
In a divorce, the court cannot divide property belonging to a third party, even a business entity owned by the parties. The court instead must divide the ownership interest in the business. If you are anticipating the end of your marriage, an experienced Texas business divorce attorney can advise you regarding business division and help you protect your rights. Set up a consultation with McClure Law Group at 214.692.8200.