Fraud on the Community in Texas Divorce

Spouses have a fiduciary duty toward each other with regard to the community estate and commit fraud on the community if they breach a legal or equitable duty in violation of the fiduciary relationship.  Fraud on the community often occurs when assets are transferred to a third party, but can also occur when it is unaccounted for.

If a court determines a spouse committed fraud, it must determine the amount the community estate was depleted and the total value it would have had absent the fraud.  The trial court then divides the reconstituted estate in a just and right manner, which may include awarding the other spouse a disproportionate share of the community estate, a money judgment, or both.  Tex. Fam. Code § 7.009.  A husband recently appealed the trial court’s finding of fraud, judgments, and property division in his Texas divorce.

The Marriage

According to the appeals court’s opinion, the husband owned a home when the parties married in 2002.

The wife had student loan debt from before the marriage. The husband was responsible for paying the student loan, but she alleged he failed to make payments regularly and let the balance increase significantly.

The husband asked the wife to borrow from her retirement account in 2013 to pay a tax debt.  She agreed based on the husband’s promise he would grant her an interest in the house.  He signed a special warranty gift deed.

The Divorce

The wife petitioned for divorce 2019, asserting fraud claims and seeking equitable reimbursement.

The husband asked the court to characterize the home as his separate property, arguing the deed did not have the required language to convert the property. He also argued he did not receive a fair disclosure regarding the legal consequences of converting it to community property.  The trial court voided the deed.

A forensic accountant testified as the wife’s expert regarding the “badges of fraud” he identified with regard to the husband’s window replacement business.  Badges of fraud are circumstances indicating an intent to defraud.  A forensic accountant can base a conclusion a party engaged in intentional fraudulent conduct on a sufficient number of badges of fraud.

Based on an industry standard gross margin between 30% and 40%, the forensic accountant concluded the business should have made a gross profit between $400,000 and $500,000 between 2012 and 2018, but the records reflected a $10,000 cumulative loss.

He created a spreadsheet reflecting categories of “Funds Unaccounted for/Waste.” He removed some of the listed funds after learning they were use to pay the mortgage and the wife’s vehicle loan.

The trial court granted a no-fault divorce.  It concluded the home was the husband’s separate property.  The court concluded the community estate was entitled to a judgment based on the husband’s fraud, including fraudulent inducement, fraudulent cash withdrawals from the separate property business accounts, and fraudulent expenditures and expenses paid by the husband from his separate property business account.  The court awarded the wife a judgment of a $213,579.45, which included 60% of the cumulative fraud judgment and an additional $6,750 for the amount due on the wife’s student loan.

On appeal, the husband argued the court abused its discretion in its fraud findings and property division.

Fraudulent Inducement

A person claiming fraudulent inducement must show the other party made a promise to perform without intending to do so, and that they detrimentally relied on the promise.

The wife claimed the husband promised her an equal share of the home if she took out the loan.  She testified she thought the home would become community property and would not have taken out the loan otherwise.  The husband signed a deed and a Survivorship Agreement that both stated the home was community property. He later claimed he had not understood what he signed.  He asked the court to void the deed because it did not have the required statutory language to convert the property.  The appeals court concluded there was more than a scintilla of evidence he did not intend to keep the promise, based on the contradictory positions he took.

The husband argued the wife had likely not relied on the promise, because she applied for a hardship withdrawal when they received the delinquent tax notice and took the money out several months before he signed the deed.  The timing was not determinative, however.  The trial court was charged with weighing the evidence and could have believed the wife.  The appeals court found no abuse of discretion in the fraudulent inducement judgment.

Fraud on the Community

The husband argued the trial court abused its discretion because the wife’s expert and his methodology were unreliable, but the appeals court rejected this argument because he had not objected at trial.

He also argued that the expert’s opinion was conclusory.  A court cannot base its findings of fact on conclusory or speculative testimony.  A party can challenge a conclusory expert opinion even if they failed to object to the expert’s methodology.

The expert reviewed the records for “badges of fraud” and testified about finding several.  He also reviewed the records for any unaccounted expenses or funds.  He extrapolated the husband’s expected income based on previous business records and industry norms, and the previous and subsequent gross profit margins supported his conclusions.  The appeals court concluded the expert had testified to the basis for his opinion and it was not conclusory.

Constructive fraud is presumed when a spouse disposes of the other’s interest in community property without their consent or knowledge.  Puntarelli v. Peterson.  The appeals court concluded there was sufficient evidence to give rise to a constructive fraud presumption.  The trial court could have relied on the expert’s testimony regarding the badges of fraud.  The wife testified she was “flabbergasted” at the business’s earnings and said the funds were not spent with her knowledge or consent.

The husband argued the evidence was legally insufficient to support the trial court’s findings of fraud, but the presumption shifted the burden to him.  He therefore had to rebut the presumption before the wife had the burden of producing legally sufficient evidence.

The trial court entered a judgment for five of the seven categories of unaccounted-for-funds identified by the  expert.  The husband testified he paid for trips with a credit card and dinners and gifts for his wife with his debit card sometimes. He did not provide any documentary evidence supporting this testimony or quantify the amount spent.  The appeals court also noted these expenditures probably fell under the categories not included in the judgment.  The appeals court concluded the trial court could have believed the wife’s and expert’s testimony and found the husband had not rebutted the presumption.

The husband testified he wrote two checks to pay off a loan from his niece, but did not offer evidence proving the loan.  The trial court acted within its discretion in disbelieving his testimony regarding the payments and he did not rebut the constructive fraud presumption as to those funds.

The husband testified he transferred funds from the business account to pay the mortgage, tax debt payment, and a credit card payment from the credit union account because his Social Security benefits were insufficient to cover the bills.  The wife testified she knew about and agreed to the transfers.  The wife’s testimony eliminated the presumption.  The expert testified he removed the transfers from his estimate of fraud.  The appeals court concluded the trial court abused its discretion in including the transfers in the judgment because there was no applicable presumption or evidence they were fraudulent.

The husband testified that payments to a bank went toward the wife’s vehicle loan.  This testimony was sufficient to rebut the presumption.  The expert took these payments out of his fraud estimate, but the trial court included them in the judgment.  The appeals court concluded there was no evidence supporting a finding of fraud and the trial court abused its discretion.

The husband argued he had rebutted the presumption as to cash withdrawals because they were nominal and the total was spread over seven years.  He pointed to the Account Register to support his argument.  He did not, however, testify about these withdrawals.  The appeals court concluded the trial court did not have to search through the evidence to find the information on these particular withdrawals.  The appeals court likewise rejected his arguments regarding certain “miscellaneous payments” because he had not testified about them, asked the other witnesses about them, or pointed the trial court to any evidence about them.

The appeals court affirmed three of the judgments for fraud but reversed the other two for lack of legal sufficiency.  Because the appeals court found there was reversible error that affected the trial court’s just and right property division, it had to remand for a new property division.

Contact a Skilled Dallas Divorce Lawyer

If you think your spouse may be hiding assets, you need the advice of an experienced Texas divorce attorney. Schedule a consultation with McClure Law Group by calling 214.692.8200.

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