What Happens When Community Funds are Wasted?
When a divorce is final, the Court divides up the community estate between the parties in a just and right manner. Typically, it divides the community property as it exists on the date of divorce. However, this is not always the case. For example, what is a spouse disposed of community property right before filing for divorce? What if a spouse spent money on a significant other throughout the marriage that the other spouse did not find out about until it was too late?
In Texas, when this happens, it is called constructive (or even sometimes actual) fraud.
Constructive fraud claims can also be called breach of fiduciary claims (as they are based on the fiduciary duties that exist between spouses), or waste claims. A presumption of constructive fraud arises when a claimant spouse shows that the other spouse has (1) disposed of community property; (2) at a time when the spouses are fiduciaries (3) without the other spouse’s knowledge or consent. There is no requirement to show that the disposing spouse intended to deceive the other spouse (however, in the case of a spouse disposing of large amounts of community property right before filing for divorce, there is probably intent). The burden of proof then shifts to the disposing spouse to rebut the presumption by showing that the disposal was “fair.”
You can prove that the property was disposed of either by proof that is was actually transferred, or by simply showing that the community property is unaccounted for by the spouse who was in control of that property.
Some examples of instances in which a court found constructive fraud are: spending money on extramarital affairs, transferring community-owned stock in a company owned by the spouse to a third party for no consideration, liquidating retirement accounts during separation, and disbursing funds to members of a spouse’s family to pay off debts that are fictitious or improper.
So, let’s say that a court found that a spouse wasted community funds. What happens next?
According to Texas law, the court’s remedy for constructive fraud is a reconstituted estate. According to Section 7.009 of the Texas Family Code, reconstituted estate is defined as “the total value of the community estate that would exist if an actual or constructive fraud on the community had not occurred.
If a court (or a jury in some cases) determines that a spouse has committed actual or constructive fraud on the community, the court shall calculate the value by which the community was depleted as a result of the fraud on the community, calculate the value of the reconstituted estate, and divide the reconstituted estate in a just and right manner.
Here is an example of how to divide a reconstituted estate: Husband and Wife are getting divorced. During the divorce process, Wife finds out that Husband has spent $100,000 over the last five years on his girlfriend. At the time of divorce, the parties’ estate is worth $900,000. The judge reconstitutes the estate by adding the $100,000 back into the community estate, making the estate worth $1 million. The judge further decides that Wife should be awarded a disproportionate share of the community estate because of Husband’s adultery. Therefore, wife would receive $550,000 of the community estate. Husband would receive $450,000, which would include the $100,000 already spent. In actuality, he would only receive $350,000. So, while the reconstituted estate would be divided 55/45, the community property in existence would be divided 61/39.
If you have more questions about how to get ready for your life after divorce, contact Greg Beane at Webb Family Law Firm. He can be reached by phone at 214-693-6543 or by email at [email protected].