Waste Claims in Divorce Cases

When couples divorce, there are two main issues to focus on. One is issues concerning the children and the second, property. Depending upon you and your spouse, one or both issues may result in a contentious divorce case.

Community property in Texas is divided in a “just and right manner.” The community estate is property that was incurred during the marriage. Typically, that means each spouse is entitled to an equal division of the community estate. There can be many instances, however, when a spouse is awarded more than an equal division of the community estate.

Sometimes, one spouse may claim that the other has wasted or misused marital assets. When this happens, the spouse claiming the waste will seek to have the wasted assets count against the other spouse. This is known as a Waste Claim.

What is a Waste Claim?

The term “waste” refers to a deliberate or reckless disregard for the depletion of the community estate without the consent or knowledge of the other spouse. Waste claims can look different for each case.

Primarily they take the form as:

• Excessive spending on personal expenses
• Gifts for a paramour
• Gifts to family members or friends
• Gambling or other forms of reckless spending
• Giving unforgiven loans to family and friends
• Excessive spending on credit cards
• Taking out loans
• Elective surgeries
• Destruction of property or assets
• Concealing or transferring assets to prevent the other spouse from receiving their fair share 
• Failing to maintain or repair community property which results in a decline in value

It should be noted that this list is not exhaustive. Waste claims can take many forms and are unique to your individual case. Most of the time, however, waste claims will center round finances.

Fiduciary Duty Between Spouses

When a couple gets married, a special relationship is created between the two. This is called a Fiduciary Relationship. You may have heard the term “fiduciary” before. A Fiduciary is a person or organization that acts on behalf of another, putting the interest of another ahead of their own, acting in good faith. A Fiduciary is bound to both legal and ethical standards to act in someone’s best interest.

Examples of fiduciaries include:

• Lawyers to Clients
• Employee to Employers
• Doctors to Patients
• Accountants to Clients
• Financial Advisors to Clients
• Executors of a Will to the Will’s Beneficiaries
• Spouse to Spouse

Texas case law has held that the relationship that exists between a Husband and Wife creates a Fiduciary Duty, requiring the duty of the most good faith. Because spouses have a particular relationship of trust and confidence, there is a requirement to manage and control community property with good faith and fair dealings.

What Happens When a Spouse Breaks Their Fiduciary Duty?

When a spouse breaks the Fiduciary Duty he or she had to the other spouse, we call this Fraud. There are two types of fraud:

• Actual Fraud
• Constructive Fraud

The difference in the two types of fraud is whether there was an intent to deceive or not.

Actual Fraud

Actual Fraud requires a spouse to deliberately act with an intent to cheat or deprive the other spouse of community property. In order to prove that a spouse committed Actual Fraud, there are several elements that must be proved:

1. Material representation was made;
2. The material representation was false;
3. When the spouse made the material representation, he or she knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion;
4. The material representation was made with the intention that it should be acted upon by the other spouse;
5. The other spouse acted in reliance upon the material representation; and
6. The other spouse suffered because of it.

Actual fraud is all about intent. A spouse commits actual fraud if that spouse transfers community property or expends community funds for the primary purpose of depriving the other spouse of the use and enjoyment of the assets involved in the transaction. This type of fraud requires dishonesty or an intent to deceive.

Examples of Actual Fraud include:

• Receiving a large sum of money from a buyout of a business and deliberately spending all of the money so your spouse can’t have any funds
• Hiding or transferring funds in a retirement account so a spouse cannot locate the funds
• Intentionally racking up credit card debt and purchasing excessive items so distort the property division

Constructive Fraud

Unlike Actual Fraud, Constructive Fraud occurs when a spouse does not act deliberately with an intent to harm the community estate. Constructive Fraud is all about how fair the fraudulent act was to the community estate. This can include actions of one spouse that unfairly disposes of community property or unfairly incurring community debt without the other spouse’s knowledge or consent.

In Texas, both spouses, acting together, are able to manage, control and dispose of community property. When one spouse does this on their own, without an agreement or knowledge of the other spouse, Constructive Fraud arises.

When this type of fraud occurs, the burden to prove that the act or transaction was in fact fair falls to the spouse accused of making the unfair fact. If you are trying to rebut a Constructive Fraud claim, you will use the Fairness Factors to prove you case.

The Fairness Factors are:

1. The relationship between the spouse and recipient;
2. The size of the gift or transfer in relation to the total size of the community estate;
3. The adequacy of the estate remaining in spite of the gift or transfer; and
4. Special justifying factors for the gift or transfer.

A spouse may make moderate gifts, transfers or expenditures of community property for just causes. A spouse also may make gifts or transfers to a third party as long as there is a reason to do so. However, any gift, transfer or expenditure of community property that is capricious, excessive or arbitrary is unfair to the other spouse.

When determining whether a gift, transfer or expenditure was made to a third party, it is important to consider:

1. The relationship between the spouse making the gift, transfer, or expenditure and the recipient;
2. Any special circumstances to justify the gift, transfer or expenditure; and
3. Whether community funds used for gift, transfer or expenditure were reasonable in proportion to the remaining community estate.

Examples of Constructive Fraud include:

• Gifts to family members or friends
• Gambling or other forms of reckless spending
• Giving unforgiven loans to family and friends
• Excessive spending on credit cards
• Taking out loans
• Elective surgeries
• Destruction of property or assets

It is important to note that just because one of these examples of Actual or Constructive Fraud occurred in your case, does not automatically mean you have a valid fraud claim. Every case is different and unique. Pursing this in litigation can take lots of time and attorney’s fees.

How are Waste Claims Resolved?

As stated above, just because one of these aforementioned examples occurred does not guarantee a waste claim. The Court must determine if the claim is valid, and if so, how it will factor into the final property division.

The Court has the broad power to divide the community estate in a manner that it deems is just and right. Just and right does not always mean that the division will be equal. The Court has available remedies when one spouse has alleged fraud on the community estate.

Fraud on the community estate is not an independent cause of action. Rather proving your fraud case is a “means to an end” either to recover specific property that was wrongfully conveyed or to obtain a greater share of the community estate to compensate the wrong spouse for his or her lost interest in the community estate.

The most common way the Court rights the wronged spouse is by “reconstituting” the community estate. This means that the Court treats the community estate in a way that would exist if the actual or constructive fraud had not occurred. Think of reconstitution as placing the parties back were they used to be prior to the fraud.

If the Judge finds that actual or constructive fraud was committed against the community estate, the Court will:

1. Calculate the value that the community estate was depleted as a result of the fraud and calculate the amount of reconstituted estate; and
2. Divide the value of the reconstituted estate between the parties in a manner that the court deems just and right.

Let’s look at an example below and corresponding inventories:

The total value of a community estate is $500,000 prior to filing for divorce. $200,000 of the community estate is comprised of a business interest. Spouse 1, who had the business interest, decided to deliberately be bought out so Spouse 2 could not obtain the business interest. Spouse 1 received $200,000 in cash for the business. Spouse 1 then hid the $200,000 from Spouse 2 and no one can find it. At trial, the total community estate is worth $300,000.

At the Final Trial, the Court determines that Actual Fraud occurred because of Spouse 1’s actions. Before the Court, the total community estate is only $150,000. The Court will then reconstitute the community estate and award Spouse 2 a property division off the $500,000 value of the community estate instead of the $150,000 community value.

Spouse 2 should not be responsible for Spouse 1’s fraud and suffer because of it.

Waste claims are complex and challenging. If you’re going through a divorce and believe your spouse has wasted assets, you will want to speak with an experienced family law attorney. Hunt Law Firm has knowledgeable attorneys who can work with you to ensure that your property division is just and right.