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Dissipation of Marital Assets Upon Divorce (Update)
© 2004 National Legal Research Group, Inc.
One of the many perennial battlegrounds in the law of equitable distribution is the struggle against dissipation of marital assets. A small minority of spouses are determined to maximize their share of the marital estate through creative but dishonest means, and providing an appropriate remedy in these cases is a necessary but ongoing task. To reduce the burden of deciding these cases and to deter future acts of misconduct, the appellate courts have been tempted to create firm rules defining certain types of conduct as improper. If the rules are not carefully designed, however, they may snare unwary but innocent spouses. In determining whether financial conduct during separation constitutes dissipation, there is ultimately no substitute for flexibility and common sense. Our main article this month focuses upon several recent dissipation decisions of nationwide interest.
Thompson v. Thompson
A number of interesting points are made by the recent Indiana decision in Thompson v. Thompson, 811 N.E.2d 888 (Ind. Ct. App. 2004). The first dissipation claim to be considered in that case was the husband's claim that while the parties were separated, the wife had taken $3,000 in cash from a safe in the marital residence and used it for her own purposes. This claim, if true, was a classic episode of dissipation. But "the only evidence of the $3000.00's existence that Jack draws our attention to is his own self-serving claim that the money was once there and has now disappeared." Id. at 911. The very existence of a dissipation claim was therefore dependent upon the credibility of the husband's personal testimony. Unfortunately, after testifying that he had not received any bonuses from his employer, the husband "'suddenly remembered' $75,591.00 in irregular income." Id. This episode of untruthfulness convinced the trial court that the husband's testimony was not credible, and the court therefore refused to believe that the $3,000 had ever been in the safe to begin with. The appellate court held that the trial court did not abuse its discretion. The lesson is that the first element of any successful dissipation claim is always credible proof that marital property existed to begin with.
The husband in Thompson also complained that the wife had removed $7,000 from the parties' checking account one to two days before separation. This withdrawal was proven with documentary evidence, so the existence of marital property was established. Unfortunately, in arguing his case in the trial court, the husband did not use the magic word "dissipation"; he simply argued that the $7,000 was marital property. The court found the omission significant:
Dana's admissions are highly indicative of improper behavior. However, Jack fails to assert that the $7000.00 in question was still in Dana's possession on May 1, 2003 and capable of being divided by the trial court. Accordingly, the $7000.00 is not subject to a claim of improper division of marital assets.
The proper manner for Jack to have addressed the $7000.00 was to claim that Dana improperly dissipated the money. Dissipation of marital assets involves the frivolous and unjustified spending of marital assets. [Citation omitted.] The test to determine whether marital assets have been dissipated is to determine whether the assets in question were actually wasted or misused.
Id. at 914-15. "Jack may very well have had a valid dissipation claim," the court concluded, but his "claim cannot be addressed for the first time on appeal." Id. at 915.
The Thompson court clearly saw a difference between arguing that an existing marital asset hidden by one spouse is still marital property and arguing that a marital asset destroyed or conveyed away by one spouse has been dissipated. This distinction is fuzzier in practice than it appears in theory. In the great majority of cases, the evidence shows simply that a marital asset which exists at the time of separation does not exist at the time of divorce. Because the asset has disappeared, the spouse who lacked control over the asset simply does not know whether it has been hidden, lost, conveyed away, destroyed, or otherwise misused. Still, from all indications, the husband argued a missing asset claim in the trial court without ever using the word "dissipation" or citing dissipation case law from the appellate courts. This practice was asking for trouble. Where an asset does not exist on the date of the property division hearing, it is subject to division only under a theory of dissipation. It is therefore essential to articulate clearly that to the extent a missing asset no longer exists, the asset should be treated as marital property under a theory of dissipation. The innocent spouse should expressly allege "dissipation" at trial in every missing asset case, for, as noted above, that spouse often has no way of determining whether the asset still exists.
Tambone v. Tambone
When most attorneys and judges consider dissipation, they think in terms of a sudden withdrawal from a bank account or the mysterious disappearance of a tangible asset. But any loss in the value of a marital asset can constitute dissipation if the loss was wrongfully caused by the actions of a spouse. A good example is Tambone v. Tambone, 2004 WL 2590497 (Mo. Ct. App. 2004). There, after the date of separation, the husband borrowed an additional $6,500 on a standing line of credit against the marital home. Missouri follows the strong majority rule that when an asset under one party's control disappears during separation, that party bears the burden of accounting for the asset. The husband was unable to account for the withdrawal, and the trial court ordered him to pay the wife $7,000, "accounting for the additional increase, as accrued interest, and a sanction to Husband for not receiving Wife's consent" before borrowing the funds. The husband argued on appeal that the wife had received $7,000 in marital property before the rest of the estate was divided, but this procedure would effectively require the wife to pay part of the $7,000. The appellate court therefore affirmed the trial court's decision that the entire $7,000 should be charged against the husband's share of the estate after division. "[I]t stands to reason that sanctions imposed against one party should not be attributable against the party who was harmed." Id. at *2.
Tambone also involved an interesting application of the general rule that consent is a defense to dissipation. The parties to that case filed a joint tax return during separation, obtaining thereby a $7,453 tax refund. Because the wife signed the joint return, the husband argued that she had consented to his use of the refund. But the evidence showed that the wife signed only after the husband promised to share the refund with her. The trial and appellate courts held that the refund was properly treated as marital property. The implied reasoning is that the wife's signature was not a valid consent because her consent was conditional upon the husband's promise to share the refund and the husband did not comply with that promise.
Allison v. Allison
In Allison v. Allison, 2004 WL 2403145 (Md. Ct. Spec. App. 2004), the court faced one of the more significant splits in authority in the law of dissipation: the use of marital funds during separation to pay attorney's fees in the divorce action. During separation, the husband in Allison borrowed $15,500 from his marital property 401(k) plan. He used $4,000 of the proceeds to make a court-ordered payment toward the wife's attorney's fees and used the remaining $11,500 to pay his own attorney's fees. The trial court held that the amount withdrawn was spent for an improper purpose. While the trial court's reasoning is not quoted in the appellate opinion, a significant number of states would agree with the result. Dissipation is the expenditure of marital funds after the breakdown of the marriage for a nonmarital purpose, and the courts have had difficulty seeing how expenses incurred in order to terminate the marriage can constitute a marital purpose.
Allowing the use of marital funds to pay attorney's fees awards also interferes with the normal operation of the domestic relations attorney's fees statute. "[A]bsolving her of the requirement to repay [marital funds used to pay attorney's fees] would be tantamount to awarding her attorney fees although she has not alleged error in regards to the denial of fees." Roe v. Roe, 311 S.C. 471, 479, 429 S.E.2d 830, 835 (Ct. App. 1993). This concern was particularly operative in Allison, where the husband used some of the withdrawn funds to make a $4,000 court-ordered contribution to the wife's attorney's fees. If the expenditure was deemed to be a legitimate use of marital funds, then the husband ultimately paid less than $4,000 of the wife's attorney's fees. Cf. Tambone (dissipation award payable from marital property, rather than from the separate property of the guilty spouse, forces the innocent spouse to share in the burden of making the payment).
For additional authority providing that the expenditure of marital funds to pay attorney's fees in the divorce case is dissipation, see 750 Ill. Comp. Stat. Ann. 5/501(c-1)(2) (Westlaw 2004); In re Marriage of DeLarco, 313 Ill. App. 3d 107, 728 N.E.2d 1278 (2000); In re Marriage of Weiler, 258 Ill. App. 3d 454, 629 N.E.2d 1216 (1994); In re Marriage of Jerome & Martinez, 255 Ill. App. 3d 374, 625 N.E.2d 1195 (1994); Hortis v. Hortis, 367 N.W.2d 633 (Minn. Ct. App. 1985); Francka v. Francka, 951 S.W.2d 685 (Mo. Ct. App. 1997); In re Marriage of Walls, 278 Mont. 413, 925 P.2d 483 (1996); Altomer v. Altomer, 300 A.D.2d 927, 753 N.Y.S.2d 174 (2002); Roehmholdt v. Russell, 272 A.D.2d 938, 712 N.Y.S.2d 709 (2000); and Isaacs v. Isaacs, 246 A.D.2d 428, 667 N.Y.S.2d 740 (1998).
Nevertheless, the Maryland Court of Special Appeals agreed with the equal number of states which have held that the payment of attorney's fees with marital funds is not dissipation. The court explained:
As a policy matter, attorney's fees should generally be viewed as a legitimate expenditure of marital funds. Since the law permits divorce, the law should permit spouses to spend the funds necessary to pay for legal services in divorce proceedings. Divorcing spouses usually do not have their own separate funds to pay their lawyers, so a rule that condemns the use of marital funds for legal services simply does not make sense.
The doctrine of dissipation was developed as a tool to prevent and remedy economic misconduct that could frustrate an equitable distribution of partnership assets. Expenditures for legal services cannot be fairly characterized as economic misconduct. On the contrary, it should be viewed as entirely appropriate for people facing marriage breakdown to obtain the legal advice and assistance needed to equitably distribute marital assets.
Furthermore, it wastes resources to require spouses either to seek court permission before spending marital funds to obtain legal assistance or to seek a preliminary award of fees rather than spending the money necessary to obtain counsel. The doctrine of dissipation should remain available, however, to provide an avenue for redress if one spouse spends an unnecessary or unreasonable amount of marital funds on legal fees.
Allison, 2004 WL 2403145, at *4 (quoting Spending Marital Funds for Attorney's Fees, 15 Equitable Distribution Journal 85, 87 (1998)). The court also noted that because the date of classification under Maryland law is the date of divorce the effect of a contrary rule would be to create a dissipation issue every time postseparation wages were used to pay attorney's fees an event which happens in the great majority of all divorce cases. Allison, 2004 WL 2403145, at *4 n.4.
For additional cases holding that the expenditure of marital funds for attorney's fees is not dissipation, see Akers v. Akers, 582 So. 2d 1212 (Fla. Dist. Ct. App. 1991); Romkema v. Romkema, 918 S.W.2d 294 (Mo. Ct. App. 1996); Harbour v. Harbour, 227 A.D.2d 882, 643 N.Y.S.2d 969 (1996); Anderson v. Anderson, 29 Va. App. 673, 514 S.E.2d 369 (1999); and Decker v. Decker, 17 Va. App. 12, 435 S.E.2d 407 (1993).
For a case holding on the facts that an expenditure of marital funds for attorney's fees was unreasonable and therefore did constitute dissipation, see Soley v. Soley, 101 Ohio App. 3d 540, 655 N.E.2d 1381 (1995) ($23,000 spent on invalid ex parte Dominican Republic divorce was dissipation).
The present author can see the arguments on both sides of the split in authority over the use of marital funds to pay attorney's fees in the divorce case. Allowing the use of marital funds to pay attorney's fees does result in an allocation of liability that differs from the allocation suggested by the trial court's attorney's fees award, but the trial court remains free to consider that effect in making its attorney's fees award. Either position reaches a reasonable end result, as the trial court's attorney's fees award can take into account past expenditures from marital funds. One point which mildly troubles the author is that the trial court in Allison lacked that opportunity, for it did not know when it made its attorney's fees award that its holding on the dissipation issue would be reversed. The trial court may have intended to award the wife $4,000 in fees payable by the husband and not from the marital estate; it might have awarded more fees had it known that the use of marital funds to pay the award was not dissipation. But the wife did not appeal the attorney's fees award, so this issue was not before the appellate court.
The Allison court also made one comment in passing which deserves further notice. The court's ultimate conclusion stated:
Michael's $13,665.31 expenditure did not meet the definition of "dissipation" set forth in Jeffcoat v. Jeffcoat, 102 Md. App. 301, 311, 649 A.2d 1137 (1994), and reaffirmed recently in McCleary, supra, 150 Md. App. at 462-63, 822 A.2d 460, viz: expenditures of marital funds "for the principal purpose of reducing the funds available for equitable distribution."
2004 WL 2403145, at *4.
The notion that dissipation must be for the "purpose" of influencing the court's equitable distribution award is one of the most troubling concepts in the entire law of dissipation. There are many types of expenditures which are clearly improper and which clearly should constitute dissipation, even though their primary purpose was not to harm the other spouse or influence the property division.
Two common examples of this point are unreasonable expenditures on paramours and gambling. E.g., Brosick v. Brosick, 974 S.W.2d 498 (Ky. Ct. App. 1998) (gifts to paramour were dissipation); In re Marriage of Bartley, 712 N.E.2d 537 (Ind. Ct. App. 1999) (excessive losses in betting pools on NCAA and NASCAR events were dissipation). The innocent spouse confronted with these types of expenditures should not have to worry about whether the guilty spouse's "primary purpose" was to harm the marital estate. Often, a spouse who spends money on a new paramour will be motivated by infatuation with a new partner, not by a desire to harm an old one. Many spouses who spend unreasonable sums on gambling are addicted to the thrill of financial risk; they do not desire to harm anyone. Indeed, they may well subjectively overestimate their likelihood of winning, so that their actual subjective intent may not be to lose money at all. In each of these situations, regardless of the spending spouse's subjective purpose, that spouse is acting with objectively reckless indifference to the financial consequences of his or her actions, and the courts almost universally find dissipation.
Another striking example of a reckless expenditure is In re Marriage of Rodriguez, 266 Kan. 347, 969 P.2d 880 (1998), where $56,000 in marital assets was seized by the federal government upon failure of the husband's illegal drug business. The court did not state why the husband started his illegal drug business, but it seems doubtful that he started it for the purpose of harming the wife or reducing the funds available for equitable distribution. If anything, it seems likely that he started the business for the purpose of earning large sums of money, and therefore increasing the funds available for equitable distribution. If a "principal purpose" analysis is applied to cases such as Rodriguez, the courts must tie themselves into analytical knots in order to reach the common-sense result that losses upon failure of an illegal drug business, run by one spouse alone without the other's knowledge, are dissipation. The better option, again, is to hold that an expenditure is dissipation if made with reckless indifference to its objectively foreseeable consequences upon the marital estate.
Indeed, the Maryland Court of Special Appeals has already successfully confronted one fact situation involving reckless indifference. In Welsh v. Welsh, 135 Md. App. 29, 761 A.2d 949 (2000), cert. denied, 363 Md. 207, 768 A.2d 55 (2001), the husband filed a pointless defamation action against the wife's counsel, spending $74,000 in marital funds on attorney's fees to recover a settlement of only $22,500. The action was not filed for the primary purpose of harming the wife; the husband acted for the primary purpose of vindicating himself against the defamation. But it is still extremely foolish to spent $74,000 to recover less than one-third as much, and the husband certainly acted with reckless indifference to the financial consequences of his actions upon the wife and the marital estate. Very properly, the Welsh court receded from the "primary purpose" language of Jeffcoat v. Jeffcoat, 102 Md. App. 301, 649 A.2d 1137 (1994), and found dissipation on the facts.
The author hopes that the reappearance of the "principal purpose" doctrine in the conclusion to the dissipation issue in Allison does not mean that the court is having doubts about Welsh. Many situations exist in which a reckless expenditure of marital funds should be viewed as dissipation, even though reducing the size of the marital estate was not the primary purpose for the guilty spouse's actions.
In no area of law is flexibility as important as in the law of dissipation of marital property. Fixed rules are helpful as general guidelines, but dishonest spouses have been extremely creative in finding ways to accomplish their purposes while remaining within the letter of the law. In addition, spouses who are recklessly indifferent to the financial interests of the marital estate can harm that estate in many different ways, in a manner which is not intentional, but which is so objectively unreasonable that the inevitable financial loss should not be shared. To the extent that the flexibility creates uncertainty in the case law, that uncertainty is much more tolerable than the abusive behavior at issue in many of the reported cases.
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