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UPDATE ON DISSIPATION OF ASSETS
© 1994 National Legal Research Group, Inc.
Even in the best of times, marriage partners do not always agree about money, and disagreements about expenditures and assets almost always escalate when the marriage breaks down.
For this reason, it is not surprising that many dissolution cases involve claims that one spouse has dissipated assets, either by spending marital funds for extravagant or improper purposes, by transferring marital assets to third parties, or by neglecting or even destroying marital property. In some cases, spouses even challenge expenditures that occurred before marriage breakdown.
This article reviews recent case law on the subject of dissipation of assets. Part I reviews cases discussing the legitimacy of particular expenditures, including living expenses during separation, gambling, and spending money on a paramour; Part II discusses decisions on asset transfers to third parties; Part III looks at cases where one spouse has destroyed or mismanaged marital property; and Part IV reviews recent cases which examine whether the concept of dissipation extends to expenditures that predate marriage breakdown.
I. Legitimacy of Particular Expenditures
Dissipation occurs, according to the most frequently cited definition, "where [one] spouse uses marital property for his own benefit and for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown." Hellwig v. Hellwig , 100 Ill. App. 3d 452, 426 N.E.2d 1087, 1094 (1981). Many expenditures fall into a gray area somewhere between strictly legitimate payments and highly questionable ones. The recent cases discussed below address the propriety of expenditures for living expenses during separation, for gambling, and for trips with a paramour.
Living Expenses During Separation. Courts disagree as to whether a spouse dissipates assets when he or she uses marital funds for living expenses. An apparent majority have found no problem with a separated spouse's use of marital funds for living expenses, at least where the expenditures are reasonable in view of spending patterns established during the marriage. E.g., Clements v. Clements , 10 Va. App. 580, 397 S.E.2d 257 (1990) (citing cases supporting the majority view); see also Sinclair v. Sinclair , 837 S.W.2d 355 (Mo. Ct. App. 1992) (marital funds that wife spent for everyday items, including food, clothing, entertainment, and a trip, were not squandered and did not have to be deducted from her share of the property division, even though she did not produce receipts or other documentary proof of these expenditures).
Some courts have taken a different view and held that marital funds used for living expenses should be included in the marital estate. E.g., Cobb v. Cobb , 107 N.C. App. 382, 420 S.E.2d 212 (1992) (money that husband paid to wife out of parties' joint checking account for her living expenses during separation were advances on her share of the marital estate).
A recent Illinois case, In re Marriage of Murphy , ___ Ill. App. 3d ___, 631 N.E.2d 893 (1994), follows the majority view. The wife showed that the husband spent $96,000 in the year following her petition for dissolution, while he spent only $28,000 in the year in which they separated. Notwithstanding this change in spending, the trial court failed to find dissipation. The Illinois appeals court held that the husband adequately explained the expenditures by specific testimony about how the funds were spent. The evidence indicated that a significant portion of the money went toward buying and furnishing a condominium for himself after he left the marital residence. There was no indication that these expenditures were extravagant, and he was not required to furnish his home exclusively with inexpensive furniture and accessories, the court said. While excessive expenditures for living expenses constitute dissipation, expenditures for necessary, appropriate, and legitimate living expenses do not, the court observed.
A recent Florida case, Kelly v. Kelly , 637 So. 2d 43 (Fla. DCA 1994), also adopted the majority view. During the pendency of the parties' dissolution proceedings, the husband liquidated an annuity valued at almost $10,000 and used it to pay support arrearages due to the wife under a temporary support order. The trial court nevertheless awarded the annuity to the husband. The Florida appeals court held that the now-depleted annuity should not have been awarded to the husband. It is acceptable in certain circumstances to credit the value of a depleted asset to the party responsible for the deletion, the court acknowledged. It pointed out, however, that the wife removed approximately $5,700 from a marital savings account prior to the final hearing and also used these funds for support, yet that savings account was not included in the distribution at all. The fact that the husband used - with court approval - a marital asset to discharge a support obligation in a contempt proceeding did not support the trial court's inclusion of that asset and exclusion of the asset which the wife had used, the court said.
Gambling. For the most part, courts have held that gambling expenditures during the period of marriage breakdown or separation constitute dissipation. See, e.g., In re Marriage of Hagshenas , 234 Ill. App. 3d 178, 600 N.E.2d 437 (1992) (husband's expenditures at casinos during marriage breakdown constituted dissipation even if gambling continued a pattern established during marriage); Gray v. Gray , 609 A.2d 694 (Me. 1992) (loss of substantial marital funds through gambling constitutes economic misconduct); Wilner v. Wilner , 192 A.D.2d 524, 595 N.Y.S.2d 978 (1993) (husband's dissipation of assets through gambling justified trial court's decision to award wife a disproportionate share of remaining marital assets); Baker v. Baker , 188 A.D.2d 710, 590 N.Y.S.2d 603 (1992) (husband's dissipation of assets through gambling was a proper factor to consider when distributing two parcels of real property, even though the dissipation did not affect the value of the real estate).
In a recent New York case, an appeals court cited a husband's gambling when it upheld an award to a wife of 70% of the proceeds from the liquidation of the marital real property. The record contained documentary evidence that the husband suffered large losses due to gambling, and there was little to support his claim that he won more than he lost, the court said. In light of his evasiveness and lack of financial records regarding his expenditures from bank accounts, it was fair to conclude that he dissipated marital assets through gambling. Conceicao v. Conceicao , ___ A.D.2d ___, 611 N.Y.S.2d 318 (1994).
But the court in a recent Connecticut case emphasized the wife's apparent approval of the husband's gambling as a factor to consider. The trial court's property division left the wife with only the assets that she possessed at the time of dissolution, and she claimed that she was entitled to more favorable financial orders because the husband dissipated their assets through gambling. The husband testified that they spent most of their Saturdays at "Jai Alai" and that although the wife bet on the games only once, she loved it and eagerly shared in his winnings. The wife denied these assertions, except that she admitted attending Jai Alai with her husband. The Connecticut appeals court said that whether the wife tacitly approved of the gambling, and the weight, if any, to be given to that conduct in its assessment of the causes of the breakdown of the marriage, were issues for the trial court to resolve. The trial court reasonably could have found such approval from the conflicting evidence and could have concluded that the wife, therefore, bore some responsibility for the gambling losses. The trial court specifically pointed out in its decision that the husband had used significant joint sums for gambling losses and that he had appropriated about $23,000 for his own use, which showed that the court considered those facts when it decided on the property division. Askinazi v. Askinazi , 34 Conn. App. 328, 641 A.2d 413 (1994).
Expenditures on Paramour. In Smith v. Smith , ___ Va. App. ___, 444 S.E.2d 269 (1994), a Virginia appeals court said that amounts spent by one spouse on an extramarital affair after marriage breakdown can be credited to the other spouse, but the court found the evidence in the case before it insufficient to justify such an award. Although the husband admitted that his paramour accompanied him periodically on trips, he testified that some of these were reimbursed business trips. The wife's evidence failed to show which postseparation trips involved the husband's paramour and, of those that did, whether they were reimbursed business expenses or paid for out of marital funds. Therefore, the court said, it could not conclude that the trial court erred in refusing to hold that the husband dissipated marital funds.
In a recent Illinois case, an appeals court acknowledged the impropriety of spending money on a paramour, but refused to reverse merely because the trial court did not specifically charge the husband with the amount he spent on his girlfriend. The appeals court acknowledged that the husband had failed to account for $2,600 in checks written for cash, and that he spent about $5,200 on trips with his girlfriend and gifts for her. Taking trips with someone other than the spouse has been held to constitute dissipation, the court said, citing In re Marriage of Osborn , 206 Ill. App. 3d 588, 564 N.E.2d 1325 (1990). But as the trial court did not set forth its reasons for the distribution of property, it was unclear whether it charged the disputed $7,800 against the husband. The trial court was dividing an asset (a personal injury settlement received by the husband) worth $1.8 million, and dissipation in the amount of $7,800 would not necessarily materially affect the division, the court said. Hence, there was no abuse of discretion in the trial court's failing to find that the husband's expenditures required a major charge against his share of marital property. Dissipation is only one factor to consider when distributing property; "[t]he trial court is not required to charge against a party the amounts found to have been dissipated but may do so," the court said. In re Marriage of Murphy, supra , 631 N.E.2d at 896 (emphasis by court).
Burden of Proof. A majority of courts have held that when a spouse has expended funds during the marital breakdown, he or she bears the burden of proving that the money was spent for a marital or proper purpose. E.g., Manker v. Manker , 11 Conn. App. 653, 528 A.2d 1170 (1987) (spouse with control over marital funds has burden of accounting for them by a preponderance of the evidence); In re Marriage of Smith , 128 Ill. App. 3d 1017, 471 N.E.2d 1008 (1984) (person charged with dissipation must establish by "clear and convincing" evidence how the funds were spent); In re Marriage of Merry , 213 Mont. 141, 689 P.2d 1250 (1984) (spouse charged with dissipation must present evidence about value and disposition of questioned items); Clements v. Clements, supra (once aggrieved spouse shows that marital funds were withdrawn or used after the breakdown, the burden rests with the party charged with dissipation to offer "sufficient" proof that the money was spent for a proper purpose). In some other jurisdictions, the aggrieved spouse has the burden of proving that funds were spent for a nonmarital purpose, Delano v. Delano , 501 A.2d 1287 (Me. 1985), that the funds were misused or secreted, Blaser v. Blaser , 225 Neb. 104, 402 N.W.2d 875 (1987), or that the money was spent with the intent to deprive the other spouse of a proportionate share of marital property. Robinette v. Robinette , 736 S.W.2d 351 (Ky. Ct. App. 1987).
In a recent Texas case, the appeals court held that the burden of proving the fairness of expenditures rests on the party who spent the money. Ramirez v. Ramirez , 873 S.W.2d 735 (Tex. Ct. App. 1994). The jury found that the husband had unfairly transferred $27,500 of community funds out of the parties' estate, and the Texas Court of Appeals held that the record supported that finding. The record indicated that the parties accumulated $29,000, which the husband agreed was community property; that the money had been spent as of the trial date; that the husband admitted that he had given away a vehicle to a woman and that he and the woman had taken two trips together; and that he had numerous unrecorded cash sales from his business. The burden of providing the fairness of the expenditures of community assets was on the husband or his donee, the court said.
II. Transfers to Third Parties
Gifts to Children. Gifts to the spouses' children around the time of separation can constitute dissipation, particularly if the gifts exceed those made in the years preceding the marriage breakdown. E.g., In re Marriage of Lee , 246 Ill. App. 3d 628, 615 N.E.2d 1314 (1993) (husband's transfer of $266,000 to the parties' children around the time of separation constituted dissipation, because the gifts primarily benefitted husband and greatly exceeded his annual gifts to the children in earlier years); Hollander v. Hollander , 89 Md. App. 156, 597 A.2d 1012 (1991) (dental practice was "given" to daughter to avoid consequences of impending divorce; therefore, its value was properly included in marital estate); Halvorson v. Halvorson , 482 N.W.2d 869 (N.D. 1992) (trial court properly charged husband with value of assets that he dissipated when he transferred them to the parties' son over wife's objection).
In a recent decision by Maine's high court, the husband was held to have committed economic misconduct within the meaning of the alimony statute by acting unilaterally on the eve of the divorce proceeding to place certain real property in the names of the parties' children, beyond the reach of both the wife and the divorce court. The trial court should have taken that conduct into account in its award, the court decided. Quin v. Quinn , 641 A.2d 180 (Me. 1994).
Only a week before being served with the wife's divorce complaint, the husband caused a condominium to which his real estate agency held title to be conveyed jointly to the parties' five children for nominal consideration. The property had been purchased with marital funds and was used as a family vacation home. The husband did not contest the wife's assertion that the purpose of conveying the property was to place it beyond the reach of the divorce court. Instead, he justified the conveyance on the ground that it gave effect to the parties' intention that the children should ultimately inherit the property. The trial court found that the property was a nonmarital asset and that the transfer was done with the wife's express or implied acquiescence.
Maine's high court held that by significantly diminishing the value of the marital estate on the threshold of the divorce proceeding for the sole purpose of placing certain assets beyond the reach of the divorce court, and in circumstances deliberately calculated to prevent his wife from forestalling the conveyance, the husband engaged in economic misconduct. A court that takes economic misconduct into account is not punishing that misconduct, but rather is preventing that misconduct from adversely and inequitably affecting either spouse's postmarital future, the court said.
The court was unpersuaded by the husband's contention that he acted properly because he was merely giving effect to the parties' previously stated intention that the children should ultimately inherit the condominium. Even if the wife did not change her mind after filing her divorce action, it did not follow that she intended to give up the right to use the property during her life, the court observed. Moreover, it is of little consequence in a divorce proceeding that a party has, at a time when she presumably expected her marriage to endure, made a statement as to her desire to make a certain bequest to her children following the deaths of her and her spouse. This unilateral, eleventh-hour diversion of marital wealth should not be condoned merely because she could not say that she objected to the children owning the property. She did testify that she did not approve of the manner of the transfer, the court pointed out. "The conduct to which she properly objects was not in the giving, but in the taking." Quinn v. Quinn, supra , 641 A.2d at 182.
Some courts, however, have refused to find dissipation in cases involving gifts to children, even when the timing of the transaction was suspicious or the donor spouse retained some beneficial use of the property. See, e.g., In re Marriage of Glessner , 119 Ill. App. 3d 306, 456 N.E.2d 311 (1983) (condominium placed in trust for children and purchased with funds from Totten trust that husband established a few months after wife filed complaint for separate maintenance was not marital property, even though the trustee (the husband's sister) allowed him to live there and pay the expense of maintaining the property in lieu of rent); In re Marriage of McGoldrick , 85 Or. App. 412, 736 P.2d 622 (1987) (transfer to children was not fraudulent, where transfer was consistent with parties' estate plan and husband discussed it with attorney before separation).
Transfers to Other Relatives. In a recent Oregon case, the husband paid $37,500 to his brother shortly before trial in the parties' dissolution proceedings, allegedly in payment of several overdue installments on a notice. The trial court found that the payment was a sham designed to reduce assets for the purpose of the dissolution, but it did not take the sham payment into account when it divided the parties' property.
The Oregon appeals court held that the trial court erred in failing to adjust the property division to account for the payment. The payment was a sham, and the fact that the money was income from separate property did not change the fact that it was marital income and, therefore, marital property. As a result, the money paid to the husband's brother should have been included in the property distribution. Since the husband did not argue that he rebutted the statutory equal contribution presumption, the wife should receive one-half of the $37,500, the court concluded. In re Marriage of Shelley & Shelley , 127 Or. App. 616, 873 P.2d 464 (1994).
Discovery. To investigate suspicions that a spouse has transferred property to a third party, the allegedly aggrieved spouse has the right to call the transferee as a witness at trial, according to Cox v. Cox , 639 A.2d 97 (D.C. 1994).
In Cox , one of the wife's principal claims at trial was that bank accounts and other assets nominally owned by a woman who worked with the husband were actually marital property which the husband had transferred to her in order to avoid their equitable distribution as part of the marital estate. The evidence showed that the husband had a relationship with the co-worker, but the trial court refused to allow the wife to examine the husband and the co-worker at trial regarding the disputed assets. The District of Columbia Court of Appeals held that the wife was entitled to call the co-worker as a witness, and to examine both the co-worker and the husband with respect to any allegedly inequitable divestitures. The public and the court have a right to every person's nonprivileged and admissible evidence, and the burden on a litigant who seeks to preclude his adversary from presenting relevant testimony is therefore a heavy one, the court observed. Here, it noted, the issue as to which the wife was seeking testimony from the husband and the co-worker was demonstrably relevant. A spouse may not circumvent the equitable distribution of the marital estate by concealing marital assets or by manipulating title to them. Indeed, the District of Columbia statute on property division requires the court to consider, among other things, each party's contribution to the dissipation of the marital estate. This provision was designed to avoid arbitrary or inequitable divestitures of property titled solely in one spouse's name. The co-worker did not assert any statutory or common law privilege or any other equitable argument that would excuse her from testifying, the court noted.
III. Destruction or Devaluation of Marital Assets
During a period of marital turmoil, spouses may not take as much care with their property as usual. For one thing, they may become distracted with the emotional problems surrounding the separation and find it hard to muster the energy and focus that it takes to maintain marital property. And some people would rather see marital assets devalued or even destroyed than share the full value of the assets with the other spouse.
Lack of Effort To Maintain Marital Assets. In a recent New York case, a husband's lack of effort to recoup the value of equipment purchased for his printing business was held to constitute a wasteful dissipation of assets. He allowed it to be sold at a sheriff's auction for considerably less that its purchase price four years earlier, even though he admitted that the equipment was in substantially the same condition at the time the business ceased operation as it had been when he purchased it, the appeals court pointed out. Baker v. Baker , ___ A.D.2d ___, 608 N.Y.S.2d 23 (1993). Other courts have similarly concluded that neglect or mismanagement of a marital asset can be characterized as dissipation. E.g., Oberhansly v. Oberhansly , 798 P.2d 883 (Alaska 1990) (husband's fault in allowing household debts to fall into default could be considered as a factor in property division without violating statutory prohibition against consideration of fault); In re Marriage of Thomas , 239 Ill. App. 3d 992, 608 N.E.2d 585 (1993) (husband dissipated marital property by allowing or causing the devaluation of the family business); In re Marriage of Siegel , 123 Ill. App. 3d 7109, 463 N.E.2d 773 (1984) (spouse dissipated marital property by allowing the marital home to be foreclosed upon and sold at a judicial sale, although that spouse could easily have prevented the sale); Heins v. Heins , 783 S.W.2d 481 (Mo. Ct. App. 1990) (husband dissipated property by refusing to make mortgage payments to prevent foreclosure, considering that he had the means to make the payments and his parents purchased the property at the foreclosure sale); Berrios v. Berrios , 159 A.D.2d 401, 553 N.Y.S.2d 100 (1990) (husband who wasted assets which he assumed responsibility for managing after the parties' separation was held to have thereby forfeited his right to share in equally valuable property managed by the wife).
Destruction of Marital Assets. A spouse's intentional destruction of marital property should not go without a remedy, according to In re Marriage of Ferkel , ___ Ill. App. 3d ___, 632 N.E.2d 1133 (1994). The husband in Ferkel testified that the wife had mutilated some family photographs that were taken during the marriage. The wife admitted destroying the photographs and testified that she did not know whether she had the negatives to replace them. The destruction was of such a minor nature that it was difficult to justify much attention to it, she claimed. The trial court denied the husband any relief concerning the destroyed photographs, concluding that it could not ascertain damages. The Illinois appeals court disagreed. The dissipating party need not derive personal benefit from the dissipation in order to be held accountable, the court said, citing In re Marriage of Petrovich , 154 Ill. App. 3d 881, 507 N.E.2d 207 (1987). The court disagreed with the wife that the destruction was unimportant. "It is not unusual for one or both parties in a dissolution action to destroy or hide marital assets or property. Because the parties in a dissolution owe a duty not to dissipate marital assets, we cannot condone the dissipation or destruction of any marital assets or property, even photographs." In re Marriage of Ferkel, supra , 632 N.E.2d at 1138.
It was error to deny relief merely because no economic value could be placed on the photographs, the court said. The destroyed marital property could be recovered if the wife retained the negatives and made copies of the destroyed photographs, the court pointed out. And if the marital property could not be restored, the trial court at a minimum should have determined damages and accordingly considered this issue in the distribution of marital property. The wife's breach of her duty not to dissipate assets was actionable, and the trial court should have granted the husband relief by restoring the marital property or at a minimum by determining and awarding nominal damages, the court said.
Another case involving the destruction of marital property was Schwarcz v. Zik , 273 N.J. Super. 78, 640 A.2d 1212 (Ch. Div. 1993). After the parties, then living in Israel, separated, an Israeli court ordered the husband to pay the wife the fair market value of items of personalty taken by him and the value of certain other items destroyed by him. After the husband moved to New Jersey, the wife instituted an action seeking enforcement of the judgment entered in Israel. The New Jersey court held that the judgment was enforceable in New Jersey. The requirement that the husband compensate the wife for items of personalty taken or destroyed was akin to equitable distribution, the court observed, noting that a New Jersey statute requires courts to divide assets acquired by parties during marriage. Thus, the award to the wife of a sum of money equal to the value of the chattels taken or broken by the husband did not run afoul of New Jersey public policy, the court concluded.
IV. Dissipation Before Marriage Breakdown
Disputes about dissipation of assets usually center on expenditures made after marriage breakdown or separation. But what if a spouse attempts to challenge the legitimacy of expenditures that occurred at an earlier time? The Illinois Supreme Court held that the term "dissipation" in the equitable distribution statute refers exclusively to the misuse of property at a time when the marriage is undergoing an irreconcilable breakdown. In re Marriage of O'Neill , 138 Ill. 2d 487, 563 N.E.2d 494 (1990); see also Panhorst v. Panhorst , 301 S.C. 100, 390 S.E.2d 376 (Ct. App. 1990) (husband's gifts to his mother over a 20-year period did not amount to dissipation even though the wife was unaware of the gifts, where there was no evidence that he made the gifts in contemplation of divorce or with intent to deprive the wife of her right to equitable distribution; statute wisely prevents spouses from resurrecting transactions before marriage breakdown to gain an advantage in equitable distribution).
Courts in two recent cases have likewise held that expenditures before the marital breakdown cannot be characterized as dissipation. In Murray v. Murray , 636 So. 2d 536 (Fla. DCA 1994), a Florida appeals court held that the trial court erred in awarding the marital home to the wife based upon alleged misconduct of the husband which took place several years prior to the breakup of the marital relationship. "Dissipation" is defined as "`where one spouse uses marital funds for his or her own benefit and for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown ,'" the court said. Id. at 539 (quoting Gentile v. Gentile , 565 So. 2d 820, 823 (Fla. DCA 1990) (quoting Hellwig v. Hellwig, supra , 426 N.E.2d at 1094 (emphasis by Murray court))). A spouse's misconduct does not justify an unequal distribution absent evidence demonstrating a sufficient relationship between the misconduct and the dissipation, the court observed. Expenditures and investment decisions not rising to the level of misconduct also will not normally support an unequal distribution of assets, it added.
Many of the matters considered by the trial court here arose well before there was any evidence of an irreconcilable breakdown of the marriage, the court noted. The husband's criminal behavior that resulted in legal fees occurred five years before the parties' separation, it pointed out, and some of the disputed expenditures could properly be characterized as nothing more than investment and purchasing decisions made during the course of the marriage relationship. During a large portion of the last five years of the marriage, when the wife complained that assets were being dissipated, the husband worked and the wife remained at home and received the benefits of the marital relationship, the court noted. Hence, the expenditure decisions did not justify the trial court's unequal distribution scheme. During the divorce proceedings in Smith v. Smith, supra , the husband admitted to a 15-year extramarital affair with a woman whom he saw at least once a year in a variety of locations, sometimes on business trips for which he was partially reimbursed. The wife contended that the trial court erred by refusing to consider the dissipation of assets which she claimed occurred as a result of the affair.
The Virginia Court of Appeals held that the husband's preseparation expenditures in connection with the affair did not constitute dissipation of assets which would justify valuing the marital estate at a date other than the evidentiary hearing. The challenged use of funds must be in anticipation of divorce and separation, and at a time when the marriage is in jeopardy, the court said. To date, it observed, Virginia appeals courts have applied the dissipation concept only to funds spent contemporaneously with marital breakdown. Thus, the court refused to expand the concept to cover expenditures made for a 15-year period which were not specifically for the purpose of depleting the marital estate and where there was no evidence that there was an irreconcilable breakdown of the marriage.
The court took pains to point out that the husband need not be allowed "to benefit financially from his continuing deceit." 444 S.E.2d at 273. Under the existing statutory scheme, the court said, the husband's preseparation use of marital funds in pursuit of his extended extramarital affair would be a factor to consider as a circumstance that contributed to the dissolution of the marriage, to the extent that it had any significant impact on the value of the marital estate. The trial court could also consider the negative impact of the affair on the well-being of the family and the mental condition of the parties, the court said.
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