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RELIEF FROM JUDGMENT DUE TO FRAUD
© 1994 National Legal Research Group, Inc.
Many a spouse winds up feeling cheated after the dust settles which was raised by the marriage dissolution proceedings. In particular, the economically dependent spouse may begin to question whether the settlement was a good one and whether the other spouse may have held back vital information about the existence or value of marital assets.
It should not be surprising, therefore, that a great deal of postjudgment motions are filed seeking to set aside or reopen the decree. But the outcome in these proceedings is often difficult to predict. The general principles regarding fraud as a basis for postjudgment relief are well settled, but courts disagree on how these principles apply in the context of attacks on property division agreements and decrees.
As the recent cases discussed in this article illustrate, a whole host of issues complicates fraud-based motions for relief from judgment. Part I focuses on the accused spouse and examines what conduct may be characterized as fraud. Part II focuses on the accusing spouse and examines the issue of due diligence and reliance, as well as the impact of a lack of independent legal advice. Part III addresses a number of miscellaneous issues.
I. Identifying Fraudulent Conduct
General Rule. The party attempting to set aside a decree on the ground that it was procured by fraud must make the usual showings required for fraud. With respect to the conduct that constitutes fraud, Delaware's high court held that these showings were required: (1) a false representation, usually one of fact, made by the defendant; (2) the defendant's knowledge or belief that the representation was false or was made with reckless indifference to the truth; and (3) an intent to induce the plaintiff to act or refrain from acting. Schmeusser v. Schmeusser , 559 A.2d 1294 (Del. 1989). Other courts have listed the same basic requirements albeit in slightly different wording. E.g., Billington v. Billington , 220 Conn. 212, 595 A.2d 1377 (1991) (plaintiff must show that (1) a false representation was made as a statement of fact; (2) the statement was untrue and was known to be so by its maker; (3) the statement was made with the intent of inducing reliance); Despain v. Despain , 855 P.2d 254 (Utah Ct. App. 1993) (plaintiff must prove (1) that a representation was made, (2) concerning a presently existing material fact, (3) which was false, (4) which the representor either (a) knew to be false or (b) made recklessly, knowing that he had insufficient knowledge upon which to base such representation, (5) for the purpose of inducing the other party to act upon it).
By analyzing how these elements apply to the facts in a particular case, counsel for the accused spouse may begin to see a defense theory take shape. For example, counsel might take the position that the alleged misrepresentation was one of opinion rather than fact. E.g., Brown v. Brown , 863 S.W.2d 432 (Tenn. Ct. App. 1993) (husband's alleged statements to wife that his financial condition was bad and that she would receive all he could afford were mere expressions of opinion).
Alternatively, if the proof supports it, counsel might argue that his client did not know, or have reason to know, that the representations were false. E.g., Castro v. Castro , 31 Conn. App. 761, 627 A.2d 452 (1993) (fraud not proven; husband claimed wife falsely portrayed her financial status by omitting an expected settlement award, but at the time of dissolution wife was not aware that she would receive any additional payments); In re Marriage of McBride , 102 Ill. App. 3d 84, 429 N.E.2d 867 (1981) (no relief for a "misunderstanding of the facts"; instead, evidence to support a petition based on fraud must establish that husband made the representation knowing it was false); Davidson v. Davidson , 53 Or. App. 516, 632 P.2d 35 (1981) (insufficient evidence that husband actually knew of possible zoning change and its potential effect on the value of the marital home at the time of the dissolution proceedings).
Another approach would be to characterize any misrepresentation or omission as a mistake or oversight made without intent to deceive. See, e.g., In re Marriage of Broday , ___ Ill. App. 3d ___, 628 N.E.2d 790 (1993) (given trial court's finding that husband lacked intent to deceive, the element of scienter necessary to establish fraud was missing). Extrinsic Fraud Versus Intrinsic Fraud. Many states allow judgments to be attacked for intrinsic fraud, if at all, only within a short time (often one year) after judgment. But most states have a longer time limit, or no time limit at all, for attacks grounded on extrinsic fraud . Extrinsic fraud is usually characterized as fraud on the court, while intrinsic fraud is the less serious evil of fraud committed against a party.
In most cases, the concealment or misrepresentation is not discovered within a short time, and thus the spouse seeking to set aside a property needs to prove extrinsic fraud. See, e.g., Wise v. Nirider , ___ Mont. ___, 862 P.2d 1128 (1993) (failure to disclose pension to the trial court did not rise to the level of extrinsic fraud upon the court, where wife herself knew about pension and was represented by counsel); Lee v. Johnson , 858 S.W.2d 58 (Tex. Ct. App. 1993) (husband's alleged mischaracterization of community assets as his separate assets did not constitute extrinsic fraud).
Extrinsic fraud is traditionally defined as fraud directed at the court itself that precludes a party from presenting his or her case to the court. But Minnesota's high court said that such a narrow definition is inappropriate in marriage dissolution cases because of the trial court's unique role in such cases, where the trial court sits as a third party on behalf of the state to see that a fair distribution is made. The court adopted a broader definition of fraud on the court: an intentional course of material misrepresentation that misled the court and counsel and made the property settlement grossly unfair. Maranda v. Maranda , 449 N.W.2d 158 (Minn. 1989).
Threats by one spouse that force the other into accepting a property settlement constitute extrinsic fraud, according to Gordon v. Gordon , 625 So. 2d 59 (Fla. DCA 1993). After the parties' marriage was dissolved, the husband sought relief from the judgment, claiming that he agreed to the settlement only because the wife threatened to turn him in to the Internal Revenue Service for falsifying his tax returns to evade federal income tax. The Florida appeals court held that his allegations, if proven, would amount to extrinsic fraud so as to justify relief from judgment. The essence of extrinsic fraud is "the deliberate use of some device to stop an adverse party's voluntary participation in the litigation process," the court said. Id. at 63. A strongly worded dissent asserted that the majority decision would "open the floodgates" for further judicial review of domestic relations cases previously thought to have been settled. Id. at 64 (Polen, J., dissenting).
Concealment of Assets. Most courts have held that a spouse's failure to divulge the existence of an asset to the other spouse constitutes extrinsic fraud. E.g., In re Marriage of Modnick , 33 Cal. 3d 897, 191 Cal. Rptr. 629 (1983) (husband's failure to disclose savings account prevented wife from receiving a fair adversary hearing and deprived her of the opportunity to present her case); Ridgway v. Ridgway , 146 Ill. App. 3d 463, 497 N.E.2d 126 (1986) (property division provisions of decree should be vacated for fraud, where husband had represented that he only had a small amount of cash and did not disclose that he had an $18,000 savings account, as well as an interest in a substantial checking account with his business partner).
Some courts, however, have taken the view that a spouse's failure to disclose the existence of marital assets does not constitute extrinsic fraud so as to allow relief from a judgment dividing property. Turoczy v. Turoczy , 30 Ohio App. 3d 116, 506 N.E.2d 942 (1986) (husband's alleged concealment of assets would not constitute a fraud on the court so as to justify vacating property provisions of divorce decree); Chapman v. Chapman , 692 P.2d 1369 (Okla. 1984) (concealment of assets constitutes intrinsic fraud and thus does not invalidate property division); Johnson v. Johnson , 302 Or. 382, 730 P.2d 1221 (1986) (husband's allegedly false testimony regarding whereabouts of money constituted intrinsic fraud and therefore could not support wife's motion to vacate).
Misrepresentation of Asset Values. As a general rule, fraud is more difficult to establish in the case of misstatements about asset values than in the case of concealment of assets. For example, Indiana's high court held that spouses do not have a duty to make a spontaneous disclosure about the value of marital assets. Selke v. Selke , 600 N.E.2d 100 (Ind. 1992).
The court in Selke rejected the argument that such disclosure is necessary to permit the court to accomplish its statutory duty to divide property in a just and reasonable manner. The equitable distribution law clearly contained no express statutory duty of mandatory disclosure, and such a duty could not be reasonably inferred from the language of the statute, the court said. Recognizing a spontaneous duty of disclosure would place attorneys in a difficult and possibly unethical situation, the court also observed. But it did add a caveat: a duty to disclose asset value information may arise from unique factual circumstances, such as a discovery request for such information or an express provision in the parties' settlement agreement.
Other cases which have rejected claims based on misstatements about asset values include DeClaire v. Yohanan , 453 So. 2d 375 (Fla. 1984) (husband's alleged misrepresentations about his net worth in a financial affidavit could not be characterized as extrinsic fraud); Bodine v. Bodine , 114 Idaho 163, 754 P.2d 1200 (Ct. App. 1988) (wife failed to establish fraud sufficient to warrant setting aside divorce judgment despite proof that husband knowingly understated property values during settlement negotiations, where she did not show that he failed to disclose information essential for her to arrive at an independent valuation of property); Ratarsky v. Ratarsky , 383 Pa. Super. 445, 557 A.2d 23 (1989) (husband's alleged failure to reveal cash surrender value of life insurance policies did not constitute extrinsic fraud so as to authorize opening of divorce decree); Lee v. Johnson, supra , (alleged undervaluation of ranch was not extrinsic fraud). But substantial authority supports the opposite view that is, that misrepresentation of property values amounts to fraud so as to support an attack on the judgment. For example, Maine's high court held that a complaint alleging that the husband led the wife to believe that the marital estate totaled $2 million, when he knew that the parties had accumulated $17 million during the marriage, stated a claim for fraud and deceit. Sargent v. Sargent , 622 A.2d 721 (Me. 1993). Similarly, a Missouri appeals court approved a trial court's decision to set aside a dissolution decree in view of evidence demonstrating that the husband misrepresented the value of his interest in an investment company. The proof demonstrated intrinsic fraud, the court decided, observing that the wife did not have to base her claim on extrinsic fraud since she had filed her motion within one year of entry of the dissolution judgment. Hewlett v. Hewlett , 845 S.W.2d 717 (Mo. Ct. App. 1993).
In Sanborn v. Sanborn , 503 N.W.2d 499 (Minn. Ct. App. 1993), an appeals court held that the wife had proven fraud on the court so as to warrant reopening the dissolution decree based on the husband's misrepresentation regarding the value of his business. Specifically, he told her that his interest in the business was worth only $324,140, but he intentionally failed to disclose his extensive negotiations to sell the business, which was in fact sold after the dissolution for $2.1 million. The misrepresentations misled the trial court and opposing counsel, the court pointed out.
II. Due Diligence and Reliance
As part of the showings necessary to establish fraud, the spouse seeking relief must prove that he or she relied on the misrepresentation. Schmeusser v. Schmeusser, supra ; Billington v. Billington, supra . In many cases, the necessity for a showing of reliance is a major hurdle for the spouse trying to prove fraud.
The case law reflects a basic disagreement among courts about what efforts each spouse must make to investigate the other spouse's representations about assets and their values. One view is that spouses are simply not entitled to rely on each other's opinions about property values. E.g., Bodine v. Bodine, supra (a spouse acts at his or her own risk if he or she accepts the other's valuation opinion as the basis for the property division).
Another view is that each spouse has a duty to inquire about the value of assets and/or to conduct an independent examination of the assets. For example, an Illinois appeals court held that a husband did not commit fraud by failing to disclose a profit-sharing plan, where he did not intend to deceive the wife and she could have discovered information about his financial status on her own but failed to do so. A settlement agreement will only be set aside for fraud if assets could not reasonably have been discovered before judgment, the court said. In re Marriage of Broday, supra , see also Ratarsky v. Ratarsky, supra (no extrinsic fraud where husband disclosed existence of life insurance policies but not their cash surrender value, and wife's attorney did not ask about their value or examine the policies).
Yet another view is that spouses are entitled to rely on the other spouse's disclosures about assets and their values without a duty to validate that information independently. The leading case is Billington v. Billington, supra , where the Connecticut Supreme Court laid out several reasons for abandoning the state's former requirement of due diligence in the discovery of marital fraud.
Other courts, without adopting a blanket rule on the issue of reliance, have held that the spouse seeking relief in the particular case on appeal was entitled to rely on the other spouse's representations. For example, in Hewlett v. Hewlett, supra , the court rejected the husband's argument that the wife had ample opportunity to make her own valuations and was negligent in not doing so. The court explained that the doctrine that equity will not aid the negligent does not apply when the fraud consists of a positive representation intended to induce the allegedly negligent conduct which then results. The wife's reliance on the husband's valuation was not unreasonable, the court decided, because she had no knowledge of the husband's business affairs, which were quite complex. The law did not require her to engage her own expert to value the husband's interests, the court said.
Along the same lines, a New Jersey appeals court held that in the face of a record that showed purposeful fraud, deceit, and concealment by the husband, the wife's failure to discover the true facts could not be characterized as neglect. As a matter of policy, "a court should be particularly cautious about making subjective judgments which aid the conspirators in giving effect to their fraud and as a practical matter ratify the fraud." Von Pein v. Von Pein , 268 N.J. Super. 7, 632 A.2d 830, 834-45 (App. Div. 1993)
Some courts have analyzed the reliance issue in terms of whether the particular spouses still had a confidential or fiduciary relationship at the time of the alleged misrepresentations. For example, in a recent Oregon case holding that a settlement agreement could not be set aside because of the husband's alleged failure to disclose the value of his pension, the court emphasized that at the time when the parties agreed on the division of their property, the wife had moved to another city, had begun cohabiting with a companion, and was completely financially independent of the husband. Under these facts, the court held, there was no fiduciary relationship between the parties as a matter of law, and they were dealing at arm's length. The court added, however, that a spouse may have a fiduciary duty to disclose property, even if the parties' confidential relationship has ended, if that spouse has sole control over an asset and the other party has no knowledge of the asset. Auble v. Auble , 125 Or. App. 554, 866 P.2d 1239 (1993); see also Webb v. Webb , ___ Va. App. ___, 431 S.E.2d 55 (1993) (existence of a special relationship that imposes a continuing duty of trust in settlement negotiations depends on the specific facts of each case).
Availability of Legal Advice. The fact that the spouse seeking relief was represented by counsel in the dissolution proceeding has been cited as evidence that the spouse did not rely on the misrepresentations, or that the spouse's reliance was unreasonable. E.g., In re Marriage of Shaner , ___ Ill. App. 3d ___, 624 N.E.2d 1217 (1993) (no fraud; no reasonable reliance where each spouse was represented by counsel); Wise v. Nirider, supra (husband's failure to disclose pension to trial court did not rise to the level of extrinsic fraud, where wife was represented by counsel in the dissolution proceedings, and the husband was not, and she knew of the existence of the pension plan when her attorney drew up the separation agreement); Despain v. Despain, supra (no reasonable reliance because wife was represented by able counsel). Other courts, however, have allowed spouses to maintain an action or motion based on fraud after equitable distribution even if the spouse was represented by counsel in the equitable distribution proceedings and the attorney undertook little or no discovery on the valuation issue. E.g., Sargent v. Sargent, supra ; Sanborn v. Sanborn, supra ; Hewlett v. Hewlett, supra.
What if the spouse seeking relief did not have counsel in the dissolution proceedings? Lack of counsel, standing alone, is not enough to invalidate an otherwise valid decree. Brown v. Brown, supra (divorce decree may not be set aside solely because the successful spouse failed to furnish counsel to the unsuccessful spouse without request); see also Jeffries v. Jeffries , 434 N.W.2d 585 (S.D. 1989) (property settlement not voidable merely because one spouse was not represented by counsel).
But other cases suggest that the lack of independent legal advice is frequently an important factor that may influence the court's decision about fraud. E.g., In re Marriage of Madden , 211 Mont. 237, 683 P.2d 493 (1984) (concluding that husband's failure to disclose assets constituted extrinsic fraud, court emphasized that husband and wife were represented by same attorney). Conversely, if a spouse was encouraged to seek independent counsel but did not do so, that fact will weigh against a finding of fraud. E.g., In re Marriage of Broday, supra.
A divorcing individual who is an attorney will be particularly vulnerable to a later fraud claim if his or her spouse is not represented at the time when the property settlement agreement is executed. See Webb v. Webb, supra (husband's position as attorney and advisor to wife placed him in the category of one who continues in a special relationship with his wife, and, as such, he had an affirmative duty to make a full disclosure to wife as to the value of his pension).
III. Miscellaneous Issues
Procedure. Procedural avenues for relief from judgment could include a motion for relief under a state counterpart to Fed. R. Civ. P. 60(b), which authorizes relief based on fraud, or an independent action alleging fraud.
According to one view, a motion in the dissolution action is the only mechanism for seeking relief based on fraud. For example, Indiana's high court held that a wife could not file an independent action against her former husband's estate seeking damages because of his alleged fraud in withholding information from her concerning his net worth. This was an impermissible collateral attack on the judgment, the court said, declaring that the wife's sole avenue of redress was to apply for modification of the divorce decree. Dodd v. Estate of Yanan , 625 N.E.2d 456 (Ind. 1993); see also Smith v. Smith , 334 N.C. 81, 431 S.E.2d 196 (1993) (for intrinsic fraud, judgment must be attacked by motion and not by collateral action).
Some cases, however, permit an independent suit. An example is Sargent v. Sargent, supra , where the wife filed a civil action seeking $8.5 million, one-half of the amount she claimed comprised the marital estate at the time of the divorce. In her action, she alleged that the husband had induced her to execute a separation agreement by misrepresenting the extent of the marital property. Vacating an order of dismissal, the Supreme Judicial Court of Maine held that the state rule on reopening judgments, which does not permit a motion for relief based on fraud after one year, does not limit the court's power to entertain an independent action for fraud and misrepresentation. See also Chrun v. Chrun , 751 S.W.2d 752 (Mo. 1988) (independent suit in equity may be maintained to set aside dissolution judgment).
Discovery; Temporary Injunction. After filing a postdecree motion or action alleging fraud, the spouse seeking relief has a right to discovery. For example, in a recent Illinois case where the wife filed a petition for relief alleging that the husband had concealed specified real property in the dissolution proceeding, the appeals court held that she was entitled to "liberal discovery, oral and written, surrounding the acquisition of the undisclosed property, as well as discovery which traces the source of the funds used in such acquisition, the stream of any funds obtained in connection with the development, sale, or disposition of such property or any part thereof, the tracing of the disposition of the proceeds of [the refinancing of other real property, which proceeds were allegedly used to purchase the undisclosed realty], and any other discovery which the trial court deems necessary to do justice between the parties." In re Marriage of Gidlund , 244 Ill. App. 3d 675, 614 N.E.2d 315, 319 (1993).
When a former spouse who is accused of fraud refuses to cooperate with discovery, that refusal can furnish justification for the other spouse to seek preliminary injunctive relief to prevent the dissipation of assets during the proceeding. Kennedy v. Kennedy , 616 N.E.2d 39 (Ind. Ct. App. 1993), is illustrative. After the parties' divorce, the wife filed a petition to set aside the dissolution decree, alleging that the husband had misrepresented the true value of his pension benefits. Some 14 months later, after a lengthy and largely unsuccessful discovery period, the wife sought and was granted a preliminary injunction enjoining the husband from dissipating his pension. The Indiana appeals court held that the trial court's reliance on the pleadings, motions, and discovery results was proper, and that those requests and responses provided the trial court with the foundation it needed to grant injunctive relief, in that they showed that the husband was not willing to turn over the requested valuation information, and that he adamantly maintained that the wife was not entitled to any greater amount than she had received in the property division.
The husband cited Selke v. Selke, supra , which held that there is no statutory duty to spontaneously disclose asset value information, but the appeals court found Selke distinguishable since it involved a claim that the husband failed to volunteer valuation information. Unlike that case, the wife here claimed that the husband deliberately misrepresented the pension's value. "Were we to adopt [the husband's] position, that assets divided or received through property settlements cannot be subject to injunctive restriction until the decree is formally modified or set aside, one ex-spouse could defraud the other and then dissipate the assets without fear of injunction before the allegations of fraud could be proven at trial." Kennedy v. Kennedy, supra , 616 N.E.2d at 43. Preliminary injunctions are "particularly well-suited to preserve the status quo when allegations of deliberate misrepresentation arising from the division of marital property have been levelled," the court said. Id.
Scope of Relief. The scope of relief granted when fraud is proven is a discretionary matter which depends upon the facts of the particular case. When the spouse seeking relief proves fraud which made the entire property division unfair, the court generally vacates the entire property settlement agreement. E.g., Ridgway v. Ridgway, supra (property settlement agreement failed to provide a fair and even distribution of parties' assets; husband had testified to $357 in assets while he had a net worth in excess of $100,000).
But when the case involves concealment of a specific asset or misrepresentation about a single asset, the court has discretion to fashion a remedy limited in scope. See In re Marriage of Gidlund, supra (no abuse of discretion to open judgment only as to undisclosed property rather than opening entire judgment, where record did not show that facts available to wife as to the extent of assets at the time of the execution of the property settlement agreement were insufficient to allow her a meaningful choice).
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