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Unintentional Conduct as Dissipation of Marital Property in Divorce
© 2004 National Legal Research Group, Inc.
As a general rule, the courts can divide only property which exists at the time of divorce. An exception to this rule applies, however, when one spouse wrongfully dissipates an asset in anticipation of a coming divorce. In this situation, the court can clearly consider the dissipation as a factor in dividing the other marital assets. Many states will even permit the court to treat the dissipated asset as if it still existed, and award it to the dissipating spouse as part of his or her share of the marital estate. See generally Brett R. Turner, Equitable Distribution of Property 6.30 (2d ed. 1994 & Supp. 2003).
Most instances of dissipation involve intentional misconduct: a deliberate attempt by one spouse to steal marital property. A close variant is dissipation through waste: reducing or destroying the value of a marital asset. In both situations, the purpose behind the dissipating spouse's actions is to prevent the other spouse from obtaining marital property rights in the asset involved.
In a growing number of cases, however, the courts are considering whether unintentional conduct can amount to dissipation of marital property. The majority rule, and the correct answer in at least some cases, is that it can. A recent Tennessee case provides a good entry point for reviewing the cases.
In Flannary v. Flannary, 121 S.W.3d 647 (Tenn. 2003), the parties owned a savings account with a balance of $48,000. The husband withdrew the funds completely, and they disappeared shortly therefore. The court explained:
Husband testified that he began drawing money out of the account in September of 1999 in response to the Y2K scare. He withdrew $8,000 to $10,000 at a time in hundred-dollar bills and placed the funds in his bedroom drawer. He testified that he planned to re-deposit the money in January of 2000. However, when he went to do so he discovered that the money was gone. Husband admitted that keeping the money in the drawer was "stupid" and that he never thought of putting the money in a safe deposit box. Husband alleges that Wife is responsible for taking the money, but Wife has denied this allegation throughout the proceedings. Wife contends that she did not know that Husband had withdrawn the money until he accused her of taking it.
Id. at 649. Neither party was able to present any positive evidence that the other party had taken the funds. The evidence showed only that the funds disappeared at a point in time when the husband controlled them.
The trial court held that the funds were a marital asset, because the husband controlled the money at the time it disappeared. But the court did not, and on the record probably could not, conclude that the husband was guilty of deliberate misconduct. The trial court in effect held that regardless of whether the funds were lost through intentional or unintentional misconduct, the husband was still responsible for their loss. A majority of the Tennessee Court of Appeals reversed, holding that the trial court erred by dividing funds which did not exist at the time of the divorce. A dissenting justice would have held that the husband's conduct was dissipation. Flannary v. Flannary, 2003 WL 132485 (Tenn. Ct. App. 2003).
On further appeal, the Tennessee Supreme Court reached a middle result. The court agreed with the majority below that funds which do not exist at the time of divorce generally cannot be divided:
It is undisputed that the money was missing before Husband filed for divorce, and both parties testified that the money was not in their possession. Furthermore, the trial court concluded that anything could have happened to the money and stated that "neither one of [the parties] knows what happened to it." Thus, it appears from the record that the property was not owned by either of the parties as of the date the complaint for divorce was filed. Accordingly, this property does not fit within the definition of "marital property" and should not have been divided as part of the marital estate.
121 S.W.3d at 650.
This conclusion did not mean, however, that the court of appeals' majority reached the correct end result. The court cannot divide an asset which no longer exists, but it can consider the reasons for the loss as a factor in dividing other assets:
[The trial court's] findings suggest that it was Husband's careless handling of the funds that caused their disappearance and that the trial court regarded Husband's conduct as relevant in considering the equities between the parties. Husband's careless handling of the funds could be characterized as a failure to preserve a marital asset under Tennessee Code Annotated section 36-4-121(c)(5). See Black's Law Dictionary 1184-85 (6th ed. 1990) (defining "preservation" as "[k]eeping safe from harm; avoiding injury, destruction, or decay; maintenance . . . not the creation, but the saving of that which already exists, and implies the continuance of what previously existed"); see also Barker v. Barker, 66 Ark. App. 187, 992 S.W.2d 136, 138 (1999) (explaining that the trial court's division of the proceeds from the sale of the marital home was based on the Husband's failure to preserve marital assets by wasting the parties' savings). In the alternative, since Husband's careless handling of the funds affected the equities between the parties, such handling could be regarded as a necessary factor in considering those equities [under Tennessee's catch-all equitable distribution factor]. See Tenn. Code Ann. 36-4-121(c)(11) (2001).
Id. at 651. "Although we hold that the funds themselves are not marital property that can be divided between the parties, the trial court may properly consider Husband's careless handling of those funds in distributing property that does constitute marital property." Id. Thus, the court of appeals correctly found dissipation, and it erred only in holding that the missing funds could themselves be divided. The case was remanded with instructions to exclude the missing funds from the marital estate, and then to consider the husband's conduct as a factor in dividing the other property.
A significant majority of cases from other jurisdictions agrees with Flannary that the reckless or negligent mishandling of funds constitutes dissipation. "Waste and misuse are the hallmarks of dissipation. Our legislature intended that the term carry its common meaning denoting 'foolish' or 'aimless' spending." In re Marriage of Coyle, 671 N.E.2d 938 (Ind. Ct. App. 1996). "[I]ntent is not an essential element of dissipation." Id. at 943. "Where the wasteful dissipation of assets can be traced to a party's poor judgment, unwillingness or inability to manage, that portion of the amount dissipated must be charged against said party's equitable share." Strang v. Strang, 222 A.D.2d 975, 635 N.Y.S.2d 786, 789 (1995).
Several fact patterns seem to be recurring on the facts of the cases. Negligent failure to place an asset in a safe place was at issue not only in Flannary, but also in In re Marriage of Walls, 278 Mont. 413, 925 P.2d 483 (1996), in which the wife claimed that $30,000 in marital cash and jewelry had been stolen from her car. The court suspected that the wife took or wasted the assets at issue, but held that dissipation would still result even if a third party were responsible, since the wife was negligent in leaving property of such value unattended in her car. Of course, intentional dissipation can be found in this situation if the court finds on the facts that the guilty spouse actually took the asset. Still, reliance upon negligent dissipation in these cases allows the court to avoid the difficult factual issue of whether the asset was taken by the dissipating spouse or by a third party.
The most common fact pattern involving negligent dissipation is the failure to maintain a marital asset during the pendency of the divorce case. Lack of maintenance is clearly not intentional dissipation, as there is no express proof in these cases that the nonmaintaining spouse was acting for the purpose of harming the other spouse. Nevertheless, the cases all hold that the failure to maintain an asset, even if only negligent, is a factor to consider in dividing the marital property. See Hansen v. Hansen, 207 A.D.2d 824, 616 N.Y.S.2d 637 (1994) (husband sold marital apartment building at a loss after negligently allowing it to fall into disrepair); Grossnickle v. Grossnickle, 935 S.W.2d 830 (Tex. App. 1996) (holding wife responsible for loss of value of home in her care; wife had neglected home, and her neglect had led to damage by vandalism); Mir v. Mir, 39 Va. App. 119, 571 S.E.2d 299 (2002) (husband failed to take proper care of home, and made improvements which ultimately reduced its value; proper to award wife 95% of marital equity).
Another common fact pattern is unreasonable investments. Where marital funds are invested in an enterprise which stands no reasonable chance of success, most decisions hold that the investment is dissipation, even if the investment was not made for the purpose of harming the innocent spouse. See Santiago v. Santiago, 749 So. 2d 584 (Fla. Dist. Ct. App. 2000) (improvident loan to cousin); Gadomski v. Gadomski, 245 A.D.2d 579, 664 N.Y.S.2d 886, 888 (1997) (husband lost 25% of parties' net worth in "rash and unreasonable" investments in "penny stocks"); Roe v. Roe, 311 S.C. 471, 429 S.E.2d 830 (Ct. App. 1993) (investment in failing pizza business); Booth v. Booth, 7 Va. App. 22, 371 S.E.2d 569 (1988) ($60,000 loss in speculative stock market venture); see also Lawson v. Lawson, 288 A.D.2d 795, 732 N.Y.S.2d 753 (2001) (husband borrowed money to start new business without wife's consent; business had substantial negative net worth at time of divorce; proper to give business a value of zero, and ignore the negative balance).
Note that where an investment stands a reasonable chance of success, dissipation is not present. The marital estate would clearly have benefited if the investment succeeded, and it must likewise bear the cost when the investment fails, so long as a reasonable chance of success existed when the investment was made. The good-faith reasonable investment of marital funds is never dissipation, even if the investment ultimately loses money. See Goldman v. Goldman, 248 N.J. Super. 10, 589 A.2d 1358 (Ch. Div. 1991), aff'd, 275 N.J. Super. 452, 646 A.2d 504 (App. Div. 1994) ($400,000 was invested in good-faith but unsuccessful attempt to maintain health of marital business; no dissipation); Nelson v. Nelson, 795 So. 2d 977 (Fla. Dist. Ct. App. 2001) (mere imprudent investment is not dissipation); Grunfeld v. Grunfeld, 255 A.D.2d 12, 688 N.Y.S.2d 77 (1999), aff'd, 94 N.Y.2d 696, 709 N.Y.S.2d 486, 731 N.E.2d 142 (2000) (investment losses during marriage were not dissipation); Hoverson v. Hoverson, 2001 ND 124, 629 N.W.2d 573 (N.D. 2001) (mere mismanagement of funds was not dissipation); McDavid v. McDavid, 333 S.C. 490, 511 S.E.2d 365 (1999) (husband's investment in failed business was not dissipation; no evidence that husband acted in bad faith). Since these cases slightly outnumber the cases finding dissipation, it appears that the courts are finding an investment to be unreasonable only in clear cases.
The most unique example of negligent dissipation in recent years is Welsh v. Welsh, 135 Md. App. 29, 761 A.2d 949 (2000). The husband in Welsh filed a defamation action against the wife's counsel during the pendency of the divorce case. The action was ultimately successful, as the husband received a settlement of $22,500. The problem, however, was that he spent $74,000 in marital funds on attorney's fees. Since the husband obtained a positive settlement, it seems clear that he was acting for the purpose of vindicating himself and not for the purpose of harming the wife by destroying marital assets. Still, a spouse who incurs a cost of $74,000 to acquire an asset worth $22,500 is negligent by any standard. The court found dissipation, expressly receding from earlier published opinions suggesting that dissipation must be intentional.
The most common fact pattern involving reckless dissipation is excessive gambling with marital funds. These cases are hard to categorize, for, in at least some of them, the funds were gambled away for the purpose of outright waste. In other cases, however, the gambling spouse did not intend to lose, but was reckless or sometimes negligent in failing to realize that the chance of winning did not justify the much greater likelihood of losing. The cases mostly ignore the distinction, and simply hold that unreasonable gambling with marital funds is dissipation, regardless of the gambling spouse's state of mind. E.g., In re Marriage of Bartley, 712 N.E.2d 537 (Ind. Ct. App. 1999) (excessive investments in betting pools on NCAA and NASCAR events); In re Marriage of Bell, 576 N.W.2d 618 (Iowa Ct. App. 1998) (proper to award husband $101,726 and wife $118,040; husband gambled away $2,000 on a single night, and $600 on the night before trial); Harris v. Harris, 261 Neb. 75, 621 N.W.2d 491 (2001).
The same analysis applies to expenditures on a paramour. These expenditures will sometimes be made for the deliberate purpose of harming the innocent spouse, but more commonly they are made for the reckless purpose of enjoying high living with a more desirable person. The latter purpose seems especially common when the expenditure is made early in an extramarital affair, before divorce is on the horizon. Once again, the cases generally ignore the distinction between intentional and reckless expenditures, finding that funds spent on paramours are almost automatically dissipated. E.g., In re Marriage of Charles, 284 Ill. App. 3d 339, 672 N.E.2d 57 (1996) (husband paid debts and purchased home for paramour); McNair v. McNair, 987 S.W.2d 4 (Mo. Ct. App. 1998) (where husband spent marital funds on gifts to paramour, proper to award wife 55% of the marital estate); Basile v. Basile, 199 A.D.2d 649, 605 N.Y.S.2d 133 (1993) (where husband spent substantial sums on long-standing paramour, proper to award wife 65% of the marital estate).
Note that the voluntary consent of the innocent spouse is a full defense to any claim of dissipation, intentional or otherwise. E.g., Askinazi v. Askinazi, 34 Conn. App. 328, 641 A.2d 413 (1994) (wife consented to husband's gambling losses); Cerratani v. Cerratani, 221 A.D.2d 814, 634 N.Y.S.2d 228 (1995) (wife consented to husband's failed investment by voluntarily participating in it).
Scattered case law exists holding that unintentional conduct cannot ever constitute dissipation. The clearest case is Skokos v. Skokos, 332 Ark. 520, 540, 968 S.W.2d 26, 36 (1998), which defined "dissipation" as a transfer made "with the specific intent to defraud [the innocent spouse] of her interest in that property." Skokos remains good law on the books, but a later case found that reckless gambling was dissipation without making any specific finding of an intent to harm the other spouse. Keathley v. Keathley, 76 Ark. App. 150, 61 S.W.3d 219 (2001). (The court held that the effect of the gambling was a fraud upon the wife's property rights, but there is no finding that the husband acted for the intentional purpose of harming the wife, rather than for the reckless purpose of enjoying himself, regardless of the financial consequences to his wife and family.) The Arkansas cases therefore are not insisting upon clear proof of intent to harm in all cases. The law on the books, however, requires such proof.
Kentucky initially held that dissipation exists only "where there is a clear showing of intent to deprive one's spouse of his or her proportionate share of the marital property." Robinette v. Robinette, 736 S.W.2d 351, 354 (Ky. Ct. App. 1987). The court adopted a different rule in Brosick v. Brosick, 974 S.W.2d 498, 502 (Ky. Ct. App. 1998), holding that "[t]he concept of dissipation requires that a party used marital assets for a non-marital purpose." The concept of a nonmarital purpose is much broader than a deliberate intent to harm the innocent spouse. A similar result was reached in Bratcher v. Bratcher, 26 S.W.3d 797 (Ky. Ct. App. 2000), which relied on Brosick and distinguished Robinette. Both Brosick and Bratcher found dissipation based upon the existence of a nonmarital purpose, without making a clear finding of an intent to harm. The author therefore does not construe present Kentucky law to require a finding of an intent to harm the innocent spouse as an absolutely necessary element of dissipation.
The leading case in the District of Columbia is Herron v. Johnson, 714 A.2d 783 (D.C. 1998), which held:
Dissipation under 16-910(b) is the disposition of marital property by a spouse in a manner intended to "circumvent the equitable distribution of the marital estate." Cox, 639 A.2d at 99. This may be shown by prima facie evidence, unrebutted, that the spouse used marital property for his or her own benefit and for a purpose unrelated to the marriage at a time when the marriage was undergoing an irreconcilable breakdown.
Id. at 786. The first sentence of this quotation suggests that an intent to harm is required. The second sentence suggests that an intent to harm can be proven by the existence of a nonmarital purpose. Since a nonmarital purpose is much broader than an intent to harm, it appears that the existence of a nonmarital purpose is the key element. But the point is not entirely clear from the court's language.
Should conduct which is not motivated by an intent to harm the innocent spouse ever be treated as dissipation? In at least some situations, the answer is clearly "yes." The husband who gambles excessively with marital funds, and the wife who spends marital funds to support her paramour, do not act for the purpose of inflicting harm. But they are recklessly indifferent to the harm which their actions are certain to inflict upon their spouse and family. No state has ever insisted that dissipation must be intentional in a case involving reckless gambling or expenditures on a paramour. Indeed, both Kentucky and Maryland receded from a strict intent requirement when they first heard a case presenting a fact situation suggesting recklessness. Welsh; Brosick; Bratcher.
The Kentucky and Maryland experiences are a good indication that adoption of a strict intent requirement is a significant mistake. Intent to harm should certainly be relevant to the consequences of dissipation; if those who dissipate property deliberately are not significantly penalized, there will be no effective deterrent to future misconduct. But, for extremely sound reasons, no court is prepared to hold that there is no remedy for expenditures made with reckless disregard of the consequences to the spouse and family. "First, do no harm," is certainly the first rule for managing marital finances, but it is also not the last. Some expenditures have such a foreseeably unfair negative effect upon the marital estate that they should constitute misconduct, even if the spending spouse did not act for the express purpose of inflicting harm. At a minimum, unreasonable gambling and expenditures upon paramours should fall into this category.
The harder question is whether expenditures which are merely negligent should constitute dissipation. There is a clear trend to give the spending spouse the benefit of the doubt, and find dissipation only where a strong case of negligence is presented. But the courts are reluctant to give no remedy for such major episodes of misconduct as massive failure to maintain marital property during separation, or significant expenditures upon risky investments which any reasonable investor would know are substantially likely to result in losses. Routine financial management, undertaken in good faith, should hardly ever constitute dissipation. But the eve of divorce is not a proper time at which to take extreme risks with marital funds, particularly when there is no history of risky investment during the marriage. Again, the better rule is to give the trial court discretion to find dissipation in at least the clearest cases of grossly negligent misconduct.
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