Your CFL Credential has prepared you for every financial aspect of divorce cases, including potential fraud, which can be hard to pinpoint unless you know what to look for.
As in the Texas Court of Appeals case of Mason v. Mason, many layers of deception may be involved. The court decided whether to uphold a finding of constructive fraud and order for reimbursement based on payment by and loans to the ex-husband’s limited liability company (LLC).
Jeff and Keri Mason married in 2010, and Keri filed an original petition for divorce in 2016. She later changed her petition to add claims for “waste and/or constructive fraud” and for reimbursement. Before and during the marriage, Jeff was the sole member and manager of a limited liability company, 338 Industries, LLC.
The final hearing before the trial court centered on property issues related to expenses and payments Jeff made by and to the company.
The trial court found the ex-husband spent more than $750,000 of company funds on travel, gambling, hotels, bars, and adult entertainment, which it described as “wasteful.” Because they were Jeff’s personal expenses paid by the LLC, they were member draws and amounted to distributions. Distributions are considered community income.
On top of that, Keri didn’t know about or consent to the expenditures.
Jeff argued there wasn’t enough evidence to call the payments distributions. The LLC paid the establishments directly with its credit card. He argued the LLC and its accountants considered the expenditures legitimate business expenses. The company’s accountant testified she had deducted the non-gambling expenses on the company’s tax returns and the IRS didn’t question them.
Mr. Mason testified that he incurred $314,740 in gambling losses while on business trips and that he considered them “nondeductible business expenses.” He didn’t provide any evidence that the company benefited from the expense payments. At trial, he agreed the gambling expenses should classify as member draws.
The divorce decree awarded Keri 55 percent of the community estate, and 45 percent to Mr. Mason. In dividing the assets, the court first granted Keri’s constructive fraud claim based on Jeff’s “wasteful” expenditures and accordingly, added $752,324 to the community estate. The trial court also defined 338 Industries, LLC as Jeff’s separate property and reimbursed the community estate $283,051from his separate estate for outstanding loans made to 338 Industries.
In five related and overlapping issues on appeal, Jeff challenged the trial court’s findings of fact and conclusions of law related to Keri’s constructive fraud and reimbursement claim. In these issues, Jeff asserted there wasn’t enough evidence to support the decision.
Texas Court of Appeals Ruling
The appellate court upheld the trial court’s verdict and overruled Jeff’s issues.
In his appeal, Mr. Mason didn’t dispute that 338 Industries paid some expenses for gambling, hotels, bars, and adult entertainment, namely strip clubs, nor did he deny that he did so without Keri’s consent.
As the court noted, “Instead, in two sub-issues, Jeff asserts that (1) ‘[t]he trial court’s finding that Jeff wasted ‘community resources’ is both factually unsupported and legally flawed,’ and (2) the trial court’s waste award was an abuse of discretion ‘because the evidence conclusively established the non-gambling debts were legitimate business expenses.’”
Jeff challenged the trial court’s characterization of the funds used to pay for the expenditures as community property. He believed there wasn’t enough evidence to show that the payments for the expenses by 338 Industries were distributions and therefore community property because he used his company credit card. He pointed to evidence in his trial court testimony showing that 338 Industries and its accountants treated them as business expenses. He also didn’t offer a reason for classifying the hotel and strip club expenses separately from the gambling losses.
The appeals court decided that Jeff hadn’t shown proof the expenditures were “legitimate business expenses,” and that instead they were his “personal expenditures.” The trial court ruled the payments constituted distributions from the LLC. There was no abuse of discretion in finding that Jeff committed constructive fraud because distributions are community property and Keri didn’t know about them. Jeff argued the LLC was a separate entity and the court abused its discretion in ordering reimbursement from his separate property. He believed there was no evidence his separate estate benefited from the loan.
Further, he stated that Keri hadn’t established that the value of his separate estate increased by the amount of the loan. The appeals court noted the statutory requirement to measure reimbursement based on increased value only applies when one marital estate benefits another. The appeals court found no abuse of discretion in calculating the reimbursement claim.
Jeff also asserted that the reimbursement award was inequitable because it didn’t account for the benefit the community estate received from the company. He noted that the community benefited from wages, draws, and retirement assets from his interest in the company. The appeals court agreed that the community estate benefited, but also believed the trial court could have found that the loans let the business continue running after the divorce, and thereby allowed Jeff to continue enjoying the same benefits.
“In evaluating a claim for reimbursement, the court shall determine whether to recognize the claim and order a division of the claim ‘in a manner that the court considers just and right.’…we cannot conclude that the trial court abused its discretion in concluding that the equities do not justify an offset against Keri’s claim for reimbursement. We overrule Jeff’s issues on appeal challenging the trial court’s decision to reimburse the community estate.”
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Cases.justia.com. (2019). [online] Available at: https://cases.justia.com/texas/third-court-of-appeals/2019-03-17-00546-cv.pdf?ts=1556885605 [Accessed 17 Jul. 2019].