Problems of Hidden Assets in Divorce Litigation

by Nina Dodge Abrams
Abrams, Yu and Associates, P.C.

INTRODUCTION

Hiding marital assets during the process of a divorce is contrary to the rules of ethics and Michigan law.  Nevertheless, some clients and, even worse, some lawyers believe greed and punishment of a spouse is more important than fair play.  Hidden assets are those not easily found and are frequently placed in the hands of third parties or behind false documents.

Looking for hidden assets is frustrating, difficult, complex, and confusing.  When the asset is found, the laws related to proving that the asset is part of the marital estate are also complex and confusing.  One must go through the minefields of ethics regulations, rules of evidence, discovery, and trial procedures.  The applicable law seems simple – that one party cannot hide assets to the detriment of another.  Proving the existence of an asset and proving it is part of the divisible marital estate are the challenges.

Finding hidden assets, unreported or under-reported income, or concealed or undisclosed property is an old problem. This article concentrates on missing property.  The cases fall into two categories, those between marital parties and those that involve a third party.  In the latter situation, the techniques involve a third party conspiracy, perhaps a fraudulent conveyance, or the use of a trust for a third party.  There are no limits to the many ways that people lie and cheat. 

Another major aspect of a project to find hidden assets is planning a budget and seeking a cost-benefit result.  At the beginning of a case, you are “fishing” for information with interrogatories, depositions, subpoenas, requests to produce, and motions to compel production for information about the marital estate and the separate estates.  If your client does not walk in with a list of assets and debts, along with the documents to prove their existence, the discovery required in identifying the “easy to find” estate is costly.

Finding all of the assets becomes a matter of asking the right questions.  The search goes beyond finding the obvious marital estate.  Because of  your client’s suspicion or because already-found items give some hint that “more” exists, you must give careful consideration to whether you should expend more effort. At what cost is the effort worthwhile to continue?  Hiring experts to search is expensive.  Hiring experts to value and testify is more expensive.  At some point, your client, and likely you, may be throwing good money after wasted effort.  Remember, the right to decide to spend the money is your client’s decision.  Nevertheless, the attorney decides what is to be done and the most effective way to find the information.

When the unusual circumstances related to hidden assets surface, try to get your client=s agreement with your discovery plan in writing.  Do not set yourself up to be second-guessed when your discovery plan or ability to prove the existence of a known asset runs into trouble.  It is hard and tedious work that the client does not always understand or appreciate.  At each stage you have to discuss with the client the evidentiary issues necessary to prove that the asset exists and to prove that the marital estate should include the asset.  Also, explain to your client your ethical responsibility to keep the opposing attorney informed of your discovery efforts.  Remember, the goal of identifying the assets and valuing the assets is to decide which marital property is subject to division. 
 
Family law attorneys must educate their clients that hiding assets from an opposing party is not ethical or legal and that this behavior will not be tolerated.  The courts are usually harsh toward clients who are uncooperative or behaving deviously.  However, the burden to discover hidden assets is on the proponent who is claiming the other party is hiding assets. The Michigan Court Rules and the Michigan Rules of Evidence provide tools to help the seeking attorney, but the attorneys and clients must balance the costs of going forward with the possible benefits of finding the information.

STATE OF THE LAW IN YEAR 2000

Between Marital Parties

In the cases between marital parties, Sands v. Sands, 192 Mich. App. 698, 482 N.W.2d 203 (1992), aff'd 448 Mich. 30, 497 N.W.2d 493 (1993) is the Michigan landmark case. The case outlines the procedural steps necessary to find and use hidden assets to increase the marital estate.  Defendant, Mr. Sands, deliberately hid assets during the primary trial period. When assets were found after the trial, the court reconsidered the property division at a new partial trial.   The Michigan appellate court awarded the plaintiff all of the found assets.  The Supreme Court then affirmed the judgment for Mrs. Sands. Nevertheless, it cautioned that in each individual divorce case the circuit court must equitably divide the assets. The burden is on the party seeking redress to show the opposing party behaved so egregiously that the court should award the complaining party the value of the entire found asset.   No automatic rule exists requiring the party concealing the asset to forfeit the entire concealed asset to the other party.

Also, at the original trial, the circuit court considered whether it should award Mrs. Sands her attorney’s fees.  She had increased costs because of her husband’s behavior in failing to cooperate with discovery and engaging in devious and deceptive conduct.  While the court divided the known assets equally, it directed the defendant to pay 70 percent of his wife’s attorney’s fees.
 
Another series of cases, Wiand v. Wiand, 178 Mich. App. 128, 443 N.W.2d 464 (1989) (Wiand I) and Wiand v. Wiand, 205 Mich. App. 360, 552 N.W.2d 132 (1994) (Wiand II), also illustrates the procedural problems in seeking to increase the marital estate with hidden assets.  In 1987, the court entered an order divorcing the plaintiff Lenore Wiand from defendant Ronald Wiand.  The trial spanned several days. There were 15 witnesses and 85 exhibits.  The trial court found that defendant engaged in a pattern of conduct throughout the proceedings designed to harass the plaintiff and frustrate her efforts to obtain meaningful discovery of his assets and his net worth.  The records also showed that defendant repeatedly violated the court’s orders for support, discovery, and injunctive relief. The defendant obviously displeased the trial court with his attempts to evade proper discovery and to shelter assets.

One reason this case is important is that the court allowed future post-judgment discovery. Another reason is that the trial court adjudicated the rights of Mr. Wiand’s brother who was found to hold assets for the defendant.
 
The court ruled, based on limited information, that Ronald Wiand’s equitable interest in certain assets was $300,000.  However, it permitted both parties to conduct more discovery, seek independent audits, or offer additional proof about the value of the defendant’s equitable interest post-judgment.  The appellate court in Wiand I repeated the general rule that property settlement provisions are final and cannot be modified.  It concluded that the lower court improperly allowed for an unlimited post-judgment discovery period during which either party could challenge the court’s estimated valuation.  It found such a provision was inconsistent with Michigan Court Rule 2.612, which addresses the various ways in which one may seek relief from the court’s judgment.  On July 6, 1989, the Court of Appeals affirmed the judgment of divorce but it struck the provision in the judgment allowing for an unlimited post-judgment discovery period.

Mrs. Wiand found new assets after the trial and the division of the marital estate. On July 28, 1989, she filed a new complaint in the Oakland County Circuit Court against her former husband.  She sought damages based on fraud, misrepresentation, interference with advantageous relationships, conversion, and violation of court orders.  These allegations arose out of the defendant’s attempts to hide his assets from distribution in the divorce action.  The court denied the plaintiff her relief, and rejected her three motions. One motion was to add parties. The second motion was to set aside, modify, or obtain relief from the original divorce decree on the basis of newly-discovered evidence and fraud.  The third motion was for additional alimony based on changed circumstances and to amend her complaint in the fraud action to add a claim for independent equitable relief.  The matter moved to the appellate court.

In 1994, in Wiand II, the appellate court, in discussing the periods for filing an action for relief, said that on the facts Mrs. Wiand had timely filed her motions for relief.  It held that on remand, the trial court should consider the plaintiff’s allegations regarding undisclosed assets and whether such assets were part of the marital estate. The appellate court also said that, as in the instant case, it is proper to include a provision in a judgment of divorce stating that the judgment does not cover concealed assets.  Such assets may be the subject of future proceedings.

When Judge McKenzie, who sat on both panels, considered the contrasting rulings in Wiand I and Wiand II, he explained the emphasis on finality in the initial judgment was inconsistent with the public policy to combat the concealment of assets established later by the Supreme Court in Sands.

Third Parties

When it comes to the rights of third parties, in contrast to the rights of the opposing party, the general rule is that “it is beyond the power of a trial court to adjudicate the rights of third parties in a divorce action.”  However, the court makes an exception whenever the aggrieved litigant can show that a third party conspired with one party to defraud the other of his or her rightful interest in the marital estate.  In Donahue v. Donahue, 134 Mich. App. 696 (1984), the defendant husband attempted to conceal certain bonds with a substantial monetary value by leaving them with his girlfriend.  The defendant’s parents, who had given him the bonds, also tried to conceal them from the plaintiff wife and the trial court. The court included the bonds in the marital estate.  The third parties, the parents and the girlfriend, had legal counsel.

In Wiand I, supra, the appellate court upheld the trial court’s determination that assets allegedly belonging to the defendant’s brother were marital assets. The major distinction between this case and Donahue, supra, was the lack of representation for the brother.  The plaintiff never made the defendant’s brother a party to the divorce action. An attorney did not represent him at the trial. However, the brother did testify on at least two separate days and was subjected to thorough cross-examination. The court held that the lack of legal representation was not significant. Wiand I, 178 Mich. App. at 148. Both cases fall into an exception to the rule that a court cannot affect the rights of non-parties. That is, the court can rule that a third party has conspired with one spouse to deprive the other of his or her rightful interest in the marital estate.  Thereafter, the court can equitably divide the marital assets.
 
In Doe v. Ewing, 206 Mich. App. 597, 517 N.W.2d 605 (1994), Mr. Ewing, who was found to have raped Jane Doe, transferred his solely-owned stock in his company to himself and his wife by the entireties to avoid paying damages to Jane Doe. The trial court did not find the evidence of the transfer credible.  Although the defendant paid funds from a joint bank account, there was no documentation of the wife’s part-time work, no written evidence of a loan, and the wife was not made an owner or partner until after the defendant committed his tort. Although this was a case where a defendant tried to transfer money into a marital estate, a defendant might use the same method to transfer money out of the marital estate. An attorney must also consider the problems of a fraudulent conveyance in trying to find assets.

Mr. Ewing, the defendant, and his wife, the garnishee defendant, appealed an order setting aside a conveyance of stock.  He claimed the order violated the Uniform Fraudulent Conveyance Act, MCL 566.11 et seq.; MSA 26.881 et seq.  The appellate court affirmed the order. When a debtor places property in an entireties estate while insolvent, or when the transfer renders the debtor insolvent, he has committed a fraud upon his creditors and the creditors may attack the property.  Once a transfer is proven fraudulent, the transfer may be set aside as against any person except a purchaser.

Thames v. Thames, 191 Mich. App. 297, 477 N.W.2d 496 (1991) is another exception to the general rule that a court has no authority to adjudicate the rights of third parties in divorce actions.  Where one spouse has acted to deprive the other by transferring marital property into a trust for the benefit of a third party, the court may include the asset in the marital estate.

One month before Mrs. Thames filed for divorce, her defendant husband placed 138 shares of Ford Motor Company, a bank account worth $5,081, and his employer-provided life insurance into an irrevocable trust for the parties’ minor child.  The court found the corpus to be an asset of the marital estate subject to division between the parties.  Further, it awarded plaintiff attorney’s fees.  The record supported a finding that plaintiff was in need of financial assistance to defend the action.  It found that defendant’s actions caused plaintiff to incur debts.  The court also found that the defendant unnecessarily prolonged the proceedings by making spurious claims and allegations.
 
In McLain v. McLain, 108 Mich. App. 166, 310 N.W. 2d 316 (1981), the court, in speaking of bank accounts in the daughter’s name, looked to whether the daughter had an independent cause of action to enforce her rights to the account, whether the transferor had established an irrevocable trust, and who inherited the account if the child died.

COSTS OF DISCOVERY

As stated above, estimating the cost and the likelihood of finding a hidden asset is important.  From the first conference, encourage your client to locate and bring as many documents as possible to you.  He or she should be cautioned not to break into locked areas or to cause an irate spouse, relative, or stranger to injure him or her.

When the client says there are more assets than are obvious, then develop a discovery plan – what actions should be taken and what experts should be hired to evaluate the documents you expect to find?  When speaking to the client, you need to be clear about the objectives. If possible, the attorney should seek a written agreement with the client about how much discovery that the client wants to have done and to secure discovery costs in advance.

Consider the costs of each discovery action necessary to find and prove the asset is marital property. Consider the costs of discovery against the known estate if the asset cannot be found or if the client cannot prove that it was part of the marital estate.  Is it worth seeking?   Before going to the extreme of hiring private investigators, do the obvious discovery.  Seek cooperation from the other side; wait for results from interrogatories, subpoenas, and requests to produce. Develop knowledge of what information can be found in libraries, government offices, and the Internet. USA Today's June 27, 2000, 2E, article “You, Too, Can Be Holmes on the Web” lists web sites and procedures to follow in cyber sleuthing.
 
However, if the information is not forthcoming or the other side refuses to cooperate, you must file motions to compel discovery and to seek instructions from the court.

WHAT TO DO WITH THE INFORMATION

An attorney who has found missing, understated, or hidden assets needs to consider his or her options about what to do with the information.  Discussing the matter with a client is critical.  The time when the information is discovered is also important.  Are the attorneys still in the exchange/discovery stage, arguing motions, negotiating with the other side, at mediation or a settlement conference, or at trial?  Was it necessary to file motions to compel in order to secure the information? If so, the other side already knows about the information.  Regardless, when you learn about the information, you must give the other side the information to review.  They are entitled to know about the information found so that they can agree or disagree with you on whether the hidden asset belongs as part of the marital estate.

Review of the above cases shows that many parties have to bring post-trial motions under MCR 2.612(C) (Grounds for relief from judgment).  They need to point out to the trial court that the other side was not acting fairly and in the interest of justice.  Only by setting aside or modifying the existing judgment of divorce can the aggrieved party receive some relief.  The Sands principle still holds.  One party cannot deliberately or inadvertently benefit from missing assets in the marital estate.

Particularly, the proponents look to MCR 2.612(C)(1)b (newly discovered evidence) that could not by diligence have been discovered in time to move for a new trial under MCR 2.611(B).  Also, the proponents look to fraud (intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party.  The motion to modify the judgment must be brought within one year of the order.  If the aggrieved party cannot bring the motion within a year, then he or she may consider an independent action to seek relief from a judgment.
 
However, the policy issue of finality of a judgment still limits which lawsuits can be brought as an independent action.  In Nederlander v. Nederlander, 205 Mich. App. 123, 517 N.W. 2d 768 (1994), Mrs. Nederlander brought an independent lawsuit for fraud more than one year after the court entered the divorce judgment.  She found her husband concealed the true value of his businesses. The court said “If a party suspects that the other party has committed fraud during a divorce proceeding, then MCR 2.612(C)(1)(c) and (2) allows the party to seek redress within one year after the judgment is entered.  On the other hand, we believe that allowing a party to file an independent action for fraud whenever the other party, more than one year after the divorce judgment is entered, liquidates assets or consummates a business transaction is contrary to the public policy behind the finality of judgments.”  Nederlander, 205 Mich. App. at 127.

It is now general practice to include a “disclosure clause” in the judgment saying all property has been disclosed by both parties.  Also, the judgment includes language that if a party does not reveal an asset, it may be subject to further discovery and future division as part of the marital property.  Therefore, the property settlement involving known assets is final; however, if newly discovered evidence shows the parties undervalued or overvalued the marital estate, the aggrieved party has a basis to re-open the judgment or start a new lawsuit. 

 
IS THE FOUND ASSET PART OF THE MARITAL ESTATE?

There are three general tests to determine if an asset is a marital asset.  One, was it acquired during the marriage?  The court determines the beginning and ending dates for the period of marriage.
 
Two, is the asset separate property?  Most pre-marital accumulations are excluded, but consider whether there are extenuating circumstances justifying inclusion in the marital estate.  Is the asset a gift or inheritance?  One spouse may claim “separate property” of the other if he or she contributed to the acquisition, improvement, or accumulation of the separate property. Reeves v. Reeves, 226 Mich. App. 490 (1997).

Three, does the asset really belong to a third party, or is it an asset of the marital parties?

WHAT IF YOUR CLIENT IS THE “HIDING PARTY”?

If your client is the one who is hiding assets, breathe deeply and consider the Michigan Rules of Professional Conduct. It is necessary to have a heart-to-heart conversation with your client.  You must know all the assets, debts, income, gifts received, gifts made, trusts benefits received, trust benefits gifted, and inheritances.  You are responsible for seeking information from your client, just as you are from the other side.  And you are responsible for sharing this information with the other side.

If both clients are clearly hiding assets from each other and both are keeping their attorneys in the dark, or if both agree that discovery is not needed, get the client to sign a letter to that effect.  Frequently, language is put into a judgment saying the client understands that discovery was not complete, but he or she nevertheless agrees to the division of property.

If your client refuses to allow you to disclose an asset (for example, a mutual fund), withdraw from representation due to a failure of communication. If the matter is beyond the discovery and negotiation stages, call the “ethics experts.”  You can lose your license to practice law by lying for a client.

 
BIBLIOGRAPHY

Disclosure and Discovery, Ferreting Out the Facts, ABA Family Advocate, Vol. 12, No. 3, p. 18, Winter 1990.

Dividing It Up Is Very Hard to Do, ABA Family Advocate, Vol. 12, No. 3, p. 31, Winter 1990.

Albert H. Lyter III, Finding Fraudulent Documents, ABA Family Advocate, Vol. 12, No. 1, p.12, Summer 1989.

Michigan Family Law Journal, Expert Witnesses, 2000, A&E Printers and Mailers, Inc., 3303 North East Street, Lansing, Michigan 48906.

Bernard B. Rinella and Leslie L. Veon, Hidden Assets, Now You See Them-Now You Don’t, ABA Family Advocate, Vol. 12, No. 1, p. 34, Summer 1989.

William M. Troyan, Uncovering Hidden Assets in Discovery, ABA Family Advocate, Vol. 5, No. 4, p. 12, Spring 1983.

“You, Too, Can Be Holmes on the Web,”  USA Today June 27, 2000, 2E.