Problems of Hidden Assets in Michigan Divorce Litigation

Hiding marital assets during divorce is illegal. That doesn't seem to stop some greedy spouses. This article discusses hidden assets and Michigan case law. See Hiding Money and Assets in a Divorce for non-state-specific information.

What Does the Law Say?

Michigan law is simple – during divorce proceedings, one party cannot hide assets to the detriment of another. In order for an equitable property division to be made by the parties (and the divorce court), all property owned by both spouses must be listed and reviewed. A party who fails to disclose an asset may be charged with fraud. The penalties can be high. In some cases, a judge may award all of the hidden property to the other (non-defrauding) spouse. Alternatively, a party who fails to respond to legal inquiries as to the property (known as "discovery"), may be held in contempt of court, and subject to financial penalties (including attorney fees – ouch!).

Despite these legal punishments, spouses are often motivated by greed and anger from the dissolution and they deliberately hide assets or involve third-parties in a game of keep away. These activities may trigger additional fraud charges or claims of fraudulent conveyances. (One common ploy, for example, is the establishment of a trust for a third party.)

The Cost of Finding Hidden Assets

The client and the attorney need to create a budget and seek a cost-benefit result. The attorney may use informal discovery techniques – sending a letter asking for accounts and other information. If this "fishing expedition" proves unsatisfactory, the attorney will usually proceed to more formal legal discovery techniques such as interrogatories, depositions, subpoenas, requests to produce, and motions to compel production for information about the marital estate and the separate estates. If these techniques seem fruitless, there's always the possibility of hiring experts to search. That quickly gets expensive. And hiring experts to value and testify is more expensive. At some point, the attorney and client need to sit down and decide whether money should be spent in further pursuit. Of course, that is ultimately the client's decision. In either case, the client and attorney should agree on their discovery plan in writing.

The Attorney's Obligations

At each stage of the investigation – informal, formal discovery, private investigation -- the attorney should 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, the attorney should explain to the client the attorney's ethical responsibility to keep the opposing attorney informed of discovery efforts. Remember, the goal of identifying the assets and valuing the assets is to decide which marital property is subject to division.

Two Michigan Divorce Cases

Sands v. Sands. The landmark Michigan 'hidden assets' case is Sands v. Sands, 192 Mich. App. 698, 482 N.W.2d 203 (1992), aff'd 448 Mich. 30, 497 N.W.2d 493 (1993). The case explains the procedural steps necessary to find and use hidden assets to increase the marital estate. The 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 Mrs. Sands all of the found assets. The Supreme Court later affirmed the judgment for Mrs. Sands. Nevertheless, the Supreme Court 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. What about attorney fees in the case? Mrs. Sands had increased attorney fees and 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 Mr. Sand to pay 70 percent of his wife's attorney's fees in order to compensate for the time spent uncovering the hidden assets.

Wiand v. Wiand, 178 Mich. App. 128, 443 N.W.2d 464 (1989) A series of cases involving Mr. and Mrs. Wiand illustrate 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 Mr. Wiand engaged in a pattern of conduct throughout the proceedings designed to harass Mrs. Wiand and frustrate her efforts to obtain meaningful discovery of his assets and his net worth. The records also showed that Mr. Wiand repeatedly violated the court's orders for support, discovery, and injunctive relief. Mr. Wiand obviously displeased the trial court with his attempts to evade proper discovery and to shelter assets. [Two interesting factors in the case were that the court allowed future post-judgment discovery, and 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 the first case (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. 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's Post-Trial Discovery! Mrs. Wiand found new assets after the trial and the division of the marital estate. On July 28, 1989, she filed a new complaint (Wiand II) 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. The court denied Mrs. Wiand any 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. Finally, in 1994, the appellate court ruled that Mrs. Wiand had timely filed her motions for relief. Any trial was ordered and the trial court was ordered to consider Mrs. Wiand'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.

The Rights of Third Parties Who Conspire to Hide Assets

When a third party conspires with one spouse to defraud the other of a rightful interest in the marital estate, Michigan courts will step in. For example, 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. And in Wiand I, mentioned above, the appellate court upheld the trial court's determination that assets allegedly belonging to the Mr. Wiand's brother were marital assets. One distinction between this case and Donahue, above, was that Mr. Wiand's brother didn't retain a lawyer. 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. In other words, a 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.

How Are Hidden Assets Commonly Hidden?

Here are some common tricks of the trade:

• Hiding paper, for example concealing evidence of securities, stocks, and bonds, etc.
• Converting cash into "mobile property," for example art, hobbies, jewelry
• Paying off fake debts, for example creating false debt instruments and paying it down to a third party
• Custodial IRA or 401K accounts created in collusion with a friend or relative
• Using a spouse-owned business entity to funnel income and purchases
• Deceptively lowering the value of assets or a spouse owned business

How Are Hidden Assets Discovered

Hidden assets are most commonly uncovered via these three sources:

• Income tax returns
• Online public records – for example, transfers of deeds, etc.
• Financial institution documentation – for example, electronic transfers, large withdrawals of cash

(To learn about the process of finding these assets, see How to Find Hidden Assets During Divorce).

What To Do When you Discover Hidden Assets?

An attorney who has found missing, understated, or hidden assets needs to discuss the matter with the client and then consider action based upon the stage of the divorce proceedings. Regardless, when the attorney learns about the information, the attorney 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.

Many attorneys must bring post-trial motions under MCR 2.612(C) (Grounds for relief from judgment). In these cases, 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.

Particularly, attorneys should 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 attorneys should consider 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.

The "Finality of Judgment"

Always keep in mind the policy issues associated with the finality of a judgment which can limit 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 was out of luck when she later 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.

The Disclosure Statement

Because of the "finality of judgment" rule, discussed above, 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.

1. Was it acquired during the marriage? The court determines the beginning and ending dates for the period of marriage.
2. 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).
3. Does the asset really belong to a third party, or is it an asset of the marital parties?

What If You Are The "Hiding Party"?

The attorney must know all the assets, debts, income, gifts received, gifts made, trusts benefits received, trust benefits gifted, and inheritances. The attorney is responsible for sharing this information with the other side. So, If a client is hiding assets, it's time for a heart-to-heart talk. Alternatively, if a client refuses to allow an attorney to disclose an asset (for example, a mutual fund), the attorney must withdraw from representation due to a failure of communication. If the matter is beyond the discovery and negotiation stages, the attorney should call the "ethics experts," as this failure can cause the attorney to lose the license to practice law.