Hidden Assets and the Duty to Disclose in a Divorce
The Colorado Rules of Civil Procedure require spouses in a divorce case to be fair with each other, and that includes providing exhaustive financial disclosures.
And there is no hiding things – not only do the disclosures make this difficult if the other side is on the ball, but the rule also provides a remedy of reopening the property division in case of hidden assets:
“If a disclosure contains a misstatement or omission materially affecting the division of assets or liabilities, any party may file and the court shall consider and rule on a motion seeking to reallocate assets and liabilities based on such a misstatement or omission, provided that the motion is filed within 5 years of the final decree or judgment.”Colo. R. Civ. P. 16.2(e)(10).
So how does this work? What happens when a spouse discovers assets which were hidden in the original divorce? The Colorado Court of Appeals recently addressed the issue of hidden assets in a divorce.
In Evans, three years after the parties’ original divorce, the wife learned through documents obtained in discovery on a child support modification that the husband had hidden an asset during the divorce – he failed to disclose a 100% interest in a company, Premier Earthworks Infrastructure. She asked the court to reopen the original divorce property division pursuant to Colo. R. Civ. P. 16.2(e)(10).
The trial court ultimately found that the husband had indeed failed to disclose this business, and awarded the wife almost $1.2m for her share of the value. The husband appealed.
(Side note – the husband is no stranger to litigation, nor to court sanctions – we wrote about this divorce previously, when he unsuccessfully appealed the trial court finding him in contempt for failure to pay support. This is a separate appellate decision, on a completely separate issue).
Separation Agreement Not Waiver of Right to Reopen for Hidden Assets
The spouses in Evans had signed a separation agreement resolving their property issues. The husband contended that by signing the separation agreement, the wife had waived her right to reopen the case if hidden assets were subsequently discovered.
During the divorce, the wife had obtained a court order to appraise three specifically named companies, (Overlook Mine & Gravel LLC, Resources LLC and Overlook Mine LLC) “or any other business operated by” the husband.
Before the divorce business valuations were completed, the parties instead signed a separation agreement awarding the husband those three named businesses “and any other business operated by the husband during the marriage.” For most family law attorneys, this “catch-all” language would probably be a gigantic red flag – why even address the possibility of other, unnamed businesses if there were none? Seems like a recipe for disaster with respect to hidden assets.
And while I have no inside knowledge as to the negotiations, seeing this language suggests the husband knew exactly what he was doing, and was trying to subtly get the hidden assets awarded to him. Indeed, during the hearing, the husband did not dispute that he knew of the existence of this additional business and failed to disclose it.
However, the separation agreement also contained some fairly standard disclosure language addressing consequences for non-disclosure:
“The Agreement is made upon the assumption that each of the parties has made a full, complete, honest, accurate, and total disclosure to the other of the nature and extent of all assets and obligations of the parties. As to any assets of the parties to which no such full disclosure has been made by either of the parties, this Agreement shall become null and void. The Court shall, upon such subsequent discovery of assets of either party, retain full jurisdiction to divide such additional assets appropriately.”
Cannot Waive Right to Undisclosed Assets
While spouses can waive rights during a divorce, without access to all of the information she was entitled to receive, the wife could not have “knowingly, intelligently, or explicitly waived her right to assert any interest” in the hidden asset. Evans, ¶ 31.
The court rejected the husband’s reliance upon Runge, where a spouse had received the required information but signed a separation agreement, thereby waiving her right to analyze the information received, because in Evans the information was never disclosed to begin with.
Spouse Has No Duty to Discover Other’s Hidden Assets
The husband’s next argument appears a bit galling – taking a leaf from that classic comedy, Animal House where after wrecking his brother’s car, Otter tells Flounder “You f***ed up. You trusted us!” The husband basically said the wife should not have relied upon his disclosures, and should have simply continued with the business valuation, which would have discovered the hidden asset. This argument, understandably, got nowhere with the appellate court:
“wife should not have had to conduct a thorough business evaluation to determine the existence of a marital asset that husband had an affirmative obligation to disclose.”Evans, ¶ 34.
In short, because the husband failed to disclose the hidden asset as required, the separation agreement was null and void as to that asset, and the court retained jurisdiction to divide the business.
Did the Husband Own the Undisclosed Asset?
The husband raised an argument he had also made to the trial court, that the undisclosed asset was really owned by a prior employee, not him. The problem, though, was that the trial court had already considered the evidence, and found to the contrary for a variety of reasons, including the fact that the husband was the named incorporator on the articles of incorporation in 2010, his home address was used for the business, the absence of any actual signed documents showing this employee was the owner, and the fact that the husband listed himself as the 100% owner on his 2013 business tax return.
Because the trial court has discretion to evaluate the conflicting evidence and make findings, those findings cannot be disturbed on appeal. Evans, ¶ 46.
Reopen Case to Divide Just Hidden Assets or Entire Marital Estate?
While Colo. R. Civ. P. 16.2(e)(10) now provides that the court may “rule on a motion seeking to reallocate assets and liabilities”, not just address hidden assets, the version of the rule in effect in effect at the time of the dissolution in Evans provided that the court may allocate the “assets or liabilities that were misstated or omitted.”
Since the trial court did not reopen the entire property division, but just divided the omitted asset, the decision was consistent with the rule in effect at that time, and the court of appeals did not have reason to determine whether the court could have gone further.
Standard to Divide Concealed Assets
Colorado’s property division statute, C.R.S. 14-10-113, sets out a variety of factors the court is required to consider when dividing marital assets and debts. For more information, see our Division of the Marital Estate article in the Colorado Family Law Guide. At a post-decree hearing on the division of an omitted asset, the court is required to follow those same factors, Evans, ¶ 51.
Economic Circumstances as of Date of Hearing, Not Original Decree
The husband argued that the omitted asset should have been divided as of the date of the decree, when the business’s gross receipts were under $6m, and not the date of the hearing, when the receipts were over $44m.
The court rejected that position, holding that the trial court must consider the economic circumstances of each spouse at the time of the actual division, not just back at the time of dissolution, ¶ 53, and the husband’s position “ignores any benefit reaped by the party who failed to disclose.” ¶ 53.
No Additional Penalty for Hidden Assets
In a way, the husband was lucky that Colorado marital property law provides the same factors for division of assets at the time of the original divorce, or at the time of a later hearing when an asset was hidden during the divorce. He had to pay up $63K for the wife’s legal fees, as well as half of the value of the business which had increased in value since the divorce, but at least he kept the other half of the omitted asset.
One story I still remember is when a woman won $1.3m in the California lottery 11 days before filing for divorce, and then concealed that winning ticket during the divorce proceedings. The California judge found fraud, and awarded the entire balance to her ex-husband as a penalty. The woman appealed and lost.
Though he lost the hidden assets issue, which was most of his appeal, the husband did not completely lose. He did score minor victories on the trial court imposing child support without making the requisite findings, and for requiring security for payment of the $1.1m for the wife’s share of the undisclosed asset (we write about the security for payment issue in this blog post).
Divorce Hidden Assets Q&A
What Happens when a Spouse Hides an Asset in a Divorce?
Where a “material” asset has been omitted from a spouse’s disclosures in a Colorado divorce, the other spouse has up to five years to reopen the property division.
How to Hide Money in a Divorce?
Really?? The purpose of this blog post is to highlight the legal consequences of hiding assets in a divorce, not to provide a “how-to” so a spouse can get away with it. Probably the most common technique a dishonest spouse will use is to transfer assets to a friend or family member just before the divorce, but as there is invariably a paper trail, this is easy to detect and will backfire on the spouse.
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