A spouse may assert a claim for fraud on the community during a divorce when their partner has improperly disposed of community assets. Fraud on the community may be either actual or constructive, and it may entitle the defrauded spouse to a greater share of community property when everything is divided. Neither actual nor constructive fraud on the community is an independent cause of action; rather, they are claims that one spouse may assert during a divorce to affect the final divorce agreement. This article examines the claims of actual and constructive fraud on the community and discusses their potential consequences on a divorce.
Actual fraud is based on intentional deceit or deception. See Matter of Marriage of DeVine, 869 S.W.2d 415, 421 (Tex.App.—Amarillo 1993, writ den.). Accordingly, to prove actual fraud, the claimant must show that their spouse:
(1) transferred or spent community assets;
(2) with the primary purpose of depriving the claimant of those assets;
(3) and had an intent to deceive or dishonest purposes.
Id; see also Wright v. Wright, 280 S.W.3d 901, 909 (Tex.App.—Eastland 2009, no pet.).
The court in Wright found actual fraud when, within days of Wife filing for divorce, Husband emptied the couple’s bank accounts, transferred titles over their motorcycles to their sons, and transferred 49% of a jointly owned company to a third party, all without Wife’s knowledge or consent. Wright, 280 S.W.3d at 905, 909. They reasoned that all of Husband’s activities were sufficient to show that he had a dishonest purpose and wanted to deprive Wife of her community estate. Id. at 9. Aggressively transferring assets out of the community estate soon after one’s spouse files for a divorce supports a finding of actual fraud.
The court in DeVine found actual fraud when Wife convinced Husband to invest community funds in the development projects of a man with whom she was having a secret affair. DeVine, 869 S.W.2d at 421. The court reasoned that Husband would not have invested had he known about Wife’s affair, making her failure to disclose the affair deceitful. Accordingly, Wife’s failure to disclose was sufficient to show her intent to deceive and her purpose to deprive Husband of community funds. Id. at 421. Failing to disclose material information about an expenditure of community funds supports a finding of actual fraud.
Constructive fraud is based on the fiduciary duty that spouses owe to one another, and it occurs when one spouse violates that duty by wastefully disposing of the community estate. Zieba v. Martin, 928 S.W.2d 782, 789 (Tex.App.—Hous. [14th Dist.] 1996, no writ). Because of this, constructive fraud claims are also called claims of waste. Puntarelli v. Peterson, 405 S.W.3d 131, 138-39 (Tex. App.—Hous. [1st Dist.] 2013, no pet.). A claimant may raise a presumption of constructive fraud by showing that their spouse disposed of community assets without the claimant’s knowledge or consent. Id. at 138. They do not have to show that the defendant intended to deceive them, as they would for a claim of actual fraud. Id. at 139. After the claimant raises a presumption of constructive fraud, the defendant has the burden to rebut it. Id.
A claimant may prove that community funds were disposed of either by showing specific transfers of community property, or by showing that community funds are missing and cannot be accounted for. Zieba, 928 S.W.2d at 790 (reversing trial court and finding constructive fraud where Husband spent significant community funds on his secret girlfriend); Puntarelli, 405 S.W.3d at 139 (raising presumption of constructive fraud when Husband’s income exceeded his expenses, and he could not account for where the excess had gone).
Courts will routinely raise a presumption of constructive fraud when the claimant neither knew about nor consented to their spouse’s expenditure, and most courts will do the same when the claimant knew about the expenditure but did not consent to it. Zieba, 928 S.W.2d at 790 (holding that mere knowledge of a transfer is “no evidence of [claimant’s] consent to the expenditure…” and does not defeat a claim for constructive fraud). However, a minority of courts have refused to raise a presumption of constructive fraud where the spouse knew about the expenditure but failed to object to it. Marshall v. Marshall, 735 S.W.2d 587, 597 (Tex. App.—Dallas 1987, writ ref’d n.r.e.).
After a presumption of constructive fraud has been raised, the defendant may rebut it by showing that the expenditure was fair to the community estate. Zieba, 928 S.W.2d at 789. Courts will examine three factors to determine when an expenditure was fair:
(1) the size of the gift in relation to the total size of the community estate;
(2) the adequacy of the remaining estate; and
(3) the relationship of the donor to the donee. Id.
The smaller the gift, the more that remains of the estate, and the closer the donor is to the donee all support the fairness of the gift. The husband in Marshall gifted 11.7 percent of his community estate to his children, leaving over $475,000 to split with his wife in the divorce. Marshall, 735 S.W.2d at 596-97. Even though the wife did not know about or consent to this gift, the Court held that the husband had not committed constructive fraud against her. Id. at 597. Because the percentage of the gift was so small, still left so much for the wife, and was given to the husband’s own children, the Court reasoned that it was fair. Id. Even if community assets were disposed of without a spouse’s knowledge or consent, there is no constructive fraud when the disposal was fair.
During a divorce, courts have the authority to divide community estates in whatever way they deem “just and right.” Tex. Fam. Code § 7.009(b)(2). Normally, this means that courts will divide the marital property in a 50/50 split between the spouses. However, in a case of fraud on the community, courts may divide the property disproportionately, giving a greater share to the defrauded spouse than the offending spouse. Id. at § 7.009(c). The more deceitful or intentional the fraud was, the more disproportionate the split may become. Schlueter v. Schlueter, 975 S.W.2d 584, 589-90 (Tex. 1998) (“if the wronged spouse can prove the heightened culpability of actual fraud, the trial court may consider it in the property division.”).
The Texas Family Code also provides that, in cases of fraud on the community, the court shall divide a reconstituted community estate, as opposed to the actual community estate. Tex. Fam. Code § 7.009(a). This means that the court will calculate the value of the estate before the fraud took place and divide that value between the spouses. Id.
If a defrauded spouse can identify the third parties that received community assets in a fraudulent expenditure, they may join those parties to the divorce. In re Burgett, 23 S.W.3d 124, 127 (Tex. App.—Texarkana 2000, pet. denied). Such third parties are necessary to afford complete relief between the divorcing spouses because they possess property that must be divided in the divorce. Id.; see also Tex. R. Civ. Pro. 39.
Fraud in the community comes in two forms: actual and constructive. The primary difference between them is that actual fraud requires an intent to deceive and constructive fraud does not. In both cases, fraud in the community involves an improper transfer of community assets to a third party. While actual fraud can only be defeated by attacking its elements, constructive fraud can be defeated by a showing of fairness. In cases of fraud on the community, the defrauded spouse may receive a greater share of the community estate than the normal 50/50 split, and the third-party recipients of the community estate may be joined to the divorce.