Uncovering Hidden Assets in Divorce

Secret Closets and Covering Your Bases

Recent headlines about a woman’s shoe collection have caused a stir this summer. Poker star Beth Shak is being sued by her Wall Street mogul ex-husband in a Pennsylvania court for allegedly hiding and/or failing to disclose during divorce proceedings three years ago a designer shoe collection. Ex-husband Daniel Shak values the collection, consisting of roughly 1,200 pairs, at an estimated $1 million. He alleges that his ex-wife hid the collection from him, possibly in a “secret room,” and that he did not find out about the collection until last summer. He is now asking the court for an accounting of the collection and is seeking a 35 percent cut, which could result in hundreds of thousands of dollars more in the divorce settlement.

The value of each spouse’s clothing and accessories is not typically factored into asset divisions in divorce. Commonly, each spouse is simply and automatically awarded his or her clothing and personal effects, free and clear of any claims by the other, and the values of these items are not usually ascertained and tallied. There are, however, always exceptions to the rule, such as million-dollar shoe collections. In such a unique case, arguably it is appropriate to factor the value of such marital assets into the division of the estate.

While most divorcing couples do not have undisclosed designer shoe collections stashed away in secret closets, allegations of hidden assets are not uncommon in divorce proceedings. Divorce often leaves one or both spouses with feelings of deep distrust of the soon-to-be ex-spouse. It can be difficult for the divorce practitioner to determine whether a client’s belief that his or her spouse is hiding assets is truly founded or whether the client is merely experiencing the typical insecurity about his or her spouse’s trustworthiness in general.

While some states have taken a clear stance on whether, and to what extent, a confidential relationship exists between divorcing parties that would give rise to a duty to affirmatively disclose assets in divorce proceedings,[1] Tennessee courts have yet to make such a determination.[2] Until the Tennessee courts and/or legislature find that divorcing parties have an affirmative duty to disclose all assets to one another, divorce practitioners must be particularly careful. If a marital dissolution instrument does not specifically reserve the right to return to court in the event an asset has been omitted, a party signing that instrument should not expect to rely on the possibility of obtaining relief from the courts after the divorce is granted based on the other party’s failure to disclose an asset about which no inquiry was made. Where a party hides the existence of a marital asset or otherwise makes an affirmative misrepresentation regarding a marital asset, such an act of fraud can be the basis for setting aside a negotiated marital dissolution agreement.[3] However, there appears to be no Tennessee appellate case authority indicating whether, and to what extent, a confidential relationship between divorcing spouses exists that gives rise to a duty to disclose all marital assets, as distinguished from a duty not to engage in an affirmative misrepresentation or a duty not to hide marital assets.[4]

One solution to this potential problem is to specifically reserve in the Marital Dissolution Agreement the right to divide later-discovered assets and/or return to Court. The agreement can include language such as the following, which delineates specifically what will happen in the event that assets are later discovered:

The parties acknowledge that to the best of their knowledge, there are no assets or liabilities that are not reflected by the terms of this Agreement. The parties warrant and represent that they have made full disclosure to each other of all assets and liabilities, regardless of the completion or noncompletion of formal discovery in this cause, and that the individual values placed upon the assets and debts addressed herein are fair and accurate. Should it develop that assets of any nature were undisclosed prior to the settlement of this matter, the following provisions shall apply:
  1. If it is determined by a preponderance of the evidence that an asset was accidentally undisclosed through no fault of a party, said asset shall be promptly divided between the parties such that Wife receives X percent and Husband receives Y percent. The cost to rectify the nondisclosure, including but not limited to attorneys’ fees (for both parties’ attorneys combined), court costs, and any administrative expenses, will be divided between the parties in the same percentage [or equally] [or will be paid by Husband/Wife] [or each party will pay his or her own respective attorney’s fees].
  2. If it is determined by a preponderance of the evidence that an asset was negligently undisclosed, then said asset shall be promptly divided between the parties such that the nondisclosing party (who knew or should have known of the existence of the asset) receives X percent and the other party receives Y percent. The cost to rectify the nondisclosure, including but not limited to attorneys’ fees (for both parties’ attorneys combined), court costs, and any administrative expenses, will be borne by the non-disclosing party.
  3. If it is determined by clear and convincing evidence that an asset was intentionally undisclosed, then said asset shall be divested from the nondisclosing party and vested solely in the other party, free and clear of any claims by the non-disclosing party. The cost to rectify the nondisclosure, including but not limited to attorneys’ fees (for both parties’ attorneys combined), court costs, and any administrative expenses, will be borne by the nondisclosing party.

The foregoing claims are specifically reserved to each party and are not discharged by the remaining terms of this Agreement.

A provision such as the foregoing is obviously quite comprehensive, as it sets forth consequences based on different types of nondisclosure. Some parties, however, might prefer instead a provision that simply provides for later-discovered assets to be divided equally, regardless of the nature of the nondisclosure. The advantage to the latter type of provision is that it would seem to avert a subsequent trial; the disadvantages are that there is essentially no penalty to the non-disclosing spouse, and the innocent spouse might have to cough up for attorney’s fees without contribution from the nondisclosing spouse.

Regardless of the complexity of the nondisclosure provision, while such a provision preserves the right to settle up in the event of a future dispute, obviously it is preferable to have knowledge of, and include in the dissolution instrument, all assets on the front end rather than have to address it after the dust has settled.

How to Minimize the Possibility that an Asset Is Overlooked or Successfully Concealed

It is good practice to obtain at least some financial disclosure before allowing your client to sign off on a Marital Dissolution Agreement. One option is to conduct full written discovery, which in the divorce arena usually includes two to five years’ worth of financial account statements and income tax returns, among numerous other Interrogatories and document requests. Sometimes it may be necessary (albeit potentially costly) to also hire a forensic accountant to assist with locating and/or valuing assets that may have been hidden, undervalued or otherwise not disclosed. The accountant will need to review the documents that have been produced in discovery and may suggest additional documents to request.

A good initial place to look for hidden assets is the income tax return, which can provide a wealth of information. It is prudent to review tax returns over a period of years. A party attempting to hide assets may produce only the first two pages of the tax return showing his or her income but omitting W-2’s, K-1’s, 1099’s and the various other schedules that accompany the tax return. Tax returns include schedules that list the accounts or holdings that have generated income that tax year (such as rent received from rental property, interest on savings or investment accounts, gains or losses on the sale of stock, business interests and retirement plan distributions). You will need proof of the account balance or value of each such account or holding. If an asset was sold, you can request proof of where the sale proceeds went.

Other potentially helpful items to request in discovery are personal financial statements and/or loan applications completed in the past five or so years. On loan applications, it is in the applicant’s best interest to portray him or herself in the strongest financial light possible in order to obtain financing. This is in sharp contrast to a divorcing spouse’s tendency to downplay and undervalue the assets that he or she will be awarded in the divorce. Because values of closely held businesses are nearly always disputed in family courts, a spouse’s own assessment of the value on a personal financial statement or loan application can be indicative of a value that he or she would likely never otherwise admit during divorce proceedings.

It may also be necessary to review bank, investment and retirement account statements over a period of time. If a party is trying to hide assets, he or she may transfer funds from one account to another, making it difficult to trace the cash flow. It can be a good idea to analyze that cash flow and evaluate the parties’ lifestyle for the past several years by examining such financial records. If nothing seems to justify a lifestyle in excess of reported income, then unreported income and undisclosed accounts or investments may exist.[5]

Credit card statements are also good to scrutinize, as they may reveal assets purchased without the other’s spouse’s knowledge. Another item easily obtainable from the opposing spouse is a credit report, which may reveal unknown accounts or other suspicious financial activity. A free credit report can be obtained from all three credit reporting agencies annually.

Some examples of deliberately hidden assets include the following:

  • brokerage accounts (They are simple to set up online and transfer funds from unknown accounts.)
  • expense reimbursements (It is not uncommon to cash or deposit expense reimbursement checks into an undisclosed account. The debits from, or charges to, the parties’ accounts appear legitimate, and the fact that the reimbursement was not credited back to the same account can be overlooked. This allows funds to accumulate over time without detection by the other spouse.)
  • false or accelerated expense or debt payments
  • hidden forms of cash such as cashier’s checks, travelers’ checks, prepaid cards
  • foreign asset protection trusts (offshore trust accounts)
  • excess prepaid income taxes and refunds
  • funds given to friends or family (presumably to hold until after the divorce) or deposited into minor children’s custodial accounts
  • deferred compensation accounts (such compensation is not recorded on tax returns when it is contributed into the deferred account, only when it is distributed, rendering its present existence easy to miss)

Not all “hidden” assets are undisclosed fraudulently or deliberately. Sometimes assets are not reported by a spouse or addressed in the marital dissolution instrument simply because the other spouse or lawyer failed to inquire about them, or because the asset was genuinely overlooked by the owner. Be sure that the discovery you are propounding is comprehensive and includes a request for information about often-overlooked assets such as the following:

  • affinity points programs for merchandise, airlines, hotels, cash, etc.
  • club memberships
  • season tickets
  • hobby, coin or gun collections
  • artwork and antiques
  • patents, copyrights and royalties
  • stock options
  • tax credits and carryovers
  • health savings account balances
  • notes receivable
  • built-up equity in automobile leases
  • retained earnings of a close corporation, subchapter S corporation or partnership
  • savings bonds or municipal bonds

If a client has no reason to believe that his or her spouse has hidden assets, then at the very least, it is advisable for both spouses to exchange sworn statements of assets, liabilities and income, along with back-up documentation to support each value or balance appearing on the statement. This abridged version of discovery is commonly known among divorce practitioners as “informal discovery” and provides a “snapshot” of the assets currently in existence. It may be a good idea to go the extra step and provide a form for the opposing party to complete, with spaces for all categories, including the commonly overlooked assets set forth above. It is important for your client to realize that this abbreviated version of discovery will not likely provide information that could reveal red flags such as closed accounts or transfers of funds to other accounts or to third parties.

When Assets Are Discovered: Now What?

Some states, such as Oregon, Montana  and California, have enacted statutes providing remedies allowing for unequal division of assets when one spouse is guilty of fraudulent concealment of assets. While Tennessee currently has no statute or other bright-lined procedure governing the manner in which courts should treat findings of hidden assets, it is not uncommon for our courts to order an unequal division of marital assets, and award attorney’s fees as punishment and for deterrence.

Tennessee courts are obligated to divide assets equitably[6] but not necessarily equally. Although Tennessee law provides that marital assets are to be divided without regard to marital fault,[7] our statute addressing division of assets in divorce also provides that “[i]n making equitable division of marital property, the court shall consider all relevant factors including … [t]he contribution of each party to the acquisition, preservation, appreciation, depreciation or dissipation of the marital or separate property … For purposes of this subdivision … dissipation of assets means wasteful expenditures which reduce the marital property available for equitable distributions and which are made for a purpose contrary to the marriage either before or after a complaint for divorce or legal separation has been filed.”[8] The court is to consider also “[s]uch other factors as are necessary to consider the equities between the parties.”[9] Although hiding assets from one’s spouse arguably can be characterized as marital fault, and fault is not supposed to be a factor in the division of assets in a divorce, it only makes sense that courts would consider it inequitable to allow a spouse to profit from this particular type of fault related directly to the property that is to be divided equitably.

Conclusion

It is prudent for a divorce practitioner to gather as much financial information as possible, utilizing the resources that are readily available. While it is sometimes appropriate to conduct a full-blown search for hidden assets, it can be costly and time-consuming. Furthermore, despite best efforts, a diligent search does not always lead to the unearthing of useful information. It is important to manage a client’s expectations and, at the very least, spell out in the dissolution instrument the ramifications for nondisclosure.

Notes

  1. Southers v. Southers, No. 03A01-9802-CV-00001, 1999 WL 333315, at *4 (Tenn. Ct. App. May 27, 1999).
  2. Covill v. Covill, No. E2008-00557-COA-R3-CV, 2009 WL 1871944, at *9 (Tenn. Ct. App. June 30, 2009)(citing Southers 1999 WL 333315 at *4).
  3. See Rule 60.02(2), Tenn.R.Civ.P.
  4. Southers v. Southers, 1999 WL 333315, at *4.
  5. “Show Me the Money!” 26-FALL Fam. Advoc. 17 (2003), David N. Hofstein, Maris J. Weiner.
  6. See Tenn. Code Ann. §36-4-121(a)(1), which provides: “In all actions for divorce or legal separation, the court having jurisdiction thereof may, upon request of either party, and prior to any determination as to whether it is appropriate to order the support and maintenance of one (1) party by the other, equitably divide, distribute or assign the marital property between the parties without regard to marital fault in proportions as the court deems just.”
  7. Id.
  8. Tenn. Code Ann. §36-4-121(c)(5).
  9. Tenn. Code Ann. §36-4-121(c)(11).

Marlene Moses MARLENE ESKIND MOSES is the principal and manager of Moses Townsend & Russ PLLC, a family and divorce law firm in Nashville. She is the immediate past president of the American Academy of Matrimonial Lawyers. She has held prior presidencies with the Tennessee Board of Law Examiners, the Lawyer’s Association for Women, and the Tennessee Supreme Court Historical Society. She has also served as vice president for the United States Chapter of the International Academy of Matrimonial Lawyers. The Tennessee Commission on Continuing Legal & Specialization has designated Moses as a Family Law Specialist; she is Board Certified as a Family Law Trial Specialist.

Co-author BETH A. TOWNSEND is a partner at Moses Townsend & Russ PLLC, a family and divorce law firm in Nashville, where she has practiced since 2001. She earned her law degree from Vanderbilt University and her undergraduate degree from Duke University.