In the context of divorce litigation, fraud on the community estate falls within the wide spectrum of various acts frequently termed as “marital fraud.” Prior to the passage of Section 7.009 of the Texas Family Code, the Texas Supreme Court’s opinion in Schlueter was considered to be the authority on remedies available to an innocent spouse in a divorce involving fraud on the community estate. See Schlueter v. Schlueter, (Tex. 1998). In Schlueter, the Texas Supreme Court reasoned that because the fraud was committed against the community estate, the innocent spouse’s remedy was to be awarded a disproportionate share of the estate. The inevitable problem was that the fraud may have depleted the community estate to such a level that full compensation to the wronged spouse would be impossible. The Schlueter Court also ruled that a just and right division may include a money judgment on the fraud claim (not exceeding the value of the community estate). The two options made available by Schlueter, disproportionate division and money judgment, were often interpreted as being mutually exclusive. In other words, the innocent spouse could either seek a disproportionate division of the community estate (which might not make the innocent spouse whole because insufficient assets remain to be divided) or the innocent spouse may seek a money judgment (which might be essentially worthless if there are no assets subject to collection).
The purpose of Section 7.009 of the Texas Family Code, as expressed by the drafters and as testified to by experts during Congressional Committee hearings (one of whom was this author on behalf of the Texas Family Law Foundation) is to statutorily clarify and potentially increase the remedies made available to an innocent spouse by making it clear that a just and right division of the marital estate, for purposes of remedying a marital fraud, encompasses and includes the award of a disproportionate division of the community estate or a money judgment, or both. In an effort to further accommodate the potential problems resulting from a community estate diminished by marital fraud, Section 7.009 also created a new marital estate, the “reconstituted estate.” The reconstituted estate is defined as the total value of the community estate that would exist if the fraud had not occurred. The finder of fact is to calculate the value of the reconstituted estate by determining the dollar amount by which the community was depleted as a result of the fraud, and adding that dollar amount back in to the current value of the estate to make up the reconstituted estate. The reconstituted estate will then be subject to a just and right division. This method calculates the value of the community estate had the fraudulent disposition not occurred and then allows the court to penalize the spouse who committed the fraud by awarding the guilty spouse the non-existent, or what I refer to as “zombie” money, because the money existed at one point, then no longer existed, and now has been reanimated, but still doesn’t actually exist. In ordering a just and right division of the community estate, the guilty spouse’s property award will likely include the zombie dollars added back to the estate, regardless of whether they actually exist. A money judgment is also available in addition to the division of the reconstituted estate, or as an alternative to the division of the reconstituted estate. Although the Schlueter Court did not specify the time at which the finder of fact is to value the community estate (i.e., pre-fraud or currently), section 7.009(a) makes clear that a money judgment cannot exceed the value of the community estate if the fraud had not been committed.
An easy example is the wasting of community assets, one of the most common forms of marital fraud. In this illustration, assume there is a $100,000.00 community estate. One spouse has an adulterous affair, and is found to have spent (or wasted) $50,000.00 in community monies on the paramour. Hence, there is in reality $50,000.00 remaining in the community estate. Under Section 7.009, we place the wasted money (zombie money) of $50,000.00 back into the community estate. This results in a reconstituted estate of $100,000.00. If the court determines that a just and right division of the community estate is 50 percent to each spouse, then the court can award from the reconstituted estate $50,000.00 (zombie money) to the spouse who committed the waste, and the $50,000.00 (real money) to the other spouse. Hence, the wronged spouse still gets 50 percent of the community estate because it has been reconstituted to include the zombie monies before application of the division percentage determined by the Court. In this example, the spouse who is found to have committed the fraud in reality got zero real dollars. If the court decided that the innocent spouse should receive a disproportionate division of the reconstituted estate, or, for example, 60 percent of the estate, there would be insufficient real monies to award the wronged spouse her $60,000.00. Under Section 7.009, the court can award the spouse $50,000.00 of the real monies, and a judgment of $10,000.00, to complete the 60 percent award.
At the time of the preparation of this article, this author could locate no published appellate opinions specifically addressing Section 7.009 or the reconstituted estate. Thus, the matter remains ripe for what is anticipated will be much learned discussion. Regardless, attorneys representing spouses who are the victim of marital fraud should take advantage of the statutorily created reconstituted estate and other options made available by Section 7.009 to assure that compensation is sought for the wronged spouse to the greatest extent allowed by law.