Pre-Separation Dissipation and the Marital Estate

In Finan v. Finan, 949 A2d 468 (Conn. 2008), the wife argued that during the marriage, her husband frequented adult entertainment bars, taking cash out of the family's accounts to spend at strip clubs and cabarets. The wife also alleged that the husband formed a “social” relationship with another woman, assisting her with expenses, including expensive plane tickets and hotel rooms. In total, the wife claimed that her husband spent over $200,000 on adult entertainment and ATM withdrawals, and that this substantial outflow was greater than the husband's gross annual income. Of the over $200,000 the husband allegedly dissipated, approximately $30,000 came after the date of separation. The wife sought to charge her estranged spouse with $175,000 of assets dissipated pre-separation, arguing that those assets ought to have been included in the marital estate for equitable distribution purposes.

The Connecticut Supreme Court unanimously reversed the trial court's refusal to admit the wife's evidence of potential marital asset dissipation that occurred prior to the date of separation. After reviewing Connecticut statutory authority, as well as cases from across the United States dealing with this issue, Finan held that a trial court is permitted to consider whether a spouse's actions that occurred prior to the spouses' physical separation constitute the dissipation of marital assets. In order for claims involving pre-separation dissipation to be heard, however, the Connecticut Supreme Court determined that the actions constituting dissipation must occur either: 1) in contemplation of divorce or separation; or 2) when the marriage is in serious jeopardy or undergoing an irretrievable breakdown.

The Importance of Finan

Family lawyers involved in pre-separation dissipation disputes are urged to read Finan, which establishes a framework for both the bench and the bar. Modern social reality dictates that the actual breakup of a family unit may well take place many months or years before the final separation. Finan cautions, however, against the trial court acting as an auditing agency, questioning every expenditure and economic decision made during the marriage. It is up to the trial court to consider when the alleged dissipative actions of a spouse occurs, and if they are made in contemplation of divorce or separation, or while the marriage is in serious jeopardy or is undergoing an irretrievable breakdown, the assets dissipated pre-separation can be considered as part of the martial estate for property distribution purposes.

A Similar Framework

Section 4.10 of the American Law Institute's Principles of the Law of Family Dissolution uses a similar framework to Finan. The general rule is that the allegation of marital property dissipation should not be based upon a retrospective accounting of financial transactions made during the marriage. If the economic misconduct takes place in the final years of marriage, a trial court should augment the other spouse's share if it can be shown that the martial property was lost, expended or destroyed through the intentional misconduct or negligence of one spouse, including the improper concealment or conveyance of assets for the purpose of denying the other spouse's share of martial property.

What if the wife in Finan were aware of her husband's proclivity to spend money on adult entertainment? If the wife knew about this conduct for years, and did nothing about it, she probably would lose her claim for pre-separation dissipation, unless she could demonstrate that a substantial injustice would otherwise result. If the wife knew about this economic misconduct, and the husband persisted over the wife's objections, this becomes a much grayer area. Even though the wife protested her husband's reckless spending, she still remained married to him and never initiated a divorce action. In this example, the wife's argument should be that the pre-separation dissipation is a factor in distributing the remaining marital estate. If, however, the husband's spending on adult entertainment were clandestine, the wife's argument for pre-separation dissipation becomes more convincing. Clearly, if the husband spent substantial amounts of money on a paramour either in contemplation of divorce or separation, or while the marriage was in serious jeopardy or undergoing an irretrievable breakdown, the wife has a much more viable case for pre-separation dissipation.

The Money

Does it matter how much money is at issue when making a claim for pre-separation dissolution? In 2008, the supermodel Christie Brinkley was involved in a nasty divorce from her husband of ten years, architect Peter Cook. Even though the parties had signed a premarital agreement, allegations were made that Cook spent over $3,000 a month on pornography, and in addition, paid his 18-year-old “personal assistant” hundreds of thousands of dollars, presumably to keep their affair from becoming public. Were these monies a part of Peter Cook's separate property as determined under the premarital agreement? If so, they could not be considered a part of any pre-separation dissipation claim. However, if the monies were otherwise part of the marital estate and subject to equitable distribution under New York law, a pre-separation dissolution claim becomes not only viable, but one likely to prevail on the merits.

Another question that arises is if the amount of Peter Cook's spending on pornography is minimal compared with the marital income generated by both parties, is that a factor for the trial court to consider in weighing any pre-separation dissipation claim? Whether a spouse loses money at a casino or in sports betting, or whether another spends it on adult entertainment, the amount of the money misappropriated should be viewed in comparison with the overall income generated by the parties. Because Brinkley and Cook most likely generated millions of dollars a year, the dissipation of money pre-separation, however illicit, ought to be contextualized for its impact on the overall martial estate. In any event, Brinkley's allegations were made in the context of child custody litigation, and did not appear ' at least on the surface ' to bear on the competing economic claims of the parties. If the allegations were in part designed to preserve a claim of pre-separation dissipation, the burden would have been on Brinkley to prove that the money Cook spent was either done over her objection or “under the radar,” in which case she would have to document the illicit spending and provide proof that it was done either recklessly or as part of a design to defeat or thwart Brinkley's property claims.

Depending on the facts of the case, the tracing challenges for the family lawyer and his or her forensic accountant can be formidable.

Mark Momjian, a member of this newsletter's Board of Editors, is Co-Chair of the Family Law Department of Philadelphia's Schnader Harrison Segal & Lewis LLP. He can be reached at [email protected].

Contemporary family law practice abounds with allegations of dissipation and misappropriation of marital assets. Over a generation ago, few contested divorce actions involved claims of economic misconduct. As the current recession deepens, these claims are not only on the rise, but they appear to be the rule in many cases. Indeed, the tool box of the modern family lawyer is brimming with instruments designed primarily to prevent a spouse from intentionally, fraudulently or recklessly liquidating, transferring, alienating or encumbering marital assets. In addition to granting injunctions and other forms of special relief, family courts are increasingly joining third parties as additional defendants, issuing attachment proceedings, and in some of the more egregious cases, imposing constructive trusts.

These tools, however, are used to prevent or enjoin dissipation that occurs after the parties have already separated. Today, however, family lawyers are confronting issues involving pre-separation dissipation, even though many divorce statutes contain little or no guidance on whether assets dissipated or misappropriated prior to separation can be “added-back” into the marital estate for distribution purposes. This is not to say that these statutes are silent generally on the issue of dissipation. To the contrary, in dividing the marital estate, many state laws look to the contribution or dissipation of each party in the acquisition, preservation, depreciation or appreciation of the property subject to division. Pre-separation dissipation is a relatively new concept, which argues for the inclusion of the dissipated asset into the martial estate, even though the dissipation took place during the marriage and prior to the date of separation or the commencement of the action. Put another way, if a spouse deliberately or recklessly dissipates marital assets either in contemplation of divorce or during a period when the marriage is in serious jeopardy, can the spouse guilty of economic misconduct be charged with those dissipated assets at the time of equitable distribution or community property division?

Recent Case Law

In Finan v. Finan , 949 A2d 468 (Conn. 2008), the wife argued that during the marriage, her husband frequented adult entertainment bars, taking cash out of the family's accounts to spend at strip clubs and cabarets. The wife also alleged that the husband formed a “social” relationship with another woman, assisting her with expenses, including expensive plane tickets and hotel rooms. In total, the wife claimed that her husband spent over $200,000 on adult entertainment and ATM withdrawals, and that this substantial outflow was greater than the husband's gross annual income. Of the over $200,000 the husband allegedly dissipated, approximately $30,000 came after the date of separation. The wife sought to charge her estranged spouse with $175,000 of assets dissipated pre-separation, arguing that those assets ought to have been included in the marital estate for equitable distribution purposes.

The Connecticut Supreme Court unanimously reversed the trial court's refusal to admit the wife's evidence of potential marital asset dissipation that occurred prior to the date of separation. After reviewing Connecticut statutory authority, as well as cases from across the United States dealing with this issue, Finan held that a trial court is permitted to consider whether a spouse's actions that occurred prior to the spouses' physical separation constitute the dissipation of marital assets. In order for claims involving pre-separation dissipation to be heard, however, the Connecticut Supreme Court determined that the actions constituting dissipation must occur either: 1) in contemplation of divorce or separation; or 2) when the marriage is in serious jeopardy or undergoing an irretrievable breakdown.

The Importance of Finan

Family lawyers involved in pre-separation dissipation disputes are urged to read Finan, which establishes a framework for both the bench and the bar. Modern social reality dictates that the actual breakup of a family unit may well take place many months or years before the final separation. Finan cautions, however, against the trial court acting as an auditing agency, questioning every expenditure and economic decision made during the marriage. It is up to the trial court to consider when the alleged dissipative actions of a spouse occurs, and if they are made in contemplation of divorce or separation, or while the marriage is in serious jeopardy or is undergoing an irretrievable breakdown, the assets dissipated pre-separation can be considered as part of the martial estate for property distribution purposes.

A Similar Framework

Section 4.10 of the American Law Institute's Principles of the Law of Family Dissolution uses a similar framework to Finan. The general rule is that the allegation of marital property dissipation should not be based upon a retrospective accounting of financial transactions made during the marriage. If the economic misconduct takes place in the final years of marriage, a trial court should augment the other spouse's share if it can be shown that the martial property was lost, expended or destroyed through the intentional misconduct or negligence of one spouse, including the improper concealment or conveyance of assets for the purpose of denying the other spouse's share of martial property.

What if the wife in Finan were aware of her husband's proclivity to spend money on adult entertainment? If the wife knew about this conduct for years, and did nothing about it, she probably would lose her claim for pre-separation dissipation, unless she could demonstrate that a substantial injustice would otherwise result. If the wife knew about this economic misconduct, and the husband persisted over the wife's objections, this becomes a much grayer area. Even though the wife protested her husband's reckless spending, she still remained married to him and never initiated a divorce action. In this example, the wife's argument should be that the pre-separation dissipation is a factor in distributing the remaining marital estate. If, however, the husband's spending on adult entertainment were clandestine, the wife's argument for pre-separation dissipation becomes more convincing. Clearly, if the husband spent substantial amounts of money on a paramour either in contemplation of divorce or separation, or while the marriage was in serious jeopardy or undergoing an irretrievable breakdown, the wife has a much more viable case for pre-separation dissipation.

The Money

Does it matter how much money is at issue when making a claim for pre-separation dissolution? In 2008, the supermodel Christie Brinkley was involved in a nasty divorce from her husband of ten years, architect Peter Cook. Even though the parties had signed a premarital agreement, allegations were made that Cook spent over $3,000 a month on pornography, and in addition, paid his 18-year-old “personal assistant” hundreds of thousands of dollars, presumably to keep their affair from becoming public. Were these monies a part of Peter Cook's separate property as determined under the premarital agreement? If so, they could not be considered a part of any pre-separation dissipation claim. However, if the monies were otherwise part of the marital estate and subject to equitable distribution under New York law, a pre-separation dissolution claim becomes not only viable, but one likely to prevail on the merits.

Another question that arises is if the amount of Peter Cook's spending on pornography is minimal compared with the marital income generated by both parties, is that a factor for the trial court to consider in weighing any pre-separation dissipation claim? Whether a spouse loses money at a casino or in sports betting, or whether another spends it on adult entertainment, the amount of the money misappropriated should be viewed in comparison with the overall income generated by the parties. Because Brinkley and Cook most likely generated millions of dollars a year, the dissipation of money pre-separation, however illicit, ought to be contextualized for its impact on the overall martial estate. In any event, Brinkley's allegations were made in the context of child custody litigation, and did not appear ' at least on the surface ' to bear on the competing economic claims of the parties. If the allegations were in part designed to preserve a claim of pre-separation dissipation, the burden would have been on Brinkley to prove that the money Cook spent was either done over her objection or “under the radar,” in which case she would have to document the illicit spending and provide proof that it was done either recklessly or as part of a design to defeat or thwart Brinkley's property claims.

Depending on the facts of the case, the tracing challenges for the family lawyer and his or her forensic accountant can be formidable.

Mark Momjian, a member of this newsletter's Board of Editors, is Co-Chair of the Family Law Department of Philadelphia's Schnader Harrison Segal & Lewis LLP. He can be reached at [email protected].