If a Texas court determines that a spouse has committed fraud on their marital estate, they will need to calculate the value of the “reconstituted estate.” What is a reconstituted estate in Texas, exactly?
According to the Texas Family Code, the reconstituted estate is the “total value of the community estate that would exist if an actual or constructive fraud on the community had not occurred.”
In some divorces, one spouse chooses to hide, move, or spend some of the assets that are considered community property. This is a fraudulent activity that results in the other party being cheated out of part of the estate they built with their spouse during the marriage.
Section 7.009 of the Texas Family Code explains that the court can take action to protect the spouse that was wronged if the other spouse has committed “actual or constructive fraud.”
One of the ways that courts can remedy the injury done to the innocent spouse is by determining the value of the reconstituted estate. This is how much the community estate would be worth if the fraud hadn’t happened.
If you think that your spouse is hiding assets or otherwise fraudulently handling the community estate, you'll want to look into the other common sneaky divorce tactics to know what to watch out for.
As an example, let’s say that the community estate has $150,000 in it. However, one spouse spent $50,000 during the course of an extramarital affair on travel, extravagant gifts, etc. In this instance, the reconstituted estate would be $200,000.
If the court were to divide the actual existing community estate of $150,000 between the two spouses, it means that the wronged spouse is getting a raw deal– essentially missing out on roughly $25,000 that would have been awarded to them if their spouse hadn’t used the money on his or her affair.
Calculating the value of the reconstituted estate means that the wronged spouse doesn’t end up being penalized for the fraudulent behavior of their spouse.
The amount that they are awarded is based on how much money would be in the estate if their spouse hadn’t committed actual or constructive fraud. At the same time, the spouse that committed fraud doesn’t end up with an unfair proportion of the estate after factoring in the amount of money they spent or moved fraudulently.
According to Texas Family Code, the court “may grant any legal or equitable relief necessary to accomplish a just and right division.” They can do so through a number of different methods– three of which are listed right in the code. Let’s take a look at how the community estate could be divided using our above example.
Once the value of the reconstituted estate is established, the court would then be able to divide the estate in a “just and right” manner. If the innocent spouse is awarded 50% of the reconstituted estate, they won’t be penalized for the fraudulent activity of their spouse. In the above example, the innocent spouse would receive $100,000, while the spouse that committed fraud would only receive $50,000.
Courts don’t necessarily have to divide reconstituted estates 50/50, though. If they believe it is just and right to divide the estate in a 60/40 estate in favor of the wronged spouse, for example, they are free to do so.
Using the example above, this means that the innocent spouse would receive $120,000 while the spouse that committed fraud would receive $80,000 minus the amount they spent fraudulently, which would leave them with only $30,000 in the division of assets.
Courts can also award a money judgment against the guilty spouse in favor of the wronged spouse if there aren’t enough funds to divide the community estate in a just and right way. When a court grants you a judgment for a debt you are owed, the money doesn’t show up automatically. There are a number of different options when it comes to collecting a money judgment, including:
Money judgments can also be awarded if your ex-spouse doesn’t comply with the division of property after a divorce to help account for the damages caused.
Alternatively, the court can award the innocent spouse an appropriate share of the marital estate and a money judgment. One reason this might occur is when there is a community estate to be divided, but not enough to cover what is owed to the innocent spouse due to fraudulent activity.
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There are two types of fraud recognized by Texas law when it comes to dividing community property: constructive fraud and actual fraud.
Constructive fraud occurs when one spouse breaches the fiduciary duty they have toward the other spouse. Fiduciary duty refers to the legal obligation one person has to act in the best interest of another party.
In cases where there is alleged constructive fraud, the argument is that one spouse breached their fiduciary duty to the other by misappropriating assets from the marital estate. As opposed to actual fraud, cases that involve claims of constructive fraud don't require proving the intent of the spouse's allegedly fraudulent actions.
This type of claim can also be pursued if one spouse uses marital assets for non-community purposes without the consent or knowledge of the other spouse. This type of claim is possible under the theory of waste.
Constructive fraud is considered a sub-category of common law fraud in Texas.
Actual fraud occurs when one spouse transfers community property in order to deprive the other spouse of property that they have an equal right to, through an intent to deceive or dishonesty.
A higher level of culpability is required to prove a claim of actual fraud. The wronged spouse will have to prove that their spouse acted with an intent to deceive or dishonesty, beyond simply showing that assets were moved.
To be clear, the wrong spouse will need to prove the following facts about their spouse for a court to find the offending spouse guilty of actual fraud:
When a court finds that actual or constructive fraud has been committed by one spouse, they will calculate the value of the reconstituted estate and divide it between the parties in a manner they believe is just and right. In plain English, this means that the court will figure out how much money would have been in the estate if one spouse hadn’t acted fraudulently. This means that the wronged spouse doesn’t have to be penalized when it comes to a property division due to the fraudulent behavior and actions of their ex-spouse.
While a court is required to divide the marital estate in a manner they believe to be just and fair, this doesn’t mean they always have to order estates to be split 50/50.
Courts are allowed to order an unequal division of the marital estate if they find they have reasonable grounds to do so.
This exact scenario occurred in a case out of Dallas, In re Interest of MG., where the findings of the trial court were affirmed by the appellate Court. The trial court had found that a husband had breached his fiduciary duty to his wife and defrauded the marital estate by depleting community assets. His fraudulent actions included loaning $90,000 to a friend and sending money to support another woman and a child.
The trial court chose to award the wife a disproportionate amount of the marital estate, a decision which was later affirmed by the appellate Court.
Every divorce is different, so it can be difficult to determine exactly how a court would rule in your particular case. However, it’s worth knowing that it is possible for a court to award one spouse a larger share of the marital estate if they believe it is fair to do so.
Are you looking for more resources to help you navigate your Texas divorce? Check out our library of articles at TexasDivorceLaws.org.