Hidden Assets ands Divorce in Michigan

What Does the Law Say?

According to Michigan law, during divorce proceedings, neither party is allowed to conceal assets to the other's disadvantage. For a fair division of property to occur, all assets owned by both spouses must be disclosed and examined. If a party fails to reveal an asset, they may be accused of fraud, facing severe penalties. In some instances, a judge might grant all hidden assets to the other spouse who was not involved in the deceit. Additionally, a party who does not comply with legal requests regarding asset disclosure, known as "discovery," may be found in contempt of court and face financial penalties, including attorney fees.

Despite these legal consequences, spouses often, driven by greed and resentment from the breakup, intentionally hide assets or engage third parties in attempts to conceal them. Such actions can lead to further fraud charges or claims of fraudulent transfers. A common tactic, for instance, is creating a trust for a third party.

The Cost of Uncovering Hidden Assets

The client and attorney must develop a budget and aim for a cost-effective outcome. Initially, the attorney might employ informal discovery methods, such as sending a letter to request account details and other information. If this exploratory approach is unsatisfactory, the attorney will typically move on to more formal legal discovery methods like interrogatories, depositions, subpoenas, requests for production, and motions to compel information about the marital and separate estates. If these methods prove unproductive, hiring experts to investigate is an option, though it can become costly. Engaging experts for valuation and testimony is even more expensive. At a certain point, the attorney and client must decide whether further expenditure is justified. Ultimately, this decision rests with the client. In any case, the client and attorney should document their discovery plan in writing.

Guiding Case Law

Sands v. Sands. The significant Michigan 'hidden assets' case is Sands v. Sands, 192 Mich. App. 698, 482 N.W.2d 203 (1992), aff'd 448 Mich. 30, 497 N.W.2d 493 (1993). This case outlines the procedural steps required to discover and utilize hidden assets to enhance the marital estate. The defendant, Mr. Sands, intentionally concealed assets during the initial trial period. When these assets were discovered post-trial, the court revisited the property division in a new partial trial. The Michigan appellate court awarded Mrs. Sands all of the uncovered assets. The Supreme Court later upheld the decision in favor of Mrs. Sands. However, the Supreme Court emphasized that in each divorce case, the circuit court must equitably distribute the assets. The responsibility lies with the party seeking redress to prove that the opposing party acted so egregiously that the court should grant the complaining party the value of the entire discovered asset. There is no automatic rule mandating that the party who concealed the asset must forfeit the entire hidden asset to the other party.

Wiand v. Wiand, 178 Mich. App. 128, 443 N.W.2d 464 (1989) A series of cases involving Mr. and Mrs. Wiand highlight the procedural challenges in attempting to expand the marital estate with undisclosed assets. In 1987, the court issued an order divorcing plaintiff Lenore Wiand from defendant Ronald Wiand. The trial lasted several days, featuring 15 witnesses and 85 exhibits. The trial court determined that Mr. Wiand engaged in a pattern of behavior aimed at harassing Mrs. Wiand and thwarting her efforts to effectively discover his assets and net worth. Records also indicated that Mr. Wiand repeatedly violated court orders regarding support, discovery, and injunctive relief. His attempts to evade proper discovery and conceal assets clearly displeased the trial court. [Notably, the court permitted future post-judgment discovery and adjudicated the rights of Mr. Wiand's brother, who was found to hold assets for the defendant.] Based on limited information, the court ruled that Ronald Wiand's equitable interest in certain assets amounted to $300,000. However, it allowed both parties to conduct further discovery, seek independent audits, or provide additional proof regarding the value of the defendant's equitable interest post-judgment. In the first appellate case (Wiand I), the court reiterated the principle that property settlement provisions are final and cannot be altered. It concluded that the lower court erred in permitting an indefinite post-judgment discovery period during which either party could contest the court's estimated valuation. This provision was deemed inconsistent with Michigan Court Rule 2.612, which outlines the methods for seeking relief from a court's judgment. The Court of Appeals upheld the divorce judgment but removed the provision allowing for an indefinite post-judgment discovery period.

The Rights of Third Parties Involved in Concealing Assets

When a third party collaborates with one spouse to defraud the other of their rightful share in the marital estate, Michigan courts will intervene. For instance, in Donahue v. Donahue, 134 Mich. App. 696 (1984), the defendant husband tried to hide valuable bonds by leaving them with his girlfriend. The defendant's parents, who had given him the bonds, also attempted to conceal them from the plaintiff wife and the trial court. The court included the bonds in the marital estate. Similarly, in Wiand I, referenced earlier, the appellate court affirmed the trial court's decision that assets purportedly belonging to Mr. Wiand's brother were marital assets. The court found that the absence of legal counsel was not significant. In essence, a court can determine that a third party has conspired with one spouse to deprive the other of their rightful interest in the marital estate, allowing the court to equitably divide the marital assets.

Common Methods for Hiding Assets

Below are some typical strategies used:

• Concealing documents, such as hiding securities, stocks, and bonds, etc.

• Transforming cash into "movable property," like art, hobbies, or jewelry

• Settling fictitious debts by creating fake debt instruments and paying them to a third party

• Setting up Custodial IRA or 401K accounts in collaboration with a friend or relative

• Using a business owned by a spouse to channel income and expenses

• Intentionally undervaluing assets or a spouse-owned business

Methods for Discovering Hidden Assets

Hidden assets are often revealed through these sources:

• Tax returns

• Online public records, such as deed transfers

• Bank documents, including electronic transfers and significant cash withdrawals

Steps to Take Upon Discovering Hidden Assets

An attorney who uncovers hidden or understated assets should discuss the findings with the client and determine actions based on the divorce proceedings' stage. Regardless, the attorney must inform the opposing party about the findings for review. The other party is entitled to assess the information to agree or disagree on whether the hidden asset is part of the marital estate.

Many attorneys may file post-trial motions under MCR 2.612(C) (Grounds for relief from judgment). In these instances, they must demonstrate to the trial court that the opposing party acted unfairly, affecting justice. Relief can only be achieved by modifying or overturning the existing divorce judgment.

Specifically, attorneys should refer to MCR 2.612(C)(1)b (newly discovered evidence) that could not have been found in time to request a new trial under MCR 2.611(B). They should also consider fraud (intrinsic or extrinsic), misrepresentation, or misconduct by the opposing party. The motion to amend the judgment must be filed within a year of the order. If the aggrieved party cannot file within a year, they may pursue an independent action for relief from the judgment.

Understanding "Finality of Judgment"

Be aware of the policy issues related to judgment finality, which can restrict which lawsuits can be pursued independently. In Nederlander v. Nederlander, 205 Mich. App. 123, 517 N.W. 2d 768 (1994), Mrs. Nederlander filed an independent fraud lawsuit over a year after the divorce judgment was entered, after discovering her husband had concealed the true value of his businesses. The court ruled that "If a party suspects fraud during a divorce proceeding, MCR 2.612(C)(1)(c) and (2) allow seeking redress within one year post-judgment. Allowing independent fraud actions beyond a year, when the other party liquidates assets or completes business transactions, contradicts the public policy behind judgment finality." Nederlander, 205 Mich. App. at 127.

The Role of the Disclosure Statement

Due to the "finality of judgment" rule, it is now standard to include a "disclosure clause" in the judgment, stating that all property has been disclosed by both parties. The judgment also specifies that undisclosed assets may be subject to further discovery and future division as marital property. Thus, the settlement of known assets is final; however, if new evidence reveals undervaluation or overvaluation of the marital estate, the aggrieved party can reopen the judgment or initiate a new lawsuit.

Determining If an Asset Is Part of the Marital Estate

There are three main criteria to determine if an asset is a marital asset.

1. Was it acquired during the marriage? The court sets the start and end dates for the marriage period.

2. Is the asset separate property? Most pre-marital accumulations are excluded, but consider any exceptional circumstances for inclusion in the marital estate. Is it a gift or inheritance? One spouse can claim "separate property" if they contributed to the acquisition, improvement, or accumulation of the separate property. Reeves v. Reeves, 226 Mich. App. 490 (1997).

3. Does the asset genuinely belong to a third party, or is it a marital asset?