Divorce and Equitable Distribution Where There Are Hidden Assets (part 1)

by / 0 Comments / 68 View / December 1, 2007

A frequent issue in a divorce action is proving a spouse’s assets. For a w-2 employee, this is generally an easy task. Where the issue becomes tricky is where the spouse owns a cash business, such as landscaping, or the restaurant. In that case, there is a question as to how much the spouse really makes, or how much the business is really worth.

I had a case where the husband had a $14,000 a year pension, and claimed that the pension was his sole income. The wife, my client, claimed that he operated an unlicensed garage, and several joker poker machines. The business was unlicensed and all cash; further, he never reported a dime to the IRS. He thought that he was untouchable. However, the divorce court has the power to strip away the lies and determine the real state of affairs. Here, I showed that he spent over $60,000 a year. The judge then found that the husband’s income was $60,000 a year and made the appropriate orders based upon that finding.

This power to look beyond a person’s story and determine the truth of the situation was vividly demonstrated in a recent decision by Justice Arthur Diamond, who is a divorce court judge in Nassau County, in the case of C.H. v. R.H, reported in the Law Journal, November 20, 2007, on page 29.

The husband was a minister of a church in Brooklyn. The church, under New York law, was a religious corporation. As such, it did not belong to the husband, and under New York law, was not part of the martial estate. Additionally, courts are prohibited from judicial involvement with internal church governance.

But, the wife argued, the church is a marital assets because it is actually the husband’s piggy bank. Specifically, she claimed that the husband “provided $50,000 of their marital money to church as start-up capital; the defendant controls all the finances of the church, and makes all financial decisions, defendant refuses to make any financial disclosures to the church’s board of directors and the church administrator, hides his finances from the church elders, determines his own income, refers to the church as ‘my church’ and dismisses anyone who challenges his operation and finance of the church.”

Justice Diamond addressed the New York law governing churches, and the reluctance of the courts to interfere with them. He then discussed the power of a court sitting in divorce to piece the veil of a corporation to determine the true owner as opposed to the title owner. He noted that in the case of Goldberg v. Goldberg, 172 A.D2. 2d 316, which involved a for-profit corporation, the appellate division granted “a distributive award to the plaintiff as her share of the marital property after finding that the defendant had deliberately dissipated and secreted marital funds and assets through conveyance of various trusts and alter ego corporations which served as defendant’s personal pocket book.”

Based upon the statute and case law, Justice Diamond found that there were sufficient questions of fact as to whether the church was indeed a separate and independent religious corporation or merely the alter-ego (i.e. pocket book) of the husband.

This decision shows the power of the divorce court to identify the true ownership of property. After all, at first blush, who would think that a church could be considered marital property? But, if the wife can prove her case, that the husband filtered martial money into the church, and used it to generate income for his personal benefit, then the court can find the church to be a marital asset, subject to equitable distribution. The lesson of this decision is that the court will not be bound by appearances but will determine the true state of affairs based upon the facts.

For example, if the business is in the husband’s father’s name, but the father lives in Florida, has no contact to the business, the husband provided all the capital, runs the business on a daily basis and enjoys the profits from the business, the court could well decide that the husband is the true owner, and the property is subject to division.

 

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