By Bruce I. Shapiro, Henderson, Nevada
Published in the Nevada Family Law Report, Fall 2010
Reprinted with Permission from the State Bar of Nevada ©2010
1. Introduction
NRS 125.150(1)(b) provides that in a divorce action, a court shall attempt to make an equal division of the community property “except that the court may make an unequal disposition of community property in such proportions as it deems just if the court finds a compelling reason to do so and sets forth in writing the reasons for making the unequal disposition.” The statute begs the question: what constitutes a “compelling reason” for the unequal distribution of community property?
The Nevada Supreme Court held in Lofgren v. Lofgren, 112 Nev. 1282, 1283, 926 P.2d 296, 297 (1996), that “if community property is lost, expended or destroyed through the intentional misconduct of one spouse, the court may consider such misconduct as a compelling reason for making an unequal disposition of community property.” The financial misconduct in Lofgren was “found in the husband’s having transferred funds to his father and in his having used community funds for his own purposes, all in violation of the court’s preliminary injunction.” Lofgren at 1284, 297. The Nevada Supreme Court noted this in Putterman v. Putterman, 113 Nev. 606, 607, 939 P.2d 1047, 1048 (1997), and went on to observe that “[t]here are, of course, other possible compelling reasons, such as negligent loss or destruction of community property, unauthorized gifts of community property and even, possibly, compensation for losses occasioned by marriage and its breakup.” Putterman at 608, 1048.
Generally, once an allegation of waste or hiding of community assets has been made in a divorce proceeding, and there is evidence of a missing or damaged asset, the spouse accused of dissipating the asset has the burden of proving how the specific funds were spent. See In Re Marriage of Seversen, 228 Ill. App.3d 820, 593 N.E.2d 747 (1992); Morrison v. Morrison, 713 S.W.3d 377 (1986) (“because a trust relationship exists between husband and wife as to that community property controlled by each spouse, the burden of proof to show fairness in disposing of community assets is upon the disposing spouse”). In other words, if an asset existed at the time of divorce, or shortly before the divorce, and was spent or lost in contemplation of a divorce, the spouse who lost or dissipated the asset will have the burden of showing that the asset was not lost or wasted, but transferred or spent consistent with a legitimate community purpose.
2. Gambling Losses
Gambling losses may clearly be considered a “negligent loss or destruction of community property.” Putterman at 608, 1048. Some Clark County family court judges, however, view gambling merely as a form of “entertainment.” One party may take vacations, have spa days, or go to concerts for entertainment, while the other may gamble. In determining whether gambling losses constitute community waste, a court may consider historical gambling patterns, or the amount of loss and the timing of the losses relative to the divorce. There does not appear to be any distinction between legal or illegal gambling.
Oddly, there are no Nevada cases dealing with gambling as community waste. But in many other states, financial misconduct in the form of gambling is considered a dissipation of assets justifying an unequal disposition of community property. This is based largely on the incredible financial toll that gambling has on marital assets. In an article titled “Addiction and Family Law” (1998 Wiley Family Update, Chapter 3, §3.14), Eric Drogin and Curtis Barrett address this issue most poignantly. Drogin and Barrett use the term “pathological gambling,” and define it as an addiction without substance. They explain that pathological gamblers believe they have a money problem and not a gambling problem. They also state that pathological gamblers think and act tactically and strategically. An element of deception is included in this tactical and strategic thinking, and no one is more susceptible to being deceived than the family members of a pathological gambler. A spouse may be aware of some level of gambling being engaged in by the other spouse, but if the non-gambling spouse is unaware of the extent of the gambling spouse’s losses because the gambling spouse has intentionally hidden the nature of the losses, a court could find that community waste has occurred.
In Siegel v. Siegel, 574 A.2d 54 (N.J. Super. Ct. 1990), the New Jersey Superior Court was asked to determine whether gambling losses incurred before the filing of a complaint for divorce, “but when the marriage was irreparably fractured,” constituted waste. The court ruled that the gambling losses do “equate with a ‘dissipation’ of funds to be borne solely by the one who placed the family treasury at risk.” The court concluded that “requiring [the gambler] to fully assume the gambling indebtedness not only places the parties where they belong, but also where they positioned themselves,” with respect to the proceedings.
Illinois courts have taken a similar view of gambling as a dissipation of assets entitling the non-gambling spouse to an offset for community property wasted on gambling. In re Marriage of Morrical, 576 N.E.2d 465 (Ill.App. 3 Dist. 1991), was concerned with evidence showing that the husband “had sold stock worth up to $32,000.00” at a time when both parties admitted “that the marriage was undergoing serious problems.” The husband “never gave a satisfactory accounting of what happened to the proceeds from the sale of the stock, [but] he did admit that he gambled with some of the money.” The Appellate Court of Illinois held that the trial court did not err in determining that the husband had dissipated $32,000.00 of the marital property and that the wife was entitled to compensation for one-half of that amount. See also In re Marriage of Hagshenas, 600 N.E.2d 437 (Ill.App. 2 Dist. 1992).
Another example is Kozlowski v. Kozlowski, 633 N.Y.S.2d 523 (A.D. 2 Dept. 1995), where in an action for divorce, the trial court awarded the wife 100% of the interest in the parties’ marital home. Evidence showed that “the bulk of the funds used in purchasing the home came from wife’s separate property” and “that husband has a history of dissipating assets by gambling.” Based on this evidence, the New York Supreme Court, Appellate Division, determined that “the trial court’s equitable distribution award was proper.” Id. at 524. See also Lindsay v. Lindsay, 115 Ariz. 322, 565 P.2d 199 (Ariz. Ct. App. 1977) (husband sold community interest in airplane and “lost” the proceeds “in gambling”); In re Marriage of Smith, 114 Ill. App. 3d 47, 448 N.E.2d 545 (1983); Wheeler v. Wheeler, 2001036, Court of Civil Appeals of Alabama, 831 So. 2d 629 (2002) (court did not abuse discretion in considering husband’s gambling in dividing marital assets). See also unpublished opinion in Wisniewski v. Wisniewski, FA 990067303, Superior Court of Connecticut (2000) (non-gambling spouse was given a larger share of the marital assets due in part to negative financial effect of other spouses gambling).
3. Consumer Purchases
In an unpublished opinion, the Nevada Supreme Court found that a “wasteful and secretive” purchase made during the pendency of a divorce action in violation of a restraining order, and the acquisition of debt on a community credit card to pay for unauthorized gifts of community property, were compelling reasons to make an unequal disposition of the community property. “Order of Affirmance,” Evans v. Evans, No. 50979 (June 30, 2009).
The test for analyzing waste regarding consumer purchases is generally “whether the assets were actually wasted or misused.” Goodman v. Goodman, 754 N.E.2d 595, 598 (Ind.Ct.App. 2001), citing, In re Marriage of Coyle, 671 N.E.2d 938, 942, 943 (Ind.Ct.App.1996). “Factors to consider in determining whether dissipation has occurred include:
1. Whether the expenditure benefited the marriage or was made for a purpose entirely unrelated to the marriage;
2. The timing of the transaction in relation to the divorce;
3. The amount of the expenditure in relation to the value of the community; and
4. Whether the wasting party intended to hide or divert the asset.”
A South Carolina opinion examined whether trial courts should consider “preseparation” expenses, as well as postseparation expenses in considering whether or not there has been community waste. The court developed a logical analysis finding a trial court should consider preseparation and postseparation actions if the preseparation actions was “(1) in contemplation of divorce or separation; or (2) while the marriage is in serious jeopardy or is undergoing an irretrievable breakdown.” Finan v. Finan 949 A.2d 468 (Conn. 2008). See also, In re Marriage of Smith, 114 Ill. App. 3d 47, 51, 448 N.E.2d 545, 548 (Ill. App. Ct. 1983) (“Dissipation of marital assets by one spouse in contemplation of dissolution of marriage is an unacceptable practice that will not be sanctioned.”); In re Marriage of Coyle, supra, 671 N.E.2d 938, 942, 943 (“transactions which occur during the breakdown of the marriage, just prior to filing a petition of during the pendency of an action, may require heightened scrutiny”).
The court in Putterman provided an explanation to support this reasoning, opining that “[i]t should be kept in mind that the secreting or wasting of community assets while divorce proceedings are pending is to be distinguished from undercontributing or overconsuming of community assets during the marriage.” [Emphasis added.] The same community property principal applies to income as to expenditures. “When one party to a marriage contributes less to the community than the other, this cannot, especially in a community property state, entitle the other party to a retrospective accounting of expenditures made during the marriage or entitlement to more than an equal share of the community property.” The court further noted that “Almost all marriages involve some disproportion in contribution or consumption of community property,” and that “such retrospective considerations are not and should not be relevant to community property allocation and do not present ‘compelling reasons’ for an unequal disposition; whereas, hiding or wasting of community assets or misappropriating community assets for personal gain may indeed provide compelling reasons for unequal disposition of community property.” Putterman at 609,1048-9.
The Court of Appeals of Indiana elaborated on this point, stating that “[o]ne spouse’s claim of improvident spending by the other spouse can be a powerful weapon in an attempt to secure a larger share of the marital estate. However, a trial court presiding over a dissolution proceeding in which dissipation is an issue should not be required to perform an audit of expenditures made during the marriage in order to determine which spouse was the more prudent investor and spender. [Citation omitted.] The institution of marriage would be ill-served if spouses were encouraged to maintain a continuous record of expenditures and transactions during the marriage for use in the event they are ever divorced.” In sum, allegations of waste occurring during the breakdown of the marriage, just prior to commencement of a divorce action, or during the pendency of an action receive higher scrutiny than allegations of waste occurring at other times during the marriage.
4. Negligent Investments
Shortly before divorce, or even during divorce, one spouse purchases stock or invests in some other type of investment. By the time of trial, the value of the investment decreases. Is this a loss to the community or is it a separate loss of the investing spouse?
If the investment creates value for the community, there would be no argument under Nevada law that the increase was community property. The real question that generally arises is when the investment loses value. A distinction may also be made depending on whether or not the investment was in the normal actions of the community during marriage.
The appropriate test was articulated in Sien v. Sien, 889 P.2d 1268 (Okla.App. 1994). Here, the husband made investments totaling more than one million dollars over an eight year period. The contribution of capital may not have been necessary, but was made in good faith. The court essentially found that long term investments made during the marriage “were legitimate investments for the intended benefit of the parties.”
In sum, the investing spouse assumes the risk of making any unilateral investments when a divorce or separation is contemplated by either party. If the value of the investment increases it will almost certainly be community while any losses may be found to be separate.
5. Other Possible Waste Issues
As noted above, the Nevada Supreme Court, in Putterman, opined that “There are, of course, other possible compelling reasons, such as negligent loss or destruction of community property, unauthorized gifts of community property and even, possibly, compensation for losses occasioned by marriage and its breakup.” Putterman at 608;1048.
The concept of “losses occasioned by marriage and its breakup” is particularly intriguing. In DeLa Rosa v. DeLa Rosa, 309 N.W.2d 755 (Minn. 1981), which was cited by the Nevada Supreme Court in Putterman, wife worked to allow husband to pursue his undergraduate and medical school education on a full-time basis. Because all of the working spouse’s income was used for joint expenses, there was no “savings” to divide upon divorce when the newly educated spouse was ready to start reaping the financial benefits of his education. Although there was no waste, the Minnesota Supreme Court found “that the trial court did not abuse its discretion in making an equitable award to [wife] for the financial support she provided to [husband] during his schooling.” DeLa Rosa at 758. By citing this case, the Nevada Supreme Court arguably suggested it may entertain a similar argument under the right circumstances.
6. Conclusion
Cases published by the Nevada Supreme Court and courts in other states have identified specific acts that may constitute community waste and therefore justify an unequal division of community property. There are, however, other possible compelling reasons for a court to give an unequal disposition of property, such as negligent loss, destruction and unauthorized gifts of community property. Based on the published decisions, the court may also be open to other “equitable reason” for an unequal division of community property. Any finding of waste or unequal distribution of property, however, must be supported by specific findings of fact.
David J. Kenney, a legal assistant with Pecos Law Group, contributed to the research and preparation of this article.