What is the Statute of Limitations on Hidden Assets in a Divorce?
A woman from Rochester Hills, in Oakland Michigan recently contacted me regarding a post- divorce issue. She asked me what she could do if she discovered that her ex-husband failed to disclose or hid marital assets from her during the proceedings effectively denying her an equitable share of those assets. The answer is a little complicated and depends on how the divorce judgment was written.
How long does a party have to discover assets that a spouse hid from them during a divorce proceeding or what is the statute of limitations for division of hidden assets after the entry of a Judgment.
A recent unpublished opinion from the Michigan Court of Appeals, Fritzinger v Fritzinger and Lundahl, Docket No 299852, decided November 22, 2011, discusses this issue. In that case, the husband had a business with his sister, Ms. Lundhall. The business filed a federal lawsuit against a former client asserting the client had stolen software from the business. Before the divorce, the husband owned 40% of the business and his sister owned 60%, during the divorce proceedings the husband sold 30% of his stock to his sister because he was unable to pay for his share of the attorney fees to pursue the lawsuit on behalf of the business.
The divorce judgment awarded the husband his remaining 10% share of the company but indicated that any net payout to the husband from the lawsuit mentioned above would be split 50% between the husband and wife. The husband subsequently sold his 10% share to his sister to pay a cash settlement to the wife required by another provision of the judgment of divorce. The business subsequently settled the lawsuit for $5,365,988 but the husband did not receive any money from this settlement as he had sold his remaining share of the business. This of course meant that the wife did not receive any share of this settlement either.
The wife then filed a motion for the court to award her 50% of what would have been the husband’s 10% share of the $5,365,988. The court summarily dismissed this motion. There were two problems, first, the length of time after the divorce when she filed the motion and second, the judgment of divorce only gave the wife an interest in any net payout to her husband but it did not contain any restriction against him selling or transferring his interest in the business.
The wife’s attorney should have included some restrictions in the judgment which would have stopped him from selling the stock, but failed to do so. Further her attorneys failed to include any duty for him to preserve his interest in the business for the protection or benefit of his wife. This failure allowed him to sell the stock and deprive her of any interest in this substantial settlement.
The wife then claimed that her husband committed fraud when he sold his remaining interest in the business to prevent the wife from obtaining her share of the proceeds. The court indicated that any claim of fraud relating to the judgment of divorce is barred by court rule where more than one year has passed since the judgment was entered.
This provides the basic answer to the question; a party who asserts that the other party has committed fraud (such as hiding assets, selling assets or transferring assets) during divorce proceedings may seek redress within one year after the judgment is entered. A party may not bring an independent action for fraud when another party liquidates assets more than one year after the judgment.
However, the statute of limitations can be extended to six years through clever and intelligent drafting of the judgment of divorce. The way to do this is by creating a separate property settlement in addition to the judgment of divorce. Then the magic words to use in the judgment of divorce are “the property settlement separately executed by the parties is incorporated but not merged into this judgment of divorce”. When one uses those words, the separate property settlement agreement remains a separate contract and therefore the statute of limitations for enforcement and with regards to fraud (hidden assets, etc.) extends to six years. The reason for this is that the statute of limitations to seek redress for contract violations is six years, rather than the one year period associated with the judgment of divorce.
A separate property settlement is often created and then referenced in the judgment of divorce in order to maintain the private nature of the settlement as the divorce judgment is a public record but the property settlement may remain private. In addition, if one is concerned that a party may be hiding assets or otherwise acting shady, it may be a good idea to use a separate property agreement to extend the statute of limitations. Where a spouse has hidden assets and those are later discovered within the statute of limitations, then the aggrieved spouse may seek 100% of those assets, so this can be a very important issue.
In addition, the Fritzinger case provides an example of why divorce judgments must be carefully drafted in order to protect the parties. It appears that the attorney for the wife in that case should have also included language in the judgment which restricted the husband from selling his stock until after settlement of the lawsuit or otherwise created a fiduciary duty for the husband to maintain the wife’s interest in the payout from the lawsuit.
 The wife’s share would have been approximately $268,299