SCOV Law Blog: DIY asset management backfires

Editor’s note: This analysis of a recent Vermont Supreme Court ruling is by Daniel Richardson, the founder of SCOV Law Blog.

Shattuck v. Peck, 2013 VT 1

Image from Stockxchng

Image from Stockxchng

It is easy to think of marriage as a special status where we, as a society, recognize the union of two lives into one and bestow benefits upon that favored coupling. But closer scrutiny (and a few years in family court) will show that marriage is part benefit and part protection. Or as many hungover Vegas tourists have learned, marriage may be easy to enter, but it is notoriously difficult to undo —celebrity examples notwithstanding.There is a reason for that. For all of the ethereal talk of a marriage of true minds, marriage is also a business proposition that is part securities merger and part contract. To that end, family court is the impediment that the parties admit to ensure that any stock split is conducted in a fair and equitable manner.

When we enter a marriage, we make common cause with another. We mingle assets. We support the other and provide her with the platform to earn or achieve. After some time, it is difficult for the parties, let alone an outsider, to separate assets and to identify mine from yours. And to a certain extent, such questions are irrelevant. The question is what is fair and what will allow each spouse to live at the same level of comfort he or she has come to enjoy in the marriage.

This kind of thinking can drive clients nuts. What do ya mean I have to support him while he raises the kids? But it is the function of marriage. Society will let you into this relationship and will shower you with benefits, but if you decide to end it, there will be scrutiny and a price. After all, if you don’t take care of your ex, who will?

Such talk makes even the most romantic want to turn her wandering bark away from the stars. Indeed, such bitter divorces are often cited as exhibit A by the young couples who choose to cohabit and mingle assets but staunchly refuse to seal the deal in front of the man with a piece of paper.

Yet cases, like today’s, are prime examples of why marriage remains an important institution vital not only to the health of society but also as a bulwark to protect the partners of such a relationship.

All of which brings us to the present case in which neither marriage nor divorce factor in one iota to the events befalling the former couple, who have now become partners in litigation.

Let’s start at the top. Plaintiff and defendant lived together as a couple, for approximately 15 years. During that time, they never married, but they did engage in several of the activities that are common between spouses.

Sometime in the mid-1990s, plaintiff moved into defendant’s mobile home in Springfield. Defendant had purchased the property from her mother with a loan and a mortgage.

In the late 1990s, plaintiff purchased two adjoining lots in Cavendish, in his name. While plaintiff provided the bulk of the payment, defendant contributed to this purchase.

In 2004, plaintiff began building a home for the parties on the Cavendish property. Plaintiff provided most of the capital and the “sweat equity,” but defendant contributed to the process as well as the sweat and was a co-signer on the initial construction loans and mortgages.

In 1999, defendant was laid off from her job and began receiving $700 a month in Social Security benefits. The parties mistakenly believed that as their fortunes improved with the Cavendish property purchases, they had to keep the assets away from defendant or risk losing her federal benefits. It turns out that this was a completely mistaken impression and a really bad decision.

Two years later, the home was finished and the parties moved into it. Plaintiff took out a final set of loans to pay off the initial and intermediate construction loans as well as $20,000 that remained due on the Springfield mobile home property. The resulting notes and mortgages were only in plaintiff’s name. Around this time, the parties executed wills that named each other as primary beneficiaries.

So far, so good, it would seem, but during this time, the parties were engaged in a concerted effort to strip away, at least on paper, all of defendant’s assets.

In 1999, defendant was laid off from her job and began receiving $700 a month in Social Security benefits. The parties mistakenly believed that as their fortunes improved with the Cavendish property purchases, they had to keep the assets away from defendant or risk losing her federal benefits. It turns out that this was a completely mistaken impression and a really bad decision. (In fact, defendant would later at trial try to argue that this was all plaintiff’s idea, but the evidence indicated that it was a mutual error attributable to both parties.)

In pursuit of this idea, defendant put the Springfield property into plaintiff’s name and did not sign or join onto any of the loans, mortgages or deeds executed for the Cavendish property. In fact, defendant started to pay plaintiff “rent” of $600 to $700 per month in order to obtain a renter’s rebate.

Still, everything seemed to be going well until the summer of 2010 when plaintiff decided to end the relationship. Then things did not.

Defendant sought a relief from abuse order and had plaintiff kicked out of the Cavendish home. Plaintiff responded with an action in ejectment to get defendant out of the house. Defendant counterclaimed that the parties owned the property subject to a partnership agreement or a constructive trust and demanded a dissolution and accounting.

This is what happens when parties who are trying to divorce do not have the legal recourse of marriage. They are forced to create legal fictions as vehicles to house what are essentially domestic complaints. In this case, it was somewhat absurd to allege that plaintiff and defendant were engaged in a partnership arrangement. They were in a marriage. Only they never got married. What they were doing has some of the earmarks of a trust but as we will see not enough to cross the legal threshold and secure the legal protections of such an instrument.

Following a two-day hearing, the trial court ruled that there was no evidence that plaintiff fraudulently induced defendant to transfer away all of her assets.This meant that the court would not create a constructive trust to protect defendant.

There was also no evidence of a partnership or a trust between the parties. So the trial court awarded all of the property to plaintiff who was the owner of record for both parcels.

On appeal, defendant’s sole argument was that the trial court failed to recognize her equitable interest in the property. This was a tough position for defendant to try to argue on appeal. It required her to persuade the SCOV that the trial court erred in its factual findings and abused its discretion in failing to award her equitable relief. Both points have a high threshold and limited scope of review on appeal.

To reverse the trial court on the issue of a constructive trust, defendant needed to persuade the SCOV that the trial court’s refusal was “untenable” and the trial court withheld its discretion entirely. That is because the concept of a constructive trust is broad and highly dependent on the circumstances.

The idea of a constructive trust is to prevent one party from unfairly gaining from another party. This is a concept known as unjust enrichment. For example, if a wife murders her wealthy husband and inherits his estate, the courts will prevent her from benefiting from her criminal action and will hold the estate in a constructive trust for the next closest relative.

In this case, the SCOV notes, defendant got into this mess because she was trying to defraud the federal government. This is practically a textbook definition of unclean hands.

Defendant tried to meet her burden and reverse the trial court with two major arguments. First, she argued that the gifts of property lacked a “donative intent.” In other words, she did not mean to give them to plaintiff, he was just holding them for her. Second, she argued that the trial court’s judgment was unduly narrow and ignored her substantial contributions to the property.

The SCOV seems, at first, to be receptive to this latter point and cites favorable authority in support the principle that a constructive trust is warranted where a legal distribution would ignore the substantial contributions by a party. But this musing is short lived as the SCOV quickly notes that equity requires clean hands by the party seeking such relief.

In this case, the SCOV notes, defendant got into this mess because she was trying to defraud the federal government. This is practically a textbook definition of unclean hands. If your fellow robber cheats you while divvying up the loot, you cannot seek recourse from the courts.

The problem here and what fuels much of the dissent is that despite the parties’ nefarious intentions, they were actually not doing anything illegal and none of their steps constituted fraud. Defendant would have maintained her eligibility whether she had the assets or not. If she had not tried to shield them, she still would have been eligible for the same amount of benefits that she received. In essence, it would seem to be a case of no harm, no foul.

The majority does not see it that way, and it goes to some lengths to defend its decision. It does not matter whether the parties were acting illegally. They thought they were and acted in a manner consistent with a plan to defraud. The SCOV will not overlook incompetence or allow such to be an excuse. The intent to defraud is enough to cause defendant to forfeit her claims for equity.

In essence, the majority is saying, you would not be in this mess but for your greed, and we will not let your ignorance save you.

With that the majority affirms the trial court and sends defendant off to look for a new home.

Justice Robinson is the lone dissenter from the majority on this issue of unclean hands (she has had a number of these solo dissents this term). For the dissent, the issue of equity is too important to be waived away with an imaginary bad act. The dissent argues that short of actual defrauding or criminal activity, intent is not enough to void equitable relief. In support of her position, the dissent cites and discusses a number of cases from different jurisdictions where the courts have not waived equity where intended bad actions have fallen far short of their nefarious intent.

For the dissent, the overriding idea of equity compels this analysis and the unclean hands and narrow application of equity by the trial court is too stingy. The dissent’s position is that this was for all intents and purposes a marriage and the courts should be treating it like one rather than as an arms-length business transaction.

The dissent’s point is that we need to have greater flexibility in these situations to recognize the different relationships at play and the nature that couples will, for good and bad reasons, co-mingle funds and allow one spouse to hold all of the family jewels.

But at one vote, the dissent stands alone and its analysis, while well-wrought, was clearly not persuasive to the remainder of the SCOV. One reason may be the radical flexibility that is implicit within the dissent’s position. The dissent is essentially seeking to import some of the flexible and equitable concepts from family into the present civil dispute. This makes sense because this is essentially a divorce case.

At the same time, it is not a divorce case, and the importation of such concepts is offensive to the standards of a civil claim and the limited equity it offers. After all, if the parties really wanted the flexibility and scrutiny of family court, they could have just gotten married.

The majority appears to buy into the idea that the dissent’s arguments are a bridge too far and bring family law into circumstances where the parties have not availed themselves of it. As a result, the dissent’s reasoning and outcome are largely rejected, and the more restrictive unclean hands analysis prevails.

Evil-doers, beware! Get married first.

Comments

  1. Kai Mikkel Forlie :

    I understand the point of the article and argument but I disagree completely with the moral. We live in a society bizarrely willing to look the other way on the issue of marriage. By this I mean that marriage is fundamentally a discriminatory institution (that discriminates against single people and unmarried couples) and one that fundamentally marries (no pun intended) Church and State. But few complain or try to reform it.

    Marriage is a religious institution and as such should be separate from the State process that has grown up around it. On the State level people should be viewed as individuals unless and until they take steps to execute cohabitation and co-ownership agreements with another person. And even then, people who choose to enter into such agreements should absolutely NOT receive any preferential treatment by the state. On the religious side of things if a couple chooses to get married and have a party then so be it. But “marrried” couples should be married only in the eyes of whatever deity they choose to believe in, the State should have nothing to do with it.

    I find it ironic that the queer community and their supporters have been fighting for the right to marry when what I think we should have been doing is dismantling the State portion of the institution thus making everyone equal as individuals therein. Take away the benefit and there’s nothing left to fight for. And if somebody’s Church or whatever wants to discriminate against them because they’re queer then they can decide for themselves whether or not they want to continue supporting such an institution.

    As it is, the vast majority of people who marry have little or no idea what they’re getting involved in insofar as what an eventual divorce or death will entail. In fact, an entire legal industry has been created to extract uninformed people from marriage “contracts”, many of whom are in the worst possible place emotionally to be splitting up assets and responsibilities.

    On the other hand, couples who choose not to marry but instead go through the valuable and informed process of creating written agreements early in a relationship – agreements that by their very nature clearly and definitively detail what happens in the event of a disagreement and/or dissolution (think of them as a cousin of the prenuptial agreement) – know from the start exactly what to expect. In fact, I can’t think of a more loving and caring gesture by two people dedicated to spending their lives together than each ensuing in writing that both individuals are fully protected and looked after should anything happen down the road. In stark contrast, most married folks are forced to simply hope for the best, a lofty aspiration that’s proven only as effective as the divorce rate is large.

    I think it fundamentally unjust and unfair that married people benefit in ways that individuals and unmarried couples don’t. For example, married people benefit financially vis a vis federal and state tax breaks, automatic assignment of assets and property(including social security benefits and/or pensions at death) and via other less visible ways (like preferential treatment by those people and institutions who view married people as somehow more respected and/or more stable than unmarried people. And that’s not all). Married people also benefit from automatic health insurance coverage, visitation rights in hospital and by not having to testify against their spouse in a legal proceeding. And the list goes on.

    So let’s really make things fair and just by dismantling state sponsored marriage altogether.

    • Topaz Moon :

      So well said. As a single person, not entirely by choice but by life circumstances, I have borne the entire weight of life’s obligations on my own, and really struggled mightily with that. There have been may times where I have wanted to pool my resources and benefits and join permanently into a legally recognized unit with, say, a sister or a friend, and wondered why two people who want to do so have so many less rights and recognition as a “family”, if any, than two who sleep together.

      I know in past legal analysis, the state has a compelling interest in promoting marriage so that children are born into legitimate families who will care for them physically and financially, and so that laws of inheritance, etc. can be uniform, but in this day and age of gay marriage and so many permutations of how a child is conceived; there is so much more than procreation to consider when we think about the best way to organize and to care for each other in our society. Time to really question whether the institution of marriage is actually fair and just, because it excludes people who also deserve equal protection under the law.

  2. Steven Farnham :

    There are two things which make no sense here.

    First, both parties engaged in an (alleged) plan to “defraud” the Federal Government – yet it seems one is punished, and the other rewarded. And it would appear (from information given) that said reward is handed to the least deserving party.

    Second, as I was reading this, I was thinking of Dan Dewalt’s piece* from last week, “Too Big To Jail.” If you’re wealthy enough to screw the Federal Government (which is substantially equal to screwing all Americans at once), you are forgiven by virtue of our toothless legal system.

    But (getting back to Shattuck v. Peck), some poor woman living in a trailer carries out a plan which vaguely appears to be an attempt to defraud, but indeed isn’t fraud because receiving what she sought is legal anyway? Send her to the gas chambers!

    It is obvious after many decisions like “Citizens United,” that SCOTUS is a bunch of gutless, unscrupulous thugs sycophantic to the wealthy. It now appears that whatever is in the SCOTUS water – the SCOV is drinking it too.

    * http://vtdigger.org/2013/03/19/dewalt-too-big-to-jail/

    • Karl Riemer :

      Gee, I read the piece several times and couldn’t find a single gas chamber. Either I’m inept at reading between the lines or S. Farnham is adroit at embroidering there.

      Regardless of whether it was clumsily fraudulent or comically incompetently fraudulent, the scheme involved legally transferring assets from one party to the other. Those transfers were consensual and meticulously documented. All the trial court and then the supreme court did was decline to void voluntary, legal contracts undertaken with full knowledge between consenting adults, when offered the sole grounds that they were, in fact, entered into insincerely, in an effort to defraud others, not intended to be taken seriously by the consenting adults themselves. It amounts to a diminished capacity affirmative defense: the defendant deserves a do-over because she’s so bad at crime her attempted con fooled only her, and her accomplice in the attempted con turned out to be less than altruistic. That can’t be fair!

      Nothing here (save in the discerning eyes of S. Farnham) paints one party as more culpable, more deserving or more pitiable than the other. That, though, (save in the magnanimous eyes of S. Farnham) is immaterial. The unequal division of accidentally not ill-gotten gains was their doing. They knew what they were doing, or in this case equally thoroughly didn’t know what they were doing. Legally, they’re capable of making choices and, legally, they’re bound by those choices when incorporated into legal contracts. That’s as it should be.

      Equating allowing adults to bear responsibility for their choices with the Citizens United decision strikes me as overstating… wait, can querulous logomania be overstated? Is that tautologic?

    • Steven Farnham :

      I never know whether I should respond to something like this, or just ignore it. My online dictionary does not recognize “tautologic” as a word, and my spell checker rejects both “tautologic” and “logomania,” but I think we can safely say that we know Mr. Riemer’s intent. At the very least, anyone who slings around such words likely also has a firm grip on the meaning of the word “hyperbole,” yes?

      So the “gas chamber” comment is a bit of hyperbole used to characterize the treatment handed to the defendant – the one that is, who (we are led to believe) was stripped entirely of her worldly possessions. Gas chamber? Perhaps not. But harsh? Yes.

      “NO!” you exclaim, “…the scheme involved legally transferring assets from one party to the other.” I take this to mean that you believe that the defendant wasn’t “stripped” of anything – i.e. the “scheme” was entered into voluntarily, and there are no victims. Nice try.

      Perhaps in the early days of the litigants’ relationship, defendant was so starry-eyed in “Love,” that she wanted her man to have all that was hers, regardless if she never saw the whites of his eyes, or darkened his door ever again, but I doubt it. A more reasonable assumption I would argue is that defendant believed that by signing over her property, she was bettering the lot for both of them, and did so with the assumption of (her) life tenancy. A foolish assumption, and a bit reckless on her part not to have that (assumption) written into the contract, I’ll allow, but I believe we have all agreed that none of the parties involved here are the sharpest knives in the drawer.

      From paragraph 25 of the above article, it is written, “In this case, the SCOV notes, defendant got into this mess because she was trying to defraud the federal government. This is practically a textbook definition of unclean hands. If your fellow robber cheats you while divvying up the loot, you cannot seek recourse from the courts.” But we have it established from elsewhere in the article that no fraud was committed.

      Suppose an intruder breaks into your home – an intruder whom you believe to be your ex – an ex who is a known pest, but a harmless one – and you angrily react by trying to shoot her. You fail in your attempt, missing entirely, and intruder (who in better light, turns out to be an armed robber) gets scared and flees.

      Are you guilty of attempted murder, or self defence? Since the ex whom you believed you had in the crosshairs happened to be in another country at the time of the “attempted murder,” and no one was hurt, does the court have any grounds for prosecution? Maybe, but it seems tenuous at best.

      Did the woman collect social security, and stash it all in a savings account while living for free off her partner? Perhaps, but no mention is made of this, so we’re left to assume he benefitted from her collecting the social security. If any fraud was committed (and I repeat that none was), he was an accomplice in, and a beneficiary of her alleged misdeeds. I also repeat that he got to keep the loot, and she got nothing.

      My issue with the court is one of consistency. Either intent matters or it does not. If defendant’s “intent” to defraud the government matters, then surely so does her intent when entering into a contract with her partner to buttress and improve her prospects of having a place to live in her golden years. If her intent does not matter, then surely there is a law against plaintiff’s ill-gotten gain at the expense of defendant’s poor judgement.

      Either there was crime (intent to defraud) or their wasn’t. If crime happened, there is no reason she should be punished, and her accomplice not. If crime was not committed (as is duly noted in the article), then defendant is entitled to some relief along the lines of life tenancy, even if she wasn’t bright enough to require it in the contract. What sort of behaviour might this court’s decision encourage in other men who shack up with women who are guilty of nothing, apart from an acute lack of common sense?

      Bottom line: I fail to see how the court has well served us as a society (the society, I remind you which provided the funds for those SS payments). How is anyone better off with this man owning twice the real estate that he needs, and the woman being turned, homeless, into the streets?

  3. Paul Donovan :

    Marriage was not originally a religious institution. As the Roman Empire spread its influence through Germanic Europe, they found that Germanic law, unlike Roman law, consisted of tribal custom which evolved from tribal practices. Later, as the importance of Christianity grew, ecclesiastical law, derived from Roman law, gained in importance. The church sought to legislate matters such as marriage – which had previously been the subject only of secular tribal law.

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