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.

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