Dissipation and Financial Fault

By Attorney Gregg Herman
October 1, 2006

Although marital fault is not relevant to property division in Wisconsin, financial fault is very much relevant.  Wisconsin statutes allow a trial court to considered a party’s use and management of marital income and assets as a basis for deviating from the presumption of an equal division of the marital estate under the factor regarding “contributions to the marriage.” 1  Case law has affirmed that courts may consideration of a party’s handling of the marital estate in deviating from an equal division of assets.2  Several recent court of appeals cases shed additional light on where the line is crossed between dissipation and acceptable business practices. Examination of these cases reveals a relatively consistent pattern.

In Derr v. Derr3, the husband engaged in day trading stocks, resulting in a loss to the marital estate of $45,000.  The trial court found that this loss constituted a “waste” pursuant to Wis. Stat. §767.275, and charged husband with this amount in arriving at a property division equalization payment. The appellate court affirmed.  After discussing the statute and the burden of proof, the appellate court noted that the circuit court found that the husband did not give clear or credible information regarding the loss of the monies.  The appellate court held that the circuit court correctly held that the husband wasted the funds and that the timing of when the loss occurred was unimportant.

The troubling aspect of the Derr case is that typically investment losses are not treated as waste.  For example, in Hauge v. Hauge,4 the court held that a debt arising from an investment was not a dissipation, even though the investment was made while the parties were separated. The issue usually arises when the investment is a high risk, such as in the futures market. Even so, to consistently rule that these losses are a waste could lead to an absurd result.  After all, if the investment had succeeded instead, certainly the other spouse would want half of the profit. It is inconsistent to be willing to share the profit if the investment goes well, but not share the loss if the investment goes poorly. Therefore, it is suggested that Derr should be read narrowly, on the procedural basis that consequences can ensue for failure to provide complete and credible information

A much clearer holding on the issue of waste can be found in Noble v. Noble.5 In Noble,  the court of appeals affirmed a trial court decision that denied the marital waste claim of the wife, Deborah Noble. The husband, Danny Noble, was an equal partner with his brother in a farming partnership that harvests and sold grain. During the pendency of the divorce, Danny’s brother, Dale, and Dales’ wife purchased three properties, titling them in their names, but not including Danny. Prior to the acquisition of the three properties, standard practice for property acquisition had been to withdraw partnership funds, purchase the property, and title it in one-third shares which included Danny.  However, Danny was excluded from this purchase due to his marital problems and his fear that his wife’s erratic behavior might interfere with property acquisition.

The trial court rejected Deborah’s claim that Danny and his brother engaged in misconduct, warranting inclusion of the value of three properties in the marital estate.  The court noted that one property was not available to the general public and the other two were important given that they are adjacent property and Dale did not want to risk losing them due to Deborah’s uncooperative behavior.  The trial court noted the partnership was repaid by way of rental income (or rental income savings, to be accurate) and that the transaction was “nothing other than a sound business decision.” Deborah appealed.

The court of appeals rejected Deborah’s marital waste argument.  The court held that there is no requirement that a “party take advantage of an opportunity to acquire property that would increase the value of the marital estate.”  Wis. Stat. § 767.255(3) and 767.275 are intended to prevent squandering, destruction or unjustified depletion of marital assets, which did not occur, said the court. The court noted that divorce attorneys frequently (and “wisely”) advise clients to avoid acquisition of marital property when facing a prospective divorce.

One can only imagine the effect on family courts if a spouse were required to take all steps available to increase the marital estate.  There is an unending list of possible investment opportunities, the success of which is only known in retrospect.  As posited above, a spouse needs to act in good faith in managing marital assets.   As the court in Noble implicitly found, there is a difference between forgoing opportunities which might increase the marital estate and affirmatively taking actions to reduce it.

Most recently, in  Covelli v. Covelli,6 the court of appeals affirmed the trial court’s conclusion that the husband’s failure to pay sales taxes arising from his sole proprietor auto dealership (in which the homemaker-wife had no involvement in the operation or finances) constituted marital waste for which the husband is to be solely responsible.  The court specifically disagreed with the husband’s argument that waste was limited to cases involving excessive drinking and gambling or the intentional or negligent destruction of property.  Rather, the court held that “[d]epending on the circumstances of the case, one spouse’s failure to pay tax debts clearly can be considered the mismanagement or dissipation of assets and therefore marital waste.” 7

A more difficult issue is when a party has squandered substantial amounts of money on gambling. Gambling is, to a certain extent, a legal form of entertainment. Certainly no argument could be made that spending substantial amounts of income for symphony, ballet or sports tickets was anything other than entertainment. Unlike symphony, ballet or sports, with gambling, there is a possibility of actually making money.  However, the huge casinos were not built by giving money away and, at a certain point, the funds being spent stop being legal entertainment and start being wasteful.  There is no clear point where this transition is made.  Not surprisingly, case law is not clear on this issue. 8

Still, synthesis of these cases is possible. Wisconsin courts have never required a spouse is to take affirmative action to take advantage of every available financial opportunity.  A spouse has never been held responsible for the performance of investments which are beyond the spouse’s control. On the other hand, a spouse is responsible to manage assets within his or her control with the goal of avoiding a negative impact on the family.   Where questions are raised about the spouse’s management, that spouse must provide clear and credible information or run the risk of an adverse inference being drawn.

As with many other issues, a trial court has to exercise its discretion on a case-by-case basis, especially where there is a line to be drawn between a legitimate choice of entertainment and wasteful spending. The test to be applied is whether the action was in good faith. Failure to exercise good faith when spending marital funds can cause the wrath of the court to descend and the other spouse ordered to be made whole.

This article originally appeared in the Wisconsin Journal of Family Law.

Footnotes

1Wis. Stats. §767.255 (3)(d);  Anstutz v. Anstutz, 112 Wis. 2d 10, 331 N.W.2d 844 (Ct. App. 1983);
2Gardner v. Gardner, 175 Wis.2d 420, 499 N.W.2d 266 (Ct. App. 1993)
3Derr v. Derr, 2005 WI App 63, 280 Wis. 2d 681, 696 N.W.2d 170
4Hauge v. Hauge, 145 Wis. 2d 600, 427 N.W.2d 154 (Ct. App. 1988)
5 Noble v. Noble, 2005 WI App 227, 287 Wis. 2d 699, 706 N.W.2d 166.
6Covelli v. Covelli, No. 2005AP1960 (Wis. Ct. App. May 3, 2006) (recommended for publication)
7Id. at §30
8Not surprisingly, the issue of gambling as a dissipation has been litigated in other states.  See Marriage of Williams, 927 P.2d 679 (Wash. App. 1996) (Gambling debts are not a dissipation as gambling is legal and is a form of expensive entertainment.);  Conceicao v. Conceicao, 611 NYS2d 318 (AD 3 Dept. 1994)(70/30 division of estate affirmed due to husband’s gambling);  Marriage of Marten, 680 N.W.2d 378 (Iowa App. 2004)(Wife credited with extra $60,000 due to money wasted by husband gambling, although both parties gambled);  Goldinger v. Goldinger, 17 FLR 1096 (Ny SupCt., 11/27/90)( Husband’s compulsive gambling did not constitute wasteful dissipation of marital assets where wife was his partner in the fun of gambling).

Attorney Gregg Herman is a founding partner of Loeb & Herman S.C. in Milwaukee, WI. He practices family law exclusively, and can be reached via e-mail or by calling (414) 272-5632.