TN Mandatory Injunction Law | Cash Flow and Concealed Assets, PART TWO

In Part Two of our series on Tennessee’s mandatory injunction law, we review the issues of maintaining cash flow and concealing assets in divorce. What consequences follow a spouse’s failure to disclose funds received from a retirement account deemed a marital asset? When does such nondisclosure intentionally violate the injunction? And how should the court remedy the situation?

Tennessee mandatory injunction, cash flow, and concealed assets

We are taking a look in this series at how Tennessee courts have interpreted and applied the injunction since it became effective in 2001. (Read Part One.) The precise language of the statutory injunction is found in T.C.A. § 36-4-106(d).

Prohibition Against Concealing Assets in Divorce

The prohibition against hiding marital property in divorce or legal separation is found in T.C.A. § 36-4-106(d)(1)(A) which prohibits either spouse from “concealing” any marital asset. If something is concealed, then how can a court order be obtained regarding its disposition? How can informed consent be obtained from the other spouse? Experienced divorce attorneys are always on the look-out for clues to hidden assets.

Concealed marital property must be brought before the court so that the marital estate can be divided as Tennessee law requires. Maintaining the status quo during divorce or legal separation proceedings is essential for an equitable property distribution. One spouse’s noncompliance with the injunctive order could be very damaging to the other spouse, depending upon the circumstances.

What happens when a spouse gets a pension check, but does not disclose receipt to the court or other spouse? Should it matter if the payment was small or substantial? When does the recipient-spouse cross the line between using the pension fund as cash flow and hiding a marital asset in violation of the injunction?

Exception for Income as Cash Flow

There is a narrow exception to the mandatory injunction’s requirement that the status quo be maintained with the marital property during divorce proceedings (absent court order or other spouse’s consent to change). This is a necessity exception.

In certain circumstances, the injunction allows marital funds from pensions, retirement accounts, insurance policies, and similar assets to be drawn from while the case is pending. The exception only allows draw down when the recipient-spouse has little or no other income source. Here’s the rule:

“Expenditures from current income to maintain the marital standard of living and the usual and ordinary costs of operating a business are not restricted by this injunction. Each party shall maintain records of all expenditures, copies of which shall be available to the other party upon request.” T.C.A. § 36-4-106(d)(1)(B).

Under limited circumstances, a retired spouse can draw on a pension despite it being a marital asset, but must account for it. There will be a day of reckoning!

Under the injunction, a spouse who needs the income is allowed a cash flow from the marital asset (or from a disputed asset) to pay regular expenses in the ordinary course. How much? The amount allowed is limited to what the party needs to maintain the standard of living enjoyed during the marriage (assuming that is possible). Still, recordkeeping and full disclosure are required. The following Tennessee case is illustrative.

In the Matter of Strange v. Strange

In the case of Strange v. Strange, the wife filed for divorce in 2004 after 33 years of marriage. They had one minor child. That was also the year her husband retired from his job with the Tennessee Valley Authority (TVA). His entire pension was determined to be a marital asset – equitably distributed, the wife was to receive half. Strange v. Strange, E2008-01841-COA-R3-CV (Tenn. Ct. App. Aug. 5, 2009).

Pension was a marital asset divisible in divorce

At their trial management conference, the wife asked that husband be enjoined from withdrawing from his pension unless she received half of each payment. She argued his draw down would violate the mandatory injunction. Applying the cash flow exception, the trial judge ruled such withdrawals did not violate the injunction so long as the husband had no income. Such payments were marital property, though, and subject to redistribution at trial. (The judge explained this further when the wife sought post-judgment relief, discussed later.)

March 7, 2005, was the parties final trial management conference. Regarding the marital estate, they stipulated as to valuations and who got what. Having updated their statements, they agreed that the husband had no funds in any bank or credit union and that wife had $16,405.70 in her account. The following day, the husband applied for TVA pension benefits.

On or about mid-March, he received a lump sum pension payment of $39,600.64. This covered the period between his retirement date (January 2004) and requested distribution date (April 2005). The pension would pay $2,485.00 per month with the other spouse receiving 50%. The husband concealed the lump sum payment.

The timing of the $39,600.64 TVA check is significant as well. The spouses signed their Marital Dissolution Agreement (MDA) on April 5. The final judgment of divorce incorporated the MDA and was entered on April 6. In the MDA’s “Disclosure of Assets: Each party agrees that he or she has made a full disclosure of his or her assets and liabilities.” Husband received the lump sum pension payment before the wife even signed the MDA, but he never disclosed that fact.

Four months later, the wife filed a contempt petition over husband’s failure to provide account information necessary for her attorney to verify the exact amount of the pension for a Qualified Domestic Relations Order (QDRO). This resulted in subpoena of TVA pension plan documents and records. Predictably, while examining pension records in November, wife’s attorney spotted the lump sum payment and filed a Rule 26.05(2)(B) motion to modify or set aside the final judgment. Her prayer for post-judgment relief included: 50% of the lump sum payment, interest, attorney fees, costs, and punitive damages for alleged fraud. After a June 2006 hearing, the trial court granted wife’s motion, but ruled this was not a case of fraud and no punitive damages.

Discovery is an ongoing process. Answers to interrogatories should be amended whenever the spouse knows previous responses are no longer true, even if true when made. Circumstances change and the husband had a duty to update his statement to disclose the lump sum pension payment. Rule 26.05(2)(B) Tenn. R. Civ. P. Consequently, the husband was sanctioned for “misrepresentation” or “other misconduct” in his abuse of discovery and wilful, intentional failure to reveal the TVA check. The wife was awarded her half of the payment ($19,800.32), plus attorneys fees, court costs, and interest accruing from May 6, 2005.

Did the husband violate the mandatory injunction? Albeit a very close shave, this court said no. The injunction allowed him to withdraw from his retirement fund to maintain a cash flow sufficient to cover his ordinary and regular living expenses. He had no other income stream. Withdrawals from a marital asset were subject to redistribution at trial, which his wrongful concealment prevented. Essentially, the husband argued he reasonably interpreted the injunction to mean the lump sum was converted to income. Although the court rejected that argument, it was sufficient to avoid fraud and a punitive damages award.

When are retirement funds marital property?

The judge’s memorandum opinion clarified the scope of the injunction. Because the retirement fund was husband’s only source of income, drawing monthly did not violate the injunction. In this regard, however, “income” should only be understood as “cash flow” and nothing more. Every dollar the husband drew from his pension represented reduction of a 100% marital asset. Redistribution at trial means making up the amount withdrawn at the final hearing; or putting the amount withdrawn into the balance and addressing it under principles of equitable distribution.

Importantly, the mandatory injunction does not reclassify marital assets like retirement accounts and insurance policies, as current income simply because the recipient is not working. As set forth in the Strange court’s opinion:

• Rule: The exclusion of current income from the injunction does not “work a reclassification of a cash flow from a marital asset, in order to make that an acceptable expenditure.”
• Reasoning: “[I]f the cash stream from such a marital asset can be deemed pendente lite income of the recipient and not redistributed at trial, then what emerges is that the recipient is living off one-half of his marital property and one-half from her marital property…”

To allow that to happen would open up the floodgates for people to use this unfair tactic, pendente lite, “to reduce marital property benefitting only the recipient.”

Husband appealed. The Court of Appeals affirmed the trial court’s ruling. Rubbing salt in the wound, husband’s appeal was “groundless and devoid of merit” and, so, he was taxed the costs of appeal.

In a divorce where one spouse (or both) violated the mandatory injunction, the judge has authority to craft an appropriate remedy. One that is founded, in part, on principals of equity and fairness. Circumstances matter, as do unclean hands and an intentional disregard for the court’s orders. Carefully consider the injunction’s reach before doing something that could impact a marital asset. A Tennessee judge’s equitable powers are substantial.

Part 2 of 4. Read Part Three.