by Whitney Keltch Green, Godwin Bowman PC
Family law can be involved in almost every area of the legal world. Property and spousal rights affect businesses, bankruptcy, probate proceedings, real estate ownership, and many commercial disputes. Based on my experience the last eight years and conversations with other lawyers, here are some simple principles and practical tips to discuss with clients and investigate in cases regarding hidden family law principles and how they could adversely or positively impact your case.
Texas is a community property state, which means everything earned during marriage is considered community property unless proven otherwise by clear and convincing evidence. Tex. Fam. Code 3.002 and 3.003. Separate property is (1) property owned or claimed by a spouse prior to marriage; (2) property acquired during marriage by gift, devise, or descent; and (3) recovery for personal injuries sustained by the spouse during marriage except any recovery for loss of earning capacity during the marriage. Tex. Fam. Code 3.001. Accordingly, when handling assets such as property or business interests of married or divorcing couples, it is important to trace the source of funds that acquired that asset. This may implicate who your actual client is or may be.
Our system in Texas allows spouses to contract and make otherwise community property separate property and vice versa through the use of a valid premarital or postmarital agreement. See Tex. Fam. Code, Chapter 4. Make sure to ask your clients whether any of these agreements exist in the context of their marriage should a separation or dispute between spouses arise in the middle of your litigation. For example, your firm may represent a client in a construction dispute for a primary residence. It’s obviously helpful to know who the true owner of said home is, and these agreements may affect and simplify that process. They are typically not recorded in public records or line of title documents, so it’s important to ask the right questions of your clients.
Because our system characterizes property as either (1) community; (2) separate; or (3) mixed, it’s important to know how that characterization can impact businesses for purposes of commercial clients. Generally speaking, when one spouse is the sole proprietor of a business before marriage which he or she continues to operate after the marriage OR where one spouse begins a sole proprietorship with separate funds during the marriage, the profits earned during marriage are still presumptively community property. Tex. Fam. Code 3.002; In the Matter of the Marriage of York, 613 S.W.2d 764, 767 (Tex. Civ. App.—Amarillo 1981, no writ). This is because income from separate property is still community property. Id.
However, partnership property is neither community property nor separate property. See Gibson v. Gibson, 190 S.W.3d 821 (Tex. App.—Fort Worth 2006, no pet.). The property of the entity belongs to the partnership. Id. However, a spouse’s interest in the property, such as the right to receive a share of the profits, surplus, or even proceeds from a sale may be characterized as separate or community property. Id.
Likewise, corporate assets are also owned by the corporation and individual stockholders have no ownership interests in the corporate assets. Thomas v. Thomas, 738 S.W.2d 342, 343 (Tex. App.—Houston [1st Dist.] 1987, writ denied). Thus, the divorce court can only divide shares of stock and not the corporate assets themselves. Id. This is why it is crucial to determine the ownership of the corporation’s stocks in a business and the character of the stocks themselves when representing business owners.
The inception of title rule applies to stock in a corporation: if the corporation was incorporated during the marriage, it is likely community property and stock acquired before marriage or during the marriage via gift, devise or descent is separate property. See Tex. Fam. Code 3.001.The interest in the corporation arises when the shareholder spouse acquires the right to receive the stock and not the date on which he or she actually acquires possession. Gibson, 190 S.W.3d at 767. However, as mentioned above, it is necessary to trace the source of the funds and determine whether any property agreements exist. For example, it is possible that a spouse may pay for capitalization or obtain interests during marriage, but the source of funds could be from an investment account that was earned prior to marriage. This would then make the shares that spouse’s separate property.
The very nature of law forces us to stumble into areas we are not familiar with. In my experience, I have found that having a friend to call in every category helps me effectively serve my clients and identify the best solutions for them. As you can see, there are is much overlap with family law, and sometimes calling a colleague or hiring an expert, such as a forensic accountant or valuation firm, will be the most straightforward path to take.
Whitney Keltch Green is the 2020 President-Elect for the Dallas Association of Young Lawyers and Senior Counsel with Godwin Bowman, PC in Dallas. She practices exclusively family law and is currently studying for her Family Law Board Certification. She has handled and continues to handle complex divorces, involving business interests, corporate executive compensation and benefits, and real estate investments. She is also a graduate of the University of Texas and Baylor Law School.
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