Divorce and Custody Claims

Vol. 38 No. 2

The authors are with Ausley, Algert, Robertson & Flores LLP, Austin.

MEMORANDUM

To:          File

From:     Kristen A. Algert and Eric Robertson

Re:          Divorce and Custody Claims

 

Sylvie Bass asked our firm to represent her in a divorce case. Our legal assistant responsible for handling intake asked Sylvie some questions and checked conflicts to make sure we had not already spoken to her husband, Michael Bass. After confirming that we had no conflicts, the legal assistant obtained a few general facts from Sylvie, explained the firm’s consultation fee, and scheduled a meeting with us. 

Prior to our meeting, we reviewed our legal assistant’s summary of the facts, along with a summary of what an Internet search had revealed about Sylvie and Michael. When Sylvie arrived at our office, we knew that she was the mother of two young children and that she was married to a driven, high-
powered, sometimes socially inept executive. The Internet search revealed that Michael’s critics called him “ruthless” for his cost-cutting measures and layoffs at GyneTech. Until
recently, GyneTech board members and shareholders were among his biggest fans due to rising stock values and the development of a new cancer drug that promised to help those suffering from late-stage cancer. 

In recent weeks, however, Michael has had his share of problems. He was suspended with pay by GyneTech’s board because a Wall Street Journal article revealed problems with GyneTech’s cancer drug trial and because of the suspicious circumstances surrounding a whistleblower’s death. He was fired by GyneTech’s board after it became public that he was accused of an inappropriate relationship with an independent contractor of GyneTech's. He was sued by shareholders for securities fraud. And he was sued by drug-trial participants for fraud, negligence, reckless endangerment, and product liability. Michael now works for GyneTech’s competitor, MedaStar, and has sued his former employer for breach of his employment contract. GyneTech has counter-sued Michael for fraud, breach of fiduciary relationship, breach of contract, and theft of trade secrets. For all those reasons, we recognized that if we chose to represent Sylvie, the divorce case would be messy and complicated.

 

Our first impression of Sylvie was that she was angry. She would almost sneer when mentioning Michael’s name. She also was embarrassed and particularly upset that she learned about her husband’s inappropriate relationship with independent contractor Dawn Pringle while watching the Nancy Grace Show. She softened slightly when talking about the children. A full-time nanny helps Sylvie with the children, and it is extremely important to Sylvie to have the financial resources to continue to provide this level of care and support for the children.

Sylvie and the children reside in one of the couple’s homes in Austin, Texas. Sylvie considers the Austin residence the “marital residence” even though Michael rarely joins the family in Austin. Michael travels extensively due to his work commitments and appearances at trade shows.

Sylvie told us that her primary objectives are to maximize her financial take in the divorce, including sharing any recovery Michael might obtain in his lawsuit against GyneTech, and to insulate herself and her property from the various lawsuits filed against Michael.

This high-profile, high-net-worth divorce case with its complex property- and child-related issues was an attractive piece of litigation, and we wanted to take it. Before we could accept the case, however, we had to determine, and discuss with Sylvie, where she should file for divorce, given that laws related to divorce, property division, financial support, and children are unique to each state and can vary radically and that, within each state, an individual county may have its own standards regarding how certain issues are typically decided. Because Sylvie and Michael owned residences in Texas and in other states closer to GyneTech and MedaStar headquarters, Sylvie and Michael might meet residency requirements in any of those states. We therefore contacted family-law specialists in each of those states to learn more about each state’s residency requirements for filing for divorce and the legal advantages and disadvantages of filing in those states as compared with filing in Texas.

After determining whether Sylvie met residency requirements in the other states, assessing the advantages and disadvantages of filing in each state, and discussing the issues with Sylvie, we determined that no particular state offered a significant legal advantage and that it would be less disruptive for Sylvie and the children if she filed for divorce in Austin, Texas. We therefore agreed to represent Sylvie in her divorce case.

The next strategic decision we discussed with Sylvie was how to proceed with her case. Rules of professional conduct obligated us to explain to Sylvie the advantages and disadvantages of the various dispute-resolution options available to her and to help her decide which course to take. But to help Sylvie make this decision, we needed to learn more about Sylvie, Michael, and their relationship—e.g., their respective problem-solving skills, communication styles, trust levels, power imbalances, substance abuse issues, domestic violence concerns, privacy interests, and financial knowledge.

If a husband and wife have equal knowledge of all relevant facts and if there is no significant power imbalance, it may make sense for them to negotiate with each other directly with little attorney involvement. In fact, Michael already had approached Sylvie about working things out privately without too much involvement from lawyers. But Sylvie fears that her lack of knowledge about relevant facts, especially with regard to the various lawsuits and potential lawsuits involving her husband, and Michael’s history of being a cut-throat executive put her at a disadvantage. Therefore, minimal attorney involvement and direct negotiation with Michael is not an option for Sylvie.

We explained to Sylvie that because of media attention and investigators’ interest in Michael’s decisions and actions over the past several months, he might have an incentive to make generous financial concessions in her favor in exchange for a promise of privacy and confidentiality in the divorce suit. We therefore discussed in detail the dispute resolution option in Texas known as the “collaborative” process. Since September 1, 2001, the Texas Family Code has permitted parties to a suit for dissolution of a marriage to follow a procedure in which the parties and their counsel agree in writing to use their best efforts and make a good-faith attempt to resolve the divorce suit—including all issues affecting the parent-child relationship. If they succeed, the court’s only role is to approve the settlement agreement, make the legal pronouncements, and sign the orders required by law to effectuate their agreement; if they do not succeed, then both spouses must terminate their collaborative lawyers and retain new litigation counsel.

Proceeding collaboratively had several advantages for Sylvie.  Both parties would be represented by lawyers; marital grievances and substantive issues would not be aired in court but would be kept private; and both parties would be entitled to ask as many questions as they want and to obtain as much information as they need to make sound, informed decisions. In addition, the collaborative process acknowledges the historical and continuing relationship between the spouses and recognizes the importance of restructuring that relationship post-divorce, primarily for the benefit of the children. Sylvie liked that. Because her primary objectives were to maximize her financial outcome and to minimize the risks associated with Michael’s lawsuits, Sylvie recognized the value of offering her husband privacy, confidentiality, and a contractual commitment not to go to court in return for generous settlement concessions. Michael’s quick and confidential settlement with Dawn Pringle made this option even more attractive.

We also explained arbitration and traditional litigation to Sylvie. Sylvie has no desire to participate in, or pay for, a full-blown trial (unless she thinks about Dawn Pringle), but we explained that almost all divorce lawsuits settle before trial or an arbitration hearing. We also explained that a spouse sometimes is more cooperative and generous when he knows that the Texas Rules of Civil Procedure control the case, formal discovery rules impose enforceable deadlines, and a public jury trial looms in the future. In Texas, where a jury trial is an option in a divorce case, juries can decide the character of property (separate or community), the value of property, and the existence of fault grounds; juries also can decide how to allocate rights and duties between parents and whether the children must live in a restricted geographic area. We explained that to encourage Michael to be cooperative and generous, Sylvie might want to keep these options on the table as opposed to taking the collaborative route, which would not include these more coercive devices.

The allegations against Michael in the several pending lawsuits share the common theme of withholding relevant information (e.g., failing to disclose the harmful side effects of the new cancer drug and failing to disclose the relationship with Dawn Pringle). Whether or not those allegations are true, Sylvie was concerned that if the possibility of a trial and resulting publicity were removed from the case, Michael would be tempted to withhold relevant information and she might end up with less than her fair share.

After assessing the advantages and disadvantages of all available options, Sylvie chose the tried-and-true carrot-and-stick strategy: She would proceed pursuant to formal litigation procedures but offer Michael privacy by forgoing a public trial as long as she and Michael seemed to be moving forward toward a settlement that would meet her and the children’s financial goals.

Having decided to file for dissolution of the marriage in Austin, and to proceed under the formal rules of the traditional litigation process, we moved forward with the divorce suit.

Once a party files for divorce in Austin, the Travis County Standing Order Regarding Children, Property, and Conduct of the Parties takes effect. The standing order mandates the maintenance of the status quo for Michael, Sylvie, the children, and their finances. Among other things, Michael and Sylvie are prohibited from removing the children from the state of Texas; opening or diverting mail addressed to the other party; destroying property; misrepresenting or refusing to disclose the existence, amount, or location of any property; concealing or destroying records, including email and other electronic records; and canceling any insurance. In addition, we obtained orders giving Sylvie the exclusive use and possession of the Austin residence, providing her with access to funds sufficient to maintain the residence and to pay monthly expenses, and specifying her and Michael’s parenting rights and responsibilities while the case was pending. 

After these temporary orders are entered, formal discovery will begin in earnest. Keeping in mind Sylvie’s primary goals, we will focus most of our energy on gathering information related to the couple’s finances and Michael’s various lawsuits.

An important part of the process will be compiling an accurate list of all community assets and debts so that we know what is available to divide between Sylvie and Michael. Community property consists of all marital property other than “separate property.” Separate property is property owned or claimed by a spouse before marriage; property acquired by a spouse during marriage by gift, devise, or descent; and any recovery for personal injuries sustained by a spouse except recovery of loss of earning capacity. Separate property is not divided in a divorce. But property possessed by either spouse during or on dissolution of marriage is presumed to be community property and is subject to division by the court.

Of course, we want the community estate to include any and all community funds or property that Michael may have transferred fraudulently. A spouse has the sole management, control, and disposition of his or her “special” community property, including personal earnings, and has the right to dispose of community property under his or her control. But a husband and wife have a trust relationship as to the community property that each controls individually, and there will be a presumption of constructive fraud when a spouse unfairly disposes of the other spouse’s interest in community property. If Michael used community funds to settle his case with Dawn Pringle, we will ask the trier of fact to set aside this use of community funds and declare the use of those funds a constructive fraud. If we are successful, the amount Michael paid to Dawn Pringle will be “awarded” to Michael as part of his share of the community estate. If Michael used GyneTech funds to settle with Dawn Pringle, then we will ask that Michael be solely responsible to repay any funds due to GyneTech and to indemnify Sylvie from any responsibility for this obligation. Likewise, any community funds that Michael spent on gifts for Dawn Pringle, or for wining, dining, or traveling with her, would also be a constructive fraud on the community estate, and we will ask that those funds be considered part of Michael’s share of the community estate. We may have to depose Dawn Pringle to obtain this information.

We also want to include all Michael’s claims against GyneTech for breach of his employment agreement in the list of community assets. Because we have no real control over how that lawsuit will be handled or the terms of any settlement, and because Michael might be inclined to manipulate the settlement terms so that Sylvie does not receive anything, we will try to agree on the value of this claim and to apportion the entire value to Michael. Keeping Sylvie out of the GyneTech lawsuit also will help to keep her and her property safe if any recovery on Michael’s claims is offset by successful claims by GyneTech. Last, we want Michael to pay his attorney fees from post-
divorce assets, and we do not want Sylvie to be asked to help fund the fight against GyneTech.

Less of a preference, but still an option, would be to negotiate a payment to Sylvie if and when Michael receives money or stock as settlement of his claims against GyneTech. This might be an acceptable risk to Sylvie, especially if the potential payout to Michael is substantial. After consulting with an expert who has worked with many general counsel for large companies, we have learned that because GyneTech likely wants to avoid discovery regarding the drug test, GyneTech may well decide not to pursue its claims against Michael and MedaStar. GyneTech may decide that its claims against MedaStar and Michael pose more risk from government investigators and the press than the claims are worth. Based on this, Michael’s claims against GyneTech may settle relatively quickly with a minimal expenditure of attorney fees. We need to factor that into the equation.

Sylvie wants a disproportionate share of the parties’ community property, and Texas law allows the court to divide the community estate disproportionately in favor of one spouse if circumstances warrant. Here, the disparity of earning power between Sylvie and Michael would be a substantial factor favoring Sylvie’s request for a disproportionate division of the community estate. We should push for that.

Although most divorces are granted on “no fault” grounds, fault is another factor the court may consider when determining how to divide the community estate. If Michael does not want Sylvie to probe too far into his relationship with Dawn Pringle, he may be willing to agree to a disproportionate split of the community assets in Sylvie’s favor; if not, the court might well do what he would not. And Michael probably will not be able to use the Dawn Pringle confidentiality agreement to prevent us from learning more about the relationship, the lawsuit, and the financial settlement.

We have explained to Sylvie that Texas child support and spousal support statutes are not generous to her and the children. Child support guidelines, if followed, would set Michael’s child support at only $1,875 per month for both children. Sylvie will have to prove that the financial needs of the children exceed the guideline amount to get more than that. 

While the facts detailing Sylvie’s and the children’s financial needs are important to this calculation, so are Michael’s income, employment benefits, and other financial resources. Sylvie is concerned that MedaStar will terminate Michael’s employment because of the civil suits filed against Michael and MedaStar. Michael has told Sylvie that he hopes to convince GyneTech to drop the claims filed against him and MedaStar by suggesting to GyneTech that it will need Michael on its side during possible investigations by the Justice Department and in claims brought by shareholders. In addition, Michael believes that GyneTech wants to avoid discovery regarding the drug test. Therefore, Michael feels confident that he will keep his job at MedaStar and that he will be able to pay child support, maintain the children’s health insurance, pay any additional medical expenses not covered by insurance, and keep life insurance in place. Nevertheless, because there still is a chance that MedaStar will terminate Michael, Sylvie should request that Michael set aside a portion of his share of the community estate to secure his outstanding child support commitments, and we will do that for her.

Sylvie likely will not qualify for court-ordered spousal support. In fact, she will have trouble jumping the first hurdle of the spousal support statute, which is to show that she will lack sufficient property from the division of marital assets upon divorce to provide for her minimum reasonable needs. That hurdle will be even higher if she secures a disproportionate share of the community estate. And if Sylvie somehow demonstrates that her share of the community estate would be so nominal that she could not support herself, she still would have to prove at least one of the following to qualify for spousal support: (1) Michael was convicted of or received deferred adjudication for a criminal offense that constitutes an act of family violence, and the offense occurred within two years of the date of filing for divorce or while the divorce suit was pending; (2) Sylvie is unable to earn sufficient income to provide for her minimum reasonable needs because of an incapacitating physical or mental disability; (3) Sylvie and Michael were married for 10 years or longer, and she lacks the ability to earn sufficient income to provide for her minimum reasonable needs; or (4) Sylvie is the custodian of a child of the marriage who requires substantial care and personal supervision because of a physical or mental disability, preventing Sylvie from earning sufficient income to provide for her minimum reasonable needs. We know of no such facts that would entitle Sylvie to spousal support. Nevertheless, due to certain tax advantages to Michael, he might agree to contractual alimony as part of an overall settlement of the financial issues.

We will consult with securities and corporate litigation lawyers to better assess the likelihood that Michael will prevail in his lawsuit against GyneTech; in GyneTech’s suit for fraud, breach of fiduciary relationship, breach of contract, and theft of trade secrets; in the lawsuit brought by GyneTech shareholders; and in the lawsuit brought by the drug-trial participants. Because these actions clearly had nothing to do with Sylvie personally, we are not really concerned about any personal liability that she might incur. But we are concerned that community property awarded to Sylvie in the divorce might be subject to the claims of judgment creditors who have prevailed in suits against Michael. Even if the divorce is finalized and the community property divided before any judgments are entered against Michael, the judgment creditors may try to satisfy their judgments from what were community assets during the time of Michael’s wrongful conduct—even if those assets now belong to Sylvie.

With any luck, all those concerns soon will be moot. Our consulting experts tell us that it is unlikely that GyneTech will aggressively pursue its claims against Michael. In addition, we understand that Michael likely will settle his claims against GyneTech. So it appears that there is not much risk to Sylvie or her property from the GyneTech lawsuits. But to play it safe, Sylvie will ask Michael to indemnify her from any responsibility for any claims brought by GyneTech against him and to pay all legal fees from Michael’s share of the community estate.

Michael’s lawyer has told us that Michael has solid personal defenses to the class action by shareholders and drug-trial participants for the stock drop, securities fraud, and the drug-trial problems because he did not know and had no reason to know about the drug-trial problems. Regarding his relationship with Dawn Pringle, it is not clear if Michael was legally required to disclose this relationship; in fact, when he consulted with corporate counsel, he specifically was advised that such personal matters need not be disclosed. Moreover, the GyneTech shares were already volatile, so it may be hard for shareholders to connect any actions by Michael to a decline in the stock share price. For all those reasons, there does not seem to be much risk to Sylvie and her property from the shareholder class action lawsuit. But Sylvie nevertheless will ask Michael to indemnify her and her property from any responsibility for any claims brought by the GyneTech shareholders and the drug-trial participants and to pay all legal fees that are not covered by directors’ and officers’ liability insurance. To further assess risks to Sylvie, we will want our consulting experts to review all Michael’s employment contracts with GyneTech and MedaStar, and his directors’ and officers’ insurance policies, to assess whether Michael will be indemnified for any out-of-pocket damages assessed against him personally and for his attorney fees and costs.

As we work through these many issues, our goal will be to achieve Sylvie’s goals: to maximize her share of the divorce settlement and to protect herself and her assets from Michael’s creditors. As she has asked, we will try to do that through the traditional litigation process. But we know that a settlement likely will be the way this is resolved—a settlement that we will ensure is in the best interests of Sylvie and her children.

 

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