During a divorce, the court divides the parties’ property in an equitable manner. In order to do so, the parties must truthfully disclose to each other their assets and liabilities. What happens when one spouse is dishonest, or even fraudulent, in his or her disclosures? A new case from the U.S. Court of Appeals for the First Circuit illustrates just how messy this issue becomes if there is a lack of full disclosure and hidden assets.
The case, Foisie v. Worcester Polytechnic Institute, addresses an interesting issue in dividing marital property. This case grapples with the issue of if and where an allegedly defrauded ex-spouse can sue to recover purportedly hidden assets transferred to a third party corporation by the other ex-spouse following a divorce judgment.
For background, in September of 2010, Janet and Robert Foisie decided to divorce after about fifty years of marriage. At the time, they engaged in mediation, and agreed to make complete and accurate disclosures of their assets. During mediation, Robert twice listed his assets and represented that he had no offshore accounts or other undisclosed assets. Through mediation, Janet and Robert came to a divorce settlement agreement. This agreement required them to state that they had each “fully disclosed all of their assets.”
In 2011, Janet and Robert submitted their agreement to a Connecticut state court. Later, the court entered a judgment for divorce. As part of the divorce proceedings, the parties exchanged sworn financial statements. Robert also testified regarding the truthfulness of his disclosures. In agreeing to the divorce judgment and agreement terms, Janet relied on Robert’s representations about his assets.
After the divorce, Janet alleged Robert gave at least $39 million to Worcester Polytechnic Institute (“WPI”), his alma mater, over time. WPI is located in Massachusetts. Janet asserted much of the money came from accounts Robert did not disclose during the divorce. Among those accounts was a trust worth about $4.5 million and twelve promissory notes worth about $10 million.
A few years after the divorce, Janet moved to reopen the financial aspects of the divorce. Through discovery, she learned about the $4.5 million trust and its transfer to WPI. Robert acknowledged he did not disclose the trust during the divorce.
Janet claimed Robert tricked her during the divorce settlement negotiations by not disclosing various hidden assets. She alleged she had a claim on Robert’s hidden assets. Further, she claimed the assets given to WPI were transferred for either no consideration or for less than equivalent value to thwart her legitimate claims.
In June of 2018, Robert died.
Federal Court Procedure
Before Robert’s death, in January 2017, Janet brought a civil action in a Connecticut state court against Robert and WPI for, among other things, fraud, fraudulent transfer, and breach of contract. Janet ultimately withdrew her claims against WPI without prejudice.
Janet then sued WPI in the United States District Court for the District of Massachusetts. She sought to recoup assets that Robert gave to WPI. The federal district court judge dismissed Janet’s complaint, holding Janet did not have standing to bring the lawsuit.
On appeal, however, the federal appellate court vacated that judgment and sided with the ex-wife. The court noted that in 2010, during their divorce mediation, the couple agreed to fully disclose to each other their assets. Twice, Robert listed his assets and represented that he had no offshore accounts or other undisclosed assets. The couple divorced as a result, having come to a mutually agreeable divorce settlement.
The federal appeals court held that Janet had standing to sue WPI, despite the divorce case being reopened and pending in the Connecticut family court. “To start, she has plausibly alleged a concrete economic injury — that Robert fraudulently concealed millions of dollars that were part and parcel of the marital estate, triggering his liability to her for various tort and contract claims; that he gratuitously transferred the concealed assets to WPI to frustrate her claims; and that he subsequently conveyed millions more to WPI without adequate consideration and in a manner that rendered him insolvent,” the court explained. In addition, Janet may qualify as a creditor under the Uniform Fraudulent Transfer Act (“UFTA”), the appellate court held, reversing the decision below and instructing the court to analyze Janet’s UFTA claims.
Federal Appeals Court Analysis
Much of the court’s opinion centered on an issue regarding choice of laws. Which state’s substantive laws should govern: those of Massachusetts or Connecticut? The divorce was finalized in Connecticut, where Robert allegedly deceived Janet. However, WPI is a Massachusetts corporation and a substantial portion of the disputed funds are there. The federal appeals court held the district court must decide this issue after more thorough discovery. Thus, the federal appeals court remanded the case back to the district court.
“Following discovery, the district court will be better positioned to determine whether a material conflict exists between the laws of the interested states. In making this determination, we invite the district court, on a more mature record, to undertake an assessment of the elements of fraudulent conveyance claims under each state’s law and to reevaluate the practical ramifications of any potential preemption of the plaintiff’s common law claims,” the appellate court explained. “If in the end the court determines that such a conflict exists and that a choice of law is required, it should revisit the question and assess afresh which state — Connecticut or Massachusetts — possesses the most significant relationship to the plaintiff’s claims.”
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