iStock-1215119911A trial court must divide community property in a “just and right” manner in a Texas divorce.  The court must properly characterize the property before it in order to achieve a just and right division. Characterization can be complex when the parties have significant assets acquired through various means.  It can get even more complicated when the parties have ownership interests in business entities that also own property.

A husband recently appealed the property division in his divorce decree, arguing the court had improperly awarded him property owned by business entities as his separate property. The parties got married in 1993.  They lived in Connecticut, but the wife moved to Texas in 2018 for a job.  The husband remained in Connecticut where his construction businesses were located. He told the wife, however, that he would move to Texas in a year to a year and a half, but ultimately did not do so.

Wife Files for Divorce

The wife petitioned for divorce in 2019.  The husband’s father and his company filed suit against three of the husband’s businesses a few days before the divorce trial. The lawsuit alleged the husband’s companies owed his father’s company $770,644 for equipment rental.

The husband filed a counterpetition in the divorce case and moved to postpone the trial, but the court denied the motion. The wife amended the petition, asking that the lawsuit be the husband’s sole responsibility.

The wife’s financial expert testified the lawsuit was “unusual” because the husband had not told him the rent was past due when he conducted an onsite observation and because the equipment rentals were not shown in the corporate tax returns. The wife offered evidence that the equipment lease had been signed only four days before she filed her divorce petition.

The husband’s inventory and appraisement showed a liability of $582,211 to his father and his company relating to the lawsuit. His valuation of two of the entities included the value of real property each of them owned.

The trial court stated it was skeptical of the lawsuit filed by the father in its letter rendition. The court noted the lawsuit sought lease payments going back to 2011, but the lease was signed in 2019, four days before the wife filed for divorce.  The trial court expressed the opinion that the lawsuit was “a blatant attempt . . . to defraud Wife and the community estate.”

Trial Court Characterizes Business Assets as Community Property

The trial court awarded the husband as separate property the two real properties owned by the business entities, a 50% interest in three of the entities, and a 33% interest in the other entity. His interest in two of the entities was awarded “subject to [the wife’s] equitable interest” and he was ordered to pay her $700,000. The trial court also ordered the husband to indemnify the wife and the community estate from any liability related to the lawsuit by his father’s company.

In its findings of fact, the court characterized the two real properties owned by the business entities as community property.

The husband appealed, arguing the court abused its discretion relating to the separate property award of the real properties.  He argued the properties were owned by the business entities, the court’s valuation did not account for debts on the properties, and that the properties were included in the valuation of the business entities that owned them.

Appeals Court Rejects Trial Court’s Characterization

The appeals court noted that the entities that owned the properties were limited liability companies formed during the parties’ marriage. Because a limited liability company is a distinct legal entity, property it owns is neither community nor separate property. The interest in the company itself may be subject to division in a divorce, but the assets owned by the company are not. The appeals court therefore found the trial court abused its discretion in characterizing property owned by the limited liability companies as part of the community estate to be divided.

When a trial court’s mischaracterization of property would affect the just and right division of property, the appeals court must remand the case so the court can determine the appropriate division with the property is correctly characterized.

The husband argued that the mischaracterization increased the value of his separate property by $332,000, the combined amount at which the court had valued those properties.  The trial court found the community estate was worth about $2.6 million, meaning the mischaracterization was not insignificant to either the community estate or to the husband’s separate property award. Both the community estate and the husband’s separate property award were overvalued at an amount that had a material effect on the property division.

The appeals court reversed the portion of the decree addressing the property division and remanded the community estate to the trial court for a new property division.

The appeals court’s opinion did not indicate whether the circumstances surrounding the lawsuit by the husband’s father affected the trial court’s property division beyond the indemnification requirement. Regardless of the reason the court divided the property as it did, a court may only divide property that belongs to the parties, as either community or separate property.  The trial court could only divide the interests in the businesses, not the businesses’ owned assets.

Are You a Business Owner Facing Divorce? Call McClure Law Group Today

If you are facing a divorce involving complex business assets, you need the guidance of a knowledgeable Texas high net worth divorce attorney.  McClure Law Group has the skills and experience to help.  Schedule a consultation by calling us at 214.692.8200.