Clarke v. Clarke
| Docket Number | 08-23-00016-CV |
| Decision Date | 30 January 2024 |
| Parties | ROSS GENTRY CLARKE, Appellant, v. REXANN PASSMORE CLARKE, Appellee. |
| Court | Texas Court of Appeals |
Appeal from 73rd Judicial District Court of Bexar County, Texas (TC# 2019-CI-07923)
Before Alley, C.J., Palafox and Soto, JJ.
In this divorce case, Roy Gentry Clarke appeals the trial court's finding that he committed fraud against the community estate. He also challenges the trial court's division of the community estate.[1] The trial court reconstituted the community estate by adding six distinct monetary awards based on the alleged fraud. It also divided the community estate based on an unequal percentage to reach a fair and equitable division. Five of the awards used to reconstitute the community estate were exclusively based on an expert's testimony. Because the expert concluded that two of the five awards were accounted for elsewhere-and should not be included as fraud damages to avoid double-counting-we find that the trial court abused its discretion in using those two awards in calculating the reconstituted community estate. We reverse the judgment to delete those two awards, and remand for a division of property consistent with this opinion.
Roy and Rexann married in September 2002. The couple had no children together. Rexann filed for divorce in April 2019. As the issues in this divorce are limited to the division of property, we limit our recital of facts to that issue.
The couple lived in a home that Roy purchased before their marriage. Roy is 22 years older than Rexann, and four years into their marriage, Roy began collecting Social Security benefits, which he put towards the monthly mortgage payments. Roy paid the mortgage on the home, as well as routine maintenance bills, utilities, and HOA dues. Rexann paid for home insurance, health insurance, and housekeeping expenses. Rexann also paid for some renovations on the house and vacations that the couple took together.
Roy owns a window replacement business. Throughout their marriage Rexann worked various jobs, including uncompensated time helping Roy with his business. Later, she worked at USAA where her salary rose to $96,000 by the time of the divorce. While at USAA, Rexann also earned her MBA. Though USAA paid for her tuition, Rexann incurred about $35,000 in student loans from her undergraduate education before she and Roy married. Roy was in charge of making Rexann's student loan payments. But according to Rexann, he made only "a handful" of student loan payments, such that the balance rose from approximately $35,000 to nearly $100,000 at the time of their divorce. Roy largely managed the couple's finances, and Rexann testified she did not understand the extent of the couple's assets or debt.
In 2013, Roy asked Rexann to borrow money from her retirement account to pay off tax debt on the home. Rexann ultimately agreed and withdrew $22,000 from her retirement account based on Roy's promise to deed her an interest in the separate-property-house. Roy then executed a special warranty gift deed, which Rexann believed made the home community property. Rexann later took out a $35,000 loan to pay off additional debts in 2018, including debt on two of Roy's business credit cards, one of Roy's personal credit cards, and one of her personal credit cards which she alleged Roy used for business supplies without her consent.
Rexann filed for divorce on insupportability and cruelty grounds. She also sought recovery for equitable reimbursement and asserted fraud claims. In the divorce proceedings, Roy moved for partial summary judgment to declare the home as his separate property despite the special warranty gift deed. The motion claimed that because the deed lacked the requisite statutory language to convert separate property to community property under the Family Code, it remained his separate property. Roy also contended he did not receive a fair and reasonable disclosure of the legal effect of converting his separate property to community property before he executed the deed. The trial court granted Roy's motion and voided the deed. Therefore, the house remained Roy's separate property by the time of the divorce.
The case proceeded to a four-day bench trial. Rexann elicited testimony from her expert forensic accountant, Michael Turner. Turner completed an analysis based on the document discovery in the case, including bank statements, business records, loan documents, liens, and tax records. From those records, Turner identified several "badges of fraud." A badge of fraud is an instance of suspected nefarious behavior. If enough badges are identified, a forensic accountant can conclude that a party engaged in intentional fraudulent conduct. Turner testified that fraud is often evident only from circumstantial evidence showing a pattern of suspicious conduct.
In this case, Turner identified several badges of fraud in Roy's window replacement business. The first was a failure to keep records to document transactions, such as invoices, customer orders, documentation for the cost of goods sold, and labor costs. Next, Turner concluded that Roy understated his income based on a comparison of what bank statements showed, and what personal income tax and K-1 records showed. Turner also noted that Roy's business kept inadequate books and records failed to pay estimated taxes and yearly taxes on time.
Turner did not have all of Roy's business records-only what Roy produced. To document an amount for the claimed fraud, Turner recreated a set of books for sales, revenues, and the cost of goods for 2012 to 2019. Though Roy's business on paper showed a $10,000 cumulative loss from 2012 through 2018 Turner determined the business earned $1,233,000 in gross revenue during that time frame. Assuming an industry-standard 30%-40% gross margin, Turner concluded that Roy's business should have returned a $400,000 to $450,000 gross profit during that period.[2]Turner bolstered that conclusion with what Roy's business returned before 2012 and what it generated after Roy and Rexann separated. Roy's business showed between $50,000 to $54,000 of taxable income from 2010 and 2011 (evidencing a 33.7% profit margin), but then essentially showed no income from 2012 through 2019.[3] Turner also found in the eleven months just before trial (and after the couple had separated) Roy's business generated approximately $313,000 in revenue with $116,000 gross margin, which tracked his prediction for industry norms.
Turner testified he at first could not account for $393,338.22 in funds generated from the business which he found indicative of concealing assets or debt. This sum was detailed in a spreadsheet admitted at trial that set out seven categories of "Funds Unaccounted for/Waste":
Cash Withdrawals
$74,746.79
Payments to SACU/Credit Human
$89,766.02
Stores (personal)
$40,287.79
Credit Card Payments
$30,293.02
Miscellaneous
$66,035.15
Payments to Broadway Bank
$44,152.49
Misc/other unknown
$48,056.96
Total
As we explain below, Turner later reduced this total amount to $259,419.71 after learning that two of the seven items that he once believed were unaccounted for ($89,766.02 and $44,152.49) were used to pay the home mortgage and loan payments for Rexann's vehicle. So the funds were accounted for elsewhere in the assets available for division by the trial court.
Turner also testified to Rexann's equitable reimbursement claims. He stated that his analysis showed that $202,216.73 of community funds were paid toward the mortgage for Roy's separate property home, $102,909.84 of community funds were used for property taxes and home improvements on the separate-property-house, and $53,550.62 of community funds were used to keep Roy's businesses in operation. Roy did not offer his own expert witness.
Following the bench trial, the trial court rendered a judgment divorcing the parties on no-fault grounds and confirmed the home as Roy's separate property. It also agreed with Rexann's fraudulent inducement claim over her withdrawal of $22,000 from her retirement account to pay the tax debt on the home and awarded all other tax debt to Roy. After dispersing the couple's personal property, the court took the remaining issues, including the fraud and waste claims under advisement. Later, the trial court issued a memorandum of ruling, which does not appear in the appellate record.
In September 2022, the court entered the final divorce decree which, among other things, awarded each party their respective personal effects, cash and bank accounts brokerage accounts, life insurance policies, vehicles, and home furnishings. It also awarded Rexann her retirement accounts[4] and Roy his home-renovation business. As for debts, the trial court ordered each party to pay their own credit card and post-separation debts. The court also assigned to Rexann the balance due on her vehicle loan and to Roy the mortgage on his home. It ordered Roy to pay all unpaid federal income tax liabilities of the parties from the beginning of their marriage through December 31, 2021, as well as any penalties or interest due on those taxes.
The trial court then determined the community estate was entitled to a judgment based on Roy's fraud committed against the community estate based on:
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