Too often spouses attempt to hide assets during a divorce, despite the severe repercussions if caught. Penalties range from being charged with perjury and fraud to being forced to hand over 100% of the hidden asset to the other spouse. Nevertheless, according to a survey by the NEFE (National Endowment for Financial Education) with the Harris Poll, “Nearly three in five of those surveyed (58 percent) said they hid cash from their partner or spouse.” Thus, finding assets is a major part of any divorce.
This is especially true when there is a business (or multiple businesses) involved. Knowing where to look and what to look for is a big part of the battle. As a business litigator I have witnessed people go to extreme lengths try to avoid legal requirements and try to collect and preserve their own assets at any cost, so I assume every tactic is a possibility. With that in mind, here are some “tricks” to finding, evaluating, and eventually dividing business assets.
- Get everything and look everywhere! Is the company set up as an LLC, S-Corp, C-Corp, partnership, sole proprietorship, or less common entity? Are assets held in a trust by the individual, as a family, or as part of one member’s extended family (i.e., a share in a grandparents’ estate or family business)? Start with tax returns and all IRS tax documents, such as K1s. Also, review the titles to any properties owned and perform a search of County records for any properties recorded in your spouse’s name. Are those properties, in fact, community property despite only one spouse’s name being on the title?
- Get the formation and operating documents. Are there specific provisions for executive/director pay? Sweat equity? Consultation or in-kind agreements, stock options, membership interests, etc., in lieu of compensation to try to avoid paying proper spousal support? It is important to get creative because the transactional attorneys did when they buried the asset, so it would not be discovered later in a divorce.
- Some examples of transactional “creativity” include (but are not limited to): setting the company up in a different state (like Delaware, Colorado, or Arizona), even though it exists and operates in California; splitting assets into multiple entities (like having a limited liability company on title to the real property; a different corporation being in charge of business operations; and another corporation or limited liability company holding title to each of the large assets like equipment and fixtures). In these situations, it is important to look for inter-company transfers, receivables, loans, or guarantees to find all the moving parts, and places where assets can be hidden. After finding the different entities, it is important to then look at the organizational and operational documents to see who the directors, officers, members or managers are for each. That way, you can show that your spouse has a hand in everything, and it all needs to be included in the community. You do not want to get cheated out of your fair share of assets or support just because you did not look hard enough.
- Get involved. Can one spouse claim that all the equity, earnings, etc., are part of “sweat equity?” Is one spouse completely uninvolved? Start asking questions NOW about the business you and your spouse own. Get a copy of the bank statements, Quickbooks spreadsheets, payroll records, financial statements, and even accounting entries. Share ideas on the company operations (for example) to show that you are part of the business also. DO NOT let your spouse control the business and freeze you out. Stay involved in some measure with all aspects of the business, including its finances. Involvement will make it more difficult for your spouse to hide assets should a divorce occur.
- Make sure the business is healthy. Any outstanding litigation, citations, violations, etc.? Especially in California, look for potential HR problems that can result in costly litigation, such as sexual harassment claims, wage and hour claims (which can be brought on an individual, class or Private Attorneys General Act (PAGA) basis and culminate into potentially bankrupting levels of damages and fines) or wrongful termination accusations. Also, make sure that the business has all the required or recommended insurance policies (EPL, general liability, workers’ comp), and confirm who the owners are and who is covered under the policies.
- Look for spousal consents. Did the business get them when required? Did they avoid it? These are problems either way, depending on which side of the coin you are on. In community property states, a non-consenting spouse can later potentially void a transaction; so, these documents are generally recommended for practically every major business deal, such as asset or stock purchases; leases; beneficiary designations; and real estate transactions, to name a few examples. The 2017 case of Sterling v. Stiviano, involving disgraced, former Los Angeles Clippers owner Donald Sterling, is a prime example of the dangers of not having spousal consent to transactions, and the remedies available to the non-consenting spouse who was left out of the loop.
Divorce is difficult enough to accept without later learning that you were cheated out of a more equitable financial split because of underhanded maneuvers by your spouse. Stay informed throughout your marriage, and if you unfortunately find yourself in a divorce, hire an attorney who knows where to look, what to ask for, and is experienced in finding what your spouse is hiding.