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2/19/2014 Divorce Source: RELIEF FROM JUDGMENT DUE TO FRAUD

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RELIEF FROM JUDGMENT DUE TO FRAUD 1994 National Legal Research Group, Inc.

Many a spouse winds up feeling cheated after the dust settles which was raised by themarriage dissolution proceedings. In particular, the economically dependent spousemay begin to question whether the settlement was a good one and whether the otherspouse may have held back vital information about the existence or value of maritalassets.

It should not be surprising, therefore, that a great deal of postjudgment motions arefiled seeking to set aside or reopen the decree. But the outcome in these proceedingsis often difficult to predict. The general principles regarding fraud as a basis forpostjudgment relief are well settled, but courts disagree on how these principles applyin the context of attacks on property division agreements and decrees.

As the recent cases discussed in this article illustrate, a whole host of issuescomplicates fraud-based motions for relief from judgment. Part I focuses on theaccused spouse and examines what conduct may be characterized as fraud. Part IIfocuses on the accusing spouse and examines the issue of due diligence and reliance,as well as the impact of a lack of independent legal advice. Part III addresses a numberof miscellaneous issues.

I. Identifying Fraudulent Conduct

General Rule.The party attempting to set aside a decree on the ground that it was

procured by fraud must make the usual showings required for fraud. With respect to theconduct that constitutes fraud, Delaware's high court held that these showings wererequired: (1) a false representation, usually one of fact, made by the defendant; (2) thedefendant's knowledge or belief that the representation was false or was made withreckless indifference to the truth; and (3) an intent to induce the plaintiff to act or refrainfrom acting. Schmeusser v. Schmeusser , 559 A.2d 1294 (Del. 1989). Other courtshave listed the same basic requirements albeit in slightly different wording. E.g.,Billington v. Billington , 220 Conn. 212, 595 A.2d 1377 (1991) (plaintiff must show that(1) a false representation was made as a statement of fact; (2) the statement wasuntrue and was known to be so by its maker; (3) the statement was made with the intentof inducing reliance); Despain v. Despain , 855 P.2d 254 (Utah Ct. App. 1993) (plaintiffmust prove (1) that a representation was made, (2) concerning a presently existingmaterial fact, (3) which was false, (4) which the representor either (a) knew to be falseor (b) made recklessly, knowing that he had insufficient knowledge upon which to basesuch representation, (5) for the purpose of inducing the other party to act upon it).
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By analyzing how these elements apply to the facts in a particular case, counsel for theaccused spouse may begin to see a defense theory take shape. For example, counselmight take the position that the alleged misrepresentation was one of opinion ratherthan fact. E.g., Brown v. Brown , 863 S.W.2d 432 (Tenn. Ct. App. 1993) (husband'salleged statements to wife that his financial condition was bad and that she wouldreceive all he could afford were mere expressions of opinion).

Alternatively, if the proof supports it, counsel might argue that his client did not know, orhave reason to know, that the representations were false. E.g., Castro v. Castro , 31Conn. App. 761, 627 A.2d 452 (1993) (fraud not proven; husband claimed wife falselyportrayed her financial status by omitting an expected settlement award, but at the timeof dissolution wife was not aware that she would receive any additional payments); In reMarriage of McBride , 102 Ill. App. 3d 84, 429 N.E.2d 867 (1981) (no relief for a"misunderstanding of the facts"; instead, evidence to support a petition based on fraudmust establish that husband made the representation knowing it was false); Davidsonv. Davidson , 53 Or. App. 516, 632 P.2d 35 (1981) (insufficient evidence that husbandactually knew of possible zoning change and its potential effect on the value of themarital home at the time of the dissolution proceedings).

Another approach would be to characterize any misrepresentation or omission as amistake or oversight made without intent to deceive. See, e.g., In re Marriage ofBroday , ___ Ill. App. 3d ___, 628 N.E.2d 790 (1993) (given trial court's finding thathusband lacked intent to deceive, the element of scienter necessary to establish fraudwas missing). Extrinsic Fraud Versus Intrinsic Fraud. Many states allow judgments tobe attacked for intrinsic fraud, if at all, only within a short time (often one year) afterjudgment. But most states have a longer time limit, or no time limit at all, for attacksgrounded on extrinsic fraud . Extrinsic fraud is usually characterized as fraud on thecourt, while intrinsic fraud is the less serious evil of fraud committed against a party.

In most cases, the concealment or misrepresentation is not discovered within a shorttime, and thus the spouse seeking to set aside a property needs to prove extrinsicfraud. See, e.g., Wise v. Nirider , ___ Mont. ___, 862 P.2d 1128 (1993) (failure todisclose pension to the trial court did not rise to the level of extrinsic fraud upon thecourt, where wife herself knew about pension and was represented by counsel); Lee v.Johnson , 858 S.W.2d 58 (Tex. Ct. App. 1993) (husband's alleged mischaracterizationof community assets as his separate assets did not constitute extrinsic fraud).

Extrinsic fraud is traditionally defined as fraud directed at the court itself that precludes

a party from presenting his or her case to the court. But Minnesota's high court said thatsuch a narrow definition is inappropriate in marriage dissolution cases because of thetrial court's unique role in such cases, where the trial court sits as a third party on behalfof the state to see that a fair distribution is made. The court adopted a broaderdefinition of fraud on the court: an intentional course of material misrepresentation thatmisled the court and counsel and made the property settlement grossly unfair. Marandav. Maranda , 449 N.W.2d 158 (Minn. 1989).

Threats by one spouse that force the other into accepting a property settlementconstitute extrinsic fraud, according to Gordon v. Gordon , 625 So. 2d 59 (Fla. DCA


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1993). After the parties' marriage was dissolved, the husband sought relief from thejudgment, claiming that he agreed to the settlement only because the wife threatened toturn him in to the Internal Revenue Service for falsifying his tax returns to evade federalincome tax. The Florida appeals court held that his allegations, if proven, would amountto extrinsic fraud so as to justify relief from judgment. The essence of extrinsic fraud is"the deliberate use of some device to stop an adverse party's voluntary participation inthe litigation process," the court said. Id. at 63. A strongly worded dissent asserted thatthe majority decision would "open the floodgates" for further judicial review of domesticrelations cases previously thought to have been settled. Id. at 64 (Polen, J., dissenting).

Concealment of Assets.Most courts have held that a spouse's failure to divulge the

existence of an asset to the other spouse constitutes extrinsic fraud. E.g., In reMarriage of Modnick , 33 Cal. 3d 897, 191 Cal. Rptr. 629 (1983) (husband's failure todisclose savings account prevented wife from receiving a fair adversary hearing anddeprived her of the opportunity to present her case); Ridgway v. Ridgway , 146 Ill. App.3d 463, 497 N.E.2d 126 (1986) (property division provisions of decree should bevacated for fraud, where husband had represented that he only had a small amount ofcash and did not disclose that he had an $18,000 savings account, as well as aninterest in a substantial checking account with his business partner).

Some courts, however, have taken the view that a spouse's failure to disclose theexistence of marital assets does not constitute extrinsic fraud so as to allow relief froma judgment dividing property. Turoczy v. Turoczy , 30 Ohio App. 3d 116, 506 N.E.2d942 (1986) (husband's alleged concealment of assets would not constitute a fraud onthe court so as to justify vacating property provisions of divorce decree); Chapman v.Chapman , 692 P.2d 1369 (Okla. 1984) (concealment of assets constitutes intrinsicfraud and thus does not invalidate property division); Johnson v. Johnson , 302 Or. 382,730 P.2d 1221 (1986) (husband's allegedly false testimony regarding whereabouts ofmoney constituted intrinsic fraud and therefore could not support wife's motion tovacate).

Misrepresentation of Asset Values.As a general rule, fraud is more difficult to

establish in the case of misstatements about asset values than in the case ofconcealment of assets. For example, Indiana's high court held that spouses do nothave a duty to make a spontaneous disclosure about the value of marital assets. Selkev. Selke , 600 N.E.2d 100 (Ind. 1992).

The court in Selke rejected the argument that such disclosure is necessary to permitthe court to accomplish its statutory duty to divide property in a just and reasonablemanner. The equitable distribution law clearly contained no express statutory duty ofmandatory disclosure, and such a duty could not be reasonably inferred from thelanguage of the statute, the court said. Recognizing a spontaneous duty of disclosurewould place attorneys in a difficult and possibly unethical situation, the court alsoobserved. But it did add a caveat: a duty to disclose asset value information may arisefrom unique factual circumstances, such as a discovery request for such information oran express provision in the parties' settlement agreement.

Other cases which have rejected claims based on misstatements about asset values


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include DeClaire v. Yohanan , 453 So. 2d 375 (Fla. 1984) (husband's allegedmisrepresentations about his net worth in a financial affidavit could not becharacterized as extrinsic fraud); Bodine v. Bodine , 114 Idaho 163, 754 P.2d 1200(Ct. App. 1988) (wife failed to establish fraud sufficient to warrant setting aside divorcejudgment despite proof that husband knowingly understated property values duringsettlement negotiations, where she did not show that he failed to disclose informationessential for her to arrive at an independent valuation of property); Ratarsky v. Ratarsky, 383 Pa. Super. 445, 557 A.2d 23 (1989) (husband's alleged failure to reveal cashsurrender value of life insurance policies did not constitute extrinsic fraud so as toauthorize opening of divorce decree); Lee v. Johnson, supra , (alleged undervaluationof ranch was not extrinsic fraud). But substantial authority supports the opposite viewthat is, that misrepresentation of property values amounts to fraud so as to support anattack on the judgment. For example, Maine's high court held that a complaint allegingthat the husband led the wife to believe that the marital estate totaled $2 million, whenhe knew that the parties had accumulated $17 million during the marriage, stated aclaim for fraud and deceit. Sargent v. Sargent , 622 A.2d 721 (Me. 1993). Similarly, aMissouri appeals court approved a trial court's decision to set aside a dissolutiondecree in view of evidence demonstrating that the husband misrepresented the value

of his interest in an investment company. The proof demonstrated intrinsic fraud, thecourt decided, observing that the wife did not have to base her claim on extrinsic fraudsince she had filed her motion within one year of entry of the dissolution judgment.Hewlett v. Hewlett , 845 S.W.2d 717 (Mo. Ct. App. 1993).

In Sanborn v. Sanborn , 503 N.W.2d 499 (Minn. Ct. App. 1993), an appeals court heldthat the wife had proven fraud on the court so as to warrant reopening the dissolutiondecree based on the husband's misrepresentation regarding the value of his business.Specifically, he told her that his interest in the business was worth only $324,140, buthe intentionally failed to disclose his extensive negotiations to sell the business, which

was in fact sold after the dissolution for $2.1 million. The misrepresentations misled thetrial court and opposing counsel, the court pointed out.

II. Due Diligence and Reliance

As part of the showings necessary to establish fraud, the spouse seeking relief mustprove that he or she relied on the misrepresentation. Schmeusser v. Schmeusser,supra ; Billington v. Billington, supra . In many cases, the necessity for a showing ofreliance is a major hurdle for the spouse trying to prove fraud.

The case law reflects a basic disagreement among courts about what efforts eachspouse must make to investigate the other spouse's representations about assets andtheir values. One view is that spouses are simply not entitled to rely on each other'sopinions about property values. E.g., Bodine v. Bodine, supra (a spouse acts at his orher own risk if he or she accepts the other's valuation opinion as the basis for theproperty division).

Another view is that each spouse has a duty to inquire about the value of assets and/orto conduct an independent examination of the assets. For example, an Illinois appealscourt held that a husband did not commit fraud by failing to disclose a profit-sharing


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plan, where he did not intend to deceive the wife and she could have discoveredinformation about his financial status on her own but failed to do so. A settlementagreement will only be set aside for fraud if assets could not reasonably have beendiscovered before judgment, the court said. In re Marriage of Broday, supra , see alsoRatarsky v. Ratarsky, supra (no extrinsic fraud where husband disclosed existence oflife insurance policies but not their cash surrender value, and wife's attorney did not askabout their value or examine the policies).

Yet another view is that spouses are entitled to rely on the other spouse's disclosuresabout assets and their values without a duty to validate that information independently.The leading case is Billington v. Billington, supra , where the Connecticut SupremeCourt laid out several reasons for abandoning the state's former requirement of duediligence in the discovery of marital fraud.

Other courts, without adopting a blanket rule on the issue of reliance, have held that thespouse seeking relief in the particular case on appeal was entitled to rely on the otherspouse's representations. For example, in Hewlett v. Hewlett, supra , the court rejectedthe husband's argument that the wife had ample opportunity to make her own

valuations and was negligent in not doing so. The court explained that the doctrine thatequity will not aid the negligent does not apply when the fraud consists of a positiverepresentation intended to induce the allegedly negligent conduct which then results.The wife's reliance on the husband's valuation was not unreasonable, the courtdecided, because she had no knowledge of the husband's business affairs, whichwere quite complex. The law did not require her to engage her own expert to value thehusband's interests, the court said.

Along the same lines, a New Jersey appeals court held that in the face of a record thatshowed purposeful fraud, deceit, and concealment by the husband, the wife's failure to

discover the true facts could not be characterized as neglect. As a matter of policy, "acourt should be particularly cautious about making subjective judgments which aid theconspirators in giving effect to their fraud and as a practical matter ratify the fraud." VonPein v. Von Pein , 268 N.J. Super. 7, 632 A.2d 830, 834-45 (App. Div. 1993)

Some courts have analyzed the reliance issue in terms of whether the particularspouses still had a confidential or fiduciary relationship at the time of the allegedmisrepresentations. For example, in a recent Oregon case holding that a settlementagreement could not be set aside because of the husband's alleged failure to disclosethe value of his pension, the court emphasized that at the time when the parties agreed

on the division of their property, the wife had moved to another city, had beguncohabiting with a companion, and was completely financially independent of thehusband. Under these facts, the court held, there was no fiduciary relationship betweenthe parties as a matter of law, and they were dealing at arm's length. The court added,however, that a spouse may have a fiduciary duty to disclose property, even if theparties' confidential relationship has ended, if that spouse has sole control over anasset and the other party has no knowledge of the asset. Auble v. Auble , 125 Or. App.554, 866 P.2d 1239 (1993); see also Webb v. Webb , ___ Va. App. ___, 431 S.E.2d55 (1993) (existence of a special relationship that imposes a continuing duty of trust insettlement negotiations depends on the specific facts of each case).


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Availability of Legal Advice.The fact that the spouse seeking relief was represented

by counsel in the dissolution proceeding has been cited as evidence that the spousedid not rely on the misrepresentations, or that the spouse's reliance was unreasonable.E.g., In re Marriage of Shaner , ___ Ill. App. 3d ___, 624 N.E.2d 1217 (1993) (no fraud;no reasonable reliance where each spouse was represented by counsel); Wise v.Nirider, supra (husband's failure to disclose pension to trial court did not rise to thelevel of extrinsic fraud, where wife was represented by counsel in the dissolutionproceedings, and the husband was not, and she knew of the existence of the pensionplan when her attorney drew up the separation agreement); Despain v. Despain, supra(no reasonable reliance because wife was represented by able counsel). Other courts,however, have allowed spouses to maintain an action or motion based on fraud afterequitable distribution even if the spouse was represented by counsel in the equitabledistribution proceedings and the attorney undertook little or no discovery on thevaluation issue. E.g., Sargent v. Sargent, supra ; Sanborn v. Sanborn, supra ; Hewlett v.Hewlett, supra.

What if the spouse seeking relief did not have counsel in the dissolution proceedings?Lack of counsel, standing alone, is not enough to invalidate an otherwise valid decree.Brown v. Brown, supra (divorce decree may not be set aside solely because thesuccessful spouse failed to furnish counsel to the unsuccessful spouse withoutrequest); see also Jeffries v. Jeffries , 434 N.W.2d 585 (S.D. 1989) (propertysettlement not voidable merely because one spouse was not represented by counsel).

But other cases suggest that the lack of independent legal advice is frequently animportant factor that may influence the court's decision about fraud. E.g., In re Marriageof Madden , 211 Mont. 237, 683 P.2d 493 (1984) (concluding that husband's failure todisclose assets constituted extrinsic fraud, court emphasized that husband and wifewere represented by same attorney). Conversely, if a spouse was encouraged to seekindependent counsel but did not do so, that fact will weigh against a finding of fraud.E.g., In re Marriage of Broday, supra.

A divorcing individual who is an attorney will be particularly vulnerable to a later fraudclaim if his or her spouse is not represented at the time when the property settlementagreement is executed. See Webb v. Webb, supra (husband's position as attorney andadvisor to wife placed him in the category of one who continues in a specialrelationship with his wife, and, as such, he had an affirmative duty to make a fulldisclosure to wife as to the value of his pension).

III. Miscellaneous Issues

Procedure. Procedural avenues for relief from judgment could include a motion for

relief under a state counterpart to Fed. R. Civ. P. 60(b), which authorizes relief basedon fraud, or an independent action alleging fraud.

According to one view, a motion in the dissolution action is the only mechanism forseeking relief based on fraud. For example, Indiana's high court held that a wife couldnot file an independent action against her former husband's estate seeking damages


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because of his alleged fraud in withholding information from her concerning his networth. This was an impermissible collateral attack on the judgment, the court said,declaring that the wife's sole avenue of redress was to apply for modification of thedivorce decree. Dodd v. Estate of Yanan , 625 N.E.2d 456 (Ind. 1993); see also Smithv. Smith , 334 N.C. 81, 431 S.E.2d 196 (1993) (for intrinsic fraud, judgment must beattacked by motion and not by collateral action).

Some cases, however, permit an independent suit. An example is Sargent v. Sargent,supra , where the wife filed a civil action seeking $8.5 million, one-half of the amountshe claimed comprised the marital estate at the time of the divorce. In her action, shealleged that the husband had induced her to execute a separation agreement bymisrepresenting the extent of the marital property. Vacating an order of dismissal, theSupreme Judicial Court of Maine held that the state rule on reopening judgments,which does not permit a motion for relief based on fraud after one year, does not limitthe court's power to entertain an independent action for fraud and misrepresentation.See also Chrun v. Chrun , 751 S.W.2d 752 (Mo. 1988) (independent suit in equity maybe maintained to set aside dissolution judgment).

Discovery; Temporary Injunction.After filing a postdecree motion or action allegingfraud, the spouse seeking relief has a right to discovery. For example, in a recentIllinois case where the wife filed a petition for relief alleging that the husband hadconcealed specified real property in the dissolution proceeding, the appeals court heldthat she was entitled to "liberal discovery, oral and written, surrounding the acquisitionof the undisclosed property, as well as discovery which traces the source of the fundsused in such acquisition, the stream of any funds obtained in connection with thedevelopment, sale, or disposition of such property or any part thereof, the tracing of thedisposition of the proceeds of [the refinancing of other real property, which proceedswere allegedly used to purchase the undisclosed realty], and any other discovery whichthe trial court deems necessary to do justice between the parties." In re Marriage ofGidlund , 244 Ill. App. 3d 675, 614 N.E.2d 315, 319 (1993).

When a former spouse who is accused of fraud refuses to cooperate with discovery,that refusal can furnish justification for the other spouse to seek preliminary injunctiverelief to prevent the dissipation of assets during the proceeding. Kennedy v. Kennedy ,616 N.E.2d 39 (Ind. Ct. App. 1993), is illustrative. After the parties' divorce, the wifefiled a petition to set aside the dissolution decree, alleging that the husband hadmisrepresented the true value of his pension benefits. Some 14 months later, after alengthy and largely unsuccessful discovery period, the wife sought and was granted a

preliminary injunction enjoining the husband from dissipating his pension. The Indianaappeals court held that the trial court's reliance on the pleadings, motions, anddiscovery results was proper, and that those requests and responses provided the trialcourt with the foundation it needed to grant injunctive relief, in that they showed that thehusband was not willing to turn over the requested valuation information, and that headamantly maintained that the wife was not entitled to any greater amount than she hadreceived in the property division.

The husband cited Selke v. Selke, supra , which held that there is no statutory duty tospontaneously disclose asset value information, but the appeals court found Selke


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distinguishable since it involved a claim that the husband failed to volunteer valuationinformation. Unlike that case, the wife here claimed that the husband deliberatelymisrepresented the pension's value. "Were we to adopt [the husband's] position, thatassets divided or received through property settlements cannot be subject to injunctiverestriction until the decree is formally modified or set aside, one ex-spouse coulddefraud the other and then dissipate the assets without fear of injunction before theallegations of fraud could be proven at trial." Kennedy v. Kennedy, supra , 616 N.E.2dat 43. Preliminary injunctions are "particularly well-suited to preserve the status quowhen allegations of deliberate misrepresentation arising from the division of maritalproperty have been levelled," the court said. Id.

Scope of Relief. The scope of relief granted when fraud is proven is a discretionary

matter which depends upon the facts of the particular case. When the spouse seekingrelief proves fraud which made the entire property division unfair, the court generallyvacates the entire property settlement agreement. E.g., Ridgway v. Ridgway, supra(property settlement agreement failed to provide a fair and even distribution of parties'assets; husband had testified to $357 in assets while he had a net worth in excess of$100,000).

But when the case involves concealment of a specific asset or misrepresentation abouta single asset, the court has discretion to fashion a remedy limited in scope. See In reMarriage of Gidlund, supra (no abuse of discretion to open judgment only as toundisclosed property rather than opening entire judgment, where record did not showthat facts available to wife as to the extent of assets at the time of the execution of theproperty settlement agreement were insufficient to allow her a meaningful choice).

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