j:articles 9 aflc -- practicing family law in a depressed economy

PRACTICING FAMILY LAW IN A DEPRESSED ECONOMY

PART I: YOUR LAW PRACTICE AND YOUR CLIENTS

RICHARD R. ORSINGER [email protected]

http://www.orsinger.com McCurley, Orsinger, McCurley, Nelson & Downing, L.L.P.

San Antonio Office: 1717 Tower Life Building San Antonio, Texas 78205

210-225-5567 and

Dallas Office: 5950 Sherry Lane, Suite 800

Dallas, Texas 75225 214-273-2400

STEPHEN M. ORSINGER

McCurley, Orsinger, McCurley, Nelson & Downing, L.L.P. 5950 Sherry Lane, 8th Floor

Dallas, TX 75225 Phone: (214) 273-2400 [email protected]

State Bar of Texas 35TH ANNUAL

ADVANCED FAMILY LAW COURSE August 3-6, 2009

Dallas

CHAPTER 10.1 © 2009 Richard R. Orsinger, Stephen M. Orsinger - All Rights Reserved

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TABLE OF CONTENTS

I. OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-

II. PROTECTING YOUR LAW PRACTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-A. Reducing Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-

1. Employee Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-2. Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-3. Employee Turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-4. Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-5. Computer Services & Practice Aids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-6. CLE Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-

B. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-1. Initial Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-2. Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-

a. Classic Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-b. Special Retainer: Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-c. Special Retainer: Advance Fee/Advance Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-d. Special Retainer: Evergreen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-e. Default Rule for Type of Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-f. Interim Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-g. Non-Refundability of Retainers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-h. Retainers in a Depressed Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-

3. Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-4. Hourly Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-5. Flat Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-6. Contingent Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-7. Attorney’s Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-

C. Unbundling Legal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-D. Outsourcing/Insourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-E. Barter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-F. Turning Down Unpaid Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-G. Withdrawing From Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-H. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-I. Client Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-J. Interim Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-

1. Authority to Award Interim Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-2. Enforcing Interim Fees by Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-3. Enforcing Attorney Fee Awards by Contempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-

K. Expanding Your Client Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-1. Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-

L. Internal Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-M. Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-N. Client Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-

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1. Compatibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-2. Veracity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-3. Litigiousness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-4. Reasonableness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-5. Motive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-6. Influence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-7. Financial Ability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-

III. USING SPARE TIME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-A. Marketing and Networking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-B. Continuing Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-C. Other Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-

IV. CONTROLLING LITIGATION COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-A. Written Discovery & Depositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-B. Mental Health Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-

1. Social Workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-2. Marriage and Family Therapists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-3. Professional Counselors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-4. Psychologists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-5. Psychiatrists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-

C. Financial Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-D. Alternate Forms of Tracing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-E. Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-F. Arbitrating Specific Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-

V. PERSONAL LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-A. Direct Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-B. Vicarious Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-

1. Liability for Necessaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-2. Vicarious Liability for Acts of Other Spouse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-3. The Cockerham Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-

a. Family Code Section 3.201, on Spousal Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-4. Parental Liability for Acts of Child. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-

VI. MARITAL PROPERTY LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-A. What’s Liable for What? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-B. Joint and Sole Management Community Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-C. Visualizing the Rule of Marital Property Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-D. Case Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-E. Recap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-F. Presumption Regarding Management Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-G. Agreement Affecting Management Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-H. Joinder of the Spouse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-

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VII. SEPARATE VERSUS COMMUNITY CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-A. General Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-B. Significance of Separate Versus Community Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-

VIII. CREDITORS AND DEBTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-A. Effect of Divorce on Creditors’ Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-B. No Imprisonment for Debt in Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-C. Property Exempt from Creditors’ Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-

1. Protection Under Texas Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-a. Homestead Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-

i. Definition of Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-ii. Acquisition of Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-(A) Homestead Requires Some Interest in Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-(B) When Homestead Right Arises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-(C) Designation of Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-(1) Forcing Designation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-iii. Loss of Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(A) Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(B) Abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(1) Temporary Absence Not Fatal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(2) Temporary Renting Not Fatal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(3) Homestead Rights During and After Divorce. . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(a) The Posey Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(b) The Sakowitz Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(c) The Rimmer Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-(d) Laster and Lawrence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-(e) Other Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-(C) Alienation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-iv. Homestead in Other Spouse’s Separate Property. . . . . . . . . . . . . . . . . . . . . . . . . . . -34-v. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-(A) Vendor’s Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-(1) Express Vendor’s Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-(2) Implied Vendor’s Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-(B) Mechanic’s, Contractor’s or Materialman’s Lien. . . . . . . . . . . . . . . . . . . . . . . . . -35-(C) Tax Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-(D) Home Equity Loan Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-(E) Reverse Mortgage Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-(F) Equitable Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-(1) Economic Contribution & Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-(2) Equitable Lien For Interest in Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-(G) Equitable Subrogation to Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-vi. Sale of the Homestead and Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-vii. Fraud Can Vitiate Homestead Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-viii. Federal Preemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-

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b. Personal Property Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-i. The “Laundry List.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-ii. Designation of Personalty Exceeding Monetary Cap. . . . . . . . . . . . . . . . . . . . . . . . -40-iii. Special Fraudulent Conveyance Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-

c. Garnishment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-i. Relevant Constitutional and Statutory Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . -40-ii. The Turnover Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-

d. Proceeds of Insurance Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-e. Retirement Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-

i. Preemption by ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-ii. ERISA Protection in Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-

f. Rules of Marital Property Liability May Offer Protection. . . . . . . . . . . . . . . . . . . . . -43-D. Perfecting Liens & Abstracts of Judgment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-E. Filing Judgment in Deed Records Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-

IX. PRE- AND POST-DIVORCE TRANSFERS, TRO’S AND TEMPORARYINJUNCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-

A. Actions to Take Prior to Filing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-B. Transfers and Debts During Divorce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-C. Post-Filing Protection of Property from the Other Spouse. . . . . . . . . . . . . . . . . . . . . . . . -44-

1. Reducing or Cutting Off Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-2. The TRO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-

a. Family Code § 6.501. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-b. The Form Book TRO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-c. Standing Orders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-

3. Temporary Injunctive Orders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-4. Lis Pendens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-

a. Filing and Cancelling Notice of Lis Pendens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-b. When to File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-c. Management Rights and Presumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-d. Personal Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-e. Is Divorce a Special Case? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-

X. DISCOVERY OF DEBTS IN A DIVORCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-A. Inventory and Appraisement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-

XI. ASSESSING AND PROTECTING AGAINST RISK IN A PROPERTY DIVISION . . -48-A. Assessing Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-B. Responding to Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-

1. Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-2. Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-3. Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-4. Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-

C. Creditors’ Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-

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1. Collateralized Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-2. Uncollateralized Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-3. Personal Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-4. Contingent Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-5. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-

D. Other Risks in a Property Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-1. Performance Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-2. Inflation Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-3. Liquidity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-

XII. HANDLING DEBTS IN A DIVORCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-A. Marshalling Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-B. Secure Interspousal Payments by Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-

1. If Case is Settled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-2. If Case is Tried. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-3. Dischargeability In Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-

C. Duty to Pay Debts Owed to Third Parties and to Indemnify the Other Spouse. . . . . . . . -52-1. Form Book: Indemnification for Listed Debts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-2. Form Book: Indemnification for Unlisted Debts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-3. Dischargeability in Bankruptcy of Duty to Pay Creditors and Hold Other Spouse

Harmless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-D. Tax Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-E. Partition Agreement Versus Agreement Incident to Divorce . . . . . . . . . . . . . . . . . . . . . -54-

XIII. CREDITORS’ REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-A. Fraudulent Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-

1. Fraudulent Conveyance Can Be Set Aside. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-2. When Can This Be Done? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-

a. Section 24.005 Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-b. Section 24.006 Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-

3. Spouses and Children as Creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-B. Secured Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-C. Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-D. Turnover Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-E. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-

XIV. CREATION OF ENTITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-A. Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-B. Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-

XV. HEALTH CARE COVERAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-A. Private Health Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-B. COBRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-C. HIPAA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-

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D. Texas’ High Risk Health Insurance Pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-

XVI. UNDOING TRANSFERS IN BANKRUPTCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-A. Preferences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-B. Avoidance of Lien in Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-C. Undoing Fraudulent Conveyances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-

1. Bona Fide Purchaser Status of Third Party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-2. Enhanced Scrutiny of Intrafamily Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-3. Consideration Received Not “Reasonably Equivalent Value.” . . . . . . . . . . . . . . . . . . -61-

a. Promissory Note With Unfavorable Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-b. Are Family Obligations Enough? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-

4. Do These Rules Apply to Exempt Property? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-a. When Homestead Converted Into Cash Held by Third Party. . . . . . . . . . . . . . . . . . . -61-b. When Homestead Abandoned Upon Marital Separation. . . . . . . . . . . . . . . . . . . . . . . -62-c. Conversion From Non-Exempt to Exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62-d. Incidental Benefit Ignored. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-

5. Other Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-D. Bar to Bankruptcy Discharge for Fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-

1. Barring Discharge as to Certain Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-2. Barring Discharge Altogether. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-

a. Gift to Grandson Resulting in Discharge Being Denied. . . . . . . . . . . . . . . . . . . . . . . -63-b. Wrongful Intent Must be Clearly Shown. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-c. Shifting Burden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-d. Default in Divorce was Fraudulent Conveyance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-e. Converting Non-Exempt to Exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-f. Malicious Injury to Property, as an Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-g. Sustained Course of Transfers Without Consideration . . . . . . . . . . . . . . . . . . . . . . . -64-

Practicing Family Law in a Depressed Economy - Part 1 Chapter 10______________________________________________________________________________________________________

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I. OVERVIEW. We are in the worst recession inseventy years, and it has the potential to become aneconomic depression. As family lawyers, thisimpacts us in three ways: it affects our clients, whohave less wealth and more debt; it affects our lawpractices, which are threatened with decliningincome; and it affects our personal lives, where wehave to increase our work hours to maintain oldincome levels, adjust to reduced personalexpenditures and diminished retirement security,and deal with spare time resulting from lack ofwork. Part I of this Article discusses these threedomains. Part II of this Article discusses all aspectsof the economy in depth.

II. PROTECTING YOUR LAW PRACTICE.One economist recently said on the radio that “abusiness stays in business by making more moneythan it spends.” Since most of us are in business,this idea is an important one for us. Because we cancontrol our expenses more easily than we cancontrol our income, we'll begin our discussion withexpenses.

A. Reducing Expenses. Whether you're as big asGeneral Motors, or as small as a solo practitioner,the key to surviving an economic downturn is tocontrol or reduce expenses. If you don't controlyour expenses proactively, the economy will makeyou do that reactively. Here is a list of expenses fora typical law firm:

- Employee compensation- Employee benefits- Rent- Computer Services- Practice Aids (reporters, formbooks, codes, etc.)- Office Supplies- Entertainment- Marketing

A “profit margin” is the percentage that profitcomprises total revenue. The converse of a profitmargin is the ratio of expense to revenue. As theprofit margin increases, the ratio of expense torevenue will decrease. A healthy law practice will

have profit margin and expense-to-revenuepercentages approaching 50%.

1. Employee Compensation. In a deflationaryeconomy such as the one we have now, thepurchasing power of the dollar increase as timepasses. That means that the same salary can buymore goods and services. Smaller raises, or even noraises, can be justified from an economic point ofview, because even on the same salary theemployee’s purchasing power is increasing. Withthe number of unemployed rising, the businessowner may be able to replace an existing employeewith a new employee that would be happy to havea job at a lower salary than the employee beingreplaced. It would be a bad business decision toreplace a good employee with a new employee justto reduce salary expense. However, it may makebusiness sense to replace a bad employee, or amarginal employee, with a new employee at alower salary. Many businesses that do not want tolay-off employees can simply not replace anemployee who resigns, and the work load of thedeparting employee can be distributed among theremaining employees.

If the workload is diminished enough, the businessowner could reduce the work week by one hour perday, or could change some full-time positions intopart-time positions. Administrative jobs, such asbookkeeping, could be terminated and the tasksoutsourced. A receptionist job could be replaced byconverting to a voice mail system, or havingparalegals answer the phone.

If your business has a history of paying bonuses, adiscretionary bonus system can be converted intoa performance-based bonus system. For example,bonuses for employees who bill their time orservices can be tied to hours billed or feescollected. Salaried employees, like associateattorneys, will then have a direct input into theircompensation, with the more profitable employeesbeing rewarded for their higher profitability. Thatway the employees are contributing to their ownbonuses.


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A prevalent approach to performance-basedbonuses focuses entirely on an “objective” measureof the value an employee adds to the business:quantity of billable hours. This insular fixationignores another more “subjective”—yet equallyintegral—component of value: quality of workdone. An employee must excel at both of these twocomponents in some balanced proportion in orderto do an amount of work that is valuable enough tojustify additional compensation. Effort expended todo work is like a gas; it expands to fit its container.Thus, cinching bonuses solely to billable hoursencourages either over-billing (through employeesdevoting too much time to projects that do notwarrant it) or carelessness (through employeestaking on too many projects and not havingsufficient time to competently complete them).These consequences are inevitable andunsustainable, and obviously ethically improper. Asystem that sets a lower quantitative threshold anda higher qualitative threshold can avoid theseproblems, but ultimately requires assessments bothobjective and subjective, both mandatory anddiscretionary. A practice that seeks to earn revenueby focusing on increasing billable hours, at theexpense of paying only cursory attention to thequality of work produced in those hours, isdestined to fail.

2. Employee Benefits. Employers well know thatthe cost of employee benefits, particularly medicalinsurance, has been increasing at a greater rate thanother costs. Many businesses are shifting some ofthe cost of medical insurance coverage toemployees, by having them pay a portion of theinsurance premiums. Many health insurers canprovide a “cafeteria plan,” where the employee hasthe ability to choose the deductible that fits theirinsurance needs. Instead of paying the full cost ofmedical insurance, the employer can pay a setamount, and allow each employee to decide howthat insurance money should be applied. Someemployees may prefer to have a Health SavingsAccount (HSA) instead of regular insurance, inwhich event the employer-provided premium canbe contributed to the HSA.

3. Employee Turnover. Employee turnover isbad. In hard economic times, employees who mightotherwise stay with the job may have to move dueto outside factors, like a spouse's unemployment. Ifyou have to replace a valuable employee, you willlose the former employee's contribution to revenueduring the replacement period, and you will losethe productivity of everyone involved in trainingthe new employee.

One factor in keeping a work force happy is tomake employees feel secure about their paychecksand about their jobs. Assume there will be negativespeculation and gossip over any indications that thefirm may be having cash flow problems. The betterpractice is to never be late on paychecks.

When an employee is terminated, they can applyfor unemployment benefits. “Chargebacks” are theamount of unemployment benefits that affect theformer employer's tax rate, and are computed byadding the total of regular unemployment benefitsand half of the extended benefits paid to a claimant.

4. Rent. If your lease comes up for renewalduring a bad commercial real estate market, itpresents an opportunity to reduce rental expense.You can search for an older building, or a lessdesirable location, or downsize offices in a newlease space. Commercial brokers can do thissearching for you, and even negotiate terms withthe new landlord, and their fees are customarilycharged to the new landlord. Office-sharingpresents the opportunity to share overhead withother lawyers, each of whom pays part of the salaryand benefits of common employees like areceptionist, and part of the rent on the commonareas like the reception area, library, andbreak-room. Speaking of a library, in this day ofWestlaw and Lexis, and the State Bar of Texas'“On Line Library,” the library can be eliminatedand the rent on that space can be eliminated.

5. Computer Services & Practice Aids. The costof computing power continues to drop. Hard diskspace is one of the cheapest commodities in the


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world. In big offices, a computer network based ona computer server model is necessary, but forsmaller offices a peer-to-peer network may meetyour needs without the necessity of buying andservicing an expensive network server. Thepeer-to-peer network is less vulnerable tocatastrophic failure that results when the serverfails, because each individual computer continuesto function even when one computer on thenetwork fails.

You can outsource your email system to an off-siteemail service provider at a nominal cost, usuallybilled as a fixed dollar price per email account.

The State Bar's On Line Library costs $295.00 peryear, and gives you access to all State Bar of TexasCLE articles dating back to 1998, which you candownload as a pdf file and print or search on yourcomputer.

You can have a flat fee contract with Westlaw orLexis that gives you a fixed library cost per month.The sales representative can give you arecommendation as to which databases best suityour research needs. Westlaw has multiple familylaw packages. Westlaw offers a Family Law Corepackage, which includes the annotated FamilyCode, family law forms, the family law section ofTexas Jurisprudence and ALR, and various otherresearch aids tailored to family law practitioners.Other packages include additional features: theFamily Law Counselor package adds multistaterecords (such as People Finder and Asset Locator),and the Family Law Expert package featuresmultistate records, administrative materials, familylaw journals, and law reviews. The “Lawrev-pro”database permits you to search all American lawschool reviews and journals for an economicalprice.

Westlaw and Lexis also offer reports that can trackthe amount of on-line usage on a client-by-clientbasis, which allows you to charge a pro rata part ofyour Westlaw or Lexis bill to the client whoreceives the benefit of that service. Out-of-plan

research can be billed to the client whose casecalled for the out-of-plan charges.

6. CLE Expense. Continuing legal education isa necessary part of practicing law. To remainlicensed, Texas lawyers must have 15 hours ofCLE per year, of which at least 3 hours must beethics credit. Up to 5 of those 15 hours may “beself-study” credit, but at least 10 hours must be“participatory credit” earned at a formal course orseminar. To maintain Family Law Specialization,the Texas Board of Legal Specialization requires100 CLE hours in a 5 year period, of which 15 maybe self-study. The following chart lists the cost perhour of various family law CLE courses:

Advanced Family Law Course $24.12/hrFamily Law Boot Camp $31.25/hrMarriage Dissolution Institute $37.35/hrMarriage Dissolution Boot Camp $23.75/hrNew Frontiers in Marital

Property Law $82.78/hrAdvanced Family Law Drafting

Course $45.00/hr

The biggest cost of CLE is not the registration feeor cost of food and lodging; it is the time out of theoffice which generates no fee income. For thisreason, many lawyers meet their CLE requirementsand needs by attending local CLE functions, orgetting participatory credit through the State Bar’son-line CLE offerings, which permits you to getCLE and CLE credit while sitting at your computerat the office. The State Bar offers telephone CLEevents of an hour in length, and the State Barallows you to participate in some CLE events“live” through an Internet connection. The varietyof CLE offerings from the State Bar can bereviewed at <www.texasbarcle .com>.

B. Fees. One of the most important considerationsin a troubled economy is ensuring the timely andcomplete collection of receivables. The mosteffective thing you can do to increase fee income isto reduce non-fee producing professional activitiesand other pro bono work and use that free time


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representing clients for a fee. However, there areseveral other methods which can help increase feeincome. Underlying this issue is the importantbalance between maintaining financial viability onthe one hand, and remaining able to attract clientson the other. This section addresses these twotopics and interplay between them.

1. Initial Interview. Some lawyers charge for aninitial interview, others do not. A free initialinterview may serve as an inducement for potentialclients to come to your office. You probably can’tprove that without trying both approaches overtime and seeing how revenue is affected. Theproblem is that, by interviewing one party to adispute, you preclude yourself from representingthe opposing party, and you get no compensationfor that loss of potential business or for your timespent in the interview. Additionally, some case lawindicates that even without charging a fee orgetting a signed employment agreement you maybe sued for negligence by this person who neverpaid you a dime.

2. Retainer. The retainer serves as a filter, toseparate out those potential clients who are notserious about hiring you. It also serves as a fund foryou to bill against. There are two broad categoriesof retainers: “classic” and “special.” In rePannebaker Custom Cabinet Corp., 198 B.R. 453,459 (Bankr. M.D. Pa. 1996).

a. Classic Retainer. With a “classic retainer,”also referred to as a “true,” “general,” or“earned-on-receipt” retainer, the client agrees topay a fixed sum in exchange for the attorney’spromised availability to perform future servicesthat may arise during a specific period of time orfor a specified matter. Id.; 7 Am.Jur.2d Attorneysat Law § 249 (2009) (emphasis added). The classicretainer is earned by the lawyer when paid, andneed not be held in trust.

b. Special Retainer: Security. A special retainercomes in three main types: “security” retainers,“advance fee” or “advance payment” retainers, and

“evergreen” retainers. With a “security retainer,”the attorney holds the funds to secure payment offees incurred for future services. Id. These funds donot constitute a present payment, but insteadremain the property of the client until the attorneyapplies them to charges for services actuallyrendered, normally at the time or after a bill is sent.Id. In Texas, the general rule is that, unless provenotherwise, a retainer constitutes funds held in trustfor the benefit of the debtor, i.e., a security retainer.See In re Office Products of America, Inc., 136B.R. 964, 970 (Bankr. W.D. Tex. 1992) (cited byPannebaker, 198 B.R. at 459).

c. Special Retainer: Advance Fee/AdvancePayment. With an “advance fee retainer,” theattorney receives payment in advance forcontemplated legal services and depletes theprepaid “balance” as services are rendered. Id.Advance fee retainers differ from security retainersin that ownership of the funds is intended to pass tothe attorney at the time of the payment. Id. In otherwords, an advance fee retainer is a present paymentto the lawyer in exchange for the commitment toprovide legal services in the future, while a securityretainer is not a present payment, and merelystreamlines payment for future legal services whenthey are incurred. At least one jurisdiction hasrecognized that, because the overriding principlegoverning the appropriate type of retainer is theprotection of the client’s interest, advance feeretainers are permissible, but rarely justified. SeeDowling v. Chicago Options Associates, Inc., 226II1.2d 277, 292, 875 N.E.2d 1012, 1021 (Ill. 2007).One Northern District Bankruptcy Court Judgeinterpreting Texas law held that a retainer remainsproperty of the client until the attorney “applies it”to charges for services actually rendered. In reDixon, 143 B.R. 671, 677 (Bankr. N.D. Tex. 1992).This holding vitiates the distinction betweenadvance fee retainers and security retainers,collapsing the former into the latter. In other words,advance payment retainers may not be allowed inTexas.

Some authorities use the term “advance fee” (as

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opposed to “advance fee retainer”) to signify whatis, in effect, a classic retainer. See Tex. Comm. onProf 1 Ethics, Op. 431, 49 Tex. B.J. 1084 (1986) (atrue retainer “is not a payment for services. It is anadvance fee to secure a lawyer’s services, and –remunerate him for loss of the opportunity toaccept other employment.”) (cited by Cluck v.Commission for Lawyer Discipline, 214 S.W.3d736, 739 (Tex. App.–Austin 2007, no pet.)). Theseauthorities state that, “[i]f a fee is not paid to securethe lawyer’s availability and to compensate him forlost opportunities, then it is a prepayment forservices and not a true retainer.” Id. at 740 (citingEthics Op. 431). Thus, under these authorities, anadvance fee is distinct from a prepayment forservices, and a prepayment for services (whichincludes security retainers, advance fee retainers,and evergreen retainers) is not a true retainer.Furthermore, money that constitutes theprepayment of a fee belongs to the client until theservices are rendered and must be held in a trustaccount. Tex. Disciplinary R. Prof 1 Conduct 1.14cmt. 2 (cited by Cluck, 214 S.W.2d at 740).Therefore, this line of authorities reaches the sameconclusion as Dixon that any type of “retainer”other than a classic retainer (i.e. an advance fee tosecure a lawyer’s service and compensate them forloss of opportunity to accept other employment)may not be a present payment, remains theproperty of the client, and must be held in trust bythe attorney.

d. Special Retainer: Evergreen. An “evergreen”retainer is a retainer that must be replenished afterit is drawn down. When the funds in the client’strust account fall below the required balance, theclient must replenish the retainer balance to its fullamount. For example, if the initial evergreenretainer is $10,000.00, and replenishment isrequired when the trust balance falls below 50%,and in the first billing period the attorney bills$2,000.00, then the attorney would transfer$2,000.00 from the trust account into theiroperating account, and the client would not need topay any additional funds at that time. If during thenext billing period the attorney bills $3,500.00,

s/he would transfer that sum out of the trustaccount into the operating account, and the clientwould be required to replenish the retainer to itsfull amount by paying the attorney $5,500.00. Thethreshold for a full replenishment can range fromcomplete depletion of the retainer to any depletionof the retainer.

An evergreen retainer is designed to minimize anattorney’s risk of non-payment if the client’sfinancial position deteriorates, their estate becomesilliquid, or are otherwise unable or unwilling to paythe bill.

e. Default Rule for Type of Retainer. Thegeneral rule is that, unless shown to be otherwise,a retainer constitutes funds held in trust for thebenefit of the debtor, i.e., a security retainer.Pannebaker, 198 B.R. at 459 (citing In re OfficeProducts of America, Inc., 136 B.R. 964, 970(Bankr. W.D. Tex. 1992); In re PrintingDimensions, Inc., 153 B.R. 715, 719 (Bankr. D.Md. 1993)). The burden rests with the professionalto establish that a retainer is a classic, flat-feeretainer or an advance payment retainer,. Id. at459-60 (citing In re Mondie Forge Co., 154 B.R.232, 238 (Bankr. N.D. Ohio 1993).

f. Interim Deposits. Apart from the initialretainer, an attorney is also permitted to request atrial deposit, which is the payment of additionalfunds to cover preparation for trial and trying of thecase. See In re A.R., 236 S.W.3d 460, 47980 (Tex.App.--Dallas 2007, no pet.). The trial deposit maybe either an increase of or an addition to the initialretainer, and may provide for any of the differentprocedures used for those types of retainers. Thepurpose of a trial deposit is to ensure that theattorney is promptly and completely paid their feesfor preparing and trying the case, which oftenexceed (sometimes substantially) in only onebilling cycle the total amount of the retainerbalance. Additional deposits can be required forother services, such a depositions, hearings,mediation, and so on.

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g. Non-Refundability of Retainers. In Texas,only classic retainers may be nonrefundable. SeeTex. Comm. on Prof 1 Ethics, Op. 431, 49 Tex.B.J. 1084 (1986) (“A fee is not earned simplybecause it is designated as non-refundable. If the(true) retainer is not excessive, it will be deemedearned at the time it is received, and may bedeposited in the attorney’s account.”) (cited byCluck v. Commission for Lawyer Discipline, 214S.W.3d 736, 739 (Tex. App.--Austin 2007, nopet.)). As explained supra, in order to be a classicor “true” retainer, the payment must be for thepurposes of securing an attorney’s services, andremunerate them for loss of the opportunity toaccept other employment. Id. Essentially, if theattorney’s services are billed against the payment,it is not a classic retainer, and may be a refundableor advance payment. See Cluck, 214 S.W.3d at739-40; Tex. Disciplinary R. Prof I Conduct1.15(d) (“Upon termination of representation, alawyer shall take steps to the extent reasonablypracticable to protect a client’s interests, suchas...refunding any advance payments of fee that hasnot been earned.” (emphasis added).

h. Retainers in a Depressed Economy. Differenttypes of retainers serve different ends in differentcircumstances, and an attorney must balance theirretainer requirement against their client’swillingness and ability to comply with it.

With regard to ensuring the timely and completecollection of receivables, each type of retainer hasits own benefits and detriments. Classic retainersare nonrefundable and may be deposited into anattorney’s operating account upon receipt. Classicretainers are not widely used in the family lawfield, however, and, unless the lawyer is uniquelyqualified, many clients will not agree to pay asignificant amount of money simply to induce thelawyer to take the case.As discussed supra, there are different types ofspecial retainers, but for each, the retainer is aprepayment for future expenses that must be heldin trust and may only be moved to the attorney’soperating account as fees are incurred. These types

of retainers are generally favored by familylawyers, but variations exist in the requirements forreplenishment.

The first variation is an initial retainer, expiringwhen it is exhausted, after which the client paysfees to the attorney each time those fees are billed.Only security and advance fee retainers can be usedin this way. This arrangement is attractive to manyclients because a significant amount of their moneyis not sequestered in an account for which theyreceive no interest for most of the duration of thecase. However, this method is less attractive toattorneys because it subverts the primary utility ofa retainer as a guarantee that they will be paidpromptly for the work that they do, covering onlya small portion of the potential fees for a case.

The second variation is a retainer that persiststhrough the entire representation, and attorney feesand costs are billed against it at regular intervals.After that retainer is depleted below a certainthreshold, the client must replenish it in full. Theseretainers carry the benefit to the attorney ofassuring that there are enough accessible funds topay their fees for a particular billing period, andease the burden on the client of paying fees eachcycle and the client has to write fewer checks, tothe extent that the replenishment threshold has notbeen crossed.

The third variation is a special case of the second,where the client must pay the initial retainer andreplenish whatever portions are used in full eachbilling cycle. On a month-by-month basis, thisprocedure closely resembles the more traditionalpayment schedule where the client pays eachinvoice for legal work billed during that period.This variation serves a dual function as both aguarantee that the attorney will be paid promptlyfor the work that s/he does, and as a reserve out ofwhich to pay fees at the end of the case. In thisway, this retainer is a hybrid of both classes ofevergreen retainers discussed supra.

The complexity of the case, the demeanor of the




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client and the size, and liquidity of the estate are allfactors which must be considered in determiningwhich type of retainer is appropriate for a particularcase. The decision of what type of retainer to usecan affect the type of client your practice attracts,and can significantly impact your ability to collectfees and retain a viable practice in troubled times.

3. Credit Cards. Accepting credit cards as aform of payment can help attract new business aswell as aid in the collection of accounts receivable.A lawyer must first open a merchant servicesaccount at a bank, which usually involves somepaperwork and a minimal setup fee. The lawyermay choose which types of cards will be acceptedduring the application process. Different cards havedifferent discount fees (i.e. the percentage of eachtransaction paid to the merchant account provider),usually ranging from 1.95% to 4.0%. There are alsovarious interchange fees associated with a merchantaccount that vary depending on the risk involvedwith the transaction, and some merchant servicecontracts prohibit passing these fees on to theclient.

Because lawyers must strictly segregate funds heldin trust that are unearned from funds in theiroperating account, payment of these fees and thetransfer of funds from the merchant serviceprovider must be closely managed. One approachis to open an IOLTA account specificallydesignated solely for credit card transactions intowhich all funds charged by the client are deposited.From this account, funds can be separatelytransferred to either the client’s trust account or thefirm’s operating account as appropriate.

4. Hourly Rates. While attorneys typically dreadlowering their hourly rates, doing so in a distressedeconomy can give an attorney a competitiveadvantage over their competitors. An attorneyshould ascertain the prevailing hourly rate in therelevant market for professionals of similar skill,expertise, and experience, and determine whetherlowering their rate to or below that value wouldbenefit their practice. It is important, though, to

actually calculate the difference a drop in hourlyrates can have. For example, if a lawyer charges$100/hour, but only has enough business to bill 35hours/week, they will bill about $3,500 per week.If lowering their hourly fee by 15% (to $85/hour)would increase their case load enough to generatea 14% increase (5 extra hours) in their billable timeper week, then they will make only about $3,400per week. This change resulted in doing more workfor less money. The underlying principle is thatmore work is not always better, and the intuitivereaction to a lackluster economy might not alwaysresult in positive gains. Keep a close eye on thepercentages, and make sure that any reduction inbilling rate increased time billed enough so thatoverall revenue goes up.

5. Flat Fees. Taking a flat fee in a family lawcase is dangerous, because settlement decisions arenot necessarily driven by rational considerations,and because the client may not respect reasonablelimits when phone calls are free and when it coststhem nothing to have a motion filed. However, ifthe flat fee is high enough, the risk of overrunningthe fee must be weighed against the reward of anearly settlement.

6. Contingent Fees. A contingent fee agreement(also referred to as a “contingency fee agreement”)is a contract “for attorney services...that dependsupon the success or failure in an effort to enforce asupposed right.” 23 Williston on Contracts § 62:4(citing Jeffries v. Mutual Life Ins. Co. of New York,110 U.S. 305, 4 S. Ct. 8, 28 L. Ed. 156 (1884)).These types of agreements exist primarily toaccomplish two goals:

(1) to allow a party who is unable to pay anattorney at the beginning of a case to securerepresentation by arranging to pay the attorney atthe end of the case; and

(2) to compensate the attorney with a higher feethan they would receive under an hourly billingmethod for incurring the risk of receiving no feewhatsoever if the case is lost.

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See Arthur Andersen & Co. v. Perry EquipmentCorp., 945 S.W.2d 812, 818 (Tex. 1997); see alsoIn re Polybutylene Plumbing Litigation, 23 S.W.3d428, 436 (Tex. App.--Houston [1st Dist.] 2000, pet.denied).

Generally, contingent fees are valid under Texaslaw. Tex. Disciplinary R. Prof. Conduct 1.04(d),reprinted in Tex. Gov’t. Code, tit. 2, subtit. G app.A, Art. 10, § 9, Rule 1.04(d) (State Bar Rules, art.X, § 9). However, the unique dynamic of familylaw cases reverses this general rule. Contingent feeagreements are problematic in family law casesbecause they:

(1) tend to promote divorce in violation of thepublic policy of Texas; and

(2) may be inconsistent with a lawyer’s obligationto encourage reconciliation.

Tex. Disciplinary R. Prof. Conduct 1.04 cmt. 9. Forthese reasons, “contingent fee arrangements indomestic relations cases are rarely justified.”

While no case has specifically stated what rare setof circumstances would justify a contingent fee ina domestic relations case, several cases have listedcircumstances in which contingent fee agreementsare not justified. One such case is Piro v. Sarofim,in which the trial court’s Findings of Fact andConclusions of Law were reprinted in full. See Pirov. Sarofim, No. 01-00-00398-CV, 2002 WL538741, at *7 (Tex. App.--Houston [1st Dist.] April11, 2002, no pet.). The trial court found that thecontingent fee agreement was invalid, in part, forthree reasons:

(1) the attorneys did not adequately describe themethod to be used to calculate the fee;

(2) the attorneys did not fully and fairly disclose allimportant information to the client prior to enteringinto the contract, including the fact that contingentfees in divorce cases are rarely justified; and

(3) the reduction of one attorney’s hourly ratesused for the accounting of the charges for hisservice was illusory because the retainer was highand another attorney did a large portion of thework.

Id. at *7-*8. After this opinion was issued, theparties settled and the Court of Appeals vacated theappeal, but declined to withdraw this April 11,2002 opinion. Piro v. Sarofim, 80 S.W.3d 717, 721(Tex. App.--Houston [1st Dist.] 2002, no pet.).

In many other jurisdictions, contingent feeagreements in family law cases are void. See, e.g.,King v. Young, Berkman, Berman & Karpf, P.A.,709 So.2d 572, 573-74 (Fla. 3d DCA), reviewdenied, 725 So.2d 1111 (Fla. 1998) (contingent feein domestic litigation specifically prohibited bystate bar rules); Stoller v. Onuszko (1973), 10Ill.App.3d 598, 599-600, 295 N.E.2d 118, 119 (“Itis against public policy for attorneys to enter intocontingent fee contracts in divorce actions.”);Rogers v. Webb, 558 N.W.2d 155, 156 (Iowa 1997)(“It is clearly unethical for an attorney to undertakea contingent fee arrangement in a domesticrelations case. Any contract providing for one isvoid as against public policy.”); State ex rel.Oklahoma Bar Assn., v. Fagin, 848 P.2d 11, 14(Okla. 1992) (OK rule of professional conduct“forbids ‘any fee in a domestic relations matter, thepayment or amount of which is contingent upon theresult obtained.’” (emphasis in original)); In reHill, 261 Or. 573, 574, 495 P.2d 261, 262 (1972)(contingent fees in divorce proceedings invalid).

In addition to Texas’ justifications that contingentfees promote divorce and are inconsistent with theattorney’s duty to encourage reconciliation, otherjurisdictions have found further grounds on whichto invalidate contingent fees. One such basis is thatthere is no longer the need to allow contingent feesso that a spouse who is unable to pay an attorney atthe beginning of a case may secure representationby arranging to pay the attorney at the end of thecase; many states–including Texas–provide astatutory mechanism whereby the non- monied





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spouse can receive interim fees to pay theirattorney. See, e.g., Barelli v. Levin, 144 Ind. App.576, 247 N.E.2d 847, 853 (1969); Tex. Fam. Code§ 6.502(a)(4). Thus, the first goal of contingent feeagreements mentioned above has been foreclosedin domestic relations cases, and contingent feescannot be justified on the lawyer’s risk alone.

Texas law strongly discourages contingent feeagreements in family law cases, but it does notcategorically prohibit them. If a lawyer is going toenter into one of these agreements, s/he must makesure that they adequately describe the method usedto calculate the contingent fee, advise the client thatcontingent fee agreements in Texas are rarelyjustified, and require that the client consult with anindependent attorney before agreeing to thecontingent fee. The fee agreement should be ladenwith disclaimers, and all parties should sign it, aswell as the independent third-party attorney.

7. Attorney’s Lien. Another effective tool forsecuring payment of fees is an “attorney’s lien.” Anattorney’s lien is a “security interest in property ofthe client recovered for the client though thelawyer’s efforts.” Restatement (Third) of the LawGoverning Lawyers (2009) § 43(1). The TexasDisciplinary Rules of Professional Conductprovide:

A lawyer shall not acquire a proprietary interest inthe cause of action or subject matter of litigationthe lawyer is conducting for a client, except that thelawyer may:

(1) acquire a lien granted by law to secure thelawyer's fee or expenses; and

(2) contract in a civil case with a client for acontingent fee that is permissible under Rule 1.04.

Tex. Disciplinary R. Prof’l Conduct 1.08(h),reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. Gapp. A (Vernon 2005) (Tex. State Bar R. art X, §9). The Texas Commission on Professional Ethicshas also approved the use of attorney’s liens in

certain limited situations:

If an attorney, when representing a client in aproperty dispute, acquires an undivided feesimple interest in the disputed property in goodfaith and with the client’s consent, then there isno violation of DR 5-103 [now Rule 1.08(h)].The attorney’s acquisition of an interest in theproperty is equivalent to contracting for acontingent fee which is allowed by DR5-103(A)(2) [now Rule 1.04].

Tex. Comm. on Prof’l Ethics, Op. 449, 51 Tex. B.J.165 (1988). The use of this form of attorney’s lienhas been approved by the San Antonio Court ofAppeals to secure a contingent fee. See In reSlusser, 136 S.W.3d 245, 249 (Tex. App.--SanAntonio 2004) (orig. proceeding). But this seeming“equivalence” of attorney’s liens and contingentfees might deserve some thought from family lawpractitioners; in family law cases, contingent feearrangements are rarely justified. Tex. DisciplinaryR. Prof’l Conduct 1.04 cmt. 9.

Only one reported case has addressed attorney’sliens in the context of a family law case. SeeStephenson v. Leboeuf, 16 S.W.3d 829 (Tex. App.--Houston [14th Dist.] 2000, pet. denied). InStephenson, the attorney represented client in herdivorce. Id. at 834. The client signed a promissorynote for the payment of attorney’s fees which wassecured by a deed of trust on the client’s house. Id.As part of the property settlement, the client’sspouse received the house on which the lienattached, and was to give the client a note securedby another deed of trust on the house, which notewould be used to pay the attorney’s fees. Id.Stephenson is a fascinating opinion addressing amultitude of issues ranging from attorney-clientrelationships to fiduciary duty, discharge of debt inbankruptcy, trial amendments, and awards ofattorney’s fees, but for the purposes of attorney’sliens, the court concluded that the type of lienacquired in this case was proper under Rule1.08(h). Id. at 838.

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Stephenson is a specific judicial endorsement of theuse of attorney’s liens in divorces. The appellatecourt in that case considered the property in theproperty division to be “disputed property.”

The Restatement provides that an attorney’s lienmay attach to other property of the client which isnot recovered through the representation, but onlyif (1) attachment is provided by law, (2) thecontract is enforceable, (3) the client has adequateinformation about the terms of the contract, (4) theterms and circumstances of the agreement are fairand reasonable to the client, and (5) the clientconsents after being encouraged and given theopportunity to seek independent legal advice. SeeRestatement (Third) of the Law GoverningLawyers §§ 43(4), 18, 126.

C. Unbundling Legal Services. “Unbundling,”also called “discrete tasks representation,” or“limited scope legal assistance,” is an arrangementwhere a lawyer agrees to perform legal services fora client that are more limited than fullrepresentation. The advantage to the client is areduction in fees. The disadvantage is that theclient may forego receiving important legal adviceor the lawyer may not learn important informationthat would lead to important legal advice. A risk tolawyers is that a client, seeking to avoid legal fees,may have an unsatisfactory result and may laterblame the lawyer for negligence for failing to dosomething the lawyer was not hired to do. Thislatter concern keeps many lawyers fromunbundling their legal services. Three styles ofunbundling are: coaching (advising a client onwhat to seek without negotiating on the client’sbehalf), ghostwriting (drafting pleadings orcontracts without revealing the lawyer’sinvolvement), and limited participation (appearingfor one court proceeding like a motion–withoutagreeing to handle other court proceedings). Theethics of ghostwriting and whether courts willrespect limited participation in court proceedings,are issues being worked out around the nation. TheAmerican Bar Association has published aHandbook on Limited Scope Legal Assistance,

which discussed unbundling. See <http://www.abanet.org/litigationitaskforces/modest/report.pdf>.

If you do limited representation, be sure that youand the client understand what you are agreeing todo and not do. If you get that in writing it mayavoid a swearing match if the client botches thecase or the transaction and later sues.

D. Outsourcing/Insourcing. Costs can also becontained by either outsourcing or insourcingcertain tasks. With regards to the former, someservices performed by a firm’s dedicatedemployees can be delegated to an outside source.For example, if a firm employs a “runner” to filecourt documents, the firm may eliminate thisposition and hire a courier service to perform thesame job if doing so would cost less than theamount to employ the runner. With regard to thelatter, some tasks which usually entail hiring anexternal specialist can be handled in- house. Forexample, if a lawyer usually employs forensicCPA’s to review documents, the lawyer maychoose to review documents himself/herself, if it iswithin his/her ability to do so.

E. Barter. Some clients may not have cash to paylegal fees, but may instead possess items or bewilling to do work that would be of value to thelawyer. In this Nation’s history, when the currencywas rare, people would trade goods and servicesdirectly without relying on currency as medium ofexchange. While it might seem antiquated to drafta pleading for someone in exchange for thempainting your house, it is important to rememberthat practicing law is a service that requires trainingand skill, just as painting houses, or repairing cars,or preparing meals are. While money is a greatconvenience, money is not, and never has beenindispensable to the practice of law.

F. Turning Down Unpaid Work. AbrahamLincoln is reputed to have said, “A lawyer’s time ishis stock-in-trade.” [Richard says:] In 1989, whenI left a law firm and for the first time opened up myoffice as a sole practitioner, I asked Houston family


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lawyer Don Royall about taking cases, “in the leantimes,” when you needed the retainer to make yourcar payment but you knew the client wouldn’t paythe balance of the fee. Don said, “If I’m going tomake no money, I’d rather make no money fishingthan I would make no money representingsomebody.” I resolved to follow Don’s advice. Iweakened during Desert Shield, the six monthbuildup to Desert Storm, which hit San Antoniolike a ton of bricks. My telephone didn’t ring forweeks at a time. I did every bit of billable work Icould do, organized my files, straightened up myoffice, and still ran out of things to do. I weakened,and took some child support and visitation casesthat I knew couldn’t pay more than the retainer.After America won “the Mother of all Battles” inrecord time, my case load eventually picked up.But I was still dogged by the nonpaying clients I’dtaken, who expected first class treatment despite amounting receivable. I had to work their cases forno fee, while other clients needed work on theircases and had positive balances in my trustaccount. I vowed “never again.”

Somebody gave me a test to use, when I wastempted for whatever reason to take or continue towork a case for no fee. They said, “Go home andask your wife if she would write this prospectiveclient a check for 5, 10 or 15 thousand dollars. Ifyou can convince her to do so, then go ahead andwork the case for no fee.”

G. Withdrawing From Representation. In itsmost revered and commonly proclaimed form, theimpetus for choosing a career in the practice of lawis a desire to help solve others’ problems andimprove their lives, to do good and better society,to “pursue a common calling in the spirit of publicservice.” The Texas Lawyer’s Creed-A Mandatefor Professionalism, Order of Adoption (adoptedby the Supreme Court of Texas and the TexasCourt of Criminal Appeals Nov. 7, 1989), reprintedin Texas Rules of Court 759, 761 (West 2009). Asa result, the professional bond that forms betweenan attorney and their client, especially in thepractice of family law, can be a strong one. For

some lawyers, this bond makes it difficult towithdraw from representation, even when the clientis not complying with the fee agreement.

However, “[w]e must always be mindful that thepractice of law is a profession.” Id. One of theessential characteristics of being a professional isreceiving compensation for the work we do. Thus,despite the bonds we share with our clients,relationships and duties that we willingly take onand sometimes even seek out, it is our prerogative,and often our imperative, to withdraw from a casein which we are not being paid.

The Disciplinary Rules of Professional Conduct listseveral bases upon which an attorney may justifywithdrawal:

1. the withdrawal can be accomplished withoutmaterial adverse effect on the interests of the client;

2. the client persists in a course of actioninvolving the lawyer’s services that the lawyerreasonably believes may be criminal or fraudulent;

3. the client has used the lawyer’s services toperpetrate a crime or fraud;

4. a client insists upon pursuing an objective thatthe lawyer considers repugnant or imprudent orwith which the lawyer has fundamentaldisagreement;

5. the client fails substantially to fulfill anobligation to the lawyer regarding the lawyer’sservices, including an obligation to pay thelawyer’s fee as agreed, and has been givenreasonable warning that the lawyer will withdrawunless the obligation is fulfilled;

6. the representation will result in an unreasonablefinancial burden on the lawyer or has beenrendered unreasonably difficult by the client; or

7. other good cause for withdrawal exists.

Practicing Family Law in a Depressed Economy - Part 1 Chapter 10________________________________________________________________________________________________________

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Tex. Disciplinary R. Prof. Conduct 1.15(b),reprinted in Tex. Gov’t. Code, tit. 2, subtit. G app.A, Art. 10, § 9, Rule 1.15 (State Bar Rules, art. X,§ 9). Note that each of these reasons is framedaround some adverse action of the client, notaround the desires of the attorney. Thus, the clientmust actually do something to justify withdrawalby their attorney, and the attorney may notterminate the representation at will for just anyreason, or no reason at all. This focus on the clientis also embodied in the Rule that a lawyer mustcontinue to represent a client and may notwithdraw, even if good cause is shown, if the courtso orders. Tex. Disciplinary R. Prof. Conduct1.15(c). Finally, after the lawyer withdraws, theymust take steps to the extent reasonably practicableto protect the client’s interest, including givingreasonable notice to the client of the withdrawal,allowing time for the client to employ othercounsel, surrendering papers and property in thelawyer’s possession, and refunding any advancepayment of fees that have not been earned. Tex.Disciplinary R. Prof. Conduct 1.15(d).

H. Accounts Receivable. An essential businesspractice for any attorney during economicallytroubled times is paying close attention to themoney that they are owed and the steps that arebeing taken to collect it. The attorneys at a firmshould meet frequently, preferably once each week,to monitor the status of the accounts receivable foreach of the cases being handled by the firm. Manyfirms already conduct regular meetings to discussthe status of the legal work on the cases, toformulate strategies, and to assign various tasks.Adapting these meetings to incorporate financialmatters is simple, efficient, and effective.Frequently addressing the condition of each case’sreceivable will allow attorneys to detect anypotential problems with payment before theybecome too large to successfully manage, and willprovide more options for rectifying the problemthan discovering it later would allow.

I. Client Bankruptcy. One of the more salientreasons for not allowing receivables to build up is

the danger of client bankruptcy. When a client whoowes outstanding legal fees files for bankruptcyprotection, the attorney to whom they owe thosefees is relegated to the role of a creditor inbankruptcy, and must endure the delay anduncertainty of the bankruptcy process in order tocollect the debt. Furthermore, continuing torepresent a client against whom the attorney hasfiled a claim in the bankruptcy may potentiallycreate a conflict of interest. For some clients,bankruptcy is an inevitability, and being able torecognize that fact early on and take steps tomitigate it is extremely important in a depressedeconomy.

J. Interim Fees. The award and collection ofinterim attorney’s fees continues to be an issue infamily law cases.

1. Authority to Award Interim Fees. TexasFamily Code § 6.502(a)(4) provides for the awardof interim fees in a suit for divorce. Such an orderis considered to be temporary spousal support, andis therefore enforceable by contempt. Tex. Fam.Code § 6.506; Ex Parte Kimsey, 915 S.W.2d 523,525 (Tex. App.--El Paso 1995, orig. proceeding)(holding that “it matters not whether the trial courtawards alimony pendente lite to the wife in order toprovide her sufficient funds with which to pay herattorney or whether the court orders, as temporaryspousal support, that the monies will be paiddirectly to the attorney for the wife’s benefit...[I]neach instance, the wife is recouping the benefit ofthe support award.... [A]ccordingly, we find thatRelator has not been imprisoned for failure to paya debt.”)

Additionally, Section 105.001 of the Family Codeprovides for the award of interim fees in a suitaffecting the parent-child relationship. Tex. Fam.Code §105.001(a)(5). This section also establishesthat the court has the authority to award interimfees in a suit for modification brought underChapter 156 of the Family Code. See Hughey v.Hughey, 923 S.W.2d 778, 780-81 (Tex. App.--Tyler 1996, writ denied); Tex. Fam. Code




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§§101.031 & 101.032. While Section 156.006(a)governs temporary orders in suits for modification,the dictates of Section 105.001 apply to an awardof interim fees in a modification. See Hughey, 923S.W.2d at 780-81 (“We find nothing in Chapter105 that would preclude its application to anoriginal suit under Chapter 156”). Therefore, in anysuit affecting the parent-child relationship, theaward of interim attorney’s must be “for the safetyand welfare of the child.” Tex. Fam. Code§105.001(a); see Saxton v. Daggett, 864 S.W.2d729, 736 (Tex. App.--Houston [1st Dist.] 1993,orig. proceeding) (“Section [105.001] does notauthorize a trial court, in a suit affecting theparent-child relationship, to make a temporaryorder for payment of reasonable attorney’s fees fora purpose other than the safety and welfare of thechild.” (emphasis in original)). Such an order is notappealable, and is considered temporary childsupport for the safety and welfare of the child, andthus would be enforceable by contempt. Tex. Fam.Code §105.001(e) and (f).

2. Enforcing Interim Fees by Sanctions. InBaluch v. O’Donnell, 763 S.W.2d 8, 10 (Tex.App.--Dallas 1988, orig. proceeding), the trial courtordered the alleged husband in a divorceproceeding to pay $25,000 interim attorney’s feesto the wife’s lawyers. When the husband failed todo so, the trial court struck his pleadings. The courtof appeal granted mandamus, saying that thesanction could not be justified as a discoverysanction because it did not further one of thepurposes that discovery sanctions were intended tofurther, and there was no other basis to support thetrial court’s order. Judge O’Connell recusedhimself from the case, which was reassigned toJudge Miller. Judge Miller refused to set the casefor trial until Baluch paid the interim fees. Baluchsought mandamus again and, in Baluch v. Miller,774 S.W.2d 299 (Tex. App.--Dallas, orig.proceeding), the court of appeals again issuedmandamus, saying that Judge Miller had “exceededher authority” in refusing to set the case for trial. Incontrast, Shirley v. Montgomery, 768 S.W.2d 430,432-33 (Tex. App.--Houston [14th Dist.] 1989,

orig. proceeding), the trial court artfully framed thesanction for failure to pay interim fees to anattorney ad litem as a discovery issue because thefunds were to be used for discovery expenses–andmandamus was denied. The Fourteenth Court ofAppeals came down against sanctions as a remedyin the case of In re N.R C., 94 S.W.3d 799 (Tex.App.--Houston [14th Dist.] 2002, pet. denied). In asuit to terminate parental rights, the trial courtappointed an attorney ad litem for the child. Thetrial court ordered each party to deposit $2,500with the ad litem as security, but the mother failedto do so. The trial court granted the ad litem ajudgment for attorney’s fees, and further prohibitedthe mother from presenting at trial witnesses on herbehalf other than herself. The Court of Appealsreversed, saying the ruling barring witnesses wastantamount to a death penalty sanction which didnot meet the constitutional requirements ofTransAmerican Natural Gas v. Powell, 811 S.W.2d913 (Tex. 1991). In the case of In re Flores, 135S.W.3d 863 (Tex. App.--Houston [1st Dist. 2004],orig. proceeding), the father had filed a motion tomodify the divorce decree. The trial court orderedinterim attorneys’ fees paid to the mother, but thefather did not pay them. The trial court thengranted a motion to strike the trial setting. Thecourt of appeals granted mandamus relief, agreeingwith the Dallas Court of Appeals’ opinion inBaluch v. Miller. The court held that there was noauthority for the trial court to refuse to proceed.

3. Enforcing Attorney Fee Awards byContempt. In Texas, a court cannot imprison aperson for not paying a debt. Tex. Const. Art. I,§18. However, courts have consistently recognizedthat obligations incurred for the support of childrenand spouses do not constitute a “debt” for purposesof contempt. Ex Parte Kimsey at 525 (Tex. App.--El Paso 1995, no writ.) (holding that “[t]heobligation which the law imposes on spouses tosupport one another and on parents is notconsidered a ̀ debt’ within Article I, section 18, buta legal duty arising out of the status of theparties”).














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Kimsey involved a court order rendered during atemporary hearing held in a divorce proceeding.The court mandated that Husband pay the sum of$50,000 in interim attorney’s fees into the registryof the court, to be paid “[a]s additional spousalsupport.” Id. at 524. Because the Family Codeallows for orders requiring temporary supportpayments (in terms of both child support andspousal support) to be enforceable by contempt, theEl Paso Court of Appeals held that “an order ofcontempt arising from the failure to pay thoseobligations may be enforced by incarcerationwithout running afoul of the constitutionalprohibition.” Id. at 526.

However, in Ex parte Hightower, 877 S.W.2d 17(Tex. App.--Dallas, writ dism’d w.o.j.), the Courtheld that unpaid fees and expenses of an attorneyad litem appointed for the child in a suit formodification of visitation were not to be considered“child support” for purposes of the constitutionalprohibition of imprisonment for debt. Therefore, itwas held that trial court’s enforcement of paymentof fees and expenses by contempt violated theTexas Constitution.

Similarly, in In the Matter of Moers, 104 S.W.3d609, 611 (Tex. App.--Houston [1st Dist.] 2003,orig. proceeding), the court held that attorney’sfees incurred in suits to modify could not becharacterized as “child support” for purposes ofcontempt. The First Court of Appeals, citingHightower, distinguished fees awarded in suitsbrought to enforce child support from fees awardedin suits brought to modify child support because ofconsequences which arise from characterizing feesas child support. Based on the long-standingprincipal that courts are to exercise their contemptpower with great caution, the appellate court inMoers sought to “limit any extension of the ‘dutyto support’ to services and costs required forenforcing child support.” Id. at 612. In so doing,the court noted that because “a decree that awardsattorney’s fees characterized as child support couldresult in garnishment of the obligor’s wages andloss of the obligor’s professional licenses in a suit

brought to enforce the decree...[the] court imposespotentially serious consequences on the obligor.”Id.

Incidentally, in Moers, the court distinguished itsparticular set of facts and final ruling from thatnoted in Ex parte Kimsey. In Footnote 1, the Moerscourt noted that “[i]n Ex parte Kimsey, 915.S.W.2d 523 (Tex. App.--El Paso 1995, no writ), thecourt opined in a footnote that nonpayment of adlitem fees is enforceable by contempt. We note,however, that Kimsey dealt with contempt in thenonpayment of attorney’s fees required by atemporary order. Because temporary orders havetheir own rules and regulations that are notapplicable to parent-child modification orders, wefind Kimsey distinguishable on its facts. To theextent that Kimsey holds that attorney’s fees maybe characterized as child support in a suit to modifythe parent-child relationship, we respectfullydisagree with our sister court.”

In line with these rulings, the Fourteenth Court ofAppeals, in In re Jih, 2003 WL 22707113 (Tex.App.--Houston [14th Dist.] 2003, pet. denied)(memorandum opinion), determined that a trialcourt could not enforce an award of attorney’s feesin divorce action by contempt where child supportwas not ordered. The trial court originally assessedthe sum of $15,000 against relator for discoverycosts. At a later hearing, the trial court foundrelator in contempt for failure to pay $15,000 indiscovery costs, and assessed $6,275 in attorney’sfees against relator. Because it was determined thatno child (or spousal) support was ordered, thecontempt order issued against relator for failure topay attorney’s fees was found to be void.

In Kogel v. Robertson, 2005 WL 3234627, *10(Tex. App.--Austin 2005) (memorandum opinion),the court of appeals held it was error for the trialcourt, in awarding attorney’s fees in a childcustody modification case, to incorrectlycharacterize a portion of each fee award as being“in the nature of child support,” thus impermissiblysubjecting the appellant to fine or confinement for





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failure to pay a debt.

K. Expanding Your Client Base.

1. Marketing. Twenty years ago, only plaintiffs’lawyers advertised, and then only through a limitedarray of media: buses, billboards, yellow pages,late-night television, and the like. Today, lawyersof all types market in a wide variety of differentplaces, and magazines especially have providedlawyers unique opportunities to market themselves.Trade publications such as Texas Lawyer, as wellas more mainstream magazines like Texas Monthly,frequently publish special editions that ostensiblyserve as surveys and rankings, but which alsooperate as excellent vehicles for marketing.

If you are as busy as you want to be, with thequality of cases you want, then don’t advertise.Otherwise, marketing your practice can helpexpand your client base, focus that base onparticular segments of the populace, reinforce yourreferral network, and heighten your exposure andreputation among your peers. Effective places tomarket consist of old staples such as television,yellow pages, and billboards, but now also includeradio, newspapers, trade publications, local andstate-wide magazines, and on the internet througha firm website, banner ads on blogs and law-relatedwebsites, as well as through search engines andsocial networking sites.

One useful method for budgeting marketing is toallocate a certain, defined percentage of grossreceipts for marketing expenses, and to consistentlyspend that amount. This percentage should bedetermined by reference to various factors:quantifiable ones such as the average rates for adsin the market in which the lawyer practices and thetype of demographic targeted by the lawyer, andunquantifiable ones such as the importance andnecessity of marketing to the particular lawyer andthe effectiveness of marketing in a particularcommunity. This percentage will be different fordifferent lawyers in different places, but moreimportant than the amount of money spent is the

consistency with which it is spent. One of the mostbasic principles of rhetoric as applied to thepractice of law is that judges and juries are morelikely to remember concepts and ideas that arerepeated to them multiple times, between the upperand lower limits of over-saturation andinsufficiency, respectively. The same principleapplies to marketing: potential clients in need of afamily lawyer are more inclined to remember yourname if they have encountered it multiple times ina variety of places.

During economic downturns, the natural impulse ofmany practitioners is to reduced “non-necessary”expenditures, and frequently, their marketingbudget is one of the first expenses to be cut.However, because the true efficacy of marketinglies in repetition, reducing the amount of moneyspent on marketing can dramatically reduce itseffectiveness, decreasing the influx of new clientsin turn. Maintaining a constant proportion betweenmarketing expenditures and gross receipts tiesthose expenditures to a variable with which theyare already inextricably intertwined. Effectivemarketing increases the number of clients, whichincreases gross receipts, which increases the moneyspent on marketing, which again increases thenumber of clients, and so on. Artificiallydecreasing marketing expenditures asynchronouslywith gross receipts disrupts this mutualamplification, taking them out of phase with eachother and harming both.

In addition to amount, the other essential elementof marketing is content. Different types of ads areeffective with and appropriate for different targetclientele, and the content of a lawyer’s marketingmust be tailored for their likely potential clients.Marketing firms are skilled at designing anddisseminating effective and appropriateadvertisements for lawyers, but the lawyer must layan active role in the design of these advertisements.Too often, lawyers pay large sums of money tomarketing firms that may not understand all thenuances of the practice of family law and thesensibilities of the typical family law client, and


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who end up producing an ineffective orinappropriate ad because the lawyer did notprovide proper guidance or remained passivethroughout the process. Look at other lawyers’advertisements that catch your attention and try topick out the elements that make them effective.Show drafts of your ads to friends, family and otherlaymen and solicit their opinions. Mostimportantly, look objectively at your ad and askyourself “If I knew nothing about the law butneeded a family lawyer, would I want to hire thisperson? Do they look trustworthy? Do they lookcompetent? Do they look like someone I wouldwant in my corner?” V i e w i n g y o u r o w nadvertisements with a critical eye is imperative toeffective marketing.

With regards to marketing your firm using awebsite, the following index reflects the top tenhighest scoring law firm websites in a recent studyon internet presence. Visiting these websites canprovide helpful ideas for how to design aninformative and attractive internet presence:

Jones Day (Score: 81) www.jonesday.comMayer Brown

(Score: 77) www.mayerbrown.comDLA Piper (Score: 76) www.dlapiper.comBaker & McKenzie

(Score: 74) www.bakernet.comMcDermott Will & Emery

(Score: 73) www.mwe.comGreenberg Traurig, P.A.

(Score: 68) www.gtlaw.comMorrison & Foerster

(Score: 68) www.mofo.comMorgan Lewis & Bockius

(Score: 66) www.morganlewis.comSkadden Arps Slate Meagher & Flom

(Score: 61) www.skadden.comWilmer Hale

(Score: 59) www.wilmerhale.comKirkland & Ellis

(Score: 59) www.kirkland.com

09-4 Law Off. Mgmt. & Admin. Rep. 2, Institute of

Management and Administration Inc., (April 2009)(websites scored by Muzeview LLC(www.muzeview.com) based on several factorsincluding: search engine positioning; web site“stickiness”; popularity; content ranking; size;traffic; and social media). While each of theseinternational law firms dwarfs even the largestTexas family law firm, valuable lessons that can belearned from critically analyzing their approach toweb marketing. One salient example is the URL.Despite the fact that some of these firms have asmany as five name partners, not one of the URLs ismore than 11 characters, and most are 8 charactersor fewer. Intuitively, it is easier for a potentialclient to remember or enter a URL like:“www.orsinger.com” than: www.orsingerfamilylawattorney.com.”

There are also several marketing opportunities thatcan be exploited on a limited budget. See Cuyler,Aviva, Small Marketing Steps with Big Impact, 26NO. 3 GPSoIo 10 (April/May 2009). The processof taking advantage of the easiest opportunities firstis referred to in marketing as “picking thelow-hanging fruit,” and includes tactics such asfostering social ties with your referral network.One excellent idea for free marketing proposed byDavid V. Lorenzo in How to Market a Small LawFirm for Less Than $500 (available at: www.smallfirmsuccess.org/files/How to Market a Small LawFirm for Less Than $500.pdf) is to take advantageof news media:

Every day, there are news items in the newspaperand on television and radio that fall into your areaof expertise. Your local newspaper editor isalways looking for expert commentary on thesetopics. A news story without a quote is not a truenews story.

Fax and mail a press release every month to localeditors and reporters who cover relevant stories.Include a business card or two with your fullcontact information – including your home andmobile telephone numbers. The editors will mostlikely throw away the press release, but some will


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save your contact information.

Id. Lorenzo also suggests that attorneys write andspeak for free, and this marketing method, alongwith its benefits and drawbacks, is discussed morethoroughly in the CLE section of this article.

L. Internal Fraud. In an economic downturn,financial desperation could cause an employee tosteal from the business. Existing financial controlsshould be evaluated to be sure they are tightenough. Recommended procedures includesegregating related functions so that they are notperformed by one person. For example, the personsigning checks should not also balance the checkbook. Another technique is surprise audits thatfocus on high- risk areas such as expense reports,payroll checks, purchases, cash deposits, accountsreceivable, etc. You might consider tighter controlsfor overtime expenses, especially if you paytime-and-a-half for overtime work or if you permitemployees to work outside of the office.

Internal fraud can extend to padding time slips toincrease fee income. That is both unethical andillegal (former Associate U.S. Attorney GeneralWebster Hubbell was sentenced to 21 months’imprisonment for mail fraud in overchargingclients).

Internal fraud can also extend to using clients’credit cards or bank information to steal moneyfrom clients. The sensitivity of information in adivorce practice might be a hiring consideration,and under the Business & Commerce Code, lawfirms have a duty to protect sensitive financialinformation of clients. See Tex. Bus. & Comm.Code ch. 48; Gordon, Stephen H., New Duties toProtect Client Information, San Antonio Lawyer,May-June 2007. A computer network manager canrestrict access to certain folders on the networkserver. Some client records could be kept underlock and key.

Insurance is available to cover the risk ofembezzlement and theft from clients.

M. Line of Credit. An old joke describes abanker as someone who loans you his umbrellawhen the sun is shining and takes it away when itstarts to rain. A line of credit can be used to smoothout irregular cash flows, by borrowing andrepaying, reborrowing and re-repaying, etc. Thebest time to get a line of credit is before you needit.

N. Client Evaluation. As Trautz & Pinningtonwrite, “it is a myth that it is always better to havemore clients. What is critical to success is to havemore of the right clients.” An integral part ofremaining afloat in rough economic seas is to makecertain that your clients are as committed as youare to honoring the employment contract and willpay your invoices promptly and in full.

One of the most effective ways to assess whether ornot a prospective client is the right or wrong typefor your practice is the process of client evaluation.The chief goal of client evaluation is to maximizethe number of good clients and minimize thenumber of problem clients. In a normal economicclimate, a firm can afford to take the risk onrepresenting clients who might possibly causeproblems in the future, but in leaner times,selecting conscientious clients is critical. On theother hand, in a depressed economy, some firmsmay need to take on more improvidentrepresentations in order to maintain a positive cashflow. In this circumstance, a lawyer must beattuned to the risks and ramifications of differentproblems they might face with a particular client,and make an educated decision on which risks areacceptable, and which risks are not.

Client evaluation should begin at the initialconsultation with the prospective client andcontinue throughout the entire course of therepresentation, with the attorney employing asystematic set of factors to ensure uniformity. Thelist of factors for effective client evaluation hasbeen adapted from R. Hal Moorman’s incrediblyinsightful article Don’t Come to My Office with


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Suing Me on Your Mind: Ethical EngagementLetters, 25th Annual Advanced Tax Law Course,State Bar of Texas (2007), which in turn was takenfrom Frank N. Ikard, Jr.’s article Negotiating FeeContracts and Recovering Fees in FiduciaryLitigation, Advanced Planning and Probate Course,State Bar of Texas (2003).

1. Compatibility. The lawyer must determinewhether the prospective client’s personality,approach, and goals are compatible with theattorney’s personality and the general ethos of thefirm. The first impressions a lawyer gets about aprospective client will inevitably, to some extent,color the relationship with that client goingforward. While these impressions are notimmutable, they are typically very resistant tochange, and relationships that begins on uncertaingrounds have a tendency to get worse–notbetter–over time. It can be a grave mistake toignore indications that a particular client andparticular lawyer will not get along. Unhappylawyers are reluctant to interact with antagonisticclients, and unhappy clients are less likely tostrictly comply with their fee agreement.

2. Veracity. The lawyer must determine whetherthe prospective client is telling them the truth in theinitial consultation. It might not be feasible orpossible to verify the accuracy of this information,so the lawyer’s intuition will necessarily play animportant role in this determination. The venerableattorney-client privilege exists not only to protectconfidential communications, but also toencourage them, so the lawyer should explain tothe client that the only way to fully protect theclient’s interests is for there to be complete candorin those communications. A client who will lie toor withhold important facts from their lawyer mayalso be more inclined to refuse to pay fees.

3. Litigiousness. The lawyer must determinewhether the prospective client is too eager or tooreluctant to go to trial. The preferred outcome ofany lawsuit is the amicable, efficient, andinexpensive resolution to the dispute. But not all

cases–and not all clients–are amenable to thisalternative. If a client is unwilling to incur theexpense and endure the stress of trial despite thefact that their financial position and the merits oftheir claim warrant it, then their attorney will loseout on a legitimate and possibly lucrative source ofincome. Conversely, if a client relentlessly craveslitigation regardless of whether they can fund orjustify it, their lawyer may be forced to wastevaluable time and damage their reputation withtheir peers. A good client should not be afraid to goto trial, but also should not be recklessly litigious.

4. Reasonableness. The lawyer must determinewhether the prospective client has reasonableexpectations and a reasonable demeanor, which ofcourse is easier said that done. Some clients willpresent well at first, but become unbalanced lateron. Ascertaining reasonableness is perhaps themost difficult–and the most important–aspect ofclient evaluation, but it is also the facet of the clientthat is the most susceptible to influence by thelawyer. Inform the client of their realistic prospectsfrom the very beginning, but understand thatcertainty in the legal field is rare. Obviously,making guarantees or promises about the outcome,or claiming to have a special advantage over otherlawyers in any way not related to advocacy skillsor experience, dangerously skews the client’sperspective. Fostering unreasonable expectationsmay help sign up clients today, but, over the longterm, always generates a net loss. Often, thereasonableness of a client will reflect thereasonableness of the attorney counseling them.

5. Motive. The lawyer must determine whetherthe prospective client’s motives for resorting to thejustice system to resolve their dispute comportswith the lawyer’s sense of what’s right. This aspectof client evaluation is intertwined with veracity,litigiousness, and reasonableness, but do notnecessarily correlate with them. For example, aclient may have pure motives, but might still lie tothe attorney in order to accomplish their goals, orforce the attorney to try the case, or makeunreasonable demands on the attorney’s time.


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Conversely, a client may be honest, conscientious,and reasonable, but may be inappropriately seekinglegal redress. A client with proper motives will notnecessarily be good or bad, but a client withimproper motives will create an ethical problemwith regards to representation, so ascertaining aclient’s motives is an essential part of theevaluation process.

6. Influence. The lawyer must determine whetherthe prospective client is subject to the influence ofan extrinsic source, such as their spouse (current orformer) or parents. Not all extrinsic influences aredetrimental, but they have the potential tocomplicate the attorney-client relationship. Theattorney owes a duty to the client themself, and ifthat client’s perspectives and decisions arecontrolled by someone to whom the attorney owesno duty, it may prove difficult for the attorney toprotect the client’s interests. This difficulty isespecially pronounced when the person influencingthe client is active in communicating with andinstructing the attorney. These situations are furthercomplicated when that person is also funding thelitigation, and the responsibility the lawyer mayfeel they owe to the person paying their bill mayconflict with the actual duty the lawyer owes to theclient.

7. Financial Ability. Finally, the lawyer mustdetermine whether the prospective client hassufficient resources to fund the litigation. While itis impossible for a lawyer to estimate their totalfees for any particular case, experience provides agauge by which the lawyer may make a general,tentative, abstract estimate of what different typesof litigation can cost. Overestimating is alwaysbetter than underestimating, but it becomes verydifficult to manage a client’s expectations whenthey are left to make their own inexperienced,uneducated guess about how much they may haveto pay. Furthermore, while it seems obvious tolawyers, some clients do not realize that often, thetotal fees will exceed the amount of the retainer.The lawyer must not only determine whether theclient has the financial ability to pay fees

throughout the duration of the case, but must alsoadvise the client on the extent of the financialcommitment they are making.

III. USING SPARE TIME. When the economyslows down and the influx of clients decreases, alawyer may be faced with more free time than s/hehas in the past. However, non- billable time neednot be wasted or unproductive time.

A. Marketing and Networking. Many of thetechniques described in section II.K.1. supra formarketing can be pursued when there is a dearth ofclient work to do. Also, additional free time can beused to maintain social contacts within anattorney’s referral network.

B. Continuing Education. If you don’t haveenough work to fill your entire day, you can takepart of that time and put it into continuingeducation–either learning or teaching and writing.Maybe you’d like to get comfortable writing andprobating wills. Maybe you could learn the skills torepresent a friend who has a business. There arealso various writing opportunities. Local barassociations typically have a newsletter with someCLE content. The Family Law Section report isalways in need of good articles.

There are local bar committees, State BarCommittees, and ABA Committees. Serving oncommittees can be very informative and rewarding.You get out of a committee in proportion to whatyou put into it. If you show up at committeemeetings with no preparation and don’t volunteerfor any projects, you may as well not be on thecommittee. If you work on projects and show upprepared, you may develop both friendships andreferral sources.

If you would like to start giving CLE speeches,find out from the State Bar of Texas or law schoolswho the course directors are for the upcomingcourses, and send them a letter advising them ofyour interest and providing a resume and maybeeven an example of a past article you have written.


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Local bars are another place to develop CLE skilland experience.

If you work for a lawyer or law firm with ties toCLE, they can promote your inclusion on a coursefaculty. If you don’t, you will have to do somethingto come to the attention of people who plancourses, be they course directors or planningcommittee members. Maybe your law school almamater will give you your first state-wide speech.Maybe a local bar family law section will get youstarted with local CLE, and somebody hears youtalk and suggests your name at a planning meeting.Maybe working on a committee with someone withCLE ties will get your name advanced as a recruit.Every planning committee is looking for some“new faces.”

C. Other Activities. Other activities that can berewarding when there is not much work to doinclude spending increased time with family andfriends, concentrating on personal health andfitness, being active in a religious community,focusing on personal growth, doing pro bono orcommittee work, enjoying recreational activities,and participating in politics or other civic pursuits.

IV. CONTROLLING LITIGATION COSTS.Reducing litigation costs leaves the client withmore money to pay attorneys’ fees. Delegatingtasks to lower- priced professionals outside youroffice reduces the amount of legal work you needto be paid for. When it comes to case preparation,buying a Ford instead of a Ferrari may be the bestinvestment of your client’s litigation dollars.

A. Written Discovery & Depositions.Depositions can be costly and time-consuming, andmuch of the information derived from them may bediscovered more efficiently through less expensivemeans. In lieu of depositions, an attorney can tailorbroad interrogatories and requests for disclosure,which will compel the opposing party to reveal theessential components of their position and legaltheories. An attorney can also economize discoveryby crafting thorough, yet precise, requests for

production.

B. Mental Health Experts. The State of Texaslicenses social workers, marriage and familytherapists (MFT), professional counselors (LPC),master’s-level psychologists (“psychologicalassociates”), doctorate-level psychologists,psychiatrists, and other health care professionals.Each of these professionals can be an expertwitness in a family law case, and each will chargewithin a different range of fees. Thus, the availablefinancial resources of the client, as well as theparticular issues of the case, will determine whichtype of professional would be an appropriate expertwitness.

1. Social Workers. Chapter 505 of theOccupations Code governs social workers.According to Section 505.0025, “the practice ofsocial work is the application of social worktheory, knowledge, methods, ethics, and theprofessional use of self to restore or enhance social,psychosocial, or biopsychosocial functioning ofindividuals, couples, families, groups,organizations, or communities.” The practice ofsocial work “may include the provision ofindividual, conjoint, family, and grouppsychotherapy using the Diagnostic and StatisticalManual of Mental Disorders, the InternationalClassification of Diseases, and other diagnosticclassification systems in assessment, diagnosis,treatment, and other activities by a person licensedunder this chapter.” Under the statute, “socialworker” means a person who holds any licenseissued by the board under Chapter 505, andincludes a “licensed baccalaureate social worker,”“licensed clinical social worker,” “licensed mastersocial worker,” and “licensed social worker.” Tex.Occ. Code § 505.002.

2. Marriage and Family Therapists. Chapter502 of the Occupations Code governs marriage andfamily therapy, which means “providingprofessional therapy services to individuals,families, or married couples, alone or in groups,that involve applying family systems theories and


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techniques. The term includes the evaluation andremediation of cognitive, affective, behavioral, orrelational dysfunction in the context of marriage orfamily systems.” Tex. Occ. Code § 502.002. A“licensed marriage and family therapist” is a personwho offers marriage and family therapy forcompensation. A “licensed marriage and familytherapist associate” is someone who offers toprovide marriage and family therapy forcompensation under the supervision of aboard-approved supervisor.

3. Professional Counselors. Chapter 503 of theOccupations Code, the “Licensed ProfessionalCounselor Act, governs the licensing of LPCs.Section 503.003 defines the “practice ofprofessional counseling” to mean “the applicationof mental health, psychotherapeutic, and humandevelopment principles to: (1) facilitate humandevelopment and adjustment throughout life; (2)prevent, assess, evaluate, and treat mental,emotional, or behavioral disorders and associateddistresses that interfere with mental health; (3)conduct assessments and evaluations to establishtreatment goals and objectives; and (4) plan,implement, and evaluate treatment plans usingcounseling treatment interventions that include: (A)counseling; (B) assessment; (C) consulting; and(D) referral. The terms in this definition arethemselves given a special meaning in the statute.“The term [assessment] does not include the use ofstandardized projective techniques or permit thediagnosis of a physical condition or disorder.” Tex.Occ. Code §503.003(b)(1). Thus, LPCs canadminister the MMPI, but not the Rorschach, theThematic Apperception Test, or a sentencecompletion test.

4. Psychologists. The licensing of psychologistsis governed by Chapter 501 of the OccupationsCode. According to Section 501.003, the practiceof psychology (1) encompasses providing oroffering to provide services to an individual orgroup, including providing computerizedprocedures, that include the application ofestablished principles, methods, and procedures of

describing, explaining, and ameliorating behavior;(2) addresses normal behavior and involvesevaluating, preventing, and re-mediatingpsychological, emotional, mental, interpersonal,learning, and behavioral disorders of individuals orgroups, as well as the psychological disorders thataccompany medical problems, organizationalstructures, stress, and health; (3) includes: (A)using projective techniques, neuropsychologicaltesting, counseling, career counseling,psychotherapy, hypnosis for health care purposes,hypnotherapy, and biofeedback; and (B) evaluatingand treating mental or emotional disorders anddisabilities by psychological techniques andprocedures; and (4) is based on: (A) a systematicbody of knowledge and principles acquired in anorganized program of graduate study; and (B) thestandards of ethics established by the profession.As distinguished from LPCs, psychologists canadminister both objective and subjectivepsychological tests. A psychological associate (PA)is a licensed practitioner who holds a master’sdegree from an accredited university or college ina program that is primarily psychological in nature.Id § 501.259. A PA must practice under thesupervision of a licensed psychologist.

5. Psychiatrists. Psychiatrists are medical doctorswho specialize in the treatment, study andprevention of mental disorders. Medical Doctorsare governed by Chapters 151-160 of theOccupations Code. Section 155.003 requiresAmerican-educated medical licensees to complete60 hours of undergraduate education acceptable tothe University of Texas toward a BA or BS degree,plus medical school. (Applicants educated in othercountries have other requirements.) In addition toconducting testing and counseling as psychologistsmay do, psychiatrists may prescribe psychiatricmedication, conduct physical examinations, andorder and interpret laboratory tests, includingcomputed tomography (CT) or computed axialtomography (CAT), and magnetic resonanceimaging (MRI).

C. Financial Experts. The same principle that


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governs the use of mental health experts in a familylaw case applies to the various strata of financialexperts. While these different levels of training andexpertise are not as clearly delineated, there are avariety of financial experts who are qualified totestify at trial, including an entity’s bookkeeper, theclient’s personal accountant, and forensicaccountants.

D. Alternate Forms of Tracing. Line-itemtracing of commingled funds is probably the mostcostly forensic expense in a divorce. There arealternate forms of tracing, recognized by Texascase law, that trace at an aggregate level, and cansave a lot of accounting fees. An especiallycost-effective form of tracing commingled funds isthe family expense method. Alternative forms oftracing are discussed in Richard Orsinger’s TracingWorkshop Article elsewhere in this coursebook.

E. Mediation. With regards to minimizing thecosts of litigation, mediation is often a veryeffective tool. However, determining the propertime for mediation requires care; an attorney mustbalance the cost-reducing aspects of mediating acase early against the fact that all cases requiresome time for the central issues of contention tocrystalize. Conversely, mediating too late cannegate much of the expense-saving incentive tosettle.

F. Arbitrating Specific Issues. In certainsituations, arbitrating the specific contested issuescan help reduce costs. If the parties agree on mostissues and only dispute a select few, the parties canagree to resolve them through arbitration in lieu oftrying the whole case in court. In addition,impasses in settlement negotiations can alsosometimes be resolved through arbitration; theability to continue negotiating a settlement after theresolution of those issues by the arbitrator is afeature that distinguishes this method from seekinga determination in court.

V. PERSONAL LIABILITY. Liability can bedivided into contractual or quasi- contractual

liability, on the one hand, and tortious liability, onthe other. All liability is either direct or vicarious.

A. Direct Liability. A person is directly liable ifthey are held responsible for his own acts, whetherit is breaching a contract or committing a tort. Ifliability is established, then the injured party cancollect their damages from all of the defendant’snon-exempt property. Acts can trigger statutoryliability as well, such as when the spouses sign ajoint federal income tax return, and each becomesjointly and severally for any tax liabilities for thetaxable year. I.R.C. § 6013(d). See In Re Hollis, 7Tex. Fam. Law Rptr. 303 (May 1990).

B. Vicarious Liability. One person can be heldliable for the wrongful acts of another in situationsof vicarious liability. Various legal principles existwhich establish vicarious liability, includingrespondeat superior, agency, partnership/jointventure, joint adventure, conspiracy anddisregarding the corporate fiction, to name a few.These are discussed below. For an example, seeTraweek v. Larkin, 708 S.W.2d 942 (Tex. App.--Tyler 1986, writ ref d n.r.e.) (tort victimunsuccessful in seeking to impose personal liabilityon wife for tortious act of husband). There are alsospecial rules of vicarious liability for the acts offamily members.

1. Liability for Necessaries. Spouses and parentsin Texas are affected by a special statute, section2.501(a) of the Texas Family Code, which giveseach spouse the duty to support the other spouse,and gives each parent the duty to support theirchildren. Section 2.501(b) provides that “a spouseor parent who fails to discharge the duty of supportis liable to any person who provides necessaries tothose to whom support is owed.” Tex. Fam. Code§ 2.501.

2. Vicarious Liability for Acts of Other Spouse.There are situations where one spouse might bevicariously liable for the acts of the other spouse.There are also situations where the other spousecan suffer an adverse judgment for which the first



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spouse is not personally liable, but wherecommunity property assets can be taken to satisfythe judgment. In State Farm Lloyds, Inc. v.Williams, 791 S.W.2d 542, 548 (Tex. App.--Dallas1990, writ denied), the court wrote that a judgmentagainst a spouse’s interest in community property,where that spouse is not personally liable, is reallya judgment in rem against community propertyassets. Id. at 542.

In addition to the ordinary legal bases for imposingvicarious liability upon someone not directly liablein tort or contract, under one Supreme Courtdecision spouses have a special basis for vicariouscontractual liability for the acts or omissions of theother spouse.

3. The Cockerham Case. In the case ofCockerham v. Cockerham, 527 S.W.2d 167 (Tex.1975), a majority of the Supreme Court joined inan opinion which spoke of “a joint liability” ofspouses. The majority opinion in Cockerhamappeared to announce a rule of vicarious liabilitybetween spouses which was different from the rulesof vicarious liability between non-spouses. Threejustices dissented.

Absent some rule of law to the contrary, when aperson acts he creates liability (if at all) only forhimself. Where the person is married, he may alsosubject his spouse’s interest in certain communityproperty to liability. But even so, the acts of onespouse do not ordinarily create personal liabilityfor the other spouse. In some situations, however,a liability incurred by one spouse can also be aliability of the other spouse. For example, undersection 2.501 of the Family Code, a spouse whofails to discharge his duty of support is liable to anyperson who provides necessaries to his spouse.Tex. Fam. Code § 2.501; see also Gabel v.Blackburn Oper. Corp., 442 S.W.2d 818, 820 (Tex.App.--Amarillo 1969, no writ). If the spouses aregeneral partners, they are jointly and severallyliable for debts of the partnership. If one spouse isacting as agent for the other, the other spouse maybe liable under the principles of agency.

Interspousal relationships that can give rise to jointtortious liability are examined in Orsinger, Intraand Inter Family Transactions, State Bar of TexasAdvanced Family Law Course J-2 –5 (1983).

However, the majority opinion in Cockerhamappeared to soften the normal requirements forvicarious liability where spouses are concerned.According to the Court’s majority, the question ofwhether a debt is a debt of only the contractingspouse or is instead a debt of both spouses is to bedetermined by examining “the totality of thecircumstances in which the debt arose.” Id. at 171.Of “particular importance” in Cockerham wasevidence that the non-contracting husband hadgiven “implied assent” to his wife’s incurring debtsin connection with her dress shop. The fact that thehusband acquiesced in the wife’s operation of adress shop, and received the benefit of businesslosses on a joint tax return, and a few other factors,were sufficient for a majority of the Court to findpersonal liability on the part of the husband. Threejudges dissented, arguing that, except fornecessaries of the other spouse, a non-contractingspouse should be liable “only to the extent andunder the same rules of law that would make anon-family party liable.” Id. at 175 (J. Reavley,dissenting). See also Humphrey v. Taylor, 673S.W.2d 954 (Tex. App.--Tyler 1984, no writ)(source of repayment contemplated by the creditor,as well as the other spouse’s attitude toward thedebt, indicates whether the debt is joint or not).

a. Family Code Section 3.201, on SpousalLiability. Texas Family Code Section 3.201 relatesto the liability of spouses:

(a) A person is personally liable for the acts of theperson’s spouse only if:

(1) the spouse acts as an agent for the otherperson; or

(2) the spouse incurs a debt for necessaries asprovided by [Section 2.501].






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(b) Except as provided by this subchapter,community property is not subject to a liability thatarises from an act of a spouse.

(c) A spouse does not act as an agent for the otherspouse solely because of the marriage relationship.

Tex. Fam. Code § 3.201.

Section 3.201 appears to eliminate any possibilitythat a different rule of vicarious personal liabilityexists for spouses than for persons who are notmarried to each other. Under Section 3.201, aspouse is only liable for the acts of the other spouseif the rule of necessaries comes into play, or if anagency relationship exists between the spouses.The statute indicates that the marriage relationshipdoes not, of itself, make one spouse the agent of theother. In the Authors’ estimation, Section 3.201confirms into law the reasoning of the dissenters inCockerham.

See State Farm Lloyds, Inc. v. Williams, 791S.W.2d 542, 547-49 (Tex. App.--Dallas 1990, writdenied), for a discussion of this statute. A trialcourt was reversed for refusing to give aninstruction based on the predecessor statute tosection 3.201 in conjunction with a suit wherein thecreditor of a man sued to have his ex-wife declaredjointly and severally liable on her former husband’sdebt. Carr v. Houston Business Forms, Inc., 794S.W.2d 849 (Tex. App.--Houston [14th Dist.]1990, no writ).

4. Parental Liability for Acts of Child. UnderChapter 41 of the Family Code, a parent (or personhaving the duty to control and discipline the child)is liable for property damage proximately causedby the negligent conduct of his child, if the child’sconduct is reasonably attributable to the failure ofthe parent (or person with the duty of control) toexercise control. Tex. Fam. Code § 41.001(1).Liability also exists for property damageproximately caused by the wilful and maliciousconduct of a child at least 10 but under 18 years ofage. Tex. Fam. Code § 41.001(2). Liability is

capped, however, at $25,000.00 per act, plus courtcosts and attorney’s fees. Tex. Fam. Code §41.002.

VI. MARITAL PROPERTY LIABILITY.Texas’ rules of marital property liability are set outin Family Code Section 3.202. Published appellateopinions reflect that lawyers and judges whounderstand these concepts when stated abstractlyhave difficulty applying these concepts practicallyto particular fact situations. In some instances thisdifficulty appears to result from a failure todistinguish the concept of “community credit” fromthe concept of “marital property liability.” SeeMcKnight, Annual Survey of Texas Family Law, 37Sw. L.J. 65, 77 (1983), quoted in Latimer v. CityNational Bank of Colorado City, 715 S.W.2d 825,827 (Tex. App.--Eastland 1986, no writ). In otherinstances this inability appears to be a consequenceof the desired result controlling the legal reasoning.

A. What’s Liable for What? Family CodeSection 3.202 provides:

(a) A spouse’s separate property is not subject toliabilities of the other spouse unless both spousesare liable by other rules of law.

(b) Unless both spouses are personally liable asprovided by this subchapter, the communityproperty subject to a spouse’s sole management,control, and disposition is not subject to:

(1) any liabilities that the other spouse incurredbefore marriage; or

(2) any nontortious liabilities that the otherspouse incurs during marriage.

(c) The community property subject to a spouse’ssole or joint management, control, and dispositionis subject to the liabilities incurred by him or herbefore or during marriage.

(d) All the community property is subject totortious liability of either spouse incurred duringmarriage.







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Tex. Fam. Code § 3.202.

B. Joint and Sole Management CommunityProperty. Family Code Section 3.102 describescommunity property which is subject to the solemanagement, control, and disposition of a spouse,and that which is subject to joint management. Aspouse’s sole management community propertyconsists of community property which wouldbelong to one spouse alone were there no marriage.Community property changes from solemanagement to joint management when the otherspouse comes to share control of the property. Ifhusband’s sole and wife’s sole managementcommunity property are mixed, the mixture is jointmanagement community property. The generalrules can be altered by agreement of the spouses.

C. Visualizing the Rule of Marital PropertyLiability. The rules of marital property liabilitycan most easily be demonstrated by a diagram. Thediagram on the next page shows which categoriesof the property owned by married persons aresubject to which kinds of claims. The husband’spre-marital liabilities can be collected from hisseparate property, and his sole managementcommunity and joint management communityproperty, but not from the wife’s sole managementcommunity property and not from the wife’sseparate property. The husband’s non-tortiousliabilities incurred during marriage can be collectedfrom his separate property, his sole managementcommunity property, and the joint managementcommunity property, but not the wife’s solemanagement community property and not thewife’s separate property. Tortious liabilities of thehusband incurred during marriage can be collectedfrom the husband’s separate property, his solemanagement community property, his jointmanagement community property, and the wife’ssole management community property, but not thewife’s separate property. The converse is true forthe wife. A joint liability, being a personal liabilityof each spouse individually, can be collected fromboth spouses’ non-exempt property, be it separateor community.


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Husband’sSeparateProperty

Husband’sSole

ManagementCommunity

Property

JointManagementCommunity

Property

Wife’s SoleManagementCommunity

Property

Wife’sSeparateProperty

Husband’s SeparateDebt

Husband’s Pre-MaritalLiabilities

Husband’s Non-Tortious LiabilitiesDuring Marriage

Husband’s TortiousLiabilities During

MarriageWife’s Tortious

Liabilities DuringMarriage

Wife’s Non-TortiousLiabilities During

Marriage

Wife’s Pre-MaritalLiabilities

Wife’s Separate Debt

Join Liabilities of theSpouses

It should be noted that the ordinary rule set out insection 3.202(c)–that the community propertysubject to a spouse’s sole or joint management,control, and disposition is subject to the liabilitiesincurred by that spouse before or duringmarriage–is not true in instances where a creditorhas contracted away the right to seek recovery

from community property. For example, a “norecourse” note can be collected only out of thecollateral and not out of the borrowing spouse’ssole or joint management community property. A“separate property debt” (i.e., where the creditorhas agreed to look solely to the borrowingspouse’s separate estate for repayment) cannot be


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collected out of community property.

D. Case Law. Nelson v. Citizens Bank and TrustCo. of Baytown, Tex.,881 S.W.2d 128 (Tex. App.--Houston [1 Dist.] 1994, no writ), addressed theissue of whether one spouse could be personallyliable for a debt personally guaranteed by the otherspouse. Husband personally guaranteed a noteexecuted by his separate corporation with CitizensBank, and both Husband and Wife executed a notewith that same bank at the same time. Nelson, 881S.W.2d 128-29. Both notes were secured by deedsof trust on corporate realty and a ranch owner bythe spouses. Id. The corporation defaulted on itsnote, and Husband and Wife defaulted on theirnote. Id. at 129. During subsequent litigation, thetrial court held that Wife was personally liable onthe corporate note personally guaranteed byHusband, and Wife appealed. Id.

Relying on the predecessor to Family CodeSection 3.202, the court wrote “either spouse canincur contractual liability that will bind the shareof the non- contracting spouse’s communityproperty subject to the sole or joint control of thecontracting spouse, but the non-contracting spouseis not ‘personally liable’ for the obligation.” Id. at131 (citing Joseph W. McKnight, Family Law:Husband and Wife, 45 Sw.L.J. 415, 424 (1991)).The court distinguished Cockerham by pointingout that, unlike the spouse in that case, Wife hadno actual involvement in Husband’s business. Id.Thus, the court held that a spouse cannot be heldpersonally liable for a corporate debt guaranteedonly by the other spouse based solely on themarriage relationship and community propertylaws, but a non-signing spouse’s interest in jointmanagement and control community property issubject to execution to satisfy the debt. Id. at 128.

The case of Latimer v. City Nat. Bank of ColoradoCity, 715 S.W.2d 825 (Tex. App.--Eastland 1986,no writ), also demonstrates marital propertyliability. There, Husband, but not Wife, signed apromissory note. The creditor sued both spouses.The Court of Appeals held that Wife was not

personally liable on the note, but that nonexemptcommunity property was subject to execution topay the note. The Court of Appeals was right inholding that Wife was not personally liable on thenote, but wrong in failing to protect Wife’s solemanagement community property.

The cases of LeBlanc v. Waller, 603 S.W.2d 265,268 (Tex. Civ. App.--Houston [14th Dist.] 1980,no writ), and Humphrey v. Taylor, 673 S.W.2d954, 956 (Tex. Civ. App.--Tyler 1984, no writ),relate to the question of whether an admittedlycommunity liability is a personal obligation ofboth the contracting spouse and the non-contracting spouse, or whether it is a personalliability of only the contracting spouse. Again, theissue in those cases was not the question ofwhether the debt was separate or community.

The determination of the character andmanagement rights of property can be made by theintervention in the divorce by a judgment creditorseeking a turnover order and declaratoryjudgment. Owens v. Porter, 796 S.W.2d 265 (Tex.App.--San Antonio 1990, no writ); see alsoBrooks v. Sherry Lane National Bank, 788 S.W.2d874 (Tex. App.--Dallas 1990, no writ) (intent ofspouses that property be one spouse’s separateproperty is not determinative for the purposes ofcharacterizing bank accounts to be garnished ifother facts make the character community).

E. Recap. To recapitulate: under Texas maritalproperty law, Spouse #2 does not automaticallybecome personally liable for debts contractedduring marriage by Spouse #1. Debts contractedfor during marriage by Spouse #1 can be collectedfrom Spouse #1's separate property, and from hissole management community property, and fromthe joint management community property. Suchdebts cannot, however, be collected from Spouse#2's sole management community property, orfrom Spouse #2's separate property, unless Spouse#2 is personally liable for the debt. LeBlanc andHumphrey deal with the question of whether thenon-contracting spouse’s sole management












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community property or separate property wasliable for contractual debts incurred duringmarriage by the other spouse. Both cases said“no.” The courts in both of those two casesrecognized that the liability was a communityliability, since there was no agreement from thelender to look solely to the borrowing spouse’sseparate estate for repayment. But since the otherspouse was not personally liable on the debt, itcould not be collected out of the other spouse’sseparate property or sole management communityproperty. Tort claims arising before marriage canbe collected from the tortious spouse’s separateproperty and sole management communityproperty and from joint management communityproperty. Tort claims arising during marriage canbe collected from the tortious spouse’s separateproperty and all non-exempt community property.

F. Presumption Regarding ManagementPowers. Section 3.104 of the Family Codeprovides certain presumptions regardingmanagement powers over marital property whichcan effect what property is liable for a creditor’sclaim. Property is presumed to be subject to aspouse’s sole management and control if it is heldin the spouse’s name (for titled assets) or in thespouse’s possession (for non-titled assets). Tex.Fam. Code § 3.104(a). A third person dealing witha spouse is entitled to rely on that spouse’sauthority to deal with property which ispresumptively in that spouse’s sole managementand control, and the third person is not a party toa fraud on the other spouse, and does not haveactual or constructive notice of the spouse’s lackof authority to deal with the property. Tex. Fam.Code § 3.104(b).

G. Agreement Affecting Management Powers.Texas Family Code Section 3.102(c) authorizesspouses to enter into agreements regardingmanagement rights over their property. In LeBlancv. Waller, 603 S.W.2d 265, 267 (Tex. Civ. App.--Houston [14th Dist.] 1980, no writ), The Courtfound and enforced an oral agreement betweenspouses that all community property in Wife’s

control since marital separation was subject to hersole management and control. In Brooks. v. SherryLane Nat. Bank, 788 S.W.2d 874, 877 (Tex. App.--Dallas 1990, no writ), such a claimed oralagreement was deemed superceded when thespouses opened an account where the spouses hadjoint right of control.

H. Joinder of the Spouse. The Texas SupremeCourt has ruled that a judgment from jointmanagement community property. A judgmentagainst one spouse can be collected out of jointmanagement community property even where theother spouse was not joined as a party. In Carltonv. Estate of Estes, 664 S.W.2d 322 (Tex. 1983).The Supreme Court did not say that the creditorcould dispense with joinder of the non-liablespouse where the creditor is a tort claimantseeking to collect from non- liable spouse’s solemanagement community property. However, theSan Antonio Court of Appeals has held that anon-liable spouse’s interest in all communityproperty can be reached by a tort creditor of theother spouse, even without joinder of thenon-liable spouse in the lawsuit. Lawrence v.Hardy, 583 S.W.2d 795, 799 (Tex. Civ. App.--SanAntonio 1979, writ red n.r.e.).

VII. SEPARATE VERSUS COMMUNITYCREDIT. Apart from the rules governingliability of marital property are the rules governingthe characterization of debt as separate orcommunity. The determination of the character ofa debt does not control whether one or bothspouses are personally liable for the debt. Rather,it controls whether the proceeds from the loan, oran asset purchased on credit, are separate orcommunity property. Under Texas law, propertyacquired by community credit, or with fundsborrowed on community credit, is itselfcommunity property. Gleich v. Bongio, 99 S.W.2d881 (Tex. 1937).

A. General Principles. The Texas Family Codedoes not specify when a debt is a separate debt andwhen it is a community debt. Under the case law,








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“debts contracted during marriage are presumed tobe on the credit of the community and thus arejoint community obligations,1 unless it is shownthe creditor agreed to look solely to the separateestate of the contracting spouse for satisfaction.”Cockerham v. Cockerham, 527 S.W.2d 162, 171(Tex. 1975). The mere intent of the spouses doesnot control whether the credit is community orseparate. Gleich v. Bongio, 128 Tex. 606, 99S.W.2d 881 (1937). Some courts of appeals havetaken a liberal view of what constitutes proof of anagreement by the creditor to look solely to theborrowing spouse’s separate estate for repayment.For example, in Brazosport Bank of Texas v.Robertson, 616 S.W.2d 363, 366 (Tex. Civ. App.--Houston [14th Dist.] 1981, no writ), the court heldthat the bank’s loan of money to the wife over thehusband’s objection, where the note was signed bythe wife alone and the title to the automobile takenin the wife’s name alone, constituted an agreementby the lender to look to the wife alone forsatisfaction of the debt. See also Holloway v.Holloway, 671 S.W.2d 51, 57 (Tex. App.--Dallas1983, writ dism’d), where an implied agreementon the part of a creditor to look solely toHusband’s separate estate was construed from thefact that the loan proceeds were deposited into anaccount designated as Husband’s separateproperty account, and the fact that Husband alonesigned the loan papers “Pat S. Holloway, SeparateProperty,” and the fact that only Husband’sseparate property was used a collateral. Comparewith Broussard v. Tian, 295 S.W.2d 405 (Tex.1956), where evidence that the down payment forland was made with Husband’s separate property,that all payments on the note secured by the landwere also made with Husband’s separate property,that the deed ran to Husband alone, that Husbandalone signed the note and deed of trust, that thespouses were separated at the time of thetransaction, and that the banker and Husband

discussed payment of the note with Husband’sseparate property royalty income, was held legallyinsufficient (i.e., no evidence) to support a juryfinding of an agreement that the note would bepaid out of the husband’s separate estate.

B. Significance of Separate Versus CommunityDebt. A separate debt is, by definition, collectibleonly out of the borrowing spouse’s separate estate.A community debt is collectible in accordancewith the ordinary rules of marital propertyliability. See Tex. Fam. Code § 3.202.

VIII. CREDITORS AND DEBTORS.

A. Effect of Divorce on Creditors’ Rights. Adivorce decree does not diminish or limit therights of creditors to go against what waspreviously marital property to satisfy debts.Stewart Title Co. v. Huddleston, 598 S.W.2d 321,323 (Tex. Civ. App.--San Antonio 1980), aff’d,608 S.W.2d 611 (Tex. 1980) (per curiam); Rush v.Montgomery Ward, 757 S.W.2d 521, 523 (Tex.App.--Houston [14th Dist.] 1988, writ denied);Anderson v. Royce, 624 S.W.2d 621, 623 (Tex.App.--Houston [14th Dist.] 1981, writ ref d n.r.e.);Inwood National Bank of Dallas v. Hoppe, 596S.W.2d 183, 185 (Tex. Civ. App.--Texarkana1980, writ ref d n.r.e.); Dorfman v. Dorfman, 457S.W.2d 417, 423 (Tex. Civ. App.--Texarkana1970, no writ). This issue was discussed inWileman v. Wade, 665 S.W.2d 519 (Tex. App.--Dallas 1983, no writ), where the panel majorityappears to have misunderstood the distinctionbetween community property liability andpersonal liability.

B. No Imprisonment for Debt in Texas. TheTexas Constitution provides that a person cannotbe incarcerated for failing to pay a debt. Tex.Const. art. I § 18. The judiciary has respected thisstricture. See e.g., Ex parte Yates, 387 S.W.2d 377(Tex. 1965). Child support and court-orderedmaintenance are not deemed to be a “debt” withinthe scope of this constitutional bar.

1 The Opinion’s statement that community debts are“joint obligations” was regrettable and has needlesslyconfused the law in this area.


















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C. Property Exempt from Creditors’ Claims.Both state law and federal law protect someproperties from seizure to pay debts.

1. Protection Under Texas Law. Texas lawprotects the following categories of property fromthe claims of unsecured creditors:

1. Homestead.2. Particular types of personalty totaling no morethan $30,000 for an individual or $60,000 for afamily. Tex. Prop. Code §§ 42.001(a), 42.002.3. Current wages and unpaid commissions up to25% of the $30,000/$60,000 limits. Tex. Prop.Code §§ 42.001(b)(1), (d).4. Health aids. Tex. Prop. Code § 42.001(b)(2).5. Alimony and child support. Tex. Prop. Code§42.001(b)(3).6. Worker’s comp. Tex. Rev. Civ. State. Ann. art.8306, §§ 3(b), 8a.7. Cemetery lots. Tex. Prop. Code § 42.001.8. Property held in a spendthrift trust for thebenefit of the judgment debtor. Hines v. Sands,312 S.W.2d 275 (Tex. Civ. App.--Fort Worth1958, no writ).9. Insurance benefits.10. Retirement benefits and HSA’s.11. College Savings Plans. Tex. Prop. Code§42.0022.12. Artwork on Consignment.

For a more exhaustive list of exemptions and theauthority underlying them, see Petrocchi, Mark J.,Exempt Property: Or, No Property is Safe Whilethe Legislature is in Session, Collections PracticeCourse (2003) at 9, 11-18.

a. Homestead Protection. Chapter 41 of theProperty Code governs the homestead’sexemption from seizure. See Tex. Prop. Code §41.001, et seq. Texas has long been known for itslaws relating to the homestead. Historians haveobserved that many of the politicians of the nation,and later the state, of Texas were men who hadfled civilized areas of the United States to escapeproblems with creditors. When these fugitives

from commerce fashioned a set of laws to governTexas, they built into the constitution a number ofrestrictions upon creditors’ ability to recover theirdebts. The homestead protection was one suchrestriction.

However, the laws relating to homestead gobeyond debtor-creditor relations. Texas law placesa number of restrictions on a spouse’s or parent’sability to deal with the homestead. A spouse’shomestead interest is also protected against theclaims of heirs. Furthermore, Texas recognizes ahomestead right as an asset, quite apart fromownership rights in the underlying property, whichis subject to division in a divorce.

i. Definition of Homestead. A “homestead” isan estate in land, not just a privilege of exemptionor possession. Andrews v. Security Nat. Bank ofWichita Falls, 121 Tex. 409, 50 S.W.2d 253, 256(1932); Villarreal v. Laredo Nat. Bank, 677S.W.2d 600, 607 (Tex. App.--San Antonio 1984,no writ). The homestead right does not dependupon unqualified fee ownership of the land.Villarreal, 677 S.W.2d at 606; Gann v.Montgomery, 210 S.W.2d 255, 258 (Tex. Civ.App.--Fort Worth 1948, writ ref d n.r.e.). Thehomestead right is akin to a life estate. Sparks v.Robertson, 203 S.W.2d 622 (Tex. Civ. App.--Austin 1947, writ ref d), except that a homesteadinterest can be abandoned.

The Texas Constitution differentiates betweenrural and urban homesteads based on whether ornot the land is in a town or city. Tex. Const. art.XVI, § 51. The former may comprise no morethan 200 acres of land for a family or 100 for anindividual, while the latter may comprise no morethan 10 acres. Id.; Tex. Prop. Code § 41.002(a),(b). A person may not claim both a rural and urbanhomestead. Ran v. City National Bank, 272 S.W.510, 515 (Tex. Civ. App.--Fort Wroth 1925, writdism’d). Urban homesteads may be used as ahome, or for the claimant’s business. PropertyCode section 41.002(c) provides the means fordetermining whether property is rural or urban:









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(c) A homestead is considered to be urban if, atthe time the designation is made, the property is:

(1) located within the limits of a municipality orits extraterritorial jurisdiction or a plattedsubdivision; and

(2) served by police protection, paid orvolunteer fire protection, and at least three of thefollowing services provided by a municipality orunder contract to a municipality:

(a) electric;(b) natural gas;(c) sewer;(d) storm sewer; and(e) water.

Some courts interpret this statute to raise apresumption that property that fulfills thesecriteria is urban, but that other factors may stillrender the property rural, while other courtsconsider Section 41.002(c) the sole means fordetermining the nature of a homestead. CompareIn re Perry, 267 B.R. 759 (W.D. Tex. 2001), withIn re Bouchie, 324 F.3d 780 (5th Cir. 2003).

ii. Acquisition of Homestead. The followingrules apply to the acquisition of a homesteadinterest in land under Texas law.

(A) Homestead Requires Some Interest inLand. Homestead can adhere only to some title orinterest in land. Villarreal v. Laredo Nat. Bank,677 S.W.2d 600, 606 n. 3 (Tex. App.--SanAntonio 1984, no writ). However, fee simpleownership in the land is not required. Id at 606.Sufficient interests include tenancyin-common,tenancy-at-will, and a right of present possession.Id at 606 n. 3. In Villarreal, the provision in thedecree of divorce allowing Wife “use andoccupancy” of the house until the youngest childturned 18 was a sufficient interest to support ahomestead claim for the wife, as against a creditor,even though ownership of the house was awardedby the decree of divorce to Husband.

(B) When Homestead Right Arises. Ahomestead right arises upon the intention of aperson to use the premises for homesteadpurposes, coupled with occupancy or some overtact of preparing to occupy the premises for thatpurpose. Kostelnik v. Roberts, 680 S.W.2d 532,536 (Tex. App.--Corpus Christi 1984, writ ref dn.r.e.); Davis v. McClarken, 378 S.W.2d 358, 360(Tex. Civ. App.--Eastland 1954, no writ).

(C) Designation of Homestead. The owner’shaving designated or not designated the propertyas homestead for property tax purposes is notcontrolling. Dodd v.Harper, 670 S.W.2d 646(Tex. App.--Houston [1st Dist.] 1983, no writ).Such designation, or the lack thereof, is merelyone evidentiary factor to consider on the ultimatequestion, which is whether the claimant intendedto make the property his homestead.

(1) Forcing Designation. The Property Codeprovides a way for a creditor to require a person todeclare a homestead. Where execution is issuedagainst someone who holds land which might behomestead, the judgment creditor can give thejudgment debtor notice to designate homestead.The notice must state that upon failure of thedebtor to designate a homestead, the court willappoint a commissioner to make such adesignation, at the debtor’s expense. Tex. Prop.Code § 41.021. The debtor has until 10:00 a.m. onthe Monday following the twentieth day afterservice of notice to designate his homestead, byfiling a written designation with the court issuingwrit of execution. The designation must include aplat. Tex. Prop. Code § 41.022. If the debtor failsto do so, then on motion of the judgment creditorfiled within 90 days of issuance of execution, thecourt issuing execution must appoint acommissioner, together with a surveyor and otherswhose assistance is needed. Tex. Prop. Code§41.023(a). The commissioner is to file hisdesignation, and plat, on behalf of the judgmentdebtor, within 60 days of appointment, or withinsuch time as the court may allow. Id. Either thejudgment creditor or the judgment debtor may,


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within 10 days thereafter, request a hearing fromthe court on the designation, and by filingexceptions to the designation prior to hearing beentitled to present evidence for or against thedesignation. Tex. Prop. Code § 41.023(b). Afterthe hearing, the court designates the homestead,and orders sale of any excess property. Id. Thefees and expenses of the commissioner, appraiserand others appointed, are taxed against the debtoras costs of execution. Tex. Prop. Code §41.023(c).

iii. Loss of Homestead. A homestead interest canbe lost by death, abandonment or alienation. Poseyv. Commercial National Bank, 55 S.W.2d 515(Tex. Comm’n App.--1932, judgment adopted).

(A) Death. As stated above, the homestead statuscan terminate as a result of death. Upon the deathof both spouses, the property ceases to behomestead. Williamson v. Lewis, 346 S.W.2d 957,959 (Tex. Civ. App.--Fort Worth 1961, writ ref d).The fact that one spouse dies does not deprive thesurvivor of an existing homestead right. Julian v.Andrews, 491 S.W.2d 721, 727 (Tex. Civ. App.--Fort Worth 1973, writ ref d n.r.e.); accord, Cox v.Messer, 469 S.W.2d 611 (Tex. Civ. App.--Tyler1971, no writ).

(B) Abandonment. The homestead status ofland can be lost by abandonment. Paddock v.Siemoneit, 147 Tex. 571, 218 S.W.2d 428 (1949).If the homestead claimant is married, however, thehomestead cannot be abandoned without theconsent of the claimant’s spouse. Tex. Prop. CodeAnn. § 41.004. See In re Johnson, 112 B.R. 15(Bkrtcy. E.D. Tex. 1989).

(1) Temporary Absence Not Fatal. It has beenheld that a temporary absence from a homestead,and even temporary removal to another state, doesnot alone constitute abandonment of thehomestead. McFarland v. Rousseau, 667 S.W.2d929, 931 (Tex. Civ. App.--Corpus Christi 1984, nowrit).(2) Temporary Renting Not Fatal. The

temporary renting of the homestead does notdestroy its homestead character provided theclaimant has not acquired another homestead. Tex.Prop. Code § 41.003.

(3) Homestead Rights During and AfterDivorce. Several Texas courts have faced thequestion of whether a spouse’s leaving the homeupon marital separation constitutes abandonmentof that spouse’s homestead interest.

(a) The Posey Case. In Posey v. Commercial Nat.Bank, 55 S.W.2d 515 (Tex. Comm’n App. 1932,judgm’t adopted), Husband conveyed his one-halfcommunity property interest in the parties’ hometo Wife for life in anticipation of divorce.Creditors of Husband claimed the conveyanceconstituted an abandonment of his homesteadprotection, and that his one-half interest wasreceived by Wife subject to Husband’s debts. Thecourt rejected the argument, holding thatHusband’s homestead interest inured to the benefitof Wife because the conveyance was coerced bythe impending court action, and was thus not avoluntary abandonment of the homestead.

(b) The Sakowitz Case. In Sakowitz Bros. v.McCord, 162 S.W.2d 437 (Tex. Civ. App.--Galveston 1942, no writ), the court rejected anargument that the filing of a divorce and issuanceof a temporary injunction denying Husband accessto the parties’ home constituted abandonment byHusband of the homestead protection of hisone-half interest in the property. The court heldthat once the homestead character of property isestablished, it continues through a divorce for solong as some members of the family continue tooccupy the property.

(c) The Rimmer Case. In Rimmer v. KcKinney,649 S.W.2d 365 (Tex. App.--Fort Worth 1983, nowrit), Creditors argued that Husband hadabandoned the homestead character of his one-halfcommunity property interest in the parties’ homewhen he moved from the home after the divorcewas filed and later conveyed his one-half interest













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to Wife pursuant to the decree of divorce. BecauseWife and their children continued to live in thehouse, the court held that its homestead charactercontinued. The appellate court observed certaindifferences from the facts in the Sakowitz case.Husband moved out voluntarily, rather than inobeisance to an injunction, and the conveyance inRimmer was from Husband to Wife, rather thanfrom both spouses to a third party, as in Sakowitz.These differences were not deemed significant.

(d) Laster and Lawrence. In Laster v. FirstHuntsville Properties Co., 826 S.W.2d 125 (Tex.1991), the parties’ divorce decree granted bothHusband and Wife undivided interests in thecommunity property residence, which was theirhomestead. Id. at 127-29. Husband retained aninterest unclassified by the Court (under thesefacts, probably a reversion). Id. Wife retained apresent possessory interest subject to certainconditions, at least one of which was guaranteedto be fulfilled. Id. After the happening of one ofthose stated events, Wife’s sole right to the useand possession of the residence would cease, andHusband and Wife would own the residence “inaccordance with their interests as set out in thejudgment.” Id. at 128. Rejecting the lower court’sclassification of these interests as creating acotenancy with Husband and Wife as tenants incommon, the Court analogized Wife’s interest tothat of a life tenant (as in Posey) and theHusband’s interest to that of the future interestheld by a vested remainderman (also as in Posey).Id. at 128-29. Husband subsequently mortgagedhis interest in the property and defaulted on thenote. Id at 128. Bank sued to force the partition ofWife’s homestead.

The issue on appeal was whether Husband’sinterest was protected from seizure by his debtorsunder the homestead designation (as Husband’sreversion interest in Wife’s life estate in Poseywas exempt from his creditors). The Courtexplicitly stated that “homestead protection,however, can arise only in the person or familywho has a present possessory interest in the

subject property. Accordingly, one who holds onlya future interest in property with no present rightto possession is not entitled to homesteadprotection in that property.” Id. at 130 (internalcitations omitted) (emphasis added). Thus, theHusband’s mortgage “created a lien against hisnon-possessory interest in the property which wasnot impressed with any homestead interest.” Id. at131. Thus, Bank was permitted to force thepartition of what had been Wife’s homesteadbecause that designation had terminated upon theoccurrence of a stated event (viz., the youngestchild of the parties’ marriage attaining the age ofmajority). Id. at 131. Apparently, for the LasterCourt, the conveying of a “life estate” was analienation that terminated the homesteaddesignation as to the conveyor.

This complex decision was addressed in Lawrencev. Lawrence, 911 S.W.2d 450 (Tex. App.--Texarkana 1995, writ denied), where theTexarkana Court of Appeals seemed to call intodoubt Posey, Sakowitz, and Rimmer, writing that“we can only assume that the Supreme Courtintended to change the law by its decision inLaster.” Id. at 453. However, the Lawrence courtalso observed that “the Laster opinions, bothmajority and dissenting, do not even cite any ofthe earlier cases, either to overrule them or toattempt to distinguish them” Id. Even though theLawrence court did not see any facts whichdistinguished Laster from Posey, it followedLaster and concluded that “one who holds only afuture interest in property with no present right ofpossession cannot claim a homestead right in theproperty, regardless of how he was dispossessed.”Id.

While Posey presents a set of facts so similar toLaster that the latter opinion can be reconciled inno way other than my concluding that it overruledthe former, Sakowitz presents a materially distinctsituation. In Sakowitz, Husband and Wifeconveyed the property during the pendency oftheir divorce, while Husband was enjoined by atemporary order from present possession of the




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property. In Laster, on the other hand, Husband’spresent possessory interest was suspended by thefinal judgment of the court. The exact scope ofLaster remains uncertain.

(e) Other Authorities. See also Villarreal v.Laredo Nat. Bank, 677 S.W.2d 600, 606 (Tex.App.--San Antonio 1984, no writ) (“[a]s a generalrule, the complete breaking up of the family forany cause does not operate to forfeit thehomestead right of one who has acquired it andcontinues to use the property as his home”);Wierzchula v. Wierzchula, 623 S.W.2d 730, 732(Tex. Civ. App.--Houston [1st Dist.] 1981, nowrit) (“[t]he homestead character of the propertyis not destroyed by a divorce if one of the partiesto the divorce continues to maintain it ashomestead”).

(C) Alienation. In Boyd v. United Bank, NA.,794 S.W.2d 839 (Tex. App.--El Paso 1990, nowrit), the ex-wife was held to have alienated herhomestead interest by a letter agreement andassignment to her ex-husband, which were reliedupon by a bank in lending money to the ex-husband under a lien in the house.

iv. Homestead in Other Spouse’s SeparateProperty. A spouse can have a homesteadinterest in land which is the separate property ofthe other spouse. Villarreal v. Laredo Nat. Bank,677 S.W.2d 600, 606 (Tex. App.--San Antonio1984, no writ). This interest, or the right to use theproperty as a residence, can be awarded to thecustodial spouse for the duration of the minorityof the parties’ children. Hedtke v. Hedtke, 248S.W.2d 21, 12 (Tex. 1923); see Eggemeyer v.Eggemeyer, 554 S.W.2d 137, 138 (Tex. 1977);Villarreal, 677 S.W.2d at 606. Presumably such ause can be continued for as long as the childsupport obligation continues, including beyond theage of majority. See Tex. Fam. Code Ann.§154.001. A homestead interest in the otherspouse’s separate property also constitutes aproperty right which can be awarded, orcompensated for, on divorce. See Wierzchula v.

Wierzchula, 623 S.W.2d 730 (Tex. Civ. App.--Houston [1st Dist.] 1981, no writ).

v. Liens. Under the Texas constitution,2 certaintypes of liens can be foreclosed against ahomestead, including purchase money liens, taxliens, builder’s and mechanic’s liens, and oweltyof partition liens.3 Tex. Const. art. XVI, § 50. Therefinancing of a valid lien against a homestead canalso encumber the property. Id. A judgment lien infavor of one spouse, created in a decree of divorce,cannot be foreclosed against a homestead interest,except to the extent that the lien fits one of therecognized exceptions: to secure an obligation topay money in exchange for the home, or to securea claim for reimbursement for payment ofpurchase money principle or interest, or forpayment of property taxes on the property, or forpayment of indebtednesses secured by vendor’sliens or builder’s and mechanic’s liens in theproperty. Eggemeyer v. Eggemeyer, 623 S.W.2d462, 466 (Tex. App.--Austin 1981, writ dism’d).

(A) Vendor’s Lien. A vendor’s lien is a lienwhich secures the unpaid portion of the purchaseprice of the property.

(1) Express Vendor’s Lien. Ordinarily, thevendor’s lien is retained in the deed conveyingtitle to the purchaser. The vendor’s lien can furtherbe secured by a deed of trust, providing fornon-judicial foreclosure if default is made in thepayment of the purchase money indebtedness. A

2 Federal law preempts state homestead protection incertain instances. See United States v. Rodgers, 103U.S. 2132 (1983); see also discussion beginning atsection VII.A.1.a.viii infra.

3 The Property Code states that “[e]ncumbrances maybe properly fixed on homestead property for: (1)purchase money; (2) taxes on the property; or (3) workand material used in constructing improvements on theproperty if contracted for in writing as provided bySections 53.254(a), (b), and (c).” Tex. Prop. Code Ann.§ 41.001.













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warranty deed reserving a vendor’s lien to securepayment of part of the purchase price is valid andenforceable under the Texas Constitution. SeeBenchmark Bankv. Crowder, 919 S.W.2d 657, 660(Tex. 1996); Reed v. Skelly Oil Co., 227 S.W.2d360, 362 (Tex. Civ. App.--Texarkana 1950, writred n.r.e.).

(2) Implied Vendor’s Lien. The Texas SupremeCourt has ruled that where one party sells realtyon credit to another, an implied vendor’s lienarises to secure the debt. McGoodwin v.McGoodwin, 671 S.W.2d 880 (Tex. 1984). InMcGoodwin, Wife conveyed her interest in theparties’ homestead to Husband pursuant to anagreement incident to divorce. No vendor’s lienwas retained in the deed. The Supreme Court heldthat an implied vendor’s lien arose from theproperty settlement agreement, securing the wife’sone-half community property interest conveyed.The Court specifically noted that the lien reachedonly the undivided one-half community propertyinterest conveyed by Wife to Husband, and not theone- half interest already owned by Husband. Id at883.

A similar result was reached by the Austin Courtof Appeals in Colquette v. Forbes, 680 S.W.2d536 (Tex. App.--Austin 1984, no writ), where animplied vendor’s lien was held to have arisen fromthe agreement incident to divorce even though novendor’s lien was retained in the deed conveyingHusband’s one-half community property interestin the property to Wife. See McKnight, FamilyLaw: Husband and Wife, 39 Sw. L.J. 1, 19, 26-27(1985).

In Stapler v. Stapler, 720 S.W.2d 271 (Tex. App.--Fort Worth 1986, no writ), an ex-husband wasallowed to judicially foreclose on an impliedvendor’s lien in real estate awarded to his ex-wifein their agreement incident to divorce, where theex-wife failed to pay an obligation owed to theIRS as required by the agreement. This was so,even though there was no language in theagreement to suggest that the realty was awarded

to the ex-wife in consideration for her paying theIRS debt.

(B) M e c h a n i c ’ s , C o n t r a c t o r ’ s o rMaterialman’s Lien. The mechanic’s,contractor’s or materialman’s lien is covered byChapter 53 of the Texas Property Code. Thischapter lists persons entitled to the lien and theproperty which is subject thereto, describes theprocedure for perfecting the lien, and provides forthe withholding of funds by the owner on behalfof subcontractors, among other provisions.Ordinarily, however, the family home will behomestead, and will be protected by Section41.001 of the Texas Property Code. Section41.001 provides that an encumbrance may beproperly fixed on homestead property for workand material used in constructing improvementson the property only if contracted for in writingbefore the material is furnished or the labor isperformed and in a manner required for theconveyance of a homestead, with joinder of bothspouses if the homestead claimant is married. Tex.Prop. Code §§ 41.001, 53.254.

(C) Tax Lien. On January 1 of each year a taxlien attaches to property to secure all taxes,penalties and interest ultimately imposed for theyear on that property. Tex. Tax Code Ann. §32.01. This lien takes priority over a homesteadinterest in the property. Id § 32.05(a). The lienalso has priority over other debts of the owner,even if they are secured by a prior lien on theproperty. Id. §32.05(b). Priority as to a federal taxlien is controlled by Texas law, subject, however,to any contrary provision of federal law on thesubject. Id. § 32.04. The tax lien may beforeclosed.

(D) Home Equity Loan Lien. Prior to 1997,Texas was the only state in the United States thatdid not allow the proceeds from a voluntary lienagainst a homestead to be used for a purpose otherthan purchase money or improvements. 15 Tex.Prac., Texas Foreclosure Law & Prac. § 2.176(2009). However, that year, the Texas Constitution









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was amended to include provisions allowing homeequity loans less than or equal to 80% of theequity of the home. Tex. Const. art. XVI, §50(a)(6). In Stringer v. Cendant Mortgage Corp.,23 S.W.3d 353 (Tex. 2000), the Texas SupremeCourt interpreted these provisions:

The amendment’s purpose was to expand thetypes of liens for loans that a lender, with thehomeowner’s consent, could place against ahomestead. The amendment allows homeownerswho have either entirely repaid their home loansor who have accumulated equity in theirhomestead over and above existing liens toapply for a loan against that equity. The first partof the amendment details the terms andconditions of a loan and the rights andobligations of both a borrower and thehome-equity lender. See Tex. Const. art. XVI,§50(a)(6)(A)-(Q). It includes Section50(a)(6)(Q)(i), which provides that ahome-equity lender cannot require a borrower toapply the loan proceeds “to repay another debtexcept debts secured by the homestead or debt toanother lender.”

Id. at 354. Section 50(a)(6) allows a home-equitylender to require the borrower to use loan proceedsto pay: (1) debts secured by the homestead; and(2) non-homestead debts to third-party creditors.Id. at 356 (citing Tex. Const. art. XVI, §50(a)(6)(Q)(i)). This provision establishes thesubstantive rights and obligations of lenders andborrowers and the terms and conditions ahome-equity lender must satisfy to make a validloan. Id.

The notice provision of this same subsection wasamended following Stringer to mirror thelanguage of Section 50(a)(6)(Q)(i), mandating thatthe home equity lender must notify the borrowerthat the former may not require the latter to applythe proceeds of the home equity loan to any otherdebt except a debt secured by the home or owed toa different lender. Tex. Const. art. XVI, § 50(g).

(E) Reverse Mortgage Lien. In 1999, the TexasConstitution was amended to include provisionspermitting reverse mortgage liens on homesteads.Tex. Const. art. XVI, § 50(k). A reverse mortgageis an extension of credit to a homeowner based onthe equity in their homestead in exchange for avoluntary lien on the property. Id. In order toqualify for a reverse mortgage, the borrower mustbe 62 years old, and the loan must be madewithout recourse for personal liability against theborrower. Id. No payment of principal or intereston the loan may be required until either theborrower dies or sells the property, abandons thehomestead designation, defaults on an obligationto maintain the property, or commits actual fraudwith regards to the loan. Id. The lender may notforeclose on the lien until the borrower is giventhe same notice required for the foreclosure of allliens on homesteads. Id.

(F) Equitable Lien. Upon divorce, where thecourt awards the house to one party and a moneyjudgment to the other for his or her interest in thehome, the money judgment can be secured by anequitable lien, created in the decree of divorce,which is enforceable against a claim of homestead.Lettieri v. Lettieri, 654 S.W.2d 554 (Tex. App.--Fort Worth 1983, writ dism’d). In Wierzchula v.Wierzchula, 623 S.W.2d 730, 732 (Tex. Civ.App.--Houston [1st Dist.] 1981, no writ), the courtsaid that in a divorce action a lien could be placedon a spouse’s separate property homestead “tosecure the payment of the amount awarded to theother spouse for the spouse’s homestead interest.”Accord, Wren v. Wren, 702 S.W.2d 250, 252 (Tex.App.--Houston [1st Dist.] 1985, no writ). Anequitable lien can also be awarded to secure ajudgment for reimbursement for payments madeon purchase money loans, home improvementloans, or property taxes on the home. Eggemeyerv. Eggemeyer, 623 S.W.2d 462, 466 (Tex. App.--Austin 1981, writ dism’d); see Buchan v. Buchan,592 S.W.2d 367 (Tex. Civ. App.--Tyler 1979, writdism’d) (husband awarded judgment to offsetleasehold interest in wife’s separate propertyresidence taken from him in divorce). Professor








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McKnight wrote:

Texas courts have generally acknowledged thatin a suit for divorce a lien may be placed upon aspouse’s homestead in order to secure thepayment of a money judgment awarded to theother spouse for his or her homestead interest.

McKnight, Family Law: Husband and Wife, 38Sw. L.J. 131, 154 (1984).

In In re Miller, 58 B.R. 192 (Bankr.S.D.Tex.1985), the bankruptcy judge ruled that anequitable lien created by a divorce decree was animplied vendor’s lien, enforceable against ahomestead. The lien arose at the time of renditionof the decree of divorce, and did not have to beabstracted in order to be perfected. However, anumber of courts have held that such a lien can beavoided in bankruptcy.

(1) Economic Contribution & Reimbursement.In 2009, economic contribution was repealed; theterm “economic contribution” was replaced with“reimbursement” in the Family Code, and theeconomic contribution formula established byFamily Code Section 3.403 was removed. Act ofJune 1, 2009, 81st Leg., R.S. (unpublished,available at: http://www.capitol.state.tx.us/BillLookup/History.aspx?LegSess=81R&Bill=SB866).

However, these changes only affect suits filedafter September 1, 2009, and suits pending as ofthis date are still governed by the old economiccontribution statute.

Under the repeated law, on dissolution of amarriage, the court was required to impose anequitable lien on property of a marital estate tosecure a claim for economic contribution in thatproperty by another marital estate. Tex. Fam.Code § 3.406(a). This lien may be imposed uponthe entirety of the spouse’s property, subject tohomestead restrictions. Tex. Fam. Code §3.406(c). Under the new law, the mandatory

language of subsection (a) is changed topermissive language and “economic contribution”is replaced with “reimbursement,” whilesubsection (c) is repealed.

It is well-settled that a court can impose anequitable lien on a separate property homestead ifthe other spouse’s reimbursement claim satisfiesthese strictures:

[T]he homestead of a family or a single adultperson, shall be, and is hereby protected fromforced sale, for the payment of all debts exceptfor the purchase money thereof, or a part of suchpurchase money, the taxes due thereon, or forwork and material used in constructingimprovements thereon, and in this last case onlywhen the work and material are contracted for inwriting, with the consent of both spouses.

Heggen v. Pemelton, 836 S.W.2d 145, 147-48(Tex. 1992) (quoting Tex. Const. art. XVI, § 50).

In other words, if the award representsreimbursement for the payment of a debt thatwould be permitted under the Constitution to besecured by a lien on the homestead, then thereimbursement award may also be secured by alien on the homestead. See also Falor v. Falor,840 S.W.2d 683 686-87 (Tex. App.--San Antonio1992, no writ).

Some commentators also aver that it is well-settledthat a court can impose an equitable lien on aseparate property homestead if the other spouse’seconomic contribution claim satisfies thoseconstitutional strictures. See, e.g., O’Connor ‘sTexas Family Law Handbook (2009) at 775 (citingHeggen and Falor). The Eastland Court ofAppeals cited these same sources, but remainednoncommittal on the issue:

The issue of whether a Section 3.406 lien can beforeclosed on a spouse’s separate propertywhich is homesteaded is not before us. Section3.406(c); also generally see Heggen v.





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Pemelton, 836 S.W.2d 145 (Tex. 1992); Falor v.Falor, 840 S.W.2d 683 (Tex. App.--San Antonio1992, no writ).

Langston v. Langston, 82 S.W.3d 686, 689 n. 1(Tex. App.--Eastland 2002, no pet.). Both Heggenand Falor were decided before the enactment ofthe economic contribution statute in 1999.

(2) Equitable Lien For Interest in Homestead.In 1984, Professor McKnight suggested that thehomestead is not subject to the imposition of anequitable lien for any claims “except liens forimprovements and taxes attributable to thepremises and interest in the property made thebasis of the homestead and for improvements andtaxes.” McKnight, supra at 154-55, citingEggemeyer v. Eggemeyer, 623 S.W.2d 462, 466(Tex. Civ. App.--Waco 1981, writ dism’d); Day v.Day, 610 S.W.2d 195, 199 (Tex. Civ. App.--Tyler1980, writ ref d n.r.e.). An equitable lien can alsobe fixed in the homestead for a reimbursementclaim for payment of a vendor’s lien indebtedness,as well. See Heggen, 836 S.W.2d at 147-48.

An interesting question exists regarding a separateproperty home. Where the home is the separateproperty of one spouse, can the other spouse begiven a judgment secured by lien in the homesteadfor his or her “homestead interest” in the otherspouse’s separate property? The court inWierzchula v. Wierzchula, 623 S.W.2d 730 (Tex.Civ. App.--Houston [1st Dist.] 1981, no writ),held that it could. Thus, although Eggemeyerwould prohibit the divesting of title to separaterealty and awarding it to the other spouse, perhapsa money judgment can be awarded to the otherspouse who relinquishes his or her “homesteadinterest” in the other spouse’s separate propertyhome.

(G) Equitable Subrogation to Lien. Undercertain circumstances, where a party pays anindebtedness secured by lien, that party isequitably subrogated to the lienholder’s securedposition. In Citizens Say. Bank & Trust Co. v.

Spencer, 105 S.W.2d 671, 677 (Tex. Civ. App.--Amarillo), writ dism’d, 110 S.W.2d 1151 (Tex.1937), it was said:

A third person who has paid or has loanedmoney to pay a debt secured by a vendor’s lien,is entitled to be subrogated to the rights of thevendor where the money was advanced at thedebtor’s request and for his benefit.

See also Henke v. First Southern Properties, 586S.W.2d 617, 621 (Tex. Civ. App.--Waco 1979,writ ref d n.r.e.) (one who discharges a vendor’slien upon land, even homestead, either by payingas surety, or at the request of the debtor, or at ajudicial sale, which for some reason fails toconvey the title, is subrogated to the lien of thecreditor to the extent of the payment made). It canbe argued that a spouse, or even an unmarried“partner,” should equitably subrogate to avendor’s, mechanic’s, or tax lien in the otherspouse’s or partner’s property, where funds of theformer have been used to pay indebtednessessecured by such liens.

vi. Sale of the Homestead and Title Insurance.The proceeds from sale of the homestead areimmune from garnishment for six months after thedate of sale, during which time they can bereinvested in another homestead. Tex. Prop. Code§ 41.001(c). Nevertheless, outstanding judgmentliens can affect the ability to sell the homestead,since many are reluctant to buy a house withouttitle insurance, and title companies often refuse toinsure the title of a homestead as long as judgmentliens appear to exist against the property. Thesituation was described in Tandy & Black,Fundamentals of Title Insurance, State Bar ofTexas Advanced Real Estate Law Course D-25(1985):

In the ordinary course of business, whenexamination of title discloses abstracted andrecorded judgment liens against the seller ofputative homestead property, the almostuniversal response of Texas title insurers is a













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requirement that such judgment liens be releasedof record. Such releases are usually forthcomingonly as the result of partial or completesatisfaction paid to the judgment-creditor fromthe seller’s proceeds of sale. Certainly, on itsface, this practice would seem to be inderogation of the constitutional and statutoryprotection afforded to the homestead. Practicallyspeaking, however, as a matter of title insuranceunderwriting standards, the purely factual natureof homestead status cannot be satisfactorilydemonstrated for the purpose of disregardingprior recorded abstracts of judgment against theseller-owner. The only other acceptablealternative for the title company would requirethe seller to institute a district court proceeding,ci t ing the judgment- creditors asparties-defendant, out of which would hopefullycome a judicial determination that, by reason ofproven uninterrupted homestead status, thecreditors’ liens have not attached to the propertybeing sold.

As a practical matter, when the buyer of financierrequires title insurance as a condition of purchase,a seller with outstanding judgment liens may haveto use some of the proceeds from sale of hishomestead to discharge such liens, even thoughthe liens are not enforceable against such proceedsat the time of sale.

vii. Fraud Can Vitiate Homestead Protection.In Kolstelnick v. Roberts, 680 S.W.2d 532 (Tex.Civ. App.--Corpus Christi 1984, writ ref d n.r.e.),the court ruled that the homestead exemptioncannot be used as a shield against imposition of aconstructive trust where the homestead claimantsknowingly misused property transferred to themfor the benefit of another. The trial court imposeda constructive trust for the benefit of a third party,upon a mobile home and other property alleged tobe homestead. However, in Curtis Sharp CustomHomes, Inc. v. Glover, 701 S.W.2d 24 (Tex. App.--Dallas 1985, no writ) (en banc), a divided DallasCourt of Appeals concluded that a constructivetrust could not be imposed on a homestead interest

established prior to the wrongdoing. Thus, in thatcase a judicially- created equitable lien inhomestead was held void where it secured ajudgment for the recovery of embezzled fundswhich were used to improve a homestead.

Compare these cases with In re Lodeck, 61 B.R.66 (Bkrtcy. W.D. Tex 1986), in which thebankruptcy judge held that an equitable lien givento secure a constructive trust imposed on ahomestead for funds traced into improvementsmade to the homestead was not a judicial lienavoidable under Bankruptcy Code Section522(f)(1).

viii. Federal Preemption. In United States v.Rodgers, 461 U.S. 677 (1983), the United StatesSupreme Court decided that the Texas law ofhomestead has been preempted by the InternalRevenue Code insofar as the Code affords theUnited States government the right to collect taxesowed to the government out of propertyrecognized under Texas law as homestead. InRodgers, the Supreme Court held that Husband’stax liability could be paid out of proceeds derivedfrom selling his share of homestead property, evenif that property is also the homestead of his Wife,who had no liability to the United Statesgovernment. The Supreme Court further held thatthe government was not constrained to sell onlyHusband’s interest in the property, but rather thatthe entire homestead property could be sold, withthe government collecting its due from Husband’sshare of the proceeds. Wife’s share of the proceedswould be given to her after the sale of her home.

b. Personal Property Exemptions. Sections42.001 and 42.002 of the Texas Property Code setout personal property which can be exempt fromthe claims of creditors. An individual can have upto $30,000, and a family up to $60,000, inspecified types of personal property that areprotected from creditors’ claims. Tex. Prop. Code§ 42.001. Of course, the exemption does not applyif the personalty is pledged as collateral for theindebtedness being collected. Landlords’ claims







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also can penetrate the exemption. Tex. Prop. Code§ 42.001(c).

i. The “Laundry List.” The types of personaltyeligible for exemption are listed in section 42.002,and include: home furnishings; comestibles;farming and ranching implements; tools,equipment, books, and apparatus used in a trade orprofession; clothing; jewelry valued up to a certainamount; two firearms; athletic and sportingequipment; one motor vehicle for each driver inthe household; and certain animals, including pets.Life insurance and annuity benefits are also fullyexempt. Tex. Ins. Code § 1108.051.

ii. Designation of Personalty ExceedingMonetary Cap. Section 42.003 provides aprocedure for the debtor to determine which itemsof personalty will be seized if the total personaltyexceeds the $30,000/$60,000 limit. Failing that,the officer executing on the items can designatewhat will be levied upon. Tex. Prop. Code §42.003.

iii. Special Fraudulent Conveyance Provision.Section 42.004 regulates fraudulent converting ofnon-exempt property into exempt property. If non-exempt property is used to acquire, makeimprovements to, or pay debts on exemptproperty, and is done so with the intent to defraud,delay, or hinder an interested person4 fromobtaining what they may be entitled to, then theotherwise exempt property will lose its exemptstatus. If the transaction is structured so that asecured debt to a third party is paid on exempt

property, the aggrieved party subrogates to therights of the other lienholder. A claim under thisSection must be brought within 4 years. A creditorwith a claim that is unliquidated or contingent atthe time of the transaction must bring suit withinone year of when the claim is reduced tojudgment.

c. Garnishment. Generally, non-exemptproperty such as bank accounts, safety depositboxes, stock, commercial paper, andnon-spendthrift trust distributions are subject togarnishment by a creditor. However, in Texas,garnishment of current wages from a debtor’semployer is constitutionally prohibited.Exemptions statutes have also protected currentwages. However, aggressive creditors have in thepast made incursions into this forbidden area usingthe “turnover statute.” The law on the point is setout below.

i. Relevant Constitutional and StatutoryProvisions. Texas Constitution article XVI,section 28, provides that “no current wages forpersonal service shall ever be subject togarnishment, except for the enforcement ofcourt-ordered child support payments or spousalmaintenance.” The Supreme Court defined“garnishment” as “a statutory proceeding wherebythe property, money, or credits of one person inthe possession of, or owing by another are appliedto the payment of the debt of a debtor by means ofproper statutory process issued against the debtorand the garnishee.” Beggs v. Fite, 130 Tex. 46,106 S.W.2d 1039, 1042 (1937), quoted in Rabornv. Davis, 33 Tex. Sup. Ct. J. 249 (February 21,1990), vacated, 795 S.W.2d 716 (Tex. 1990).Civil Practice and Remedies Code section 63.004provides that “current wages for personal serviceare not subject to garnishment.” CPRC section31.002(f) provides that a court may not require thepost-judgment turnover of exempt property,which, by virtue of the Constitution and section63.004, would include current wages for personalservices.

4 The term “interested person” is not defined in thestatute. The next subsection of the same provisionsubstitutes the term “creditor” one time and the term“person with a claim” another time. The old fraudulentconveyance statute, former Tex. Bus. & Comm. CodeSection 24.02, used the phrase “creditor, purchaser orother interested person.” See discussion of interpretivecase law in Orsinger, Intra and Inter FamilyTransactions, State Bar of Texas Advanced Family LawCourse J-20 (1983).




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ii. The Turnover Statute. Section 31.002 of theTexas Civil Practice & Remedies Code providesfor the right of creditors to seek the assistance ofthe court in collecting money judgments, as toproperty that cannot readily be attached or leviedon by ordinary legal process and is non-exempt.

Among other available remedies listed in thestatute, the court can order the judgment debtor toturn over nonexempt property in his possession orcontrol, and all related documents, to the sheriff orconstable for execution. Or, the court can appointa receiver to take possession of the property, sellit, and apply the proceeds to satisfy the judgment.

Section 31.0025 provides:

(a) Notwithstanding any other law, a court maynot, at any time before a judgment debtor is paidwages for personal services performed by thedebtor, enter or enforce an order that requires thedebtor or any other person to turn over thewages for the satisfaction of the judgment.

(b) This section applies to wages in any form,including paycheck, cash or property.

(c) This section does not apply to theenforcement of a child support obligation or ajudgment for past due child support.

Tex. Civ. Prac. & Rem. Code § 31.0025. Thus,turnover orders are not available for wages not yetreceived.

In light of Chapter 31 of the CPRC and articleXVI, section 28 of the Texas Constitution, thequestion of what the term “current wages”does–and does not–include will determine whetherproperty is subject to turnover. For a gooddiscussion of property that may not be exempt, seeBrown, Donna, Post Judgment Remedies.Judgment Liens. Garnishment, ExecutionsTurnover Proceedings. Receiverships under theDTPA, and “Other Stuff?’ Collections andCreditors’ Rights Course (2006) at 32-35. See also

Toben & Toben, Using Turnover Relief to Reachthe Nonexempt Paycheck, 40 Bay. L. Rev. 195(1988) for further background.

The following cases address the vulnerability ofvarious forms of income to turnover orders:

In Sloan v. Douglass, 713 S.W.2d 436 (Tex.App.--Fort Worth 1986, writ ref d n.r.e.), theCourt of Appeals concluded that deferredpayments due a professional baseball playerwere current wages despite the fact they were tobe paid out over a ten year period beginningwhen his employment contract expired. TheCourt held that the deferred payments wereexempt as “current wages,” and therefore notsubject to a turnover order. The Court also ruledthat the exemption of current wages, deriving asit does from the Constitution itself, cannot bemade subject to a $30,000/$60,000 limit, andthat to the extent Property Code section 42.001purported to do so it was unconstitutional. Thelaundry list no longer contains an exemption forcurrent wages.

In Cain v. Cain, 746 S.W.2d 861 (Tex. App.--ElPaso 1988, writ den’d), the El Paso Court ofAppeals reviewed a turnover order entered toassist a former wife in collecting a judgment forpayments due from the former husband underthe agreement incident to divorce that werenever paid. At issue were the former husband’sTeacher Retirement System payments andmilitary retired pay. The Court had no problemswith the anti- assignment statutes relating toeither type of benefits, because no garnishmentof the paying agencies was involved. Also,retirement benefits have been held to be propertyand not current wages. Also, all exemptions thebenefits may have enjoyed prior to their receiptwas lost on receipt. The Court indicated that thelater passage of Property Code section 42.0021,regarding “Additional Exemption for RetirementPlan,” would not change its ruling. The turnoverorder was held valid, amid a ringingpronouncement that “Texas will move out of the




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Twentieth Century not as a debtor state but as astate where just debts can be collected under theturnover statute.” Id. at 864.

In Maumus v. Lyons, 771 S.W.2d 191 (Tex.App.--Fort Worth 1989, no writ), the Fort WorthCourt of Appeals distinguished the 1920'svintage cases ruled that Property Code Section42.002, which exempts “current wages forpersonal services,” prohibits a court fromordering a turnover “for services performedduring the pay period immediately precedingpayment to an employee.” Maumus, supra at195. This limitation to the immediatelypreceding pay period might leave periodicbonuses at risk.

It should be remembered that the trial court is notrequired to order turnover. On appeal, the standardof review is abuse of discretion. See CommerceSavings Association v. Welch, 783 S.W.2d 668(Tex. App.--San Antonio 1990, no writ).

d. Proceeds of Insurance Policy. Section1108.051 exempts all proceeds, without limit,payable under an insurance policy issued by a life,health or accident insurance company, or payableunder annuity, from execution, attachment orgarnishment. The only exception to this exemptionis for premium payments made in fraud ofcreditors of for debt actually secured by theproceeds. Tex. Ins. Code § 1108.052. Althoughnot explicitly listed, such proceeds presumablywould include a disability policy. One case hasheld that this statute does not protect the receipt ofthe cash surrender value of a policy. In reBrothers, 94 B.R. 82 (Bankr. N.D. Tex. 1988).Another case has held that this statute did notprotect proceeds from the settlement of a personalinjury claim due from a liability insurance carrier.In the case of In re Powers, 112 B.R. 178 (Bankr.S.D. Tex. 1990), the bankruptcy judge ruled thatthe phrase “life, health or accident insurancecompany” does not include a casualty or liabilityinsurance company, and that sums due a debtorfrom a liability insurance company are not exempt

under this statute.

e. Retirement Benefits. Section 42.0021establishes a state law exemption for retirementplans. This exemption is above and beyond the$30,000 or $60,000 limit established by Section42.002. The plan must be a “qualified plan” underthe Internal Revenue Code. IRA’s and SEP’s areincluded. However, the exemption does not applyto overfunded IRA’s, where the sums depositedexceed the deductible contributions permitted bythe Internal Revenue Code. Non-taxable rolloversare protected as well. Roth IRA’s are also exempt,despite the fact that contributions to Roth IRA’sare not tax-deductible. Finally, HSA’s areexplicitly exempted by the statute. See generallyLozano v. Lozano, 975 S.W.2d 63 (Tex. App.--Houston [14th Dist.] 1998, no pet.) (burden ofproof to establish exemption on party claiming it).

Several savings clauses are included in the statutein the event that the statute is preempted byFederal law. Tex. Prop. Code § 42.0021.Preemption is an important issue, as explainedbelow.

i. Preemption by ERISA. The United StatesSupreme Court has ruled that the federal statutegoverning “qualified” retirement plans of privateemployers, ERISA, preempted a Georgia statutewhich exempted ERISA plans from garnishment.Mackey v. Lanier Collections Agency & Service,Inc., 486 U.S. 825, S.Ct. 2182, 100 L.Ed.2d 836(1988). Under the Mackey case, a state statute ispreempted if it relates to an employee benefit plan,or in other words has a connection with or makesreference to an ERISA plan. Section 42.0021 ofthe Texas Property Code dangerously relates to anumber of different types of retirement programs,ERISA plans being only one of them. Because thestatute is preempted as to ERISA, there has beensome concern that the entire provision, with all ofits other exemptions, may have been invalidated,even as to non-ERISA plans. The statute itselfcontains a severance clause, supporting thevalidity of whatever portion of the statute that is








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not preempted. Tex. Prop. Code § 42.0021(a).

The fact that Section 42.0021 is preempted insofaras ERISA plans are concerned is universallyacknowledged. The question is how much of theremainder of the statute survives the preemption.The bankruptcy judge in In re Dyke, 99 B.R. 343(Bkrtcy S.D.Tex. 1989), acknowledgedpreemption of Section 42.0021 insofar as ERISAis concerned, but said that the preemption did notknock out the entire statute. The bankruptcy judgein In re Volpe, 100 B.R. 840 (Bkrtcy.W.D.Tex.1989), ruled that the preemption did not destroythe entire statute, and that a debtor’s profit sharingplan and IRA were exempt. The bankruptcy judgein In re Laxson, 102 B.R. 85 (Bkrtcy.N.D.Tex.1989), also ruled that IRA’s are exempt. Seegenerally In re Chadwick, 113 B.R. 540(Bkrtcy.W.D.Mo. 1990) (holding that ERISA doesnot apply to IRA’s so that no preemption ofKansas state exemptions for IRA’s occurred).

ii. ERISA Protection in Bankruptcy. The FifthCircuit Court of Appeals ruled that a Keough plancannot be exempt property in a bankruptcyproceeding, because it is a self-settled plan thatdoesn’t meet the traditional definition of aspendthrift trust. See In re Goff, 706 F.2d 574 (5thCir. 1983). In that same case, the Fifth Circuit alsostated that ERISA plans are not exempt propertyin bankruptcy.

This view of the Fifth Circuit has not beenuniversally accepted. A bankruptcy judge in theWestern District of Texas, in the case of In reKomet, 104 B.R. 799 (Bankr. Ct. W.D. Tex.1989), severely attacked the Fifth Circuit’sreasoning in In re Goff, concluding that an ERISAplan is exempt in bankruptcy. And in the case ofIn re Felts, 114 B.R. 131 (Bkrtcy.W.D.Tex. 1990),yet another Texas bankruptcy judge ruled thatERISA plans and IRA’s are exempt in bankruptcy.

However, another Texas bankruptcy judge, in thecase of In re Dyke, 99 B.R. 343 (Bkrtcy S.D.Tex.1989), ruled that ERISA plans are not exempt in

bankruptcy. To quote an Oklahoma bankruptcyjudge who ruled that ERISA plans cannot beexempt property in bankruptcy:

This issue has been considered by many courtsand the overwhelming majority including allUnited States Courts of Appeals that haveconsidered the question have held that debtor’sinterest in qualified ERISA plans are not exemptfrom the debtor’s estate under federal law asnonbankruptcy code federal exemptions. See Inre Graham, 726 F.2d 1268 (8th Cir. 1984); In reGolf, 706 F.2d 574 (5th Cir.1983); and In reLichstrahl, 750 F.2d 1488 (11th Cir.1985); In reDaniel, 771 F.2d 1352 (9th Cir.1985).

In re Brown, 95 B.R. 216, 219 (Bkrtcy.N.D.Okl.1989).

f. Rules of Marital Property Liability MayOffer Protection. A debtor need fall back on theprotections of the personal property exemptionstatute only if the property in question is subject tothe debt. If the creditor has a judgment againstonly the husband for a contractual claim, then thewife’s sole management community property andher separate property are not subject to seizure forthe claim, and would not be included in thecalculation of the $60,000.00 worth of familypersonalty that can be exempted.

D. Perfecting Liens & Abstracts of Judgment.An abstract of judgment is designed to create alien against the judgment debtor’s property and toprovide notice to subsequent purchasers andencumbrancers of the existence of the judgmentand the lien. Citicorp Real Estate, Inc. v. BanqueArabe Internationale D ‘ Invest issement , 747S.W.2d 926, 929 (Tex. App.--Dallas 1988, writdenied). Tex. Prop. Code § 52.003 requires anabstract of judgment to contain the followingseven elements: (1) the names of the plaintiff anddefendant; (2) the birth date and driver’s licensenumber of the defendant if available to the clerk orjustice; (3) the number of the suit in which thejudgment was rendered; (4) the defendant’s

















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address, or if the address is not shown in the suit,the nature of citation and the date and place ofservice of citation; (5) the date on which thejudgment was rendered; (6) the amount for whichthe judgment was rendered and the balance due;and (7) the rate of interest specified in thejudgment. It is the judgment creditor’sresponsibility to insure that the clerk abstracts thejudgment properly. Texas American Bank/ FortWorth, N.A. v. Southern Union Exploration Co.,714 S.W.2d 105, 107 (Tex. App.--Eastland 1986,writ ref d n.r.e.). Substantial compliance with thestatutory requirements is mandatory before ajudgment creditor’s lien will attach. Reynolds v.Kessler, 669 S.W.2d 801, 804-05 (Tex. App.--ElPaso 1984, no writ).

Compliance with the statutory requirements ismandatory before a judgment creditor’s lienattaches. Caruso v. Shropshire, 954 S.W.2d 115,116 (Tex. App.--San Antonio 1997, no pet.).Section 52.002 provides for the clerk of the courtto prepare the abstract upon request, and permitsthe attorney for the judgment creditor to preparethe abstract himself or herself, as long as it isverified.

E. Filing Judgment in Deed Records Office.Property Code Section 12.013 permits a certifiedcopy of a judgment to be filed with the deedrecord office. The issuing court can be of thisstate, or another state subject to the full faith andcredit clause of the U.S. Constitution, or of aforeign country subject to an act of Congress or atreaty. A judgment properly recorded in the propercounty is “notice to all persons of the existence ofthe instrument.” Tex. Prop. Code § 13.002.

IX. P R E - A N D P O S T - D I V O R C ETRANSFERS, TRO’S AND TEMPORARYINJUNCTIONS.

A. Actions to Take Prior to Filing. As explainedinfra, once divorce is filed, both parties becomesubject to a variety of restrictions on theirdisposition of marital property and establishment

of credit.

Two preparations for a spouse to consider beforefiling for divorce are withdrawing funds andprepaying bills. The spouse can withdraw enoughfunds to pay the retainer fees of counsel and anexpert, and to prepay important bills such as themortgage on a separate property house.

B. Transfers and Debts During Divorce.Section 6.707(a) of the Texas Family Codeprovides that a transfer of property by a spouse,occurring after a petition for divorce or annulmentis filed, is void with respect to the other spouse ifthe transfer was made with the intent to injure therights of the other spouse. The same conceptapplies to debts incurred by a spouse during thependency of a divorce or annulment. Id. at §6.707(b). However, a transfer or debt occurringunder such circumstances is not void if the persondealing with the spouse had no notice of the intentto injure the rights of the other spouse. Id. Section6.707(c) provides that the spouse seeking toinvalidate the transfer or debt has the burden toprove notice of intent to injure. Id. One wonderswhether that burden of proof is reversed if thethird party is in a fiduciary or confidentialrelationship with the complaining spouse.

C. Post-Filing Protection of Property from theOther Spouse. One matter of concern upon thefiling of a divorce is the possible damaging effectof the other spouse incurring debts which willhave to be awarded in the divorce. Practitionerswho fear this in a particular case frequently securea temporary restraining order to prohibit manydeleterious activities, including the incurring ofindebtedness. However, there are some self- helpmeasures that can be taken as well.

1. Reducing or Cutting Off Credit. If yourclient is concerned about the other spouse’spossible abuse of credit, consider advising theclient to reduce the risk of excessive charging, byplacing a telephone call or faxing a letter to theappropriate creditors, reducing the credit limits on





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all of the charge cards, and revoking the otherspouse’s charge privileges on cards like AmericanExpress that have no credit limit. Once a TRO isissued or standing orders go into effect, such anaction will be prohibited.

2. The TRO. Courts routinely grant upon requestan ex parte TRO prohibiting the other spouse fromincurring debts other than for necessary livingexpenses and in the ordinary course of business. Ifthe prohibition is violated, theoretically at least thecourt can punish the violation as a contemptuousact.

a. Family Code § 6.501. Section 6.501 of theTexas Family Code contains a list of the kinds ofcommands that can be contained in an ex partetemporary restraining order. Tex. Fam. Code§6.501. While the expending of funds ismentioned as behavior which can be precluded, nomention is made of prohibiting the incurring ofdebts, other than a prohibition against“encumbering” an asset. A bar againstencumbering property would prohibit pledging anasset but not incurring an unsecured debt.However, the list is non-exclusive.

b. The Form Book TRO. The State Bar of TexasFamily Law Practice Manual 2d. ed. (2008) Form4-3 suggests a paragraph for inclusion on the TROthat prohibits “[i]ncurring any indebtedness, otherthan legal expenses in connection with this suit,except as specifically authorized by this order.”The Manual also suggests another paragraphregarding the cutting off of credit, prohibiting aspouse from “Waking any action to terminate orlimit credit or charge cards in the name of [aspouse].” Id.

c. Standing Orders. The “standing orders” ofseveral venues around the state are designed toreplace TROs as a way of preserving the spouses’property during the divorce. For example, DallasCounty’s standing order prohibits the spousesfrom, among other actions: destroying, removing,concealing, encumbering, transferring, or

otherwise harming or reducing the value of thespouses’ property; damaging or destroyingtangible property or documents; selling,transferring, assigning, mortgaging, encumberingor alienating the spouses’ property; incurring anyindebtedness other than legal expenses; et al.

3. Temporary Injunctive Orders. The TexasFamily Practice Manual contains suggestedTemporary Orders which regulate the parties’ useof credit during the pendency of the divorce. Thesample temporary orders contain a bar against“[i]ncurring any indebtedness, other than legalexpenses in connection with this suit, except asspecifically authorized by this order.” Id. Aparagraph is suggested that prohibits a spousefrom terminating or limiting credit or charge cardsin the other spouse’s name. Id. The form laterpermits each spouse to incur indebtedness forreasonable attorney’s fees and expenses related tothe divorce, and reasonable and necessary livingexpenses. Id. The form also permits the spouseoperating a business to engage in acts reasonableand necessary to the conduct of the business. Id.The form temporary orders further providelanguage for allocating the responsibility ofpaying debts during the pendency of the divorce.Id.

4. Lis Pendens.

a. Filing and Cancelling Notice of Lis Pendens.Texas Property Code § 12.007 provides for lispendens. At common law, the mere pendency of alaw suit affecting title to land resulted in alltransactions in the land being subject to theoutcome of the suit. The Legislature supplantedthat rule with the lis pendens statute. Fannin Bankv. Blystone, 417 S.W.2d 502, 503 (Tex. Civ. App.--Waco, 1967), writ ref’d n.r.e., 424 S.W.2d 626(Tex. 1968). Under section 12.007, a party seekingaffirmative relief in an action involving title to realproperty can file with the county clerk a lispendens notice, identifying the suit and theproperty in question. This notice givesconstructive notice to all persons who thereafter




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acquire an interest in the land, making theirinterest subject to the outcome of the law suit.Prop. Code § 13.004; Cherokee Water Co. v.Advance Oil & Gas Co., 843 S.W.2d 132, 135(Tex. App.--Texarkana 1992, writ denied) (“Therule effectively prevents a grantee from being aninnocent purchaser”); Gene Hill Equip. Co. v.Merryman, 771 S.W.2d 207, 209 (Tex. App.--Austin 1989, no writ) (the underlying purpose ofa lis pendens is to put those interested in aparticular tract of land on inquiry as to the factsand issues involved the suit or action concerned).Under Prop. Code § 12.008, the lis pendens can becancelled by filing a motion in the court hearingthe action. The cancellation may be predicated ondepositing money in court, in the amount of thejudgment sought, plus interest, plus costs. If abond is given, it must be in twice the amount ofthe judgment sought, and have two acceptablesureties.

b. When to File. Most lawyers believe that thestandard temporary injunctive orders, whichprohibit either spouse from transferring assetsexcept for necessary living expenses, litigationcosts, and in the ordinary course of business, areadequate protection in a divorce. Consequently,few lawyers file lis pendens notices in divorce.Fortunately, few spouses make fraudulentconveyances of real property during divorce,especially when temporary orders prohibit suchtransfers. However, occasionally a spouse willmake a fraudulent conveyance of land, and thenthe issue arises of whether the other spouse’s rightor claim to the property is superior or inferior tothe third party now claiming title. If a lis pendensnotice of the divorce had been filed, there can beno basis for bona fide purchaser (BFP) status.There is little cost to filing a lis pendens notice ina divorce, and little chance of harm. Maybe weshould file them more often.

c. Management Rights and Presumptions. Ifno lis pendens is filed when a divorce is filed, anda spouse alienates community property, whetherthe alienation is subject to the divorce depends on

management rights to the property. In general,community property is subject to the “jointmanagement, control and disposition of thespouses unless the spouses provide otherwise bypower of attorney in writing or other agreement.”Jean v. Tyson-Jean, 118 S.W.3d 1, 9 (Tex. App.--Houston [14th Dist.] 2003, pet. denied).

According to Jean v. Tyson-Jean, “[t]o effectuatea valid conveyance, both spouses must necessarilybe joined in a transaction.” Id. at 5 (citing Cooperv. Texas Gulf Indus., Inc., 513 S.W.2d 200, 202(Tex.1974)). The Court of Appeals said:

In general, community property is subject to the“joint management, control and disposition ofthe spouses unless the spouses provide otherwiseby power of attorney in writing or otheragreement.” Tex. Fam.Code Ann. § 3.102(c)(Vernon 1998); In re McCloy, 296 F.3d at 373.To effectuate a valid conveyance, both spousesmust necessarily be joined in a transaction.Cooper, 513 S.W.2d at 202.

However, where community property is held inone spouse’s name only, there is a presumptionthat the property is sole-management communityproperty. Tex. Fam. Code § 3.104(a) (Vernon1998). Section 3.104 therefore trumps section3.102. Absent a showing of fraud or notice onthe part of persons dealing with the namedspouse, this sole-management presumptionprotects third parties who rely on the spouse’sauthority to deal with the property. Tex.Fam.Code Ann. § 3.104(b) (Vernon 1998); In reMcCloy, 296 F.3d at 373.

Jean v. Tyson-Jean, 118 S.W.3d 1, 5 (Tex. App.--Houston [14th Dist.] 2003, pet. denied).

d. Personal Property. Notice of lis pendensoperates only against real estate. What about theIRA’s, the 401K’ s, the brokerage accounts, andthe children’s trust accounts? Try sending thetemporary orders to the depository institutions,and see if they will put a “freeze” on the accounts.








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If not, ask the Court to order that communityproperty assets be placed under joint control,requiring both spouses to sign for a transfer.Alternatively, join the institutions as parties to thedivorce, and ask for injunctions prohibiting theremoval of funds and assets on deposit.

e. Is Divorce a Special Case? In Fannin Bank v.Blystone, 417 S.W.2d 502, 503 (Tex. Civ. App.--Waco, 1967), writ ref’d n.r.e., 424 S.W.2d 626(Tex. 1968), the court of appeals stated that, evenin the absence of a notice of lis pendens under thelis pendens statute, the Family Code provisionrelating to fraudulent transfers during a divorcegave lis pendens effect to the mere pendency of adivorce, so that persons who purchased property ata foreclosure sale under a deed of trust given bythe husband on community property, were onnotice of the divorce and were not protected fromthe wife’s claim of fraud that nullified the deed oftrust. The Supreme Court denied review, with aper curiam opinion noting evidence sufficient tosupport a finding that the purchaser at theforeclosure sale had actual notice of the wife’sinterest in the real estate which was in litigation,and that “[i]t is therefore unnecessary in this caseto determine whether the mere pendency of adivorce action renders compliance with article6640 unnecessary.” Thus, the court of appeals’language on that point is dictum. The court inFirst Southern Prop., Inc. v. Gregory, 538 S.W.2d454, 458 (Tex. Civ. App.--Houston [1st Dist.]1976, no writ), held that the mere pendency of adivorce action was not constructive notice ofwife’s rights.

X. DISCOVERY OF DEBTS IN A DIVORCE.In a depressed economy, ferreting-out liabilities isan important responsibility of the divorce lawyer.Even families with high levels of income havebeen damaged by the collapse in the value of realestate, which typically have a continuing debtservice requirement. In many instances, partners inthe investments have gone broke, leaving anincreased burden of debt service on the remainingpartners. The possibility of a bank or other

creditor taking a major portion of the family’sassets is a real concern in many cases.

In the present environment, it is extremelyimportant for the non “wheeling-dealing” spouseto identify all credit threats to the marital property.Obtain the paperwork from the transaction to seeif the non- investing spouse signed notes orguarantees. Determine which investments orbusiness transactions present a threat of tortliability as opposed to contractual liability.Contractual creditors of one spouse alone cannotreach the other spouse’s sole managementcommunity property. Tort creditors of one spousealone can reach all non-exempt communityproperty.

A. Inventory and Appraisement. Counsel willtypically want temporary orders requiring theother spouse to prepare and deliver an inventoryand appraisement of all debts. The opposingparty’s inventory should be a starting point, not anending point, for discovery regarding debts. TheTexas Family Practice Manual’s suggests thefollowing temporary order language relating to thepreparation of an inventory:

IT IS ORDERED that Petitioner and Respondentshall each (furnish to/exchange with) opposingcounsel (INCLUDE IF APPLICABLE: and filewith the Clerk of this Court) a sworn inventoryand appraisement, in the form and detailprescribed by the Texas Family Law PracticeManual, form 5-1, of all the separate andcommunity property owned by the parties. IT ISORDERED that the inventory be (furnishedto/exchange with) opposing counsel (INCLUDEIF APPLICABLE: and filed with the Clerk ofthe Court) by ______, 20___.

The Author, preferring to use his own format foran inventory, uses the following language instead:

It is ORDERED that each party shall prepareand exchange Sworn Inventories andAppraisements of all of the property owned by






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the parties, whether located within or withoutthe State of Texas, including property ownedjointly with, or held in trust by, third persons,and stating the names, addresses, telephonenumbers, and exact nature of ownershipbelonging to any such third person, and statingthe location of all such property, and stating aseparate value of each item of property, togetherwith a list of all debts and liabilities owed byeither party, showing the identity of the creditor,any identifying numbers for said debt, and theamount and frequency of payments due on each.Each party shall deliver a sworn inventory to theother party on or before 2009.

B. Interrogatories and Requests forProduction. The Texas Family Practice Manualcontains proposed interrogatories relating to debts.Id. at Form 543. Sample debt-related language toinclude in a request for production is set out in theManual at Form 5-22.

C. Credit Report. The Author will sometimesobtain a credit report on the client or opposingparty. Federal law imposes sanctions for impropercredit inquiries and the state law tort of invasionof privacy might be implicated, so that the prudentpractice is to secure written consent or a courtorder before obtaining a credit report. Theapplicable provisions of the Fair Credit ReportingAct should be complied with. See, e.g., 15U.S.C.A. § 1681b (Permissible purposes of creditreports).

XI. ASSESSING AND PROTECTINGAGAINST RISK IN A PROPERTYDIVISION.

A. Assessing Risk. To assess risk in a particularcase, you must engage in a risk assessmentprocess. There are several important factorsoperating here. First, risk is basically uncertain,so that you are estimating risk rather thancalculating risk. Second, you have neither thetime nor the money to eliminate all risk, so youallocate resources among different risks. If the

likelihood of harm is less, or if the degree of harmis less, then you will want to spend less of yourresources to reduce that risk, or mitigate thatdamage. The risk assessment process involvesidentifying risks, assessing the likelihood of eachrisk occurring, calculating the harm that may arise,putting safeguards in place, and maintaining thesesafeguards over time. In a divorce propertydivision, there can be the risk of loss of value ofan asset, or risk of loss of property to a creditor, orrisk that the opposing party may fail to performobligations created in the divorce settlement oraward.

B. Responding to Risk. The typical responsesto risk are: avoidance, transfer, mitigation, andacceptance.

1. Avoidance. You avoid risk primarily bystructuring the property division in such a way asto eliminate the risk, or have the other party bearthe risk.

2. Transfer. You can transfer risk to someoneelse, including the opposing spouse. This is thefunction of insurance. You can insure againstdefault resulting from death of the defaulting partyby purchasing life insurance on that party. Youcan also get a guarantor of the risk, whichtransfers the risk of non-performance to theguarantor. In a property division, you can try toarrange the division of assets and debts to put therisk as much as possible on the other party. If youare receiving a risky asset as part of the propertydivision, you can try to share the risk as much aspossible with the opposing party. An examplewould be unvested employee stock options. Thereis a risk that the employed spouse will leaveemployment before they vest, and lose all value.There is also the risk that the stock price will dropafter divorce and the options will no longer be “inthe money” before they expire, in which eventthey will end up having no value. If the employedspouse takes the options at the market value at thetime of divorce, that spouse is taking all the risk(and all the reward). If the options are divided if,


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as, and when received, the parties are sharing therisk.

3. Mitigation. You can mitigate risk by puttingsafeguards in place so that if the event occurs, thedamage is minimized. Taking collateral on anobligation is an example. Also, requiring yourclient’s consent before the opposing party canundertake risky behaviors would be another wayto mitigate risk.

4. Acceptance. You can also accept risk, or takesome corrective action to reduce risk to a levelyou can accept. Sometimes risk is offset with achance of reward, so that some risks may beattractive to assume because the chance of rewardoffsets the risk. If the transaction standing alonedoes not have enough potential reward to warrantthe risk, then perhaps something can be done toenhance the reward. Reducing risk to anacceptable level might involve structuring thearrangement in a way that the opposing partytakes a greater share of the risk.

C. Creditors’ Claims. When handling divorcesin a depressed economy, the allocation ofresponsibility to pay debts can be as important asdividing assets.

1. Collateralized Debt. Where a debt is securedby a marital asset, the better choice is usually toaward the debt to the party receiving the collateral.That way the desire to continue to own thecollateral provides an incentive for the partyreceiving the collateral to pay the debt. Awardingthe collateral to one spouse and the debt to theother eliminates that incentive. Furthermore,separating the debt from the asset also creates asituation where post-divorce litigation may berequired, with its attendant costs and delays. Theseparation of debt from collateral can also result inan ex post facto change in the property division.Take for example a car worth $25,000 that issubject to a $25,000 debt. If the car is awarded tothe wife and the debt to the husband, the wifereceives a plus $25,000 on her side of the ledger

while the husband receives a negative $25,000 onhis side of the ledger. As a result, the wife gets thecar in lieu of $25,000 of other property and thehusband gets $25,000 more property to offset thedebt he is assuming. If the husband defaults onpayments after the divorce, and the loan companyrepossesses the car in discharge of the debt, it endsup that the wife had no plus $25,000 and thehusband had no minus $25,000 in the propertydivision, which throws the property division out ofbalance after it is too late to do anything about it.If the ex-wife sues the ex-husband and gets ajudgment which she can then collect on, thenmaybe she’ll be made whole. But the cost ofcollection and the hassle of litigating may not berecovered, in which event the ex-wife would havebeen better off to let the default go unpunished.Instead of that arrangement, it would be better forthe wife if at the time of the divorce, she took thecar and the debt on the car, which would be on herledger as a net zero, and would not reduce theamount of other property she received in thedivorce.

2. Uncollateralized Debt. If the debt is notcollateralized, then the creditor may choose tomove against any non-exempt communityproperty that is subject to that type of creditor’sclaim. See the discussion of “marital propertyliability” in Section VI. In a property division, thenon-debtor spouse would want to receive assetsthat are exempt from creditors’ claims, or assetsthat are not subject to marital property liability forthat claim.

3. Personal Liability. As discussed in Section Vabove, it is very important to determine whetheryour client is personally liable on a debt. If not,then the maximum exposure for your client is theloss of joint management community property orthe sole management community property andseparate property of the liable spouse that isawarded to your client in the divorce. If yourclient is personally liable on the debt, then it canbe collected out of all non-exempt property thatyour client may receive in the divorce or acquire


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after the divorce.

4. Contingent Liability. Contingent liabilities(such as personal guarantees) may not be due atthe time of divorce. The opposing party may takethe position that the liability, being contingent, isnot to be considered. If the case is settled on thatbasis, and the contingent liability is later triggered,then the property division is ex post facto alteredby the amount that the spouse must pay on thecontingent claim. A good response to a claim thata contingent liability is not real is for the spouseclaiming that to indemnify the liable spouse, justin case the contingent liability is triggered. If theother spouse won’t share that risk, then the claimof “no risk” is a hollow one.

5. Indemnification. If debts are awarded toSpouse #1 in a divorce, Spouse #2 can attempt toget an indemnity from Spouse #1 in case thecreditors come against Spouse #2. If the indemnityis uncollateralized, it is not worth much, as theindemnity will trigger only after the indemnifyingspouse has defaulted on paying the debt, so thatthe indemnifying spouse would probably be tryingto enforce the indemnity against a judgment-proofex-spouse. If the indemnity is collateralized, itprovides an incentive for the indemnifying spouseto pay the debts, to avoid repossession orforeclosure by the indemnified spouse.

D. Other Risks in a Property Division.

1. Performance Risk. Performance risk is therisk that the other party will not perform theirobligations under the Agreement Incident toDivorce and Decree of Divorce. If the obligationis to pay interest or principal, pay alimony, or payoff a debt owed to a third party, the risk is called“credit risk” or “default risk.” This type of risk isameliorated by structuring the divorce settlementto add incentives to performance, such as rewardsand/or penalties. The obligation can also bycollateralized or guaranteed by third partes orentities. The possibility of bankruptcy can beprotected against by (i) collateralizing the

obligation; or (ii) expressing the obligations as anon-dischargeable claim (like child support oralimony).

2. Inflation Risk. “Inflation Risk” is the risk thatgeneral increases in prices of goods and serviceswill reduce the value of money you are to be paidin the future. One way to avoid this inflation riskis to purchase is to include an inflation adjustmentin the obligation, so that the principal and interestkeep pace with inflation. For example, the amountof the principal balance of a note could beadjusted in keeping with changes in the ConsumerPrice Index, or Implicit Price Deflator. If theobligation is an alimony obligation, the alimonycould change as the inflation index changes. SeePart II of this Article, Section VI.A.13. If the rateused in a promissory note is taken from marketrates, an inflation premium will already be builtinto the market interest rate. An “inflationpremium” is the portion of the interest rate that isattributable solely to expected increases in thegeneral price level of goods and services.

3. Liquidity Risk. In the context of the presentdiscussion, “liquidity risk” is the risk of not beingable to liquidate the obligation in question quicklyfor a price that reflects the true intrinsic value ofthe asset. An alimony stream is not transferrable,but a promissory note is. The liquidity risk intaking a long-term promissory note from theopposing party in a divorce is the risk that theobligee may develop a need to cash that requireshim/her to sell the note at a discount for cash.Recognizing the liquidity risk leads to the idea ofa “liquidity premium,” which is an additionalcomponent added to the interest rate tocompensate for that risk.

XII. HANDLING DEBTS IN A DIVORCE.The following thoughts are offered on thehandling of debts in a divorce.

A. Marshalling Assets. Section 3.202 of theTexas Family Code provides a procedure for acourt to determine the order in which community


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and separate property will be subject to executionto satisfy a judgment. Tex. Fam. Code § 3.202.The standard is “just and equitable.” The court isdirected to consider the “facts surrounding thetransaction or occurrence” giving rise to theliability. One spouse could trigger this process ofpaying debts in a divorce.

B. Secure Interspousal Payments by Lien.Every divorce attorney contemplating a situationwhere the client is to receive payments from theother spouse in the future should considerobtaining a lien to secure the promise.

1. If Case is Settled. In McGoodwin v.McGoodwin, 671 S.W.2d 880 (Tex. 1984), theSupreme Court held that where the husband agreesto pay money to the wife in consideration of herinterest in a piece of property, and that promise isincluded in an agreement incident to divorce, animplied vendor’s lien arises from the agreement,such that the wife can foreclose on a one-halfinterest in the property despite the husband’sassertion of homestead protection. However, itwould be better to retain a vendor’s lien in thedeed between spouses, and to secure signed deedsof trust on all real estate that is to be used ascollateral.

2. If Case is Tried. A divorce court can securesuch a money judgment by an equitable lien inproperty awarded to the obligor spouse. Anequitable lien is different from the judgment lienwhich arises upon the filing of an abstract ofjudgment. An equitable lien is created by virtue ofa declaration contained in the decree of divorce. InHanson v. Hanson, 672 S.W.2d 274 (Tex. App.--Houston [14th Dist.] 1984, writ dism’d), the courtof appeals said that a trial court should providesecurity for money judgments granted to achievean equitable division of the community estate, soas to protect the receiving party “fromuncertainties such as bankruptcy, concealment,and use of assets, which could work to deprive theparty of his share of the community estate.” Id. at279. However, several courts have declined to

reverse for the failure to impose an equitable lienin a divorce. See Wren v. Wren, 702 S.W.2d 250(Tex. App.--Houston [1st Dist.] 1985, writdism’d); Wisdom v. Wisdom, 575 S.W.2d 124(Tex. Civ. App.--Forth Worth 1978, writ dism’d);Goldberg v. Goldberg, 392 S.W.2d 168 (Tex. Civ.App.--Fort Worth 1965, no writ).

A question arises as to whether the court can affixan equitable lien in homestead. Cases suggest thatthe court can affix a lien in the homestead tosecure: reimbursement for community funds spentin payment of a purchase money lien against theproperty, Day v. Day, 610 S.W.2d 19 (Tex. Civ.App.--Tyler 1980, no writ); a money judgment tothe husband for his leasehold interest in the wife’sseparate residence, Buchan v. Buchan, 592 S.W.2d367 (Tex. Civ. App.--Tyler 1980, writ dism’d); anamount awarded the other spouse for his or herhomestead interest in the property, Wierzchula v.Wierzchula, 623 S.W.2d 730, 732 (Tex. Civ.App.--Houston [1st Dist.] 1981, no writ). Somecases have said that a lien should not be affixed inhomestead to secure a money judgment notspecifically referable to the homestead. See Wrenv. Wren, 702 S.W.2d 250 (Tex. App.--Houston[1st Dist.] 1985, writ dism’d); Wierzchula, supraat 732 (lien is permissible only to secure paymentof a sum awarded for the other spouse’shomestead interest).

There is some doubt whether a judgment given toachieve an equitable division of the communityestate can be secured by an equitable lien in aspouse’s separate property. Duke v. Duke, 605S.W.2d 408 (Tex. Civ. App.--El Paso 1980, writdism’d), held that ordering a spouse to execute adeed of trust in his separate property to secure apromissory note granted to the other spouseviolated the proscription of Eggemeyer againstdivestiture of separate property. By extension thesame reasoning would apply to a court-orderedequitable lien. The case of Smith v. Smith, 715S.W.2d 154 (Tex. App.--Texarkana 1986, nowrit), supports this proposition to the extent thatthe court of appeals would permit a lien in a















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spouse’s separate property only to secure a claimfor reimbursement relating to the property putunder lien. However, several other courts ofappeals have held that imposing such a lien onseparate property does not violate Eggemeyer. SeeMullins v. Mullins, 785 S.W.2d 5 (Tex. App.--FortWorth 1990, no writ); Buchan v. Buchan, 592S.W.2d 367, 371 (Tex. Civ. App.--Tyler 1980,writ dism’d); Wisdom v. Wisdom, 575 S.W.2d124, 125-26 (Tex. Civ. App.--Fort Worth 1979,writ dism’d).

3. Dischargeability In Bankruptcy. 11 U.S.C.§523(a)(5) of the federal Bankruptcy Codeexcepts from discharge debts owed “to a spouse,former spouse, or child of the debtor, for alimonyto, maintenance for, or support of such spouse orsuch spouse and child, in connection with aseparation agreement, divorce decree, or propertysettlement agreement . . . .” The Fifth CircuitCourt of Appeals long ago established thatpayments to be made after the divorce by onespouse to another can be non- dischargeablealimony in bankruptcy. In re Nunnally, 506 F.2d1024 (5th Cir. 1975).

When the dischargeability of such an obligationarises in bankruptcy, the bankruptcy court must“determine the true nature of the debt, regardlessof the characterization placed on it by the parties’agreement or the state court proceeding.” In reBenich, 811 F.2d 943, 945 (5th Cir. 1987). Thebankruptcy court hears extrinsic evidence on thepoint. The burden is on the person assertingnondischargeability to prove it. In Benich, thehusband’s obligation in the agreement incident todivorce to pay the wife $ 725.00 per month forthree months and then $ 400.00 per month for lifeor until remarriage was found by the bankruptcyjudge to be nondischargeable, and this finding wasaffirmed by the Fifth Circuit. In the case of In reSmith, 97 B.R. 326 (Bkrtcy.N.D.Tex. 1989), aformer husband’s obligation under an AgreementIncident to Divorce to pay off a $ 130,000.00promissory note to the former wife over twentyyears was deemed to be nondischargeable

alimony. In the case of In re Pattie, 112 B.R. 437(Bkrtcy.M.D.Fla. 1990), a $ 250,000.00 lump sumpayment ordered in the divorce “to effect equitabledistribution and as a lump sum alimony payment”was held to be dischargeable. The Court in Pattielisted ten different factors to consider indetermining whether an obligation is for supportor property division.

C. Duty to Pay Debts Owed to Third Partiesand to Indemnify the Other Spouse. Thefollowing considerations arise in connection withpromises or obligations by one spouse to pay afterthe divorce, debts owed to third parties, and tohold the other spouse harmless from those debts.

1. Form Book: Indemnification for ListedDebts. The sample decree of divorce in the TexasFamily Law Practice Manual, Form 17-1, awardsdebts to each party, and provides that the partymade responsible for debts and obligations “shallindemnify and hold [the other] harmless from anyfailure to so discharge these debts andobligations.” Similar indemnification in Form17-6. It is important to remember that anindemnification obligation is performable in thefuture, just like a promissory note. The very samefactors that might lead to the granting of collateralor security for a promissory note exist inconnection with an indemnification obligation. InStapler v. Stapler, 720 S.W.2d 271 (Tex. App.--Fort Worth 1986, no writ), the court of appealsfound that in an agreed divorce the award of landto the former wife was dependent upon the formerwife’s paying certain unrelated debts, and that animplied vendor’s lien in the land arose in favor ofthe former husband to secure the former wife’sobligation to pay unrelated debts. The ex-husbandwas allowed to foreclose on the land to collect hisjudgment for damages caused by the ex-wife’sfailure to pay the debts.

2. Form Book: Indemnification for UnlistedDebts. The sample agreement incident to divorcein the Texas Family Practice Manual, Form 17-6,requires each party to indemnify the other for













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debts, obligations, or other liabilities incurred bysuch party not described in the agreement incidentto divorce. The indemnification obligationincludes the duty to pay any loss, cost, expense,penalty, or other damages, such as counsel feesand expenses of investigation, etc. Thisindemnification obligation applies only to debtsand obligations not described in the agreement. Ifthe obligation is specifically assigned to a spouse,then the indemnification language in the award ofdebts would apply. It should be noted that theform decree of divorce does not contain anequivalent indemnification clause for undiscloseddebts.

3. Dischargeability in Bankruptcy of Duty toPay Creditors and Hold Other SpouseHarmless. The same standards of determining thedischargeability of a payment between spousesapplies to an obligation of a spouse to paycreditors of jointly-owed debts, and to hold theother spouse harmless therefrom. If the obligationis in the nature of support of the other spouse orchildren, it is not dischargeable in bankruptcy. Ifthe promise is in the nature of property division, itis dischargeable. See In re Calhoun, 715 F.2d1103 (6th Cir. 1983). The fact that the obligationis to pay third parties rather than the ex-spouse isof no consequence. Id at 1107. Accord, In re Coil,680 F.2d 1170 (7th Cir. 1982); In re Williams, 703F.2d 1055 (8th Cir. 1983); Draper v. Draper, 790F.2d 52 (8th Cir. 1986); Stout v. Prussel, 691 F.2d859 (9th Cir. 1982); In re Goin, 808 F.2d 1391(10th Cir. 1987).

In the case of In re Gianakas, 112 B.R. 737(W.D.Pa. 1990), the federal district judge affirmeda bankruptcy judge’s ruling that a formerhusband’s promise, in the agreement incident todivorce, to pay the second lien mortgage on thehome awarded to the former wife in the divorce,was nondischargeable support. In the case of In reRobinson, 113 B.R. 687 (D.Colo. 1990), abankruptcy judge ruled that the former husband’sdivorce-time promise to pay the second lien on thehome awarded to the former wife was in the nature

of support and would be non-dischargeable.However, the former wife had refinanced the debt,and the bankruptcy judge ruled that in doing soshe extinguished the debt the former husband wasobligated to pay. On appeal, the federal districtjudge affirmed the finding that the obligation wasin the nature of support and thereforenon-dischargeable, but reversed as to theextinguishment of the debt, holding that theformer husband had a non- dischargeableobligation to pay the refinanced loan.

In In re Woods, 561 F.2d 27 (7th Cir. 1977), anindemnification obligation running from theex-husband to the ex-wife as to debts owed tothird parties was discharged in the ex-husband’slater bankruptcy, as being part of the propertysettlement and not support for the ex-wife. InSmith v. Smith, 595 S.W.2d 631 (Tex. Civ. App.--Fort Worth 1980, no writ), the former husbandfailed to list his ex-wife as a creditor in hisbankruptcy, so that after the bankruptcy wasconcluded she was able to recover a judgmentagainst him for breaching his promise to pay debtsowed to third parties.

An obligation to pay creditors was discharged inIn re Cline, 114 B.R. 665 (Bkrtcy.D.Neb. 1990).

D. Tax Liability. Each spouse is liable forincome and social security and medicare taxes onhis or her income. In community property states,like Texas, an additional complication sets in. Aspouse in a community property state owns onlyone-half of his/her community income, and alsoowns one-half of the other spouse’s communityincome. If the spouses file separate returns, eachspouse must report one-half of his income, andone-half of the other spouse’s income. Eachspouse will be personally liable for the tax liabilityon one-half of the community income, and on anyof the spouse’s separate property income. If thespouses file a joint return, then all income will becombined into one figure, and each spouse whosigns the joint return will be personally liable forall taxes owed on all income reported on the tax

















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return. A spouse, by signing a joint return, makeshimself/herself personally liable for payment ofthe other spouse’s tax liability.

E. Partition Agreement Versus AgreementIncident to Divorce. As discussed in SectionVIII.A above, the rights of creditors to collectdebts from available assets are not impaired by adivorce and property division. Thus, an agreementincident to divorce may be seen as being subject tothe rights of creditors. On the other hand, TexasConstitution article XVI, section 15, provides thatspouses can partition or exchange their communityproperty into separate portions, if this is donewithout the intent to defraud preexisting creditors.See also Tex. Fam. Code § 4.106 (partitions orexchanges void as to creditors who are defraudedthereby). Can a divorce be settled with a partitionagreement instead of an agreement incident todivorce, and have the better protection affordedpartitions under the Texas Constitution?9

F. Use of Assets to Pay Debts. The parties mayagree that assets will be liquidated and used to paydebts. The divorce court also can order this.However, the court cannot require spouses toliquidate property which is exempt from theclaims of creditors and require them to use thismoney to pay unsecured creditors. Delaney v.Delaney, 562 S.W.2d 494 (Tex. Civ. App.--Houston [14th Dist.] 1978, writ dism’d); Klein v.Klein, 370 S.W.2d 769 (Tex. Civ. App.--Eastland1963, no writ).

Where cash is going to be used to pay debts, orassets liquidated and the proceeds used to paydebts, cautious lawyers will want to assure that themoney or assets targeted for this purpose are infact used for this purpose. As to cash, require thatit be paid at or before the decree of divorce issigned by the Court, or put it in a trust account orjoint account requiring two signatures. As to assetsto be liquidated, either put title in escrow or makethe spouses joint payees, so that one spouse cannotmisdirect the proceeds.

XIII. CREDITORS’ REMEDIES.

A. Fraudulent Transfers. In 1987 the TexasLegislature enacted the Uniform FraudulentTransfer Act, replacing an older Texas statute onthe subject. The Uniform Fraudulent Transfer Actis contained in Chapter 24 of the Texas Businessand Commerce Code. It is similar in concept toprior law, but different in various details.

1. Fraudulent Conveyance Can Be Set Aside.Under Section 24.008, a creditor can obtain “anavoidance” of a fraudulent transfer or obligation,to the extent necessary for the creditor to satisfyhis claim. The creditor can secure an attachment orother provisional remedy against the assettransferred. And the creditor can obtain aninjunction to stop further attempts to convey orencumber the property in question, or theappointment of a receiver to take charge of theasset in question or even other property of thetransferee, or “other relief the circumstancesrequire.” Where the creditor has obtained ajudgment against the debtor, the creditor levyexecution on the transferred asset or its proceeds.Tex. Bus. & Com. Code § 24.008.

2. When Can This Be Done? Relief from afraudulent transfer is afforded under Section24.005 and also section 24.006 of the TexasBusiness and Commerce Code.

a. Section 24.005 Transfers. Under Section24.005 of the Texas Business and CommerceCode, a transfer made, or obligation incurred, bya debtor is fraudulent as to a present or futurecreditor, if the debtor made the transfer or incurredthe obligation:

(1) with actual intent to hinder, delay, or defraudany creditor of the debtor; or

(2) without receiving a reasonably equivalent




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value5 in exchange for the transfer or obligation,and the debtor was: (i) engaged or about to engagein an undercapitalized business or transaction; or(ii) intended to incur, or believed that he wouldincur, debts beyond his ability to pay as theybecome due.

Tex. Bus. & Comm. Code § 24.005(a). Section24.005(b) lists (non-exclusively) eleven factorsthat can be considered in determining the actualintent of the debtor. They include:

! whether the transaction was with an“insider”

! whether the debtor retained possession orcontrol of the property transferred

! whether the transaction was concealed

! whether the transfer was of substantiallyall of the debtor’s assets

! whether what was received was reasonablyequivalent to what was given up

! whether the debtor was insolvent orbecame insolvent shortly after the

transaction

b. Section 24.006 Transfers. Under Section24.006 of the Business and Commerce Code, atransfer made, or obligation incurred, by a debtoris fraudulent as to a creditor whose claim arosebefore the transfer was made or obligationincurred, if:

(a) the debtor made the transfer or incurred theobligation without receiving a reasonablyequivalent value in exchange for the transfer orobligation, and the debtor was insolvent6 at thattime or the debtor became insolvent as a resultof the transaction;

(b) the transfer was made to an insider7 for anantecedent debt, the debtor was insolvent at thattime, and the insider had reasonable cause tobelieve that the debtor was insolvent.

Tex. Bus. & Com. Code § 24.006.

3. Spouses and Children as Creditors. Casesinterpreting prior law acknowledged spouses ascreditors who could invoke the powers of theprevious fraudulent conveyance statute. See

5 Various concepts of “value” and “reasonablyequivalent value” are described in Section 24.004(b).For example, Section 24.004(a) concedes that value isreceived where property is transferred or a preexistingdebt is secured or a pre-existing debt is satisfied in thetransaction under attack. However, value does notinclude an unperformed promise made outside theordinary course of the prommisor’s’s business tofurnish support to the debtor or another person. Section24.004(b) provides that a reasonably equivalent valueis given if a third party acquires the debtor’s interest inthe asset pursuant to a regularly conducted,noncollusive foreclosure sale, based upon default undera mortgage, deed of trust, or security agreement.Section 24.004(d) provides that “reasonably equivalentvalue” includes a transfer or obligation that is “withinthe range of value for which the transferor would havewilfully sold the assets in an arms length transaction.”

6 Insolvency is discussed in Section 24.003. A debtor isinsolvent if the sum of the debtor’s debts is greater thanall of the debtor’s assets at a fair valuation. “Assets”does not include assets that were transferred in afraudulent transfer. “Debts” does not include securedobligations to the extent they are secured by valid lienin property not included as an “asset.” A debtor who isgenerally not able to pay his debts as they come due ispresumed to be insolvent. Tex. Bus. & Comm. Code §24.003.

7 “Insider” is defined in Section 24.002(7). If the debtoris a person, “insiders” include relatives, or partnershipsor corporations owned or managed by the debtor. If thedebtor is a corporation, “insiders” include officers,directors, or persons in control. If the debtor is apartnership, “insiders” include a general partner, orrelative of a general partner, or affiliated business.


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Orsinger, Intra and Inter Family Transactions,State Bar of Texas Advanced Family Law CourseJ-19 (1983). Chapter 24 of the Business &Commerce Code (the Uniform FraudulentTransfer Act) now governs these transactions.This Act can be used by creditors to set asidetransfers in fraud of the creditors’ rights.

A spouse is considered to be a creditor.§24.002(4). A transfer (or obligation incurred) isfraudulent as to a creditor whose claim arosebefore the transfer, or within a reasonable timethereafter, where the transaction was done “withactual intent to hinder, delay, or defraud anycreditor of the debtor.” The statute prescribes a listof factors to consider in determining actual intent,including whether the recipient was an insider,whether the transferor retained control, whetherthe transfer included most of the debtor’s assets,and the like. A transfer (or obligation incurred) isalso fraudulent as to a creditor whose claim arosebefore the transfer or obligation arose if (a) thedebtor was insolvent, at the time or as a result ofthe transaction, and the debtor did not receive areasonably equivalent value in exchange for thetransaction, or (b) the transfer was by an insolventcreditor to an insider in discharge of an antecedentdebt, where the insider had reasonable cause tosuspect involvency. Id. § 24.006. A creditor whosucceeds in a fraudulent transfer suit can set asidethe transfer, obtain an injunction, have a receiverappointed, and more. Id. § 24.008.

The present statute explicitly lists “a spouse,minor, or ward, who has a claim.” Tex. Bus. &Com. Code Ann. § 24.002(4). Additionally, theterm “claim” as used in the statute includes a rightto property. Tex. Bus. & Comm. Code Ann. §24.002(3). A spouse, minor, or ward has a speciallimitation period. An action under section 24.005(intent to hinder, delay or defraud) or 24.006(a)(transfer by insolvent debtor) must be broughtwithin two years after the cause of action accrues,or if later, within one year after the transfer orobligation was or could reasonably have beendiscovered by the claimant. An action under

Section 24.006(b) (transfer by insolvent debtor toinsider for antecedent debt) must be broughtwithin one year after the date the transfer wasmade. Id. § 24.010.

See Jackson Law Office v. Chappell, 37 S.W.3d 15(Tex. App.--Tyler 2000, pet. denied) (transfers bydebtor to mother and former lover werefraudulent); Putman Pension Plan v. Stephenson,805 S.W.2d 16 (Tex. App.--Dallas 1991, no writ)(debtor’s transfer of community property to hisown pension plan was fraudulent).

B. Secured Property. Chapter 9 of the TexasBusiness and Commerce Code governs the use ofpersonal property as security for indebtedness.Section 9.109 describes the scope of Chapter 9,and includes “a transaction, regardless of its form,that creates a security interest in personal propertyor fixtures by contract....” Perfection of a securityinterest in chattel paper, deposit accounts,documents, and goods covered by documents,instruments, investment property, letter-of-creditrights, and money; perfection by permissive filing;temporary perfection without filing or transfer ofpossession are governed by Section 9.312, andrequire control of the collateral. Under Section9.104, a deposit account is under control of thesecured party if, among other things, the debtor,secured party, and bank have agreed in anauthenticated record that the bank will complywith instructions originated by the secured partydirecting disposition of the funds in the depositaccount without further consent by the debtor.

C. Setoff. In some circumstance, banks have aright of “setoff,” which is the common law right ofa lender to seize a debtor’s deposits with thatlender for non-payment of an obligation. Thus, ifa debtor with $1,000 in deposit at a bank defaultson a $500 note owed to that bank, the bank mayseize $500 from the funds the debtor has ondeposit to set off the obligation owed. Oneimportant limitation to the right of set-off is theTruth in Lending Act, which prohibits set-off insome consumer credit transactions.




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If your client has an unsecured bank loan, as wellas community and separate property on deposit atthe bank, have them withdraw the separate fundsfrom the bank, so the set-off can only be exercisedagainst community property funds.

D. Turnover Proceedings. Civil Practice andRemedies Code Section 31.002 gives the court thepower to assist collection of a judgment throughcourt proceedings. This remedy is available wherethe property of the judgment debtor cannot readilybe attached through ordinary legal process, andthe property is not exempt. The exclusion ofexempt property does not apply to enforcement ofa child support obligation. Id. § 31.002(f). Thecourt can issue a turnover order, appoint a receiverto sell the property, and enforce by contempt arefusal to obey. The creditor can also recoverattorneys’ fees. Id. §31.002(e).

Courts of appeals have disagreed whether aturnover order can be directed to third partiesholding property for a judgment creditor.Compare Parks v. Parker, 957 S.W.2d 666,668-69 (Tex. App.--Austin 1997, no pet.) (cannotissue order against third party); Cross, Kiesch-nick& Co. v. Johnston, 892 S.W.2d 435, 439 (Tex.App.--San Antonio 1994, no writ) (improper toissue turnover order against non judgment debtor);with Lozano v. Lozano, 975 S.W.2d 63, 68 (Tex.App.--Houston [14th Dist.] 1998, pet. denied)(turnover statute allows a court to reach assetsowned by and subject to control of a judgmentdebtor, even in the hands of a third party); Dale v.Finance Am. Corp., 929 S.W.2d 495, 498 (Tex.App.--Fort Worth 1996, no writ) (turnover ordercan be issued to third party holding property underthe control of the judgment debtor); Plaza Court,Ltd. v. West, 879 S.W.2d 271, 277 (Tex. App.--Houston [14th Dist.] 1994, no writ) (court, indicta, said that turnover statute can be broughtagainst a non-judgment creditor if the property issubject to the possession or control of thejudgment debtor).

E. Other Remedies. Creditors may also seek

other remedies, such as foreclosing on real estate,hiring a debt collection agency, or filing anadverse claim with a credit reporting agency.

XIV. C R E A T I O N O F E N T I T I E S .Corporations and partnerships have certainfeatures which affect what funds creditors canaccess.

A. Corporations. Since a corporation has aseparate legal identity from the shareholders, allassets of a corporation belong to the corporationand not the shareholder. Legrand-Brock v. Brock,246 S.W.3d 318, 322 (Tex. App.--Beaumont2008, pet. denied) (citing Bryan v. Sturgis Nat'lBank, 40 Tex. Civ. App. 307, 90 S.W. 704, 705(Tex. Civ. App. 1905, writ ref'd) (“Theaccumulated earnings or surplus funds of acorporation constitute a part of its assets, andbelong to the corporation, and not to thestockholders, until they have been declared and setapart as dividends.”). TBCA art. 4.01B providesthat a shareholder has no vested right resultingfrom the articles of incorporation.

One of the signature qualities of a corporation isthat shareholders are not liable for corporate debts.However, shareholders can be held liable forcorporate debts under the equitable doctrine of"piercing the corporate veil." See Castleberry v.Branscum, 721 S.W.2d 270 (Tex. 1986). Theholding in Castleberry, that a complaining partymay show either actual or constructive fraud inorder to prove that a corporation had been used asa sham to perpetrate a fraud, has been limited byTBCA art. 2.21A(1) & (2) as to contract creditors,effective August 28, 1989. Piercing the corporateveil based on "failure of the corporation to observeany corporate formality" has been eliminated as toany "obligation of the corporation." Id. The statutehas been held to be retroactive. Farr v. Sun WorldSav. Ass'n, 810 S.W.2d 294, 296 (Tex. App.--ElPaso 1991, no pet.). The effect, if any, ofCastleberry and Article 2.21A on piercing thecorporate veil in divorce proceedings is still beingworked out.









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B. Partnerships. Some of the Texas maritalproperty cases involving partnerships weredecided at a time when Texas followed theaggregate theory of partnership. On January 1,1962, it is said that TUPA ushered the entitytheory of partnership into Texas. TUPA wasreplaced effective January 1, 1994, by TRPA. Theholdings and analysis in Texas cases involvingpartnerships and marital property law should beconsidered in the context of the common law orpartnership statute that governed the case. Forexample, the significant Texas Supreme Courtcase of Norris v. Vaughn, 152 Tex. 491, 260S.W.2d 676 (1953), was decided before TUPA.

The normal rules of marital property governwhether a partnership interest is separate orcommunity property at the time it is acquired. SeeIn re Marriage of Higley, 575 S.W.2d 432 (Tex.Civ. App.--Amarillo 1978, no writ) (partnershipinterest acquired prior to marriage was separateproperty); Horlock v. Horlock, 593 S.W. 2d 743(Tex. Civ. App.--Houston [1st Dist.] 1980, writref'd n.r.e.) (limited partnership interest acquiredby husband after divorce was his separateproperty); York v. York, 678 S.W.2d 110 (Tex.App.--El Paso 1984, writ ref'd n.r.e.) (partnershipinterest acquired during marriage deemed to becommunity property).

The Texas Revised Partnership Act establishesthat specific partnership assets do not belong to aspouse. TRPA art. 5.01. They therefore are neitherseparate nor community property. A court in adivorce cannot award specific partnership propertyto either spouse. McKnight v. McKnight, 543S.W.2d 863, 867-68 (Tex. 1976).

XV. HEALTH CARE COVERAGE.

A. Private Health Insurance. The major sourceof health insurance for clients not covered byMedicare is private employer-sponsored grouphealth insurance. Private health insurance can bepurchased on an individual basis, but typically itcosts more and covers less. A good summary of

health insurance for Texas residents is AConsumer’s Guide to Getting and Keeping HealthInsurance in Texas on the web at <http://www.healthinsuranceinfo.net/statecoverageguides/TexasHealthInsuranceGuide.pdf>.

B. COBRA. The Consolidated Omnibus BudgetReconciliation Act of 1986 (COBRA) amendedERISA to require private employee benefits plans(for 20 or more employees) to permit employeesand their dependents, at their own expense, tocontinue group health care benefits if they leavethe group due to a “qualifying event.” “Qualifyingevents” include loss of benefits coverage due to(1) the death of the covered employee, (2) areduction in hours that causes the worker to loseeligibility for coverage, (3) divorce, whichnormally terminates the ex-spouse’s eligibility forbenefits, or (4) a dependent child reaching the ageat which coverage terminates. <http://www.dol.gov/dol/topic /health-plans/cobra.htm>. Where thequalifying event is divorce, coverage can becontinued for up to 36 months. <http://www.dol.goviebsa/faqs/faq _consumer_cobra.ht ml>.

C. HIPAA. The Health Insurance Portability andAccountability Act of 1996 (HIPAA) contains“portability rules” that allow workers to changejobs and group health plans more easily withoutbeing denied benefits under the new health planbecause they had a pre-existing health condition.

D. Texas’ High Risk Health Insurance Pool.Texas has a high risk pool health insuranceprogram, called the Texas Health Insurance RiskPool. This plan offers health coverage for personswho are HIPAA eligible and for people withexpensive health conditions who are unable to buyindividual coverage. You qualify for the Risk Poolif you are HIPAA eligible. More explanation is setout in A Consumer’s Guide to Getting andKeeping Health Insurance in Texas,<http://www.healthinsuranceinfo.net/statecoverageguides/TexasHealthInsuranceGuide.pdf>.

XVI. U N D O I N G T R A N S F E R S I N









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BANKRUPTCY. There are a number of differentsituations where a court in bankruptcy can undoprior transfers, or invalidate liens. The matter isonly touched on here, with a caveat to the readerthat there is complexity and controversy in thisarea of the law. Cases barring bankruptcydischarge because of this kind of activity areincluded, for good measure.

A. Preferences. Section 547 of the federalBankruptcy Code (11 U.S.C. § 547) relates topreferential transfers made by a debtor shortlybefore filing for bankruptcy. A transfer of adebtor’s interest in an asset is a preference whichcan be set aside if the transfer is made withinninety days of the filing of the bankruptcypetition, and the transfer was for the benefit of acreditor on account of a debt owed by the debtorprior to when the transfer was made, and thetransfer was made when the debtor was insolvent,and the creditor thereby received more than itwould receive if the case were a Chapter 7liquidation and the payment were made under theBankruptcy Code.

B. Avoidance of Lien in Homestead. Familylaw practitioners who secure for their client acourt-ordered lien in the homestead to secure amoney judgment on a divorce take heed! Your lienmay be subject to avoidance in bankruptcy.

11 U.S.C. § 522(f)(1) of the federal BankruptcyCode permits a debtor to avoid a lien in thefollowing circumstances:

1. The lien is fixed on an interest of the debtor inproperty;

2. The lien impairs an exemption to which thedebtor would otherwise be entitled; and

3. The lien is a judicial lien.

In In re Sanderfoot, 899 F.2d 598 (7th Cir. 1990),the Seventh Circuit Court of Appeals invalidateda lien in the husband's home, where the lien had

been given to the wife in a decree of divorce, tosecure the husband's obligation to pay the wifemoney as part of the property division. In thedivorce, the trial court awarded the wife propertyvalued at $1,000, and awarded the husbandproperty valued at $60,000. To achieve a fairdivision of the property, the court ordered thehusband to pay the wife some $29,000, in twoinstallments, one due four months and one dueseven months after the divorce. The husband laterfiled Chapter 7 bankruptcy, and sought to avoidthe lien securing the debt, which remained entirelyunpaid. The Seventh Circuit characterized theproblem as follows:

The issue before the court is whether 11 U.S.C.§522(f) allows a bankruptcy creditor to avoid alien against his homestead where the lien wasgranted to the debtor's former spouse under adivorce decree.

Id. at 600. The Seventh Circuit rejected thatargument that the lien attached to an interest of thewife in the home, and not an interest of thehusband, saying that any rights the wife had in thehouse were extinguished when the decree awardedthe house to the husband. The lien was therefore"fixed on an interest of the debtor in property,"meeting the first prong of the test. It wasundisputed that the home was exempt under statelaw as homestead, so that the second prong of thetest was met. And the lien was a judicial lien,having been created by the decree of divorce, sothat the third prong of the test was met. Theformer wife's lien was therefore invalidated.

On appeal, the United States Supreme Courtoverruled Sanderfoot, holding that “[section]522(f)(1) of the Bankruptcy Code requires adebtor to have possessed an interest to which alien attached, before it attached, to avoid the fixingof the lien on that interest.” Farrey v. Sanderfoot,500 U.S. 291, 301, 111 S.Ct. 1825, 114 L.Ed.2d337 (1991). The Court examined the legislativehistory and the reasons for the enactment ofsection 522(f), and reasoned that its primary



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purpose was to avoid a “race to the courthouse”between a debtor filing bankruptcy and theircreditors seeking to get a judgment lien in placebefore the filing. Id. at 297. Reasoning that section522(f) was intended to allow a debtor to avoid alien on exempt property only if the lien attachedafter the debtor acquired their interest, the Courtobserved that Wife’s lien and Husband’s feesimple interest accrued simultaneously through thedivorce decree. Id. at 296, 299-300. Thus,Husband “took the interest and the lien together,as if he had purchased an already encumberedestate from a third party.” Id. at 300. As a result,Wisconsin’s homestead exemption did not applyto this lien. Id. at 299-300.

Subsequently, Texas courts applied Farrey, withone concluding that Texas and Wisconsin maritalproperty law are comparable, and that, because thecommunity property interest of a spouseterminates on divorce, the division of property viadivorce is the acquisition of a new interest. Seegenerally In re Finch, 130 B.R. 753 (S.D.Tex.1991). Another Texas court limited Farrey’sscope to situations where community propertyinterests are divided, not to include situationswhere separate property interests are confirmed.See In re Parrish, 144 B.R. 349, 353 (Bankr.W.D.Tex.) aff'd and remanded 161 B.R. 785 (W.D.Tex.1992).

C. Undoing Fraudulent Conveyances. Section548 of the Bankruptcy Code allows a bankruptcytrustee to set aside certain conveyances whichconstitute fraudulent transfers, thus bringing theproperty recovered back into the estate. Thecontrolling statute is 11 U.S.C. § 548, of thefederal Bankruptcy Code. In general terms, thereare two three-prong tests: (1) the debtor transfersan interest in property, within one year of filingbankruptcy, with the intent to hinder, delay, ordefraud any entity to which the debtor is thenindebted; (2) the debtor transfers an interest inproperty, within one year of filing bankruptcy, ata time when the debtor was insolvent, and thedebtor received less than a reasonably equivalent

value in exchange for the transfer.

1. Bona Fide Purchaser Status of Third Party.The case of In re SLF News Distributors, Inc., 649F.2d 613 (8th Cir. 1981), involved the oldBankruptcy Act provision relating to fraudulenttransfers. In this case, the trustee filed suit torecover from a third party the sum of $ 10,000.00,allegedly made as a fraudulent transfer. The thirdparty claimed to be a bona fide purchaser since ithad waived its right to file a mechanic’s lien on adebt owed to it by the debtor. The transfer met theAct’s definition of a fraudulent conveyance: thebankrupt, while insolvent, made a transfer withinthe year prior to the bankruptcy without receiving“fair consideration.” However, the transfer wasmade to pay the debt of another business. Thecourt found that the third party did not know orreceive notice of the fraudulent conveyance, andprovided a valid consideration (albeit not to thedebtor), and therefore had BFP status.

2. Enhanced Scrutiny of IntrafamilyTransfers. In the case of Orbach v. Pappa, 482F.Supp. 117 (S.D.N.Y. 1979), a trustee attemptedto set aside as fraudulent a bankrupt’s conveyanceof his marital residence to his wife. The propertyh a d p r e v i o u s l y b e e n h e l d i ntenancy-by-the-entirety. The trustee relied uponSection 70(e) of the Bankruptcy Act whichprovides that a transfer by a bankrupt which is afraudulent transfer under any federal or state lawis null and void against a trustee of the debtor. Inthis case, the conveyance rendered the bankruptinsolvent under state law. The Court stated that inan intrafamily transaction, a heavier burden isplaced on the grantee to establish fairconsideration for the transfer. The wife’spurported release of an $ 8,000.00 debt owed byhusband to wife was not sufficient to save thetransaction, where the property transferred wasworth $ 100,000.00. The conveyance was setaside. See In re Porter, 37 B.R. 56 (Bicrtcy.E.D.Va.1984) (where transfer is between related parties,it is subject to close scrutiny, and if withoutadequate consideration, it is presumptively






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fraudulent). See also In re Stevens, 112 B.R. 175,177 (Bankrtcy. S.D. Tex. 1989) (execution of adisclaimer of right to inherit was a fraudulenttransfer; fact that debtor’s children received theinheritance instead was a “badge of fraud” fromwhich the court can deduce fraudulent intent).

3. Consideration Received Not “ReasonablyEquivalent Value.” Under Code Section 548(b),a trustee may avoid a transfer of an interest in thedebtor’s property, made within the year prior tofiling for bankruptcy, where the debtor receivedless than a reasonably equivalent value for thetransfer, and the debtor was insolvent on the dateof the transaction, or was thereby made insolvent.The term “value” does not include “anunperformed promise to furnish support to thedebtor or to a relative of the debtor....” 11 U.S.C.§ 548(d)(2)(A). See In re Butcher, 72 B.R. 447(Bkrtcy.E.D.Tenn. 1987) (promise to providefuture legal services to debtor’s dependents notreasonably equivalent value).

a. Promissory Note With Unfavorable Terms.In the case of In re Newman, 11 B.R. 628(S.D.N.Y. 1981), a Chapter 7 trustee sued to setaside the debtor’s transfer of $40,000.00 cash to acorporation owned entirely by his children, inexchange for a $ 40,000.00 promissory note fromthe corporation, to be paid over 36 years and 11months at an interest rate of 7% per annum. TheCourt held that the note was not “the reasonableequivalent” of $ 40,000.00 in cash on hand now.The Court cited old section 548(a)(2) (now section548(b)) of the Bankruptcy Code as authority thatthe trustee may avoid any transfer of a debtor’sinterest in property made within one year of thefiling of the petition, if the debtor received lessthan reasonably equivalent value in exchange forthe transfer or obligation and was insolvent on thedate of the transfer, or became so as a result of thetransfer.

b. Are Family Obligations Enough? In the caseof Butz v. Wheeler, 17 B.R. 85 (S.D.Ohio 1981),a trustee sought to negate the debtor’s transfer of

an undivided one-half interest in his tax refund tohis wife. The bankruptcy judge held that theFederal law permitting the filing of a joint taxreturn did not affect the ownership of the refund.The fact that the husband possessed familialresponsibilities to the wife was not consideredsufficient consideration to cause the transfer to bean allowable preference of a creditor. The husbandreceived nothing of value in exchange for theassignment, and he was insolvent on the date ofthe transfer. It was therefore a fraudulentconveyance. The court stated that the fact thetransfer occurred just prior to the filing of thebankruptcy petition is prima facie evidence ofactual intent to defraud. The conveyance was setaside.

4. Do These Rules Apply to Exempt Property?Under Texas law a creditor without a specific lienon an exempt asset cannot attack the transfer ofthat exempt asset. Morriss v. Morriss, 482 S.W.2d400, 402 (Tex. Civ. App.--Waco 1972, writ ref dn.r.e.); Collier v. Perry, 149 S.W.2d 292, 295-96(Tex. Civ. App.--El Paso 1941, writ dism’djudgmt. cor.). This same rule exists in many otherjurisdictions. Some cases involving these issuesare discussed below.

a. When Homestead Converted Into CashHeld by Third Party. In the case of In re Vidana,19 B.R. 787 (D.S.Fla. 1982), a trustee sought torescind a transfer of property pursuant to 11U.S.C. §§ 544 & 548. Exactly one year beforefiling for bankruptcy, the debtor and his wifejointly conveyed the homestead they owned intenancyby-the-entirety to their adult daughter,who gave no consideration. The debtor hadoutstanding judgments against him at the time.The daughter sold the property for $150,000 to athird party and, after paying the closing costs andmortgage, paid $5,000 to the debtor’s wife andkept the rest. The debtor argued that the propertywas exempt homestead not subject to the claims ofcreditors, and that therefore the transfer could nothave involved the intent to defraud creditors.However, the bankruptcy judge found that the










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daughter was a straw man used to convert anexempt homestead into cash to be held on behalfof the debtor. The trustee was given judgmentagainst the daughter for the money she retained.

Note that Under Texas law, the proceeds from thesale of a homestead are exempt from the claims ofgeneral creditors for up to six months after sale.Tex. Prop. Code § 41.001. After six months, thoseproceeds lose their exempt status if not reinvestedin a new home. A debtor who fraudulentlyconveys the proceeds from sale of a homesteadruns the risk that the six month period will haverun by the time the conveyance is set aside,making the funds subject to general creditors’claims.

b. When Homestead Abandoned Upon MaritalSeparation. The case of Joe T. DehmerDistributors, Inc. v. Temple, 826 F.2d 1463 (5thCir. 1987), involved a husband’s conveyance ofhis interest in the homestead to his estranged wife,a year and five months prior to his filing a Chapter7 bankruptcy. Dehmer, a creditor of the husband,sued under 11 U.S.C. § 544(b) to void the transferas a fraudulent conveyance under Mississippi law.The bankruptcy judge, district judge, and Court ofAppeals all agreed that the transaction was afraudulent conveyance under Mississippi law. Thewife cited a Mississippi case holding that theconveyance of a homestead cannot be fraudulent,since it involved an exempt asset which was notsubject to the claims of creditors. The lower courtsfound, however, that the debtor had abandoned theproperty as homestead when he separated from hiswife and moved to another town.

c. Conversion From Non-Exempt to Exempt.In the case of In re Carey, 112 B.R. 401 (W.D.Okl. 1989), the federal district judge affirmed thebankruptcy court’s decision that the debtor’sactions in liquidating all non-exempt property andusing the proceeds to pay down the mortgage onthe exempt homestead was not done withfraudulent intent. The court cited the followingauthority:

With respect to conversions of non-exemptproperty to exempt property, the law definingthe “per se” rule is old and well established. It issuccinctly stated in Crawford v. Sternberg, 220F. 73, 76 (8th Cir. 1915), as follows:

It is well settled that it is not a fraudulent act byan individual who knows he is insolvent toconvert a part of his property which is notexempt into property which is exempt for thepurpose of claiming his exemptions therein, andof thereby placing it out of the reach of hiscreditors (citations omitted).

See also, Forsberg v. Security State Bank, 15 F.2d499 (8th Cir. 1926); In Re Ellingson, 64 B.R. 271(Bkrtcy.N.D.Iowa 1986).

Id. at 403. The bankruptcy judge’s determinationthat there was not fraud such as should bar adischarge in bankruptcy was also affirmed.

In the case of In re Chadwick, 113 B.R. 540(Bkrtcy.W.D.Mo. 1990), the debtors paid some $70,000.00 on their house mortgage 30 days beforefiling bankruptcy. The bankruptcy judge wrote:

This type of prefiling planning is universallypermitted in respect to homesteads. See In reJohnson, 880 F.2d 78 (8th Cir. 1989) (settingforth the Eight Circuit’s approval of suchactivity). Further, Kansas courts, including bothfederal bankruptcy and state courts, haveapproved the procedure of “maximizing” thehomestead exemption by paying down themortgage with otherwise non-exempt funds. Seee.g. Barash v. Public Finance Corp., 65 F.2d504 (1981).

In the case of In re Compton, 70 B.R. 60(Blcrtcy.W.D.Pa. 1987), the Court, evaluated thedebtor’s conversion of non-exempt property intoexempt property via transfers to his wife shortlybefore filing for bankruptcy. Based on case lawthat a transfer of nonexempt to exempt propertycan be rescinded if done with the intent to



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defraud, hinder or delay creditors, the courtinvalidated the interspousal transfers. In thiscase, the wife was a co-debtor, and the transferof property was made to allow the wife to applyBankruptcy Code exemptions to the assets.

Note that Property Code Section 42.004 providesthat a conversion of non-exempt property toexempt property will destroy the newly-arguedexempt status, if the conversion is done with theintent to defraud, delay, or hinder interestedpersons. See discussion at p. 28 above.

d. Incidental Benefit Ignored. In re Jamison, 21B.R. 380 (D.Conn. 1982), involved a preferentialtransfer of cash by a debtor to a credit union towhich he owed money. The debtor had incurredthe debt to buy a car which was taken in the son’sname. The trustee argued that the debtor’spayment to the credit union benefitted the son byincreasing the equity in the son’s vehicle forwhich the debtor received no consideration inreturn. The court noted that there was no depletionof the debtor’s estate since the transfer wasmatched by an equivalent reduction in the debtor’sdebt. Despite the incidental benefit to the son, thetransfer was not set aside.

5. Other Cases. In re Stevens, 112 B.R. 175(Bankr. S.D. Texas 1990), the debtor’srenunciation of an interest in his grandmother’sprobate estate was done for no consideration andwhile the debtor was insolvent, so the renunciationwas canceled as a fraudulent conveyance and theproperty was brought into the bankruptcy estate.The debtor’s children would have received theinheritance if the renunciation stood.

D. Bar to Bankruptcy Discharge for Fraud.Section 523(a)(2), (4) and (6) of the BankruptcyCode permit the court to except particular debtsfrom discharge. Section 727 of the BankruptcyCode allows the court to refuse dischargealtogether, if fraudulent conveyances occur priorto the filing of the bankruptcy.

1. Barring Discharge as to Certain Debts.Under the Bankruptcy Code, the court may excepta particular debt from discharge. For example, inIn re Tressler, 41 B.R. 779 (Bkrtcy.D.C. Del.1984), an ex- husband sought to have a debtexcepted from discharge in his ex-wife’sbankruptcy, under section 523(a)(4), where shedidn’t pay a debt owed to a third party andawarded to her in the divorce. He argued that hisex-wife had defalcated while acting in a fiduciarycapacity. The argument was rejected by the court.

2. Barring Discharge Altogether. The followingcases involve efforts to bar a debtor’s discharge asa consequence of fraud or fraudulent conveyances.

a. Gift to Grandson Resulting in DischargeBeing Denied. In re Riddle, 8 B.R. 797 (S.D.Fla.1980), involved an action by two creditors to denya debtor’s discharge under 11 U.S.C.§727(a)(2)(A). The court observed that under thisSection, discharge may be denied if the debtor hadactual intent to hinder, delay, or defraud hiscreditors. Such intent may be inferred and will bepresumed if the debtor gratuitously transfersvaluable property when pressed by creditors. Inthis case, the debtor conveyed homes to each ofhis two daughters, to his secretary, and to hisgrandson. The first three transfers were completedmore than a year before the filing of thebankruptcy petition and could not, therefore, be aground for denial of discharge under Section 727.The gift to the grandson, however, occurred withina year of filing. The bankruptcy judge found thatthe debtor did have actual intent to hinder, delayor defraud the creditor-plaintiffs, as well as othercreditors. Discharge was denied.

b. Wrongful Intent Must be Clearly Shown.The case of Matter of Vogel, 16 B.R. 546(S.D.Fla. 1981), involved a trustee’s attempt to bardischarge on the grounds of a fraudulentconveyance and false oath made in connectionwith bankruptcy proceedings. The trustee’srequest was denied. The bankruptcy judge notedthat, in the Fifth Circuit, “the rule of law requires








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a specific proof by the objector to clearly andconcisely establish the intention the part of thedebtor to conceal assets, to hinder and delaycreditors, to make false oath, or to concealproperty. This proof cannot be by inference, itmust be positive.” Id. at 549.

c. Shifting Burden. In re Bateman, 646 F.2d1220 (8th Cir. 1981), was an attempt to bardischarge under the old Bankruptcy Act. Here thehusband conveyed his one-half interest in aprofitable family business to his wife, after whichhe remained a director of the corporate business.The court stated that “the fact...that valuableproperty has been gratuitously transferred raises apresumption that such transfer was accompaniedby the actual fraudulent intent necessary to bar adischarge . . .. [U]pon a showing that the actalleged was in fact committed, the burden ofrebutting the presumption shifts to the bankrupt.”Id See In re Johnson, 68 B.R. 193 (Bkrtcy.D.Or.1986) (agreeing that burden shifts upon primafacie showing by creditor).

d. Default in Divorce was FraudulentConveyance. In the case of In re Clausen, 44 B.R.41 (Bankr. D. Minn. 1984), discharge was deniedunder Section 727(a)(2) where the debtor allowedhis wife to take a default judgment in a divorceproceeding, thereby acquiring the husband’sinterest in the parties’ homestead. The court foundthat permitting the default judgment to be takenwas done with the intent to hinder or delay thedebtor’s creditors.

e. Converting Non-Exempt to Exempt. In thecase of In re Ford, 773 F.2d 52 (4th Cir. 1985),the Court of Appeals affirmed a lower courtdetermination that a debtor husband hadfraudulently transferred a piece of real estate fromhimself to himself and his wife, intenancy-by-entireties, in an effort to make theproperty exempt. According to the Court ofAppeals, mere conversion of property fromnon-exempt to exempt is not enough to show thekind of fraud that would bar discharge of the

debtor under Section 727. However, if the transferof property occurs within one year of the filing ofbankruptcy, and there is evidence other than theconversion itself to show fraudulent purpose, thenthe claimed exemption is subject to the provisionsof Section 727.

In the case of In re Reed, 11 B.R. 683 Bankr. N.D.Tex. 1981), aff’d sub nom First Texas SavingAssoc. v. Reed, 700 F.2d 986 (5th Dir. 1983), adebtor used nonexempt assets to pay down themortgage on his homestead. The bankruptcy judgecould not invalidate the homestead protection, buthe could and did deny the debtor a discharge.

f. Malicious Injury to Property, as anAlternative. The case of Matter of Ries, 22 B.R.343 (W.D.Wis. 1982), was a proceeding broughtby a creditor to deny discharge under 11 U.S.C.§727(a)(2)(A). To warrant this, the creditor mustshow three things: (1) that the debtor transferred,removed, destroyed, mutilated or concealed hisproperty; (2) that he did so within one year of thefiling of the petition; and (3) that it was done withthe requisite intent. In this case, the creditor didnot prove that the transfer occurred within a yearof filing, so discharge was not barred. However,the bankruptcy judge was persuaded that thedebtor had engaged in a wilful and maliciousinjury to property under 11 U.S.C. § 523(a)(6).The creditor’s debt was therefore not dischargedto the extent of the value of collateral wrongfullysold by the debtor.

g. Sustained Course of Transfers WithoutConsideration. In the case of In re Powers, 112B.R. 184 (Bankr. S.D. Tex. 1990), a Houston areabuilder’s discharge was denied by Judge LetitiaClark, for a series of conveyances to friends, agirlfriend, and employees, all detailed in theOpinion.













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