Considering the high cost of litigation and the potential for a financially devastating outcome, I, like many others, have a generalized concerned about the possibility of being involved a lawsuit. I do not, however, have any reason to believe that I will be involved in any particular lawsuit. What are the greatest legal risks to my financial bottom line? What can I do to protect against that risk?
Clients often seek to manage and reduce legal risk, and rightly so. The cost of litigation – whether in the form of adverse judgments or simply the expenses that must be incurred to litigate a case – can bankrupt or severely impair the financial well-being of most individuals and businesses.
When discussing legal risk, clients often express concern about liability resulting from personal injuries others might sustain on the client’s real property, liability from automobile or other accidents, or liability from contractual or related business dealings that somehow went wrong. These concerns are legitimate. A large amount of money is lost to adverse judgments in these types of cases, as well as from litigating these types of cases.
The enormity of such losses might explain why many people seek to manage risk through use of various complicated and fancy (not to mention, expensive) asset protection strategies. However, the truth of the matter is that the vast majority of people will never be involved in such high-stakes litigation and, therefore, do not need the (sometimes questionable) protection that might be provided by such strategies.
Simple (and usually less expensive) is often better than complex (and expensive). Such is the case here.
Statistically, most Texans are more likely to find themselves in divorce court, fighting over the division of marital assets, than in a civil court fighting over personal injury or contract damages. Thus, for most Texans it makes sense to focus, at least in the first instance, on the management of marital property.
A brief look at American marital property systems is necessary to better understand why Texas Divorce Courts pose such a great financial risk.
The marital property laws of all American states derive from two basic systems: the Common Law (aka: equitable distribution) system and the Community Property system. Generally speaking, in Common Law states, married couples decide whether – and which – assets that are acquired during marriage will be considered “marital property” or part of the “marital estate.” Upon divorce, courts in Common Law states divide the marital estate in a manner determined by the court to be “equitable.” Most states can be classified as Common Law marital property states.
The Community Property system, on the other hand, presumes that all property acquired during marriage (with certain limited exceptions) is marital property. Upon divorce, the marital estate – that is, all community property owned by the couple – is divided equally. The community property form of marital property, having been derived from Spanish law, is found mostly in states located in the southwest and western areas of the country.
Texas statutes classify the Texas system of marital property as being of the community property variety. Consistent with such a classification, all property acquired by Texans during marriage (again, with limited exceptions) is considered to be community property.
However, in sharp contrast to the “classic” or “textbook” definition of Community Property, Texas law provides that: “In a decree of divorce or annulment, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.” Texas Family Code § 7.001.
Neither Texas statutes nor Texas judicial opinions articulate any objective or other meaningful standard by which to determine whether the division of marital property in any particular case is “just and right,” unjust and wrong, or somewhere in between. Apparently, “just and right” is, as the statute itself states, whatever “the court [that is, the trial judge] deems” it to be.
Thus, the statutory mandate that Texas marital property be divided in “a manner that the court deems “just and right” is, for all intents and purposes, an almost unrestrained legislative invitation for the trial judge to do whatever he or she wants to do. Indeed, what two or more judges consider “just and right” in a given situation might be vastly different. There is absolutely no legislative (or judicial) attempt to ensure, or even promote, the uniformity of Texas divisions of marital property, whether from Texas county to Texas county, or even between different courtrooms within any given Texas county.
Furthermore, it is important to note that judicial discretion to divide Texas marital property in “a manner that the court deems just and right” is not limited to divorce cases that allege “fault.” So-called “no-fault” cases are equally susceptible to the whims of the trial judge. Thus, to the extent that a divorce litigant (or that litigant’s attorney) can cast the other party in a “bad light” before the trial judge, or where the other litigant brings judicial disfavor upon himself or herself for whatever reason, a divorce case that ostensibly is a “no-fault” case can, as a practical matter, yield a property division that is based on considerations of fault or other wrongdoing.
In all fairness to Texas judges, most probably hold a sincere belief that their “just and right” property divisions are, well, just and right. The problem here is not most Texas judges; the problem is the Texas legislature.
The Texas legislature has failed to give Texas trial court judges any objective or otherwise meaningful guidance on how to properly divide marital property. The result has been that each Texas trial judge that is tasked with making a “just and right” decision regarding the division of marital property has no choice but to apply his or her own values and ideas about how marital property should be divided in a given case. The result is – literally – “Legislating from the Bench” – not because all or any particular judge has decided to be a “judicial activist,” but rather, because the Texas Legislature has failed to legislate.
Now for the good news. The Texas Legislature has allowed you to do what it has failed to do. Texas statutes affirmatively authorize and allow married couples to contract with each other on issues such as: specifying what property will (and will not) be considered marital property; whether and how marital property is to be divided; whether, in the event of divorce, one spouse may be made to pay the other spouse’s attorney fees (in whole or in part), whether one spouse may be made to pay alimony to the other spouse (and if so, how much), and other important issues.
More good news. Marital property contracts are not just risk management tools that can be used in case of divorce. Such contracts are also extremely valuable asset protection tools for couples where, for example, one spouse is self-employed or who engages in a profession or occupation that exposes that spouse to significant levels of litigation risk from dealings with third parties.