Opinion
No. FA06-4005176S
July 16, 2009
MEMORANDUM OF DECISION REGARDING MOTION TO REOPEN JUDGMENT (#164)
FACTUAL BACKGROUND
The record reflects that judgment of dissolution of the marriage entered on June 4, 2007 pursuant to a marital settlement agreement which was reached after two days of trial on May 2 and May 3, 2007. The plaintiff filed this motion to reopen judgment dated May 2, 2008 alleging inter alia that the defendant husband's financial affidavit declaring his income to be $175,698 was fraudulent and that, in fact, his income for the year at issue (2006) was $311,332. The parties appeared before this court together with counsel on October 30, 2008, May 26, May 29 and July 15, 2009.
The court heard testimony from both parties, James Russell, CPA, Attorney Kim Duel (defendant's prior counsel), and John Zdebski, CPA.
LEGAL DISCUSSION
It is well held that "a judgment rendered may be opened after the four month limitation if it is shown that the judgment was obtained by fraud . . ." Hill v. Hill, 25 Conn.App. 452, 455 (1991). As the court held in Weinstein v. Weinstein, 275 Conn. 671 (2005):
Fraud consists in deception practiced in order to induce another to part with property or surrender some legal right, and which accomplishes the end designed . . . The elements of a fraud action are: (1) a false representation was made as a statement of fact; (2) the statement was untrue and known to be so by its maker; (3) the statement was made with the intent of inducing reliance thereon; and (4) the other party relied on the statement to his detriment. A marital judgment based upon a stipulation may be opened if the stipulation, and thus the judgment, was obtained by fraud . . . A court's determinations as to the elements of fraud are findings of fact that we will not disturb unless they are clearly erroneous . . . There are three limitations on a court's ability to grant relief from a dissolution judgment secured by fraud: (1) there must have been no laches or unreasonable delay by the injured party after the fraud was discovered; (2) there must be clear proof of the fraud; and (3) there is a substantial likelihood that the result of the new trial will be different. Id., 685.
The burden is on the movant to prove by clear and convincing evidence that the other party knowingly misrepresented his income on his financial affidavit. Weinstein at 694.
The court in Greger v. Greger, 22 Conn.App. 596 (1990) found that the husband had committed fraud when he had represented on his financial affidavit that his closely held insurance business had no value although he knew at the time the affidavit was filed exactly how much the business was worth. In the instant case, there was no evidence that the husband knew, at the time the financial affidavit was filed, what his income would be once the business tax return was prepared.
The court in Terry v. Terry, 102 Conn.App. 215 (2007) confronted a similar problem wherein the value of the plaintiff's lawsuit was at issue. Both parties were aware of the pending lawsuit but the plaintiff failed to disclose her lawsuit on her financial affidavit because she believed that the lawsuit had little or no value. After the dissolution, the events unfolded and it turned out that the lawsuit had great value, unbeknownst to either party. "Neither party was clairvoyant, and thus neither knew what the final outcome of the lawsuit would be. The ultimate value of the lawsuit was unknown at the time of dissolution." Id. at 229. The circumstances in the instant case are similar. The plaintiff was aware what the defendant's income had been during the course of the marriage. She had an opportunity to conduct her own investigation, business evaluation, pretrial discovery and to present competent evidence during the two-day hearing as to what was the husband's actual income. She failed or neglected to take advantage of any of those opportunities.
"Our Supreme Court has also recognized, however, that the government has an interest in encouraging private agreements that have been incorporated into decrees for dissolution, separation or annulment." See Billington v. Billington, 220 Conn. 212, 221, 595 A.2d 1377 (1991) ("strong policy that the `private settlement of the financial affairs of estranged marital partners is a goal that courts should support rather than undermine'"). Negotiated settlement of these affairs conserves judicial resources and encourages private resolution of family issues. Additionally, the government has an interest in preserving and enforcing orders that were entered by the courts in dissolution proceedings after a determination that the judgment is fair and equitable. Dougan v. Dougan, 114 Conn.App. 379, 385 (2009).
The plaintiff wife testified that she understood very little which took place at the time of the trial regarding financial matters and did not avail herself of the opportunity to ask questions of her lawyer. She testified that she reviewed no pleadings prior to the trial, that she never saw the motion to reopen prior to her testimony on May 26, 2009 and that she generally discussed the difference between LLC pass-through income and income to an individual but did not understand the concept. She acknowledged that her trial counsel had filed a motion for order pendente lite dated November 1, 2006 requesting funds to hire an expert to value the net worth of her husband's LLC. It is unclear if that motion was ever pursued but the record reflects that she elected to rely on her husband's valuation expert who she called as a witness at the trial before the case was ultimately settled. The plaintiff testified that she believed that her husband earned approximately $170,000 per year.
The plaintiff argued that the defendant intentionally delayed producing and filing his 2006 tax return until after the judgment entered and four months had passed. This is contrary to the testimony of John Zdebski, CPA, who testified on behalf of the plaintiff on May 29, 2009. Mr. Zdebski testified that the 2006 tax return was filed in October, just had the 2005 tax return and in fact, the delay was due in large part to the plaintiff's own delay in returning documents to him. He testified that no one told him to delay the filing of the tax return and that it was not unusual in any event.
The defendant husband testified that he earned, by way of a draw, the same amount of money from 2003 until 2009; approximately $180,000 gross. He testified that the financial affidavit which he prepared for the hearing at the time of dissolution was based on the business tax return of 2005; the most recent tax return that was then available. He testified that at the time of the trial in June 2007, his business tax return had not yet been completed for the year 2006 but that he thought his income would be the same. Throughout the hearing the defendant asserted that he did not attend to the financial details of the business; that he had a company to run.
The court extended to the plaintiff great latitude in calling witnesses and exploring the theory that she he had been the victim of her husband's alleged fraud. Over the strenuous objections of the defendant, she was permitted to call financial experts. Nonetheless, there was no "smoking gun" or convincing evidence that the husband knew, at the time of the May 2007 trial that he would be earning a sum other than what he listed on his financial affidavit. Nor was there any evidence that his income was other than the $176,000 he reported as his draw. All of the direct evidence was that he listed the information as he knew it to be from his most recent tax return. The test is not what he might have known, could have known, should have known or what he probably knew. The burden is on the movant to prove by clear and convincing evidence that the other party knowingly misrepresented his income on his financial affidavit. Weinstein at 694.
In fact, all that was proven for certain is that the dissolution agreement in May 2007 was premised upon the husband's earnings of $180,000 and that his tax return for 2006 eventually showed pass-through income from his LLC of $310,000. There was no evidence that pass-through income from an LLC is the same as spendable, received income. In fact it was proven, both at the 2007 trial and again at the hearing to reopen, that pass-through income from an LLC is not money received.
In fact, at the May 2007 trial, Mr. Russell, CPA was asked:
Q: So but yet he's taxed on a number that comes from the company that he didn't actually receive. Correct?
A: That's correct (Russell transcript p. 63).
During the underlying trial conducted May 2 and May 3, 2007, the plaintiff called James Russell, CPA, as its own expert. Mr. Russell had produced a business valuation summary of the defendant's business for the defendant's business partner, Hills, during the Hills' divorce and this same valuation was relevant to the issues in this case.
Mr. Russell testified that 2003 was the best of all the years of the business operation, 2003, 2004 and 2005 and that "the gross profit rate for the first six months of 2006 was analogous to the gross profit rate in 2003" (Russell transcript page 14). Mr. Russell further testified that, based on the internal financial statements, the net income to the business had increased from $371,000 in 2005 to $653,000 in 2006 (Russell transcript page 31). Mr. Russell further testified that the total draw per year for Mr. Wyse for 2003, 2004, 2005 and 2006 was a gross figure of $176,000 (Russell transcript page 63). Finally, Mr. Russell testified that irrespective of the draw amount, the figure which would show up on the partners' personal tax returns and the amount they would be taxed on was the flow through income of the LLC. He reiterated that the draw amount paid to the partner is not the same as the flow through income which the partner had to report on his 1040 tax return (Russell transcript page 61).
James Russell was again called to the stand on July 15, 2009. He made clear that at the time of the May 2007 trial in which he testified, trial exhibits H, I and J clearly revealed that the pass-through income which would be imported into the Wyse personal tax return for 2006 was $326,000. He took great pains to explain, as he had when he testified in May 2007, that the pass-through income from an LLC is not what the partner necessarily receives. He reiterated that Mr. Wyse received approximately $176,000 as his draw despite the fact that his tax returns showed pass through income of $311,000.
The plaintiff and her attorney had available to them every document, tax return, business evaluation, and financial statement available to the defendant. In fact, her proposed orders and amended proposed orders submitted to the court at the time of trial incorporated many of the documents prepared by James Russell which contained the very information which she complains she did not have. Finally, the plaintiff and her lawyer(s) knew or should have known from Mr. Russell's trial testimony in May 2007 that the defendant's pass-through income from the LLC would be in excess of $300,000 but that would not be his draw.
The court in Friezo v Friezo, 281 Conn. 166, 195 (2007) held that the knowledge of an attorney is imputed to one's client.
The court finds that the plaintiff did not prove by clear and convincing evidence that the defendant knew, in June 2007, that his income would be anything other than the figure he stated; $178,000. In fact, the plaintiff did not prove that the defendant's income was anything other than the $178,000 he reported. For the plaintiff to prevail, she would have to have proven by clear and convincing evidence that the defendant knowingly misrepresented his income on his financial affidavit. This would require not only that the entire testimony of the defendant be discredited, but that the court conclude by clear and convincing evidence that the opposite is true and that he knew in May of 2007 precisely how much his tax return would show when it was completed some four months later. There was simply no evidence to support this conclusion which even remotely approaches the standard of clear and convincing evidence. Moreover, the plaintiff confuses the difference of pass-through income from an LLC and money actually received.
While at first blush, it might appear that the difference between the defendant's stated income and that contained on his personal tax return was a "smoking gun" but it should have been apparent to anyone who listened to Mr. Russell's 2007 trial testimony that this was not the case.
CONCLUSION
The plaintiff's motion to reopen is denied. The court finds that said motion was filed by plaintiff's predecessor counsel without good cause and that she should pay the defendant's counsel fees and costs.
The parties shall schedule a hearing to determine that amount.