When your divorce settlement ends up in the dock

As every family lawyer knows only too well, financial settlements of some kind lie at the heart of nearly every divorce settlement. The partners who take on the main responsibility for childcare are entitled to financial assistance from their former spouse, and both parties rightly expect a fair and equitable division of assets and property. It would not be much of a stretch to suggest that the essential function of a divorce settlement is to convert pain and heartache into pounds and pence.

Sometimes the wealthier partner is slow to settle, not entirely honest about his assets, or simply drags his feet when it comes to paying the child maintenance agreed upon. Usually, although not always, this is the husband. In those cases, the wife is perfectly entitled to pursue her former spouse through the courts for missing payments or simply more money. This is a routine situation, something every experienced divorce lawyer will encounter many times in their careers.

But imagine a different situation. Imagine you have gone through a divorce and reached a financial settlement with your ex-husband. You are unhappy with the settlement and so return to court. Then it emerges that he has been involved in massive financial fraud and you then find yourself being pursued through the courts for return of moneys he has paid you as part of the settlement.

That is precisely the situation outlined in a recently published Court of Appeal case. This is considerably more unusual scenario than routine divorce court wrangling but one which I think vividly highlights a little recognised danger of extended litigation.

The case concerned a Mr and Mrs Morris, who were married in 1998 and divorced in 2005. In early 2007, a consent order (an agreed division of money and property) was granted. In this Mr Morris agreed to give the couple’s former home to Mrs Morris along with £1.2 million, as well as to make regular maintenance payments.

However the following year Mrs Morris returned to court and asked the judges to ‘set aside’ (cancel) this ‘financial remedies’ order (the agreed amount of financial support to be provided as part of her divorce). She claimed ‘material non-disclosure’ by Mr Morris (failure to fully disclose his financial assets). In April 2009, her application was granted, and on the same day her husband paid her the substantial sum of £1,481,920. This was the payment agreed in 2007, along with accumulated maintenance arrears.

Unfortunately for Mrs Morris, by that point her former husband had become involved in a significant fraud involving the disappearance of £52 million from two pension schemes. The money was traced to offshore companies set up by Mr Morris and just under £5 million was found to have gone directly to him. A company set up to administer the pension schemes – Independent Trustee Services Ltd (ITS) – pursued Mr Morris through the courts and he was eventually found liable for the lost money in July 2010. Mr Justice Peter Smith also found that the £1,481,920 paid to Mrs Morris the previous year had come from the pension funds that had gone astray.

So, after Mrs Morris’ new financial remedies order against her husband was finalised at the beginning of 2010, ITS duly took her to court to claim back the entire sum paid to her by Mr Morris.

Mrs Morris’s defence was a claim to be what is known in law as ‘a bona fide purchaser for value without notice’ – that is to say, someone who accepted the money granted to her during the original divorce proceedings in good faith, without knowledge that it had been obtained through fraud.

ITS argued that such a claim was no longer valid, as she had since successfully applied to have the financial agreement set aside. She had also become aware in the meantime of her husband’s fraudulent activities. Nevertheless, at the first hearing, the judge found in Mrs Morris’ favour, saying that her grounds for having the financial order set aside – that her former husband had not fully disclosed his assets – protected her right to the money.

ITS appealed and were successful, no doubt to the considerable dismay of Mrs Morris. Lord Justice Patten ruled that Mrs Morris had in fact lost her status as a bona fide purchaser precisely when the original financial agreements were set aside. As a result she no longer had a valid defence against the ITS claims.

Lord Justices Tomlinson and Lloyd agreed with the ruling. The latter also noted that if Mrs Morris had not become aware of the frauds until after completion of the second financial remedies hearing, she could still have justifiably claimed to be a ‘bona fide purchaser’.

And there lies the nub of the case. Even ITS accepted that she they would not have been able to pursue Mrs Morris for the money if she had not had the original consent order issued in February 2007 cancelled.

In my opinion the takeaway lesson from this is case is: be careful what you wish for, because you might get it. Mrs Morris wished to have the original ancillary relief order set aside and it was. As a result, she has now lost her right to every penny of the settlement.