In a previous post, I gave you a simple introduction to a complex topic: cryptocurrency, and specifically, how cryptocurrency may be divided in a California divorce. In general terms, cryptocurrency is divided essentially the way any other digital asset such as gift cards, airline mileage, and downloaded media might be divided. However, because the value of crypto can fluctuate dramatically and frequently, and because this is a fairly new area, there is still a very small body of related case law upon which to draw, which means there are no hard and fast rules about how the court may choose to handle your case.
In one notable California divorce between Erica and Francis deSouza, the question of how to divide the millions of dollars of value in crypto became pretty complicated. The deSouza case is widely considered the first “big” crypto divorce case, and it’s worth looking at. If you find yourself feeling overwhelmed by the details, just push through—I promise the ending is worth it!
January 2013: Erica Is Granted a Temporary Restraining Order
When Erica filed for divorce in January 2013, she was also granted a temporary restraining order that prohibited Francis from “[t]ransferring, encumbering, hypothecating, concealing, or in any way disposing of any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life.” In other words, Francis was required to obtain permission from Erica if he wanted to—among other things—buy or sell cryptocurrency or anything else.
April 2013: Francis Violates the Restraining Order and Buys Bitcoin
Just three months later, over the course of less than a week in April 2013, Francis purchased bitcoin in three separate transactions through a Japanese bitcoin exchange called Mt. Gox (this detail becomes very important later on). As it turns out, he did so without notifying or obtaining agreement from Erica.
Approximately $150,000 Spent on Three Bitcoin Purchases
First, Francis wired $45,000 to Mt. Gox to purchase bitcoins himself. Second, he had a friend named Wences Casares purchase $99,451 worth of bitcoin on his behalf and transfer it to his Mt. Gox account. Finally, he had another friend named Khaled Hassounah purchase $44,940 worth of bitcoin on his behalf, which he did, but the bitcoins were never transferred to Francis’s account and they remained with Mt. Gox. The bitcoins Francis purchased directly also remained with Mt. Gox. Only the bitcoins purchased on his behalf by Wences Casares were transferred from Mt. Gox to another digital wallet belonging to Francis.
February 2014: Mt. Gox Fails
Mt. Gox filed for bankruptcy in February 2014, coincidentally the same month Francis filed his preliminary schedule of assets and debts in the divorce, in which Francis disclosed his ownership of the bitcoins purchased the previous year. Whether he knew about the Mt. Gox bankruptcy at that time is unclear, but it IS clear he knew about the bankruptcy by May 2014.
September 2017: The Divorce is Settled
It was three years later when the divorce was finally settled. In September 2017, the court deemed the bitcoins community property to be divided equally between Erica and Francis. But it wasn’t until December when Erica sought her half of the bitcoins that Francis revealed that of the 1,062.21 bitcoins he had purchased, he had possession of only 613.53 of them, the rest having been lost in the Mt. Gox bankruptcy. This was also when he finally revealed to Erica and the court that he had used colleagues to make purchases on his behalf, that some bitcoins had been transferred from Mt. Gox to another digital wallet, and that some of the bitcoins had generated bitcoin cash and gold.
December 2017: The $150,000 Investment is Now Worth $21 Million
At this point, in December 2017, the bitcoins Francis had purchased for approximately $150,000 were worth an astounding $21 million. Notably, the bitcoins purchased by Khaleed Hassounah for about $45,000 had a value of $8 million…but they were gone.
As ordered by the court, Francis transferred Erica’s share of the bitcoins he had to Erica. But Erica sought post-judgment relief because she believed Francis had violated his restraining order and failed to meet his fiduciary responsibility to Erica with regard to his bitcoin investments.
October 2018: Francis Pays Out More Than He Bargained For
In October 2018, the court issued its ruling. The court found that Francis had breached the restraining order on several occasions by failing to disclose his bitcoin purchases and transfers and by having colleagues make purchases on his behalf. In fact, not only had he not disclosed the involvement of his proxies, but the court determined he had purposefully hidden this information from Erica until 2018. Francis also had breached his fiduciary responsibility to Erica by failing to inform Erica of the Mt. Gox bankruptcy as well as by failing to disclose the additional crypto cash and gold generated by his initial investments.
As a result, Francis was ordered to give Erica an additional $22,500 in cash, 249.445 bitcoins and the corresponding bitcoin cash and gold, and pay her attorney’s fees and costs in bringing the post-judgment motion.
It’s reasonable to infer that Francis was deliberately trying to hide assets from Erica after they had separated and trying to hide investments he hoped would appreciate in value and that he would not have to disclose to her. But by doing so, he ended up paying her far more than he would have if he had chosen to be transparent with her from the beginning. He violated the restraining order with his initial bitcoin purchases made without her permission, which was foolish enough. But he compounded his misdeeds over time by continuing to withhold information, even during the final stages of the divorce proceedings and settlement.
The Bottom Line
California courts do not look kindly upon those who try to hide assets from their soon-to-be ex-spouses. Despite what many think, cryptocurrency is not completely untraceable. In fact, there are forensic experts who specialize in tracing and tracking down crypto transactions, and they are quite expensive. If Erica had hired one, Francis would have had to pay those expenses too!
The lessons here are clear—follow court orders, never try to hide assets from your spouse, and if you do make a mistake or a bad move, don’t make matters worse with a string of lies and obfuscations. Such a strategy is likely to catch up with you in a California divorce court.
My recommendation is that whenever possible, keep the lines of communication open with your spouse and if you both are open to using mediation or a collaborative divorce process, do so. Every marriage that ends does so with a lot of complex feelings and emotions, and the way people often deal with those is by fighting about assets and property—and worse, about the kids. If you and your partner are willing to try to communicate, keep things civil, and work toward win-win outcomes, mediation and collaborative divorce are processes that can be quicker, less expensive, and more cathartic and productive than a courtroom battle.
Explore your no-court divorce options and the prenuptial process in Santa Rosa and Sonoma County and schedule a confidential consultation with divorce lawyer Jeanne Browne. With more than 30 years of experience helping couples divorce without court through mediation and collaborative practice, she will give you compassionate legal advice on your issues related to family law, divorce, and prenuptial/postnuptial agreements. Click here to schedule a meeting.
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