What Could Happen to my Bitcoin During a Divorce?

Marriage of DeSouza (2020) 54 Cal. App. 5th 25

Bitcoin during a Divorce

In this 2020 case, the trial court found that a husband had breached his fiduciary duty to his wife by investing in cryptocurrency after being served with a petition for dissolution, and ordered him to transfer bitcoins and other cryptocurrency to her and to pay her attorney fees and costs. This result was upheld on appeal. 

In January 2013, Erica DeSouza served her husband Francis with a summons and petition for dissolution. In California, the second page of the summons form used in every divorce case lists a series of Standard Family Law Restraining Orders, which go into effect automatically when the respondent is served. Among other things, these temporary restraining orders prohibit both spouses from “transferring, 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 April 2013, four months after being served with Erica’s petition for divorce and the above restraining orders, Francis engaged in three separate transactions attempting to purchase cryptocurrency from Mt. Gox, a now-liquidated Japanese bitcoin exchange company with a controversial history. Francis never notified Erica or sought her consent before engaging in these three transactions, which met with varying levels of success. 

In the first transaction, Francis wired $45,000 to Mt. Gox to purchase bitcoins. However, Francis never received any bitcoins in exchange for this money, nor did he ever recover the $45,000 from Mt. Gox. Several days later, Francis (through an intermediary) purchased 558.32 bitcoins from Mt. Gox for $99,451. This transaction was effected successfully, and the bitcoins were accordingly deposited into Francis’s “digital wallet.” Finally, Francis used another intermediary to purchase 498.89 bitcoins from Mt. Gox for $44,940. Although the purchase was completed, this transfer did not go through, and the 498.89 bitcoins remained with Mt. Gox. 

Unfortunately, after being hacked, embezzled, or both, Mt. Gox lost billions of dollars of bitcoins and declared bankruptcy in February 2014. Francis filed a claim but never recovered the 498.89 bitcoins that Mt. Gox held for his benefit. Nor did he ever receive anything in exchange for the initial $45,000 payment to Mt. Gox. Francis had more luck with the 558.32 bitcoins purchased from Mt. Gox in the second transaction. In December 2013 and August 2014, Francis moved these bitcoins among various digital wallets. Eventually, the bitcoins “forked”, which generated dividends from bitcoin holdings in the form of new currency, “bitcoin cash” and “bitcoin gold.” On December 31, 2017, the price of bitcoin was $13,500. At this point, the bitcoins held by Francis had appreciated from their initial purchase price of approximately $99,000 to around $8 million.

When the parties exchanged their declarations of disclosure, Francis listed 1,062.21 bitcoins, which were ordered to be equally divided between the parties.

Only then did Francis admit that he was unable to recover all of his bitcoins after the Mt. Gox hack, and in fact only possessed 613.53 bitcoins. Erica moved for an emergency order compelling Francis to immediately transfer her full interest in community bitcoins to her. Following a hearing on Erica’s motion, the court ordered Francis to immediately transfer to Erica half of the 613.53 bitcoins and associated bitcoin cash and gold he had in his possession and to show cause why he should not be ordered to transfer an additional 224.34 bitcoins and proportional cryptocurrency. Francis transferred 306.765 bitcoins to Erica in compliance with the first part of the court’s order.

After a four-day trial, the court found Francis had breached his fiduciary duty in many ways, starting with his undisclosed purchase of the bitcoins in violation of the family law restraining orders, but also including his transfers of bitcoins between digital wallets, failure to disclose Mt. Gox’s bankruptcy, failure to disclose the bitcoins received from “forks,” etc. Francis was ordered to transfer $22,500 in cash and 249.445 additional bitcoins to Erica, along with the corresponding bitcoin gold and bitcoin cash, and to pay her attorneys’ fees and costs.

On appeal, Francis made the following two arguments, both of which were rejected by the appellate court:

First, Francis argued that his failure to disclose the bitcoin transactions was not “material” because Erica took little interest in the couple’s finances during their marriage and would not have taken any action had he informed her of his intent to invest in bitcoin. The court was unconvinced by this argument, pointing out even if Erica had allowed Francis to handle the couple’s finances during marriage without question, she might very well have adopted a different attitude and approach to protecting her own financial interests after retaining an attorney and filing for divorce. 

Second, Francis argued that even if a portion of the undisclosed bitcoins were tied up in the Mt. Gox bankruptcy, the community’s interest was not impaired because his purchase of the 613.53 bitcoins netted millions of dollars for the community. The court rejected the argument that taken as a whole, Francis’s bitcoin investments had done more good than harm: “[T]he financial success of one undisclosed investment does not erase the harm to the community estate, and Erica, occasioned by a separate undisclosed transaction.” [Marriage of DeSouza (2020) 54 Cal.App.5th 25, 36.]

The lesson for divorce litigants tempted to ignore the family law restraining orders and dispense with seeking their spouse’s consent is that they do so at their peril. This is the case even if one spouse traditionally made financial decisions without the other spouse’s input over the course of the marriage. Couples who are going through a divorce owe each other greater transparency about finances, not less. Also, a litigant should not expect that their transgression will be forgiven after the fact if a lucky or skillful investment results in a net gain for the community. As Francis DeSouza learned, the success of one undisclosed transaction will not offset the harm caused by a separate undisclosed transaction.