In cases where a party owns a business, as justification for a disproportionate split of the business in equitable distribution, we often hear that the titled spouse has to be rewarded for their effort, ingenuity, ideas, etc. related to the business. While arguably those things could be part of the analysis of the statutory factors, there really is not any law suggesting that this must be so. In fact, the real justification that I can really get my arms around as to why a business would be disproportionately distributed is the fact that it is often pregnant with capital gains. While the law is pretty clear that we cannot reduce the value because of hypothetical tax consequences, we can certainly look to same in the percentage distribution. This makes sense because the failure to do so may actually give the non-titled spouse a greater percentage if taxes are ignored.
That said, I have heard this "sweat equity" argument over the years but have rarely seen a case where it was articulated. That is until today when the Appellate Division released the unreported (non-precedential) opinion in Falkowski v. Falkowski.
In this case, the husband renovated two homes., purportedly without the assistance of the wife. The first was a premarital home which he renovated during the marriage. The second, renovated after the parties’ child was born and she left the workforce, was purportedly done on his days off (he worked full time as well.) For the first house, the husband’s "sweat equity" garnered him an additional 5% of the equity in the asset. For the second home, the husband received 65% and the wife 35%. In so ruling, the judge said:
[Husband] worked for five years to build that house into what it is, I gather, today. The testimony was pretty clear. Aside from the fact that [wife] had no say in it, and [husband] did all this with his friends, over five years he gutted everything to the frame. And he replaced everything. And he was fairly passionate when he testified about it too, all the work he did.
. . . . [I]t was a monumental amount of work. I was impressed with the fact that he
basically took the house down to its bare frame and bare rafters and built the entire
thing over. For those reasons I am not splitting this asset equally either. I
believe it’s fairer to recognize that sweat equity and give him 65% of the net value and give [wife] 35% of the net value.
Noting that New Jersey is an equitable not an equal distribution state (i.e. a community property state), the Appellate Division upheld the ruling. At the end of the day, the wife got $73,000 less than the husband.
The question is can the analysis here be applied to other assets and other situations. What if instead of working and spending all of his free time on renovating the property, the husband spent 90 hours a week to build a business while, as here, the wife was home with the child(ren)? Is he rewarded for his sweat equity? Should the wife get more alimony and child support in that case because she spent most of the time with the children? Maybe – maybe not.
What if, the parties need a similar type of renovation to both their residence and shore home, but instead of the husband doing all of the work (with the assistance of his friends), he entrusts the job to the wife who serves as the general contractor, arranging for and dealing with all of the subcontractors, picking out and purchasing all of the appliances, floors, wall coverings, furniture, furnishings, etc. and dealing with the entire project without any assistance from the husband other than his income to pay? At the same time, she is also primarily responsible for the children. Does the same court award her a greater share of those homes? I wonder.
I have often said that though New Jersey is not a community property state, you often would not know it based upon how assets other than businesses are divided. If "sweat equity" and other statutory factors are going to be applied, I am all for it. Someone just better tell everyone in the system that that is what we are doing. Too often, people default to equal distribution and "rules of thumb" for support ignoring statutory factors and equitable principles. When someone argues against the norm, they may be accused of being litigious or unreasonable. Why is this so? I posit that it should not be.
Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or firstname.lastname@example.org.