Equitable Distribution

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The issue of the division of deferred compensation in divorce – more particularly, unvested deferred compensation, is often one that is hotly disputed.  This is in part because there is not a lot of case law on the issue.  The case law is clear that deferred compensation (eg. stock options, restricted stock, RSUs, REUs, etc.) granted during the marriage, or even shortly after the date of complaint but for efforts that occurred during the marriage are subject to equitable distribution.  The fights arose regarding whether (1) the deferred compensation should be treated as either income and/or an asset; and (2) if an asset, should they be divided 50-50 or in some other percentage.  In fact, I blogged about this in a piece entitled Deferred Compensation – Income, Asset or Both, back in 2013.  at the time, I said:

If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult.  I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests.  More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse.  Many believe this to be the fairer way of equitably dividing deferred compensation.

There hasn’t been much case law on this issue since that time, though a case that I will discuss later, suggests that the language of the documents granting the deferred compensation is key,  That said, late in 2018, we got some more guidance from the Appellate Division.  Specifically, in the reported (precedential) opinion in the case of M.G. v. S.M. decided on December 26, 2018, Judge Mawla gave new guidance with regard to the distribution of deferred compensation, again pointing to the importance of the plan documents.

In M.G., the plaintiff worked as a  principal consultant for a large multi-national corporation. Beginning in August 2003, and every August thereafter until 2010, plaintiff received a stock award from his employer. Plaintiff received 490 shares in 2003 and those years began to vest at a rate of 174 shares per year commencing in 2011. A similar vesting schedule was applied to the other grants.  Note that in my experience, this is an unusual vesting schedule.  That is, it is unusual, in my experience, for their to be  a 7 year gap before deferred compensation vests.  Typically, I have seen deferred compensation serially vest, over three or five years, starting with the year following the grant.  What that means is that if 600 shares of restricted stock were granted in 2018, then they would vest 200 shares each in 2019, 2020 and 2021.  Other times, you see shares cliff vest in 3 or 5 years.  What that means is that if 600 shares were granted in 2018 that vest in 3 years, all 600 shares would vest in 2021.  This is important because the argument you most often heard from the titled spouse is that the because the shares will vest post divorce allegedly based upon post divorce efforts, that they should be distributed in a less than 50-50 percentage.

Back to M.G.  At the date of complaint, only 3 of 8 awards were fully vested.  At trial, plaintiff offered into evidence plan documents that stated:

Stock-based compensation is a key component of our reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term. To preserve this core element of our culture, in July 2003, [we] decided to grant employees stock awards, which represent the future right to receive shares of . . . stock when a vesting requirement is satisfied.

. . . .

At [our company] we believe that employees who become shareholders maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.

. . . .

Each eligible employee’s annual stock award grant is based on his or her impact, level, and country.

In my experience, the plan language for most plans is much more generic than this.  However, in this case, the plan language supported the husband’s position that his continued employment was required for him to receive the value of the options.  Judge Mawla noted:

Plaintiff’s unrefuted testimony was clear that post-complaint efforts were necessary to cause the stock, which had not vested as of the date of complaint, to become payable. The plan documents and literature adduced in evidence at trial, and attached to plaintiff’s post-judgment motion, stated vesting would occur dependent upon plaintiff’s post-complaint performance. We reject defendant’s argument that “performance” in this case required plaintiff merely to continue living and go to work. Nothing in the record supports this assertion. Indeed, all of the objective evidence in the record demonstrates much more was required of plaintiff as a high-level corporate employee in a highly competitive industry.

As we noted, plaintiff’s employer described the stock plan as a “reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term.” Company literature explained the stock grants were to “maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.” This language does not suggest the stock would vest through mere continued employment without consideration of plaintiff’s level of proficiency. Nor does this language suggest the stock awards were for work already performed.

As a result, Judge Mawla held that the trial judge misapplied his discretion because in the absence of any evidence or testimony to the contrary, he concluded the stock was earned for work performed during the marriage.  Judge Mawla rejected both the use of a coverture fraction or applying the concept of “marital momentum” to address the equitable distribution of the unvested stock awards noting, “In instances where an asset has been granted after the date of complaint, these principles are of little help because they presume a marital component attributable to the asset in question.” (emphasis added).

In determining how to divide such assets, Judge Mawla modified a mechanism found in a case out of Massachusetts.  Specifically, the court adopted the following rubric:

(1) Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution;

(2) Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it too is subject to equitable distribution; and

(3) Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, either in whole or in part, is for future performance. The party seeking to exclude such assets from equitable distribution on such grounds bears the burden to prove the stock award was made for services performed outside of the marriage. That party must adduce objective evidence to prove the employer intended the stock to vest for future services and not as a form of deferred compensation attributable to the award date. Such objective evidence should include, but is not limited to, the following: testimony from the employed spouse; testimony of the employer’s representative; the stock plan; any employer correspondence to the employed spouse regarding the award; and the employed spouse’s stock plan statements from commencement of the award and nearest the date of complaint, along with the vesting schedule.

In this case, the court noted that the unvested stock was either in whole or in part unattributed to the marriage based upon the plan documents and testimony at trial.

But before people go too wild about this decision, and simply say that all non-vested deferred compensation is the property of the titled spouse, they should really go back to square one and look at the grant documents, because many, if not most, are not like those in M.G.  In fact, in an reported case last year entitled K.C. v. D.C., a review of the plan documents lead to an entirely different result.

Rejecting the husband’s argument about his post-complaint efforts being necessary to receive the deferred compensation, the court held that the RSUs awarded were “subject to equitable distribution and shall be equally divided,” observing defendant provided no evidence to support his theory that the award was for future performance.  Like in M.G., the generic purpose of the plan was:

to aid the Company . . . in recruiting, retaining and rewarding key employees . . . of outstanding ability and to motivate such employees . . . to exert their best efforts . . . by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such key employees . . . will have in the welfare of the Company as a result of their proprietary interest in the Company.

Different from M.G., however, is the fact that the employee would still get the deferred compensation if they died, became disabled, or were terminated through no fault of their own.  Put another way, no post-complaint efforts were specifically required.  Accordingly, the Court held:

Aside from the generalized aspiration that “key employees” who are granted RSUs will have an enhanced interest in the welfare of Accenture, there is no requirement that the employee meet any performance goals before a batch of RSUs will vest pursuant to the schedule. The only condition for vesting is “continued employment.” Moreover, in the event the employee is no longer employed due to death or disability, all of the RSUs granted, whether vested or not, are transferred to the employee or his estate. Obviously, the transfer of RSUs following death or disability would not be based on future performance.

In sum, all the documentary evidence in the record1 states that such promotional grants are awarded based on performance ratings at the time of the award, in recognition of employees’ efforts, and no document provided to the court states defendant must meet any given performance goal to trigger the vesting of RSUs that are part of the grant. Contrary to defendant’s argument, the record was clear, and fully supported the trial court’s determination that the RSUs were subject to equitable distribution.

So what is the takeaway here.  You need more than just a party’s self serving testimony.  You need the plan documents and the documents seemingly must really require post-divorce exemplary efforts more than just staying employed, in order to exempt the deferred compensation granted but not vested during the marriage.  M.G. does not address the necessary corollary which would be that if the deferred compensation is exempted from equitable distribution, should it not then be considered as income available to pay alimony when it vests?  Seems so but we shall see.

Eric S. Solotoff, Partner, Fox Rothschild LLPEric 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 is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

 

 

 

Perhaps Kurt Cobain knew when writing the song “All Apologies” that one day his daughter would be embroiled in a nasty divorce battle.  While the lyrics, “Married, Buried, Married, Buried”, may not sound uplifting, they are undeniably classic Nirvana.  Fans of the band would largely agree that the most well known live performance of the song was the acoustic version played during the band’s “Unplugged in New York”, which took place shortly before Cobain’s death.  Now it is the guitar used by Kurt during that performance which lies at the center of Frances Bean Cobain’s divorce from her husband.

nirvana

Specifically, Frances’s husband is in possession of the guitar – thought to be worth several million dollars – and refuses to return it to her while alleging that she gave it to him as a wedding present.  Not surprisingly, Frances denies ever giving it to him at the start of their short-term marriage, and is taking the position that he has no right to any money from her fortune (Kurt’s estate is valued at approximately $450 million).

With that said, and straight from Seattle to the swamps of New Jersey, how would a court here potentially address the issue?

I Think I’m Dumb, or Maybe Just Happy:  Well, for starters, is there a prenup protecting Frances’s rights and interests in Kurt’s estate and, as part of the estate, the subject guitar?  I don’t know the answer, but even if Frances was blinded by her love for her now soon to be ex-husband, she would hopefully be smart enough to have had some sort of agreement drafted and signed protecting her from the claim now being made (unlike Paul McCartney in his divorce from Heather Mills, for example).  Such agreements often have language addressing so-called separate property and whether separate property is exempt from equitable distribution.  Language regarding interspousal gifts is also common and can be crafted in a way to ensure that even if she did gift the guitar to him during the marriage, it could still remain separate property exempt from distribution.

And For This Gift, I Feel Blessed:  At the heart-shaped box of this matter is whether the guitar was an interspousal gift from Frances to husband during the marriage.  This is essentially what husband is claiming.  In New Jersey, an interspousal gift is subject to equitable distribution.  Husband can take the position that even if the guitar was originally a non-marital asset exempt from equitable distribution (for instance, as an inheritance or gift to Frances, or by agreement), it lost that exempt status and became marital property subject to distribution once she gifted it to him.  If proven, Frances loses the right to claim that the guitar is exempt from equitable distribution at the time of the divorce.  With a guitar worth several million dollars, husband may look at his share of the guitar as the proverbial meal ticket in a short-term marriage where his rights are likely otherwise limited.

Hey!  Wait!  I’ve Got a New Complaint:  To rebut husband’s claim and supporting evidence/testimony that Frances gifted him the guitar, Frances would have to establish that there never was any gift.  In other words, there was no intent by Frances to gift him the guitar – a fact that perhaps she could establish by testifying about how she told husband at the time, and/or at other times during the marriage, that it was her/her family’s guitar, rather than husband’s guitar.  Maybe husband simply took it from the home and is now fabricating the entire story.  Credibility and the surrounding factual circumstances will play a large part in the final result.  Also, even if the guitar was ultimately deemed to be an interspousal gift, Frances may be aided in the actual allocation of the asset by New Jersey’s equitable distribution factors, especially that regarding who brought the subject property to the marriage.  Keeping the guitar in the Cobain family would seemingly be an important consideration for a family court judge, and may sway any determination regarding whether Frances could ever have intended it to be a gift.

It will be interesting to see how this matter unfolds and ultimately concludes.  Whether the litigant is Frances or anyone else similarly in her shoes, learning the law regarding gifts and equitable distribution may leave the litigant forever in debt to such priceless advice.

 

*image courtesy of google free images.

In the recent case O’Hara v. Estate of John B. O’Hara, Jr., the Appellate Division reminded us that even though the death of a party to a marriage ends that marriage, it doesn’t always end the divorce.  In Carr v. Carr, 120 N.J. 330 (1990), our Court examined what happens in the event that a party dies mid-divorce – after the Complaint has been filed, but before the divorce is finalized.  You might think that when this happens, the case simply ends – after all, if one party passes away, what is the point of the divorce?

For better or worse, things aren’t so simple.  If a party passes away mid-divorce, then the intent to divorce and to no longer be married has been expressed.  If one party’s death mid-divorce would lead to unjust enrichment for either the deceased party’s estate or for the surviving spouse, the Court must see the divorce through.  Otherwise, the surviving party might be unjustly enriched; what if he or she were to inherit everything in the deceased spouse’s estate, when the deceased party may not have wanted that?  The converse could also be true.  What if the spouse had specifically been provided for in a will, despite the divorce, but the bequest affords the surviving spouse less than (s)he would have gotten in the divorce case?

That latter is the issue at the center of O’Hara, where, in the midst of the divorce matter, the husband passed away.  While the divorce was pending, but prior to his death, the husband executed a Last Will & Testament.  The Will left the wife without any property interest in the marital assets, but created a trust for her benefit and support.  The problem with this was that, in filing a Complaint for Divorce, the Wife had asserted her right to an equitable share of the marital assets.  The trial judge permitted her to see that through by amending her complaint to include a claim against the husband’s estate.  The Court concluded that  “[w]ithout allowing the matrimonial matter to proceed to determine the value of the parties’ assets and what is available per equitable distribution, it will never be clear whether [the wife] received everything under the trust to which she is entitled, via equitable distribution.”

 

division of property

The Appellate Division affirmed.  Skeptical of the husband, the Appellate Division found that the marital estate had to be valued, and the wife’s equitable interest had to be determined before it could be said that the benefits to the wife under the trust established by the husband did not deprive her of what she would have been entitled to under the divorce.  Therefore, the lower court’s decision to impose a constructive trust – to effectively freeze the estate – was upheld and despite the death of one of the parties, the divorce litigation set to continue.

headshot_diamond_jessicaJessica C. Diamond is an associate in the firm’s Family Law Practice, resident in the Morristown, NJ, office. You can reach Jessica at (973) 994.7517 or jdiamond@foxrothschild.com.

As a lover of all things Coldplay, I was sad to hear that lead singer Chris Martin and his wife of more than 10 years, Gwyneth Paltrow, were divorcing. Gwyneth Paltrow announced the separation on her website Goop.com and used the term “conscious uncoupling” to describe their approach to divorce.  Although the term had been originally coined by marriage and family therapist, Katherine Woodward Thomas, as with anything else endorsed by celebrities, the phrase went viral after her post.  It was of particular interest to me personally given my chosen profession as a divorce lawyer.

As professionals, especially ones whose practice is client-centric, we are always striving for better ways to do our jobs.  In my case, that means getting clients their desired result in the most effective and streamlined way possible. After practicing for several years, experience has shown me time and time again, that people going through divorce are most satisfied with the process when they feel they have control over it (i.e., are “conscious[ly] uncoupling”) and can proceed with a form of alternative dispute resolution (such as mediation) rather than traditional, costly, protracted litigation.

Even as American culture has become more progressive and accepting, divorce is still considered taboo and is almost always surrounded by extreme negativity and hostility.  Even if the couple themselves wants to proceed amicably, they are unfortunately often allowing others in their life (parents, siblings, friends, new boyfriend or girlfriend) to control the dialogue and encourage them to dig in their heels.

Once people “dig in”, it is often impossible to “dig out”.  Protracted litigation only intensifies negativity and hostility. The idea that divorce has to be a negative experience then becomes a self-fulfilling prophecy, in which divorcing parties behavior, is influenced by their expectation that divorce must be awful.  I believe if you change the conversation surrounding divorce and allow yourself to “consciously uncouple” you will have much more satisfying experience surrounding your divorce.

I recently completed a 40-hour divorce mediation training program. This program has only solidified my beliefs that in many cases, a mediated divorce, is a better divorce. That is not to say that litigation is never necessary. There are some circumstances that cannot be mediated and some people that simply cannot effectively participate in mediation. That said though, divorce is multi-dimensional: it is legal, it is financial, and it is emotional. The great thing about mediation is that it can effectively address each of those dimensions.

(1) LEGALLY

Whether you litigate or mediate, you achieve the same end result: a legal divorce.  A mediated divorce however is often faster, less adversarial and provides more flexible and creative resolutions, narrowly tailored to your specific family dynamic.  It also allows for a more confidential process than airing out your dirty laundry in a series of public court filings and appearances.

(2) FINANCIALLY

I will never say “always” or “never” because I’ve come to learn that nothing is absolute.  A mediated divorce however, can certainly be more cost effective. Spending less to uncouple leaves more to be divided between the parties and therefore places both parties in a better position to maintain financial independence and stability post-divorce.

(3) EMOTIONALLY

Although emotions can run high during mediation, there is a much more focused approach on compromise and collaboration rather than “winning” as is seen in litigation. When people feel their spouse is negotiating in good faith and trying to be part of the solution, rather than part of the problem (i.e., zealously litigating over the smallest of disputes), they walk away feeling better about uncoupling, which leads to healthier relationships with themselves, their ex-spouse, and future romantic partners.

The takeaway from all of this is that choosing to uncouple, does not always have to be adversarial, financially draining and emotionally damaging. Take control of your divorce and find avenues in which to minimize the long-term effects.  Before deciding to wage war against your spouse, consult with an experienced and trained family law mediator to see how mediation can work for you.

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Lauren K. Beaver is a contributor to the New Jersey Family Law Blog and an attorney in Fox Rothschild LLP’s Family Law Practice Group. Lauren practices out of the firm’s Princeton, New Jersey office representing clients on issues relating to divorce, support, equitable distribution, custody, and parenting time.  Lauren also offers mediation services to those looking to procure a more amicable divorce. Lauren can be reached at (609) 844-3027 or lbeaver@foxrothschild.com.

You’re at the Courthouse and your attorney has handed you for your final divorce documents.  It may be as a result of a negotiated settlement, or it may be as the result of a judge’s decision, but you are a single, independent person again.   But the end of the divorce is not exactly there yet. Various tasks and decisions still remain.

Division of Retirement Accounts:  If a retirement plan has been distributed between former spouses, steps need to be taken complete the division of any retirement accounts, particularly pensions, otherwise known as defined benefit plans.  Most these types of plans require a specialized order known as a Qualified Domestic Relations Order  to divide the account according to the terms of a divorce.  Others, including 401(k) plans, or defined contribution plans, may require a domestic relations order, or a specific form from the institution in which the funds are held.

Health Benefits:  In the event of an absolute divorce, a former spouse can no longer be a dependent on an individual’s health plan.  The non-subscribing spouse typically has a 30 day grace period in which alternate coverage must be obtained.  30 days go quickly however, and it is important to procure coverage.  Sometimes, it is wise to take COBRA benefits from the former spouse even for a few months just to make sure there is no gap in coverage if you have not researched other plans.

Beneficiary Designations on Life Insurance, bank accounts, and retirement accounts:   Unless you have obligation as a result of the divorce (often the case with some amount of life insurance), be sure to change your beneficiary designations.  If you die, the designations on accounts will typically govern who receives the benefit.  It may not matter if a judgment of divorce has been granted.

Estate Planning:  If it has not already been done, estate planning documents, including wills, health care directives and durable power of attorneys should be changed to reflect current wishes, and, if appropriate, to conform with directives in the divorce documents (trusts for minors, etc.)

Maintaining financial records: In the event that there is a future financial court proceeding concerning finances, it will be important to demonstrate what the financial circumstances were at the time of divorce.  Saving a copy of the Cases Information Statements that were filed at the time of divorce is important.

School records: Many times it is appropriate to inform childrens’ schools of a change in status so the records can accurately reflect any limitations in custody agreements. This is particularly true of one parent will be picking children up on certain days.  Also, most schools will arrange to have duplicate sets of school notices sent to each parent to avoid confrontation.

Closing out credit cards and other joint accounts:  It is helpful to obtain a credit report in order to make sure that all joint credit cards, or cards in which the former spouse is an authorized user have been identified and closed.

Making sure these tasks are attended to sooner, rather than later, will help with a smooth transition into the next chapter!

The Importance of the Filing Date of the Complaint

A recent unpublished decision from the Appellate Division, McNamara v. McNamara, serves as a reminder that, when it comes to marriages, the old saying is true: it ain’t over ’til it’s over.  In McNamara, the parties separated in 2006, but the husband did not file the complaint for divorce until 2008.  However, in his first attempt to file the complaint, he failed to properly serve his wife.  He filed two other complaints in a similarly deficient manner, until finally he filed a complaint that stuck – in February 2013, about seven years after the parties’ separation.

The parties were able to settle all of the issues except one: when did the marriage end?  As family attorneys know, this question is critical because the end date of the marriage serves as the cut-off date for purposes of equitable distribution of marital assets and debts.  For example, at issue in the McNamara case, the husband held a pension during the marriage, to which the wife was  entitled an equitable share.  The question was whether she would be entitled to a share of the pension’s value as of December 2006 (the date of separation), as of June 13, 2008 (the date the husband filed his first complaint for divorce), or as of February 13, 2013 (the date the husband filed a complaint for divorce that commenced a proceeding that led to a final judgment of divorce).

If you ask the parties to a marriage when their marriage ended, you will inevitably get different answers from each spouse.  The question is, truly, a subjective one.  When I was a law clerk, I saw a trial during which the husband testified that he knew the marriage was over while the parties were on their honeymoon – and they were married for more than twenty years.

Because the question of the end date of the marriage is a thorny and subjective one, our courts have long instituted a presumption that the end date – and therefore the cut-off date for equitable distribution purposes – is the date on which the Complaint for Divorce was filed.  Not only must the complaint be filed, but the complaint must commence a proceeding that culminates in the entry of a Judgment of Divorce.  This caveat is a logical one.  I can imagine a scenario where a complaint is filed, the parties reconcile for a period of time, and then later decide to go through with a divorce.  The marriage couldn’t be considered “irretrievably broken” the first time the complaint was filed, since the parties ended up giving it a second try.

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Using a Date other than the Filing Date of the Complaint to Establish the End Date of the Marriage

So, if your client wants to use a different date than the filing of the complaint for divorce to establish the end date of the marriage, he or she better be prepared to prove it.  As the Court in  observed, the only way to really do so – under the current law –  is to show that the parties have not supported one another for some time, and to show that a complete distribution of the assets/debts has already been made.  If the parties have truly ended the commingling of their assets and live independent lives, then the presumption can be overcome.

And of course, one way to get around the problem entirely is to enter into a cut-off agreement, or an agreement to utilize a specific date as the end date of the marriage for purposes of equitable distribution.  This probably would have helped Mr. McNamara, whose pension was ultimately divided as of February 2013 rather than December 2006.

Practice Tip

As all litigators know, timing is everything.  A conversation with your clients about the timing of the filing of the complaint or entering into a cut-off agreement is critical to effectively representing your client with respect to his or her financial interests.

You’re wealthy and entitled to a big settlement but does that mean that it will be easy to get your share of equitable distribution?  When all of the assets are valued, you are worth $2,000,000, $10,000,000, $25,000,000, $9 billion.  In many cases. the issue is less about the amount of the award of equitable distribution but how to pay it out.  That issue is in the spotlight today with the story reported in today’s New York Daily News that Russian billionaire Dmitry Rybolovlev allegedly reneged on a deal to settle his divorce case for a relatively modest $1 billion, and then was hit with a record $4.8 billion divorce judgment.  It is reported that despite a net worth approaching $9 billion, he claimed that he was unable to come up with the cash to satisfy the settlement (though both accuse the other of reneging).

Treasure Chest With Coins Stock Photo Photo courtesy of freedigitalphotos.net

In many cases, it matters less about how much you have, but how liquid your are or are able to become.  In the last few years, I had a case that settled reasonably quickly and easily because most of the nearly $60 million net worth was in liquid assets (cash and securities.)  In that case, it was easy to transfer some homes, cash and securities and call it a day.

Most high net worth cases are not that easy, especially where there are business interests and/or commercial real estate.  The business may be profitable and it may be worth a lot of money, but it is not likely to be sold any time soon.  Sometimes the business owns the real estate (in the marital pot and most often valued separately) where it is located making the claim for the share of the business and the property even harder to pay out without disrupting the business.

The business throws off an income stream, but the non-titled spouse is often seeking alimony from that income stream.  If the business or property has to be sold to satisfy the equitable distribution, is it still fair to award alimony.  Not to mention, this could have very real tax ramifications perhaps not contemplated which could make the deal unfair.  Borrowing to pay the settlement out up front is often easier said than done, and moreover, you don’t want the borrowing to impair the business’ ability to continue to operate.

For better or for worse, in these types of cases, the equitable distribution may have to be paid out over time.  What a reasonable amount of time is depends on the facts of the case.  The next fights are (1) should there be interests and if so, how much, and (2) how to provide security for the obligation.  This can get very complicated, often requiring consultation with corporate, tax, real estate and/or trust and estates counsel.

What happens when you can’t resolve it and try the case?  Hopefully the judge will consider all of these things.  That said, I can point to at least two cases that I handled some appellate work on where that was not the case.

In one case, after a more than 20 day trial, most of which was expert testimony, where the values were widely divergent, the trial judge held that it was too complicated to decide and ordered that everything should be sold.  However, given certain unique tax issues related to the assets, the result could have been catastrophic because assets valued between $20 and $40 million would have been rendered valueless or worse, when the tax bill came.  Neither party wanted that and the case was ultimately settled.

In another high profile case, with a valuable business, and valuable real estate used by the business for its operations, the trial judge issued an award of more than $30 million and simply reduced it to judgment.  The trial judge did not order or even suggest how it be paid, even though everyone seemed to want direction, and simply left the parties to their own devices.  That was untenable too and the case was ultimately settled.

The take away is that just because there is great wealth, and just because you agree how much the non-titled spouse is entitled to receive, the hard part may be figuring out how to make that happen.

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Eric SolotoffEric 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 is resident in Fox Rothschild’s Roseland and Morristown, New Jersey offices though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.

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We deal with a fair number of cases where a spouse’s interest in a business has to be valued for equitable distribution purposes.   While there are many objective parts of a business valuation report, reasonable (a/k/a replacement) compensation is subjective.   That is why this is one of the first things I look at when partisan experts issue widely varying values.  Even when reviewing a joint or neutral report, or when the values are reasonably close, I will often go right to the reasonable compensation to see if it appears to make sense.

Dollar Bill On Dartboard Stock PhotoPhoto courtesy of freedigitalphotos.net.

What is reasonable compensation?  In noted valuation expert Shannon Pratt’s book, The Lawyer’s Business Valuation Handbook”, he defines it simply as “What would it cost the company for a hypothetical replacement for the position in question.”  He further notes that the principle is substitution, not on whether the specific person is worth more or less.  Pratt notes that when determining reasonable compensation, the expert must quantify the total compensation being paid to the party in question and compare that to the compensation needed to attract an employee or employees of similar skill.

Why is it important?  Because the higher the reasonable compensation, the lower the value of the business and vice versa.  As such, when there are partisan experts, it is not unusual for these subjective factors to favor the party that the expert is working for.  That said, depending on the industry, there are numerous publications and databases that the experts use to determine reasonable compensation – so one would think that this subjective factor might be closer.  That happens sometimes, but not always.

For divorce purposes, as well as many other situations where businesses are valued, they are valued based in whole or part on their income.  Reasonable compensation is a consideration in two valuation methods often seen in divorce cases – the excess earnings method and the capitalization of earnings method.  These methods involve examining earnings available to a potential hypothetical buyer after he or she receives a “reasonably compensation”  for running the business. Earnings available, beyond “reasonable compensation” are a large factor in valuation. The higher this figure is, the more the business may be worth. In the excess earnings method, the difference between actual compensation and reasonable compensation is capitalized and for all intents are purposes represents the “intangible asset” known as good will of the business.

In cases where there are publications and databases, such as physicians or laywers, for example, one would expect to see the experts using the data sources, but selecting income information from different percentiles, etc. That said, I just had a matter where the experts differed by nearly $600,000 on reasonable compensation of a doctor causing their values to be about $1.5 million, or more apart.  In that case, a forensic accountant was brought in to mediate and his opinion was far closer to one party than the other – ultimately getting the people closer to settlement.

In another case, an expert imputed two full time high management level incomes to father and son, where (1) dad worked part time; (2) son just came into to business and was learning the ropes; and (3) there had never been two people in those roles before.  The result was a lowering the value.

In another case, the husband was the sole partner of a law firm that had a few associates.  While the firm was extremely profitable for its size, much of the profits were based upon leveraging associates, as the owner’s actual billable hours were pretty small compared to the “average” lawyer.  Because there was no office manager, his expert used reasonable compensation for a lawyer (without adjusting for the fact that this lawyer billed less hours than the peer group that he was being compared to) plus reasonable compensation for an office manager.  The net result of this was substantially lowering the value of his practice.  After a trial, the judge did not buy this and accepted the valuation of our experts who were much more conservative.

In another matter, the opposing expert used a similar figure that our expert used.  However, though he used a five year model, he kept the compensation fixed for each of the 5 years, which is not only unrealistic, it is contrary to economic reality.  As such, it skewed his value in favor of his client’s position.

In yet another matter, the client was a brand new partner at one of the top handful of law firms in the country.  Compensation at that firm was significantly higher than even most big firms and non equity partners were making almost seven figures.  The client himself got a seven figure offer to go in house.  That said, the expert used “reasonable compensation” that was more than $750,000 less than he actually earned.  Needless to say, that skewed value in an unreasonable way and was disregarded.

It is important to understand the concept of reasonable compensation, question the experts about their assumptions and data sources used, to make sure that the “reasonable compensation” used in your valuation is not unreasonable.

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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 is resident in Fox Rothschild’s Roseland and Morristown, New Jersey offices though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.

As our loyal readers may know, Eric Solotoff blogs annually about the so-called “New Year’s Resolution Divorce,” where the number of new clients walking through our doors spikes at the beginning of the new year.  There are, most definitely, verifiable statistics to show that this concept is for real.  A new cnn.com article, “In January ‘ex’ marks the spot,” sheds further light on the theory and, interestingly, suggests that the peak for divorces is March.

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The March filing statistics only further confirms the New Year’s phenomenon – new clients first meet with a divorce lawyer in January/February, learn and understand his or her rights and the benefits of filing, strategize, and, perhaps, shortly thereafter file a Complaint for Divorce.   The article was also interesting in that it further fleshed out the reasons why someone might wait to file.

  • Money, Money, Money – People often start fresh in the new year, and, for many people, year-end bonuses have been paid and can be used to fund divorce expenses, whether it be an attorney, mediator, etc.  As for whether those bonuses would be included as part of the “pot” for equitable distribution, many people believe that it will be excluded if he or she files for divorce before the bonus is paid.  The law, however, is not so black and white and will include, at least to some degree/percentage, a bonus that can be deemed as actually having been earned during the marriage, or attributable to so-called marital efforts.  There are several other legal components to such a discussion that we have previously blogged about and will be the topic of future entries.
  • Appearances – The article talks about how no one wants to drop the proverbial “D” bomb around the holidays.  It is certainly understandable that a person considering divorce does not want to tarnish what is supposed to be the happiest time of year for friends and family.  On the other hand, there could be potential legal implications depending on how long you wait to file including, but not limited to, tax filings, assets that are and are not subject to equitable distribution (alluded to above), and more.  Also, sometimes the relationship between you and your spouse is so uncomfortable (or worse), that the holidays may be even worse than if the news had been broken beforehand.  There really is no right answer, but traditional mindsets when it comes to the holidays suggest that appearances is a large part of the reason why people wait to proceed, or, at least learn about his or her options.
  • Emotional Readiness – This ties into appearances.  As a large part of going through a divorce is not only your mindset, but that of your children, being in the right frame of mind is necessary.  It is not just about a New Year’s resolution, since the article also talks about how the other uptick in divorces is after the summer time when school starts.  It is about a fresh start.  A clean slate.  Call it what you will.  It is about the time of year, whenever that may be, when you can focus on what you need to do for yourself, and, potentially, for the children, to ensure that you are ready for a divorce, efforts to reconcile, or whatever it may be to better your situation.
  • Time – Honestly, with everything going on around the holidays, who has time to think about a divorce, let alone file a Complaint.  The same goes for the summer time when people, in a more relaxed way, are traveling, getting the kids ready for the new school year, dealing with camp, and the like.  While the beginning of the new year and after the summer seem like extraordinarily hectic periods of time because we have to focus on getting back to the everyday grind, people seem more willing to find the time to address marital issues when school is in session.

So what does this all mean?  There is definite validity to the phenomenon discussed in Eric’s annual blog posts.  There is also no doubt that the divorce mindset and a return to  everyday life, with holidays and vacations behind you, are connected.

 

Keeping with the Beatles theme from earlier last week (“8 Days a Week” of Extracurricular Activities), one of the most common questions asked during the initial divorce consultation is “how long is this going to take?”  It is essentially the equivalent of my kids asking “Are we there yet?”  I want to give them an answer that actually means something, but all I can usually tell them is “No, we aren’t there yet…it depends on traffic, how fast we are going, how many times I have to pull over to a rest stop so that you can go to the bathroom, how many times your baby brother is going to make me want to pull over to a rest stop because he won’t stop screaming, etc.).

I used the name of the Paul McCartney-penned Beatles song in the title because, when he paid former spouse Heather Mills $235 million to settle their 2006 divorce case, he indicated that he did it, in part, to preserve his health.  According to reports from that time, Sir Paul’s kids told him, “If this goes on, it could kill you. Being happy is more important than money.”  Ultimately, that is easy for Paul to say with bottomless pockets to work with, but the sentiment is well taken.

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(Photo courtesy of freedigitalphotos.net)

So how long will your divorce case take?  A number of factors come into play including, but not limited to:

1.  Is there a business to value?

Cases that require a business valuation inevitably take longer.  Generally, each side has retained his or her own expert, each expert has their own set of requests and document requirements, each expert works at their own pace, etc.  Some businesses are more complex than others, and some cases involve business owner spouses who simply do not want to give everything being asked of them, whether he or she is trying to hide something or otherwise.  The owner spouse will accuse the non-owner spouse of engaging in a discovery fishing expedition, which will only heighten the non-owner spouse that something may be lurking beneath.  Also, if the two experts are far apart in their ultimate values, the court may appoint a third expert!  Aside from the fact that forensic accountant experts are generally very expensive, a third expert will only take longer.

2.  Is there a custody dispute? 

Litigating cases with a custody dispute is sort of like stepping into a third dimension.  All of a sudden, everything that parents did during a marriage is foisted under the strictest microscope possible.  Did daddy do homework with the kids tonight during his parenting time?  Did mommy say something about daddy?  Does a letter have to be sent to the other lawyer or even the custody expert to show that daddy’s house is either too small or really messy and, according to mom, not a place to house children?  The possible issues are – truly – endless.  With that comes the custody evaluation process.  While most cases seem to involve a joint expert, or a court-appointed expert, rather than each party obtaining their own expert (unless the first report comes out and one parent is unhappy with it, at which point he or she may retain an entirely new expert as is permitted by the Rules of Court), the process is still costly, and still can take months depending on the expert involved.  I recently had a judge appoint an expert in June and her report was done by November – only six months (otherwise known as “ludicrous speed”).  In another matter where the judge appointed the expert last November (2012), we are still waiting for the report!  Judges will often order that the report be expedited, but that word often has no bearing on the actual result.  Why?  Custody experts are oftentimes balancing many cases at once, have to conduct several meetings with the parties and children, and then have to write the report.  It takes time, simply put.

3.  How agreeable are the parties?

Are you going to fight over every single issue no matter how small?  Are you going to work with each other towards a resolution with as minimal an expenditure of counsel fees as possible?  Ultimately, it is all up to, including whether to have a forensic accounting expert value a business (or perform some other task) or have a custodial expert issue a best interests analysis.  When potential clients come in for a consult, I answer the “how long is this going to take” question with, “it depends, in part, on the two of you.”  Along with that comes the lawyers – i.e., what lawyer was retained in a specific case, and what reputation for litigating/or not litigating does that attorney carry with him or her.

4.  How fast is the Court system? 

Well….to put it simply, not typically very fast.  With hundreds of cases and a shortage of judges, it will take months, if not years for your case to start a trial.  Depending on the county, it could take two years, three years, or even more.  This is where #3 comes into play – if the litigants can be agreeable, you will not have to wait for the window when the trial judge can finally try your case.  Rather, you can be on your merry way.

There are so many more reasons why you may be proceeding down the “long and winding road,” in litigation.  It largely depends on you and your spouse, however, to see if you, like Sir Paul once sang, “can work it out.”