781.708.4445

info@levinedisputeresolution.com

Divorce Mediation Blog

MEDIATION CONFIDENTIALITY: IS IT A STEP FORWARD OR BACK?

Wednesday, October 26, 2016

ZVI Construction Company, LLC v. Franklin Levy & another

The Appeals Court recently enforced the important policy of honoring the right of contractual and statutory confidentiality in mediation, as provided by M.G.L., ch. 233, §23C. The statute states that:

    Any communication made in the course of and relating to the subject matter of any mediation and which is made in the presence of such mediator by any participant, mediator or other person shall be a confidential communication and not subject to disclosure in any judicial or administrative proceeding…

Meaning, that what is said in mediation should stay there, freeing parties of the inhibiting worry that their factual or negotiating concessions may come back to haunt them in court, should their mediation fail to achieve complete resolution.

The plaintiffs in October 6th’s ZVI Construction Company, LLC v. Franklin Levy and another, challenged this important principle by demanding that the court write in a “fraud exception” to confidentiality. The Appeals Court declined, upholding trial court decisions to strike statements made in mediation by counsel from pleadings, and later dismissing all claims based on the defendant’s mediation conduct.

In a case of first impression, the Appeals Court relied on the absence of any fraud exception in the statute and the explicit exclusion of a fraud exception in the Uniform Mediation Act of the Uniform Laws Commission, which is the law in 11 states and the District of Columbia, though not Massachusetts. The court also discussed the celebrated case Facebook, Inc. v. Pacific N.W. Software, Inc., a Ninth Circuit Court of Appeals decision, in which the federal courts declined to relieve the Winklevoss twins of their mediated settlement by reason of Mark Zuckerberg’s alleged overstatement of Facebook’s value.

Unfortunately, we worry that the Appeals Court diluted its message. In discussing the facts of its case, the court observed that:

    [W]e would be hard pressed to find that such an exception exists in the circumstances of this case, where there is a confidentiality agreement, negotiated between sophisticated people with the assistance of legal counsel… (Footnote omitted.)

We are equally hard pressed to imagine that the Appeals Court intended to imply that a fraud exception might exist in other circumstances.

 

Proposed IRC §2704: Life Imitating Divorce?

Wednesday, October 12, 2016

We receive newsletters from several CPA firms, and they are often both informative and useful. Recently, they are aflame with comment on proposed IRC §2704, issued by the Internal Revenue Service on August 4th. Section 2704 would limit or eliminate the use of discounts for lack of control and lack of marketability for businesses being valued for estate and gift tax purposes: raising values and taxation on intergenerational transfers; and challenging estate planners in crafting tax avoidance/minimization strategies.

To accomplish this, we understand, the proposed rule includes minimum valuation rules (pro rata share of net worth); mandated disregard of ownership agreement and state law restrictions on stock transfers; and close scrutiny of personal goodwill, size and customer concentration concepts as value reducers. Valuation experts and estate planners promise complexity, uncertainty, litigation and general misery ahead. Among other things, critics opine that treating highly illiquid assets, as most small businesses are, as liquid, indulges a fiction that will undermine families’ ability to preserve businesses across generations.

In divorce world, we have seen this movie before. Since 2007’s Bernier v. Bernier, Massachusetts has led the way in severely limiting -- all but abolishing -- the application of discounts in valuation: rejecting the concept that divorce valuation is based on a hypothetical sale, with attendant discounting; and analogizing divorce, instead, to that of the involuntary purging of a shareholder from a going concern for which sale is not, in fact, contemplated. Fair value, rather than fair market value,now holds sway in most cases since business owners can’t dispose of their firms – quite apart from market realities – because they, and their families, depend on the businesses for their economic support. As with proposed §2704, the result of Bernier is higher valuations that often disregard business realities, to the consternation of business owners.

Policy is shaped by goals. In Bernier, the Supreme Judicial Court felt it unfair to reduce the non-owner’s sharing of value when continued operation is the value to the holder, and ruled accordingly. The government wants more tax receipts and the I.R.S., exists to collect it. No surprise there.

Is Bernier the chicken to the federal government’s egg?

 



Get e-mail notifications of new blog posts! Enter email address below.:



Delivered by FeedBurner