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Divorce Mediation Blog

A “Growing Business” Negates Argument of Double Dipping in Washington State in Marriage of Cheng

Wednesday, March 29, 2017

In the Washington Court of Appeals’ recent case, Marriage of Cheng (denominated “unpublished” as in our Appeals Court Rule 1:28) the court set out an interesting marker for double counting analysis with closely held businesses that are valued by income methodologies: if it is a business with expectations for income growth, awarding alimony (they call it “maintenance”) from its future earnings is not a “double recovery” or, as we call it “double count” or “double dip”.

The husband in Cheng ran a consulting business with 2013 net income to the owner of over $900,000.00. Both experts valued the practice by capitalizing the “excess earnings” over the owner’s “replacement income” (the market value of the owner’s services to the company, putting aside compensation for the risk associated with his investment).The judge assigned a $3.6 million value to the enterprise, of which the wife received half, under Washington’s community property laws.

The judge also ordered the husband to pay a declining term of maintenance. The husband argued that this constituted double counting because the initial monthly sum of alimony exceeded the husband’s replacement income, and the first step-down was ¾ of his replacement income. Therefore, the husband argued, the alimony was, inevitably, to be paid from the capitalized portion of income.

The Court of Appeals disagreed, opining that to constitute a double dip, the maintenance award would have to “erode [the company’s] value.” Since the Husband predicted that his 2013 income would likely hold up for the year after divorce, the court reasoned that the he would have more than enough income to pay the maintenance, without any diminution of value; hence, no double dip.

This decision suggests that double dipping is a concept that considers alimony in relation to value itself, and not to the income that was used to determine value.

If Washington is a “fair market value” state, the Cheng court’s eyes are on that theoretical terminal event from which the business owner reaps the rewards of sale to a third party, when the hypothetical buyer will be disinterested that his or her seller was beleaguered by support obligations, focussing solely on the likelihood of continued cash flows for his or her own benefit.

Where we are a “fair value” state for divorce business valuation, in which the focus is on the value of future cash flows to the divorcing owner, and not directly premised on an imagined future arm’s-length sale, it is hard to envision the Cheng conclusion here – that it is not double dipping- on the same facts, since he core of the double dipping controversy here is whether alimony impedes on capitalized income, a distinction that can be consequential.

But, since our law does not preclude double dipping per se, but only that which is “inequitable”, the Cheng reasoning could lead to the same bottom line in Massachusetts. Our courts could conclude that the Cheng facts do, in fact, implicate double counting, but still be within the bounds of discretion, because the other spouse has needs and owner has the cash flow to afford to pay the alimony ordered.

It’s enough to make business owners , and their counsel, swoon.

 

Probate and Family Court New Standing Order 1-17 on Parenting Coordination: A Baker’s Dozen of Interesting Aspects, Plus One

Wednesday, March 15, 2017

[Preface: We do not accept parenting coordinator assignments, but as divorce mediators, we do address parenting coordination in agreements from time to time, with clients. Our observations follows the order of appearance in the rule and not any editorial priority.]

  1. No review process for binding PC decisions: Rule (1)(e) asserts that a PC appointment does not divest a court of continuing jurisdiction over child matters “…even where the parties have agreed to [PC] binding decision-making authority...” But, Rule 1-17 provides no special limitation on the scope of issues on which an agreed PC may make binding decisions. More surprisingly, there is no requirement that a party have the right to seek court review of a binding PC decision, nor a defined action to facilitate same, and no standard of review. Does this undermine parens patriae?
  2. Training of PC’s: Rule (3)(c) mandates 6 hours of continuing education for PC’s, including lawyers. According to Lawyerist.com, Massachusetts stands among only 5 states that do not have mandatory lawyer CLE, https://lawyerist.com/40252/how-wacky-are-mandatory-continuing-legal-education-rules/) For the mental health community, this is nothing new.
  3. Joint petition required: Whether intended or not, Rule (5)’s introductory clause requires that PC agreements may only be proffered to the court by joint petition for modification (Form CJD 124). This seems odd when many appointments come at the time of divorce.
  4. Designations of PC’s: Rule (5)(b)(i) requires that agreements to appoint a PC identify the person selected, since the PC must sign the agreement. Gone are the days of agreement deferrals, such as “…to be selected by the parties within 30 days.” Smart.
  5. Specified duties: Rule (5)(b)(iii) requires that agreement clearly specify (and inferentially, limit) the PC’s duties. This is a critical need.
  6. Limited duration by agreement: Agreements must specify duration of the PC’s engagement in Rule (5)(b)(iv), subject to remedies to shorten or extend (Rule (14)). Co-parenting problems that persist indefinitely suggest that PC intervention is insufficient.
  7. Spending cap: In addition to specifying fees and each party’s responsibilities to pay, Rule (5)(b)(v) mandates a maximum obligation for each party over the life of the PC’s appointment. This may be observed more frequently in the breach.
  8. Colloquy: Rule (5)(c) subjects every PC agreement to specified questioning by the court before its approval. Especially given observation #1, this is essential.
  9. Merging agreements only: Rule (5)(c) introduces the colloquy requirement with “Before…incorporating and merging the agreement in a judgment…” It appears that the court may not approve a surviving PC provision. We guess that the Probate Court does not want the “countervailing equities” standard to get in the way of ending PC interventions.
  10. Limited duration by court initiative: A court-initiated PC appointment may not exceed the duration of litigation, or 2 years after judgment under Rule (6)(d), the latter subject to 1-year extensions (Rule (14)(a)(3). Ibid., Observation #6.
  11. Limited duties: Rule (7) tightly regulates a PC’s permissible duties, without any catch-all flexibility. Maybe expedient, but shouldn’t competent adult be able to fine tune this?
  12. Not mandated reporters: Rule (10)(b) relieves PC’s of mandated reporter obligations, in the event of suspected abuse or neglect. Presumably this does not excuse PC’s who are mandated reporters by professional licensure; but lawyers, who are not, do not take on this added burden.
  13. Standing: PC’s have may independently bring motions or complaints to seek appointment of a G.A.L to waive a child’s psychotherapist-patient privilege, under Rule (10)(c). Yikes! This rule absolutely be part of the colloquy, if it needs to be in the rule at all.
  14. No conflicts: Rule (10)(c) bars G.A.L.’s or other professional in the family’s life already from serving as PC. This reflects this professional consensus, though, in a way it is too bad that competent parties can’t be trusted to waive one of these known conflicts, for someone who has already earned their trust, with knowledge and after advise of counsel.

 

High Times: Another Indication of Marijuana Going Mainstream

Wednesday, March 01, 2017

We have recently seen marketing materials for the “Marijuana Licensing Reference Guide, 2017 Edition”, written by the aptly-named “Cannibiz Media”, and co-published with BVR, a pre-eminent business valuation resource.

It carries a hefty price tag - $495.00 per ounce – er – per hardback copy.

While we expect CM’s budding publication to cultivate updates that will flower with the growing industry that it reflects, Attorney General. Jeff Sessions may have something to say about that.

Then again, maybe not, given this recent tweet of a former Swedish Prime Minister about Sessions’ boss::

Carl Bildt Verified account ‏@carlbildt

Sweden? Terror attack? What has he been smoking? Questions abound.

 

The Massachusetts Appeals Court Relies on Baccanti v. Morton, in Tapping Option Income for Alimony, in Ludwig v. Lamee-Ludwig: A Fresh Look at Baccanti

Wednesday, March 01, 2017

The Appeals Court’s recent Ludwig v. Lamee-Ludwig approaches the intersection of unvested stock options and double counting, colloquially known as “double dipping”, in divorce litigation. Relying on the Supreme Judicial Court’s (SJC) Bacanti v. Morton, they got it right. But, was the SJC precedent correctly decided? It is worth revisiting.

In Baccanti, the SJC addressed the question of unvested stock options at divorce, concluding that options granted during marriage but to be vested thereafter “may” be treated as marital property by the trial court. As we have discussed here before, “may” is plainly a word that grants discretion, meaning that the grantee is permitted, but not compelled, to do something. Think: “Do it if you think it appropriate, but don’t, if not.”

By contrast, and while there is some case law to the contrary, common usage of “shall” imposes an obligation – and if it does not, there are a whole lot of temporary orders, separation agreements and judgments out there that don’t say what they mean, or mean what they say! Think: “Do it.”

This common-sense distinction is highlighted when the words “may” and “shall” inhabit the same sentence. M.G.L., ch. 208, §34, upon which the Baccanti ruling relied, reads:

    “…the court may assign to either husband or wife all or any part of the estate of the other, including but not limited to, all vested and non-vested benefits…and which shall include, but not be limited to, retirement benefits, … pension, profit-sharing, annuity, deferred compensation and insurance.” (As quoted by the SJC; bold italics ours.)

Thus, as we read it, §34 requires (“Do it”) the trial court to include the enumerated, but unlimited, forms of compensation or other benefits within the marital estate, but it permits (“Do it if/how you think it appropriate”) the trial judge to assign them between the parties as she sees fit. Why would the statute drafters have used two different modal verbs in the same sentence, if they were not to connote different meanings?

Yet, the Baccanti court equated the two by concluding that the trial court may include unvested options in the marital estate. May = shall. Think: judicial amendment.

None of this made much practical difference in 2001, as Baccanti took hold in asset divisions. After all, the SJC’s “time rule” sensibly divided granted but not yet vested options in a way that distinguished between those that were tightly related to the marital enterprise during which both parties contributed, from those for which the connection to mutual marital efforts was diluted by the passage of post-divorce time. Who cared if the time formula technically excluded some options from the estate, or if it simply assigned them disproportionately between the spouses because of the declining nexus with marital efforts?

Now, it matters, the intangible becoming material, with unvested options ripening into disposable cash.

The central holding of Ludwig is that the income generated by the post-divorce exercise of stock options granted during marriage, but excluded from marital property at divorce by application of Baccanti, may be tapped for payment of alimony (and, perforce, child support) because it does not constitute a double counting, let alone one that may be reversibly inequitable. (The law does not bar double dipping per se, but only if it is deemed inequitable.) The SJC obliquely suggests that alimony exposure for income arising from later vested options that were deemed to be marital property at divorce, presents a more compelling case of double counting.

The Baccanti holding made Ludwig an easy case for the Appeals Court to decide. But, had the higher court stuck to statutory interpretation in 2001, rather than effective revision, the current case might, and we think should, have been more challenging.

[The Appeals Court easily dispatched the argument that inclusion of the unvested option-derived income was precluded by M.G.L., ch. 208, §53(b)(1), by holding the legislature to its precise words. Those drafters exempted certain income derived from assets assigned under §34, for income calculation purposes, listing interest, dividends and capital gains only, without any indication these were mere examples; and income produced by options is none of the above. We infer (but do not know) that the drafters just did not consider the particular wrinkle.]

 



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