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In the Washington Court of Appeals’ recent case, Marriage of Cheng (denominated “unpublished” as in our Appeals Court Rule 1:28) the court set out an interesting marker for double counting analysis with closely held businesses that are valued by income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, focusing 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.

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