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In the Washington Court of Appeals’ recent case, Marriage of Cheng (denominated “unpublished” as in our Appeals Court Rule 1:28) the court set out an interesting marker for double counting analysis with closely held businesses that are valued by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

 

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 parents 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.]

 

Unusual Alimony Strategies in the Wake of Snow v. Snow

Wednesday, February 22, 2017

Imagine with us for a moment.

You represent the lower earning spouse whose income is insufficient to fully meet his lifestyle needs. His job is insecure, but not enough to convince the judge to discount it as best evidence of earning capacity. Or, his spouse’s earnings curve is ascending, with the resulting potential for a greater alimony award for your client, if only the alimony determination were made, not now, but later. The presumed durational alimony limit is 7 years, and the potential payor is 15 years shy of social security retirement age. So, your client can play for up to 8 years’ time before his spouse’s retirement age threatens the presumed maximum term.

Do you have your client disclaim alimony at the divorce trial?

Or, you represent the higher earner. She knows her income prospects are rising, and she takes spouse’s griping about job insecurity as a smokescreen for his wish to walk away from a steady but unpleasant occupation. He signals that he is not going to ask for alimony at trial.

Do you demand that your client have the right to begin paying alimony immediately?

Both sound far-fetched, but less so after the Supreme Judicial Court’s (SJC) Snow v. Snow, released, as our old friend Jessica Dubin noted, on a recent snow day in Boston.

In Snow, the SJC decided that alimony durational limits do not begin to run until a judgment that affirmatively orders alimony enters (subject to Holmes exceptions); hence, if a divorce judgment does not include alimony, but alimony orders arise from a subsequent modification judgment, the durational clock does not start until the later judgment.1

In other words, disregard the procedural labels. A modification judgment that initiates alimony is an initial judgment for alimony purposes; so, the plaintiff need not show changed circumstances; and he can still demand the full presumed maximum durational term.

We could quibble about the substance of the decision itself. Do you think that the legislature intended this result when M.G.L., ch. 208, §53(g) (if child support alone, or unallocated support is ordered at divorce, the durational clock on alimony runs from that judgment, despite the absence of alimony orders) dictates the opposite?

But, to us, the counterintuitive incentives that Snow sets up are more interesting.

When was the last time that you advised a client to demand the privilege of paying alimony when tax leverage was not at stake? Or, to decline it when it is there for the taking?

And either client’s likely reply?

“What are you nuts?”

Maybe not after this particular Snow day.


1Query whether this new rule would apply to a merging separation agreement that actually recites that the parties are waiving past and present, but not future, alimony.

 

Top 25 Ways in Which Our Current National Government is Like Divorce Litigation

Wednesday, February 08, 2017

  1. Both can last up to four years, eight with appeals.
  2. Both can feel a lot longer – and the effects will outlast it.
  3. Facts are often “alternative facts”.
  4. Objective truth is aspirational.
  5. Memory is selective.
  6. Transparency is an illusion.
  7. Ad hominem is de riguer.
  8. Spokesmen never get the message quite right.
  9. “Zealous” is conflated with “blind”.
  10. Sound and fury signifies nothing…but doesn’t stop anyway.
  11. Ethics are situational.
  12. “Approval” is conflated with effectiveness.
  13. Volume exceeds quality.
  14. Yes-men (and women) abound.
  15. People want more service for less cost.
  16. Positions over-ride interests.
  17. The person who has the last word thinks s/he will win the argument.
  18. The person who speaks the loudest thinks s/he will win the argument.
  19. A good judge is one who agrees with the client.
  20. A good decision is one that agrees with the lawyer.
  21. Cost-benefit analysis is rare.
  22. Efficiency is a second – or third thought.
  23. Hypocrisy abounds.
  24. Victimhood abides.
  25. The best interests of the children/population often get lost.

 

A Prenup Head Shaker from the Appeals Court: Stacy v. Stacy

Wednesday, January 04, 2017

In a Rule 1:28 Memorandum and Order, a panel of the Massachusetts Appeals Court ruled that a pre-marital agreement applied to the death of a spouse, based on contract language that described its scope. Here is that term, fully as reported in the opinion, but broken down by clause:

    … a final and complete settlement of all matters relating to the interest and obligations of each [party] with respect to all future property matters, including but not limited to alimony, support, maintenance, property assignment, and the rights of the parties under G.L., c. 208, §34, as amended, in the event of divorce.

Yet, here is how the Appeals Court must have read it:

    … a final and complete settlement of all matters relating to the interest and obligations of each [party] with respect to all future property matters[.]

    [ ]

    [ ]

The appellate panel tossed out two of the three clauses, which spoke only of divorce, consigned as surplusage, unworthy of consideration, despite the “agreement’s caption referring to G.L., c. 208, §34”, the divorce property division statute.

Now,, let’s cast the provision in the way that is consistent with the maxim that words in a contract are to be accorded meaning within customary everyday usage, with the law of pre-marital agreements that requires that waivers be explicit and the highly probable intent of the parties:

    … a final and complete settlement of all matters relating to the interest and obligations of each [party] with respect to all future property matters, in the event of divorce [,] including but not limited to alimony, support, maintenance, property assignment, and the rights of the parties under G.L., c. 208, §34, as amended[.]

Do you think that the parties’ might have used the word “death” somewhere, if they intended to cover that contingency? Or “estate”? Bequest”? Maybe, “inheritance”? Even “survivor”?

The result is that a widow, with no hint of pending divorce, or even marital strain, must now answer to her sister-in-law (the estate’s personal representative) for “several furnishings and personal belongings” that she removed from her marital home, in part, for alleged violation of a premarital agreement that was to all appearances, extinguished by her husband’s death.

We have no quarrel with the Appeals Court remand on the grounds that a violation of G. L. c. 190B, § 3-709 may have occurred, or that the alleged facts were also sufficient to state claims of a conversion, an unjust enrichment, and a constructive trust. But the Appeals Court is makes unnecessary mischief by inferring intent that doesn’t appear in, or even between the lines of, the contract.

 

Woulda, Coulda, Shoulda? Not So Much (The SJC weighs in with “interests of justice” alimony guidance) George v. George

Wednesday, December 21, 2016

[Note: This blog is corrected to eliminate what we conclude was mistaken in our previous observation that the Supreme Judicial Court had incorrectly stated that the standard of proof for extending alimony beyond its durational limit is the “preponderance of the evidence”. Since this is only a blog, we can correct our errors with the stroke of the keyboard, so we do! We apologize to you, and thank our friend David Lee for pointing this out to us.]

The Massachusetts Supreme Judicial Court (SJC) recently waded into the murky waters of durational alimony limits under the Alimony Reform Act (eff. 3.1.12) in George v. George, upholding the trial court’s denial of relief to an alimony payor on technical grounds, but:

    …utiliz[ing] this opportunity to set forth guidance for how the “interests of justice” standard of [M.G.L., ch. 208] §49(b) should be applied when determining whether deviating beyond the durational limits of the act is warranted.

Which they did – sorta.

First, the SJC rejected the inevitable argument in modification of pre-ARA judgments – that alimony recipients who negotiated equal property divisions at a time when case law generally precluded courts from restricting the length of alimony, when faced with newly enacted durational limits, would equitably argue that had they known that alimony would not continue indefinitely, they would have asked for more property.

The SJC understandably reasoned that the trial judge's acceptance of that argument was not only based on speculation, but if allowed to stand, it would negate the retrospective effect of durational limits for pre-ARA judgments, inconsistently with the statute, and its own precedents. Hence, our title.

The SJC then stated that:

    Further, a judge should evaluate the circumstances of the parties in the here and now; that is, as they exist at the time the deviation is sought, rather than the situation as it existed at the time of divorce. As a logical example, the justices posited that if the recipient were disabled at the time of the initial alimony award, the trial court may consider the current level of disability, as that may impact on present needs.

Then, the murky got just a little bit murkier. The SJC noted the trial court's broad discretion in setting alimony, but also set out the specific text of M.G.L., ch. 208, §53(e), with 8 specific criteria that a court may consider when initially ordering, or modifying alimony, plus the 9th innominate “anything else relevant" factor.

Unfortunately, the SJC deviated from statutory text, again, by replacing the legislature’s suggestion that the trial court "may" consider the §53(e) factors, with "here, the appropriate statutory factors to be considered are…” (italics ours), curiously passive, but a mandate nonetheless. In turn, this creates a bizarre anomaly, in relation to factor # 6, which requires, by the SJC’s lights, that the court weigh:

    … significant premarital cohabitation that included economic partnership or marital separation of significant duration, each of which the court may consider in determining length of the marriage; …

Mischievous minds wonder if the trial court's initial determination of the length of the marriage, and hence the durational limit itself, is up for redetermination at the time of potential extension? At a different time, in a different place by a different judge? Does this mean that a party who did not raise significant premarital cohabitation as an issue at the time of divorce is not precluded from raising it at the time of requested extension? Is the issue ever precluded?

All the result a not-too-careful, and unfortunate, shift of statutory language.

 

WHAT THE #%&*?! Or, Yikes, It’s the Probate Court: Creedon v. Haynes

Wednesday, December 07, 2016

Preface: We love the Probate and Family Court. It struggles daily with unrelenting demand, a vulnerable population, a crumbling social safety net, short staffs and an indifferent funding legislature. Between us, we made our living, and served, in the Probate Court for more than 5 decades. But, sometimes, you just shake your head, and say “You can't make this stuff up”. This is one of those days.

Creedon v. Haynes is a perfect storm of Massachusetts Probate and Family Court dysfunction:

    A separation agreement and divorce judgment required the husband to designate his children as beneficiaries of an existing life insurance policy with death benefits of $100,000.00.

    It didn’t specify any security purpose for the insurance benefits.

    He didn't have a life insurance policy.

    The Wife sued in contempt.

    A judge found Husband in contempt from the bench.

    The judge didn’t issue a paper judgment.

    The judgment never entered the docket.

    The wife asked that the court issue a written judgment.

    The contempt the judge had retired, so a new judge heard her motion.

    The new judge dismissed the wife’s contempt complaint because the children were adults.

Say, what?

Five years after the start of the contempt action, the Massachusetts Appeals Court reversed the dismissal and ordered the Probate Court to reduce the retired judge’s decision to writing. The appellate panel recounted, without any irony, its own decision to obtain the docket from the Probate Court, to search for the contempt judgment. Few Probate Court veterans are surprised to learn that the docket disclosed nothing useful.

How the wife successfully entered the appeal, without a paper judgment or supporting trial court docket entry, is mystery enough.

How the second Probate Court judge dismissed a complaint after her former colleague purported to enter judgment, on her own, and without request by the defendant, is equally curious.

Whether the first judge actually did not produce a written judgment, or if it somehow died in dictation, or if it sits in a dusty pile of paper somewhere in the courthouse to this day, is something that we will never know.

But, the wife will get her judgment; and, someday, she just may need to do something with it. Except, of course, when the wife finally does obtain her written judgment, and if it is docketed, the husband's appellate rights will begin.

Oh, my.

 

Rule 2704 Opposition - Talking Points

Wednesday, November 23, 2016

Recently, we blogged about the Internal Revenue Service proposed new section 2704 rules, which if enacted in their current form would create a new minimum value for businesses subject to intra-family transactions, and essentially eliminate discounts for marketability in that context.

Many in the business appraisal and estate planning communities are up in arms, and they mobilizing to defeat this IRS move, before it becomes entrenched.

While keeping an eye on unfolding commentary, we ran across “talking points” suggested by the American Society of Appraisers for use in opposing the new regulations. In summary they are:

  1. By increasing the value of fractional interests in family businesses, the new rules would result in an "stealth" tax increase of 25-50% in estate and gift taxes.
  2. By treating intra-family actors as "known parties", rather than hypothetical buyers and sellers, the rule would disregard the reality that a fractional interest is in fact, fractional, and not controlling, reducing its economic value.
  3. The notion that families will always work in concert has been rejected previously by the United States Supreme Court.
  4. The suggestion that intra-family transfers should be treated differently than those between unrelated parties is unsupported by any public reasoning advanced by the IRS.
  5. The proposed rule may put IRS regulations on a collision course with various state laws which recognize applicability of marketability discounts.
  6. This new approach will cause family-owned businesses to delay capital investment, and inhibit new hiring, as they preserve cash for pain increased taxes.

As divorce mediators and arbitrators, a former Probate judge, and litigators-in-recovery, we are used to this approach from Bernier, in the divorce context, but in estate and gift taxation?

What do you think?

 



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