A fun story about a New York wife who needs $53,000 – per week! – in support from her husband, the former United Technologies chairman George David. Well, she’s a countess, after all.
Another Big Decision: Personal Goodwill in Kentucky
Apparently the new frontier in divorce litigation is personal goodwill. Following closely on the heels of May (W.Va.2003) and other divorce decisions, the Supreme Court of Kentucky held recently that the non-transferrable goodwill of a professional practice was properly excluded from the marital estate.
The subject business in Gaskill v. Robbins (2/17/09) was an oral surgery practice, operated by the wife, without associate professionals. The wife’s expert presented an asset-based valuation, giving no value to goodwill because “Gaskill’s role in the business amounted to a ‘non-marketable controlling interest.’” The wife’s expert reasoned that no buyer would pay more than the fair market value of hard assets when the wife could set up shop down the hall and attract her patients away from the old practice.
The husband’s expert considered several approaches: capitalization of earnings, excess earnings, net asset value, and market comparables. He averaged these approaches to arrive at a valuation that included goodwill and a non-compete agreement. He also criticized the opinion of the wife’s expert who had doubled the compensation of the wife’s non-professional staff, thereby depressing earnings.
The trial court adopted the valuation of the husband’s expert, reasoning that the salary adjustment made by the wife’s expert was unreasonable, and noting that Kentucky law did not recognize a distinction between enterprise goodwill and personal goodwill.
The Kentucky Court of Appeals reversed, holding that not all businesses have goodwill; and the Supreme Court of Kentucky affirmed that reversal on other grounds.
In its Opinion, the highest court of Kentucky examined the fair market value standard and the meaning of “goodwill” in the context of business valuation. The Kentucky court noted that none of its prior decisions had specifically considered the difference between enterprise goodwill and personal goodwill but none had prohibited such an analysis. The Court recognized that the reputation and skill of this professional practice were closely associated with the wife and might not be transferrable to a buyer. The Court also noted that professional degrees are not regarded as marital property to be divided upon divorce under Kentucky law.
The Kentucky Supreme Court also considered the decision of the West Virginia Supreme Court in May v. May (2003), which contained a survey of cases dealing with goodwill nation-wide. May, in turn, relied heavily upon the Indiana Supreme Court’s decision in Yoon v. Yoon (1999), which distinguished between transferrable enterprise goodwill and non-transferrable personal goodwill. Ultimately, the Kentucky court aligned itself with these courts in reaching that distinction.
See also Helfer (W.Va.2007); Stewart (Idaho 2007); Hess (Maine 2007).
Gaskill joins a long list of cases that distinguish personal goodwill from enterprise goodwill in the context of professional practices. It will be interesting to see, in the future, whether these courts will extend this rationale to other types of businesses, where the reputation, skills and efforts of the business owner spouse are not so easily associated with the goodwill of the business.
SRR Answers “Taxing” Year-End Questions
The forensic accounting firm of Stout Risius Ross Advisors LLC has published an excellent guide to year-end tax questions that separated and divorcing spouses may have:
1.) What is my filing status for 2008? Your filing status is determined as of the last day of the calendar year. You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree. Your filing status will be either single or head of household.
2.) How can I qualify to file as head of household? In general, you must meet the following requirements to file as head of household.
1. You are unmarried or “considered unmarried” on the last day of the year.
2. You paid more than half the cost of keeping up a home for the year.
3. Your home was the main home of your child for more than half the year.
4. You must be able to claim an exemption for the child. However, you meet this test if you cannot claim the exemption only because you waived the right to claim the child pursuant to your divorce decree.
3.) What if my ex and I have the child an equal amount of time?
If the child lived with each parent the same amount of time during the year, the parent with the higher adjusted gross income has the right to the head of household filing status.4.) Who claims the exemptions for our children? In most cases, a child of divorced or separated parents will qualify as a dependent of the custodial parent under the rules for a qualifying child. However, the noncustodial parent may be able to claim the exemption for the child if the special rule (discussed next) applies. Special rule for divorced or separated parents. A child will be treated as the qualifying child or qualifying relative of his or her noncustodial parent if all of the following apply.
1. The parents: a. Are divorced or legally separated under a decree of divorce or separate maintenance, b. Are separated under a written separation agreement, or c. Lived apart at all times during the last 6 months of the year.
2. The child received over half of his or her support for the year from the parents.
3. The child is in the custody of one or both parents for more than half of the year.
4. The custodial parent signs a written declaration, discussed later, that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.
If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater part of the rest of the year.
More answers are available at SRR’s website.
Standard of Value dictates Use of Discounts in Divorce Case
The Alabama Court of Appeals recently issued an opinion in Grelier v. Grelier, holding that the parties’ agreement to employ the fair market value standard in a divorce case precluded wife from arguing on appeal that the trial court should not have applied marketability and minority discounts.
In Grelier, the parties appointed a neutral expert to determine the value of the husband’s business, a retail and commercial real estate development company. The husband owed a 25% interest; his father, brother and college roommate owned the other interests. The consent order appointing the expert specified that he would determine the fair market value of the business. Husband and Wife each hired independent experts to offer their opinions of value as well.
The court-appointed expert testified that marketability and minority discounts should not be applied to the husband’s interest in the real estate business, but the opinion does not reveal why. Wife’s expert testified that the court-appointed expert’s valuation was flawed because it relied on out-dated appraisals and verbal statements of value but agreed that discounts should not be applied. Husband’s expert testified that a minority interest discount was appropriate because the wife had not proven that the husband had a right to act independently from the majority stakeholders; and that a marketability discount was standard practice when determining the FMV of close corporations. Husband’s expert suggested a 25% minority discount and 25% marketability discount, but the trial court reduced the combined discounts to 40%.
On appeal, the wife argued that the trial court should have utilized the fair value standard instead of FMV; and that the minority interest and marketability discounts should not have been applied. The Alabama Court of Appeals held that the wife’s argument was waived for failure to raise it in the trial court, where she had consented to a FMV standard in the order appointed the expert. Moreover, the appellate court held that the trial court had not abused its discretion in applying the discounts to arrive at FMV.
Can the Court Award Legal Fees in a Child Suppot Modification Proceeding?
An interesting, and perhaps unanswered, question which may arise in a child support modification proceeding is, “Can the court award legal fees to the prevailing party?” Since 1997, there has been statutory authority for awarding legal fees in a child support case. Previously, no statutory authority existed.
23 Pa.C.S. 4351 authorizes an award of legal fees where “an obligee prevails in a proceeding to establish paternity or to obtain a support order.” Soon after the enactment of this law, it was tested in the Pennsylvania Supreme Court by a lawyer who advocated an automatic award of legal fees to all support recipients, based on a simple disparity in their net incomes.
The Supreme Court rejected that notion in Bowser v. Blom, a case that established several criteria for determining whether a support recipient should receive reimbursement of legal fees.
Factors which the court may consider include: (1) whether the obligor’s unreasonable or obstreperous conduct impeded the determination of an appropriate support order; (2) whether the obligor mounted a fair and reasonable defense in a child support order; (3) whether the obligor’s failure to fulfill his moral and financial obligation to support his children required legal action to force him to accept his responsibilities; and (4) whether the financial positions and financial needs of the parties are disparate.
Subsequently, the Superior Court was asked to determine, in Krebs v. Krebs, whether the trial court should have forced a father to reimburse the mother’s legal fees, in a case where child support was modified retroactively for several years because the father had concealed an increase in his income. The Superior Court vacated and remanded the case, instructing the trial court to consider whether the mother’s claim for legal fees was appropriate under 23 Pa.C.S. 4351 or 42 Pa.C.S. 2503 (a different statute authorizing an award of legal fees as a sanction for dilatory, obdurate or vexatious conduct by a litigant).
More recently, in Sirio v. Sirio, the Superior Court was again asked to decide whether the mother should have been awarded legal fees in a child support modification proceeding. Once again, the Superior Court vacated and remanded the trial court’s decision not to award fees, instructing the trial court to consider 23 Pa.C.S. 4351 as well as 42 Pa.C.S. 2503. The Sirio Court alluded to Krebs, suggesting that it answered the question of whether fees could be awarded in a modification proceeding (despite statutory language that refers to “establishing” paternity or “obtaining” a support order).
I think both Krebs and Sirio have asked the question, but I have yet to see an authoritative decision (or, for that matter, a strong policy argument).
Why Good Drafting Counts
A recent decision issued by Florida’s intermediate appellate court, Craissati v. Craissati, amply demonstrates the importance of good contract writing skill. The husband and wife in this case entered into a marital settlement agreement, in which the husband agreed to pay alimony for eight years. Like most alimony agreements, this agreement provided that the alimony would terminate upon the death of the recipient, her remarriage, or cohabitation for a period of three months or more.
The wife in this case was incarcerated after a DUI conviction, and the husband petitioned the court for termination of his contractual alimony obligation. The parties stipulated that wife was, technically, “cohabiting” with her cell mate for a period in excess of three months, and that the termination clause of the marital settlement agreement was unambiguous. Still, the trial court held, the termination of alimony due to incarceration would be an absurd result not within the contemplation of the parties. The trial court modified the amount of alimony (since wife’s needs had been temporarily curtailed) but refused to terminate the obligation.
On appeal, the Florida appellate court reversed, adopting a literal construction of the agreement. Adding insult to injury, the author of the opinion found that driving under the influence was a voluntary act known to possibly result in incarceration, so the wife should have known that her criminal behavior could result in the termination of alimony.
If only the prisons were less crowded, the wife could have maintained her alimony award, I guess.
Basics of Pennsylvania Divorce: Kulko
Pennsylvania has jurisdiction over its own citizens as well as those who have signficant contacts with our state. The law that extends Pennsylvania’s jurisdiction over non-citizens who have significant contacts is known as the “long-arm” statute (as in “long arm of the law”).
Long-arm jurisdiction over non-residents in divorce actions is limited, as in all actions, by the due process requirements of the Fourteenth Amendment of the U.S. Constitution, which requires that the forum state have personal jurisdiction over the defendant. The residence of a plaintiff in this state is not, by itself, sufficient to constitute “significant contacts” to a defendant who has never resided here under the standards enunciated by the U.S. Supreme Court in International Shoe Co. v. Washington, 326 U.S. 310 (1945). See Kulko v. Superior Court, 436 U.S. 84 (1978).
In Kulko, the husband and wife resided throughout their marriage in New York, although they were married in California during a brief stopover while the husband was en route to overseas military duty. The parties’ children were born in New York, and husband returned to New York after his tour of duty. Upon separation, the wife moved to California, where the parties’ two children eventually joined her. The wife obtained a divorce decree in Haiti and then filed an action in California to register and modify the Haitian divorce decree. Husband contested the California action for lack of personal jurisdiction. The California Supreme Court held that there were sufficient contacts, under the standards enunciated in International Shoe Co. v. Washington, 326 U.S. 310 (1945), to confer personal jurisdiction over the defendant. Specifically, the California Supreme Court looked to the parties’ marriage in California and the husband’s consent to sending the children to live with their mother in California.
On appeal, the U.S. Supreme Court reversed, finding there was no personal jurisdiction over the defendant in California. The Supreme Court held:
The Due Process Clause of the Fourteenth Amendment operates as a limitation on the jurisdiction of state courts to enter judgments affecting rights or interests of nonresident defendants. See Shaffer v. Heitner, 433 U.S. 186, 198-200, 97 S.Ct. 2569, 2577, 53 L.Ed.2d 683 (1977). It has long been the rule that a valid judgment imposing a personal obligation or duty in favor of the plaintiff may be entered only by a court having jurisdiction over the person of the defendant. Pennoyer v. Neff, 95 U.S. 714, 732-733, 24 L.Ed. 565, 572 (1878); International Shoe Co. v. Washington, 326 U.S., at 316, 66 S.Ct., at 158. The existence of personal jurisdiction, in turn, depends upon the presence of reasonable notice to the defendant that an action has been brought. Mullane v. Central Hanover Trust Co., 339 U.S. 306, 313-314, 70 S.Ct. 652, 656-657, 94 L.Ed. 865 (1950), and a sufficient connection between the defendant and the forum State to make it fair to require defense of the action in the forum. Milliken v. Meyer, 311 U.S. 457, 463-464, 61 S.Ct. 339, 342-343, 85 L.Ed. 278 (1940). . .
The parties are in agreement that the constitutional standard for determining whether the State may enter a binding judgment against appellant here is that set forth in this Court’s opinion in International Shoe Co. v. Washington, supra: that a defendant “have certain minimum contacts with [the forum State] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial **1697 justice.’ ” 326 U.S., at 316, 66 S.Ct., at 158, quoting Milliken v. Meyer, supra, 311 U.S., at 463, 61 S.Ct., at 342. While the interests of the forum State and of the plaintiff in proceeding with the cause in the plaintiff’s forum of choice are, of course, to be considered, see McGee v. International Life Insurance Co., 355 U.S. 220, 223, 78 S.Ct. 199, 201, 2 L.Ed.2d 223 (1957), an essential criterion in all cases is whether the “quality and nature” of the defendant’s activity is such that it is “reasonable” and “fair” to require him to conduct his defense in that State. International Shoe Co. v. Washington, supra, 326 U.S., at 316-317, 319, 66 S.Ct., at 158, 159. Accord, Shaffer v. Heitner, supra, 433 U.S., at 207-212, 97 S.Ct., at 2581-2584; Perkins v. Benguet Mining Co., 342 U.S. 437, 445, 72 S.Ct. 413, 418, 96 L.Ed. 485 (1952).
Like any standard that requires a determination of “reasonableness,” the “minimum contacts” test of International Shoe is not susceptible of mechanical application; rather, the facts of each case must be weighed to determine whether the requisite “affiliating circumstances” are present. Hanson v. Denckla, 357 U.S. 235, 246, 78 S.Ct. 1228, 1235, 2 L.Ed.2d 1283 (1958). We recognize that this determination is one in which few answers will be written “in black and white. The greys are dominant and even among them the shades are innumerable.” Estin v. Estin, 334 U.S. 541, 545, 68 S.Ct. 1213, 1216, 92 L.Ed. 1561 (1948). But we believe that the California Supreme Court’s application of the minimum-contacts test in this case represents an unwarranted extension of International Shoe and would, if sustained, sanction a result that is neither fair, just, nor reasonable.
In reaching its result, the California Supreme Court did not rely on appellant’s glancing presence in the State some 13 *93 years before the events that led to this controversy, nor could it have. Appellant has been in California on only two occasions, once in 1959 for a three-day military stopover on his way to Korea, see supra, at 1694, and again in 1960 for a 24-hour stopover on his return from Korean service. To hold such temporary visits to a State a basis for the assertion of in personam jurisdiction over unrelated actions arising in the future would make a mockery of the limitations on state jurisdiction imposed by the Fourteenth Amendment. Nor did the California court rely on the fact that appellant was actually married in California on one of his two brief visits. We agree that where two New York domiciliaries, for reasons of convenience, marry in the State of California and thereafter spend their entire married life in New York, the fact of their California marriage by itself cannot support a California court’s exercise of jurisdiction over a spouse who remains a New York resident in an action relating to child support.
Finally, in holding that personal jurisdiction existed, the court below carefully disclaimed reliance on the fact that appellant had agreed at the time of separation to allow his children to live with their mother three months a year and that he had sent them to California each year pursuant to this agreement. As was noted below, 19 Cal.3d, at 523-524, 138 Cal.Rptr., at 590, 564 P.2d, at 357, to find personal jurisdiction in a State on this basis, merely because the mother was residing there, would discourage parents from entering into reasonable visitation agreements. Moreover, it could arbitrarily subject one parent to suit in any State of the Union where the other parent chose to spend time while having custody of their offspring pursuant to a separation agreement.
Kulko, at 92-93.
The Kulko decision has been adopted and applied by our courts in Pennsylvania. See, e.g., Wagner v. Wagner, 564 Pa. 448, 768 A.2d 1112 (2001); Scoggins v. Scoggins, 555 A.2d 1314 (Pa.Super. 1989). Pennsylvania’s jurisdiction is limited by the same principles and considerations as described in Kulko.
January is Divorce Month….hmmm
From an article called, “January 12 is D-Day for Divorce” by Emily McCombs
Tis the season to be jolly! But did you know that it’s immediately followed by the season to ditch that spouse who’s been weighing you down through the last month of eggnog and holiday parties? Lawyers in the U.K. estimate more couples will decide to divorce on January 12th this year than any other day. While January is always a popular month for splitting couples, this year experts expect that the recession will have led many unhappy unions to stick it out through one more Christmas of shared finances before calling it quits, which they’ll do the Monday after their children return to school. Says U.K. lawyer Shelley Hesford, “We get more calls in the first few days of New Year from couples wanting to separate or divorce than any other time of the year – and the reasons behind divorce are often, though not always, based on money problems having pushed a relationship to breaking point.”We can’t help but wonder if the previous few weeks spent stuck in close proximity with your spouse’s annoying in-laws might also have something to do with it. Either way, if your New Year’s resolution is to lose some weight in the approximate poundage of your unwanted partner, you might want to give your lawyer a heads-up before he gets too overloaded.
Shadle – NAV Accepted by Divorce Court
In Shadle v. Shadle (108 PDDRR 102), a Bucks County divorce decision, the main issue was the valuation of an HVAC contracting business owned by the husband. The contracting business generated revenues from two primary sources: prepaid service contracts, and residential repair and replacement of HVAC systems. The company employed seven technicians, including the parties’ two adult sons. An ancillary issue was whether the husband had made an enforceable agreement with his sons to transfer the business to them upon his retirement.
On the latter issue, the trial court found no consideration for the promise made by husband to transfer the business to his sons. The trial court noted that each son had received adequate compensation for his services in the course of employment. The suggestion that the sons may have sacrificed other career opportunities in exchange for the promise was deemed speculative.
On the issue of valuation, there was a battle of experts. Wife’s expert considered three valuation approaches and concluded that the value of the business was $200,000. (The opinion does not reveal which approach(es) yielded this result.) The net asset approach, which is utilized when “liquidation is contemplated in the not-too-distant future,” as Wife’s expert explained, would yield a value of $130,000.
The testimony of Husband’s expert is not discussed at all in the opinion.
The trial court found that the fair market value of the HVAC business was equal to the NAV of $130,000, reasoning that “Husband will likely transfer the business to his sons rather than an independent buyer at some point in the future.” The trial court thus demonstrated a misunderstanding of valuation concepts, overlooking the fact that all parties contemplated an ongoing concern, not liquidation. It will be interesting to see whether the Superior Court of Pennsylvania reverses this erroneous decision, and whether, on remand, the issue of personal goodwill is raised.
Big Surprise: Mortgage Business Bankrupt!
In Wilson v. Wilson, 2008 WL 2312726 (Ky.App.2008), a man started a mortgage brokerage business with his high school sweetheart in 2004. Soon the business blossomed, and so did the romantic relationship between the man and his classmate, who unfortunately was not his wife. The business expanded from Kentucky to Florida and paid all of the classmate’s living expenses. Soon the business floundered, the man bought out his partner, and he filed for divorce and bankruptcy. A discharge order was entered shortly thereafter, the bankruptcy court finding that the business was insolvent and no assets existed.
In the divorce action, a court-appointed valuation professional determined the value of the business as an ongoing concern as of September 2005, one year before the bankruptcy. The trial court accepted the valuation but assigned no value to the business as marital property, since it was bankrupt and worthless a year later. The business owner’s wife appealed, arguing that it should be assigned the value given by the expert.
On appeal, the Kentucky Court of Appeals affirmed, holding the trial court did not commit an error by assigning no value to the bankrupt business. The expert and the court did not seem to violate the principle that facts not known or knowable on the date of valuation may not be considered. Rather, the date of the expert’s valuation did not appear to coincide with the date used by the court. The lesson, perhaps? Make sure the date of expert’s valuation is the same date that the court will consider at trial.
Under Pennsylvania law, the same result probably would have occurred. Under Sutliff v. Sutliff, 518 Pa. 378, 543 A.2d 534 (1988), the proper date for valuing marital assets is presumed to be the date of distribution. There are cases, however, in which the courts of Pennsylvania have adopted an earlier date, such as where there has been intentional dissipation of marital assets. See, Nagle v. Nagle, 799 A.2d 812 (Pa. Super.2002); Smith v. Smith, 653 A.2d 1259 (Pa.Super. 1995). For some reason, the Kentucky courts rejected that logic.