divorce

In Balicki v. Balicki, 2010 PA Super. 134 (July 30, 2010), the Superior Court considered the husband’s argument that the alimony order provided more income to his ex-wife than she could spend (as shown by her budgetary expenses). The trial court in its opinion justified the alimony award by noting that the wife would pay income tax on her alimony award, thereby reducing the after-tax dollars available to her. The trial court presented a seemingly reverse-engineered analysis of available income sources to prove that the income nearly matched wife’s claimed budgetary needs, thereby vindicating the result.

An important element of the trial court’s opinion was its calculation of the ex-wife’s income tax liability arising from her alimony award. The trial court held, and the Superior Court agreed, that a tax “gross-up” may be warranted under 23 Pa.C.S. § 3701(b)(15), one of the 17 statutory criteria for judging alimony claims. The trial court’s tax gross-up was triple the provision recommended by the master, but the trial court also disapproved the master’s inflated budget. These two adjustments offset each other, and the trial court affirmed the result reached by the master on different grounds.

The husband argued that the trial court had no right to reconsider the tax gross-up since neither party raised the issue in their exceptions from the master’s report. The Superior Court agreed that the trial court was not limited to the issues specifically raised on exceptions. Ironically, the Superior Court dismissed all of the husband’s allegations of error pertaining to specific items on wife’s budget, holding that they were waived because they were not specifically identified in the § 1925 statement.

All of the ex-wife’s issues on appeal, most of which seemed to be calculated to counter-balance husband’s appeals, were dismissed by the Superior Court, which affirmed the rationale of the trial court.

The Supreme Judicial Court of Massachusetts ruled recently that agreements between spouses who plan to continue their marriage but wish to define their legal rights and obligations in the event of divorce are enforceable in that state. Some states (notably Ohio) do not permit spouses to execute agreements waiving their marital rights unless they are actually pursuing divorce, and the law of many states is unsettled. In its recent decision, the highest court of Massachusetts joined the ranks of states (including Pennsylvania) where such “post-nuptial” agreements are permissible.

Post-nuptial agreements may combine certain elements of prenuptial agreements with features of marital settlement agreements. Post-nuptial agreements may divide marital property between spouses, protect their separate property, and establish or restrict spousal support and alimony, like settlement agreements. Post-nuptial agreements can also protect family businesses, inheritance, and other separate property to be acquired in the future, just as prenuptial agreements do.

In Ansin v. Ansin-Cravin, 457 Mass. 283, 929 N.E.2d 955 (2010), the husband and wife entered into a post-nuptial agreement two years before their eventual divorce. The post-nuptial agreement in that case gave the parties a chance to attempt marital reconciliation while removing the financial risk of taking “one last chance”. The couple had been married for nineteen years at the time of their agreement. At that point, the husband separated from his wife and advised her that he would not return unless she would sign an agreement. She hired legal counsel, investigated the nature and value of their assets, and negotiated the terms of the agreement.

Having signed the agreement, the husband and wife reconciled for nearly two years. Ultimately the reconciliation did not last, but the parties were able to avoid the stress and expense of protracted divorce litigation by having an agreement in place (at least, they would have avoid those pitfalls if the wife had not challenged the validity of the agreement). The Massachusetts court applied the same standards to post-nuptial agreements as many states employ when judging the validity of prenuptial agreements and settlement agreements: (1) availability of independent legal counsel; (2) full and fair disclosure of financial resources; (3) absence of fraud or duress; and (4) reasonableness of the provisions for each spouse.

Pennsylvania has long recognized post-nuptial agreements, and for good reason. When entering into a post-nuptial agreement, full and fair disclosure is an essential element; and it may be important to engage legal counsel. While formbooks and software programs may contain “boilerplate” prenuptial agreements, post-nuptial agreements are very different and require the skill of an experienced family law attorney.

News stories were posted today on CNN.com and VanityFair.com claiming that a growing number of people are using Facebook to cheat on their spouses…. and getting caught! Divorce lawyers have discovered that many careless cheaters leave obvious evidence of their infidelity on social networking sites, where anyone can find it. In fact, a site called FacebookCheating.com has recently popped up to hype this phenomena. According to CNN, “a recent survey by the American Academy of Matrimonial Lawyers found that 81 percent of divorce attorneys have seen an increase in the number of cases using social networking evidence during the past five years. More than 66 percent of those attorneys said the No. 1 site most often used as evidence is Facebook with its 400 million registered users.”

So if this internet evidence of cheating is out there, how can it be useful in a court where most divorces proceed under the no-fault laws? In my experience, Facebook and other social networking sites can be gold mines of useful evidence that can help parents to win custody cases. Too many people post pictures and stories of their drunken or bawdy behavior on their profiles. Facebook evidence can prompt a judge to question a parent’s ability to observe appropriate values and boundaries with their children. Evidence of cheating is not necessarily relevant to the economic aspects of most no-fault divorces, but it can be a defense to spousal support or alimony under some circumstances. If you discover a spouse’s Facebook profile with damaging evidence of cheating, contact your family lawyer immediately to find out what to do next.

A thorny issue that arises early in many divorce proceedings is the question of who may live in the marital residence during the separation period. Generally speaking, the courts will not evict either spouse from the marital residence during separation if they are living together peacefully and have not voluntarily moved away. This principle leads some devious spouses to seek questionable or even fraudulent protection from abuse (PFA) orders. Spouses who have quick tempers must avoid confrontations that can provide legitimate grounds for a PFA order, which are granted when a victim can prove “a reasonable fear of imminent bodily harm.” Some judges will grant PFA orders even where the only grounds are a verbal threat or demonstrative act (such as smashing or throwing an object in the presence of a spouse).

In theory, the courts are authorized by statute to award exclusive possession of a marital residence on an interim basis pending equitable distribution. 23 Pa.C.S. § 3502(c); Laczkowski v. Laczkowski, 496 A.2d 56 (Pa.Super.1985). In practice, exclusive possession is most often awarded to the spouse who remained in the home while the other spouse willingly vacated. If the residence is nonmarital property or titled in the name of one spouse, the titled spouse may have an advantage. The level of conflict between the parties, the ability of a spouse to afford alternate housing, and the effect upon custody arrangements are other likely considerations. An exclusive possession order does not preclude the court from awarding the residence to the excluded spouse in equitable distribution. See, e.g., Kokolis v. Kokolis, 82 Pa.D. &C.4^th 214 (Allegheny Co.2006), affirmed, 927 A.2d 663 (Pa.Super.2007). Yet, practically speaking, it can be very difficult for a spouse who is evicted from the marital residence to return. This is one of the first issues that a spouse should discuss with a lawyer at the beginning of any divorce proceeding.

In Pennsylvania, marital property is divided in a process known as equitable distribution. The method prescribed by the Divorce Code is a “dual classification” equitable distribution scheme because marital property is distinguished from nonmarital or separate property (terms which are used interchangeably). In other jurisdictions governed by an “all-property” equitable distribution scheme, the divorce courts do not distinguish between marital and nonmarital property.

Pennsylvania does not recognize community property, which is a method by which married persons may hold title to property in certain jurisdictions, creating mutual fiduciary duties between spouses and usually resulting in an equal division upon divorce. See, Drake v. Drake, 555 Pa. 481, 489-490, 725 A.2d 717, 720-721 (1999); Wilcox v. Penn Mutual Life Ins. Co., 357 Pa. 581, 55 A.2d 521 (1947). Instead, married persons in Pennsylvania may hold joint title to property as tenants by the entireties (“per tout et non per my”), which cannot be severed by partition or attached by creditors of an individual spouse. See, Fazekas v. Fazekas, 727 A.2d 1262 (Pa.Super.1999). Entireties property ceases to exist upon marital dissolution, 23 Pa.C.S. § 3507(a), and unlike community property, is not presumed to be divided equally.

Pennsylvania is in the minority of jurisdictions where the increase in value of separate property is subject to equitable distribution, regardless of whether the appreciation is active or passive. In most states, the appreciation of separate property due to inflation or market forces is not divided in equitable distribution. This approach was advocated in the early days of the Pennsylvania Divorce Code. See (Hon.) Emanuel A. Bertin, Equitable Distribution: Preparing the Case for Settlement or Trial 92-94 (PBI 1982). The Superior Court soon took a different view. Aletto v. Aletto, 537 A.2d 1383 (Pa.Super.1988); Anthony v. Anthony, 514 A.2d 91 (Pa.Super.1986).

The preceding is an excerpt from a new book published by the Pennsyvlania Bar Institute (2010), entitled “Slicing Up the Pie: Equitable Distribution in Pennsylvania” (David Ladov, Editor).

Divorcing spouses often ask me about credit card debts and loans. While a divorce court may assign responsibility for paying credit card debts and loans that were incurred during the marriage, the court generally lacks jurisdiction over the creditors. In other words, the divorce court cannot force the credit card issuer to collect from one particular spouse if both spouses were cardholders.

If both spouses’ names are on the credit card accounts or loans, then creditors may choose to collect from one spouse or the other or both, at their discretion. Surely, the divorce court can hold a spouse in contempt if he or she failed to meet his or her court-ordered responsibility to pay the debts, but that is cold comfort when the other spouse’s credit rating has been ruined and debt collectors are calling on the phone.

My thoughts? (1) Use marital funds to pay off marital debts. The divorce courts may give full credit, partial credit or no credit at all if one spouse uses his or her post-separation earnings to pay marital debt, but the courts will grant full credit if marital assets are used to pay marital debt. (Just be cautious about impairing cash flow for current expenses.) (2) The spouse who has greater income may have a greater ability to pay debts. (3) If the debts are excessive and income is minimal, consider bankruptcy.

This article contains some good information about credit cards and divorce.

The advance sheets have been cold lately, so let’s take a brief look at New York’s recent effort to pass a no-fault divorce law. New York is the fiftieth and last state to consider no-fault divorce, which was first enacted in California in 1969. Both supporters and opponents of n0-fault divorce have blamed divorce lawyers for the push to enact the law and the delays the bill has encountered in the legislature.  (It seems that divorce lawyers will profit either way, depending on whom you listen to.)  Yours truly received a call recently to provide information about spousal support guidelines, one of the features that some New York legislators want to build into the law.

Does no-fault divorce cause the divorce rate to increase? I don’t know. What I do know is that New York’s fault-based divorce law has not prevented or diminished the frequency of divorce in that state.  Arcane strategies have developed to get around the fault-based divorce law in New York, which would not be necessary under a no-fault regime. A more straightforward law might make it easier, and in the long run, cheaper, for divorcing spouses to settle their differences. If estranged couples can break up and divide their money and property more efficiently, and with less stress to their children, then no-fault divorce will have served its purpose.

While doing research on corporate control issues recently, I came across the following article, published by The Wilmington Trust, a venerable private wealth management firm:

Imagine attending the next board meeting of your venerable family firm, only to be seated across from your former spouse’s new partner, who is 15 years your junior. With the divorce rate high, the liklihood of these situations occurring is increasing. But when it comes to protecting your family business from such potentially disagreeable divorce fallout, it’s important to take some precautionary steps:

• Develop a corporate culture that separates ownership from authority and control.
• Employ legal tactics and structures to prevent a divorce from deadlocking the business.
• Establish mechanisms (including participation in family business associations) to keep the channels of communication open and prevent small conflicts from becoming big.

Corporate Culture
Too many families confuse a stake in the business with authority and control. Here is one textbook example from Paul Karofsky, director of the Northeastern University Center for Family Business: “A century-old company, in which ownership was diluted among 18 grandchildren, gave everyone an identical salary, private office and luxury car regardless of their job with the now-defunct company. It would have been much more appropriate to provide salaries and benefits commensurate with their job descriptions and to distribute dividends based on their ownership and profits.”

The model for separating ownership from control in a mature family company, such as the one with 18 owners, is akin to a public company. At Staples®, where just about everyone owns stock — from truck drivers to senior management — no one has grounds to complain when a truck driver, who bought Staples stock 20 years ago, owns a bigger stake in the company and has a higher net worth than his newly hired, better-paid branch manager.

Legal Tactics
When children marry and their spouses enter the family with a presumption of status in the company, the stresses can severely impede business success. Add divorce, and the business could be doomed. As the founder, or senior family member, you have a responsibility to protect the company from being deadlocked by an irate ex-spouse following a child’s divorce. When the children are young and unmarried, it is relatively easy to insist on prenuptial agreements to prohibit spouses from owning stock. To encourage acceptance among the adult children and their betrothed, make it clear that the lack of stock ownership bears no relationship to a financial settlement in the event of divorce.

Obviously, prenuptial agreements cannot be required if marriages have already taken place or in situations where spouses feel justified in owning part of the business. For example, two sisters started a small, mail-order company to sell gardening tools. One sister’s husband offered to set up and run the website, which became hugely profitable. Meanwhile, the other sister’s husband helped out with the books and eventually joined the burgeoning company as CFO. The small business grew into a sophisticated corporation, with no one addressing any of the tough issues such as divorce, death, succession, and so forth.

In an emerging business, such as the gardening tool company, the owners and their spouses must recognize that their obligation to the business far outweighs their individual need for control. Since the spouses are already active in the company, one solution is to create a trust which will own and control all of the stock. In addition to family members, the trust should have one or more outside trustees, preferably a corporate trustee, to break any deadlock. Without a trust in place, shareholders can seek, and will likely receive, a remedy from the courts if a deadlock threatens the business. Unfortunately, having the courts make business decisions is costly and cumbersome, and everyone can wind up with bruised feelings. Trust documents should be re-examined and revised periodically to make sure they continue to serve business and family interests.

Family Business Associations
Family Business Associations can assist in facilitating communication, resolving conflict, and providing management, legal, and other insights. In addition, these organizations offer family business owners, including spouses and children, an opportunity to share their problems and solutions in a non-threatening, peer-to-peer forum.

In a Nutshell

• The divorce rate is high, but the probability of divorce increases when the number of family members involved in the business grows.
• Disputes over power, money, and control at home will be played out in the business.
• Be alert to status issues, both within the company and community.
• Clearly distinguish between ownership and jobs, but do not go overboard by being unduly tough on an heir apparent.
• Communicate and revise the trust and other agreements to cope with advancing age, marital status, involvement, health, and the like.
• Establish an exit strategy, such as a Texas Shootout, which allows one partner to set the price for his or her half of the business and the other partner to either buy or sell at that price.
• Employing spouses offers substantial benefits, including participation in business travel, the company pension plan, health plan, and Social Security. But roles and compensation for spouses must be well defined, recognizing that other family members and employees will notice every scintilla of preferential treatment.
• Assess your strengths as the business grows; if running the business day-to-day is not your forte, consider hiring an outside CEO or general manager.

Developing an ongoing relationship with your financial institution and a family business forum is well worth the effort. No corporate job can compare to a well-run family business when it comes to flexibility, financial reward, and an opportunity to work with people whom you know, love, and trust.

Source: The Wilmington Trust

The Colorado Supreme Court, in Marriage of Thornhill (June 1, 2010), held that it would not mandate the “fair value” standard for valuation of business in divorce proceedings. The husband in Thornhill operated an oil and gas service company that was valued at $1.625 million after applying a 33% marketability discount as part of an FMV valuation for divorce purposes. The wife argued on appeal that the marketability discount should not be applied, citing a Colorado precedent in which marketability discounts were prohibited in minority shareholder oppression cases. The Supreme Court affirmed the trial court’s refusal to prohibit marketability discounts in divorce cases. The Supreme Court noted that the “fair value” standard was required under the state’s shareholder oppression statute but not under the state’s divorce statute.

This decision contains a good explanation of the reasons why “fair value” is not necessarily appropriate to divorce cases. The wife argued that divorce cases are similar to shareholder oppression cases because a divorce involves an involuntary divestiture of a party’s interest in the business. The Colorado Supreme Court explained that valuation discounts are prohibited in shareholder oppression cases to discourage majority shareholders from engaging in oppressive behavior. In other words, the prohibition of marketability discounts in shareholder oppression cases forces the majority shareholders to pay more than fair market value as a penalty for their conduct. Imposing the fair value standard in divorce cases would not serve the same purpose.

The Colorado Supreme Court did not go as far as prohibiting the fair value standard in divorce cases. Instead, the court held that marketability discounts must be considered on a case-by-case basis. It is conceivable, under certain circumstances, that marketability discounts might not be applied in divorce cases. It would not be appropriate, however, to impose the fair value standard in every divorce.