What factors inflence a spouse’s eligibility for alimony after divorce under Pennsylvania law?

Under Pennsylvania law, post-divorce alimony “is a secondary remedy . . . available only where economic justice and the reasonable needs of a party cannot be achieved by way of an equitable distribution award and development of an appropriate employable skill.” These are the well-known words of the Superior Court of Pennsylvania in its Opinion in Nemoto v. Nemoto, 620 A.2d 1216 (Pa.Super.1993). Most of the important concepts in alimony jurisprudence are covered in this sentence. First, the trial courts must attempt to divide marital property in a way that avoids the need for post-divorce alimony. Why? Because the courts encourage a complete cessation of financial ties between divorcing spouses. If enough property (particuarly income-generating property) can be conveyed to a divorcing spouse, then that property can fulfill all of the spouse’s economic needs without the financial “umbilical cord” of alimony.

• The value of the assets and liabilities distributed to each of the parties must be considered before awarding alimony. 23 Pa.C.S. § 3701(b)(10), (16); Fee v. Fee, 496 A.2d 793 (Pa.Super. 1985).
• In its determination of alimony, the trial court must consider the income generated by a spouse’s marital and nonmarital assets. Ressler v. Ressler, 644 A.2d 753 (Pa.Super. 1994).

Second, our Courts encourage spouses to maximize their earning capacity and income potential through appropriate employment. In the first decade of the Divorce Code, enacted in 1980, the law provided that alimony could be awarded only for rehabilitative purposes, such as paying for college or vocational training. Alimony was not permitted in Pennsylvania prior to 1980, and the legislators who enacted the  Divorce Code worried that spouses would lose their incentive to become self-supporting if they could easily receive post-divorce alimony. The alimony law has been revised since 1980, allowing alimony for other reasons, such as meeting the budgetary shortfall of a spouse who is incapable of self-support. Still, the old law remains a strong influence among judges and lawyers in Pennsylvania. Several attempts to modernize the alimony law have failed, primarily because they might reduce a spouse’s incentive to go back to work. 23 Pa.C.S. § 3701(b)(1), (9), (17).

• The Court imputed an earning capacity to a dependent spouse who devoted her time to an unproductive start-up business instead of seeking gainful employment. Thomson v. Thomson, 519 A.2d 483 (Pa.Super.1986).
• An award of alimony for ten years was deemed excessive when a college education leading to a self-supporting job would require just four years. Barrett v. Barrett, 614 A.2d 299 (Pa.Super.1992).
• In cases where there is no evidence of an impediment that would prevent a spouse from becoming self-supporting, the court is authorized to limit an alimony award. Adelstein v. Adelstein, 553 A.2d 436 (Pa.Super.1989).
• In cases where a spouse’s earning capacity was limited by a medical disability or the disability of a custodial chid, Soncini v. Soncini, 612 A.2d 998 (Pa.Super.1992), the court may decline to impose a full time earning capacity upon a dependent spouse, justifying an award of alimony.

Finally, the law looks to the reasonable needs of a spouse. After a divorce, each spouse must have sufficient cash flow to meet his/her monthly household expenses. Yet, judges realize that two households cannot exist as cheaply as one combined household. The marital standard of living is just one of the seventeen statutory criteria for alimony awards, and in practice, it is one of the least influential. The expenses associated with custody of a child is more influential in an ex-spouse’s request for alimony. Just as important is the ability of a dependent spouse to become self-supporting through appropriate employment and the financial hardship that alimony may cause to the payor. When determining the amount and duration of an alimony award, the courts scrutinize the budget of a spouse seeking alimony carefully. 23 Pa.C.S. § 3701(b)(7), (8), (13).

• The Court will not allow an award of alimony that would divert twice as much income to the alimony recipient as the payor, which would allow her to enjoy a better standard of living than she had enjoyed during the marriage Ressler v. Ressler, 644 A.2d 753 (Pa.Super.1994).

Marital misconduct is just one of the seventeen factors in awarding alimony, and it has remained one of the least influential since the enactment of the Divorce Code. 23 Pa.C.S. § 3701(b)(14); Nuttal v. Nuttal, 562 A.2d 841 (Pa.Super.1989).

The Superior Court of Pennsylvania will be publishing my successful result in Mackay v. Mackay (2009), a case in which a parent attempted to enforce a casual conversation about college plans for their young children as a “verbal agreement” to pay college expenses. The Superior Court held that their conversation was merely an expression of plans or intentions, rather than an enforceable verbal contract.

The incident from which the dispute arose was a dinner conversation held between the parents when their children were pre-teens. The mother declared that she would like to retire after 30 years of service to her employer, and the father admonished her that both parents would have to continue working to pay for college expenses. Many years later, the parties divorced. In the divorce action, the mother testified about the dinner conversation but did not attempt to assert a contract claim in connection with the divorce. When the eldest child graduated from high school, the father pursued a reduction of his child support obligation, and the mother counter-claimed for enforcement of the alleged oral agreement.

The Superior Court examined the record exhaustively and concluded that a discussion of future plans for college did not constitute a verbal contract between the parents. The Court accepted my argument that the parents did not have an intention when they conversed to enter into a legally-binding agreement. This decision recognized and honored the difference between verbal contracts versus plans made by harmonious married couples, which are not understood or intended to have legal consequences after divorce.

192 WDA 2009

Each year I am one of the broadcast presenters for Family Law Update, one of the most-watched legal education courses for the Pennsylvania Bar Institute. We make live presentations in Philadelphia and Pittsburgh, followed by a satellite broadcast to nearly two dozen counties around Pennsylvania. Traditionally, I have presented the most recent cases involving child support, spousal support and alimony pendente lite.

The Pittsburgh live presentation will be given tomorrow (October 23, 2009), with the satellite broadcast to be given on November 18, 2009. The book is available on PBI’s website, and I publish my Powerpoint slides here.

Update: I have added a page to this site with my Powerpoint slides.

The Superior Court of Pennsylvania granted reargument en banc to the litigants in Silver v. Pinskey (2009), to consider whether Pennsylvania’s child support law might be pre-empted by the federal Social Security Act, precluding the trial court from ordering the parents to share the children’s derivative benefits. In this case, the mother initially had primary custody of two teenaged children following the parents’ separation. The mother was initially designated as the representative payee of the children’s Social Security benefits derived from their father’s retirement. Later, father won equally shared custody and was designated as the representative payee. The trial court ordered father to share half of the children’s Social Security derivative benefits with mother, noting that the Pennsylvania guidelines do not address the situation where an obligor is receiving such benefits. The Superior Court initially vacated the trial court’s order, prompting Father to request reargument, which was granted.

On reargument, Father argued that the Pennsylvania courts lacked subject matter jurisdiction to order him to share the Social Security derivative benefits with mother. He also argued that the trial court misapplied the criteria for granting a deviation from the support guidelines due to “other household income.” The Superior Court en banc held that it was not deprived of jurisdiction, as it had not altered the designation of the benefit payee. The Court also held that the Social Security benefit could be properly considered as grounds for a deviation from the child support guidelines. Yet, the Court held that the trial court had erred by ordering father to share the Social Security benefit while setting child support at $0. The Superior Court regarded this result, however well-intentioned, as “bordering” on violation of federal law. Consequently, the Court remanded to reconsider the child support guidelines.

Several other issues raised by Father were dismissed by the Superior Court. Specifically, Father argued that the trial court had no authority to order him to pay his proportionate share of medical insurance provided by the mother’s spouse or extracurricular activities including gymastics, softball, baseball, basketball, summer camp, and piano lessons. The Superior Court saw no merit in these arguments.

The California Court of Appeal’s decision in Marriage of Blazer (2009) dealt not only with double dipping, but also with the exclusion of a company’s retained earnings when determining the owner’s income subject to an alimony obligation. After a 20 year marriage, Husband and Wife divorced, the husband retaining ownership of a berry distribution business. At trial, the husband’s expert testified that the berry company was thinly capitalized for its gross revenue. Wife’s expert agreed (if not grudgingly) that some earnings must be retained for capital reserves. The trial court excluded these retained earnings from the husband’s income for alimony purposes.

The husband’s expert also testified that retailers were seeking to eliminate middlemen, forcing the business to integrate vertically. The capital expenditures to purchase a growing farm and expand distribution were not added back to the company’s income, despite wife’s argument that husband “chose” to incur those expenses and would benefit from the enhancement in the company’s value. Again, the trial court adopted the position of the husband’s expert, over the opposition of wife’s expert.

On appeal, the California Court of Appeals affirmed the trial court’s decision under an “abuse of discretion” standard. The Court noted that there is no statutory definition of “income” for alimony cases in California, and it was unclear whether retained earnings could be properly categorized as “income” for alimony purposes. Case law held that the child support definition of “income” did not apply to alimony cases.

BVWire.com reported this week on a recent California case where the issue of double dipping was examined in the context of divorcing business owners:

The husband owned a produce company in California, valued at $5.6 million, ostensibly under the capitalization/excess earnings method. After a marriage of “long duration and substantial standard of living,” the trial court awarded the wife $20,000 per month in spousal support plus half ($2.8 million) of the business. The husband appealed, urging a blanket prohibition against double dipping—i.e., using the same stream of earnings to determine business value/property division and also support.

In Blazer v. Blazer (No. DR 38292, Aug. 25, 2009), the California Court of Appeals discusses the excess earnings method and, in particular, the myriad ways to distinguish personal from enterprise goodwill. It also considers the double-dipping precedent from other jurisdictions as well as its own cases concerning pension divisions. In the end, the court sidesteps the issue by finding insufficient proof that the husband’s expert in fact valued the business by capitalizing his future income stream. Moreover, “the earnings of an ongoing business…do not always derive solely from the personal efforts of its operator, nor is there evidence that such is the case here.” The court explicitly confirmed the equity of the spousal award in this case as well as the trial court’s implicit determination that there was no double counting of the husband’s income.

Thus, the question remains open in California and elsewhere—especially for cases concerning owners of a professional firm or solo practice whose interests are valued under the excess earnings method. Look for a full summary of Blazer and our continuing analysis of double dipping in the November Business Valuation Update™.

This weekend I am in Chicago to attend the BVR Divorce Conference. I will read the case and many others while I am there, so I will have much to report about when I return!

Note: this decision was originally published on April 17, 2009, reaching a different result. It was re-argued en banc, and the final decision issued on August 21, 2009.

If you haven’t read the Pennsylvania Superior Court’s recent decision en banc in Estate of Sauers (2009), start with the dissenting opinion. The facts were simple: the husband did not change the beneficiary of his employer-based life insurance policy after his divorce. He died. The plan administrator honored the beneficiary designation and paid the $40,000 in life insurance benefit to the ex-wife. The husband’s estate sued the ex-wife to recover the proceeds under § 6111.2 of the Probate Estates and Fiduciaries Code. That law says that a beneficiary designation in favor of an ex-spouse is automatically revoked upon divorce unless the designation was clearly intended to survive the divorce. The ex-wife tried to dismiss the estate’s lawsuit against her but failed. When the trial court refused to dismiss the suit, the ex-wife took an appeal. The Superior Court initially reversed the trial court’s order, but after reargument en banc, affirmed the trial court’s order allowing the estate to seek recovery of the proceeds from the ex-wife.

In her dissenting opinion, Judge Mary Jane Bowes of the Superior Court dissected § 6111.2 to see whether it was pre-empted by ERISA, the federal law that governs employee benefits like pensions and life insurance. She identified three distinct clauses in the state law: (1) a redesignation clause (which revokes beneficiary designations); (2) a prior restraint clause (which protects the plan if it pays the ex-spouse); and (3) a remedy clause (which makes the ex-spouse liable to anyone who should have received the benefit). Judge Bowes concluded that the first and second clauses were pre-empted by federal law, but the third clause was not.

The majority held that state law was not pre-empted. Like the dissenter, the majority of the Superior Court cited Egelhoff (2001), a Washington Supreme Court decision holding that Washington’s redesignation statute was pre-empted by ERISA.

In this author’s opinion, the only material distinction between Egelhoff and this case was that the ex-wife in Egelhoff received a pension and life insurance proceeds. In Egelhoff, the Washington Supreme Court held that its redesignation statute conflicted with ERISA’s mandate requiring plans to make payments to beneficiaries “designated by a participant or by the terms of the plan.” Accordingly, the state law was pre-empted by federal law.

The majority in Sauers never really considered the redesignation clause in the first sentence of Pennsylvania’s statute. They skipped directly to the second sentence, which protects plans from liability if they pay the “wrong” person. The majority held: “Plan documents continue to control the administration, and the objective of a national uniform administrative format is maintained.” In other words, there is no conflict with federal law because plans cannot be penalized for paying the designated beneficiary contrary to state law. 

The majority acknowledged that a law which requires payment of benefits into court or to a person who is not the plan beneficiary would conflict with ERISA. Yet, the majority did not consider the first sentence of § 6111.2, which provides: “any designation in favor of his former spouse . . . shall become ineffective for all purposes….” Perhaps the majority overlooked this sentence because it did not contain the word “revoke.”

The majority compared § 6111.2 to the QDRO provisions of ERISA, which are an exception to the anti-alienation provisions of ERISA. Yet, a QDRO is authorized by federal law, not state law. The U.S. Supreme Court has not recognized an exception to ERISA that is based on state law.

The majority also noted that the Western District’s decision in Metropolitan Life v. Walsh (1995)(holding § 6111.2 was pre-empted by ERISA) was not precedential in state court. Yet, the majority made no attempt to distinguish Met Life or its rationale.

Curiously, the majority’s opinion began with the proposition that there are three forms of federal pre-emption. The majority correctly held that express pre-emption was an issue in this case, but never examined the other two forms of pre-emption. Having found that Pennsylvania’s law was not expressly pre-empted, the majority never considered whether it might be pre-empted under one of the two other branches.

This week I reviewed a recent decision by one of our Allegheny County judges, regarding modification of child support. Kozel v. Kozel, No. FD98-00761 (Allegheny Co., June 30, 2008).

After a decade of litigation following a four year marriage, the Supreme Court of Pennsylvania denied Wife’s petition for allowance of appeal seeking a review of the child support award and alimony pendente lite, as well as equitable distribution of marital property. Five months later, Mother filed a Petition for Modification of Child Support, alleging “the children’s monthly expenses have increased.” Father moved to dismiss the petition, arguing that it was not legally sufficient to state a claim warranting a hearing. The trial court agreed and dismissed the Petition for Modification. Mother filed a Petition for Reconsideration, alleging “the children’s monthly expenses have increased, including all expenses listed on Mother’s budget from the last support proceeding.” Mother attached the budget from the previous support proceeding without modification. The trial court denied reconsideration.

In her Opinion, Judge Kathryn Hens-Greco cited Rule 1910.19, which requires petitioners to “specifically aver the material and substantial change in circumstances upon which the petition is based.” Mother argued that the pleading rules do not require parties to present their evidence before trial and allow discovery to build a claim based upon information and belief.

In this author’s opinion, the decision reflects a reasonable concern on the part of the trial judge that she could not measure the materiality of the alleged change in circumstances. As she noted, many of the expenses on Mother’s budget were disallowed in the prior proceedings. If the increase in Mother’s expenses were solely or primarily due to the disallowed expenses, then perhaps no modification would be warranted and the petition might be viewed as an attempt to relitigate the appeals. Perhaps Mother’s request for modification would have been permitted had she alleged increases in the expenses that were not disallowed. On the other hand, how much should petitioners be required to plead? Will factfinders restrict petitioners to the specific grounds they plead?

The Tennessee Court of Appeals recently held that a business owner’s spouse who signed a buy-sell agreement was bound by the value in a divorce action. In Inzer (2009), the husband and wife both signed a buy-sell agreement when they formed an LLC to purchase a Sonic Drive-In franchise. The buy-sell agreement granted other partners a right of first refusal to buy the interests of a withdrawing partner for the lesser of book value or the offer procured by the withdrawing partner. The owner’s expert presented evidence that the owner’s 24% interest in the franchise was worth $120,000 to $135,000 using capitalized cash flow or market methods, but only $16,000 net book value after discounts. Wife’s expert testified to a value of more than $500,000 after making adjustments to the owners’ compensation and ignoring discounts for lack of marketability, lack of control or the restrictive operating agreement.

The trial court valued the owner’s interest at $200,000 without much explanation. The Tennessee Court reversed, holding that the franchise was worth $33,000 book value without consideration of intangible value or discounts (as specified in the buy-sell agreement). The appellate court distinguished cases in which buy-sell agreements were not controlling, since the non-owner spouse in those cases did not sign the buy-sell.

Consider whether it was appropriate for Wife’s expert to perform  Type I adjustments in his normalization of the income statement, i.e., adjusting the owners’ compensation. Could a purchaser of a 24% interest compel the other owners to reduce their compensation? Even if the Court had not held the buy-sell to be controlling, it seems unlikely that Wife’s expert would have prevailed.

The Superior Court recently considered the case of Murphy v. McDermott (2009), in which the Court was asked to consider whether the unmarried father of a child should be required to pay parochial school tuition. Prior to the outbreak of child support litigation, Mother unilaterally enrolled the child in parochial pre-school, a decision that Father opposed but acquiesced in. When Mother enrolled the child in private kindergarten, Father was roused from complacency and refused to pay. Mother sued him for child support, including private school tuition, and won.

On appeal, the Superior Court considered the two-pronged test previously established by the Pennsylvania courts: (1) whether the child would benefit from private school; and (2) whether the expense was consistent with the standard of living established prior to separation. (Note that the parents never lived together.)  Father argued that the public school should not be presumed to be inferior, and that public school offered more programs than parochial school. The Superior Court held that it would not overrule the trial court’s finding that parochial school would benefit the child, nor its finding that Father could afford the expense. One of the Superior Court judges wrote a strong dissent, expressing his opinion that public schools should not be denigrated.  In fact, the dissenting judge would have created a presumption that public schools are adequate unless the parent seeking private or parochial school could prove a deficiency.