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).

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.

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!

The Pennsylvania Divorce Code says that the court must consider the homemaker’s contribution. When representing a stay-at-home spouse, it may be helpful to prove that the spouse was an active homemaker whose efforts enabled the breadwinner to devote more time and attention to his or her career. A homemaker’s contributions might include: 

• meal planning and shopping
• cooking
• cleaning
• researching and selecting furniture, carpets, wall coverings, decorations, vehicles, appliances, clothing, service providers
• scheduling and supervising home repairs, service calls and maintenance (plumbers, appliance repairmen, tree service, etc.)
• child care (including feeding, bathing, dressing, making school lunches, administering discipline, attending school conferences, assisting with homework, arranging extracurricular activities, scheduling and keeping appointments with doctors, picking up children at school when ill, etc.)
• caring for elderly or disabled family members
• bill paying and budgeting
• entertaining clients and business associates
• vacation planning
• participating in community and charitable organizations

 When representing a working spouse, it may be helpful to prove that these tasks were not performed by the stay-at-home spouse or were shared.

The Superior Court of Pennsylvania held, once again, that the budget is the most important element of a Melzer child support case — that is, a high-income case where the guidelines do not apply. Under Pennsylvania law, the child support guidelines govern cases where the parents’ combined net incomes are $20,000 per month or less. Yet, in those high-income cases above $20,000 per month, the guidelines are irrelevant except to set the minimum level of child support. In high-income cases, the courts must analyze the parents’ budgetary expenditures to determine the proper amount of child support.

A recent case, Rich v. Rich (2009), demonstrates how important the budget can be in high-income cases.  The aptly-named patriarch of this family provided the standard of living that only a ten-figure salary can afford. Father earned $9 to $10 million per year as the CEO of a coal company. During the marriage, the family lived in a 10,000 square foot home on 150 acres with an indoor pool and amenities. The family traveled worldwide on vacations and spent summers at homes in Florida and the Jersey shore. After separation, Mother purchased a modest home and moderated her lifestyle. She did not submit a detailed budget when she applied for child support. Instead, she pointed to the Father’s affluent lifestyle as an indicator of how much she should receive.

When Mother was awarded an amount of child support equal to nearly 100% of her expenditures, she complained because it was just 2% of the Father’s income. She reasoned that she should receive more like 15%. The Superior Court disagreed, holding that Mother should have proven that she was actually spending that much.

In divorce litigation where one of the spouses owns a professional practice, such as a medical practice, dental practice, law firm or accounting firm, the lawyers and their experts have to determine whether the business has value. Their determination depends upon whether the professional practice is believed to have enterprise goodwill.

Briefly, enterprise goodwill is the price that a buyer would pay for a professional practice over and above the value of its hard assets like equipment and supplies. In theoretical terms, enterprise goodwill is the reputation of the business that is not closely associated with a particular owner or professional. The opposite of enterprise goodwill is personal goodwill, which is the reputation and skill of the professional. Enterprise goodwill has value because it is transferrable but personal goodwill is not. Someone might be willing to pay for a name like Aspen Dental Systems, but what about Jane Doe, PC?

Increasingly, there is a market for professional practices that are not part of a regional or national chain. Dental practices, even those with a single location and single dentist, are bought and sold frequently. The same is true for specialty medical practics. Yet, primary care medical practices and legal practices are rarely bought or sold. So, how does a lawyer decide whether a professional practice should be evaluated by a business valuation specialist? Here are three signs that a professional practice might have value:

1. Actual transactions. If a professional or his/her partners have bought or sold their practices, it is more likely that there is transferrable enterprise goodwill. However, you must distinguish market transactions from succession planning. If the only transactions are between retiring partners and advancing associates, then there may not be much enterprise goodwill.

2.  Subordinates and equipment.  One reason why dental practices are increasingly transferrable is that dental procedures are performed by hygenists and associate dentists. If the owner of the practice is earning profit from other professionals and paraprofessionals, then a buyer might be willing to pay something to step into those shoes.

3.  Excess compensation. If a professional is earning substantially more than industry standards, then the professional’s practice might have enterprise goodwill. No buyer would pay to assume an existing practice if he or she could start a new practice for free – except if the existing practice were more profitable than a new practice would be. This criteria is based on the principle of substitution.

It’s never easy to take the first step on any journey. When you are facing a marital separation, there are five things that you can do to protect yourself, financially and emotionally.

1.         Secure your property. Review your joint bank and credit card statements regularly to ensure that no unexpected withdrawals or charges have been made. You might want to divide joint accounts or close credit cards if there is no legal restriction, but check with your divorce lawyer first. It’s also a good idea to secure property that may have sentimental value, like family heirlooms, where they cannot be misplaced or damaged.

2.         Conserve resources. Creating a budget and sticking to it are always prudent measures, especially during a marital separation. When one household becomes two households, the expenses are increased but income is not. When making financial decisions, consider the effect on cash flow and liquidity. It might be better to pay joint debts out of joint income and assets instead of your separate income and assets, but check with your divorce lawyer first.

3.         Gather financial records. If you keep your records organized, you will have an advantage in the divorce process and save legal fees. Make photocopies and keep them in a secure place so that you can furnish them to your divorce lawyer when asked. If you have access to your spouse’s records legally, make copies of them as well. You can obtain most documents through a legal process known as discovery, but it is cheaper to make copies yourself.

4.         Think twice before acting. Imagine at all times that your kids and a family judge are watching every action and reading what you write. Anything you say or write in emails and text messages might be used as evidence. How would a family judge react to your Facebook profile? If you have a temper, consider moving out before you do something that might result in a restraining order. Don’t make any agreement without consulting a lawyer first.  

5.         Contact reliable allies. Trust is one of the first casualties of divorce, so you need to find reliable allies. Consider supportive friends and family members who are able to keep your confidences and empathize with your feelings. Physical activities like exercise can reduce stress more effectively than alcohol or junk food. Hire a family lawyer that you feel comfortable with. It is very important to understand what your lawyer is saying and to be heard when you speak to your lawyer. Consider lawyers who concentrate their practice in divorce and know the nuances of this complex area of legal practice.