Archive for April, 2010

The Largest Single Cost of Litigation

Friday, April 30th, 2010

The largest single cost of litigation is attorney fees. The cost of a litigated divorce can be eye popping. Sometimes the cost of litigation can be so great that the parties may not have sufficient funds to pay the lawyers until their assets are divided.

For the protection of both the lawyer and the client, most lawyers prefer to work with a contract between them and the client, with an up-front payment of a retainer fee. The lawyer works at an hourly rate. Typically, the total number of hours multiplied by the hourly rate is the lawyer’s fee. (This fee does not include attorney costs, such as copying costs, service fees, telephone charges, travel expenses, filing fees, expert witnesses.) When a lawyer is retained, the contract between lawyer and client spells out the terms of the arrangement, and it greatly reduces the chance of a misunderstanding.

Attorney fees can be reduced when the spouses do more of the work associated with a divorce. For example, when the couple cooperates with each other — for example, freely exchanging financial information needed in conjunction with the marital settlement agreement rather than forcing expensive discovery — legal costs can be held down. Uncontested actions also greatly reduce the amount of work a lawyer has to do.

Courts generally do not order the parties to pay each other’s legal fees; however, in some cases, jurisdictions by statute permit courts to award attorney fees in domestic relations cases. Courts, in deciding this, consider the financial positions of the parties, and the court has the discretion to order one party to pay all or some of the other party’s attorney fees if one spouse has the ability to pay and the other one does not. The conduct of the parties may be a consideration in awarding attorney’s fees in divorce actions, and the actions of parties who raise unnecessary issues or raise issues in bad faith may be sanctioned with attorney fees.

In general, divorce courts in the United States follow the American Rule, which means the winning side is not entitled to attorney fees because it won.

The burden of proof is on the party asking the court to make an attorney’s fee award.

Imputed Income: Applied in Child Support Calculations and Alimony

Tuesday, April 27th, 2010

Sometimes, the husband argues that he cannot work anymore or does not have the income he had at the onset of the divorce, and the wife, in turn, contends that the income should be imputed, or attributed. He contends that he is struggling to survive as a novelist; she contends he is a willfully unemployed idler. She supports her contention by demonstrating that he has the ability to work and that the unemployment is elective.

This can happen during the trajectory of the divorce or when the parties appeal for modifications of alimony or child support as a result of a change in circumstance, but on this point, the wife has the law on her side. In general, for purposes of spousal and child support, courts consider the earning capacities of the parties, not their actual income. Courts view elective unemployment (idling) or underemployment as bad faith and remedy that with the legal fiction of imputed income, which makes the party responsible for the payment.

Courts impute income in two ways — the first, as a matter of fact, where the court considers the actual earnings of the spouse, and the second, as a matter of law, where the court considers the earning power of the party.

For example, a judge may impute a certain income level to a brain surgeon who abandons his profession to become a street musician because courts believe his family has a right to income that would have been provided had he paid “diligent attention” to his career. The rationale behind the imputation of income is that no one should be allowed to escape obligations by taking actions that make the fulfillment of such obligations impossible.

The desire of a woman to stay at home with small children is a good-faith reason for not imputing income to her, courts have found.

An Important Calculation in the Marital Estate

Tuesday, April 20th, 2010

In dividing the marital estates, the appreciation of assets, both separate and marital, present difficult questions. Assets appreciate actively, which means as a result of improvements or actions by its owner, such as building a fireplace in the marital home, or passively, which means as a result of changes in the market, such as during the house boom. This sounds simple, but like everything in the context of divorce, it becomes more complicated.

Very often judges face complicated arguments about the active and passive appreciation of assets that are in part marital and in part separate. For example, in general, in a private company headed by a single owner all appreciation is generally active, but one of the most difficult situations in family law happens when courts must deal with the appreciation in the value of private, family-run businesses. Active or passive appreciation can become something of a Gordian knot in the case of private business that is separate property when marital or community funds are commingled with uncompensated contributions of a homemaking spouse. This situation happens very frequently, such as doctors who employ their spouses as secretaries.

The management of separate property investments can become problematic, particularly during the wide gyrations of the financial markets. When one spouse plays an active role in the management of separate property investments, the other spouse may claim that the increase should be marital, particularly when it is the husband managing the wife’s property. By the same token, a wife whose investments take a plunge may allege dissipation because her husband mismanaged her money. At the least, both spouses should have some idea of the original cost of an asset because this number is used to calculate any appreciation.

In general, courts have held that when a nonmarital asset appreciates because of the efforts of either party, the appreciation becomes marital. The asset need not be money. In a 1991 Montana case, a court held that a wife who had managed her husband’s collection of baseball cards should share in the appreciation of the collection.

One of the more difficult situations arises when separate property appreciates during the marriage. In general, in dual-classification, equitable distribution states, active appreciation that results from marital efforts is marital property while passive appreciation remains separate property. Courts look on appreciation as a result of marital efforts as active, and appreciation as result of market forces or third-party as passive.

Good Records Cut Discovery Costs

Friday, April 16th, 2010

After the initial shock that happens when a couple decide to end the marriage, very practical considerations come to the fore. One of the most important is the division of the marital estate. The couple, one way or another, must come up with hard numbers of what they own individually, as separate property, jointly as a couple, as well as what owe individually and together.

Depending upon the circumstances of the breakup, these numbers can be had by discovery, which is a very time consuming and expensive process whereby one party subpoenas the other requiring the production of records, or the couple can work together and assemble this records themselves.

The more wealth a couple has, the harder and more complicated the task becomes. Couples very often have everything they need to do this; however, frequently the records are not all in one place. Sometimes they are not up to date.

It may seem darkly comic, but a couple preparing to divorce needs the same financial records they would need if they were going to a financial planner to prepare for their so-called “golden years.” The same information is used to prepare a property settlement. On the asset side, this includes, but is not necessarily limited to, everything each owns individually as well as everything they own together; on the liability side, it includes, but is not necessarily limited do, everything each owes individually as well as everything they owe together. On the asset side, this means checking and savings accounts, mutual funds and money market accounts; real estate records, including the marital home and second homes and unimproved land; personal property, such as automobiles, furnishings, collections (art, stamp, coin); stocks, bonds, annuities, retirement plans, including pensions and profit sharing; accrued vacation time, medical savings accounts; other valuable personal property, life insurance and season tickets. On the debt side, this means records of credit cards, vehicle loans, mortgages and home equity loans, promissory notes, student loans and other debt.

It is a good idea for both spouses to have copies of all financial records — his, hers and theirs. Later in the divorce action, the assets and liabilities in these records will be classified as marital or separate — an important step in determining the size and eventual distribution of the marital estate. That cannot be done without the records, however.

A “metaphysical quest for the sound of one hand clapping”

Tuesday, April 13th, 2010

Many divorcing couples struggle to agree on the value of a professional practice, particularly its goodwill, which is its value beyond the market value of any tangible assets. Battling spouses argue vastly different calculations for this business asset that neither can see nor touch nor sell.

It is not an easy call. One Florida court likened “[t]he attempt to determine the goodwill value of the business of a sole professional practitioner, absent consideration of reputation, presence and tangible assets, is somewhat akin to a metaphysical quest for the sound of one hand clapping.”

Goodwill, which includes reputation, prestige, and company name, is the favor that a business enjoys by virtue of being established — that hard-to-calculate part of the whole that is greater than the sum of its parts. Goodwill is based on the observable phenomenon that when a business is sold, the sale price is greater than the value of its assets.

In divorce actions, particularly those involving professional practices such as a doctor or lawyer, goodwill becomes a point of contention when one side (usually the professional himself) contends that it is separate property and the other side (usually the wife) contends that it is marital. Very often goodwill can far exceed the value of any physical assets accumulated by the professional. Goodwill can also be a factor among tradesmen. Ralph runs a thriving shoe repair business out of a hole-in-the-wall shop on a side street, but when Ralph and Mrs. Ralph want to retire they cannot find a buyer because all the value of the business is Ralph and his reputation for good work.

In divorce actions, courts must grapple with the distinction between realizable goodwill, which can converted to cash by selling the business, and unrealizable goodwill, which is the business, professional and marketing skills of the owner. In general, most courts hold that realizable goodwill is marital property and take a variety of positions about unrealizable goodwill.

Or the craftsman, in the case of the shoe repair shop. In some businesses unrealizable goodwill may be the business. Ralph’s Shoe Repair has a substantial value as long as its founder, proprietor and sole employee does the work; without Ralph, its value is reduced to nothing but the sale value of his tools and tiny shop.

Goodwill questions also surface when courts must deal with the goodwill value of professional degrees acquired during the marriage, particularly when one spouse (often the wife) forsakes a career for the promise of a payoff of enhanced earnings because of the degree (taken by her husband).

A majority of American jurisdictions hold that personal goodwill of a business is unrealizable and cannot be classified as marital property; on the other hand, enterprise goodwill — “the corporate, transferrable reputation of the business itself” — is realizable and must be included in the marital estate. “If enterprise goodwill is not marital property, the valuation of a business will be much lower than the actual price than the same business could command on the open market.”

Tools to Move the Action

Wednesday, April 7th, 2010

Leverage factors are considerations made by each of the parties pertaining to disputed issues. Leverage factors can be both tactical and strategic, and in a nasty adversarial divorce, both come into play as ways of putting the other side on the defensive and extracting concessions.

Put simply, leverage factors are things one side controls that the other side wants. When the facts of a case point toward a particular legal outcome, that is called a legal leverage factor. Leverage factors come into play when the couple and their lawyers negotiate the marital property settlement.

When both sides have leverage factors, each can “horse trade,” swapping considerations like chips.

One veteran Pennsylvania divorce lawyer says that in a contested divorce, the strongest leverage factor, one to be answered from the onset of the action is, In whose interest is it to remain married longest? Answering this question can be a starting point at the onset of divorce negotiations because it creates leverage over the negotiations. If Rufus has Roxanne waiting in the wings, but Rhonda is prepared to remain married until Hades freezes solid, Rhonda has leverage over Rufus: he wants out; she’s prepared to make him wait. A person willing to wait has a bargaining tool that can be brought to bear in property negotiations, and Rhonda, coached by her lawyer, can use it to extract concessions from Rufus.

A Road Less Taken

Tuesday, April 6th, 2010

Of the 10 common fault grounds for divorce, adultery — the marital infidelity that happens when one spouse has sexual intercourse with a third party — carries with it the most legal baggage. Today, when all states offer some form of no-fault divorce, many lawyers advise against using adultery in divorce even when it is the case, even when it can be proven.

In the bad old days, judges used adultery to punish the guilty because it was the sole ground for divorce in some jurisdictions, and fault determined the terms and conditions of marital support and even in some cases the distribution of property. Today, judges may focus on the economic impact of adultery, such as the dissipation of marital assets on a paramour, but fault itself carries with it less importance than it did 30 or more years ago.

Adultery as grounds is not as common as it once was, but some believe that it can be useful in a property settlement negotiation or in a spousal support dispute. Judges still look with disfavor on adultery, and some lawyers believe that proof of adultery may sway a judge to a particular point of view.

Some angry spouses, particularly women (hell hath no fury like a women scorned) use adultery as a way of achieving a moral vindication. In this routine, the scorned spouse has the psychological satisfaction of saying, “Yes, the marriage failed, he was an unfaithful s.o.b., and that’s the reason.”

The difficulty here is that outside of her family and maybe some friends, moral vindication does not mean much. So many lawyers try to discourage angry spouses from such an approach.

One of the best reasons for not using adultery as a ground is that the allegation means that the divorce goes to trial, and that increases the cost of the whole dissolution dramatically. That’s where uncontested and no-fault divorce comes into play, opening the way for a marital dissolution that while not emotionally painless is at least less expensive. Furthermore, some believe that alleging adultery is scandalous or shameful, and reflects poorly on both marital partners, and so it might not be alleged. Some people also believe that only people who are dissatisfied at home stray in search of satisfaction away from home.