Equitable Distribution

Experts and their reports can be an expensive, but necessary, element to many types of cases. This is particularly true in divorce cases, whether they are personal or business divorces. In all cases, it is incumbent on the attorney, client, and expert to all have the same understanding of the scope of the work and expectations on expense. Sometimes, it is not possible to absolutely predict how much litigation will cost or account for every variable or obstacle to a project. Consequently, the costs of a case or preparation of an expert report can exceed the expectations of a client.

A recent Superior Court case dealing with an insurance report highlights the problem created by different understandings and expectations between an attorney and the expert he hired on behalf of his clients. More pointedly, it reaffirms the concept that the engagement letter between an attorney and expert (or client and expert) is an enforceable contract and that an oral estimate of costs will not serve to modify or supersede it.

In the case of MCMP v. Gelman, attorney Bruce Gelman hired Marsico Construction Services and their principal, Louis S. Marsico, to provide expert testimony and a report for an insurance coverage dispute Gelman’s clients had with their homeowner’s insurance carrier.  Marsico provided the report, which was submitted by Gelman to opposing counsel and the insurance company. However, when Marsico provided his invoice to Gelman, it had costs totaling about $30,000.00 – considerably above Gelman’s expectation based on Marsico’s rough estimate of the cost being between $7,500.00 to $10,000.00. Gelman refused to pay the cost and Marsico demanded that he not use the report in the insurance coverage dispute or at trial. Though not noted in the case, the report is considered hearsay unless otherwise stipulated to and if Marsico refused to testify, Gelman would have been unable to move the report into evidence. Once barred from using the report further, Gelman would later claim that by not having a report, the case settled for less than it could have.

Gelman’s appeal tried to assert that the oral estimate provided by Marsico constituted an enforceable, orally accepted express contract term between Gelman and Marsico’s company. The lynchpin of the case, however, is the engagement letter: Gelman agreed to pay Marsico an hourly rate and Marsico was awarded $20,000.00 after a two-day bench trial for breach of contract.

On appeal, the Superior Court rejected Gelman’s arguments and found that the hourly rate engagement was valid and that the estimate provided by Marsico was “off the cuff” and not an express contract term. That point was particularly true since a written engagement letter with specific terms for the firm’s consulting services followed the oral estimate.

The takeaway from the case applies to clients and attorneys: understand the terms of your engagement letter for professional services. Review them and ask questions about any term you do not understand. Addressing a misunderstanding on the precipice of trial leaves you with few options and may severely prejudice the client (another issue altogether). As seen in this case, the courts will not step in to fix your error or accept a modification to the contract that does not strictly conform the Pennsylvania law on express and oral contracts. You do not want to find yourself paying for a report that only collect dusts in the file.

A standard provision in most written agreements establishes that no modification of the agreement shall occur unless the parties do so in writing (and usually notarized to avoid fraud). Recently, however, I confronted the issue as to whether or not a party may make a valid oral modification of a provision of an agreement.  In other words, was the “all modifications in writing” provision of the agreement as ironclad as it appeared?

The issue stemmed from the reimbursement of expenses related to the sale of property.  Over time, the reimbursable expenses grew and became substantial enough that the party responsible for reimbursing the other balked at the figure and tried in many ways to extricate themselves from the obligation.

It is common to include modification language in agreements to ensure that ad hoc revisions by the parties do not alter or create new obligations; or to avoid the chance that oral agreements are misunderstood or reneged upon by one or both parties. Interestingly, a commercial litigation case sheds light on the weakness of these clauses. The case of Crown Coal & Coke Company v. Powhatan Mid-Vol Sales LLC, 929 F.Supp.2d 460 (W.D.Pa. 2013) addresses whether a provision prohibiting modification of an agreement unless in writing precludes any modification whatsoever. The U.S. District Court, citing a variety of state and federal cases found that even where such a prohibition exists in the agreement, the parties may revise the agreement by parol (oral) negotiation: “[the] hand that pens a writing may not gag the mouths of the assenting parties.”

Modification of an agreement by parol negotiation, however, has the significant burden of being proven by clear, precise, and convincing evidence. This is a reflection of the general rationale behind written agreements: the need to eliminate ambiguity or confusion between the parties. Here, the Crown Coal court is articulating that in order to prove the validity of revised terms of the agreement, the party seeking enforcement must show that the terms are clear, unambiguous, and the evidence convincing enough to prove to the court that both parties intended to abide by the terms. Evidence along these lines includes the actions of the parties effectuating the terms.

This case reminds us that terms of an agreement are alterable by the parties so long as they satisfy the elements of being a binding contract. However, it is always advisable to work with a lawyer to make sure the revisions are in writing since the high burden of proving a modification by parol evidence – while not impossible – is difficult.

Any term of an agreement worth adhering to is best established in writing and amended to the Agreement. In the case of a Marital Settlement Agreement, it is also advisable to take the additional step to have the amendment incorporated into the Divorce Decree.  Once a MSA is entered as an Order of Court through a Divorce Decree, it really cannot be modified except by another Order of Court.  Consequently, if a revision to the terms has been made and both parties expect the other to adhere to the terms (or want the ability to compel enforcement), the best practice is to have a written amendment signed and filed for incorporation with the Divorce Decree.  This additional step might be the difference between easily enforcing the new term(s) or having to take a circuitous route to enforcement. MSA becomes a court order once incorporated into the decree and court orders can only be modified by the court.

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.

Hopefully all of us know that Pennsylvania is an “increase in value state” meaning that under Section 3501(a) of the Divorce Code, the increase in value of non-marital assets during marriage (to final separation) is a marital asset subject to division. There are two sides to this equation in cases where a spouse brings a premarital home to the marriage. The first is the increase in value that may be brought about by market demand for real estate. In laymen’s terms, your spouse bought her house four years before marriage for $200,000. It was worth $225,000 on the day of marriage and at separation, it was worth $275,000. Voila, $50,000 increase in value that is subject to distribution.

The other side is increase in value brought about by reduction in the principal balance due on the mortgage of the non-marital home. This requires some documentary investigation but today more and more counties make copies of the mortgage instruments available on line. Obviously, the best way to show this is to have all of the mortgage documents including the note as the note specifies the interest rate. But our clients tend to either discard these documents or bury them deep in attics and garages.

If you can get a copy of the mortgage on line, there is a decent chance it might refer to the mortgage rate. It will tell you whether you are dealing with a 15 or 30-year term. If you cannot find the rate, try looking at a website called http://mortgage-x.com. It will provide national monthly averages for 1 year ARMS and 15/30 year conventional financings on a historic basis. Obviously, it does not have your particular mortgage but it is going to be reasonably close.

Armed with that information, then go to http://bankrate/com. and look for an amortization table. Plug in the mortgage amount, the term and the interest rate and it will give you an amortization table from which you can determine the balance due on the mortgage on the date of marriage and the date of separation. The tables default to an assumption that you are getting the mortgage the day you went to the website but print it out and then, by hand correct it for the actual dates relevant to your case.

Is this admissible in a formal sense? Well, to ask the question is to answer it but unless we start demanding that every mortgage company come to every courtroom where there is a claim for increase in value, it will get you pretty close to where you need to be.

 

Recently, a case came before the Superior Court addressing the question as to whether a party has the right to charge interest on unpaid portions of an equitable distribution award. In Raines v. Raines, 2016 PA 227 (Superior Court), the basic facts are that husband and wife divorced and the recommendation of the master requiring husband to refinance a property and pay out wife was entered as an Order of Court. Under the terms of the order, if husband had not paid the cash by a certain date, wife was entitled to 6% interest per year on the unpaid balance.

Suffice to say, husband didn’t pay his obligation. He could not refinance the property and was forced to try to sell it in order to pay out wife. Consequently, wife pursued contempt and to have the debt considered a judgment. She was not successful since the court found that husband was not in willful violation of the Order and was trying to mitigate the problem by selling the house.

Eventually the house sold and at settlement, wife presented husband with a settlement distribution which provided her interest under the order, plus interest under Section 8101 of the Pennsylvania Code which relates to interest attached to monetary judgments. That law exists so that a judgment holder is not prejudiced by any appeals which might delay the ultimate satisfaction of the judgment. Here, wife was trying to attach it to the money owed and increase her recovery from husband, even though the trial court rejected her request to do so.

Husband, under protest, paid the interest so to not delay settlement and filed to have the Section 8101 interest returned.

The trial court found, the Superior Court upheld, that an equitable distribution order is not a “judgment” as contemplated by Section 8101. A judgment is a “final determination” of a case and in the context of divorces, it is the decree which is the “final determination” and the equitable distribution order is an ““ancillary issue.” The court went on to identify that the entry of judgments against equitable distribution property is permitted under 23 Pa.C.S.A. 3502(e)(1) as an enforcement remedy and to accept Wife’s argument in favor of Section 8101 would effectively nullify a portion of Section 3502. The Court, understandably, declined to invalidate Pennsylvania law on this point.

So while Section 8101 is available to family law cases, it is only after someone has successfully had the equitable distribution order entered as a judgment under Section 3502(a)(1). The order, in and of itself, is not a judgment.

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.

Potential Gold Mine? (No)
Potential Gold Mine? (Answer: No)

Leslie Spoltore, a partner in our Wilmington, Delaware office, recently wrote a post on our Delaware Family Law Blog about a uniquely unusual to Delaware “asset:” license plates.

Unlike every other state in the Union, there seems to be an dedicated, obsessed, and well heeled local market for low number Delaware license plates. According to the article written by Adam Duvernay of The News Journal, a couple recently paid $325,000.00 for license plate number 14. In Delaware, you can reuse the license numbers and even transfer them to other people (either through sale, will, or auction). Consequently, enthusiasts will bid to own low plate numbers. For perspective, the Governor, Lieutenant Governor, and Secretary of State have license plate numbers 1, 2, and 3, respectively. Number 6 sold in 2008 for $675,000.00.

The larger point behind this unique bit of Americana is that the value of a marital estate may take many forms. We’ve written about the million dollar shoe collection, but there could be any number of unusual collectibles or pieces of personal property that are more than the norm and, in fact, justify their own consideration, appraisal, and identification as marital assets. I have had a case where our claim for antique carnival games was countered (unsuccessfully) by a claim for value in a Longaberger basket collection (apparently the secondary market had dropped out at the time of the case).

You simply never know where the value may appear and it is important for clients and lawyers to fully explore every potential source of value.

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// Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter@AaronWeemsAtty.

iPad Texts?
iPad Texts?

We have written about electronic discovery and Pennsylvania’s wiretapping law on this blog before. For family law attorneys, they are issues which can be critical to your case, but also present a minefield of ethical and evidentiary issues. How information may be collected and in what manner can be unclear; similarly, it can be ambiguous to counsel and the courts how to weigh evidence collected electronically and presented to the court in a manner which makes it difficult to authenticate (i.e. text messages).

The criminal courts are, as always, the great laboratory of evidentiary law and last June the Superior Court issued a ruling in a case involving text messages from an iPad. Specifically, whether the Pennsylvania Wiretapping and Electronic Surveillance Control Act was violated by police when had an informant relay text messages to them from the defendant in a drug deal.  The trial court in Commonwealth v. Diego suppressed the text message evidence.

The Wiretapping Act was originally passed in 1978 and has been periodically updated to address evolving technology, though probably not quickly enough. This case presents iPad communication as a case of first impression.  The Superior Court cited a 2001 case (Commonwealth v. Proetto) which found that there was no reasonable expectation of privacy in sending emails or chat-room messages to third parties. Basically, using email and text services renders moot any expectation of privacy. Not unlike arguments used with social media; once released, an email or text may be forwarded, modified, and read by anyone the recipient chooses to disclose it to. Knowledge that the message was being recorded by text or email was sufficient notice to keep it from within a protected category of communication.

An iPad is not a telephone under the common understanding of the relevant term, the Superior Court reasoned, and no one would misidentify an iPad for a telephone.  The Superior Court’s decision, however, did not ultimately hinge on the type of device more so the method of intercept. The informant cooperated with police and relayed to them the contents of the text messages he received from Diego. Rather than observing them before the informant received them – which the Court identified as being a separate and distinct legal issue – the informant was voluntarily disclosing them to the police after he received them.  Accordingly, the evidence collected which lead to Diego’s arrest was legally obtained.

The take-away, as always, is that anything placed in a digital format poses a threat of being repurposed, passed along, or disclosed to unintended third parties. Maintaining solid “e-security” is difficult, if not overwhelming, but as this case indicates, you cannot be certain that texts and emails are not going to be discoverable or accessible to third parties; you can never be sure the recipient’s eyes are the only ones on them.

(Photo Credit: 123rf.com; Dirk Ercken).

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter@AaronWeemsAtty.

Ashley Madison Data Breach only Slightly Less Obvious
Ashley Madison Data Breach only Slightly Less Obvious than Lip Stick on the Collar

 

When I first heard of the Ashley Madison data breach, I seem to be one of the few family law attorneys who felt somewhat cool to the idea it was going to result in a crescendo of divorce filings. First, due to Ashley Madison not having an email verification protocol, the presence of an email on the list is not in any way a confirmation that the legitimate owner of the email registered it with the website. Secondly, I had to assume that anyone with common sense was not using a “real” email and the chance for exposure would be minimal. Thirdly, I assumed that of the millions of identified users, perhaps a smaller percentage were active users and a portion were fake emails or users who registered as a goof; I imaged a much smaller pool relative to amount of registered users. Finally, I considered the other spouse and whether they would have the wherewithal or suspicion to search for their spouse’s email (emails?) among the users. Overall, I imagined a smattering of “Ashley Madison motivated divorces” being reported, but nothing that would move the needle on average filings.

If initial reports are accurate, I clearly overestimated the common sense of many Ashley Madison users and grossly underestimated their laziness in not opening anonymous, dedicated email accounts to register to the site.

Now that the data has been dumped and various websites are combing the data for notable users and email suffixes, I am much more certain that there will be some serious fall-out for relationships, certainly, but also for the employment of users. The news coverage surrounding the breach also brought to light what might end up being the most relevant aspect of the breach for any future divorce cases: the expense. Again, while the presence of an email is not dispositive of use, the credit card records are pretty conclusive.

Based on the price scaling reported, a motivated philanderer could rack up a fairly significant bill on Ashley Madison before they ever get to their first illicit rendezvous. When you factor in the costs of carrying on an affair (i.e. meals, travel, and gifts) the expenses increase exponentially. Each dollar applied to the affair is a dollar inappropriately dissipated from the marital estate.  Once the affair is exposed and a case is in litigation, a forensic accounting of bank accounts and credit cards will occur and eventually the financial scope of the affair will emerge.

The affair, in of itself, may not have a tremendous impact on a case since equitable distribution in Pennsylvania is blind to the bad actions of parties (unless those actions have a financial impact on the estate). For members of the armed forces, however, adultery is a punishable crime which could lead to dishonorable discharge and loss of financial benefits, such as pensions. Losing a pension adversely impacts not just the service member, but the service member’s spouse. Losing a retirement account due to such behavior would undoubtedly be argued as a dissipation of that marital asset and with the value of the lost pension being assigned to the service member and corresponding assets given to the spouse (assuming there are any).

Other people may be in sensitive positions involving confidential data or public positions where the appearance of impropriety from an exposed affair has a greater impact than whether the affair affects their ability to do their job. Losing a job over an affair could be interpreted as a “voluntary decrease” in income, not unlike being fired for cause or voluntarily taking a lower paying position to avoid a support obligation.

The real story about Ashley Madison data drop is not the salacious exposure of people seeking out affairs, but the breach of security for an organization relying so heavily on confidentiality – their entire business model and marketing campaign hinges on it. Go see our blog on data security for more information on such topics.

What will continue to generate news for the coming weeks, however, will be the cases where Ashley Madison data will be presented as evidence for economic loss in divorce or support cases, and the jumping off point for investigations into certain registered users. After the initial fireworks of the disclosures, this will be a slow burn story as more people are exposed and the repercussions are felt. The easy joke is that this is a boon for divorce lawyers, but I think it will be the family therapists and accountants who end up the busiest in the end.

(Photo Credit: Copyright a href=’httpwww.123rf.comprofile_toniton’toniton  123RF Stock Photoa)

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter@AaronWeemsAtty

On April 15 of this year, a company called ETSY went public offering 111.25 million shares of stock at $16 a share. This produced what in stock parlance is called a market capitalization of 1.78 billion.  That means what the world thought ETSY was worth.  Once offered to the public it quickly shot to almost $30 a share, doubling its market capitalization. Today, the stock trades below $15.

Sometimes stocks rocket to levels that make them difficult to trade. In 2006 Mastercard went public at just under $40 a share. By 2014, it has risen to more than $800 a share. In order to make the stock more attractive to buyers in January of that year, the company announced a 10:1 split. Thus a person who owned 100 shares of the stock on January 21, 2014, awakened the following morning with 1000 shares.  Eureka! Right? Well not really, because when a stock splits, the price is divided commensurate with the split. So the 818.00 closing price on the day before the split was an $81 price the next morning. The market capitalization did not change. The investor was not enriched. Now typically, Mastercard at $81 a share is an easier stock to buy than at $818 but lawyers and clients need to understand that splits do not themselves create value.

There is also something called a reverse stock split. We saw some of these in the wake of the 2008 recession. When a stock plummets so low that buyers start to equate it with a penny stock, discussion turns to pumping up the price by reducing the number of shares. In 2009 the insurer AIG announced a 1:20 split. The AIG owner who went to bed with 200 shares on one night woke up the next day with 10. Again, the market value of the investment is not changed but the stock now has a price that seems more “dignified”.  Radio Shack is struggling with this issue as we write this. RSH trades for under 10 cents.

When tracing securities holdings this can be important to know.  If husband held 20,000 shares of AIG when he married in 2006, how come he owns only 2,000 today? Dissipation? Transfer to another account to hide the asset. Sometimes a quick check at a website like StockSplitHistory.com can clarify this issue.  Some of the on-line market charts will actually reference a split on the chart. But most charts simply adjust the chart as if the split never occurred because it is the most efficient way to show changes in market price over time. We ran into this recently when a client received a securities account that was 10% lower than the date of trial value in a market that rose 3-5% over the corresponding period. As we examined this, two matters became clear. First, husband’s stock in Apple had undergone a 7:1 split in Summer, 2014 and his heavy reliance upon the future of Russian and oil based stocks had wiped out the gains his other investments had experienced.

There are several sites that provide information on stock splits. It is worthwhile to note this tool in valuing a marital estate.

401(k) retirement plans are commonly divided in divorces by way of a Qualified Domestic Relations Order which prevents the transfer of the funds from the plan participants account to the other spouse from being a taxable event such as it would be if they simply withdrew money from the account. If you participate in a 401(k) plan then you are probably well aware that withdrawing money before you reach retirement age subjects you to a 10% penalty on the amount of money you withdrew and you have to pay income tax on the withdrawal.

For many divorce cases, however, the use of the 401(k) funds is a necessity for one or both of the parties. Recognizing the reality that people needed access to their accumulated retirement funds for legitimate and immediate financial purposes, the IRS created a mechanism for being able to utilize your 401(k) funds without having to pay the taxes or penalty on the withdrawals. A “hardship distribution” is defined by the IRS under Reg. § 1.401(k)-1(d)(3)(i) as an immediate and heavy financial need by the employee or the employee’s spouse or dependent with the withdrawal being a sufficient amount to satisfy the need.

The need to take a “hardship distribution” is not uncommon for many people involved in a divorce. Divorces can cause financial damage to both parties, but particularly the “dependent spouse” who may not have the cash flow or immediate resources to address an urgent financial need. It can also be a tool for the “independent spouse” who transferred a significant portion of their wealth to the other spouse. The award of 401(k) assets (if in the form of an IRA, the analysis changes somewhat) may be the financial resource they need to stabilize and rebuild their financial health. While any financial advisor would advise against using tax deferred money if it all possible, circumstances dictate otherwise at times and knowing this option exists may be helpful.

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.

The general rule is that personal expenses are almost never deductible by taxpayers on Schedule “A” (Itemized Deductions) of their personal returns.  But all rules have exceptions and almost everyone is familiar with the deductions available for medical and dental expenses.  These are great deductions but with this hitch.  You only get to deduct the amount that exceeds 7.5% of Adjusted Gross Income.  Thus, it takes some pretty catastrophic medical expenses to get past the threshold.

But there are two lesser known deductions that merit some attention.  Under Section 212(1) of the Internal Revenue Code, a taxpayer may deduct expenses directly attributable to the production or collection of income that is taxable.  Spousal support and alimony is taxable income and both the Tax Court and the Internal Revenue Service agree that counsel fees attributable to the determination and collection of spousal support and alimony are proper deductions under Section 212.  This includes proceedings to collect arrearages (overdue amounts) and to increase alimony payments.  The deductions apply only to the payee.  The payor does not qualify for a similar deduction in defending these claims.

The fees must be reasonable for the goal sought.  Thus a $10,000 deduction to secure a $9,000 increase may be subject to challenge.  The deductions for legal fees are also limited to those greater than 2% of adjusted gross income.  Thus if an otherwise unemployed spouse incurred $10,000 in fees to secure an award of $3,000 a month in alimony, her adjusted gross income of $36,000 per year means that the first $720 (2%) of counsel fees are not deductible.  The deduction is taken on Schedule “A” under “Job Expenses and Certain Miscellaneous Deductions” (lines 21-27 for 2014).

The second and more nebulous area where deductions may be taken is for “Tax Advice.”  Section 212 (2) of the Internal Revenue Code allows deductions for “the management, conservation or maintenance of property held for the production of income.”  This is a far trickier deduction as there are no Treasury Department regulations directly addressing it.  The regulations under Section 212(1) inform us that investment management fees and custodian fees associated with investments are deductible.  The same costs for a personal residence are not. Expenses of estate litigation are afforded deductibility even though not directly related to production of income.  Expenses incurred in asserting rights to property are non-deductible.  But if the property produces income and the claim is related to collection of a portion of it, that “income” portion is deductible.  Expenses associated with preparing tax returns are deductible but again the deduction is for expenses beyond 2% of Adjusted Gross Income.  The general view (not found in the regulations) is that “tax advice” secured for purposes of managing one’s investments is deductible and many divorce practitioners sometimes freely “allocate” a substantial portion of their invoice to “tax advice” to help a client out.  But, this is a slippery slope for both the adviser and the tax payer because unlike the alimony deduction, there is no real means to measure what is reasonable and what is not and to a large degree, the assets being allocated in the divorce are not income producing.