This afternoon brought me an email from a fellow from West Virginia. The caption indicated it might involve a new divorce matter.  I opened it to read:

“I found your name online and I wanted to send you a quick email before I called your office. If you are interested in taking on new clients or finding new cases, please take 30 seconds to read this email. You will not be disappointed.

The way our program works is simple. We have your name or firm’s name on the first page of Google within hours. We have a portfolio of high traffic family law keywords that we will optimize in your listing 24/7. You’ll be able to type in high volume search terms like Divorce Lawyer, Child Custody Lawyer, Child Support Lawyer, Family Lawyer, Adoption Lawyer and any many more.”

A few days before, I received a similar invitation to join an exclusive group who would receive referrals of personal injury cases to augment my practice.  I last did a personal injury case 35 years ago.

Would you use a surgeon who hadn’t done surgery in 35 years?  If yes, these referral networks are just for you.  If you are listening to news lately, the US government is trying to rid us of a Chinese company called Tik-Tok, which entices you with catchy videos and then sucks the data out of your computer while you are entertained.  Then they sell your information to others who bombard you with content based upon your search history.  A couple of years ago my water heater croaked, so when the plumber said $1,000, I went online to see what the actual price was for this device.  For the next two months, I could not open my computer without being given the chance to acquire a new water heater.  It was easy to turn down these invitations as I had already bought the replacement and I have found that one water heater is enough, thank you.

If you are looking up the law online, you will be given many opportunities to find lawyers who have operators standing by to take your call 24/7.  This may be a convenience, but those names are there because someone is paying for it.  The more the lawyer pays the more exposure to potential clients he or she gets.  If you experienced sciatic pain, would you choose your surgeon based on the advertisement?  Is the lawyer on the back cover of the phone book or the back of the bus always the best lawyer?  I have represented some back of the bus lawyers.  Some are excellent, but the bus is not really an indicator.

If you need a lawyer, ask around.  Yes, you are to some degree buying a pig in a poke, but realize that online research often yields a very bad fit because the fellow who contacted me from West Virginia has only one need.  To get me to pay him to post ads somewhere in exchange for money I am supposed to pay him.  He’s the modern day matchmaker (Yenta in Yiddish).  His job is to marry you to the lawyer who pays him.  Your happiness is not on his radar.  The matchmaker’s fee is coming out of someone’s pocket.  Either the lawyer if the client doesn’t take the bait or the client if the client does take the bait.  Understand; lawyers are not stupid.  If you are a client coming from a referral service you are going to pay a higher rate than the average bear so that the lawyer can recover the cost of having someone fish for clients on the internet.

If you were home last week or this week, the television screen has lit up with some of the most rancorous debate I have seen in my lifetime.  This is saying something because I was around for the summer of 1968 when the world watched assassins, protesters and rioters really start to take America apart.  At that time, 300 young Americans were dying each week in Vietnam.  The Chicago police were dragging delegates off the floor of the Democratic Convention.

These are also challenging times.  We are afflicted with a pandemic and it has inflicted some serious economic damage.  We can have political views; we should have political views, but we are still a long way from America run by fascists or anarchists.  The anger and invective I have heard in the last 10 days seems extreme on both ends.  But to me, it masks a far deeper set of problems, which I have heard nothing about.  This goes to the issue of family life in 21st century America.  Permit me to offer some data about issues our political leaders are not discussing.

The drug overdose data is harrowing enough.  In family law, we are seeing substance dependence cut with equal vigor into families at all economic levels, rich and poor.  As is always the case, wealthier people have more tools to fight addiction.  Nevertheless, addiction, like the coronavirus, is a tricky thing.  You think it is under control and find it is not.

The drug problem can be explained.  Science has made medication extremely effective at mitigating pain.  Unfortunately, those same medications are also highly addictive.  Science has also made illegal narcotics more effective at bringing the high, but also accelerating the crash.

Another statistic is far more challenging to explain.  It is what has happened with suicide rates.  The top bar of the chart is the total number of deaths.  The second bar is male suicide rates.  The bottom is for women.  Before the health catastrophe of this spring, we already passed 47,000 for 2019, half-involving firearms.  We are told that 2020 is going to be far worse as we have many people depressed by both the pandemic and the economic consequence.

As if this is not sad enough, a big part of the increase is actually death among children.  The number of self-inflicted child deaths has risen 56% since 2000.  I am hearing lots of lofty language from both political parties about preserving and improving America for our kids.  The truth is that suicide is the second leading cause of death among that age group.  That speaks volumes about their optimism.  We are hearing many speeches about how horrid life will be if one party controls the Congress or the White House. But look at the chart above from 1999 to 2016.  Eight years of Republican leadership, eight years of Democratic leadership, and now four years of resumed Republican dominance.  The trend of death is the same, and it is relentless.

Perhaps this could be explained by life events. I think not.  Here are some demographic data to prove the point.

1999 2019
S&P 500 Index 1350-1400 3500 2.5 times greater
Life Expectancy 77 79 +2 years
Unemployment 4.0% 3.5% -12%

We are living longer, our financial markets are far healthier and unemployment declined steadily from 2009 until this March.  Yet, the suicide trend shows no real response to that happy news.

In 1968, the battlefield was in Southeast Asia and in the streets of our cities and college campuses.  We are seeing some of that today as well.  I suggest this data demonstrate that the real battle of 2020 is going on inside our homes.  That is where addiction takes root and that is where adults and children decide that life in not worth living.  There are many great discussions to be had about racism, the economy and the climate.  However, the data presented suggests that we need to find out what is wrong inside our homes that makes us unhappy enough to decide that life is not worth living under either political party’s leadership.

While writing this I learned that during a protest over a police shooting in Wisconsin last evening, a 17 year old decided he would shoot at protestors; killing two.

I have strong views about this election.  Yet, what concerns me more is that partisan rancor and hatred are filling our minds and depressing our kids.  I join with people in both parties in wanting to create a better world.  I suggest that a better world is one that begins with less invective and hyperbole and more civility and understanding.  If our people are addicted to drugs or worse yet, dead from self-inflicted wounds, it matters little what party or ideology is in charge.

Long ago Samuel Johnson wrote, “To be happy at home is the ultimate result of all ambition, the end to which every enterprise and labor tends, and of which every desire prompts the prosecution.”  If we are to enjoy our time on this planet, it would seem that we need to focus a bit more on what is really bothering us and a bit less on whether we need to cancel student debt or defund the police.

N.B.     A couple of additions since this was published.  On the evening of August 27, the topic of drug deaths was mentioned at the Republican Convention.  It was discussed in the context of resolution when drug related deaths grew 4.6% in 2019 to 71,000.  There were 47,000 suicides in 2018 the most recent data available.  The data in the charts stops with 2016.

When the CARES Act passed last spring we wrote about the provisions, which allowed IRA & 401(K) holders to access their accounts while avoiding tax consequences.  We also noted that the devil is often found in the details.  Nevertheless, in late June, the IRS issued Notices 2020-50 and 2020-51.  You should review these publications and/or confer with your retirement consultant/administrator before taking any distribution or loan.

First and most important from a temporal viewpoint.  If you took money out of a plan at any time in 2020 as a Required Minimum Distribution (RMD), you can roll it back and thereby reverse the tax consequence if you do so before August 31, 2020.  See Notice 2020-51.

We now have some definition as to who is qualified to either distribute or borrow money from an IRA or 401(K).  We knew people who were diagnosed with coronavirus and those with a spouse or dependents with the affliction were qualified.  That has been expanded to include any account holder whose spouse or dependents were diagnosed.  In addition to having the coronavirus, if you or a household member had COVID-19 negatively affect:

  • employment hours;
  • work hours to care for children;
  • business hours; and/or,
  • a job offer, through either delayed start or withdrawal of offer.

You are eligible to borrow or distribute up to $100,000 from the IRA or qualified plan (if the plan allows it).  Actual need or quantifiable damage related to COVID-19 are not factors, but you should maintain records of the triggering event.  You report these transactions on Form 8915-E (not yet available), including any funds you repay to the plan within the three year window in which you are permitted to do so.  It appears that you will report the distribution as income and it should follow that you will pay tax on that withdrawal.  However, if you do pay the money back into the plan, you again report that repayment on another Form 8915-E and then amend your tax return to get any tax you paid refunded.  If you distribute and do not repay, the penalty for early withdrawal of 10% is avoided.

Also, a reminder if you are repaying a loan to a qualified plan, you may defer payments due between March 27, 2020 and December 31, 2020, by a year.  That should be confirmed with the plan administrator.

So there is now more flesh on the regulatory bones of pandemic relief.

Since 2011, we have had a statute setting forth both a procedure and a judicial standard for the determination of requests to relocate with a child.  We have previously observed that the appellate decisions coming both before and after enactment of 23 Pa.C.S. 5337 have made relocation a rocky road.  However, a panel decision issued on August 17 in J.G. v. K.G clarifies that the professed “duty to mitigate” is one rock too many.

Marriage in Indiana produced two children ages five & seven.  The parties moved to Allegheny County in 2016 so that they could live near mother’s family.  Three months later the parties separated and reached an agreed custody arrangement that was essentially alternate weeks “plus” with mother having primary physical custody.  The case reports father was involved in children’s’ activities.

In February 2019, mother’s employer was sold and she lost her job.  She quickly found alternate work, but that offer would necessitate relocation to San Francisco.  In March, she issued a notice of intent to relocate and father filed opposition.  The case was heard in October and the Court denied the request.  Mother appealed citing six (6) alleged errors.

The Superior Court reversed and remanded on the basis that the trial court imposed an improper standard.  By statute the standard under Section 5337 (i)(1) is whether the relocation promotes the interests of the children.  In so doing, the court is expressly authorized to evaluate the bona fides of the parties in seeking or opposing relocation.

The Trial Court Opinion interpreted the statute as imposing a burden on a relocating parent to demonstrating that she had sought to “prevent relocation” by “exploring every possible avenue for employment even at a lower salary and outside of her specific field.”  In a 2-1 decision, the Court held that the law imposed no such duty.  In short, the burden did not include a requirement that the proposed relocation be unavoidable.

Regardless of which side you favor on this issue, the precedent (or lack thereof) is a vital matter.  In many, if not most relocation cases, this writer has either read or witnessed the availability of “local alternatives” that avoid relocation is often a central issue in the hearing.  It is typical for the “remaining parent” to devote lots of cross examination to what jobs the relocating parent has explored locally and the failure to do so is often treated as a demonstration of improper motivation (i.e., escape from the non-custodial parent).  Under this ruling, those questions might well become legally irrelevant beyond the simple question:  Did you apply for any jobs locally before accepting or pursuing the Californian job?  A negative answer, “No, I did not look for anything in Southwestern Pennsylvania,” might go to motivation, but once the witness answers that she did explore local possibilities, it would seem that a remaining parent does not have the right to conduct lengthy questioning or produce independent evidence of local employment alternatives.  As this case comes down, the core question is only, “would California be better for the kids?”  Of course, pregnant in that question is what effect relocation would have on the children’s relationship with their father once they move 2,500 miles away. But one of the matters that often slows the progress of any relocation case is the exploration of local alternatives.

The case is non-precedential.  Nevertheless, it is nonetheless highly important and may affect how relocation cases are tried.

N.B.  Not discussed in this case but worthy of mention is the impact of COVID-19 on those cases that are pending.  As a society, we are accustomed to packing kids in crowded planes to spend summers with another parent.  That is going to be an issue.  Moreover, as COVID-19 continues to change the work environment in terms of both overall employment and telecommuting, conventional thinking about those issues is going to change.

J.G. v. K.G, 1900 WDA 2019 (August 17, 2020)

 

 

There are still things to discover about the 2017 Tax Reform passed by Congress late in that year.  The bar and the accounting community have spilled lots of ink over the changes to the law affecting alimony and many other lesser issues.  One of those issues is the temporary disappearance of the longstanding dependency deduction/exemption.  It still goes to the parent with primary custody unless there is an agreement otherwise.  Nevertheless, until 2025, the “deduction” has been effectively gutted.  In 2018, it was supposed to be $4,150 per dependent.

Therefore, the value of the “dependent” is now measured largely in the power it provides to move from a single taxpayer to a head of household.  This also used to mean a somewhat meaningful reduction in income tax rates.

We were recently asked to evaluate whether the “status” of household head was worth quarreling over.  We ran numbers at $160,000 in taxable income and at $518,000.  What we were surprised to learn was that the tax difference was largely inconsequential.  At the top bracket, the tax savings were $1,442.  At $160,000, it was $1,426.  Not nothing, but a far cry from olden days when three children brought $12,000 in taxable income reduction and $2,723 in tax savings at $160,000.  It is conceded that the standard deduction has increased.   However, the fight over who claims the kids just doesn’t have the same pizazz it did in 2017.  At least for now.

In a reported three judge panel decision issued on June 12, 2020, the Superior Court appears to have made it easier for parties to avoid a contractual agreement on the basis of duress.  The case, Lewis v. Lewis is reported as 2020 Pa. Super. 140.

The Pennsylvania standard for duress as a basis for voiding a contract has long been that set forth in Carrier v. William Penn Broadcasting, a 1967 decision by the Supreme Court. 233 A.2d 519.   To set aside an agreement a party needed to show restraint or threatened danger sufficient to overcome the mind of a person of “ordinary firmness.”  The seminal phrase in that decision was, “There can be no duress where the contracting party is free to consult with counsel.”

The decision in Lewis v. Lewis notes that no spouse has ever achieved that high bar.  William Penn was cited in upholding the prenuptials in Simeone v. Simeone, 581 A.2d 167 and in Hamilton v. Hamilton 591 A.2d 720,722 (Pa.S. 1991).  In Lugg v. Lugg, another panel held that daily badgering and pressure was insufficient. 64 A.3d 1109, 1113 (Pa.S. 2013).  Adams v. Adams, refused to employ a subjective standard that would consider a party’s low self-esteem, alcoholism and attention deficit disorder to set aside an agreement. 848 A.2d 991 (Pa. S. 2004).

Thus, the wall of duress stood fairly high.  However, in the Lewis case, here are some of the phrases employed to set aside a property settlement agreement:

  1. “Wife believed she had to sign the agreement, that she was afraid of husband and the punishments he doled out when she disobeyed him.” (Slip at 15). A common punishment was to force wife to sleep on the porch.  This occurred ten times that wife could recall.
  2. Husband had begun physically abusing [wife] prior to execution of the settlement agreement.
  3. Husband told Wife that if the agreement was not signed, he would “ensure that she never saw their daughter (roughly age 4) again.” He also threatened to call the police if Wife took their child to a park.
  4. Husband “exploited” the judicial system by securing a Protection from Abuse Order against her, only to invite her to return and then threaten her with contempt of the PFA Order because she continued to reside with him.
  5. Husband drained the bank account so Wife had no access to money. While acknowledging that this is not a “danger,” the Court suggests that this financial duress prevented her from escaping to secure legal counsel.

The opinion refers to husband’s “intense and sustained domestic abuse,” although the record indicates that husband had secured an abuse order against wife in 2016.  Unfortunately we do not know whether this came through agreement or hearing.

The case indicates that in the weeks preceding the agreement wife was taking medication, which made her nauseous and apathetic.  She was under the care of a psychiatrist, but curiously, husband insisted that he attend each appointment.  The opinion says wife was  “prescribed unnecessary medications,” although there is no reference to what those medications were or how they impacted her aside from nausea and apathy.

Wife claimed she did not know what the medications were because husband kept them under lock and key.  At one point, husband suggested wife commit suicide and it appears she made an attempt that resulted in her involuntary commitment.  Upon her release, husband presented an agreement and badgered her to sign it.  At approximately the same time, wife went back to her psychiatrist, who changed her medications, although wife does not know how because husband dispensed the pills.  Following the appointment on January 13, 2017, they drove to a notary where the agreement husband had drafted was acknowledged.  They resumed living together until July 2018, a period of 18 months.  In July 2018, Wife filed her own abuse case and secured an Order.  Then she found an attorney who moved to set the agreement aside.

On the day she signed the agreement husband is quoted as having said, “ If you dare get a lawyer, I’m divorcing you and you will never see your daughter again.”  Wife testified that she believed this threat.

The appellate decision opines that wife signed the agreement while facing “impending physical danger” and an explicit threat that she would never see her child again.  The Court notes that duress will not lie if one has the opportunity to confer with counsel.  It also finds that the impending threat of bodily harm prevented wife from seeking counsel, while acknowledging that the threat “was not explicitly verbalized.”

This is a troubling case in many, many aspects.  As you wade through the litany of threats and intimidation, every practitioner can click off cases we have had where these kinds of threats have been employed.  This writer can probably recount hundreds of cases where a spouse threatens that the child will never be seen again.  But, if those kinds of threats are to become a basis to void agreements, we are going to have an explosion of cases to set aside all kinds of agreements.

At the time this agreement was signed wife was 24.  The opinion tells us that the medications her psychiatrist prescribed and her husband administered to her were unnecessary.  Wife professes that she never read the agreement and that she was told it was a document related to husband’s employment.  Meanwhile, when she expressed reluctance to sign this “employment” document, husband purportedly threatened to divorce her and take their child.  Really?  The record indicates that the threat of divorce had been in the air for at least five months before the agreement was presented for her signature.

It is also troubling that we have claims that husband did not give her a copy of the agreement until the divorce was filed later in 2017.  This writer is troubled by wife’s claim that, despite a relationship, which was abusive from the beginning, she had no “ability” to seek a lawyer’s advice either before or up to eighteen (18) months after signing the agreement.

The delay may be explained by the assertion that the contract wife signed was hidden from her. . But in Sixsmith v. Martsolf, the Supreme Court held that a claim for rescission based on fraud was lost when the victim of fraud did not act to set aside the agreement promptly. 196 A.2d 662 (Pa. 1964).  A contract secured by fraud is voidable only at the option of the injured party who must act promptly on the discovery of the fraud, or the right to rescind is waived: Hilliard v. Wood Carving Co., 34 A. 231 (Pa. 1896); Kinter v. Commonwealth Tr. Co., 118 A. 392 (Pa. 1922); McEvoy v. M. Samuels and Sons, Inc.,  121 A. 189 ( Pa.1923); and, Peoples Pittsburgh Tr. Co. v. Com.,  60 A.2d 53 (Pa. 1948).

Again, hard facts can make for bad law, but a decision that wife was not competent to form a contract immediately after her involuntary commitment would have been a more narrow holding.  Here we have a sweeping attack on the psychiatric community for drugging wife at husband’s request, and a declaration, without supporting facts, that husband had “exploited” the judicial system.  Pray, what is a common pleas judge to say in response to a litigant who attacks prior judicial orders on the basis that what they represent is not res judicata, but “judicial exploitation?”  The judicial dockets are crammed with thousands of cases each year where a party “loses” a child based on abuse or neglect.  Does the common but empty threat that a person won’t see their child again vitiate the consent necessary to form an agreement?  In this case, the author found no direct threat of immediate bodily harm proximate to the execution of the agreement.  That’s been the standard.  Unfortunately, the Lewis case opens the door to a dark basement of empty and idle threats and suggests that judges go down there and evaluate all of the events that culminated in the challenged agreement.  A lot of agreements are going to be challenged based on this case, and trial courts are going to be looking back to the days when there were firm standards of duress to grab hold of when deciding them.

I attended a seminar offered by accountant, Mitchell E. Benson, CPA, MT, CFF (Savran Benson LLP), Brian C. Vertz, Esquire (Pollock Begg) and Aliah Molczan (Savran Benson LLP) on July 9, 2020.  One of the topics discussed was the Payroll Protection Plan (PPP) loans, which were distributed in the second quarter of 2020 to allow employers to keep staff on payroll through June 30, 2020. The tax aspects of this plan are still in a state of flux, and there are conflicting IRS and Congressional interpretation of what it means.

These funds were technically a “loan” issued with the intention that repayment will be forgiven or discharged if the funds were demonstrably employed to pay wages and other classified expenses.  Much of that money is already spent by those who received the loans.  For accounting purposes, the cash is gone, but as of June 30, 2020, the loan remains a debt of the business until the discharge is granted.

While the precise terms and date of the discharge remain somewhat murky, almost everyone agrees that these loans will be discharged so long as the terms of use were followed.  From a tax viewpoint that brings in a question of whether the discharge will occur in the 2020 tax year or later.  Under federal law, the discharge of indebtedness is ordinarily income to the person who had the obligation discharged.  26 U.S.C. 61(a)(11).  The statute authorizing the PPP loans makes clear that is not the case.  BUT, let’s assume you have a small business and you had a $250,000 PPP loan.  You used it to pay payroll and other prescribed expenses between May 1, 2020 and June 30, 2020.  Your loan, which you employed to pay those expenses, is discharged. Can you deduct the expenses that were effectively paid by the loan you don’t have to repay?  As of today, the IRS says you cannot take those deductions against revenue.  Congress says that was not their intent.  More complicated is if you file your 2020 business return when due in March 2021.  Your loan is not actually forgiven yet.  So, you deduct the expense, as would ordinarily be the case.  Two months later, your discharge comes through.  Amend the return?  Keep the return but report the discharge as income?  Apparently, these questions remain unresolved and that may be the case for some time.  One thing is clear; discharge of debt is “income” for purposes of support under 23 Pa.C.S. 4302 and I have not heard anything about the Pennsylvania General Assembly amending that.

Also mentioned in this seminar were some other lingering issues:

  1. Many businesses will conclude 2020 with a whopping loss that may be an asset or an income tax offset in future years for purposes of equitable distribution.
  2. In divorce and support proceedings you should be inquiring what forms of loans and grants were applied for and what their status is. Many folks have loans and benefits stuck in an administrative pipeline that may not fully clear for months.  You should be tracking the status of these funds in a support context.
  3. We have previously written about the ability to use retirement as a hardship withdrawal without penalty and to either spread the income over three tax years, or repay the money to the retirement and reverse the tax event. Also, these transactions become pregnant with tax consequences and my affect support payments or asset distributions beyond 2020.  Lastly, if you are making these withdrawals, you had better keep some reliable evidence that your transaction has a relationship to the virus either directly, or because it caused your unemployment.  Otherwise, the tax benefit may be lost.

When couples decide to end a marriage, the process involves division of the good (the assets) the bad (the liabilities) and the ugly (liabilities that exceed assets).  Hearing officers whom we have spoken with report that they are seeing more cases where the controversies are ugly.  A decade ago, the battles were typically about overleveraged homes that were “upside down” (debt far exceeding market value).  The growing economy of the past decade has fixed many of those problems, but, for the past generation, we have seen a relentless growth in student debt.

Student loan debt presents its own special problems.  For the most part, like secured debt (e.g., mortgage debt) it really resists discharge in bankruptcy.  We have learned in recent years that some discharges have been obtained, however, the general rule seems to remain that this debt may be structured, but it does not go away.

Most students incurring these debts are not married.  But they have parents who are, and those parents often sign on either as primary borrowers (it’s the parents who took the loan), or as guarantors (the child is primarily liable but if the child doesn’t pay the lender has recourse against the parents who guaranteed the loan(s)).  We have found that most adults sign the loan documents without a clear understanding of who is obligated and how.  After all, education is a necessity, right?  So you do whatever it takes.

Once documents are signed, it is tough to emerge from the student debt swamp.  The three boats out are named: Restructure, Forbearance and Discharge, with the third boat being the most difficult to find.  Nevertheless, with 45 million Americans occupying parts of the student debt swamp, people are looking for a means out.  The smartest folks evaluate the swamp before going in.

Listed below are some resources that may help.  Realize that divorce courts don’t have jurisdiction to do much more than allocate the debt they are presented with.  In addition, if you are a co-borrower or co- guarantor of a debt, the fact that the divorce court assigned the debt to your spouse in equitable distribution does not affect whether the lender can come after you.  So navigate carefully if you are about to enter the swamp, and take a look at these resources.

Studentaid.gov:  is a creature of the US Dept. of Education.  It has both information and a guide for loan management, including a loan simulator that permits the borrower to “try on” different payment plans.

Forgivemystudentdebt.org

National Federation for Credit Counseling

Financial Counseling Association of America

The Institute of Student Loan Advisers or TISLA

Pillar.app

Chipper.app

Rounduptozero.com

Be cautious as you navigate through these sites.  Some are heavily oriented toward managing your money as a means to better allocating funds to reducing student debt.  That can be a useful tool but it does not change the payment plan.  Be aware as well that there are many sites devoted to Public Service Loan Forgiveness, which only applies to people in some form of public service, and even those candidates encounter some pretty rocky channels of forgiveness eligibility.

There are attorneys and fee based services that also provide guidance.  Just be certain whom you are dealing with.  This is not something the typical lawyer will know how to manage.  There is no harm in asking for references.  We have seen happy results in the area of forbearance (pay less now based on low income).  But, having sailed into the swamp, you want to make certain that you are not getting in deeper with a service or a lawyer who misdirects you.

As I write this, the Atlanta branch of the Federal Reserve System has just announced their forecast that second quarter gross domestic product is expected to plummet 53%; a harrowing statistic.  Meanwhile, the S&P 500 Index sits at 3,055.  That’s where it was on March 5 of this year, at which time, there were fewer than 50 coronavirus deaths in the entire country.  On March 5, unemployment in the United States was 3.5%.  At the end of April, it was 14.7% and Goldman Sachs just announced that they think we are currently over 21%.

So what gives?  The best answer I have heard is that stock markets are always forward thinking.  Investors seem optimistic that there will be a recovery, and a relatively strong one.  However, if you represent a client who owns a restaurant, a retail store or even a school bus company, that client is looking at the various stock indices and shaking their head.  The world has changed, and while we all hoped this would pass quickly, the coronavirus seems to be a guest who insists the visit must linger.  The good news is that we are down to roughly 500 deaths per day in the U.S..  The bad news is that we were there a week ago and then the numbers spiked.

For those in the “break-up” business who do business valuations, this is an especially harrowing time.  The 2019 year-end numbers are trickling in and for just about everyone except box retailers, 2019 was a fine year.  But as you dump your data into the valuation calculator, you know that someone is going to assert that those numbers are ancient history and have “no relevance” given what has happened since March 1, 2020.  Is that fair?

It isn’t, and for many different reasons.  We have been down this road before.  The stock market has seen us through banking crises in 1990 and 2008 as well as a tech bubble crash in 2000.  This market is quite different.  In 1990, 2000, and 2008 there were some real fundamental viruses in the economy.  In two of the three corrections, the lending system got itself into real trouble.  That required not just stimulus, but also some institutional correction.  It took time to recover and the stock market history shows that.  In February 2020, the S&P 500 was chugging toward 3,400, then utterly collapsed – falling by 1/3 in three weeks.  Since then, the market got up, dusted itself off in April, and rose more than 7% in May.  So we have a situation where the unemployment numbers and the gross domestic product numbers signal “depression,” while the stock market indices, (what people will pay to own shares in businesses) seems to think things are comparable to last November or early March (each with S&P at 3050).

I have read some articles and spoken with a colleague who values businesses for a living.  He characterized the market issues in two ways: (a) episodic; and (b) systemic.  If you owned a Wendy’s franchise and it was brought down by fire, flood or pestilence, there is no question that the flattening of the franchise affects its value.  But if you have insurance, you rebuild and resume operations.  Your problem was quite real but it was episodic.  The value is still there, because once you re-build, people will resume eating at your trough.  However, if the state highway department builds a spur that diverts traffic away from your franchise or the CDC announces that hamburgers cause COVID, you have a systemic problem.  You may be able to adjust to compensate by changing your product line or offering free oil changes for customers at the drive through, but that’s the result of your genius and not the value of the business to Mr. Willing-Buyer.  He might pay a healthy price for the business after you re-tool it for the new economic world and show him that sales and profits are back to the old days. But not now, thank you.

What this means for the domestic relations bar is that you have to pull your head out of the data and think about how COVID will affect the business you are valuing a year from now.  Understand we are not done with COVID.  Today it is like your crazy uncle who likes to roam around the house and cause destruction when visiting.  As I write this, Uncle COVID has wandered into North Carolina, but we don’t know how long he stays or where he wanders next.  Meanwhile, if you have a retail sit down food operation where you pay real rent expecting to seat 50 guests at a time, you may have a systemic problem; the kind where your genius is going to have to create value that otherwise has been crushed by six foot distancing.  If you own a dance club or a stadium you are in worse shape, although those patrons may be willing to assume the risk if the authorities will allow it.

The stock market may actually be an indicator of what investor’s think of the business you are valuing.  In the last recession I was involved in valuing a luxury goods wholesaler/retailer.  So I watched Tiffany (TIF) and LVMH (LVMUY) to see what investors thought of the 2008 crash.  They were slow to bounce and to some degree buoyed by a growing Chinese market that my client could not access.  Today, you can see that any kind of box retailer is headed toward bankruptcy.  The virus only hastened that process along.  The cruise ship business has taken a slight bounce back, but if your client owns hotels in Port Miami, he has a systemic problem.  Hotel operators in Cooperstown or Williamsport are in a different place.  Sports will come back and so will the demand of parents to revel on the fields of dreams.  Many businesses are cutting back and that may last a while.  But, again, this is a physical virus and not an economic one.  In addition, the market is telegraphing that most businesses will survive and thrive again.  The second quarter does not decide the game.

It is said that desperate times call for desperate measures.  Many people out there today are facing some financial headwinds that were not reasonably foreseeable a few months ago.  Today they have businesses to operate or even daily bills to pay while afflicted with cash shortages.

The reverse mortgage or more properly the Home Equity Conversion Mortgage (HECM) has been around for a while.  In an age of low interest rates it has seemed like a device which merited attention.  Many of today’s divorces involve folks who qualify by age (you must be 62) and have significant equity trapped in a home, which is not appreciating as it did in the past.  As we have noted, the current financial crisis has caused increased interest in this product.

The problem has always been that most conventional mortgage brokers stay away from reverse mortgage products.  If you search for a reverse mortgage on the internet you will be scooped up by dozens of websites that instantly want your name, address, home value and current mortgage information.  That is concerning in its own right.  Then, over the weekend, I heard the inevitable horror story of a family that “lost the family home” to what seemed like a good way to supplement household income.  If you want to hear the entire story it ran on May 16, 2020 and can be found at a Public Radio Exchange (PRX) website.

As an attorney, I found the PRX episode titled “Homewreckers” to be a pretty poorly executed and highly prejudiced piece of journalism with the current U.S. Treasury Secretary loudly depicted as the villain.  The point of this article is to talk about practical pitfalls rather than public policy.  Suffice to say that the lending industry is not always honorable.  But, I also have some problems with people who took things like no doc mortgages claiming to be the victims. Now, allow me to try to cast off my prejudices and stick to the facts I have researched.

There are a lot of different programs out there.  And, as noted, trusty human reverse mortgage lenders don’t seem to be widely available.  So, you may have to go fishing on the internet and risk being hounded by pop-up advertising each time you check messages or the news.  Once you find something that sounds like a plan, the key is to ask to see what the loan documents look like and insist that a copy be made available for you to print. DO NOT let these people come to your house.  Yes, the lender is going to need someone to appraise your home’s value after you understand the transaction from top to bottom.  The only other reason you need to be visited is to hotbox you into signing a deal you may soon wish you had not. The PRX story, although highly prejudiced, does identify in explicit detail some things that can go wrong.

Let’s say you see a reverse mortgage you like in terms of what the loan will amount to and how it operates.  My general impression is that some of these lenders are interested in getting title to your house rather than making a simple loan against the equity you have in it.  That’s why you need to see the actual documents you will sign and take them to a real estate lawyer who will represent you and not the lender.  Never, ever, ever, sign a loan of this kind without a lawyer or relying upon a lawyer you are not paying.  This is not a friendly business.  Some people see that programs are FHA approved and believe that protects them.  It may or may no,t but it is your job to protect your home equity not a government agency.

Among the games I have read and heard about in the PRX story are the following:

  1. Appraisal games. It would appear you can be “low balled” on the appraisal for the loan so that you cannot borrow as much as you would like.  You can also be “high balled”, to encourage you to borrow more than you really need to borrow.  Do some research on your own to see what your property is worth and it may be worthwhile to get your own appraisal.
  2. You need to be at least 62. You will need to pay your real estate taxes, condo assessments and/or repair bills on time.  Your failure to do that for any reason is a default of the mortgage and can produce foreclosure.  Most people are deathly frightened of foreclosure and with good reason, but there seems to be some evidence that aggressive lenders threaten foreclosure to intimidate the homeowner into doing what they want.  Most conventional mortgage lenders view these defaults as their headache.  It seems that some of the reverse mortgage lenders are more willing to get in your face and threaten to take your property.
  3. Make certain the lawyer you confer with tells you in detail what happens if you don’t or can’t live in the house any longer. These loans appear to have covenants on your part that you will remain in the house.  That’s normal in conventional financing.  But realize that if you are 62 or older, age and infirmity may deprive you of your well thought-out plan to stay.  If you have to move out you may be forced to sell against your wishes.  If your plan was to give the house to your kids, be aware that this reverse mortgage gets in the way.  This may be a useful place to sit down with your children and have a frank conversation about the house.  In the story reported on PRX, a family member had been recruited to come live with Mom and Pop.  Pop died and Mom needed to move to assisted living.  The family member ended up homeless because she had no rights under the reverse mortgage.  Realize that in fairness to the lenders, they need to see the house sold to get back the money they lent you on this mortgage.  Understand as well that sometimes life insurance or other assets the borrower owns may be used to pay off the debt due the lender on the reverse mortgage.  You should have a clear understanding of what occurs if you die before the house is sold.  You might have a $300,000 house but owe the reverse mortgage lender $150,000.  Can the lender insist you sell to anyone offering more than the amount you owe?  Do you have the right to make the lender wait for years and mess with your now empty house while your heirs unreasonably insist the house is worth $300,000?  The person who will be your executor needs to know how the estate’s right to sell at the highest price corresponds with the lender’s right to get his loan money back.
  4. The fees associated with doing this financing appear to be higher than conventional financing. So, get that in writing.  Your $150,000 loan from home equity may be only $125,000 depending on the fees, usually charged up front.  Realize that many of these fees may be negotiated or waived if the lender wants to close the loan.  On the other hand, no one is lending to you for free.  These deals also involve your having to purchase private mortgage insurance.  You should find out the annual percentage rate (APR) on any financing because the stated interest may look low, but the “fees” paid at closing drive it much higher.
  5. Don’t outsmart yourself. This is what happened to all of those folks who took out home equity loans (HELOC) in 2005-2007 to dump money into the stock market.  It worked well until it didn’t.  Borrowing money to gamble is never a sound plan.

In short, proceed cautiously and lawyer up.  Yes, every lender uses standard forms.  They are written by the lender, for the lender.