A recent criminal case addressed, in part, an issue we saw in the case of Elonis v. United StatesThe Elonis case went to the U.S. Supreme Court which ultimately reversed the criminal conviction of a man based on statutory construction grounds that his Facebook postings did not offer the requisite mental intent to threaten the victim(s). The Supreme Court’s opinion did not  address any First Amendment rights, however.

The case of Commonwealth v. Lambert, involved a Protection from Abuse Order entered against Lambert, the victim’s ex-boyfriend.  Interestingly, and likely an insight into the voluminous use of social media by Lambert, was the specific PFA Order instruction that he shall refrain from posting “any remark(s) and/or images regarding Plaintiff, on any social network(s), including, but [not] limited to, Facebook, Myspace, Twitter, or any other electronic networks.” In other words, he was not permitted to post anything to social media pertaining to his ex-girlfriend. It should be noted that a Protection from Abuse Order restricts a perpetrator from having direct or indirect contact with a victim. If they do have contact, they could be subject to an Indirect Criminal Contempt.  PFA Orders are civil restraining orders to protect a victim, but they have criminal repercussions: a violation – either verbally, in writing, or physically – will land someone in jail.

With that context in mind, we look at what Lambert did to violate the PFA Order. A day after the Order was entered, he posted a series of Facebook comments in which he does not name his ex-girlfriend, but that she was clearly the subject of the posts. As the Superior Court points out, Trial Courts need to consider the context of the violation and “temporal proximity” of the statements. Perhaps if Lambert had not made his posts a day after he was found to have abused his ex-girlfriend, the context and temporal proximity would have led the court to a different interpretation. The posts were not actually threatening or outwardly menacing (though the victim could certainly feel otherwise), but, as the Court considered, the posts were about the victimThey were discovered by the ex-girlfriend when she went to his Facebook page – she testified that she regularly checks the page for her own knowledge since he is such a voracious social media user that if he was angry or having mental health issues she would have notice of them before risking an interaction with him.

The victim let her local police know about the postings; they contacted the District Attorney’s office, who then initiated the contempt action. He was subsequently found guilty of contempt. That conviction led to the appeal by Lambert as to whether his indirect criminal contempt conviction was a violation of his First Amendment rights to free speech and whether the lack of wrongful intent (i.e. the posts were not threats) should have led to acquittal.

The main issue the Superior Court considered was the First Amendment claim. The Court’s opinion on that issue can be summarized with concept that the PFA Order is contact-based not content-based.  In other words, the PFA does not restrict speech so much as it restricts who the speech is directed at.  This is an important distinctions since restrictions on content must be strictly scrutinized.  Here, however, the contact was – directly or indirectly – made to the victim through Lambert’s public (likely another factor) Facebook profile. By making statements about the victim on a public profile where she could reasonably be exposed to them, Lambert was, effectively, attempting to contact the victim.

As a consequence, his conviction was upheld. His mental intent argument – which successfully led to the overturning of the Elonis conviction – was unsuccessful, as well, since his mental intent to threaten was not at issue; merely the attempt to contact mattered – whether it was to threaten or say he was sorry is immaterial. It should also be noted that the standard of proof for Elonis was the criminal justice system’s “beyond a reasonable doubt,” whereas the standard for finding abuse occurred is the lower “preponderance of the evidence” standard, though an indirect criminal contempt carries the “beyond a reasonable doubt” standard.

The broader implication is that Facebook and social media can be and will be considered forms of communication with the victim of a PFA. Shouting into the void of social media is not without consequences and, as Lambert demonstrates, the intent is secondary to the act of communicating.

My colleague, Mark Ashton, reported on the case of D.P. & B.P. v. G.J.P. & A.P., and identified how the Court’s opinion addressed on a limited basis how Section 3525(2) was, in part, unconstitutional by placing an unreasonable restriction on the parents to raise the children as they deem appropriate, including restricting the children’s exposure to their grandparents.  This decision left open many questions about what happens in circumstances other than separation of six months or more which will likely need to be addressed in the future as grandparents seeking custody re-frame their arguments based on this decision.

One point that I found compelling was that this decision articulated a rejection of the implicit idea that separation, in of itself, equated an unfitness of the parents. As the statute was written, if parties were separated by six months or more then grandparents have standing to bring a custody action. The Court recognized that the statute basically treated separation as a “flaw” and “implicit presumption of unfitness” of the parent when in reality there are numerous parents who parent very effectively while separated and/or divorced, while there are couples in intact marriages who are terrible parents. The Court felt that being separated did not justify a third party needing to step in for the children’s best interests or for the state to exercise parens patrie powers. Separation does not equate abuse, neglect, or an inability to perform parental duties.

Finally, the court reiterated prior case law that when a custody dispute arises between parents and a third party, “the evidentiary scale is tipped, and tipped hard, to the parents’ side.” So, as pointed out in Mark’s blog on this case, the door has been cracked for dealing with grandparents’ standing in cases, there is no doubt that the desire of the parents will create a significant hurdle for the grandparents to overcome even if they establish standing.

On September 26, the Pennsylvania Senate returned to session and adopted amendments to the Pennsylvania Divorce Code that reduced the period by which a party can secure a no-fault divorce on the basis of irretrievable breakdown from two years to one. The bill is awaiting signature by Governor Wolf.

When first enacted in 1980 the Divorce Code required a three-year separation before a divorce could be obtained on no-fault grounds without consent. In 1988 the law was amended to reduce the waiting period to two years. Legislation to further reduce the wait was introduced in February, 2015 and secured approval from the House of Representatives in June of 2016.

The new law does not affect pending divorces and does not become effective until 60 days after Governor Wolf signs the bill. But it is a major change and will bring improvement to the lives of many for whom divorce is a financially and emotionally draining life event. Ironically, while many argue that this will only promote divorce, the greatest number of divorces to be processed in any one year, came in 1979, the year before no fault came into play. Today the number of divorces is much lower than in the 1980s and 1990s but the real cause for that statistic may be the reluctance of millennials to embrace marriage as the sine qua non of a meaningful relationship.

There is also an amendment to Section 3323(C.1) of the Divorce Code related to bifurcation. It mandates that Courts evaluate the impact of a proposed bifurcation on any minor children of the marriage as it relates to the economics of the case.

I recently attended a firm sponsored seminar on business valuation where one of the presenters was Sandra Klevan, a seasoned expert in the field who is affiliated with Financial Research in Bala Cynwyd, PA.

One of the subjects Sandy touched upon was the importance of the management interview to the valuation process. In an effort to manage costs and, in some instances, out of pure arrogance, some business appraisers will either severely limit or even skip this highly important step.

A business appraiser’s function is to estimate what an enterprise will sell for in the open market where buyer and seller have the freedom to negotiate. The typical business appraisal involves the appraiser pretending that he or she is a potential buyer. In a sentence, the opening question is: “What do I get if I buy this business?” Obviously, the principle driver of what any buyer is looking at is derived from study of the tax returns and financial statements issued for the business. But as the Pennsylvania courts have often acknowledged, these financial records can often obscure rather than illuminate highly important facts.

The typical interview involves the appraiser asking management questions such as:

  1. How does the business secure customers and what induces them to stay or go?
  2. How is the business managed in terms of both its organization and its personnel?
  3. Who constitutes the competition and what makes the target company competitive or not?
  4. Have there been transactions involving sale of ownership interests and on what terms were they effected?

Let’s take these questions and provide some playful, yet not unrealistic answers. Let’s assume the business is a small convenience store where customers can purchase everything from batteries to milk and eggs. The business has been at its location for more than 40 years.

  1. Obviously, the business secures its customers because it provides convenience. This can often yield higher profits because these stores typically emphasize that convenience. The advantage of these stores is almost entirely geographic.
  2. Let us say that the business is run by the same guy who started when it opened 40 years ago. He knows and grew up with many of the people living in the neighborhood. Like the town post office people often stop in to find out what is going on the in the neighborhood and when they stop there is usually something overpriced they will need and buy. But seller wants to retire to Florida so the new buyer is not going to be a conduit for information and new buyer is not interested in promoting the “town hall” concept.
  3. Profits from this business on a historic basis are great. But Wawa, Landhope, or one of the other chain convenience stores is opening four blocks north where you can get sandwiches and gasoline. Construction permits have been issued. Oh yes, seven blocks south, Target has filed an application to build a 60,000 square foot store with on-site parking.
  4. Twelve years ago, owner bought out his father who started the business to give current owner a job. Son effectively paid, 2x net profit as reported on his father’s tax return. Do you get it? These facts really do change the playing field. This is a tired old business which still reports great earnings but it is facing competition that is likely to overwhelm it in the next 2-5 years. The goodwill of the business is arguably built around the 60-year-old guy behind the counter who is packing for Tampa. And if I want to buy overpriced AA batteries and a quart of skim milk, why not do it when I am getting gas and a meatball sandwich. The advantages of the business are there on the tax returns but the future looks bleak. Past is not always prologue except for Shakespeare. If your appraiser comes to court and testifies to value without knowing these facts, the cross examination will be brutal. We live in an age when things change fast. If you doubt that reality, ask the bondholders for the Revel Casino or anyone else who invested in Atlantic City in the past decade. Cold accounting papers often do not reveal hot trends that can make or break a business despite a long history of success. If you disagree I encourage you to hop over to your neighborhood Blockbuster and watch a movie while your appraiser finishes his report. Oh, never mind.

On September 9, 2016 the Pennsylvania Supreme Court ruled that portions of the current child custody law were an unconstitutional interference with the fundamental right of parents to raise their children in accordance with their own standards and beliefs. It involves some unusual facts and a quirky portion of the custody law defining when grandparents have standing to seek an award of partial physical custody.

The section in controversy, was enacted in 2010. It relates only to requests for partial custody. In D.P. and B.P. v. G.J.P. and A.P., the mother and father of the subject children had separated for more than six months but no divorce action had been filed. Referencing Section 5325(2) the grandparents brought their action for partial physical custody of the children. Both mother and father filed a motion to dismiss this action asserting that they jointly objected to such an award. The trial court in Westmoreland County considered the objections and, citing the US Supreme Court’s 2000 ruling in Troxel v. Granville, determined that because this was an interference with parental custodial rights deemed fundamental as a matter of law, the statute conferring these rights was subject to strict scrutiny. 530 U.S. 57,65. Under that standard, the state had a duty to demonstrate a compelling need to legislate in this area and the grandparents had failed to show the state had met that standard in crafting Section 5325(2). The only statutory threshold to invade the fundamental rights of the parents to raise their children without interference was a separation of six months. The Court noted that this case involved no assertion that the children were not adequately cared for or that there was other reason for legislative action to protect the children.

The trial court ruling was immediately appealed to the Supreme Court which heard argument in early April. In an analysis by Chief Justice Saylor, the high court concluded that in circumstances where a parent was deceased (Sec 5325(1)) or where a child had actually lived with a grandparent, there was a compelling basis for state action. But, where, as here, the parents actually agreed that grandparent custody was not in the child’s best interests, the state had no basis to interfere with that determination. The majority decision was careful to restrict the holding to cases where parents had separated, appearing to preserve the right of grandparents to make custodial claims once a divorce was filed. Dissenting opinions by Justices Baer and Wecht argue that this distinction was not sustainable under a strict scrutiny standard as the existence of a divorce filing was not more a basis to warrant judicial intervention in family affairs than a separation of six months.

This is an interesting crack in the door and one which invites eventual removal of the door. The dissents ask questions such as: suppose the parents disagree about grandparent visits or file for divorce? Is the door now open? Suppose the parents never did marry or even live together? This heads into even more controversial territory which is fast coming upon us. Who is a parent for purposes of custody and support? Genetic testing affords us the ability to determine this in a biological sense. But we have started to see more and more cases working around adults acting in some form of loco parentis. Obviously, grandparents and, according to the statute great grandparents have their own rights. In a world where “parents” move freely from one relationship to another and children often “attach” to these adults, is there a limit to how many participants can be involved before it becomes clear that the litigation is itself a harm to the child? This is a question which was not before the court but it looms larger every day.

D.P. and B.P. vs. G.J.P. and A.P.     Journal-53-2016             25 W.A.P. 2015   (9/9/16)


This author is not much for the world of Hollywood although this law firm does have an office there. But in reviewing the general news of the day, the screen divulged that the divorce involving Halle Berry and Olivier Martinez is now on hold, nine months after that party started.

This is a new phenomenon affecting the ordinary world as well. We have several cases where the parties have either found a reason to stop the presses of divorce filings or just take a pause to refresh.

In olden times, like the 20th century, a break in the action was very rare.  Once a split occurred both parties tended to pound away until the case was either litigated or settled.  There was no “Finland” or Christmas 1914 when soldiers from the Allies and Axis gathered to sing “Silent Night”.  But today, people are doing a better job of taking stock in the havoc that divorce can wreak and sometimes they realize that things were not as bad as they seemed or that the man or woman who may have enticed a separation was not “the best” or even “better.”

The problem with a break is a financial one. For people securing divorce, trust levels are low and the job of the lawyer is to identify the assets that existed at or about the time of separation and make certain they don’t disappear.  That can be hard enough to do when the couple are unhappily split but when they re-unite only to divide once again, it is the task of the lawyer and the forensic accountant to make certain that during the Summer of Love or reconciliation no one stole or dissipated the assets to be divided.  In many instances as well, reconciliation prompts decisions to buy a new home or to take the dream vacation that the couple always wanted.  If the marriage survives, the couple can typically absorb that financial wave.  But if things don’t work out, the financial burdens are now greater and, as we all know, houses can’t be split down the middle.

So if you decide to take a break either from exhaustion or out of renewed affection, just be certain to keep it real and maintain very careful records of your assets and expenses.

One other note. There certainly was plenty of news during the Johnny Depp/Amber Heard controversy that erupted this spring with allegations of physical violence.  What made this matter all the more interesting is the fact that for both participants there was a lot at stake.  Here were two people with enormously lucrative star power whose agents no doubt grimaced when the abuse case was filed.  The risk was that either or both would be found to be violent or dishonest in their statements as to what occurred.  The public tends to be tolerant of what celebrities do but no one ever got a lucrative role for unsocial behavior.  Although there was a dust up at the end about “how” Depp paid the settlement, the end was otherwise peaceable and the brand names remain bankable.  Even real world clients need to realize that while there is undeniable power in getting out the whole truth that truth can come with very drastic consequence.

We have written before about the subject of when and how a person can be in “contempt” of a court order. The word itself is riddled with often misunderstood meaning.  What could be worse than having a court decide that you are contemptible?

In the past week I have been called to court to prosecute or defend two of these cases. The first instance involved a request to find my client in contempt of a custody order.  The court where the matter was heard summons people to a non-record hearing where a hearing officer either recommends or denies a request for a finding of contempt.  The hearings are scheduled one per hour and if you don’t like the recommendation you take an appeal and have a record hearing before a judge.  The typical remedy of make up time for lost custody, an award of $118 in costs and a $200-300 fine makes it such that the game is not worth the candle.  I recommended to my client to do what he wanted as Step 1 would cost $1000-2000 in attorney time and an appeal would consume that much and more.  Who wins contempt proceedings?  Almost without exception it is the party who has superior financial resources. The litigant with $50,000 in net earnings has twice the staying power of the one making $25,000 and the remedies are pathetically weak.  So if you want to exhaust your opponent financially, spurious or weak contempt proceedings and appeals are a great way to win a custody war by attrition.

This week was a petition to enforce a prior court order in divorce. I had the enforcing side and the spouse had been held in contempt on at least two prior occasions for ignoring an order to sell a house. The most recent petition was filed after the house was finally sold while in foreclosure and the actual damages could be calculated and assessed as the hemorrhaging had ended.  The petition to assess the damages had been filed almost 90 days earlier but, the Respondent waited until the day before the hearing to retain counsel.  That begot a request for a continuance to prepare.

My newfound opposing counsel is resourceful. As I anticipated she came to court ready to challenge every paragraph of the petition and to assert defenses that might have had some traction two or more years ago but were effectively waived by the fact that they should have been raised in prior proceedings.  But in contempt court the rules work to the advantage of the party who plays games.  You see, they are entitled to a specific pleading setting forth how they violated the court’s orders.  Do they have to specify their defenses?  Not in Pennsylvania.  The joke is on the party seeking to enforce the order because the responding party needs to do nothing except appear in court on the appointed day. So in my case, we killed three hours of time while new counsel asserted defenses and demanded “proofs” never before articulated.  In candor, some of them had merit.  But whether the defense arguments were good, bad or indifferent, the party prosecuting the contempt never gets to see or hear about them until the case is called.  The cost of preparing a contempt hearing is always unnecessarily high because the person prosecuting the case has to conjure what the defenses might be.  Why force a party to explain why he or she disobeyed a court order or put in writing the reasons their conduct did not violate the order?  That would be efficient.

Then we get to the remedies. In under Section 3502(e)(7) a divorce setting you can at least claim attorneys fees.  But what about damages caused by a party’s refusal to comply with a court order?  You won’t find that remedy in the statute.  Support law is even worse.  Section 4345 allows 180 days of county subsidized imprisonment, a fine not to exceed $1,000 which is payable to the Court and up to a year of taxpayer funded probation.  You have to go to Section 4351(b) to get reasonable fees and costs and you have to prove the obligor did not have good cause for his failure to comply.  Once again, burden is not on the person with the duty to comply but on the person supposedly benefiting from the award.  Custody violations are covered by Section 5339 and impose the same standard as 42 Pa.C.S. 2503.  The action must be obdurate, vexatious, repetitive or in bad faith. Pa.R.C.P. 1915.12’s notice for hearing makes no reference to counsel fees as a remedy which, of course, creates a due process problem in its own right should an award be made.

The statute and the rules need to make it clear that failure to obey costs money and lots of it. The sanction of a fine or award for failure to comply should be monetary and have a temporal element. When the message gets out that failure costs $25 a day or $250 a day, people will pay attention.  Putting parents and divorcing people in prison or on parole only punishes the taxpayer without corresponding benefit to the innocent party victimized by the non-compliance.  But the starting point is to force litigants to frame the issues in writing before anyone enters the courthouse.  It takes what is supposed to be a pointed procedure and dulls it beyond recognition.

Last week Newsweek published its annual rankings of America’s Top High Schools.  This is a much awaited publication for those with children of that age and it is undoubtedly well circulated in the admissions offices of our colleges and universities.

These compilations also commonly hit the family lawyer’s desk whenever there is a hot dispute over primary custody or relocation. In reading the recent history of relocation cases, the decided focus of Superior Court cases is on the matter of how the relocation benefits the child and in many instances we are given these rating compilations by custody litigants who want to show that a new school would be “better” for the child or the present placement is “fine.”

Many judges and hearing officers deciding these cases will admit these magazines “for what their worth.” Technically, there are myriad evidentiary problems with any “ranking.”  The content of the magazine is itself hearsay.  The person making the statement that “Quaker Valley is the 271st best high school in the nation.” is not a named person at all.  It is a magazine.  So we don’t know the identity of the person who decided that Quaker Valley was No. 271 while Penncrest was No. 276.  We also don’t know the specifics of how this was decided.  The article will tell you about general parameters employed such as college matriculation and graduation rates and average SAT scores.  But the typical editors who do the ranking don’t tell us how these metrics are weighted or whether a planetarium is a plus while a ceramics kiln is neutral.  Lawyers who stand up and object to the admission of these rankings have excellent reasons why the objection should be sustained and most law school professors would harshly grade any student of Evidence who would admit “speculative hearsay compiled without ascertainable scientific foundation.”  Of course you could subpoena the editors of Newsweek to explain all of this but, alas, they rarely come to court.

What really happens? Most judges this author has seen will admit the document over objection noting that the actual “value” of this as evidence is not easily ascertained.  I suspect they then lug the magazine back into chambers and scan it first to see whether their high school got in.  Then they will glance at the schools the litigants want to compare and spend a couple of minutes seeing what data there is that they can assess (e.g., grad rates and SAT scores).  Because, even they realize that Newsweek and other magazines of its ilk don’t really spend the other 51 weeks of the year studying America’s 18,000+ high schools. Americans love rankings of all stripes and a magazine’s job is to amuse its audience.

The other thing that happens in chambers after the dust of a school enrollment fight settles is lamentation. I suspect that what most judges would privately tell the litigants is that if they truly wanted a positive outcome, the best thing two parents could do would be to agree on a school placement and support the child together in that placement.  For most children a custody war is a diversion from life and education over which they have no control.  In many instances it is clear that No. 36 ranked Conestoga High School is a superior school to No. 168 Fox Chapel.  But outstanding kids from Fox Chapel go to Harvard too and in the vast majority of custody disputes, Harvard is not really on the horizon.  There are always special cases where a child has really unique gifts (not as much as their parents think) or special educational challenges where a special educational “fit” is called for.  But, most judges grade on the “curve.”  They are not trying to raise young venture capitalists or nuclear physicists.  They want children who will not commit crimes and pay taxes when they grow up.  Judges get to see plenty of adults who are very bright but never mastered the “no crimes” or “pay taxes” thresholds of adult life.  So often they are put off by parents who think that a child custody trial is a sound means of securing maximum educational achievement.  Parents are often disappointed to discover that “The judge doesn’t seem to care.”  Ironically, judges do care, but from their elevated view on the bench they often see quite clearly that moving a child from No. 284 Haverford High to No. 126 Kiski will not vastly improves the chances for post grad studies in math at Stanford.

The ratings wars will go on because we love quick answers to complex questions. And if you have a custody case where you want to enroll Eloise in No. 113 Upper St. Clair while the useless father wants to keep her at a school that doesn’t even have a ranking, be certain to get the August 11 edition of Newsweek and bring it to Court so the judge can see that you are a concerned parent.  But don’t bet the down payment on a house in western Pennsylvania on the belief that the magazine is your ticket to a new life in a new town.  It’s not how the cookie crumbles.

In recent years much has been written about the “marriage penalty” when it comes to federal income tax. As a group known as the Tax Foundation states it “An unmarried couple with equal incomes that earn a combined $300,000 would have a total tax bill of $83,232.50 ($64,374.50 from the individual income tax and an additional $18,858.00 from the payroll tax).  If they were to get married, they would be hit by a marriage penalty of $3,806.50.  The penalty has declined in significance over recent years but it still exists.

A year ago the US Court of Appeals for the 9th Circuit (i.e., the west coast) decided Voss v. Commissioner.  Voss and his life partner Sophy owned a house together on which there was a jumbo mortgage exceeding $1,000,000.  Section 163(h)(3) of the Internal Revenue Code limits home mortgage interest deductions to those attributable to not more than $1,000,000 in mortgage debt if used for acquisition and $100,000 of home equity loans.  The purpose of this law was to capitate home mortgage deductions for the wealthy and, in the case of the home equity cap to discourage people borrowing against home equity to fund activities unrelated to savings.

Personal interest is generally nondeductible. The government allows interest on qualified residences to be deducted with qualified residences being up to two taxpayer’s homes, each being used as a residence.  The statute also states that individuals filing separately are limited to $500,000 each and $50,000 in the case of a home equity loan.

Taxpayer Voss and his partner Charles Sophy who are registered domestic partners under California law. And, together they own two homes with mortgages for which they are jointly liable.  For the tax year involved, their mortgages and home equity debt were about $2.7 million and were recorded on their primary residence in Beverly Hills.  They filed income tax returns separately for the tax years involved and each claimed averaging about $90,000 per annum.  The IRS reviewed the returns and assessed tax premised on the conclusion that any interest associated with debt above $1.1 million ($1 million acquisition and 100,000 home equity) was not deductible.  Messrs. Voss and Sophy filed in Tax Court asserting that the $1,100,000 limitations were not calculated per “residence” but per tax taxpayer.  The Tax Court agreed with the IRS and upheld the limitation on interest to $1.1 million.  But in a decision premised upon the express language found in Section 163 (h)(3) the US Court of Appeals held that the limitation is per taxpayer.  The Court notes that this is probably not what the Congress intended but it is what the statute says and, as such, the clear language trumps legislative intent.

The decision was rendered on August 7, 2015 and undoubtedly, the IRS has hoped that the Congress would adopt a technical amendment to correct this. But, that amendment has not been adopted and on August 1, 2016 the IRS issued something called an AOD (Action of Decision: 2016-2) stating that it accedes to this approach to home interest deductibility until Congress adopts a statute saying otherwise.  So big mortgage deductions for couples not filing jointly are there to be had until Congress finds the time and energy to close the door.

Voss v. Commissioner    796 F3d 1051 (9th Cir. 2015)

Listen to the rhetoric of any political campaign and you will hear the familiar refrain. “Family business is the backbone of the American economy.”  Factually, true enough but history has taught us that families that play together don’t always stay together.  So here is the common scenario: a couple forms a business. They do it on the dining room table of their first apartment and without thinking about any consequence, husband takes 80% of the stock and gives wife 20% because she is going to do the books and scheduling the appointments. Or perhaps they do it 50/50.  But as time evolves one spouse clearly becomes the “active” manager and the other moves on to other things.  The business grows and today the board room of the business is 4x the size of the dining room it was started in.

You represent the “outsider” spouse. She owns 20% of the business and you ask for the tax returns and other related documents in modest proportion.  You are ignored.  You ask her to contact the family accountant who now does the accounting she once did and when she asks them for the same records, she is ignored.

You can always file motions to compel in family court. Sometimes effective; sometimes not. But there is another avenue worthy of consideration.  You not only represent a spouse, you also represent a minority shareholder who has statutory rights under Pennsylvania’s business corporation law.

That law does a better job of defining rights than anything we have in the Divorce Code, where the business involved is not already required to file disclosures under federal and state law with securities regulators. For example, every shareholder has the right to annual financial statements including income statements and balance sheets.  They are to be mailed to the shareholders 120 days after close of the fiscal year.  If independent analysis is done in the form of a compilation, review or audit, that report is also to be published once the accountant has completed the work. The applicable section is 1554 of the Business Corporation Law and the comment to it states that failure to comply is clear evidence of conduct sanctionable under 42 Pa. C.S. 2503(7).  These rights are not really subject to limitation by the shareholders agreement unless it was adopted prior to 1991 and even then it applies only to shareholders who had that status in 1991.

There is also the right to examine the books and records of the corporation. This includes, stock registers, shareholder address records and the bylaws and minute books.  The right is to be exercised at the place where the records are kept during normal business hours and includes the right to have copies made.  Section 1508.  There is a good faith standard here but that is intended to keep shareholders from essentially occupying the business with a limitless set of demands.

Failure to comply with a written request within five days invites a petition directed to the court to order the inspection. The burden falls on the corporation to show improper purpose in proffering the request.  Pennsylvania corporations are required to hold an annual meeting every 12 months. Section 1755.  If a meeting has not been held in 18 months any shareholder has the right to demand one.  In addition, special shareholder meetings can be called by any shareholder or group holding 20% or more of the voting stock.

Unless “written out” of the corporate documents, cumulative voting is permitted. This allows each shareholder to vote all of his shares for one director candidate even though there might be three open seats.  This allows minority shareholders to aggregate votes to assure that one of their candidates can secure a seat on the board.  So, in a setting where there are three board positions open and six candidates, a shareholder with 2,000 shares can cast 2,000 votes for one candidate.

Section 1791 allows for judicial supervision of corporate governance. One such right is to secure a summary order for a corporate meeting where the bylaws designate an annual meeting date but management fails to call the meeting.  Section 1793 allows anyone to raise issues of improper corporate conduct.

Majority shareholders have a fiduciary duty to act for the benefit of the corporation in contrast to their own individual benefit. Ford v. Ford, 878 A.2d 894,905 (Pa, S, 2005); Viener v. Jacobs, 834 A.2d 546,556 (Pa.S, 2003).  A majority that acts to its own benefit to the oppression of the minority may be liable in damages.  This can include conduct like refusal to pay dividends where there are profits and reasonable cash flow, appropriation of business assets or payment of unreasonable salaries.  It also includes withholding information from shareholders.  The same is true of officers and directors, Sections 1712(a)&(c).

Indeed, much of this disclosure is available through the divorce process. So why spend any time thinking about it?  To this writer’s mind, the rights and remedies are much more clearly articulated and not really subject to the “it’s just harassment” defense commonly seen in discover court.  Second, when attacked from a corporate governance viewpoint, you may find other shareholders of the business will rally to your cause or apply pressure to the uncooperative spouse to “get this solved, it’s costing the corporation money.”  These tools may open some doors to resolving not only the discovery but the case itself.