Equitable Distribution

We have recently been working with a client married to a “sophisticated investor.”  When we cracked open the documents telling us what Mr. Investor owned, we found a succession of limited partnerships not one of which offered us any information from which we could begin in ascertain value.

Meanwhile, there were eight of these and one formed the impression at the outset that the investments were heavily weighted towards newly formed businesses.  

Valuing any closely held business is a challenge.  The typical approaches employed to do this involve measuring the stream of income or cash flow and efforts to find a comparable company that has recently sold.  The trouble with startup companies is that they rarely have strong financials.  It is not uncommon to engage a business appraiser to have that person come back and report that while they can see value from an intuitive viewpoint, the objective criteria needed to opine about value in an objective report is simply not there.  

Occasionally, the stock market affords us a demonstration of this conundrum and the recent transaction involving Merck’s acquisition of tiny Cubist Pharmaceuticals is a good example.  Cubist was formed in 1992.  It has fewer than 1,000 employees but it has been publically traded at a price that did not crack the $25 mark until 2010.  Startup pharmaceutical companies can be a roller-coaster as good and bad news circulates about the products they are trying to develop.  Moreover, it costs millions if not billions to bring a meaningful drug to market and that investment is typically a multi-year journey.  However, Cubist rose in price on a pretty steady basis until early 2014 when it reached $75 a share.  In 2014, after peaking early, it tumbled back toward $60 and then clawed up to $75 a share.  

In today’s world pharmaceutical companies trade at about 40x earnings.  As December approached Cubist was trading at 87x earnings, more than double the industry average.  It’s profit margin was 5.6%. Operating margin was 9.5%.  Return on assets was 2.3%.  Return on equity 4.47%.  On these numbers one could argue that the market had it a little overpriced. 

Then Merck stepped in offering to buy the company for $8.4 billion; roughly $110 a share.  That’s just about one-third more than the market thought it was worth the day before.  But then, on the very evening when the sale was announced, a court in Delaware issued a ruling that challenged one of Cubist’s patents.  Cubists shares instantly fell 4% and Merck’s shares fell 5%. 

Cubist’s largest individual shareholder holds 176,000 shares.  He saw this transaction coming as he is the CEO.  Let’s assume he was dividing his property with a spouse.  Last Friday his spouse would have been negotiating over shares with a market value of $13,200,000.  On Monday those same shares were worth $19,360,000.  A day later; $2,640,000 less.   If you were being divorced from the shareholder and made your deal on December 5, you would have had no idea that the following Monday would see the shares worth an additional six million.  But then who could predict both a court ruling on Tuesday and just how the market would react.  The experts are saying Merck overpaid by $2 billion. 

The point of this is that we all like certainty when valuing assets.  But even it situations where the stock is publically traded, the tides of the market can change precipitously.  The problem is all the more difficult the smaller the business involved because small companies, like small boats, are less seaworthy in changing economic climates.

The process of equitable distribution is multi-stage, often involving one or more conferences with a “master” specifically assigned to the case and who is an expert in equitable distribution. The master develops a recommendation which can be accepted by the parties; negotiated further, or; rejected outright by one or both parties who take exception to it and move the matter to an equitable distribution trial before a judge. The recommendation is just that – a recommended outcome – and while the master’s recommendations often closely mirror the outcome determined by the judge, they are not dispositive and they are not binding once the parties go before a judge.

Due to the propensity for the trial court to seemingly adopt the master’s determination, litigants can get confused as to the weight afforded the recommendation by the trial court or fail to understand that the trial court has no obligation to incorporate in part or in whole the recommendation. It is against this reality that the Superior Court recently issued a non-precedential (i.e., it cannot be cited as law) opinion highlighting the trial court’s ability to fashion an outcome dissimilar from the master’s recommendation.

The case, Waterstone v. Waterstone, Memorandum Decision, No. 444 MDA 2014 (Pa.Super. November 13, 2014), involves the trial court’s decision to deviate from the master’s recommendation on the allocation of marital debt. Wife received 60% of the marital estate and while the master allocated only 20% of the marital debt to Wife, the trial court – recognizing the disproportionate amount of the assets awarded to Wife – decided to allocate 40% of the debt to Wife. Wife’s arguments for a greater portion of the debt going to Husband are persuasive – she alleges that the bulk of the debt was due to gambling and repairs made to automobiles that he was keeping. Nevertheless, the trial court declined to consider the manner in which the debt was accumulated; it cited the well-settled law that since the debt was accumulated during the marriage it is subject to equitable distribution.

Wife’s reliance on the master’s recommendation was misplaced. Though both the master and the judge were considering the same equitable distribution factors, the judge is ultimately making findings of facts and conclusions of law. The trial court judge may make, in his/her discretion, determinations on credibility and evidentiary determinations. What may have persuaded a master at the equitable distribution conference may not have been admitted into evidence at trial.

Though it is unstated, the master’s hearing may well have been a non-record hearing; meaning there was no transcript taken establishing evidence on the record which could be relied upon at the trial level. Absent that record, the trial court would have been the opportunity to place on the record all of the essential facts for the trial court to consider. The trial court, affirmed by the Superior Court, made their own independent decision on the distribution of the assets and liabilities and Wife lost her appeal.

I’m sure it felt cathartic at the time. An estranged husband rolled his wife’s 1990 Camaro into the Delaware River. He was frustrated that his wife had not turned the family mini-van over to him.

The funny thing about having impulse control issues is that there is a certain lack of foresight as to the consequences. For instance, there is the impact on your divorce case: destroying a marital asset such as a car will likely result in the value of the vehicle being assigned to him at equitable distribution.

Other consequences that this gentleman failed to consider would be the law enforcement response to his actions. Perhaps it did not occur to him that dumping a car in a river might be illegal and that the police have the obligation to send divers into the freezing cold, 30 foot deep water to make sure no one was in the vehicle when it went under. He might not have considered that the police consider having to deploy divers into a dangerous environment for a frivolous reason the reckless endangerment of law enforcement officers.

In his mind, however, the husband, John Kramer, didn’t think he was doing anything wrong. How do we know this? Mr. Kramer’s next move, after having had an arrest warrant issued and his actions garnering a lot more attention that he expected, was to talk to a reporter. In what is probably an interview chock full of good sound bites, the husband, John Kramer, pleads to Philadelphia CBS3’s Todd Quinones, “I didn’t know I was doing anything wrong.” He was sick of fighting over the car and really wanted to use that mini-van.

Of all of his poor decisions, however, Mr. Kramer’s greatest sin was that of pride: according to detectives interviewed by Quinones, he boasted to his wife over text that she could find her car in the river. Unfortunately for him that text violates the Protection from Abuse Order she has against him which prohibits direct and indirect contact. That text could constitute contempt of the PFA and potentially land him in jail. The PFA contempt would be a separate action from the criminal charges the police has filed against him.

Mr. Kramer’s interview made a bad situation worse by making admissions as to the commission of the act and having fled the area. He caps off his day of backfiring decision-making by then dictating through the media his conditions for turning himself in to the police (his demand: released in eight hours on an ankle monitor). This string of decisions took what may have been a frustrating and contentious divorce case and now expanded it to criminal charges, the likelihood of fines, jail time, and a worse outcome in his divorce (and, I assume, any custody case). The momentary gratification of antagonizing an estranged spouse rarely results in any long-term gain.

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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.

We periodically report on macro trends in housing prices because our clients typically have a lot of their wealth invested in their homes.  And each time we have a case, one of the questions that comes about is:  Stay or go?

We recently happened upon some data that gives us insight into home values measured over roughly 20 years.  In the early 1990s Toll Brothers began to build luxury homes in central Chester County, about 30 miles Northwest of central Philadelphia and accessible to the city both by train and turnpike.  These were big homes ranging in size from 3100-6300 square feet on lots that were typically one acre.

What was unusual was that we identified seven homes on one street which had sold in the last nine months.  We confirmed that this was not a fire sale caused by the construction of a nuclear plant or abattoir next door.  Moreover the economy of this area is strong with low unemployment.  Median household income in the township where the homes are located ranges near $100,000 per annum.

The homes we examined were all built between 1995 and 1998.  Only one sold more than once during the last 18 years.  So, we looked at what they sold for when built and what prices they commanded in 2013 and 2014.

DATE   SOLD BEDS/BATHS SQUARE   FEET ACRES PRICE 1995-8 PRICE
A.     7/2014 4/4 6300 1        650,000 1995/410,000
B.     7/2014 5/4 4800 2        570,000 1995/435,000
C.     2/2014 5/3.5 5200 1        590,000 1998/335,000
D.     11/2013 5/4 3100 1.2        555,000 1997/341,000
E.    10/2013 4/2.5 4200 1.2        557,000 1996/345,000
F.    10/2013 4/2.5 4500 1        579,000 1995/435,000
G.    10/2013 5/4 3500 1.3        565,000 1995/354,000

 

Four of the Magnificent Seven were sold in 1995 at an average price of $85.50 per foot.  In 2013-4 these houses sold for $124 per foot.  Over 19 years, the average return comes to 2.4%.  This trails the 2.7% average annual increase in consumer prices over the same period.  It rose from 162 to 245 for the Philadelphia region.

The lesson.  In June 1996 the S&P 500 closed at 670.  Nineteen years later it was just over 1600. So where the Toll Brothers manse increased by 1.45x, an index fund would have increased 2.3x.

Now, we acknowledge, you can’t raise a family inside an index fund.

An index fund does not allow $250-500,000 in gain to pass tax free.

And you can’t margin stock 90% anymore when you can still buy a house with less than 10% down.

But houses are not the investment they were from 1950-2007.  We are in a new age where real estate is not high-yield and risk free.  So, think clearly when choosing to keep a marital residence.

 

Last May, Susan Foreman Jordan in our Pittsburgh office issued a very informative alert on the impact of the United States Supreme Court’s decision in United States v. Windsor on the IRS and Department of Labor recognition of same-sex marriages.

Susan identifies and explains how the IRS and Department of Labor clarified, so as to avoid any ambiguity, that if the same-sex marriage was legally entered into, then they would consider it a valid marriage even if the parties were domiciled in a jurisdiction which does not recognize same-sex marriage.

More technically, the IRS issued a Notice (Notice 2014-19) confirming that for qualified retirement plans and other employee benefit programs must recognize same-sex marriages as of June 26, 2013 when the Windsor decision was made, but that they do not have to extend retroactive recognition to that marriage. Susan expands upon that point and amending plan language to confirm to the Windsor decision.

Susan’s alert is really aimed at plan sponsors and what they can do to confirm with the law. It is also informative to plan participants to understand how the Windsor decision has affected their retirement plan.

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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.

 

I hope you enjoy your box full of $20's
I hope you enjoy your box full of $20’s

As we head into the second half of 2014, now is a good time to take stock of your financial and tax situation, particularly if you are separated or divorcing. Over the next few posts, I am going to highlight some areas worth considering if you are in either situation since it is much easier to stay ahead of these issues rather than scramble to catch up to them in January or February next year.

For this post, I wanted to give a brief summary of how monetary gifts are dealt with by the IRS and how they can impact a divorce case.

The first thing to know is that the IRS has a maximum tax exclusion of $14,000.00 for gifts.  The IRS allows up to that amount to be excluded from taxes, however, anything above $14,000.00 requires a Gift Tax Return to be filed by the person giving the gift and the possibility that they will have to pay tax on the gift. The recipient (or “donee”) does not have to file anything with the IRS or pay any taxes on the gift they receive. Anyone giving gifts in excess of $14,000.00 has to file a Form 709. The exception to this rule is if the gifts are made to a spouse.

Understanding the rules on gifts and the threshold for what requires the filing of a gift tax return is important for those receiving financial assistance from a third-party during a divorce action. The donor may be able to contribute the money as an excluded gift.  From the perspective of litigation, it is also important where there are concerns that an estranged spouse is dissipating the marital estate through gifts to third parties. Requesting the production of gift tax returns should be a standard discovery request in most divorce cases.

Though this is really an estate planning concept, it nevertheless can be relevant in a divorce action. There may also be situations where a spouse receives a portion of the estate and there are tax ramifications which he or she cannot address due to their income levels. Gifts and other estate planning devices may be useful tools for managing such issues. If you have questions about gifts and gifts exclusions, speak to your attorney. In my firm, we are fortunate to have many excellent estate planning attorneys who collaborate with us on family law cases to help address such issues.

Form 709 can be found here.

(Photo Credit: www.giftster.com)

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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 Instruments of Embarrassment
The Instruments of Embarrassment

A recent story through ABC’s Good Morning America website highlighted the evolution of the prenuptial agreement in the social media age. Divorce lawyers are reporting an increasing amount of requests for language in prenuptial agreements – if not stand-alone agreements – addressing social media usage.

It makes a lot of sense. In an age where nothing ever really seems to be removed from the internet, protecting one’s privacy or “personal brand” on social media is a major personal and professional priority. People have been fired from their jobs due to content someone posted about them online; personal and professional reputations have been tarnished over embarrassing photos.

The concept of this clause does raise some intriguing legal issues. First, your ex-wife posting an embarrassing photo of you is not going to be defamation per se; after all, it is difficult to assert she is lying when the photographic evidence speaks for itself. Secondly, how can financial damages even be measured for someone posting on social media? Unless a job is lost or there is a concrete connection between the posted content and the outcome, I think a person calling “foul” over their ex-spouse posting photos will have a difficult time proving they lost income.

The way to give such an agreement “teeth,” therefore, is to provide for a defined financial sanction against the posting party. One attorney in the story suggests that the sanction should be relative to the earning power of the violating party and apply to each incident in which barred information was published. Practically speaking, the sanction has to be great enough that neither party will feel that the personal satisfaction of humiliating their former spouse outweighs the financial penalty.

I would think such an agreement, however, would need to carve out an exception for trial evidence or at least be narrowly tailored to the dissemination of information through social media platforms. Pictures and video acquired during the marriage can be a valuable resource for the corroborating behavior or actions of a party; it can provide important, admissible evidence. A blanket prohibition of the dissemination of pictures or video could undermine their application at trial and would certainly be subject to a discovery motion as to whether the agreement precluded the use of information at trial or, merely, the use of such information on social media. I would be surprised if people – particularly if they plan to have children – would want to prospectively preclude the introduction of certain types of evidence which may be relevant at a custody trial. An exception for the use of such media evidence at trial or, possibly, an agreement that such evidence would be viewed by the judge “in camera” (i.e. not in open court) could also help address the sensitive nature of the evidence.

It is axiomatic that technology changes faster than the court system can keep up. Private agreements, however, can mirror the shifting landscape of technology and privacy. Expect to see greater creativity in prenuptial and post-nuptial agreements dealing with this and other technologically based issues.

(picture credit: celeritystaffing.com)

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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

Psst, can I stop whispering in your ear and just email you instead? Its work-product.
Psst, can I stop whispering in your ear and just email you instead? Its protected as work-product.

Many of my cases involve the use of expert witnesses; individuals hired to review and testify about a specific issue or topic. Usually they are financial experts whose job is value a particular asset such as a business, while other experts could be psychologists conducting a custody evaluation. In other areas of law, there are individuals qualified as experts in virtually every conceivable topic and issue.  Whatever the underlying issue of a case, it is reasonable to assume there is an expert out there prepared to testify about it.

Consequently, communication between an attorney and the expert working on the case is critical and often encompasses trial strategy. It is vitally important that the expert and the attorney can openly and easily communicate about the case.  Not too long ago, however, this relationship and communication became subject to discovery in the case of Barrick et al. v. Holy Spirit Hospital of the Sisters of the Christian Charity et al.  At the time, the trial court ruled that expert testimony was subject to Pennsylvania’s liberal discovery rules and should be turned over to the other side. This was a radical departure from commonly held beliefs and practices protecting this communication and created significant consternation among attorneys.

The Superior Court heard the case in 2011 and overruled the trial court’s decision and barred the production of communication between a surgeon serving as an expert and the plaintiff’s attorney in a personal injury case. Attorneys across the state breathed a sigh of relief; they could actually email their experts again.

Recently, any ambiguity was mostly removed when the Pennsylvania Supreme Court upheld the Superior Court’s decision through a split, 3-3 decision (an evenly divided court results in affirmation of the Superior Court decision). I say mostly because it was a 3-3 split, but in affirming the decision, three justices created a bright-line rule denying the production of expert/attorney communication.

The argument that communications with experts did not fall within the work-product doctrine of confidentiality and were critical for counsel to the cross-examination and critiquing by counsel was not accepted by the Court. The Court felt that by having the opportunity to cross-examine the expert, there was sufficient opportunity to attack his/her opinion without having to divulge communications between the expert and attorney.

This is an important decision in Pennsylvania and affects every litigator, regardless of area of expertise and will allow for experts and attorneys to freely exchange ideas without fear that they will turn into trial exhibits.

Photo Credit: www.health.com

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a resident of 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

As the nation emerges from the fog of tax season, many people who paid little attention to their taxes for the previous eleven months just received a crash course in tax planning, either on their own or with their tax professional. If they have a 401(k), they dealt with their retirement account in some way, either by having to pay tax on a distribution or looking at what they were able to contribute over the year; perhaps they were making one last payment before the tax filing deadline.

For many people, however, having a 401(k) plan begins and ends with a few simple actions: sign up for a plan through your job; contribute a pre-tax amount from each paycheck, and; never deal with it until you retire.

Such a simplified approach is a great way to ensure consistent savings and a retirement nest egg. It is not, however, the end of the equation. Recently, Paul T. Murray, president of PTM Wealth Management, wrote a blog entry on five techniques for avoiding the 10% tax penalty for an early withdrawal from a 401(k). This is great information because it sheds light on a practical issue many people going through a divorce or separation face: having to use the only accessible financial account available to them – the 401(k) – before they reach the mandatory distribution age.

Paul highlights five areas where people can avoid paying the 10% tax penalty on an early withdrawal. Not surprisingly, they are complicated and require significant planning to successfully utilize. The most intriguing, in my opinion, is the one-time withdrawal from a rollover of 401(k) funds. Many times a dependent spouse either had no retirement account or a lightly funded account. When the time comes for them to receive a substantial rollover from their spouse’s 401(k) to their IRA, the IRS provides for a one-time withdrawal in any amount. This could be a major tool for a spouse who is in a case with little cash in the marital estate and has the immediate need for cash. It might be the cash infusion they need to pay off a debt or cover their expenses as they transition into their new phase of life.

Four other techniques are highlighted and the blog entry is worth reading. The tax code is complicated, but if you know where to look it can also provide for some creative solutions to financial and tax problems.

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a resident of 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

Not the best use...
Not the best use...

A very interesting opinion recently came down from the Pennsylvania Superior Court awarding attorney’s fees in a divorce case. This case is a non-precedential opinion, meaning it cannot be cited as establishing law on the issue, but it is emblematic of the risk one runs if you do not follow the rules.

The parties, two attorneys, in fact, had resolved their divorce by way of a Marital Settlement Agreement in March 2011, about two years after the wife filed for divorce. They also had a prenuptial agreement, so the distribution of their estate was addressed in a comprehensive way and nothing was preventing them from getting divorced.

After the deal was done, however, the husband came back and raised an issue about the return of jewelry he gave wife and about the payment of a ten-percent referral fee for a case he sent to his ex-wife’s firm.

Another two years pass.  In March 2013 wife files an Affidavit of Consent under Section 3301(d) of the Divorce Code. That form of affidavit is used when two years have passed since separation and, unlike Section 3301(c), wife was the only one who needed to file it to establish the no-fault grounds for divorce. Once the divorce decree is entered, the parties are prevented from raising any other economic claims. In other words, if husband wanted the referral fee and jewelry, then he needed to have them dealt by raising the issues with the court.

Husband filed a Counter-Affidavit in conformity with the rules. This document is used whenever a party wishes to raise an economic claim for resolution by the court and this was the first step husband needed to take to address the referral fee and jewelry issues he first raised two years prior.

When filing his counter-affidavit, he checked off the box indicating he wished to raise economic claims. Under that box there is language stating that,

“I understand that in addition to checking (b) above, I must also file all of my economic claims with the prothonotary in writing and serve them on the other party.  If I fail to do so before the date set forth on the Notice of Intention to Request Divorce Decree, the divorce decree may be entered without further delay.”

Husband never filed anything else. When the notice period ended, wife obtained a divorce decree on or about May 2, 2013 and husband lost his chance to address his referral fee and jewelry repossession.

When filing his appeal, Husband took the position that the rule requiring him to file his economic claims with the prothonotary wasn’t really followed in Montgomery County. He argued that the trial court abused its discretion because the court generally does not enforce the rule requiring a party to file their economic claims with the prothonotary. Basically, checking the box was enough, wife knew he had additional economic claims, and they should not have entered the decree (or, rather, declined to strike the decree).

Suffice to say, the Superior Court disagreed and found that husband demonstrated no proof that Montgomery County engages in “[a] routine practice…to allow parties to disregard clear instructions set forth in form documents pursuant to the Rules of Civil Procedure” and that “the trial court flatly denies [husband’s] contention, saying that it ‘is unaware of any unspoken practice not to adhere to the instructions on the form counter-affidavit.”

The Superior Court found the appeal frivolous and agreed with wife’s request for counsel fees from husband. As of this writing, the Superior Court has sent the case back to the trial court to determine how much in counsel fees husband will have to pay wife. He cannot feel very confident that the Court he argued did not, as a practice, follow the rules, is now in the position of deciding how much money he will have to pay his ex-wife.

The major lesson from this opinion is that one should never take the rules for granted and assume they can be ignored; do so at your own risk.

No one is perfect and mistakes do happen, however. No one wants to miss a deadline or misinterpret a rule, but if it happens, do not let your ego or pride push you into making worse decisions.

Opinion available at: Savett v. Rovner, No 1743 EDA 2013

Photo: www.myipadretinawallpaper.com

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a resident of 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.