We have recently had inquiries about foreclosures.  Given the current economic climate, this is probably going to become more common.  The good news is that home prices are up, particularly in the Philadelphia suburbs.  But for those who have a house that’s underwater (debt exceeds sales price less commission/transfer taxes) there are things worth knowing.

First, what we like to term a “mortgage” is usually two different legal documents.  A mortgage is actually a legal document filed in the Recorder of Deeds telling the public that the owner’s rights come subject to the claims of a lender.  The mortgage is the product of a document, which you won’t find in the Recorder of Deeds called a promissory note or simply a “note.”  The note says essentially, “I have borrowed money in a certain amount (or up to a certain amount), and here is how I agree to pay it back.”  The mortgage itself just references the note and indicates that if someone tries to buy the property the note and the mortgage will have to be paid in full.  The legal name for this is “due on sale.”

Today, people in relationships often have very different credit histories.  Suppose I am married and I own a house with my spouse.  My spouse has a horrible credit history.  I want to borrow money but the lender looks at my spouse’s credit history and says “We will lend to you but we want nothing doing with that spouse.”  I respond “OK, just loan me the money.”  Lender says “We want security for the loan.  We want a mortgage on your house.”  “But I own the house with my spouse and you don’t like her.”  Lender says, “You still need to get her to sign a mortgage because she is on the deed.”

Note well:  In this transaction, spouse is not an obligor on the debt.  But what spouse actually is doing is agreeing that if I default on the debt, the lender can foreclose on the jointly owned house even though my spouse is not actually a borrower.  In other words the spouse signing the mortgage is effectively saying, “Even though I don’t owe the lender any money, I am prepared to see my interest in a house I own lost to foreclosure if the borrower spouse does not pay.”  It doesn’t matter whether the non-borrower ever got a dimes worth of benefit from the transaction.  Also, once the lender forecloses and even before the lender’s only recourse against the the non-borrower spouse is the equity in the house.  In short, if the lender forecloses but the proceeds from the sale are insufficient to pay off the debt, the spouse is not on the debt but pledged the property via a mortgage is off the hook.

So, I borrow the money to start a business and my spouse agrees to pledge whatever interest she has in our house to secure my debt.  Then I default on the note by not paying it on time.  The lender sues me to recover the debt and takes action to foreclose on the jointly titled house.  My spouse typically has no defense.  By signing the mortgage (not the note), she pledged the house as security for what was my debt alone.

The house goes to foreclosure.  That’s a slow process and in many instances, the home sells at a distressed price.  Often, the borrower and the lender will agree to a private sale to a third party even though the proceeds are less than the lender is due.  However, that requires agreement between the borrower and the lender – and in a world of big banks with vast bureaucracies, getting lenders to agree to anything requires hours/weeks of time trying to secure their cooperation.  Let’s assume that the house is worth $200,000.  I owe the lender $205,000.  I have a buyer at $185,000.  In simple terms, the lender is going to come up $20,000 short if they let the transaction go through.  They could force the property to be sold by the sheriff at foreclosure.  Then they risk the possibility that the sheriff’s top bid is $175,000; now we have a $30,000 shortfall. The lender has the right to a deficiency judgment against the spouse who signed the loan (the borrower) for the $30,000, but the lender now wishes it had consented to the private sale, which would have produced more money.

Title insurance issues can complicate the problem.  Almost every homebuyer wants and should have title insurance.  Most lenders on home purchases insist the property have title insurance to protect them as well as the buyer.  No title insurer has to insure a transaction and like most insurance companies, they are risk averse.  Lenders can release liens of mortgage meaning that even though they are entitled to more money than the house will yield at sale; they would rather take a private deal than see the property sold by the sheriff.  However, unless they file a document with the Recorder of Deeds releasing their lien interest, the private sale cannot be concluded.  Understand that if a lender releases as lien to permit a sale, they are not releasing the balance of the debt but retaining its rights against the borrower alone.  A sale by the sheriff can effectively dissolve the lien on the property even where the debt is greater than the value.  Nevertheless, that’s because the sheriff is selling it in an open bid auction.  If the debt is larger than the value of the home, the lender has the right to take the property in lieu of the debt repayment.  Most lenders avoid that because they don’t like having the responsibility to manage property and deal with utilities, taxes and securing the property.

Tax authorities, including the IRS and many municipalities can be another headache.  They have liens for unpaid taxes as well.  You and your husband own a house worth $200,000.  The mortgage you both signed is for $100,000 of which $50,000 is still unpaid.  But your husband owes $200,000 in federal income taxes for which the IRS has recorded a judgment.  That debt could prevent a title company from insuring the sale even though the taxes are not yours and the proceeds would otherwise be $200,000 minus $50,000 to pay off the mortgage or $150,000.  In theory, the husband’s income tax lien in his name alone should not “attach” to a property that is held as tenants in common or some form of joint tenancy.  But title companies don’t have to insure every transaction; only the ones they want and many would rather not risk that the IRS comes after the buyer for buying a property where a tax lien was “of record” when the transaction took place.

Even more alarming is the situation where a divorcing couple agree to sell a property.  One spouse agrees to pay the mortgage and occupy the property until it is sold.  He/she doesn’t do that causing the debt to increase.  Then that same spouse has a $50,000 IRS lien that arises after the agreement to sell the house.  The couple’s divorce severed the tenancy by entities and made them tenants in common (each owning 50%).  But the $50,000 tax lien due from husband is now clouding the title.  In theory, it should come out of husband’s half of the proceeds and if his half of those proceeds can satisfy the $50,000 debt, a title company may insure the transaction.  But they don’t have to.  Effectively, husband’s poor handling of money after divorce is barring wife from getting her half even though that is what was agreed to.  Effectively, wife’s equity has been trapped in the house even though she bargained to get it and its husband’s subsequent bad act (not paying the mortgage or his income taxes) that bar her from getting to what was to be her money.

If the parties are in a divorce, there is a noteworthy legal doctrine called custodia legis.  Under an appellate case called Klebach v. Mellon Bank, NA, the Superior Court said that in Pennsylvania, property subject to court orders is not subject to attachment by judicial liens.  Lappas v. Brown, supra.  See also Weicht v. Automobile Banking Corp., 354 Pa. 433, 47 A.2d 705 (1946) and Buchholz v. Cam, 288 Pa. Super. 33, 430A.2d 1199 (1981) (property in custodia legis is not subject to attachment until purpose for which Commonwealth holds it has been effectuated).  See generally, Ross v. Clarke, 1 Dall. 354, 1 L. Ed. 173 (1788) (inception of rule in Pennsylvania that property in the custody of the law is not subject to attachment); Bulkley v. Eckert, 3 Pa. 368 (1846) (early formulation of Pennsylvania rule that property held by a public official in his authorized capacity is not subject to attachment by creditors).  The exact limits of this doctrine are not clear.  Property settlements are typically orders of court by operation of law (23 Pa.C.S 3105).  They sometimes takes years to effectuate.  Does that mean that property subject to such an agreement is also immune from attachment for years at a time?

The author thanks Ronald Kalyan of the firm’s Real Estate group for his corrections and additions to this post.

Back in March of this year when the first lockdown began, there were news reports of people electing to quarantine together, if for no other reason, than to avoid isolation.  In some instances, it was to give a forming relationship a “test run.”

Living together, what my parents’ generation liked to call, “living in sin,” is the new normal.  The pandemic just caused some timetables to be advanced.  Nevertheless, as we know, cohabitation often breeds other entanglements, both literally and figuratively.

Take the recent example offered by the relationship of two Lackawanna County residents whose relationship toggled between “off” and “on.”  One of the “on” periods produced a child, although they never married.

In February 2018, Jeffrey Jones and Ruthann Colachino were back “on.”  It was tax time and when they reviewed their tax situations, they agreed that it would be advantageous to allow Mr. Jones to claim their child as his dependent and then file as a head of household.  Ms. Colachino was fine with that so long as Mr. Jones agreed to share the $5,500 refund that his head of household status was due to yield.

When the refund check arrived, the momentarily “happy couple” decided to do what every responsible couple does; they drove to a convenience store in Carbondale and “invested” their newfound wealth in “Bingo Squared” lottery tickets.  They returned to their common dwelling and followed the direction of Gus the Groundhog.  Mr. Jones managed to scratch his way to a $100,000 prize.  Elated, the couple told friends and family they would buy a home together.  They drove together to collect the $72,930 that Gus allows when you scratch off $100K.

You know the rest of the tale.  It lasted a week.  Two weeks after that Ms. Colachino filed to get her $36,465.  The trial included the now ubiquitous surveillance footage from the Turkey Hill store where the winning ticket was acquired.  After watching, that riveting video and hearing from the store clerk and some friends and family the Lackawanna Court ruled the proceeds must be shared as the product of a “joint venture.”

The appeal to Superior Court followed, suggesting this was not a joint venture.  So what’s the law?

A joint venture is an association of persons or entities who form an express or implied contract to engage in a common enterprise for mutual benefit.  McRoberts v. Phelps, 138 A.2d 439,443 (Pa. 1958).  It is shown by facts and circumstances illustrating what, if anything, the parties “intended when associating together.”  There are four elements spelled out in McRoberts: (1) each party must contribute something, whether cash, services, skill, knowledge or material; (2) there must be an intention to share the profit; (3) there is mutual control over the subject matter of the enterprise; and (4) an identifiable transaction rather than a general and continuous transaction.

The video showed they purchased the tickets together, as they had done in the past at the same store (per the clerk).  They called friends and family once they won and used the first person plural “We won!”  They told these same people of a plan to acquire real estate together.  The Superior Court Opinion then circles back to the common plan to share Mr. Jones’ tax refund premised upon Ms. Colachino’s contribution of a “head of household” filing status.  They went directly from where the refund was cashed to the Turkey Hill and Gus’ burrow where they bought their tix.  The suggestion by Mr. Jones that their visit was coincidental was rejected, as it was a credibility finding.

Facetious moral of the story.  Stand clear of others when buying your lottery tickets and if you do win, never, ever use the first person plural.  If someone is standing nearby do not profess to others any intention to acquire real estate with them.

More mature observation.  Lottery tickets make for amusing stories but the difference between buying a ticket and the founding of Microsoft are simply different increments of the same concept, a common enterprise resulting in an extraordinary result.  Even partnerships can be formed through implied conduct.

Colachino v. Jones, 1845 MDA 2019 Pa Superior Memorandum (10/9/20)

N.B.  I’m indebted to Judge Jason Legg of Susquehanna County for finding and reporting on this case in his regular legal column published in the Montrose Independent.  My wife, an ardent reader of the Independent, and fan of Judge Legg’s column brought it to my attention.  Whether that makes this a joint venture, I leave to the reader.

In February 2017 and again July 31, 2019, we posted an article regarding what returns should be ascribed to investment assets transferred in equitable distribution.  In 2019, with dividends reinvested the S&P 500 returned just over 33%.  This year-to-date, 8.5%, which is still not bad, but it has also been a wild ride.  In 2019, we wrote about a 10-year Treasury yielding a lousy 2.06%.  Today 0.83%.

So last July, we played off an article appearing in Kiplinger’s Magazine that set forth 11 stocks that were described as “Boring but Beautiful” because they had an average dividend yield of 5.3%.

A bit more than a year later, we thought it provident to revisit these stocks, if for no other purpose than to see what happened with the yields. Obviously, a full exploration would look at price but we wanted to test the question of whether the 5.3% yield was sustainable. On the whole the results were encouraging. The same portfolio of stocks is today producing an average of 6.48%.  Only three of the eleven stocks saw a decline in yield while one company, Macquarie (MIC), ballooned from 9.6% to 14.39%.  One company fell of out bed on the yield side.  Albemarle went from 7% to 1.6%, but when we did look at stock price, it rose from $75/share to $97/share, a consolation for the dividend loss.

Meanwhile, the Freddie Mac House Price Index has risen from 194 to 205 in the past year.  A decade ago, it was at 126.  So, while houses really did not get back their Fall 2006 mojo until 2016, they have been back on the rise and now are adding value to investor portfolia.

In a word, if you have investments, people are making money and it’s a lot more than the 1% the Treasury Department is paying or the staggering 0.05% rate my saving bank offers.  At those rates your savings doubles once every millennium.

Here’s the dividend yield chart from last July as updated last week.

July 2019                              October 2020                     Trade Symbol

Crown Castle 3.5 2.92 CCI
ATT 5.9 7.8 T
Altria 6.4 8.89 MO
CVS 3.6 3.4 CVS
Macquarie 9.6 14.39 MIC
Enterprise 5.9 6.42 EPD
3M 3.3 3.45 MMM
Iron Mountain 8.2 9.02 IRM
Realty Inc. 3.9 4.73 O
Vereit 6.0 4.7 VER
Albermarle 7.0 1.6 ALB

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, 2020See 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.