Is Cohabitation and alimony an oxymoron?
In Reese v. Weis, the Appellate Division held that “emoluments”, which enhance a dependent spouse’s lifestyle, also equate to a tangible economic benefit. The Appellate Division held, therefore, when considering an application to reduce or terminate alimony that ” it is fair and equitable for the trial judge to consider lifestyle enhancements realized from the new relationship, which raise the dependent spouse’s standard of living above that enjoyed during the marriage.”It should be noted, however, that it took Mr. Reese three months shy of five years to have a court ( Appellate) rule in his favor. Significant sums were paid for counsel fees and experts which begs the question as to the real significance of this case when the “average” litigant does not have the means to litigate these issues. However, this case may assist trial judges when they hear and decide matters filed by the majority of less “well heeled” litigants to consider facts of life style enhancements and to use a common sense approach to modify or terminate alimony based on cohabitation.Nonetheless, a litigant should not be lulled into the belief that “cohabitation” is the holy grail for ending an alimony obligation. There is much more to do than merely establishing an intimate relationship. The court is looking for the economic interdependence between parties and unless that is proven a party paying alimony may be on the hook for the duration of the new relationship.
Robert H. Goodwin, Esq. Moderates “Law on the Line”
Although the Courts are often reluctant to entertain the highly personal area of religious choice or religious education, in a recent Appellate Division Case, Phillips v. Emerson, the Appellate Division ordered the trial court to hold a hearing to determine whether the custodial parent (mother) may unilaterally decide to send her teenage daughter to parochial high school over the father’s objection. In the parties’ judgment of divorce, both parents were granted legal custody of the children with mutual obligations to discuss all major decisions affecting them. The Appellate division citing Asch v. Asch, 164 N.J. Super. 499 (App. Div. 1978). said schooling is a major decision that should not be made unilaterally by one parent. Thus, the trial court has an obligation to conduct a hearing and take testimony as to whether or not the decision to send a child to parochial school is in the child’s best interests, given the specific circumstances, despite the non residential parent’s objection to the decision. The father, the judges said, may have a hearing to to determine whether attending parochial school is actually in the best interests of the child. The Appellate Division also said that the trial court has an oversight responsibility based on the doctrine of “parens patriae” which court’s exercise in the best interest of children as part of their supervisory responsibilities. A hearing has been scheduled on an expedited basis.
In a recent mediation that I conducted the issue of medical insurance coverage came up. Although the parties were young, the spouse who would be without insurance upon divorce had medical issues. Rather than seeking an absolute divorce, she asked whether or not her husband would entertain a divorce from bed and board in order to maintain insurance coverage. To my surprise, given their relative youth, he agreed to this knowing that neither party would be able to remarry until the divorce from bed and board, in the future, is converted to an absolute judgment of divorce. ( A conversion to an absolute judgment is a matter of right under New Jersey Statute) However, there appears to be a movement afoot that may make the practice of using a divorce from bed and board ineffective as a vehicle to maintain medical insurance for “divorcing spouses”. Therefore, in the event a party is considering whether or not to use a divorce from bed and board as a means to continue medical coverage, I strongly suggest that the covered spouse’s insurance policy be thoroughly examined to see if there is language that would exclude coverage upon a divorce from bed and board. Perhaps a call to the personnel department of the covered spouse’s employer may suffice, but I suggest a review of the policy is the best practice.
Defense of Marriage Act struck down by Supreme Court
The Supreme Court’s decision striking down Section 3 of DOMA focused on why a federal law (DOMA) denying recognition of same-sex marriage is unconstitutional. The reasoning in Justice Kennedy’s opinion — that the denial of recognition of same-sex marriage reflects animus and serves no legitimate purpose — will provide a basis for challenging state laws denying marriage equality. In New Jersey the issue of same sex marriage will now be front and center given the Supreme Court’s decision that it is unconstitutional to withhold the opportunity for same sex couples to marry as it would be a violation of equal protection under federal and state law and serves no legitimate purpose. Justice Kennedy, a swing Justice between the liberal and conservative wings of the Supreme Court, does not mince words, which should be fair warning to state legislators and judges.
NEW PENALTIES FOR TEXTING OR PHONING WHILE DRIVIING WITHOUT HANDS FREE DEVICE
Although the following is not generally considered to be a “family law” issue, since parents of young drivers may be called upon to “pony up” the funds to pay the ticket, it should be noted that Gov. Chris Christie has signed legislation that hike fines for texting or phoning while driving without a hands-free device, with local governments and the state splitting the revenue.The bill will increase the present $100 fine to a minimum of $200 and a maximum of $400 for a first offense, $400 to $600 for a second offense, and $600 to $800 for a subsequent offense. It also will allow a judge to suspend a third-time offender’s license for 90 days. Third and subsequent offenders would get three motor vehicle penalty points. The new fines go into effect in 13 months ( summer 2014). 50 percent of the fines collected would go to the town and county where the violation occurred, the rest to the Motor Vehicle Commission for an education program on the dangers of texting or phoning while driving.
Ban on Paramour Overnights Voided by Family JudgeCharles Toutant, New Jersey Law Journal
August 4, 2015 | 1 Comments
Judge Lawrence JonesAsbury Park Press
A family court judge’s ruling calls for fewer restrictions on contact between the child of divorcing parents and the new boyfriend or girlfriend of one parent.
An indefinite ban on contact between the child and the parent’s new paramour in a consent agreement is unenforceable, absent any evidence of inappropriate conduct, Ocean County Family Part Judge Lawrence Jones ruled in a decision made public Aug. 3. Instead, contact between the child and the parent’s new love interest should be increased gradually in a manner that considers the circumstances and is tailored to the child’s needs, Jones said.
In Mantle v. Mantle, the parties agreed in November 2014 to an indefinite restriction on new girlfriends or boyfriends having contact with the child during parenting time. The child’s mother filed a motion in January 2015 to enforce the restraint against the father, whose new girlfriend was allowed to be around the litigants’ son.
An open-ended restriction is unenforceable without any evidence of inappropriate behavior by the girlfriend toward the child, Jones ruled. But the court will enforce short-term restrictions on contact with a parent’s new girlfriend or boyfriend, designed to protect the child’s well-being, Jones ruled.
Such terms are known as DeVita restraints, for a 1976 Appellate Division ruling in DeVita v. DeVita.DeVita restraints are among the most contentious issues in matrimonial litigation, Jones said. The judge questioned whether the rationale employed by the court in the DeVita ruling is still “socially viable in 2015.”
In DeVita, the Appellate Division upheld a ruling barring overnight visits by the father’s girlfriend when the couple’s children were visiting him. The court found that “a substantial body of the community” shared the mother’s view that their children’s “moral welfare” would be harmed by exposure to such visits. But today, Jones said, it’s “highly debatable” whether a substantial portion of the community would take that view.
“Sociologically speaking, 1976 was a million years ago. Given the overwhelming number of couples from all walks of life who presently live together full-time without the benefit of marriage, the landscape has changed drastically since the long gone days of the bicentennial,” Jones wrote.
The judge said children should not be thrust into an emotionally overloaded situation overnight. But they cannot be raised in a vacuum either, Jones said.
When evaluating a DeVita restraint, a court might consider how long the parties have been living apart; the age of the parties’ child; how long the parent and new partner have been dating; whether the new partner is already known to the child; and whether the child has a psychiatric, psychological or emotional issue that might require special consideration, Jones said. And a court may grant a blanket restriction against contact with a dating partner who poses a threat through inappropriate actions or comments, he said.
In the Mantle case, Jones said duration of any restraints should relate to the best interest of the child. A never-ending restriction on a new dating partner’s contact with the child is “an invitation for potential legal mischief, i.e., for one party to unreasonably attempt to control the other party’s dating life without any legitimate reason, while obstructing the anticipated natural progression and right of the other parent to pursue new relationships following separation or divorce,” he said.
Jones noted the parties’ child is 6 and his parents have been separated for five months, and that the child is already familiar with the father’s new girlfriend. No evidence suggests the father’s girlfriend poses any specific risk to the child, and the child has no specific psychiatric, psychological or emotional disorders, he said.
Nonetheless, the best interests of the child support a “gentle and logical progression, rather than a sudden and abrupt one,” the judge said. He called for a six-month moratorium on exposing the child to a new dating partner, beginning with the couple’s separation in October 2014. After six months, but before 12 months, the parties may introduce the child to new dating partners, but that person may not stay overnight when the child is present. After 12 months, the parties are free to have a dating partner stay overnight when the child is present, Jones ordered.
Lindsay Lutz, a solo in Brick who represented the child’s mother, said the ruling was “very well-reasoned” and that the judge was right to put the child’s needs first. Problems like the one in theMantle case are common, in part because matrimonial litigation moves slowly and a case can take several years to resolve, he said.
Kevin Young of Herlihy and Young in Toms River, who represented the child’s father, declined to comment on the case.
Amanda Trigg, who is chair of the New Jersey State Bar Association’s family law section, said theMantle decision would not be dispositive in other cases, but is “great instruction” and “wonderful guidance.”
“What I like about it is it puts the focus where it needs to be, on the children,” said Trigg, of Lesnevich, Marzano-Lesnevich & Trigg in Hackensack.
Contact the reporter at [email protected]
Accounting For Marital Assets- How to Avoid Failure in their Distribution- From a Seminar presented on behalf of the National Business Institute
I. Overview. Equitable Division of Property New Jersey is not a community property state. It is an equitable distribution state. Therefore, New Jersey divorce courts divide your marital assets in an equitable manner, which means distribution between you and your spouse will be fair but not necessarily equal. Under the rules of equitable distribution, the court can give one spouse a significantly greater share of the parties’ assets rather than splitting them in half equally. Prenuptial agreements may heavily impact the court’s division since the terms of such agreements frequently address how marital property should be divided in a divorce. that the marital property will be divided between spouses in a way that is equitable, or fair. The court decides what’s fair based on a set of factors designed to show how the spouses contributed to the marriage and what each of you will need to move forward after divorce. The division does not have to be equal. The court’s involvement in the division assumes that the spouses alone could not resolve their property disputes. Throughout the divorce process, you will have opportunities to work with your spouse to split your property between yourselves, without court intervention. The court will usually accept a written property settlement agreement that details what each of you will keep or split up. Notably absent is the issue of a spouse’s fault in causing the marriage to fail even if your marriage ended because your spouse had an affair or otherwise behaved badly.
Factors for Property Division
If you and your spouse cannot reach a mutual agreement about property division, a New Jersey court considers many factors to reach a property decision. These factors include: the length of the marriage; the spouses’ earning capacities; the age of the spouses; the physical and mental health of the spouses; and the contributions of each spouse to the earning power of the other and acquisition of the marital assets. New Jersey law provides a list of factors the court must consider, but the court is not limited to those factors.
Divisible Property Generally, the court has the authority to divide assets acquired during the marriage — marital assets — but not assets acquired before marriage or by gift or inheritance. These are considered the separate property of the spouse who acquired them. Marital property may include real estate, vehicles, bank accounts, investment accounts, certain life insurance policies, household furnishings and other personal property. Marital property may also include IRAs, pension plans and 401(k) plans.
Social Security Benefits The Social Security Administration controls Social Security benefits; thus, New Jersey courts do not have authority to divide those benefits. Instead, the SSA determines in what circumstances divorced spouses are entitled to benefits. You can receive a portion of your ex-spouse’s Social Security benefits — if he is eligible for benefits — only if your marriage lasted at least 10 years and you meet other SSA eligibility criteria, such as being at least 62 years old and unmarried.
II. STATUTORY FACTORS: N.J.S. A. 2A: 34-23
The equitable distribution law in New Jersey is similar to most equitable distribution states. New Jersey law directs the Court to consider fifteen factors in determining what is an equitable, fair and just division of assets. They are:
The duration of the marriage;The age and physical and emotional health of the parties;The income or property brought to the marriage by each party;The standard of living established during the marriage;Any written agreement made by the parties before or during the marriage concerning an arrangement of property distribution;The economic circumstances of each party at the time the division of property becomes effective;The income and earning capacity of each party including education background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children, and the time and expense necessary to acquire sufficient education or training to enable the party to become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage;The contribution by each party to the education, training or earning power of the other;The contribution of each party to the acquisition, dissipation, preservation, depreciation or appreciation in the amount or value of the marital property, as well as the contribution of a party as a homemaker;The tax consequences of the proposed distribution to each party;The present value of the property;The need of a parent who has physical custody of a child to own or occupy the marital residence and to use or own the household effects;The debts and liabilities of the parties;The need for creation, now or in the future, of a trust fund to secure reasonably foreseeable medical or educational costs for a spouse or children; andAny other factors which the court may deem relevant.
The only exceptions are the following property if kept separate:
Inherited property – This is real estate or money or any other property inherited through a will or through inheritance laws of the state. Property acquired prior to marriage – Ask was the asset acquired from the date of marriage to the date of filing of the Complaint for Divorce. Gifts to you by a third person – Gifts from one spouse to another are marital assets.
Gifts to a spouse from a third person. If an asset was acquired prior to the marriage, and there is an increase in value due to direct action or work by the other partner, the increase in value may be a martial asset but not the asset itself.
The Court will order equitable distribution of all property acquired during the marriage. What are some of the assets commonly distributed?
Real Estate. Automobiles and other vehicles. Stocks, Bonds, Cash & Savings Accounts. Individual Retirement Accounts, Pension Plans, 401K’s and other funds set aside for retirement. Cash value of Life Insurance Policies. Furniture and fixtures in all houses. Business owned by one or both spouses.
The Court not only orders equitable distribution of marital property but also marital liabilities and debt. What is marital debt?
The mortgage balance on your home. Any debts you owe to banks, savings and loan association, or any lending institutions. Car loans, school loans (if not premarital), home improvement loans, any money you borrowed during the marriage and have not paid back in full (remember, it does not make any difference who signed the loan papers). Loans payable to relatives or friends. Unpaid bills at the time of the hearing (department stores, credit cards, doctors, dentists, etc.)
Equitable Distribution – Important Points to Remember
Equitable Distribution is not automatically a 50/50 split. Title does not count. It does not matter whose name the asset is in. Every asset acquired from the date of marriage to the filing of the Divorce Complaint is subject to equitable distribution. (In New Jersey and a few other states a premarital asset may be subject to equitable distribution if acquired “in contemplation of marriage.”) Assets for Distribution can include: Retirement benefits through employment. Businesses or professional practices started during the marriage. It is your obligation to prove the existence of marital assets. Dissipated assets may still be subject to equitable distribution. Example: spouse tells partner she is going to see a lawyer. Partner goes to the bank and takes out $5,000.00 from the savings account. He later says he “lost track of it” or “doesn’t know where he spent it.” The Court may consider the $5,000.00 he spent as his share of assets and award you $5,000.00 from the remaining assets. Commingling of separate assets muddies equitable distribution In summary a marital asset is everything you and your spouse accumulate during the marriage, regardless of who did the accumulating. Items in one person’s name – like a 401K, IRA, car, bonus money, stock purchase. Also, if your separate property increases in value during the marriage or if you receive any income from it, then most of the time that asset will remain yours alone. There are a few circumstances, however, when an increase in the value of your separate property could be characterized as marital property. For example, if your spouse owned a residence before marriage which became the new marital home and your spouse built an addition or a deck around it, painted it, and helped maintain it during marriage, and the residence increased in value, then the court might be persuaded to give your spouse an equitable portion of the value of the increase. Similarly if later on you rented out the property during marriage and your spouse helped to manage the property, then the rents, too, could be marital property.
(To read more on how an increase in the value of separate property during marriage can transmute into marital property, see the case Scavone v. Scavone, 230 N.J. Super. 482, 486-93, (1988). If your spouse tried to kill you, you might get the court to consider that fact in the property division by using the case D’Arc v. D’Arc, 164 N.J.Super. 226 (1978) and 175 N.J. Super. 598 (App.Div. 1980), where the court kept property from the husband who had “taken out a contract” to have his wealthy wife murdered.)
1II.Dissipation of Marital Asset Claims
The typical allegations of dissipation include bad business decisions, spending marital monies to support a spouse’s extended family, gambling debts, and spending money on extramarital affairs. The critical issue in these types of scenarios is at what point does one spouse’s extravagant spending considered to be dissipation. The Court retains judicial discretion when it comes to dealing with claims of marital dissipation
The key case that defines what is dissipation is Kothari v. Kothari, 255 N.J. Super 500 (App. Div. 1992). Here, the Appellate Division defined dissipation as “where a spouse uses marital property for his or her own benefit and for a purpose unrelated to the marriage at a time when the marital relationship was in serious jeopardy.”
What is and what is not considered the dissipation of marital assets?
Bonventura v. Bonaventura, 2005 WL 5801340 at 3 (App. Div. 2005). Here, the husband lost a sizable amount of marital assets by day trading. The court held that these lost assets was not a dissipation of marital assets. The court held that the husband had no intent to dissipate any marital assets.Ferrier v. Anastons-Ferrier, 2005 WL 3617896 (App. Div. 2006). Here, the husband liquidated some marital assets to pay off his personal debts and his support obligations. These assets were liquidated after the divorce complaint was filed. The court held that the liquidation of these marital assets was considered to be dissipation.Goldman v. Goldman, 248 N.J. Super. 10 (Ch. Div. 1991). Here, the plaintiff-husband advanced $400,000 of marital assets to his car dealership. The car dealership was ultimately lost. The court held that this advancement was not dissipation. The court held that it was made in a good faith effort to save the family car dealership. Finally, the court noted that he tried to save the dealership for himself and his wife.Kabir v. Kabir, 2009 WL 1097901 (App. Div. April 24, 2009). Here, the husband wired funds to Bangladesh after the couple separated. The court held that these wire transfers were considered to be dissipation.Kothari v. Kothari, 255 N.J. Super 500 (App. Div. 1992). Here, the court held that funds that are wired out of the country to a party’s family after the party contemplated divorce is considered to be dissipation. Here, the defendant-husband dissipated marital assets when he wired large amounts of money to his parents in India. The husband had filed for divorce three separate times.Kronberg v. Kronberg, 2006 WL 1507036 (App. Div., June 2, 2006). Here, the husband kept the home in poor condition after the couple separates. The husband lived in the marital home after the separation. The wife was awarded a greater share of the equity in the marital home because of the husband’s poor choices in maintaining the house. This decision led to a decrease in the marital assets. Thus, a spouse’s intentional poor maintenance of a marital asset after the filing of a complaint for divorce can be considered to be dissipation.Lynn v. Lynn, 165 N.J. Super 328 (App. Div. 1979). Here, the court held that a person could not use marital assets to pay for his support obligations.
How may a judge rule on a dissipation of assets case?
A court has a great deal of discretion in fashioning an equitable remedy in any divorce where there are serious claims of dissipation. N.J.S.A. 2A:34-23.1(l) authorized a court to consider “the contribution of each part to the …. dissipation …. in the amount of value of the marital property …. when determining the equitable distribution of the marital assets.” See, Painter v. Painter, 65 N.J. 196 (1974); (Holding that a court can promptly take judicial action to remedy any fraudulent disposition of property in any divorce.)
The court must analyze several facts to determine if one spouse’s spending is considered to be dissipation. The court will consider:
The timing of the expenditures to the couple’s separation;Whether the expenditures were a typical expenditure made by the parties prior to the breakdown of the marriage;Whether the expenditures benefitted both spouses;Whether the expenditures only benefitted one spouse;The need for, and the amount of the expenditure. If there is a gross dissipation, then the court has the authority to allocate assets. Moreover, it can also disproportionally allocate any marital debt in the case divorce proceedings.The court also has the authority to allocate any debt in the divorce case. Illustrative is the case of Monte v. Monte, 212 N.J. Super. 557 (App. Div. 1996). Here, the Appellate Division held that, “a debt resulted because one spouse intentionally dissipated marital assets then such intentional dissipation is no more than a fraud on the marital rights and the debt will not be charged to the other spouse
How to prevent or limit dissipation.
File a Notice of Lis Pendens: In a divorce case where real estate is titled in either party’s name or in both parties’ names, and if it is subject to equitable distribution, then a Notice of Lis Pendens can be filed against the property. See, N.J.S.A. 2A:15-6. Basically, a Notice of Lis Pendens is a pleading that alerts third parties that a party has a legal right to the subject property. Therefore, the public is placed on notice of the potential claims to the real estate.Obtain a Court Order to Freeze Marital Account(s): This is the most common method used to preserve a marital estate. A court can order that both spouses shall not dissipate, hypothecate, withdraw or otherwise use any marital assets. Once the order is signed by the judge, then legal counsel can send the executed order to each bank, broker, mutual fund, credit union, to freeze these accounts. Shut Down Any Lines of Credit: Once a divorce starts, then it is imperative that all home equity lines of credit must be immediately closed. Moreover, any joint credit cards also should be shut down asap. IV. Distribution of Retirement Accounts Following a New Jersey Divorce Typically, retirement accounts are one of the largest assets distributed between spouses following a divorce. Pensions, 401ks, 403Bs, traditional and Roth IRAs, deferred income, and any other monies that are allocated for retirement are subject to the provisions included in New Jersey’s equitable distribution statute.
Only the portion of a retirement benefit that was accrued during the coveture period (the date of marriage thru to the date of the complaint for divorce) is subject to equitable distribution. The portion of a retirement benefit/plan that predates the marriage or was contributed after the complaint for divorce is filed, are typically exempt from distribution. Such an account is typically divided using a Qualified Domestic Relations Order (“QDRO”). A QDRO is a court order that directs the administrator of a pension or other retirement asset to distribute a portion of the account to another party following the dissolution of a marriage. Although a QDRO must be signed by a judge, it should be negotiated by the divorcing couple through their respective attorneys or other means. Prior to entering into a QDRO, however, a number of factors must be considered.
Since each individual’s situation can change unexpectedly, an alternate payee has the best chance of ensuring that the full benefit to which he or she is entitled is actually received in the future during QDRO negotiations. A QDRO will usually provide a formula used to determine the participating spouse’s vested interest or accrued benefit in a pension or other retirement plan. This formula will then be used to determine when an alternate payee is eligible to begin receiving payments from an ex-spouse’s pension.
In many cases, the parties to a divorce may not have the ability to choose the commencement date of pension or other retirement payments for the non-participating spouse in a negotiated QDRO. Rather, the alternate payee may be required to wait to receive pension payments until the participating spouse reaches a specified retirement age. Because of this, any future cost of living adjustments and the effect early retirement payments or subsidies may have on a non-participating former spouse’s rights should be negotiated before the divorce case is finalized and also before a QDRO is submitted to a family law judge. Similarly, a well-negotiated QDRO should establish the effect a potential pension loan will have on the non-participating spouse’s share of the retirement funds.
Pension rights of survivorship are another important factor to consider following a divorce. For example, what happens to the alternate payee’s benefit if he or she passes away after commencement of pension payments? Likewise, a non-participating spouse must be careful to protect his or her interest in a former spouse’s pension in the event of the participant’s death. Unfortunately, doing so after a QDRO is entered by a court is not always easy. And, there are numerous retirement benefit plans that simply do not allow for a survivorship benefit to a non-spouse, such as the New Jersey Police and Fireman’s Retirement System (PFRS). Basically, if you are the former spouse of the police officer, if the police officer dies before you, your right to receive your share of that pension is gone! There are other ways to try and safeguard against the economic inequity this provision can cause. The use of life insurance is one method.
Although a QDRO is useful for dividing retirement assets, pension and other accounts may not always be subject to such an order. Instead, former spouses may agree in a marital settlement agreement (“MSA”) that the participating party will maintain ownership of his or her pension or other retirement account in exchange for accepting a smaller share of the couple’s other assets at the time of their divorce.
Another issue that occasionally arises with respect to the distribution of a retirement account is the “disability pension” Is it subject to equitable distribution as a retirement pension, or is it akin to a personal injury award or worker’s compensation award wherein it is attributable to pain and suffering it is not subject to equitable distribution.
In a recent New Jersey Appellate Court case, the Husband, who had been a fireman, was injured on the job and entitled to the Police and Fire Retirement System disability pension. The issue was whether this disability pension was subject to equitable distribution. It must be noted that State of New Jersey employees, whether public employees, teachers, police or firemen, are entitled to a pension upon retirement if those employees have the requisite number of years in the retirement system. If an employee becomes disabled before retirement, that employee may be eligible for a disability pension which takes the place of a future retirement pension. It was determined by the New Jersey Appellate Court that the State disability pension is made up of two components–one that represents a retirement allowance and one that represents compensation for the disability. It was held that the retirement allowance portion is subject to equitable distribution and the compensation for disability portion is not. Since the Court was not provided with evidence in allocating a value to each of these components and since the plan itself is not divided into separate components, the Court came up with its own formula.
In this particular case, wherein the disability was the result of a traumatic event occurring during the performance of duties, the disability allowance was two thirds (66-2/3%) of the employees’ final compensation regardless of age or years of service or contributions to the pension. There is a lower percentage disability allowance in the event of disability which is not a qualifying traumatic event (i.e. disabling illness). If an employee is injured early in his career, he/she receives the same percentage of final salary as an employee who may be injured later on in his/her career. In comparing the ordinary retirement pension to a disability pension, the retirement pension is dependent upon years of service and age. Those pensions generally range from 50% to 65% of final salary. Therefore, there is a substantial enhanced benefit in the event of a qualifying traumatic event during performance of duties that takes place early in one’s career.
The expectations of a divorcing couple are that the retirement portion of this pension, which was a forced savings during the marriage and an anticipated benefit by both parties in the future, should be allocated between the two of them upon divorce. If the disability occurs when the employee would have already been eligible for retirement, even if early retirement, then we would know what percentage of the disability pension would have been for retirement–anywhere between 50% to 65% depending on the number of years of service.
So, for example if the employee had worked for 20 years and would have been eligible for a retirement pension of 50% of their final salary, but became disabled as result of a qualifying traumatic event and therefore received a disability pension of 66-2/3% of a final salary, then the additional 16-2/3% of the disability pension is related to the disability and 50% of the pension is related to service and subject to equitable distribution.
But what happens if the employee does not have enough years of service in to be eligible for the ordinary retirement pension? How are the two components determined?
The Appellate Division decided that it would use the earliest retirement percentage of final salary which is 50% attributable to 20 years of service, stating that the disabled employee would have most likely worked until early retirement but for the disability. So, for example, if the employee became disabled after 10 years on the job, in order to determine the percentage of the retirement portion of the pension subject to equitable distribution, we should use a coverture fraction wherein the numerator of this fraction is the number of years the employee worked during the marriage (in this example, 10 years) and the denominator is the total number of years worked (or in this case, number of years he would have worked but for the disabling injury, which is 20 years). Therefore, the coverture fraction would be 10/20 or one half.
Now, assume the employee’s final salary before the qualifying traumatic disability was $60,000. The disability retirement pension would be $40,000 per year, or 2/3 (66-2/3%) of the employee’s final salary. A normal retirement pension would have been $30,000 or 50% of the final salary. The $10,000 per year difference between the two is the disability component which belongs to the injured employee and is not subject to equitable distribution.
The retirement pension component is subject to the coverture fraction, as discussed above, wherein 10/20 ( one half) of the $30,000, or $15,000 per year, is subject to equitable distribution. This case is provided in its entirety:
Superior Court of New Jersey,Appellate Division. Michael STERNESKY, Plaintiff-Respondent, v. Ana Cecilia SALCIE-STERNESKY, Defendant-Appellant.
Decided: October 22, 2007 Before Judges COBURN, FUENTES and GRALL. Robert J. Lenrow, Oradell, argued the cause for appellant. Donna J. Vellekamp, Fort Lee, argued the cause for respondent (Ms. Vellekamp, attorney and on the brief; Sandra Wilson Moss, on the brief).
The opinion of the court was delivered by
Defendant’s objections to the child support order and the relevant evidence are discussed in Section II of this opinion. Accordingly, we reverse and remand. For reasons stated in Section I of this opinion, it is clear that there is a component of plaintiff’s pension allowance that is subject to equitable distribution. Defendant appeals. Those questions were tried to and decided by a judge of the Family Part, who determined that plaintiff’s pension allowance was non-distributable income and set child support based on defendant’s current income and plaintiff’s retirement allowance plus imputed income. Although the parties were able to resolve many of the issues, they could not agree on equitable distribution of plaintiff’s accidental disability retirement allowance awarded by the Board of Trustees of the Police and Fire Retirement System (PFRS) or on the amount of child support. A final judgment divorcing plaintiff Michael Sternesky and defendant Ana Cecilia Salcie-Sternesky was entered on June 16, 2006.
Recognizing the difficulty of the position of a trial judge who is left to equitably distribute an accidental disability retirement allowance awarded to a member of PFRS without guidance from the Legislature or the Board of Trustees or evidence from the parties, we provide a formula, inferable from the statutory scheme and decision of our courts addressing equitable distribution of retirement assets, that a judge should apply in the absence of official guidance or relevant evidence. In this case, the attorneys argued for the all-or-nothing approach that favored their respective clients. Larrison, supra, 392 N.J.Super. at 16-18, 919 A.2d 852; Avallone, supra, 275 N.J.Super. at 584, 646 A.2d 1121. In Larrison and Avallone, we stressed the need for parties to present evidence that permits segregation of the component of a disability pension that is a retirement asset and part of the marital estate from the component that is designed to compensate the disabled spouse and is part of his or her individual property. The Board has not done so. 392 N.J.Super. at 18, 919 A.2d 852. In Larrison, we encouraged the Board of Trustees of PFRS to provide information that would permit courts to identify the components of a disability pension. Larrison, supra, 392 N.J.Super. at 16-18, 919 A.2d 852; Avallone, supra, 275 N.J.Super. at 584, 646 A.2d 1121. In both cases, we recognized that a disability retirement allowance has two components-one that represents a retirement allowance and is subject to equitable distribution to the extent attributable to marital efforts and another that represents compensation for disability and belongs to the disabled spouse alone. The judgment we review was entered prior to this court’s decision in Larrison v. Larrison, 392 N.J.Super. 1, 919 A.2d 852 (App.Div.2007), which addresses distribution of an ordinary disability retirement allowance awarded to a member of PFRS. Previously, in Avallone v. Avallone, 275 N.J.Super. 575, 646 A.2d 1121 (App.Div.1994), this court confronted the problem of equitably distributing a disability retirement pension upon divorce.
Plaintiff commenced this action for divorce Although he sought counseling to address post-traumatic stress, when he visited a firehouse or the scene of a fire, he was too anxious to remain. In December 2003, plaintiff was hospitalized as a consequence of injuries he sustained while fighting a fire. In April 2000, Englewood appointed plaintiff to the position of firefighter. He was enrolled in PFRS. Defendant was employed in her field. Plaintiff was employed in a job he had held since 1996, dispatcher for the Englewood Fire Department. When the parties married in 1998, both had college degrees. The following facts are pertinent to equitable distribution of plaintiff’s pension. Plaintiff is thirty-eight years of age, and defendant is thirty-five. in July 2005, and he was awarded an accidental disability retirement allowance effective December 1, 2005.
They divided the equity in the marital residence equally. The parties agreed to a division of their marital assets and personal property, other than plaintiff’s retirement allowance.
Gorman reported that plaintiff contributed “roughly” $28,000 to the pension fund before his retirement and did not qualify for a pension allowance based on age or years of service. According to him, the benefit is not taxed by the federal government because it is treated as if it were a worker’s compensation benefit. He explained that this retirement allowance is the same, two-thirds of the member’s final salary, regardless of the member’s age, years of service or contributions to the pension fund. Gorman described the various pensions available to members of PFRS. His description provided little information beyond what is disclosed by a review of the statutes authorizing pensions for members of PFRS. Gorman noted that plaintiff’s accidental disability pension was not divided into separate components consisting of retirement benefits and funds intended as compensation for traumatic injury and the resulting disability. Peter Gorman, an executive assistant with the Division of Pensions in the Department of Treasury, testified on defendant’s behalf.
In the alternative and after considering the statutory factors relevant to division of martial property, N.J.S.A. 2A:34-23.1, the trial judge determined that even if a portion of the pension allowance were deemed to be an asset subject to equitable distribution, defendant would not be entitled to a share. The trial judge determined that plaintiff’s pension is income and not a marital asset subject to equitable distribution.
See, e.g., Avallone, supra, 275 N.J.Super. at 579, 646 A.2d 1121. Nor are pension benefits attributable to work during the marriage shielded from equitable distribution because they are in pay status. Moore v. Moore, 114 N.J. 147, 156-57, 553 A.2d 20 (1989). The fact that the employee’s right to a pension has not vested or matured at the time of divorce does not extinguish the non-pensioner’s interest in the portion of this asset earned during the marriage. Because both spouses contribute to the earning of pension rights by participating in the marriage, “both justifiably expect[ ] to share the future enjoyment of the pension benefits․” Id. at 46, 535 A.2d 986. Id. at 45, 535 A.2d 986. “[A] pension plan [is] a form of deferred compensation for services rendered.” Whitfield v. Whitfield, 222 N.J.Super. 36, 44, 535 A.2d 986 (App.Div.1987). The marital portion of a pension is identified from the “perspective of when and how the pension was earned or acquired.” Larrison, supra, 392 N.J.Super. at 14, 919 A.2d 852; see N.J.S.A. 2A:34-23(h). In general, the portion of a pension that is “legally or beneficially acquired” during a marriage is subject to equitable distribution. The basic principles governing the identification of retirement assets that are part of the marital estate and subject to equitable distribution are clear.
Larrison, supra, 392 N.J.Super. at 18, 919 A.2d 852. Segregation of the components of any disability retirement allowance requires the court to address “the non-pensioner spouse’s legitimate claims to a marital asset, without attaching funds intended to compensate the pensioner-spouse for his or her disabilities.” 392 N.J.Super. at 16, 919 A.2d 852; see Avallone, supra, 275 N.J.Super. at 580-84, 646 A.2d 1121 (discussing the multiple purposes of a disability pension). As Larrison explains: there is a portion of a disability retirement allowance “that serves to compensate the pensioner-spouse for ․ disability and economic loss [that] should not be subject to equitable distribution.” As noted above, a pension benefit that is based in part on the retiree’s disability presents special questions because the allowance is not solely attributable to a benefit for work done prior to retirement.
Nonetheless, a comparison of this pension and others available to members of PFRS discloses the dual purpose of this retirement benefit. Neither the statute establishing this pension nor the Board of Trustees that administers the plan identifies the separate components of this disability pension.
That annuity is subsumed in and part of th N.J.S.A. 43:16A-7(2)(a). The allowance includes, but is not dependent upon, an annuity that is “the actuarial equivalent of [the officer’s] aggregate contributions.” N.J.S.A. 43:16A-7(2). The allowance is two-thirds of final compensation regardless of the employee’s age, years of service or contributions to the pension fund. N.J.S.A. 43:16A-7(1). An employee qualifies for an accidental disability retirement allowance only if, “as a direct result of a traumatic event” occurring during and resulting from performance of duties, the employee is “incapacitated” for his or her present duty or any other duty that the police or fire department is willing to assign. Thus, an employee who is disabled as a consequence of a qualifying accident early in his or her career receives the same percentage of final salary as one who has worked for many years prior to a qualifying disabling injury. See N.J.S.A. 43:16A-7(2)(b). at allowance.
N.J.S.A. 43:16A-11. Ibid. No benefit, other than return of contributions, is available to an employee who leaves employment without qualifying for a pension. That benefit ranges from fifty percent to sixty-five percent of final salary depending upon years of service and age. N.J.S.A. 43:16A-5. Ibid. An ordinary retirement allowance, based solely on the member’s age, years of service and contributions to the fund is also available. The benefit is a minimum of forty percent of final compensation and may be higher depending on years of service. N.J.S.A. 43:16A-6. Where a member is disabled but the disability is not the result of a qualifying accident, a retirement allowance is available only if the member has a minimum of four years of service. Benefits payable under other PFRS pensions are not as generous and, to varying degrees, are dependent upon years of service, age and contributions to the pension fund.
The enhanced benefit for injury of this sort is reasonably viewed as part of the incentive for accepting employment of the sort offered to members of the PFRS system. It is apparent that the enhanced benefit for accidental disability retirement (two-thirds of final salary as opposed to one-half of final salary for ordinary retirement at the earliest time) is intended to ensure income for a member disabled due to traumatic injury in the performance of duties that pose an inherent risk of such injury.
The longer the period of service, the greater the expectation of a benefit based on retirement credits earned during the marriage. Although an accidental disability retirement allowance is the same in both cases, the expectations are different. Depending on the date of the qualifying accident, that retirement allowance may be earned early in the member’s career, when there is a low expectation of an ordinary retirement allowance and a great need for compensatory income, or after many years of service, when there is a greater expectation of a substantial retirement allowance based on credit earned and a diminished need for compensation intended to replace years of lost earnings. From the perspective of a recipient of an accidental disability retirement allowance and his or her spouse, any expectation of receipt of an ordinary retirement allowance is included in the two-thirds benefit. It also guarantees a return on retirement credit earned during the marriage regardless of length of service when early retirement is caused by a disabling injury due to a traumatic event during performance of duties. Thus, it serves as a more generous substitute for the ordinary retirement allowance toward which the employee earned credits during his or her career. The accidental disability retirement allowance is awarded in lieu of and not in addition to any ordinary retirement benefit. It is also clear, however, that this retirement benefit includes all the compensation an injured member will receive for credits earned toward retirement benefits.
275 N.J.Super. at 582-83, 646 A.2d 1121. In Avallone, we held that it would “run counter to our recognition that marriage is ․ an economic partnership” to permanently deprive the spouse of any share of the retirement asset just because it is, in part, a disability pension. 392 N.J.Super. at 18, 919 A.2d 852. In Larrison, we held that the absence of guidance from the Legislature or PFRS as to the portion of a pension allowance that is attributable to compensation for the officer’s disability “cannot result in unjustly and improperly subjecting the full amount of a disability pension to equitable distribution upon divorce.”
Our formula recognizes and gives affect to the distinction. 275 N.J.Super. at 583, 646 A.2d 1121. In Avallone, we declined to adopt a formula utilized by New York courts because that formula treated disability pensions and ordinary pensions identically. Larrison, supra, 392 N.J.Super. at 18, 919 A.2d 852; Avallone, supra, 275 N.J.Super. at 583-84, 646 A.2d 1121. In the absence of guidance or evidence relevant to the segregation of the components of an accidental disability retirement allowance awarded to a member of PFRS of the sort suggested in Larrison and Avallone, we conclude that a trial court should apply the following formula, which is inferable from the statutory scheme and decisions of our courts considering equitable distribution of retirement assets, to segregate the component of the allowance that is a martial asset.
Accordingly, the ordinary retirement allowance amount must be isolated and the excess preserved. While the spouse of the retiree can be deemed to contribute to retirement credits earned during the marriage, the same cannot be said of that portion of the allowance that exceeds the ordinary retirement allowance and is awarded only to one disabled as a result of a qualifying injury. As discussed above, the accidental disability retirement allowance is based on a greater percentage of final salary than an ordinary pension available to a member of PFRS. Because that excess percentage is best viewed as compensation for the disabling injury, it should be reserved for the disabled spouse.
That approach will identify the anticipated return on the member’s contributions and credits toward retirement. N.J.S.A. 43:16A-5. Where the member of PFRS is injured late in his or her career and is eligible for ordinary retirement, the amount of an ordinary retirement allowance can be isolated by calculating the benefit in accordance with the statute.
The injury to the disabled spouse should neither enhance nor diminish the value of the investment interest anticipated on the basis of efforts during the marriage. Use of that percentage and salary, absent evidence or guidance suggesting otherwise, will recognize the reasonable expectation that the non-pensioner spouse has in sharing in a retirement benefit based on efforts during the marriage. Final salary is also the figure used to calculate the accidental disability benefit. N.J.S.A. 43:16A-5. Fifty percent of final salary is the amount of an ordinary retirement at the earliest date. Considering the expectation interest in retirement allowance, we conclude that when the employee is not yet eligible for ordinary retirement, the ordinary retirement allowance should be calculated at fifty percent of the member’s final salary. The question is more difficult where, as in this case, the employee is not yet eligible for ordinary retirement.
Larrison, supra, 392 N.J.Super. at 18, 919 A.2d 852. The goal is to identify that component of the disability pension that recognizes the non-pensioner spouse’s legitimate claim to a marital asset. After identifying the ordinary retirement allowance and preserving for the retiree the excess allowance based on accidental disability, i.e., the percentage of final salary above the percentage payable on ordinary retirement, the court must further identify the portion of that allowance that is attributable to service during the marriage.
The fraction reflects the relationship between the credits earned during the marriage and total credits earned, including those earned prior to and after the marriage. In that context, the coverture fraction consists of a numerator equivalent to service during the marriage and a denominator equivalent to total years of service. See Claffey v. Claffey, 360 N.J.Super. 240, 256, 822 A.2d 630 (App.Div.2003) (discussing the formula and its use when distribution of a pension is deferred). When our courts identify the marital portion of a pension that is not yet vested or in pay status for the purpose of determining the amount that will be distributed to the non-pensioner spouse when payments are received, our courts employ a coverture fraction.
Setting aside a disabling injury, the non-employee spouse’s reasonable expectation, while his or her spouse is earning retirement credits, is no greater than a share of a retirement allowance based on service during the marriage in proportion to the years of service needed for an ordinary pension. In this context, the measure that reasonably recognizes the relationship between efforts during the marriage and total efforts required for return on that investment is the length of service that would have been required for an ordinary retirement allowance but for the disabling injury. There would be no pension benefit but for a disabling injury that cut the years of service short. While length of service during the marriage is the appropriate measure of marital efforts, length of actual service is not the proper measure of the grounds for an accidental disability retirement allowance. A variation of the coverture fraction is needed to fairly segregate the components of a retirement allowance awarded to a member of PFRS based on accidental disability.
Larrison, supra, 392 N.J.Super. at 18, 919 A.2d 852. The results will recognize the “non-pensioner spouse’s legitimate claims to a marital asset, without attaching funds intended to compensate the pensioner-spouse for his or her disabilities.” On that basis, we conclude that after determining the ordinary retirement allowance and subtracting the excess benefit based on accidental disability, the court should identify the martial component by multiplying the ordinary retirement allowance by a fraction, with a numerator equivalent to service during the marriage and a denominator equivalent to service required for an ordinary retirement allowance. 1 In both cases, the excess benefit available only to those who are disabled as a consequence of traumatic injury during the performance of duties will be preserved for the retiree. In a case where the period of service is brief and the award is, for the most part, reasonably attributable to the disabling injury, a relatively small portion of the pension will be treated as marital property. Where the disabled employee spouse has served for many years earning retirement credits, a significant portion of the pension will be deemed a marital asset, consistent with the expectations of the spouses while retirement credits were being earned.
This approach will not deprive a spouse who was dependent upon the retiree See Caplan v. Caplan, 182 N.J. 250, 264-65, 864 A.2d 1108 (2005). With respect to their children, all income and assets of both parties will be considered for child support. See N.J.S.A. 2A:34-23 (insulating that portion of a pension subject to equitable distribution). To the extent that the non-pensioner spouse is in need of alimony, the portion of the pension not deemed to be a marital asset will be available for alimony. ’s income of needed support.
Consistent with the expectation of the parties during the marriage, retirement credits earned through marital efforts, while collected earlier, are preserved at a rate no greater than they would have expected in the event of a disabling accident. Viewed in this light, early payment permits continued growth of the investment in much the same way as a deferred distribution of the marital portion of a contingent pension right. Where the disabling injury is early in the pensioner’s career, the allowance will presumably be based on a final salary that is lower than the member would have earned at the end of a long career. Nor can we conclude that the early receipt of a share of the retirement benefits will result in a windfall to the non-pensioner spouse.
N.J.S.A. 2A:34-23.1. After identifying the value of the marital share, the court must distribute the portion of the retirement benefit attributable to efforts during the marriage in accordance with the statutory criteria. In summary, we hold that in the absence of specific evidence or official guidance permitting a more precise segregation of the components of an accidental disability pension awarded by PFRS, a court should utilize the formula discussed above to segregate the marital portion of the allowance from the portion best viewed as compensation to the individual for the disabling injury.
The portion of this retirement allowance that is a marital asset may be small, but it is not non-existent. See Rothman v. Rothman, 65 N.J. 219, 232-33, 320 A.2d 496 (1974) (describing a three-step process that requires identification and valuation of marital assets prior to distribution based on the statutory factors); N.J.S.A. 2A:34-23.1 (stating the factors). The trial judge determined that even if a portion of the pension were subject to equitable distribution, defendant would not be entitled to any share. In balancing the statutory factors relevant to equitable distribution and concluding that an award of any portion of this asset would “result in an inequitable windfall to” defendant, the court did not consider the deferral of income and the contributions made during the marriage or the relative value of the parties’ retirement assets. We reject the trial judge’s alternate ground for denying defendant any share of plaintiff’s pension.
R. 2:11-3(e)(1)(E). Our review of the record convinces us that this claim lacks sufficient merit to warrant discussion in a written opinion. The trial judge reserved decision as to whether Gorman could offer an expert opinion pending a specific question, and defendant points to no opinion that was excluded. Defendant also argues that the trial judge erred in declining to qualify Gorman as an expert witness.
We reverse and remand for determination of the portion of this pension that is a marital asset and for equitable distribution of that portion.
The parties’ first child was born in September 2001 and their second child was born in December 2004. The following evidence is relevant to defendant’s claim that the trial court erred in fixing child support.
The parties further agreed that their allocation of the economic burdens of child-rearing and equal division of custodial time would be best addressed by averaging the result of two child support calculations based on shared parenting-one allocating the financial responsibilities of the parent of primary residence to plaintiff and one allocating that responsibility to defendant. Plaintiff agreed to provide child care needed during defendant’s work hours so long as he remained unemployed. They further agreed that neither parent would be considered the primary caretaker or the parent of primary residence. At the time of their divorce, plaintiff and defendant agreed to share legal and residential custody of their children equally.
He suffers from flashbacks. On both occasions he became anxious and was unable to remain. After his accident, he attempted to visit a firehouse and the scene of a fire. Plaintiff is unemployed and receives a retirement allowance of approximately $56,000 per year. Defendant is employed in sales and marketing and earns $45,000 per year.
Although the expert concluded that plaintiff could inspect and sell equipment and do training and planning related to fire prevention and response, she acknowledged that she had not considered whether plaintiff’s post-traumatic stress would prevent him from working in these capacities. Based on the testing and information plaintiff provided about his education and work experience, which included landscaping, house repair, managing an office and social work, the expert concluded that he could find employment in the field of fire prevention and earn between $31,000 and $41,000 per year. The expert interviewed plaintiff and administered aptitude tests. Defendant presented the testimony of an employability expert to establish plaintiff’s ability to resume gainful employment outside the fire department.
He imputed income of $25,000 based on plaintiff’s ability to do work such as house repair and landscaping. The trial judge did not accept the expert’s opinion on plaintiff’s ability to work in the field of fire prevention.
We cannot conclude that the trial judge’s decision so lacks support in the record as to warrant our interference. Although defendant’s expert testified that plaintiff could earn more than the imputed amount if he accepted employment in his field, she also acknowledged that she had not considered the impact of his anxiety. Tash v. Tash, 353 N.J.Super. 94, 99-100, 801 A.2d 436 (App.Div.2002). Imputation of income is left to the sound discretion of the trial judge based on the evidence presented. Defendant contends that the court erred in imputing income of only $25,000 to plaintiff.
See R. 2:10-2. Even if we were to conclude that the court erred, defendant has failed to show how the error could have had an impact on the outcome of this trial. Defendant also claims that the trial judge erred by considering plaintiff’s PFRS file, which was produced by Gorman on the trial judge’s request, but she points to no determination based upon inadmissible evidence included in that file.
The inconsistencies impact the fairness and adequacy of the child support award, which is based on an average of the two calculations. The trial judge also included in the child support calculations the estimated cost of work-related child care, but one calculation assumes that plaintiff will pay that cost and the other assumes that defendant will make the payment. The second calculation assumes that plaintiff will have five allowances and defendant will have one. The trial judge’s first calculation assumes that defendant will have four tax allowances and plaintiff will have one. The parties agreed to share the tax exemptions for their children. Although the trial judge accepted the parties’ agreement to base child support on the average of two support figures based on shared-parenting, as defendant correctly notes, the trial judge did not employ consistent numbers in performing the separate child support calculations.
N.J.S.A. 2A:17-56.8; R. 5:7-5(b). Absent agreement or a finding of good cause for a different arrangement, child support must be paid in that manner. Finally, defendant argues that the trial judge erred in declining to order child support paid through income withholding and the appropriate agency.
Reversed and remanded for further proceedings.
1 The difference, $10 N.J.S.A. 43:16A-5. The ordinary retirement allowance would be $30,000. N.J.S.A. 43:16A-7 (2/323 of final salary). The accidental disability allowance would be $40,000. Assume a qualifying, traumatic disabling injury after ten years of service, all of which were during the marriage, and assume a final salary of $60,000. We provide the following example to illustrate application of the formula. . If there were only five years of service during the marriage, the marital portion would be 5/20 of $30,000, or $7500 for division between the spouses, and, assuming an equal division, the non-retiree spouse would receive $3750. Assuming, for purposes of illustration only, an equal division, the non-retiree spouse would receive $7500 of the $40,000 accidental disability retirement allowance. The product, $15,000, is the portion attributable to service during the marriage and subject to equitable division between the spouses. The $30,000 difference is then multiplied by 10/20 (years of service during the marriage/years of service required for ordinary retirement). ,000, is preserved for the retiree.To identify the portion attributable to service during the marriage, the $10,000 preserved for the retiree is subtracted from $40,000, leaving $30,000.
V. Distribution of Personal Injury Settlements
Personal injury awards and settlements often include damages for pain and suffering, lost wages, loss of future earning capacity loss of consortium (i.e., the loss of the benefits of a family relationship due to the injuries), medical expenses and damages to property. New Jersey lawyers follow what is known as the “Analytical Approach.”
New Jersey’s Analytical Approach
New Jersey has employed the Analytical Approach method which entails the evaluation of the purposes of the settlement or award and the specific elements of damages. For example, if an individual has lost wages or medical expenses (paid out of joint assets), then the court considers those to be “marital awards”, which are subject to division between the husband and wife in a divorce. However, damages for the loss of future earning capacity, pain and suffering, and loss of consortium. are deemed to be the personal property of the injured spouse and not distributable. InAmato v. Amato 180 N.J. Super. 210 (App. Div. 1981), the court noted that:
“nothing is more personal than the entirely subjective sensations of agonizing pain, mental anguish, embarrassment because of scarring or disfigurement, and outrage attending severe bodily injury… None of these, including the frustrations of diminution or loss of normal bodily functions or movements, can be sensed or need they be borne, by anyone but the injured spouse. Why, then, should the law seeking to be equitable, coin these factors into money to even partially benefit the uninjured and estranged spouse?”
However, while a settlement or award based upon an injured party’s loss of consortium is not divisible in a divorce, both spouses may make this claim and the award to each remains separate property. This separate action is known as a per quod (i.e., loss of consortium or services) derivative action in connection with any lawsuit that might be brought.
However, when a personal injury case is settled while the parties are still married, the settlement includes proceeds for pain and suffering for one spouse yet another part of the settlement is loss of consortium to the other spouse? In Ryan v. Ryan, 238 N.J. Super.21 (Ch. Div. 1993), the Court was faced with this exact issue – whether insurance proceeds paid for personal injuries and loss of consortium, which had already been received, commingled and disbursed remains subject to equitable distribution. The husband’s net settlement was $182,946.96 which was payable to defendant for pain and suffering and to the Plaintiff for her loss of consortium. Here the funds were allocated between the two claims and the two spouses. The settlement check was endorsed by the parties and deposited into two separate accounts in the name of the Wife alone as custodian for each of the parties’ two children. Thereafter, the Wife withdrew portions of the funds for various purposes. The Ryan court was now faced with an issue involving an asset which could no longer be identified and categorized with their valued being determined and distributed. Ultimately, the court noted that commingling of separate funds for pain and suffer ring and loss of consortium with marital funds converted those funds into marital property. Therefore, in jurisdictions that follow the analytic approach, specification of damages and amounts allocated to such specifications in a settlement agreement or court verdict would provide guidance to the Court. . A court may even be bound to accept such allocations. Absent such a document, the court may be forced to determine what portion of a settlement or award is marital property, subject to equitable distribution or separate marital property not subject to equitable distribution Further, the award of punitive damages to punish a tortfeasor also follows the analytical approach and is subject to equitable distribution if the award is made while the marriage remains in tact. Some commentators and courts have noted the potential for abuse. For example, an injured spouse may settle a personal injury case and have all or a disproportionate amount of damages designated as pain and suffering, even though the claim involved lost wages. The other spouse may object and claim the settlement constituted dissipation of marital assets,
prompting the court to modify the division of the settlement accordingly. See : LANDWEHR v. LANDWEHR 111 N.J. 491 (1988) which required the Court to determine whether all or part of the settlement proceeds that a spouse receives during a marriage for claims arising out of his or her personal injuries constitutes a marital asset subject to equitable distribution pursuant to N.J.S.A. 2A:34-23. We hold that the portion of the settlement that is intended to compensate for lost earnings and the medical expenses of the injured spouse is subject to distribution, but the remainder of the settlement, which is intended to compensate for personal pain, suffering, and the mental and physical disabilities of the injured spouse or for the loss of consortium or services suffered by the uninjured spouse, are not distributable.
VI. THE STANDARD OF VALUE OF CLOSELY HELD BUSINESS IN DIVORCE-BROWN and BEYOND *
A closely held company is one which is owned by a relatively limited number of people; often entirely by one family. Determining the value of these small companies can be necessary under a variety of circumstances, such as tax and estate planning, raising new capital through private placements, negotiating share-holder or employee buyouts, and structuring mergers or takeovers, or in the context of this seminar, in connection with a divorce.
Closely held businesses require specialized valuation methods since there is no established market for their stock which can be used to determine the fair market value of the business. Although the fair market value of a business is typically defined as “the price at which it would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell,, and with both parties having reasonable knowledge of the relevant facts,” in the context of divorce no market exists to value a business, other than a hypothetical market.
Thus, the past financial performance of the company is the best information on which to establish its value. This is especially true if the information includes several years worth of accurate financial statements, or at a minimum, since the business began. Although past financial performance is a good indicator of management’s ability to generate profits, a comparison of the business to its industry’s norms to assess factors such as competitiveness, the quality of its product and the abilities of its management should be undertaken. Therefore, the value of a small business is a question of fact, dependent upon the circumstances of each business.
Although no generally applicable formula exists, the three most widely recognized valuation methods are: (1) the net tangible asset method; (2) the capitalization method; and (3) the income method.
The net tangible asset method simply involves determining the total net value of the individual assets of the business. This is done by taking the fair market value of the company’s tangible assets and subtracting its liabilities. If available, a possible component of this method may involve the actual sale of a comparable company. If a comparable company is factored into the equation, the companies should be scrutinized to ensure that they are comparable in terms of industry, size, market, product and financial condition. If a comparable company is identified, a weighted ratio analysis can be used to determine the value of the subject company.
For a business which has an earnings history but which does not have a significant asset base (e.g., a business in the service industry) or for a business that has an earnings potential that is different from its past performance, the capitalization of earnings method is probably appropriate. This valuation method is based upon the thought that the value of a company is the present value of the future benefits that can be derived from it. The earnings to be examined can be either a weighted average of past earnings or just the earnings from the latest year of operations, if it is actually indicates the company’s earning potential. Then, to calculate the fair market value of the business, the earnings figure is simply divided by an appropriate capitalization rate. Although this seems easy, determining the proper capitalization rate is one of the most difficult problems in valuation. The capitalization rate used must incorporate all of the elements of the market, investment and company specific risks. The problem is that there are no standard tables
of capitalization rates applicable to closely held companies and wide variations may exist even within the same industry. Moreover, the rate may change depending upon economic conditions.
Not withstanding, these factors are usually considered when trying to determine the appropriate capitalization rate: (1) the nature of the business; (2) the risk involved; and (3) the stability or irregularity of earnings. As a starting point, the appropriate capitalization rate is determined by first knowing the number of years that the potential purchaser expects it to take to be repaid from the business’ intangible assets, after deducting for compensation. For example, if the purchaser expects it to take 5 years to recover his investment, the capitalization rate would be 1 divided by 5 or 20%. Capitalization rates generally range from 35% for personal service businesses or businesses of high risk to 10% for low risk businesses. Once an appropriate capitalization rate is determined, the value of the business is calculated by dividing the earnings figure by the rate. For example a business with earnings of $60,000 and a capitalization rate of 20% would be valued at $300,000).
The third valuation method is the income method. This method is essentially a combination of the first two methods and is the most widely used valuation method for closely held businesses. This method relies on IRS guidelines and utilizes historical earnings as an estimate of future earnings. The income method requires first calculating the fair market value of the net tangible assets (as done in the first valuation method), but then factors in the earnings potential of the company to give total value which is greater than that of just the net tangible assets.
For example, assume the average of the ABC Company’s earnings during the last
five years is $40,000 and the fair market value of ABC’s net tangible assets is $100,000. The income method involves a four- step calculation: First, calculate the earnings that the value of the assets would produce if invested differently for one year. For example, at 8 percent, this would be $8,000. Second, subtract the $8,000 from the average earnings of $40,000; the result is $32,000. This is the business’s excess earnings. Third, calculate the “goodwill” value of the business (this is the intangible value of the business) by first assuming an appropriate capitalization rate (as done in the second valuation method). In this example an appropriate capitalization rate is 25%. Next, divide the average earnings of $40,000 by .25 to get $160,000. Fourth, add the value of the tangible assets ($100,000) to the goodwill value ($160,000) to get the fair market value of the ABC Company, which in this example is $260,000. The strength of this method is that it considers the potential value of the goodwill of the business. Assuming historical results of operation are indicative of the future, the income method is generally a reasonable, conservative method. It is widely accepted and can be applied to virtually any type of business, provided there is some asset base and some earnings history.
In New Jersey, however, the valuation of a closely held business has been consigned to a valuation methodology that is known as fair value, the offspring of business valuations for oppressed minority owners in disputes with the “oppressive” majority owners. Accordingly, the following is a summary of principle of the valuation technique known as fair value.
The Appellate Division decision of Brown v. Brown 348 N.J. Super. 466 (App. Div. 2002) (“the Brown Case”) is the seminal case that addresses whether valuation adjustments – minority interest discounts/control premiums and marketability discounts)
should be applied when valuing a closely held business incident to a divorce in those situations where sale of that asset is not imminent. According to Brown, such discounts should only be applied in “Extraordinary Circumstances” thus establishing a new standard of value to be applied when valuing an interest in a closely held corporation. However, the ramification of the decision affects all future property valuations incident to divorce in this State, and not only those related to closely held businesses.
In the Appeal of the trial court’s decision, among other issues considered by the Court, the three judge panel was called upon to address the equitable distribution of the Husband’s 47 1/2% interest in the family florist business which the Husband had been employed since college. Of relevance to the discussion of valuation of a closely held business is Husband’s challenge to the trial judge’s adoption of Wife’s expert’s valuation and rejection of his expert’s valuation, particularly the judge’s holding that neither marketability nor minority discounts were appropriate in evaluating his interest in the Florist.
Each party presented testimony of a certified public accountant with expertise in business valuations. Wife’s expert valued the entire florist business as of the date of the
Complaint at $1,183,000, and Husband’s 47 ½ % interest at $561,925, taking no discount for marketability or lack of control and assuming the full value of the business was subject to equitable distribution. Husband’s expert valued Husband’s interest at $339,000, after applying discounts of 25% for lack of marketability and 15%for lack of control. Husband’s expert further subtracted an additional $121,000 value from the value he had placed on Husband’s shares when acquired from his parents on six separate dates between 1980 and 1996, leaving $238,000 as the incremental value of Husband’s shared
to be included in the marital estate.
In its analysis of the proper methodology to employ the Appellate division observed that “valuation is not an exact science and that careful analysis on a case by case basis is required, especially when dealing with a close corporation. The Appellate Division also commented that a trial court, when rendering its decision, is free to accept or reject the testimony of either side’s expert, and need not adopt the opinion of either expert in its entirety.
At the plenary hearing, as observed by the Appellate Division, both experts adopted similar approaches to valuing the business. Each used a weighted average of the results of two valuation methods, the market approach (comparable sales of similar companies) and the capitalization of income approach (placing a present value on the anticipated future income stream). Both gave the income approach substantially more weight than the market approach: 80% – 20%, for the wife’s expert and 75%- 25% for husband’s expert. The experts also differed somewhat on the capitalization rates used in their income approach valuations (20% for Wife and 25% for Husband). As the court noted, the inverse of the capitalization rate is the multiple applied to a projected future income stream to place a value on the business. Thus Wife’s “cap” rate of 20% translates to a multiple of five times annual income, whereas Husband’s 25% “cap” rate translates to a multiple of four.
Further differences between the experts were also noted in the extent to which each added back to income excess business expenses of the company (largely for excess officer compensation and personal expenses paid for officers to calculate the true net income. However, the magnitude of the disparity between the values of the two experts largely arose out of their respective approaches to the two legal issues identified – (1) application of marketability and minority discounts and (2) gifting.
Although the Appellate Division determined that gifts had been made to the Husband from his parents during the marriage and remanded the issue to determine the extent of the same as such gifts would be exempt from equitable distribution, the historical and precedential significance of Brown relates to the Appellate Division’s endorsement of the argument that valuation techniques of marketability and minority discounts were not to be used in divorces where the distribution of a closely held business is in issue except in instances of extraordinary circumstances.
For guidance the Appellate division looked at N.J.S.A. 14A:11-1to 11, and Balsamides, 160 N.J. at 372-73 and Lawson, 160N.J. at 398, deducing from these cases that in a statutory appraisal for purposes of determining the fair value of shares owned by a dissenting shareholder, or for valuing shares in a court-ordered by-out resulting from an oppressed shareholder situation, neither marketability nor a minority discount should be applied absent extraordinary circumstances (emphasis added). The application of a marketability discount cannot be used unfairly by controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders. The unfairness of using these discounts lies in the potential for deriving minority shareholders of the full proportionate value of their shares and enriching majority shareholders by allowing a buy-out of minority interests at bargain prices. Lawson at 402. The court concluded that allowing a discount would unfairly benefit the majority owner on the occasion of a future sale of a minority owner’s interest given market conditions that would most likely “discount” the value of the minority interest, thus rewarding an oppressive majority owner whose conduct should not be awarded by the reduction in the value of the interest of the minority party.
The Court went on to opine that “fair value” is not the same as or short hand for “fair market value.” “Fair value” carries with it the statutory purpose that shareholders be fairly compensated, which may or may not equate with market’s judgment about the stock’s value. This is particularly appropriate in the close corporation setting where there is no ready market for the shares and consequently no fair market value. The “fair value” concept is inherently inconsistent with discounting value to reflect limited marketability or a “minority discount” because of a non -controlling interest in a business. The Court then went on to hold that … “The distinction between fair value and fair market value appears to us equally applicable in the valuation of one spouse’ s interest in a family’s closely-held corporation for purposes of equitable distribution.
Thus, in the context of equitable distribution to fairly divide the accumulated wealth of a marital partnership between the non-owning spouse and the owning spouse who intends to maintain the business post divorce, neither the lack of liquidity nor the owning spouse’s minority interest should affect the “fair value” of the retained minority interest. To make its point the Court found that neither discount is appropriate, inasmuch as the record before the trial court revealed no “extraordinary circumstances” related to the operation or control of the florist business sufficient to… “warrant a discount from the fair value of the company for lack of marketability, or a discount from the value of husband’s interest for his minority bloc.”
To best understand the impact of the Brown decision on the issue of valuation, Charles F. Vuotto, Jr., Esq., has authored a series of articles on the subject of business
valuations three of which are appended to this material for future reference and review. In his scholarly analysis of the Brown decision, Mr. Vuotto raises issues of its application to future case only hinted at in the Appellate Division’s decision. Moreover, there is a thorough discussion of the case law that had been utilized in New Jersey and the methodologies employed to value businesses for equitable distribution. Notably, reference is made to the fact that the legislature did not specifically mandate a standard of value when N.J.S.A. 34-23.1 was added to the statutory framework in 1988 (and amended in 1997), begging the question as to what standard should be utilized in valuing a business subject to equitable distribution. Mr. Vuotto also discusses issues implicitly suggested in Brown as to whether the standard of value used should vary depending on the type of asset being distributed (e. g., a closely held business with limited partners); whether or not a discount for lack of marketability or liquidity should be applied; and whether extraordinary circumstances exist that would endorse the use of discounts.
Prior to Brown, the trajectory of the case law regarding the standard to be applied in valuing closely held businesses appeared to follow a Fair Market Value approach defined as “The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts”. (American Society of Appraisers). However, as noted by Mr. Vuotto, no New Jersey cases until Brown gave per se mandates on divorce standards of value and employed a standard used in Balsamides v. Protameen Chemicals, Inc., 160 N.J. 352 (1999) which involved litigation affecting dissenting or oppressed shareholders whose interests were being valued. The Supreme Court in Balsamides specifically cautioned that the valuation principles adopted in that case “are not necessarily useful in other contexts such as valuation of stock for tax and equitable distribution purposes” (emphasis added).
Nonetheless, the valuation methodology of “fair value” has now become the law of the State where factors determining fair market value may not be considered unless extraordinary circumstances are established that call for the use of discounts. It has been opined by Mr. Vuotto that in order for a court to determine whether a discount is appropriate, i. e. extraordinary circumstances to warrant the use of a discount (oppressed owner for example), the issue of marital fault may have to be introduced into the litigation, although marital fault is not a factor for consideration under N.J.S.A. 2A 34-23.1. Thus, attribution of fault may be an unintended consequence of Brown. Also present is the potential for the “double-dip” where non-discounted values are utilized for determining equitable distribution along with the capitalization of the income stream of the business including compensation of the owner to establish levels of support – alimony and child support. Although the potential for problem developing was argued in Steneken v. Steneken, 183N.J.290 (2005), the Court did not see it as a problem describing excess income (income earned by a principal greater than comparable positions in the open market) as a “theoretical construct used to value the goodwill component of closely-held corporation at a specific point in time, namely, the date of the divorce complaint and based on past earnings, not future earnings, and therefore, no ensuing “double-dip” when calculating support based on current and future spousal income that has not been capitalized.
In conclusion, as aptly stated by Mr. Vuotto, “notwithstanding Brown, three choices exist for standards of value: Fair Market Value; Investment value/Value to the
holder; and Fair Value (Brown).
The stalwart and the most easily applied is Fair Market Value. It is also the standard of choice for the IRS. It also is the least likely to cause the double-dip, if discounts (adjustments) are correctly applied. On the other hand, the standard is based on a hypothetical transaction and can be ‘bastardized”.
Investment value is a standard that values the future earning stream of the business entity based on some multiple of income or cash flow benefit stream. This approach includes the capitalization of income, capitalization of cash flow, discounted future income and what is generally recognized as a hybrid of the income and asset approaches, the excess earnings (or formula) method (IRS Revenue Ruling 68-609) See: Business Valuation “The Basics” by Kalman A. Barson CPA/ABV,CFE, published by The Barson Group, PA. This valuation method, as pointed out by Mr. Vuotto, aggravates double-dipping since this standard relies solely on the income stream being produced by the spouse to value the business and to pay support. It also does tends to ignore real valuation factors attributable to the business itself such as existing disputes between owners, expiring contracts with clients or, for example, business leases that may not be renewed, although “adjustments” are often made to accommodate these contingencies by “tweaking” the capitalization rate to achieve a desired outcome.
Fair value has been the method deigned by our Supreme Court to value closely held businesses in New Jersey, having been borrowed from the business landscape to determine valued between oppressive and oppressed (dissenting) shareholders. Given that most matrimonial litigants are not similarly situated, applying fair value and ignoring discounts, unless extraordinary circumstances were to be found, inadvertently re-introduces marital fault into calculus of equitable distribution. Furthermore, as Mr. Vuotto illustrates, since there are many fair value standards which have been created around the country, and even, albeit unintentionally, by the Courts in New Jersey, less uniformity may result. Thus, it is suggested that a Fair Value standard be established that does not emanate from shareholder disputes. Rather, a Standard of Value should be adopted that can be universally accepted in marital dissolution matters to “promote a theoretically sound and objective standard of value, consistently applied, in appraising closely held business ownership interests for purposes of equitable distribution.
*A special acknowledgment is owed to Charles F. Vuotto, Esq. who has authored numerous articles on the subject of valuations of assets in the context of divorce. The above merely highlights his work in this field and both the bench and bar has been enriched by the content of his cogent analysis of the issues that practitioners face while sorting out equitable distribution of assets requiring business valuations.
Recently, a joint committee (The Standard of Value Committee (“SOVC”)) was formed between members of the Family Law Section of the New Jersey State Bar Association and members of the Matrimonial Committee of the New Jersey Society of Certified Public Accountants to create a universally accepted standard of value to be applied in marital dissolution matters. The SOVC was formed due to the growing perception, by both groups, that the appropriate standard of value in business valuations was unclear. Specifically, the express mission of the SOVC is to:
To promote a theoretically sound and objective standard of value, consistently applied, in appraising closely held business ownership interests for purpose of equitable distribution.
Given the complexity of the legal issues involved, the almost unanimous outcry for guidance and the importance of this case to families who find themselves before the divorce courts of this State, it was hoped that the Supreme Court would entertain this
matter. They have declined to do so. However, that does not eliminate the problems.
VI.I ENHANCED EARNING CAPACITY: IS IT AN ASSET SUBJECT TO EQUITABLE DISTRIBUTION UNDER NEW JERSEY LAW?
Individuals enter a marriage with certain skills, talents, education and training which they acquired prior to their marriage. Economists and sociologists often refer to these personal attributes, which may lead to future income, as “human capital.” Although both spouses enter a marriage with their distinct human capital, the attainment of additional human capital during the marriage will often lead to “enhanced earning capacity” for only one spouse.[i] Typically, as one spouse (the “enhanced spouse”) acquires enhanced earning capacity, the other spouse (the “investing spouse”), may defer his or her own career opportunities and accept a temporary reduction in her standard of living to support the enhanced spouse.[ii] In expectation of future income to be derived from her investment in her spouse’s human capital, the a spouse may be fully prepared to endure these sacrifices. When, however, the marriage ends due to divorce, the investing spouse will be left without a return on her investment unless the enhanced earning capacity of the other spouse is valued as an asset subject to equitable distribution.
Under New Jersey law a spouse’s enhanced earning capacity is typically subsumed in the valuation of a business entity. However, the enhanced earnings of a wage earner, whose income is not derived from a business entity in which he has an interest, is not subject to equitable distribution. To some scholars and courts, this disparity may be a distinction without a difference.
The concept of an enhanced earning capacity and the rationale for distributing it as property at the time of a divorce is rooted in both social and economic policy. Viewing the marital enterprise as a socio-economic unit, it is clear that the efforts of both parties during the marriage lead to the creation of marital property whether tangible like a bank account, or intangible like goodwill. All wealth is a product of investment, and those investments made during marriage represent a sacrifice of current consumption power (capital) in anticipation of greater future income gained as a result of that sacrifice.. For example, a spouse who enters a graduate school program, a union apprenticeship, or a business training program invests not only the cost and fees of tuition, but also sacrifices other opportunities by spending her time gaining necessary tools for future advancement. These tuition and opportunity costs are invested with the expectation that the asset acquired from the training will yield future income gains above and beyond what would have otherwise been earned. Thus the spouses’ investment in human capital represents the diversion of income from their present needs in anticipation of future economic gains. To the extent that an investment in such a program results in an identifiable or quantifiable increase in earning capacity, this enhanced earning capacity, whether it be a professional license or a certificate of membership in a recognized business society, may be valued as human capital.
Human capital, it has been argued, has enough of the attributes of property to fit comfortably within the traditional view of property. The physical manifestation of earning capacity, such as a professional degree or license, however, cannot be sold; only the capacity can be sold. For, “just as one can alienate the manual labor of one’s body, one can also alienate the abilities, skills, thoughts, ideas, i.e., the intellectual labor of one’s mind
The public policy of equitable distribution was enunciated by Justice Mountain in Rothman v. Rothman:
The public policies sought to be served is at least twofold. Hitherto future financial support for a divorced wife has been available only by a grant of alimony. Such support has always been inherently precarious. It ceases upon the death of the former husband and will cease or falter upon his experiencing financial misfortune, disabling him from continuing his regular payments. This may result in serious misfortunate to the wife and in some cases will compel her to become a public charge. An allocation of property to the wife at the time of the divorce is at lease some protection against such an eventuality. In the second place the enactment seeks to right what many have felt to be a grave wrong. It gives recognition to the essential supportive role played by the wife in the home, acknowledging that as a homemaker, wife, and mother, she should clearly be entitled to a share of family assets accumulated during the marriage. Thus the division of property upon divorce is responsive to the concept that marriage is a shared enterprise, a joint undertaking, that in many ways is akin to a partnership. Only if it is clearly understood that far more than economic factors are involved, will the resulting distribution be equitable within the true intent and meaning of the statute.[xvii]
The public policy was further amplified six years later by the Appellate Division in Gibbons v. Gibbons:
. . . The extent to which each of the parties contributes to the marriage is not measurable only by the amount of money contributed to it during the period of its endurance but rather by the whole complex of financial and non-financial components contributed.
The function of equitable distribution is to recognize that when the marriage ends, each of the spouses, based upon the totality of the contribution made to it, has a stake in and a right to a share of the family assets accumulated while it endured, not because that share is needed but because those assets represent the capital product of what was essentially a partnership entity.[xviii]
Although the concept of valuing enhanced earning capacity is rooted in economic and social policy, the real question is whether it is “property” subject to equitable distribution pursuant to N.J.S.A. 2A:34-23.
II. LEGAL ARGUMENTS IN FAVOR OF VALUING ENHANCED EARNING CAPACITY AS AN ASSET UNDER NEW JERSEY LAW
A. Expansive interpretation of N.J.S.A. 2A:34-23 – Painter v. Painter
Pursuant to N.J.S.A. 2A:34-23, originally enacted in 1971, New Jersey courts were granted the power to equitably distribute property, real and personal, “which was legally and beneficially acquired by them or either of them during the marriage.” Neither the statute nor the legislative history provides guidance as to the definition of property or assets that were subject to distribution.[xix]
In the seminal case of Painter v. Painter,[xx] the Supreme Court expansively interpreted the statute to encompass the equitable distribution of gifts and inherited assets from a third party. The Court interpreted the statute in an expansive manner and noted, “had . . . a more restricted meaning been intended, we believe that some confining language would have been employed to manifest this purpose.”[xxi] Accordingly, the Painter Court held that “all property, regardless of its source, in which a spouse acquires an interest during the marriage shall be eligible for distribution. . . . “[xxii] In interpreting this new statute, the Court made the following insightful comment:
We are under no illusion that what we have said above will provide certain and ready answers to all questions which may arise as to whether a particular property is eligible for distribution. We have sought only to implement the legislative intent as we discern it, by setting forth what we believe should be the general governing rules. Individual problems must be solved as they arise within the context of particular cases.[xxiii]
Painter further held that premarital property would not be subject to equitable distribution except for premarital assets that increased in value due to the “value contributed by the other spouse . . .”[xxiv] Moreover, any property acquired during coverture, attributable to the efforts of either party, qualified as a distributable asset. Significantly, the Court noted that, “We have principally in mind the earnings of husband or wife; such assets are certainly comprehended by the statute.”[xxv] Was the court saying that assets derived from earned income during the coveture are subject to equitable distribution or that income may be viewed as an asset?
Although the legislature amended 2A:34-23 to exempt inherited property from equitable distribution, with few exceptions, the progeny ofPainter have interpreted N.J.S.A. 2A:34-23 in a comprehensive and expansive manner. Clearly, property subject to equitable distribution includes tangible and intangible assets, pensions and other retirement benefits.[xxvi]
In Moore v. Moore, the Court ruled that post-retirement cost of living increases were included in equitable distribution awards.[xxvii] The Court reasoned that “the right to receive monies in the future is unquestionably . . . an economic resource subject to equitable distribution.”[xxviii] The Court, relying upon a plethora of cases, emphasized that post-divorce benefits received by a spouse are subject to equitable distribution if they are related to joint efforts.
The Moore Court, relying on Whitfield v. Whitfield, held that “the includability of property in the marital estate does not depend on when, during the marriage, the acquisition took place . . . but depends upon the nature of the interest and how it was earned.”[xxix] The Court observed that there would be no post-retirement cost-of-living increases if there were not past contributions and services by both parties.
The concept of valuing a future flow of income which had its origin in marital contribution and efforts was also addressed in Kruger v. Kruger.[xxx] A military retirement plan, in pay status, was deemed property subject to equitable distribution and not considered income that would be available for support. The Court held that all property acquired during the marriage, regardless of its source, is distributable. Justice Schreiber, in an effort to define property observed that:
. . . a contract entitling a person to a certain number of dollars per week for services to be rendered over a fixed period is a valuable right and an asset, though the receipt of the weekly sum represents income. The equitable distribution provision is not concerned with income but with a person’s assets in an economic sense on a date certain. He noted that the right to receive future monies is an enormous resource which can be valued.[xxxi]
Therefore, Painter and its progeny, along with the line of pension cases, supports the characterization of enhanced earning capacity as an asset subject to equitable distribution.
B. Celebrity Goodwill – Piscopo v. Piscopo
In the landmark decision of Piscopo v. Piscopo,[xxxii] celebrity goodwill attributable to Joe Piscopo’s celebrity status was deemed an asset subject to equitable distribution.[xxxiii] Although Piscopo, decided in 1989, is frequently cited by foreign states and scholars, it has not been cited by any New Jersey courts except for Seiler v. Seiler.[xxxiv]
Joe and Nancy Piscopo met in college and were married for 12 years. At the time of the divorce complaint, Joe was a successful entertainer and comedian. The parties stipulated that Nancy had contributed to his success by performing homemaking and custodial responsibilities and serving as a sounding board for his ideas. All of Joe’s income flowed through J.P. Productions, Inc., a corporation owned 51% by Joe and 49% by Nancy.
The Court-appointed expert valued the celebrity goodwill by calculating 25% of Joe’s average gross earnings over a three-year period. According to the expert, this method was commonly used in the industry when valuing celebrity goodwill. The trial court did not apply an excess earnings analysis pursuant to Dugan,[xxxv] since it had insufficient testimony or evidence in the record to draw conclusions related to either the average earning rate of an entertainer of plaintiff’s age and experience or an appropriate discount rate for a person of plaintiff’s level of stardom.[xxxvi]
At trial, plaintiff claimed that the goodwill attributed to his celebrity status was not an asset subject to distribution. However, on appeal, he conceded that celebrity goodwill could be a distributable marital asset but, that in his case, it was too personal in nature and his reputation as a celebrity could not be related to probable future earnings but only to possible future earnings. In essence, he argued that his income as a celebrity was too volatile. Nancy argued that Joe’s celebrity status was an intangible asset and that the goodwill generated by his reputation could be valued in a manner analogous to Dugan,[xxxvii] where the court valued and distributed a sole practitioner’s law practice despite the ethical restraints prohibiting the sale of the practice and the dependency of the practice upon the personal skills of one person.
The Court also concluded that Joe’s history of prior earnings made it probable to assume he would acquire future earnings. Although Joe attempted to make a distinction between professional goodwill and from celebrity goodwill, this distinction was rejected by the Court. The trial court’s opinion is particularly insightful:
Plaintiff contends that professional goodwill is distinguishable from celebrity goodwill. He points out that the former has educational and regulatory prerequisites which any person with acumen can attain while the latter requires ineffable talent which can have no “average” against which to measure. Contrary to plaintiff’s assertions, neither an education nor a license is perse an asset in New Jersey . . . Rather it is the person with particular and uncommon aptitude for some specialized discipline whether law, medicine or entertainment that transforms the average professional or entertainer into one with measurable goodwill.[xxxviii]
The Court reasoned that Joe had the legal right, in a non-matrimonial context, to protect his property rights related to his celebrity status. If someone tried to appropriate his acts or material without his consent, he could seek relief from the Court. Therefore, the Court aptly stated: “The Court cannot countenance the anomaly that would result if one branch of Chancery vigorously protected plaintiff’s person and business from another’s ‘unjust enrichment by the theft of . . . goodwill,’ while another branch deprived a spouse from sharing in that very same protectible interest.”[xxxix]
In essence, the Piscopo Court valued the personal skills, talents and experience of Joe Piscopo that were enhanced during the marriage by valuing probable future income that flowed through his corporation.
C. The Valuation Of A Sole Practitioner’s Law Practice – Dugan v. Dugan In Dugan,[xl] the husband and wife were married for twenty years. The husband, a member of the New Jersey bar and sole practitioner, maintained his practice as a professional corporation. The wife worked as a secretary in the husband’s law office. The Court held that the goodwill of the husband’s law practice was subject to equitable distribution, notwithstanding the fact that the husband was a sole practitioner and there were ethical restraints which prohibited the sale of his practice. The Court supported its decision by the following conclusions of law:
(1) The equitable distribution statute N.J.S.A. 2A:34-23; 23.1 should be comprehensively interpreted. Goodwill is property and is an intangible asset that can be valued regardless of the nature of the enterprise, partnership, corporation, joint venture, individual, proprietorship.
(2) “Future earning capacity perse is not goodwill. However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.”[xli] The Court noted that, “After divorce, the law practice will continue to benefit from that goodwill as it had during the marriage. Much of the economic value produced during an attorney’s marriage will inhere in the goodwill of the law practice. It would be inequitable to ignore the contribution of the non-attorney spouse to the development of that economic resource.”[xlii] Since the wife contributed to the value of the husband’s practice, she should be compensated “as if it were represented by the increased value of stock in a family business.”[xliii] “When goodwill exists, it has value and may well be the most lucrative asset of some enterprises.”[xliv]
(3) Most significantly, an “individual practitioner’s inability to sell a law practice does not eliminate existence of goodwill and its value as an asset to be considered in equitable distribution.”
D. The Statutory Factors Set Forth In 2a:34-23.1 Mandate That The Court Consider Enhanced earning capacity As A Factor In Awarding Equitable Distribution Pursuant to N.J.S.A. 2A:34-23.1, enacted in 1988 and amended in 1997, the court shall consider various factors in making an equitable distribution award. The relevant statutory factors, if read in parimateria, require the court to consider enhanced earning capacity as a factor in awarding equitable distribution. The most significant factors are:
g. the income and earning capacity of each party, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children, and the time and expense necessary to acquire sufficient education or training to enable a party to become self supporting at a standard of living reasonably comparable to that enjoyed during the marriage;
h. the contribution by each party to the education training or earning power of the other ;
i. the contribution of each party to the acquisition, dissipation, preservation, depreciation or appreciation in the amount or value of the martial property as well as the contribution of a party as a homemaker;
* * *
o. the extent to which a party deferred achieving their career goals. . . .[xlvi]
The relevant portions of this statue indicate a desire on the part of the legislature to consider earning capacity and the contributions of the parties to earning capacity as a factor in distributing assets. If the statute is interpreted in an expansive manner, it can be argued that the Legislature intended the court to consider these statutory factors in determining an asset’s eligibility as well as for guidance in distributing the assets to each party.
Without quantifying enhanced earning capacity, how can the court properly consider the above statutory factors?
Moreover, the statute provides, “in every case, the court shall make specific findings of fact on the evidence relevant to all issues pertaining to asset eligibility or ineligibility, asset valuation, and equitable distribution, including specifically, but not limited to, the factors set forth in this section.” Hence, it can be argued that the legislature intended that the asset eligibility should be considered in the context of the statutory factors.”[xlvii]
Whether the statute is given a broad or narrow interpretation, the litigants and the court have an obligation to present proofs pertaining to the relevant statutory factors. In presenting proofs to the court with respect to equitable distribution, enhanced earning capacity should be valued and presented as an asset. At the very least, if enhanced earnings are not viewed as an asset, the court should consider the quantification of earning capacity as a factor in distributing the other assets.
III. THE DECISIONAL LAW OF NEW YORK ALLOWS ENHANCED EARNING CAPACITY TO BE VALUED AS AN ASSET SUBJECT TO EQUITABLE DISTRIBUTION New York State has been virtually alone in case law development concerning the classification, valuation and division of enhanced earnings.[xlviii] New York’s decisional law concerning the valuation of enhanced earnings began with the Court of Appeals’ landmark decision inO’Brien v. O’Brien,[xlix] which addressed “professional licenses.” O’Brien has evolved into a broader valuation of “enhanced earnings,” as illustrated in the cases following O’Brien, up through last year’s decision in Grunfeld v. Grunfeld.[l] It is noteworthy that the New York statute, that lists various factors relevant to equitable distribution, does not include “earning capacity.”[li]
Expansive Definition of Property and Downplaying of Alimony
The line of cases running from O’Brien to Grunfeld are unique in the nation because, to a large extent, the New York legislature deliberately went beyond traditional property concepts when it formulated the Equitable Distribution Law.[lii] The New York statute recognizes that spouses have an equitable claim to things of value arising out of the marital relationship and classifies them as subject to distribution by focusing on the marital status of the parties at the time of acquisition.[liii] “Those things acquired during marriage and subject to distribution have been classified as ‘marital property’ although, as one commentator has observed, they hardly fall within the traditional property concepts because there is no common law property interest remotely resembling marital property.”[liv]
The key cases in New York are summarized as follows:
O’Brien v. O’Brien,[lv] held that the enhanced earnings associated with a professional license is property for equitable distribution purposes. The professional license involved was the husband’s newly acquired license to practice medicine.
Golub v. Golub,[lvi] involved the “renowned and celebrated film and television actress and model” Marisa Berenson. In that case, the New York Supreme Court held that the skills of artisans, actors, professional athletes or any person whose expertise in his or her career has enabled him or her to become an exceptional wage earner should be valued as marital property subject to equitable distribution. The Court valued and distributed the increase in value of Ms. Berenson’s career over the time of the marriage, in view of the husband’s contributions thereto.
Elkus v. Elkus,[lvii] held that the wife’s career as an opera singer and/or celebrity status constituted marital property subject to equitable distribution to the extent that her husband’s contributions and efforts led to an increase in the value of her career. The court held that even though certain “things of value” may fall outside the scope of “traditional property concepts” they still may be considered property subject to distribution. Further, even though enhanced skills may grow out of an innate talent, thereby enabling an artist to become an exceptional earner, those skills may be valued as marital property subject to distribution.
McSparron v. McSparron,[lviii] addressed the issue of whether a license that had been exploited by the licensee (i.e., a license to practice law) to establish and maintain a career may be deemed to have “merged” with the career and thereby lost its character as a separate distributable asset. To the extent that any “merger rule” existed, the McSparron court eliminated the concept and held that the merger doctrine should be discarded in favor of the common sense approach that recognizes the ongoing independent vitality that a professional license may have and focuses solely on the problem of valuing that asset in a way that avoids duplicative awards.
Hougie v. Hougie,[lix] is a one page decision, yet one of the most intriguing. New York Appellate Court held that a husband’s “enhanced earning capacity” as an “investment banker” was subject to equitable distribution.
Grunfeld v. Grunfeld,[lx] held that it was error to base both equitable distribution of one half of husband’s law license and his obligation to pay maintenance on the same projected professional earnings.
D New York Valuation Methodologies
There is truly a paucity of decisional authority giving precise and clear valuation approaches concerning enhanced earnings. When addressing valuation, the O’Brien Court stated that although fixing the present value of the enhanced earning capacity may present problems, the problems are not insurmountable.[lxxix] The Court likened the valuation process to those involved when computing tort damages for wrongful death or diminished earning capacity resulting from injury. Unfortunately, the high Court in O’Brien did not provide detail concerning the methodology used by the wife’s expert in determining a value for her husband’s medical license.
After discarding the concept of “merger,” the McSparron Court also commented upon valuation methodology. The first admonition is that any valuation must avoid “duplicative awards.”[lxxx] The McSparron Court noted that “even after the licensee has had the time and opportunity to exploit the license and to realize a portion of the enhanced earning potential it affords, the license itself retains some residual economic value, although in particular cases it may be nominal.”[lxxxi] As to the precise valuation method, the McSparron Court stated:
That value can be measured and distributed just as a newly acquired license is valued through various actuarial techniques that are well known to valuation experts.[lxxxii]
The Court provided the following guidance:
a) The value of a newly earned license may be measured by simply comparing the average lifetime income of a college graduate and the average lifetime earnings of a person holding such a license and reducing the difference to its present value; or
b) Where the licensee has already embarked on his or her career and has acquired a history of actual earnings, the foregoing theoretical valuation method must be discarded in favor of more pragmatic and individualized analysis based on the particular licensee’s remaining professional earning potential.
The McSparron Court provided the following caveat: Care must be taken to ensure that the monetary value assigned to the licensee does not overlap the value assigned to other marital assets that are derived from the license, such as the licensed spouse’s professional practice. The Court must also be meticulous in guarding against duplication in the form of maintenance awards that are premised on earnings derived from professional licenses.[lxxxiii] This admonition would later be repeated in the Grunfeld decision.
As the Court of Appeals reasoned in O’Brien over 15 years ago, the complexity of calculating the present value of a partially exploited professional license is no more difficult than the problem of computing wrongful death damages where the loss of earning potential that is occasioned by a particular injury. Nor does it lead to significantly more speculation than which is involved in the now routine task of valuing a professional practice for the purpose of making a distributive award.[lxxxv] Unfortunately, the McSparron court noted that the matter had to be remanded to the trial court so that a new distribution of the marital assets taking into account the value of the husband’s law license, could be made.
ARGUMENTS AGAINST THE CONCEPT OF VALUING ENHANCED EARNING
CAPACITY UNDER NEW JERSEY LAW In Stern v. Stern,[lxxxvi] the husband was a partner in a well-known and highly respected law firm. His income and capacity to earn money was thoroughly proven. The wife argued that, after 26 years of marriage, her husband’s earning capacity should be valued as an asset subject to equitable distribution. The trial court agreed and noted “defendant’s potential to earn in or out of the law partnership was demonstrated by his past record.”[lxxxvii] It is noteworthy that the trial court opinion rendered by Judge Consodine relied on non-matrimonial case authority.[lxxxviii] The trial court further reasoned that the husband’s earnings could be pledged as security for loans and that the concept of divided future earnings was compatible with the partnership theory referred in Tucker v. Tucker.[lxxxix]
The trial court opinion was reversed by the New Jersey Supreme Court. Justice Mountain, without relying on any authority, held that earning capacity is not a separately identified and distinct asset eligible for equitable distribution. The Court stated
. . . a person’s earning capacity, even where its development has been aided and enhanced by the other spouse, as is here the case, should not be recognized as a separate, particular item of property within the meaning of N.J.S.A. 2A:34-23. Potential earning capacity is doubtless a factor to be considered by the trial judge in determining what distribution will be ‘equitable’ and it is even more obviously relevant upon the issue of alimony. But it should not be deemed property as such within the meaning of the statute.[xc]
It is noteworthy that Stern pre-dated the enactment of the equitable distribution factors delineated in N.J.S.A. 2A:34-23.1. Hence, the holding may be viewed as inconsistent with our current statutory scheme. However, nevertheless, it is important to note that the court emphasized the importance of considering potential earning capacity in making equitable distribution awards.
A. A Captive Insurance Agent – Seiler v. Seiler
In Seiler v. Seiler,[xci] the husband was an employee of Allstate Insurance Company and was a “captive agent” of Allstate rather than an independent entrepreneur. The Court concluded that the husband was an employee and had no transferable asset. The Court observed that the “defendant’s ability to earn a substantial income must not blind us to the fact that he is an employee of a major insurance company selling its insurance products in accordance with the terms and conditions established by his employer.”[xcii] Significantly, the Court relied onPiscopo in concluding that “when goodwill is recognized as a distributable asset, goodwill is usually a facet of the larger asset such as the law practice in Dugan and the entertainment career in Piscopo.”[xciii] The Court appeared unwilling to value the wage earners income unless it was derived from an enterprise in which he had an ownership interest. The Court continued, “We have discovered no case in this State in which goodwill has been recognized as an asset unassociated with the business entity.”[xciv] The Court’s decision was influenced by the form of the husband’s working arrangement, not his probable future earnings. This should be contrasted with Dugan,[xcv] where the Court clearly noted “variances in the forms of an enterprise do not eliminate goodwill, though they may affect its worth.”[xcvi]
B. Professional Degrees – Mahoney v. Mahoney
In Mahoney v. Mahoney, the parties were married for seven years. During a sixteen-month period of the marriage, the husband attended the Wharton School at the University of Pennsylvania and received an MBA degree. During his schooling, the wife contributed $24,000 to the household while the husband was a full-time student. At the time of the divorce, both parties were earning approximately the same amount of income.
The issue before the Court was whether an MBA degree is property acquired by either spouse during the marriage subject to equitable distribution. The Court held that the professional degree was not property subject to distribution and created the new concept of “reimbursement alimony” to compensate the contributing spouse. In reaching its holding, the Court made the following conclusions:
(1) The statute’s legislative history shed no light on whether a degree was subject to equitable distribution;
(2) A degree is not property because it lacks elements associated with property:
It does not have an exchange value or any objective transferable value on an open market. It is personal to the holder. It terminates on death of the holder and is not inheritable. It cannot be assigned, sold, transferred, conveyed or pledged. An advanced degree is a cumulative product of many years of previous education combined with diligence and hard work. It may not be acquired by the mere expenditure of money. It is simply an intellectual achievement that may potentially assist in the future acquisition of property.
(3) Valuing a professional degree is speculative in that future earning capacity is being predicted . Valuation “would involve a gamut of calculations that reduces to little more than guesswork.”
The Court emphasized the individual differences among persons qualified by an education or a professional degree and unforeseen circumstances which may occur . A given individual “may choose not to practice, may fail at it, or may practice in a specialty, location or manner which generates less than the average income enjoyed by fellow professionals.”[c] The Court further noted, “The potential for inequity to the failed professional or one who changes careers is at once apparent; his or her spouse will have been awarded a share of something which never existed in any real sense”.[ci]
(4) The Court was also concerned with the finality of an equitable distribution award which cannot be modified. If the valuation was unfair, it could not be remedied.[cii]
Nevertheless, the Court felt that various inequities required a remedy to rectify an unjust result. The equitable distribution in cases of this nature “derives from the proposition that the supporting spouse should be reimbursed for contributions to the marital unit that, because of the divorce, did not bear its expected fruit for the supporting spouse.”[ciii]
Where a partner to a marriage takes the benefit of his spouse’s support in obtaining a professional degree or license with the understanding that future benefits will accrue and inure to both of them and the marriage is then terminated without the supported spouse giving anything in return, an unfairness has occurred that calls for a remedy.[civ]
The Court felt it was unfair that a supported spouse keeps not only the degree but also the financial and material rewards flowing from it. The Court emphasized that the parties had an expectation that both parties would enjoy material benefits flowing from the professional degree. The Court underscored other inequities experienced by the wife that had to be remedied: (a) the husband’s cessation of employment, in order to go to school, prevented the parties from accumulating additional income and assets that would be distributed during the marriage; (b) the wife’s postponement of a higher standard of living for the future prospect of greater support and material benefit. “The supporting spouse’s sacrifices would have been rewarded had the marriage endured and the mutual expectations of both of them fulfilled.”[cv]
The Court created the concept of “reimbursement alimony” to compensate a supporting spouse for “a loss or reduction of support, or a lower standard of living, or the inability to obtain a better standard of living in the future.”[cvi] The reimbursement alimony claim would cover all financial contributions toward the former spouse’s education, household expenses, educational costs, school travel expenses and any other contributions used by the supported spouse in obtaining his or her degree or license. The Court limited the concept to mutual and shared expectations that both parties would derive from the increased income or material benefits from a license or degree. The Court stated that they leave for future cases questions as to changed circumstances modifying a reimbursement alimony award.[cvii]
The Court sagaciously observed that “Marriage is not a business arrangement in which the parties keep track of debits and credits, their accounts to be settled upon divorce.”[cviii] However, it may be unfair for one spouse to benefit in obtaining a professional degree with the understanding that future benefits will accrue and inure to both of them. In that case, when the marriage is terminated, the supported spouse is unjustly enriched.
Clearly, Mahoney provides many reasons for denying the valuation of enhanced earning capacity. At the same time, it leaves the door open for valuing enhanced earnings under different factual circumstances. The Court, indicta, said: “Where the parties to a divorce have accumulated substantial assets during a lengthy marriage [the Mahoneys were only married for seven years], the Court should compensate for any unfairness to one party who sacrificed for the other’s education, not by reimbursement alimony but by an equitable distribution of the assets to reflect the parties’ different circumstances and earning capacities”.[cx] Therefore, the reimbursement alimony remedy may be insufficient in a long term marriage. The Court’s recognition of the underlying unfairness resulting from failing to appropriately consider enhanced earning capacity in equitable distribution awards echos, to a large degree, the underlying premise of this article.
V. SUMMARY OF ARGUMENTS AGAINST VALUING ENHANCED EARNINGS CAPACITY AS AN ASSET There are a myriad of arguments that have been submitted by courts and commentators against the concept of valuing enhanced earnings as an asset subject to distribution in divorce cases. These arguments are summarized as follows:
1. Enhanced earning capacity Is Not Property; It Is Too Personal: Enhanced Earnings or licenses do not fit within the traditional legal conceptions of property. They cannot, for instance, be assigned, sold, transferred, conveyed or pledged. Enhanced earning capacity also lacks the attribute of joint ownership because it is “personal” to the holder and has no current exchange value because it is a mere expectancy of future income. For example, in Landwehr v. Landwehr,[cxi] the Court determined that a wife was entitled to equitable distribution of a personal injury settlement that was intended to cover her perquod claim and one-half of the portion of the settlement that reimbursed the injured party, her husband, for lost wages. The Court, however, did not distribute her husband’s award for pain and suffering as property because it was so “inherently personal and not jointly acquired.”[cxii]
There are at least 14 states in the nation which differentiate between the good will of a business entity that is subject to equitable distribution and “personal goodwill.”[
2. Double Dip: Since the value of the asset depends upon the future labor of the holder and the probable flow of future income derived therefrom, the asset is totally indistinguishable from, and has no existence separate from, the holder’s projected earnings. Therefore, where the same income flow is used to calculate two or more of the following: (a) alimony; (b) the value of a business or (c) enhanced earning capacity, the same income is being distributed at least twice, and perhaps even more.
3. Too Difficult to Value: “Enhanced earnings” cannot be easily quantified.
4. Compensated by Alimony: The investing spouse can be compensated for her contributions to the enhanced earning capacity by some form of alimony award.[cxiv]
5. Compensated by Skewed Equitable Distribution: Although the enhanced earning capacity may be valued, it need not be specifically distributed but rather, it may be considered as a factor under the equitable distribution scheme, which may result in a skewed distribution in favor of the non-professional spouse. Pursuant to N.J.S.A. 2A:34-23.1, earning capacity is a factor in awarding equitable distribution. Other jurisdictions take enhanced earning capacity into account when distributing the marital property and awarding spousal maintenance.[cxv]
6. Unforeseen Future Events: One of the main problems with classifying enhanced earning capacity as marital property is that property distribution awards may not be modified. If a person wishes to change careers or if some unforeseen disaster intervenes, there is no longer a basis for the award. As stated by the concurring opinion in O’Brien, “equitable distribution was not intended to permit a judge to make a career decision for a licensed spouse still in training.”[cxvi] In the case where the professional ex-spouse wishes to do something else, a property classification would transmute the bonds of marriage into the bonds of involuntary servitude. There is always a high level of speculation as admitted by the wife’s expert in O’Brien. When asked whether his assumptions and calculations were in any way speculative, the wife’s expert replied: “Yes. They’re speculative to the extent of, will Dr. O’Brien practice medicine? Will Dr. O’Brien earn more or less than the average surgeon earns? Will Dr. O’Brien live to age 65? Will Dr. O’Brien have a heart attack or will he be injured in an automobile accident? Will he be disabled? I mean, there is a degree of speculation. . . . “[cxvii]
7. Lack of Ongoing Concern or Enterprise: Although seeming to raise form over substance, it cannot be contested that enhanced earning capacity is not connected to any ongoing concern or enterprise. Therefore, similar to the “captive insurance agency” in Seiler,[cxviii]there may be goodwill, but does it belong to the employee?
8. Cannot Divide Post-Martial Efforts: Present valuing future earnings, derived from enhanced earning capacity, is distributing post-marital efforts.
VI. VALUATION METHODOLOGY
The fact that an asset is difficult to value, does not mean that it should not be valued.[cxix] The goal is to value the asset in a fair and equitable manner.[cxx] By analogy, future earnings losses in wrongful death cases are typically calculated by economists in the following manner: A base salary will be selected, which will represent the plaintiff’s actual earnings at the time of the accident or death, or in some cases, an average of his earnings over a period of several years. In cases where there is little earnings history, government statistics can be used to estimate the person’s average earnings potential based on age, education, etc. That base income will be projected over the work life expectancy of the plaintiff, which can be age 65, or earlier, or even later, depending upon the plaintiff’s vocation. Wage increases are factored in using statistics released by the government. Also, the gross wage loss is reduced by the income tax liability. Fringe benefits are also calculated into the loss. Finally, the future loss
VII. CONCLUSION Clearly, arguments can be made for and against the concept of valuing enhanced earning capacity as an asset subject to equitable distribution. Proponents will argue that the valuation of enhanced earning capacity is consistent with the intent and spirit of the equitable distributions statutes which acknowledge the contributions and joint enterprise of the parties during the marriage. Perhaps the most significant contribution is made by an investing spouse in her husband’s earning capacity. Without valuing enhanced earning capacity as an asset for at the very least a factor relevant to equitable distribution, an unjust result may ensue.
If we compare two litigants whose earning history is the same, where one is self-employed and the other is an employee for a company in which he has no interest, the equitable distribution awards at the conclusion of a divorce will be disparate. For example, where a computer consultant doing business as a Sub S Corporation earns $50,000 a year at the time of his marriage and $300,000 per year at the time of his divorce, it is likely that his business would be valued and subject to equitable distribution. However, another person earning the same money as an employee for a large corporation, where he has no ownership interests, would not have his enhanced earning capacity valued or distributed as an asset.
The arguments against valuing enhanced earning capacity as an asset are equally persuasive and have been summarized in Point V of this article. Stern v. Stern expressly held that earning capacity is not, perse, subject to equitable distribution. Even Piscopo v. Piscopo, which valued the personal skills of a comedian, can be interpreted to mean that only income that flows through a business entity is subject to equitable distribution.
Finally, some scholars might argue that the valuation of enhanced earnings as an asset is a natural and progressive evolution of the case law leading to the creation of spousal parity. Others might argue that in an effort to correct a wrong, a draconian remedy will be created. In either event, the bench and bar should be sensitive to the concept of valuing enhanced earning capacity and fashion remedies which will be fair and just. At the very least, if enhanced earning capacity is not valued as an asset per se, our law mandates that it be valued and considered in equitably distributing other assets.
( The above article is a condensation of an article prepared by David M. Wildstein, Esq. and Charles F. Vuotto, Jr. Esq. which appeared in New Jersey Family Lawyer published by the Family Law Section of the New Jersey Bar Association. For similar articles, please refer to Mr. Vuotto’s website. )
The family law practitioner must be cognizant of the wide spectrum of assets that fall within the domain of our statute. We must also be aware of the wealth of case law that has explored this issue. Nonetheless, each divorce warrants an exploration of the myriad of options available to a skillful attorney in achieving a fair and equitable distribution of marital assets. Such skill often requires seeking creative solutions for problems facing particular litigants, which problems may not be novel in and of themselves, but unique to the totality of the circumstances involving the parties and the attorneys seeking resolution.
Esq., All Rights Reserved
GUIDANCE FROM JUDGE JONES IN HOW TO DEAL WITH RECALCITRANT FORMER SPOUSE WITH RESPECT TO THE DISPOSITION OF FORMER MARITAL RESIDENCE.
Married spouses often jointly own a home secured by a mortgage in both parties’ names. Divorcing spouses often agree or are court-ordered to divide their joint ownership interests in their marital home and their joint liability on the mortgage. Sometimes one spouse remains in the marital home after divorce and assumes the mortgage obligation. That spouse will usually be called upon to refinance the mortgage in order to remove the other spouse’s name from the joint debt. However, if the spouse remaining in the marital home fails to refinance and then defaults on a mortgage payment, the other spouse’s credit is bruised at no fault of his or her own.
In the recent unreported decision of L.H. V. D.H., Family Part Judge Larry Jones of the Ocean County Superior Court offers guidance in fashioning remedies where one ex-spouse remains in the marital home but fails to remove the other ex-spouse’s name from the joint mortgage. According to Judge Jones, the aggrieved ex-spouse may apply for power of attorney over the disobedient spouse to list and sell the home. The aggrieved ex-spouse may also seek to forcibly remove the disobedient ex-spouse who deliberately frustrates the disposition of the former marital residence.