New York Divorce Law Blog : New York Divorce Lawyer & Attorney : Law Offices of David A. Gabay, PC : Serving New York City, Long Island, Suffolk County, Nassau County

Divorce is a complicated process even under the best of circumstances. However, when your soon to be ex spouse is an attorney you can face very special challenges and problems on the way to obtaining a fair and equitable settlement or decision after trial. 

Here is a list of the top three problems faced by spouses divorcing attorneys:

1.      The Attorney is Known Throughout the Courthouse: If your spouse works regularly in Court, he or she may be well known to the Court and its staff. Even if the spouse works in a different area of the law, say criminal defense or civil litigation, judges and their staffs talk informally among themselves and Courthouse gossip is rampant. This might be the only case in a divorce setting in which the Court is familiar with one of the parties professionally but does not consider recusal. In this case, you and your attorney will have to work extra hard and be extra careful in how you handle your case.

2.        Valuation of the Law Practice: Attorneys whose spouses make a claim for a portion of the value of the law practice tend to raise the same objections time and time again: (1) that the practice has little or no value because it depends entirely on their own efforts and work, (2) that the contingent receivables can’t be accurately valued because of the uncertainties of the cases, and (3) that attorney-client privilege prevents the full disclosure of the information required to properly value the practice.  These arguments can be effectively defeated if your attorney is familiar with the specific rules and case law which govern this issue.

3.        Income “Management”: Attorneys who are planning to divorce their spouse or who know that they will be served with a divorce summons themselves use a wide variety of techniques to manage their income to their advantage. Changes to partnership agreements, decisions to reduce partnership compensation, deferral of revenue, referral and routing of work through other attorneys, and cash fees are familiar ruses designed to depress the income of the attorney and therefore lower the amount of money paid out in spousal support, child support, and equitable distribution. Like the valuation problem, this issue can be effectively countered with aggressive and thorough discovery and an understanding of how to identify and uncover income management in all of its forms.

For more information or to schedule a consultation, please visit my firm’s website at www.GabayLawFirm.com

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One of the more difficult issues faced by couples who are divorcing in the current economic environment is how to divide retirement or deferred compensation benefits, especially defined benefit plans such as a 401(k), SEP, or IRA.

New York law specifies that the ‘cut off’ date for classifying retirement assets as either martial property or separate property is the date on which a divorce action is commenced. The law also provides for a range of dates for valuing the marital portion of the account, ranging from the commencement date through the trial date.

Courts have developed certain standards for determining which valuation date should be applied to a particular asset class such as retirement and deferred compensation accounts. Under certain circumstances, the Courts may value the asset as of the date of commencement and under others it may use the trial date as the valuation point.

A problem arises in today’s economy where after the commencement of a divorce action the marital portion of the retirement assets declines in value. Disagreements arise over which party should bear the cost of that decline. Some common discussion points are:

1.                  Is the account actively managed (traded) by either or both spouses?

2.                  Which spouse is responsible for selecting the assets held in the account?

3.                  Which spouse should bear the risk of the asset declining during the time the divorce case proceeds in Court.

4.                  How are the post-commencement contributions into the account valued?

Unfortunately, there seems to be very little guidance from the Courts at this time as to how they are dealing with these issues in this new economic environment. In the absence of any definitive authority, it is extremely important for people going through a divorce to have as much factual information about their retirement assets as they can obtain and to carefully think through and negotiate this complex issue.

If you or someone you know would like more information on this topic, please feel free to contact my office.

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I recently came across an interesting decision in a case which highlights the problems and liabilities which arise from inept or ill-advised divorce planning by business owners and their families.

The case comes from the Nassau County Supreme Court and was reported in the New York Law Journal on January 8, 2008.

The parties were married in 1996. In 2001, the wife’s father sold her all of his stock in an automobile dealership he owned  for $1.4 million. The wife made a down payment of $150,000.00, using funds provided to her by her husband, and executed promissory notes for the balance.   The husband claimed he paid a total of $785,000.00 to the wife’s father on account of the notes, and that he and his wife agreed that the shares in the dealership and certain other assets would be jointly owned by them.

Six months before filing for divorce, the wife defaulted on the notes and then transferred the shares in the dealership to her father. In the divorce action, the wife claimed she had no interest in the dealership.

The husband brought multiple claims against the wife, her father, and various corporations owned by the father and the wife. The claim which survived the defendants’ motion to dismiss was for a fraudulent conveyance in violation of Debtor and Creditor Law 276-a transfer made with actual intent to defraud a creditor.

The Court found that the plaintiff’s claims regarding the wife’s intentional default on the notes six months before commencing a divorce action, the surrender of the shares to her father were sufficient to defeat a motion to dismiss the complaint.

I wonder what advice the wife received, if any, and from whom. It appears from the decision that the planning for the divorce was clumsy at best. This case is an excellent example of the need for sound and professional divorce planning by business owners and their families.

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Nobody marries with the expectation of failure. Couples never contemplate that the person they once loved could eventually become an adversary and an enemy. Yet, statistics paint an alarmingly bleak. Approximately 4 out of 10 marriages today end in divorce.

One of the greatest contributors to divorce is the issue of "control" - either financial or personal. Who controls the bank account? Who decides what to buy and when to buy it? When one partner to a marriage "controls", the other partner loses their sense of self. A divorce becomes imminent as the controlled partner tries to regain their self-esteem.

Here are six (6) steps you can take to protect yourself financially if you believe your marriage is in jeopardy:

1. Keep Non-Marital Assets Separate

Non-marital assets are not part of the assets divided in a divorce. Instead, they are considered the asset of either the husband or the wife and generally awarded to that person in a divorce proceeding. Categories of non-marital assets include:

• property you inherit;
• proceeds from personal injury awards (ie. Worker's compensation or accident proceeds);
• items owned prior to marriage; and
• gifts to one party rather than the family.

If non-marital assets are commingled with assets purchased or improved during the marriage, it may not be possible to claim the asset as yours in the event of divorce. However, some "tracing" of non-marital assets may be possible. For example, if a non-marital asset is sold during the marriage and the proceeds from the sale are used to purchase another asset, it may be possible to "trace" a non-marital interest in the new asset. For example, if a car owned before a marriage is sold during the marriage and the proceeds used to purchase a new vehicle, a party may be able to claim a non-marital interest in the new vehicle. To do so, it is very important to retain all documents demonstrating the sale of the asset and the use of the proceeds realized from the sale.

2. Establish Your Own Credit

Make sure your name is listed on all household accounts and investments. Establish at least one credit card in your own name. This will help to create an individual credit history. When you are on your own, you will have a better chance qualifying for loans, mortgages and credit cards. These are all important considerations after a divorce.

3. Review Your Financial Holdings Regularly

Maintain complete and separate records of your financial holdings such as bank accounts, IRA's, 401K, land purchases, and stocks. This includes assets in your spouse's name as well. You may wish to maintain copies of these records at your place of employment or in a safety deposit box in your name. Records have a way of disappearing after a divorce has been started.

4. Time Your Divorce

The timing of your divorce may carry with it a significant financial impact. For example, in a single income family, the non-working spouse may not have earned enough money to qualify for Social Security at the age of retirement. However, if spouses are married at least 10 years and don't remarry, the non-earning spouse may qualify for Social Security benefits based on the ex-spouse's earnings when both reach the age of 62.

5. Close Joint Accounts

If a divorce is imminent, you should immediately contact joint-credit-card companies in writing to freeze or cancel your joint accounts. You do not want to be responsible for your spouses' new credit card charges, particularly when those charges may include attorney's fees. This protects your credit. It is important to remember that, although a creditor may freeze a joint account, the outstanding balance must be paid off before the account can be closed.

You may also wish to close your joint bank accounts. If any proceeds are removed, keep a carefully accounting where the money is placed or how the proceeds are spent. You will undoubtedly be asked for that accounting as part of the divorce process. You can save yourself time and money by keeping accurate records.

6. Hire an Experienced Divorce Lawyer

It may be very important to hire a good lawyer early in your divorce planning process. An experienced attorney can help you avoid mistakes that could later cost you in your divorce proceeding. There are many lawyers to choose from so it is important that you ask important questions in order to choose one that is knowledgeable and right for you. Ask about their experience in family practice and specifically divorce. Ask the attorney to explain the legal issues as well as the legal process in your particular county.

For additional information on divorce planning, visit DivorceNet.com or DivorceSupport.com

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A common provision in many divorce agreements is that the former marital residence will be sold upon certain terms and conditions and the net proceeds of the sale be divided between the former spouses. Many times, however, the parties cannot manage to cooperate in the sale of the house or one party decides not to honor the terms of the agreement and refuses to participate in the sales process.

When these disputes, one party will often ask the Court to enforce the terms of the divorce agreement. One tool available to the Court is an order appointing a receiver to sell the home. A receiver is an agent of the Court who is empowered by Court order to effectuate the sale of the home by those means authorized by the Court.

The costs of the receiver (commissions, legal fees for the receiver’s attorney, decreased sale price) are allocated between the parties by the Court. If the Court finds that one party is particularly at fault in the dispute over the sale of the home, it can require that party to pay all of the costs associated with the receiver.

In Lutz v. Goldstone, the New York State Appellate Division, Second Department, approved the appointment of a receiver. However, it found that both parties were sufficiently at fault so that they each were charged with one-half of the cost of the receiver. 

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Daniel Clement’s blog has an interesting item regarding a new medical insurance disclosure requirement for New York state divorce agreements and judgments. The law mandates that all divorce settlement agreements contain specific language advising the parties that they may lose their health insurance as a result of the entry of a judgment of divorce.  The law requires the Court to ensure that the statutory language is contained in the agreement. The law takes effect on November 1, 2007.

This new law is, in my opinion, completely unnecessary and will do nothing but cause confusion and delay in the resolution of divorce actions for several months while the Courts and matrimonial attorneys update their forms and procedures to accommodate the additional language. 

In my experience, I have never had a cause where a party was unaware that he or she would lose his or her health insurance after a divorce was finalized. In fact, for many of my clients the questions surrounding the loss and cost of health insurance after a divorce were a major point of negotiation and contention.

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The valuation and distribution of the personal professional goodwill of a single owner service business or practice is a highly contentious issue. Personal professional goodwill is the portion of a business’ professional goodwill attributable to the presence or reputation of the owner or other key person. For example, suppose a medical practice has a goodwill value of $5 million, but that the doctor who owns the practice is a nationally recognized expert in his field. If the doctor left the practice, half of the patients of the practice would follow him to his new practice. In such a case, the personal professional goodwill attributable to the doctor is $2.5 million.

Although New York certainly allows for the valuation and distribution of this asset, the Courts have not adopted or required any particular valuation method. Therefore, the quality, credibility, and effectiveness of the appraiser, and the expertise and preparation of the attorney will be among the most critical determining factors in successfully presenting or defending a valuation of personal professional goodwill.

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An article in today’s New York Post reported on federal statistics showing that the divorce rate in the United States gas fallen to the lowest level since the 1970’s. While this information had first been reported over a week ago by the Post and other major media outlets, there is an interesting aspect of the article which deserves some additional attention.

The article quotes Raoul Felder as stating that he has drafted what he calls “living together agreements” for unmarried couples living together which spell out who gets what assets in the event of a break up.

This type of agreement is essentially a post-nuptial agreement for an unmarried couple. It is based on the general law of contracts and is informed (but not necessarily governed by) the Domestic Relations Law. For owners of businesses and professional practices who are living with someone to whom they are not married, these types of agreements should be considered as one way to deal with some very complex legal issues surrounding the rights of their current partner regarding the business or professional practice.

A carefully crafted ‘living together agreement’ should address the amount of money that should or could be awarded to the partner of the professional or business owner on account of the increase in value of the business or practice during term of the relationship. Also, the agreement should specify the conditions under which such a payment would be made, the method of payment, and the manner in which the payment would be calculated. In effect, this agreement would be a privately negotiated form of equitable distribution.

I am not aware of any case in New York which has interpreted such an agreement. If you know of such a case, please let me know and send me a copy of the decision if at all possible.

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Almost all shareholder or operating agreements contain provisions regarding the sale of a partner’s interest. Generally, the agreements restrict the sale of a partner’s interest to outside parties (by requiring that the other partners agree to the sale or by giving them a right of first refusal). 

One issue frequently overlooked by corporate attorneys when drafting these sale or transfer provisions is the effect of a divorce of a partner on the other partners and the operation of the business itself. If a partner is divorced, his interest in the business can be awarded in whole or in part to his spouse. If that happens, your new partner is now your old partner’s ex-spouse. This can cause a severe disruption in the operation of the business, to say the least.

However, this situation can be avoided and the health of the business preserved with some advance planning and careful drafting. 

In my opinion, the most effective way to protect the business and its partners from having to take on an ex-spouse as a new partner is to provide language in the agreement specifying that the entry of a final judgment of divorce for or against any partner automatically results in the affected interest being offered for sale to the business or the remaining partners. The cost of purchasing the departing partner’s interest can be structured in any number of ways and can be paid for by an appropriate insurance policy.

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