Rocket launch child.jpgIn its November 14, 2012 decision in Shah v. Shah, the Appellate Division, Second Department, held that Suffolk County Supreme Court Justice Mark D. Cohen did not improperly “double count” the income generated by the husband’s business when he awarded the wife four years of maintenance.

That business was started by the husband and a partner during the marriage, and was purportedly transferred by the husband for no consideration to his partner shortly before commencement of the divorce action. Justice Cohen awarded the wife 30% of the value of the husband’s interest in the business and additionally awarded the wife $4,000 per month for four years.

Among the issues presented on the appeal was whether the income generated by the business should have been considered when making that maintenance award.

Put differently, the question is (or should be) if the income generated by assets has already been “divided,” should that income again be “divided” through a maintenance award.

That issue became focused when the Court of Appeals in Grunfeld v. Grunfeld (94 N.Y.2d 696 [2000]) recognized the inequity of double-counting income, at least when awarding maintenance after the asset value of a license or degree has been divided. In 1985, in O’Brien v. O’Brien (66 N.Y.2d 576), the Court of Appeals had determined that New York would be unique and recognize the enhanced earnings attributable to attaining a license or degree as property to be divided upon a divorce. Earnings enhanced during the marriage through some achievement are an intangible asset capable of being divided.

The double-counting concern arises from the income-producing nature of an enhanced earnings asset. In simplistic terms, assume that at the time of a marriage, the husband has a high school diploma. During the marriage, the husband goes to college, gets his B.A., and obtains a job paying $80,000 per year at the time the divorce action is commenced and the husband is 40 years old. Also assume that a typical 40-year old high school graduate would be earning $50,000 per year. The $30,000-per-year spread between the earnings of the typical high school graduate and of our divorcing husband, is then projected over the balance of the assumed working life of the husband (say, until age 65). The present value of the 25 years (until age 65) of the $30,000 of enhanced earnings (adjusted for assumed inflation) is then calculated.

Let’s assume that the forensic evaluators conclude that $400,000 is the present value of the $30,000 per year in enhanced earnings which the husband will receive because of his B.A. over the remaining 25 years of his assumed working life. New York is unique in holding that the enhanced earnings is a $400,000 “asset;” marital property to be divided upon divorce.

Let’s assume that the court awards the wife $200,000 as her 50% share of this $400,000 marital asset. The husband must pay the wife this $200,000 either as a distributive award, or through an offset of his interest in other marital assets. Let’s assume that as an offset to the enhanced earnings, the wife is awarded the entirety of the parties’ $400,000 brokerage account and that all other assets are equally divided in-kind, The husband’s obligation to pay his wife $200,000 is deemed satisfied.

Moving on to the maintenance award, the Court of Appeals in Grunfeld recognized that the wife would impermissibly have two bites at the apple if she not only received the $400,000 brokerage account, but also received a maintenance award predicated upon the husband’s entire $80,000 annual earnings.

Rather than applying any general rule to be blindly followed to avoid double-counting the enhanced earnings already divided, one should “visualize” the true import of the division of the enhanced earnings. With our assumed $80,000-per-year husband, the import of the $200,000 award to the wife is that the wife has been given the present value of a $15,000 per year stream of income (half of the $30,000 spread). It’s the same as if the husband were to pay his wife $15,000 adjusted for inflation, each year until he reaches 65. To avoid double counting when deciding the maintenance award, the court should recognize that the wife starts each year with this $15,000, the husband starts each year left with only $65,000.

Moreover, the wife has already been given one half of the $30,000 spread. Should not the husband be allowed to retain his half of the $30,000 spread. If he is, then the maintenance award should be based on the husband’s remaining $50,000 in income.

The issue is perhaps somewhat hidden if the wife’s entitlement to a distributive award is offset against the husband’s interest in the assumed brokerage account. Without the offset, the wife would have a $200,000 brokerage account and the $15,000 per year from the distributive award; the husband would also have a $200,000 brokerage account and would be retaining $65,000 per year of his earnings. With the offset, to equalize the parties, the husband should get to keep his $30,000 per year in excess earnings, while the wife gets to keep the $400,000 brokerage account. It would be double counting for the wife to receive any portion of the $30,000 per year in excess earnings through a maintenance award based on that income.

The Grunfeld rule is that the income attributable to the enhanced earnings intangible asset should not be “double counted,” i.e., the income should not be divided both as an asset and through and award of maintenance. As the Court stated, “to the extent, then, that those same projected earnings used to value the license also form the basis of an award of maintenance, the licensed spouse is being twice charge with distribution of the same marital asset value, or with sharing the same income with the nonlicensed spouse.” A court is to avoid the double-counting either by reducing the distributive award based on that same income, or by reducing the maintenance award.

But this rule should not be blindly followed. In Grunfeld, the enhanced earnings asset attributable to the law license was divided 50/50. Suppose there is no equal division.

Suppose in our fictional example, the court awarded the wife only 10% of the $400,000 calculated value of the husband’s enhanced earnings. In that case, the husband would have to pay his wife $40,000 now, or in essence, $3,000 per year (one tenth of the $30,000 spread) for the next 25 years. Thus, when it comes to the maintenance determination, the court should recognize that the wife starts each of the next 25 years with $3,000; and the husband is left with $77,000. Certainly it would be double counting to base the maintenance award on the husband’s full $80,000 in earnings. It is also in the nature of double counting for the wife to receive as her share of an asset this $3,000 a year (or presently $40,000) and for the husband not to retain at least the same portion of his enhanced earnings as his balancing share of this asset.

On the other hand, if only awarded 10%, some 80% of the value of the enhanced earnings has not been divided. Should not that 80% be counted (for the first time) when determining maintenance?

Last week’s decision by the Second Department in Shah applied the rule that double counting is not an issue if the income-generating asset is not an intangible asset (like enhanced earnings), but rather is a tangible asset like a business. The Shah decision follows the Court of Appeals’ 2006 ruling in Keane v. Keane (8 N.Y.3d 115).

In Keane, the parties were in their 60s, having been married for 30 years. The income of the couple was generated by a realty parcel leased to a car repair shop, and a mortgage note from the sale of another parcel.

The Court of Appeals reinstated the trial court’s decision to both give the wife a distributive award based upon the mortgage note and the remaining realty parcel, and to award the wife maintenance based upon the income the husband would be receiving from the parcel. (The Second Department in Keane had disagreed with the trial court and deleted the maintenance award, holding that it was impermissible to value the realty based upon the income it generated and then both divide the asset and award maintenance based upon the income generated.)

For the Court of Appeals in Keane, the distinction was a function of the nature of intangible and tangible assets. For the Court of Appeals, where a professional license is at issue, the asset is totally indistinguishable and has no existence separate from the projected professional earnings from which it is derived. Hence, a trial court must convert the enhanced earnings attributable to the license into a monetary marital asset to achieve equitable distribution. In contrast, a court can transfer title to real or personal property in order to equitably distribute the asset. With enhanced earnings, no asset remains after the working life is over. The realty will hold its value until it is sold.

The Court of Appeals recognized in Keane that double counting may occur when marital property includes intangible assets such as professional licenses or goodwill, or the value of a service business. Such assets are dependant upon the future labor of the licensee. Such assets are totally indistinguishable from and have no existence separate from the income stream from which they are derived. Double counting results from dividing the income stream and then awarding maintenance based upon the same income stream.

In Keane, the rental property was equitably distributed. Then, the rental income from that property was considered when determining maintenance. The Court of Appeals held, though, that because the realty will continue to exist as a marketable asset separate and distinguishable from the income generated, the income generated is to be included. There is no double counting. On the other hand, the mortgage payments were properly distributed as an asset, but not counted for maintenance purposes. The payments themselves were the marital asset. At the end of the stream of “income” from the mortgage, nothing would be left.

Making a distinction based on whether after a period of years of generating income, the asset is left to be sold, is not self-evident. Suppose, instead of giving Mrs. Keane a distributive award, the court actually divided the asset, would not the Court consider the income generated by the asset as mitigating the maintenance award to her? At the end of the maintenance period, both parties would still have their half-parcels to sell. Would not the fact that Mr. Keane no longer has the half the asset transferred to the wife, preclude the payment of maintenance based at least upon the transferred half? Moreover, if the asset is divided equally, should not each party be able to retain the income generated by his or her half? Should not the maintenance award be based upon income other than from the realty? Suppose the wife received the realty and the husband received an offsetting bank account of equal value. Should the husband receive maintenance as well? When you share the income generated by the asset, then you are dividing the asset, itself.

This logic, this equity, should not disappear merely because when structuring the equitable distribution, the husband received the realty and the wife received offsetting assets or a distributive award. Suppose the husband retained the income-producing realty, and the wife retained the marital residence. The husband now needs a home. If he sells his income-producing realty to buy one, does he still have to pay maintenance?

Applying Keane, in 2010 the Second Department in Weintraub v. Weintraub and Kerrigan v. Kerrigan held there was no prohibited double counting when the wife was awarded both maintenance and a share of the value of the business that had generated the income for the couple.

Part of the difficulty here may be traced to the creation, in O’Brien, of a fictional piece of marital property, one present only as a creature of matrimonial law in New York. Regardless of the method of valuation, if a piece of an income-producing asset is awarded, then a piece of the income is divided as well.

This should not be rocket science. To the contrary, the effort to find a generalized rule distracts us from getting back to the basics. Just look at the impact of the decision. Does the mere structure of the award affect the result in a matter not intended? Has form been elevated over substance?

No one rule need be followed blindly. Whether, in fact, double counting results is not a function only of the classification of an asset as tangible or intangible. It is not only a function of whether the asset disappears over time. Results should not differ only because of the structure of the award: whether or not an asset is divided in kind, or whether an income-producing asset is offset against a non-income producing asset.

Rather, the divorce trial court has been given enormous power and discretion to look at the real picture presented by a couple, and then equitably tailor equitable distribution, maintenance and, yes, child support awards in light of that picture.

Sondra I. Harris of Rockville Centre represented the husband; Michael Catalanotto, of St. James, represented the wife.