Strategies for Family Law in New York - 2012 Edition

Shaping a Strategy
for Divorce Cases

Kieth I. Rieger
Partner
Rieger & Fried, LLP

Inside the Minds:
Strategies for Family Law in New York,
2012 ed.

Published by Aspatore Books, a Thomson Reuters business

Overview: Pre-Trial Analysis of Financial Matters

You should begin formulating your trial strategy at the initial consultation with your client.  Ascertaining the important issues to focus on through discovery is the key to successfully handling financial issues in matrimonial proceedings.  By the time you are filing your Note of Issue, Proposed Statement of Disposition and preparing for trial, it may be catastrophic to your case to first learn that you do not have the necessary information and documents. Discovery should be targeted and not be general blunderbuss requests.  Pre-trial information is critical to provide experts so that the issues and facts you consider important are part of their valuations and not left until cross-examination.  Most experts, like most people are reluctant to change their opinions once they are written and circulated.  Accordingly, the best way to obtain a favorable result in a case is to obtain a favorable expert report while leaving your adversary to convince that expert to change his/her opinion at trial.  Cases are won by proof, proof and more proof.

It is particularly important to ask the client at the initial interview the education, degrees and licenses of the parties to determine whether or not there are enhanced earnings.  Separate property issues must be discussed and addressed so they are not neglected to be pursued or that you are surprised during negotiations or at trial.  Business interests and pension plans must be identified.  Inquiry must be made as to transfer of assets during the marriage as such may have been made to hide assets or to disguise marital property as being separate property.  Analysis of lifestyle is important as well as debt, particularly as it relates to its purpose and to what extent, if any, it financed the parties’ lifestyle.  Although this article will not discuss custody issues, it is imperative that inquiries are made as to children’s special needs, specific expenses such as sports, hobbies, music and like, as well as funds available for higher education.  It is imperative that issues of domestic violence are dealt with immediately. A successful initial consultation will identify the issues and educe a path for discovery so as to provide a battle plan for the entire case.

Beginning the Case

One of the important initial considerations is to determine when and how to start the action.  A delay may be beneficial if you represent the non-monied spouse and you need time to ascertain assets and complete a Net Worth Affidavit.  This is the single most important document in the case as it will be referred to at every stage including court conferences, motions, depositions, negotiations and trial.  Meticulous care must be allocated for its proper completion.  It is particularly important to gain time if the non-monied spouse is able to obtain copies of financial documents, whether from dresser drawers, basement files or home computers.  By using this time to gather documents, you will be in a position of knowing much of the financial information at the outset of the case rather than spending time and money fighting for it during discovery.  Once the monied spouse learns of the divorce proceeding, documents are often removed from the home and computer passwords changed.

Several options exist under CPLR §306-b which provides that an action can be commenced by filing without serving the other party with a summons and/or complaint for up to 120 days.  Accordingly, one may file a Summons to freeze the valuation date, the date income and debts cease becoming marital, and the time to seek an award maintenance and child support without the other side being on notice until the actual service of the Summons.

If assets are being transferred, it is important to start an action immediately.  Although a temporary restraining order is contained in the Summons pursuant to DRL §236(B)(2)(b); as of this time, the lower courts disagree with whether or not the notice contained in the Summons is binding and subjects the opposing party to contempt.  See P.S. v. R.D., 916 N.Y.S.2d 755, 31 Misc.3d 373 (New York 2011) and Buoniello v. Buoniello, 5/7/10 NYLJ 28, col. 3 (Suffolk   2010).  This issue has yet to reach an Appellate Division.  The best practice is to commence the case immediately and to seek a Temporary Restraining Order pursuant to DRL §234 to stop the other spouse from dissipating the assets or incurring debt.  Under the statute, however, there must be a showing of damage to the non-monied spouse so that the depletion of assets or incurrence of debt will affect his/her ultimate equitable distribution.  If the parties have substantial assets and the financial changes occurring will not affect the ultimate outcome, a Temporary Restraining Order may not be issued.  Chosed v. Chosed, 116 AD2d 690 (2nd Dept. 1986); Balkin v. Balkin, 8 AD3d 416 (2nd Dept. 2004).  However, as a practical matter, all judges issue Temporary Restraining Orders in their Preliminary Conference Order and such conferences will usually be accelerated to the return date of the Order to Show Cause.  It is important to argue that the Temporary Restraining Order be narrow and not allow for the payment of ordinary expenses as it often does if assets are being depleted or debt is being incurred.

Now that New York has "No Fault Divorce" [DRL §170(7)] one should serve a Verified Complaint or insist that a Verified Complaint be served immediately (CPLR §3012).  Prior to the no-fault statute, attorneys and clients would often times forego serving a Complaint in order to not exacerbate the case by having to make allegations that might be deemed offensive by the opposing party.  However, with the no-fault statute, it is no longer an issue and one should not take the chance that a Complaint will not be served for a period of time allowing the Plaintiff to withdraw the action at will.  This can have significant and devastating consequences.   See McMahon v. McMahon, 718 N.Y.S.2d 353 (1st Dept. 2001).  Accordingly, if one is representing the Defendant, it is not advisable to extend the Plaintiff’s time to serve a Complaint sine die.  It is easy enough to prepare a no-fault Complaint and the attorney should insist upon one being served and then immediately serve an Answer so that issue is joined.  This technically also permits the service of discovery demands (CPLR §3106).

Advisability of pendente lite motions

One should also consider the timing of filing a Request for Judicial Intervention.  In the event that you would like to have time to negotiate without the pressure of court intervention, then it is advisable to delay filing an RJI to give you, your adversary and the parties time to gather information and meet.  The quicker you file an RJI,  the quicker the court will mandate a conference pursuant to court rules and further mandate the exchange of financial documents, depositions and appoint experts.  Remember, that the court has pressure from the Office of Court Administration to advance cases to conclusion in a timely manner.  The tracking of the case begins at the filing of the RJI so that the timing of filing such document is one of the areas where the attorney has the ability to control the timing of the case.

As soon as possible in a case, an attorney should determine whether pendente lite support is advisable.  In many cases, such motion is not necessary where expenses are being paid to your client’s satisfaction.   In the event that support is not appropriately being paid, then it may be necessary to make a pendente lite motion.   The enactment last year of the pendente lite maintenance statute [DRL §236(B)(5-9)] a determination can be readily made whether or not there is an advantage to making a pendente lite application.  Since the test is no longer a "needs basis," but rather now on a "re-allocation of income basis," the attorneys’ determination of what is reasonable or his/her ascertainment of what the assigned judge may think is reasonable is no longer the most important part of the analysis.  Scott M. V. Ilona M., 31 Misc.3d 353 (Kings, 2011).  Always remember that any pendente lite maintenance as well as 50% of payments on behalf of a spouse to third parties is taxable under the IRS code unless the court provides otherwise.  Accordingly, a determination should be made early on whether it is advisable to make a pendente lite maintenance and child support application.  Also see Marcklinger v. Liebert, 88 A.D.3d 1114 (3rd Dept. 2011).

As the Appellate Division has not yet made a  determination under the new statute, it is important to argue whether or not the voluntary payments for the carrying charges on the marital residence and other expenses should be considered in the statutory determination of maintenance and child support.  A.C. v. D.R.,921 N.Y.S.2d 791 (Nassau, 2011).  Remember that there is always the double dip argument for shelter allowance provided under the case law (Sicurelli v. Sicurelli, 285 A.D.2d 541 (2nd Dept. 2001) that can be argued as well as that portion of the statute that permits the court to deviate from the strict application of the law in the event that such a result would be "unjust or inappropriate."  C.K.  V.  M.K., 31 Misc.3d 937 (Rockland 2011).  The lifestyle analysis is still important to argue to convince the court to deviate from the strict application of the maintenance statute as well as for support over the $500,000 per year cap.  H.K.  V.  J.K., 32 Misc.3d 1226(A)(New York 2011).  Curiously, however, the lifestyle analysis always benefits the non-monied spouse in a marriage where people live more lavish lifestyles than the non-monied spouse in a marriage where the parties are more frugal.  This may arguably result in an unjust result which should be set forth before the court as the monied spouse will claim that any savings after the Summons are all his or hers where as if the parties "lifestyle" would be maintained in a situation where the parties were more frugal than both parties would be saving the excess funds not expended in their lifestyle.  Additionally, lifestyle is also important where it is not known exactly what the non-monied spouse earns because of cash income or personal write-offs through a party’s business.

Discovery

Although courts will order a Preliminary Conference within 45 days of filing a request for same, it is not necessary that a party wait until that conference to serve discovery demands (CPLR §3120).  This is particularly important where an attorney decides it is better to have priority in taking the deposition.  The priority is determined by who serves the notice first after issue is joined, CPLR  §3106.  Furthermore, there is no reason to delay sending a document request when the basic documents that are required are well known.  One can find out from the client information regarding the spouse’s business, advanced education and degrees, separate property claims and the like in order to formulate a reasonable document request.  This request can always be supplemented  when more facts are learned.

The Preliminary Conference forms are on-line or available with the individual judges.  The completion of these documents is arduous and requires detailed information.  It is advisable to obtain these documents in advance of the conference and work with your adversary to complete them prior to going to court.  This will allow you to spend more productive time with your client and your adversary and allow for the completion of the conference expeditiously.

At the Preliminary Conference, one of the most important decisions will be the determination of the experts.  Courts normally encourage the parties to agree on neutral experts.  It is nearly impossible to convince a court to have more than one expert for issues regarding custody, pension or an appraisal for a house.  However, it may be important in a case where the monied spouse is secreting assets to have your own expert.  Most business evaluators will concede that they are less likely to "turn over every stone" in a case where they are neutral as opposed to a case where they are hired by the non-monied spouse.  Many times there are problems regarding the lack of or limited cooperation a neutral expert will provide when preparing for trial.  This is a particular disadvantage to the non-monied spouse as the monied spouse knows where every dollar is and also normally has his/her business accountant to assist the attorney.  In addition, it also may be advisable when one is valuing commercial real estate to obtain your own separate expert.  The advantage of a neutral for the court is that it makes the court’s decision easier.  The advantage to the client of having a neutral expert is that it costs less money.  However, there are situations where having a neutral expert when representing a non-monied spouse may indeed be a grave error.

Whether by ex parte motion, or simply at the Preliminary Conference, E-Discovery is often essential for both personal and business computers.  Schreiber v. Schreiber, 29 Misc.3d 171 (Kings 2010); Etzion v. Etzion, 7 Misc.3d 940 (Nassau 2005).  It may be advisable to obtain a computer expert to determine if any information has been deleted or hidden from easy access.

When valuing a professional practice, the courts’ prefer the "excess earnings valuation" method.  Accordingly, it is extremely important to have the earnings adjusted for improper writeoffs and unreported income .  The actual income will not only affect the maintenance and child support award, but will drive the value of the business or practice as well.  It is a mistake to simply hand over your case to the expert, particularly a neutral.  The client has retained you based on your reputation and you are ultimately the "captain of your ship."  It is important that you maintain your goodwill with the client for this particular case as well as for future referrals.  You must push the neutral expert and make sure that he/she examines everything that you and your client believe is important.  One also must be careful when representing the non-monied spouse to make sure that the neutral expert’s retainer is not limited to valuation of the business, but also includes the determination of the owner-spouses actual income.   This is of particular importance when a business is valued other than the excess earnings method such as discounted cash flow or comparable sales when actual earnings are less important.

It is also critical that the appropriate reasonable compensation is determined by the expert.  Reasonable compensation is that which would be paid to an employee to perform the function of the owner.  For example, if a physician earns $350,000 and he or she is an internist, and the average income of an internist is $180,000, then the difference would be the excess earnings which is over the reasonable compensation.  That number is capitalized in order to obtain the "goodwill," which is then added to the value of the hard assets.  If the comparable sales approach is used, it is important that the companies which are compared to the spouse’s company at issue, are in fact comparable as often times there are substantial differences.  The attorney must be diligent and not accept the expert’s report or investigation at face value.

When valuing enhanced earnings, it is important to make sure that the expert compares the present earnings to the earnings that the spouse would have had his or her education been completed at the time of the marriage.  O’Brien v. O’Brien, 66 N.Y.2d 576 (1985).  Accordingly, it is important that a doctor who graduated medical school at the time of the marriage but that had not completed his or her internship, residency or fellowship is compared to a person’s earnings after completion of graduate school and not simply to a college graduate who would not have four years of post graduate education.  Information regarding the completion of any portion of the requirements of the advanced degree or license is necessary to apply the coverture fraction to determine the percentage of marital property.  Additionally, it is relevant to explore whether or not the advanced degree or license is needed for that spouses particular job.  Although this may well go to a fact finding hearing, it is important to obtain the value without the license or degree in the event you are able to establish that such an advanced degree or license is not necessary or relevant to the spouse’s present position.

When valuing a business, it is essential to obtain credit card information as well as the business’ accountant’s work papers in order to validate the propriety of the business writeoffs.  It is critical to review the business tax returns and financial statements as that is where the "cheating" will be revealed.  It is very limited as to what one can "cheat" on his/her personal income tax returns.  One should also be careful to review financial statements to ascertain whether they are "audited," "reviewed" or simply a "compilation."   For example, in a "compilation," the accountant simply takes the representation of the business owner and performs no independent investigation in a compilation report.  It may be useful to depose the accountant if for no other reason than to obtain an admission that he or she relied on the business owner’s representations and did not do an independent investigation such as would have been done with a "review" or "audit.".

It is important to ascertain what books and records are maintained by the business owner.  It may be that appropriate business records are not maintained or they are not done so in accordance with normal accounting rules and regulations.  Thus, a negative inference may be drawn at trial by the court or even prior thereto by the neutral expert.

For the monied spouse, it is vital to make sure that the expert includes certain discounts such as key-man, lack of marketability, minority discount and the like.  Cooper v. Cooper, 84 A.D.3d 854 (2nd Dept. 2011).  Additionally, shareholders agreements and buy/sell agreements must be obtained and reviewed.  Amodio v. Amodio, 70 N.Y.2d 5 (1987).  It must be ascertained whether there have been actual sales or purchases under the buy-out agreement and if so, how recently.

Discovery is also critical for tracing purposes when there are separate property issues.  It is all too common that when a marriage starts to dissolve, the person who controls the money has taken assets from joint ownership and deposits or re-deposits them into an account which is solely in his or her name.  Remember, although the burden is on the party seeking to establish separate property, [See Price v. Price, 69 N.Y.2d 537 (1986) and Hertog v. Hertog, 85 N.Y.2d 36 (1995)] the party claiming it to be marital property must also obtain discovery showing the commingling.  The party seeking to maintain the property as separate musts show that its commingling was solely for convenience by clear and convincing evidence.  Richter v. Richter, 77 A.D.3d 1470 (4th Dept. 2010).  It is important to obtain gift tax returns from the parents of a spouse and gift affidavits from the purchase of a house where parents may have provided money for the parties, but declared it to be a gift to both spouses rather than just to their child.

It is also vital to obtain pension information.  The values of defined contribution plans such as 401-K’s, 403-B’s, profit sharing, annuities, as well as IRA’s are easy to determine.  However, the separate property component of these assets must be established.  Accordingly, the earlier that one seeks to obtain the documentation the better, particularly since financial institutions do not maintain records indefinitely.

It is just as important to obtain information relating to the defined benefit plans.  Furthermore, the disability portion of a pension must also be ascertained, Howe v. Howe, 68 A.D.3d 38 (2nd Dept. 2009).  The marital portion must be identified to apply the "Majauskas formula," 61 N.Y.2d 481 (1984).  Remember, the non-monied spouse is only entitled to receive such benefits as provided in the plan.  Accordingly, the actual plan document is critical.  You must advise your client that many defined benefit plans do not allow any payment until the employee spouse retires.  You must know for your negotiations, drafting the stipulation of settlement and ultimately the Qualified Domestic Relations Order whether or not your client is entitled to cost of living increases, death benefits, early retirement benefits, survivorship rights and the like.  If these benefits are not provided in the stipulation of settlement, then they are not authorized to be provided for in the QDRO and the non-monied spouse will be severely prejudiced.  Coulon v. Coulon, 82 A.D.3d 929 (2nd Dept. 2011)  The courts have consistently held that where a benefit is not provided for in the stipulation of settlement, then it will not be included in the QDRO.  Rogers v. Rogers, 81 A.D.3d 709 (2nd Dept. 2011).

One of the most important documents to obtain in the context of discovery are home loan applications.  These documents require respective borrowers to set forth their income and assets under oath.  Many times applications disclose important information which is different than reflected in the tax returns and net worth affidavits.

Early in the case, a CPLR §3101 demand should be served to obtain party statements, whether written, computer generated or tape recorded.  It is often shocking to see statements contained in e-mails that one would never write by hand.

Technology should also be utilized at the outset to obtain information.  Business websites provide instant profiles including the type of business, number of employees, locations, customers, financial information and achievements and accolades of the owners.  Dating service sites may also provide financial or other information such as income.  As with mortgage applications, one is usually not shy in placing a positive spin on their finances.  "On site" inspections may prove invaluable for real estate or a business operation.  Observing the actual business in operation or real estate holdings often produce insight that cannot be obtained by simply reading a report,

When subpoenaing financial institutions for records, be sure to include the certification affidavit pursuant to CPLR §3122-a so that the documents may be used at trial without having to bring in an employer to satisfy the business record rule requirement.  Remember to provide notice to your adversary of receipt of such documents and intent to use them at trial under subdivision (c) of the statute.

Depositions

It is always better to conduct depositions following your review of the documents.   It is difficult to review years of bank and credit card statements when they are provided at the deposition.  It is difficult not to omit important issues and questions when put in this unfair and untenuous position.  Accordingly, you should insist on having full disclosure prior to the depositions.

Depositions should also be used to ascertain claims regarding contribution.  This is particularly true with respect to business interests and enhanced earnings.  Furthermore, questions must be asked to determine whether or not one party is maximizing his/her earnings to allow for imputation of earning capacity and determine whether the retention of a vocational expert is advisable.  Prior to the deposition, it is important to review and outline affidavits and net worth statements to prepare appropriate questions.  This will be very helpful in eliciting what proof the other side has to substantiate their claims.  For example, if one side states that there is cash income or that assets have been secreted, or that inappropriate expenses are deducted from a business, you want to inquire what information and knowledge the assertion is based.  Another major benefit of conducting a deposition is that it "locks" in the parties’ testimony prior to trial.  Their answers will be used on cross-examination to impeach that party if they alter their testimony.  If 5% to 10% of a deposition is used at trial for cross examination purposes, it was a productive exam.  Admission on authenticity of discounts or copies should also be elicited for evidentiary purposes, particularly business and personal tax returns, which copies are usually unsigned.

This will avoid surprise in motions as well as later on in the proceeding at trial.  The attorney must immediately caution one’s client to read e-mails sent to spouses carefully before pressing the "send" key.   It is also an important opportunity for the attorney to assess the quality of the party as a witness at trial.

Particularly in these times, it should be determined whether a business is cyclical.  For example, it is normally the view that a business is valued at the date of commencement since it is an active asset and not a passive asset such as money that remains undisturbed in a bank or stock account or real property that is not improved during the marriage.  Normally a decline in value at the time of trial value benefits the monied spouse as there are virtually no cases where a business’ increase during the pendency of an action benefits the non-monied spouse.  However, in certain cases, the admission by a party that his/her business is cyclical, may enable the non-monied spouse to value the business on the date of commencement where it may be higher than the date of trial.  Rich-Wolfe v. Wolfe, 83 A.D.3d 1359 (3rd Dept. 2011).  Accordingly, one must obtain information to argue the most effective valuation date for your client’s interests.

Furthermore, it must be inquired as to the extent that separate property, such as a business or real estate increases by reason of separate or passive efforts of the spouse.  Inquiry must be made whether and to what extent improvements made to the separate property marital residence have increased value or whether the increased value is solely the result of market forces.  Fields v. Fields, 15 N.Y. 158 (2010).  The extent to which a spouse participated in a family business is critical.  One never knows what facts or factors will turn a court when determining whether an asset is marital or the extent to which appreciation of a separate asset is marital.  Remember, once an asset or any portion of an asset is deemed marital, the extent to which it is distributed is still an issue for the trial court.  See Hertog, supra.

Finally, one must be aware of current events.  Particularly following Etzion v. Etzion, 62 A.D.3d, 646 (2nd Dept. 2009)  where an agreement was negotiated and signed without having updated commercial real property valuations.  During the pendency of the case, the commercial property had been re-zoned from warehouse use to office and residential use which greatly increased its value.  Updated appraisals were not obtained and the court determined that the agreement was binding and the non-monied spouse should have known the change in the valuation by reason of the fact that the change of zoning for the waterfront property was public knowledge as it was published in the newspapers.

Conclusion

Cases are won and lost in the discovery stage.  At trial, it is too late if you do not have the information that is important.  Accordingly, one must never underestimate the hard work required in the pre-trial stage and the importance of obtaining proof.  There are no short cuts in discovery.  It is imperative to constantly review the documents to look for issues and to make sure that the documents you need have been obtained.  Then, review them again.  Not only is your ability to properly prepare for trial dependent on the quality of your disclosure, but it  is also the best way to obtain a favorable negotiated settlement.