Resolving Matrimonial Cases in a Negative Economy

Perhaps I have been influenced by too many children's books, but it certainly does seem as if “Chicken Little” is afoot.

Very commonly, our clients are emotional. Recently, they have been even more upset. They are being affected by the current state of economic affairs on a conscious or subconscious level. It is harder to get people to focus, and as their advocates, we are dealing with resolving cases in a fluctuating, negative market. By the time an evaluation of an active asset, such as a business, is completed, it is no longer current. By the time a passive asset, such as a house, is appraised, it is worth significantly less than the appraisal.

Of course, it is easiest if the asset is sold; then you can use actual market value. In such a situation, you can use a floating scale, plugging in numbers with regard to the equitable distribution as the sales take place. Formulas for the division of the liquidated assets keep the percentages of asset distribution consistent while the values are allowed to be more mobile.

Today's Problems with Assets

The more difficult problems arise when assets are not divided “in kind.” This is the most common way of resolving cases; one party takes one asset and the other party takes the other. What happens when the value of one asset changes ' perhaps dramatically ' compared with the other? For example, if the proposed settlement is that the wife receives the marital home, which had an equity of $2 million, and the husband receives the brokerage account of the same value, what happens when soon after the divorce, or perhaps even before the divorce is finalized, the equity in the house goes down 20% but the investment account goes down 40%?

As it relates to alimony, what do we do about agreements in which, years ago, we would have had a waiver of a change in circumstances? In future years, can we agree to waive a client's Lepis rights? (In Lepis v. Lepis, 83 N.J. 139 (1980), the New Jersey Supreme Court held that child support, alimony, visitation, and other related issues are reviewable and modifiable. A prima facie case of a substantial change in circumstances must be shown.) Can or should agreements reflect a definition of when a change in circumstances would kick in? We know that historically the courts have taken the position that a temporary change in circumstances is not sufficient to trigger a review of a support obligation, despite the fact that if the family were still intact, the family's income and expenses would necessarily be quickly adjusted.

A New Paradigm

We are now in a new global economic paradigm. Lost jobs are hard to replace. As the economy, at this point, continues to spiral downward, can we continue to use imputed income based on prior earnings as a measure of actual earning capacity? That approach, in the past, allowed support to continue to be paid to dependent children and spouses as a way of creating stability and security. However, is this still proper when the economy is so unstable and savings that might have otherwise been available to meet support obligations are also being eradicated? Should agreements contain language clearly dealing with a waiver of any temporary change, but also a guidepost setting forth what would constitute a change in circumstances? In doing so, is the supported spouse giving up rights that he or she currently has? Are we moving to a change in the law where the support a spouse receives may be adjusted quicker than under the existing case law? Unemployment is at a recent record high. Shouldn't this reality be taken into account by parties negotiating an agreement and the courts?

If attorneys advise clients to agree to a waiver of their Lepis rights or to agree to be bound by the existing case law without carving out circumstances under which support would be subject to modification, are they opening a door to malpractice claims? Practicing attorneys will need to make sure that the client knows that any agreement to pay support is binding and unless there is language permitting a change in circumstances to be considered more quickly than allowed by the existing law, the payor may be obligated to continue payment after his income has stopped.

What Attorneys Should Do

Accordingly, attorneys should consider sending letters advising clients of the ramifications of a waiver of Lepis and explaining that they may not get very far asking the court to find that what may be a temporary change in circumstances should be sufficient to modify support.

Reaching an agreement on the value of assets, such as a house or a commercial property, is very difficult. Attorneys should continue to recognize that they are not appraisers or fortune tellers, and they should rely on experts to fix a value as of a given date and then utilize that figure. In the past, a value arrived at six months ago may be used for purposes of equitable distribution at settlement or at trial. Perhaps this time frame should be shortened and updated appraisals should be ordered if they are more than sixty days old.

Does this all encourage the return of the “quickie” divorce? Is it best to try to wrap a case up and divide what there is before the pot shrinks further? Is it worth paying for incredible amounts of discovery and obtaining formal valuations when a brush-stroke approach to a case may end it more quickly and cost-efficiently? Many experienced matrimonial attorneys can listen to the facts of a case and within certain narrow parameters come up with a solution before discovery has been completed. We must continue to balance our desire to put an end to the fighting between the parties and the issues of valuation by trying to come up with a quick answer. Such an approach may result, ultimately, in being charged with malpractice. After all, if the client was not told to value the assets and to measure them all up against each other, how can he or she be assured that they were treated in a fair way? Will disgruntled clients look to file claims against their attorney if there is only minimal discovery or will there will be more claims because we advised more thorough discovery, which delayed the division of assets during which time their values plummeted?

Litigants do not want unnecessary counsel fees incurred during a time when their assets are shrinking rapidly. Perhaps this is not a time for long, drawn-out trials and lengthy negotiations with real pressure being brought to bear on clients who will ultimately be served if their case is settled.

How do we protect our fees in this economy? Of course, we should charge significant retainers to ensure we are paid for the work we perform. On the one hand, you may lose clients and on the other hand, if it is a really big case, the amount of the retainer will likely not be sufficient to fund the entire case. Do we get third parties to co-sign retainers? Do we revisit allowing attorneys to obtain mortgages on houses to cover the cost of the litigation? How can those be secured in any event if the real estate market continues to decline?

New Jersey attorney John Paone, a Certified Matrimonial Law Attorney and Fellow of the American Academy of Matrimonial Lawyers, has considered the impact of the economy on his practice and advises that in representing the dependent spouse, it is best to obtain as much as possible in equitable distribution so as to eliminate the post-judgment litigation over changes of circumstances regarding alimony payments. He also opines that it is necessary for forensic accountants to go beyond reviewing the last five years in performing their analysis. The present circumstance must be factored in to any equitable opinion.

Conclusion

In this highly anxious time, our practices will not dry up, but we may have to adjust the way in which we practice and the way we draft our agreements. We can advise clients only as to the current law, not the law that may or may not change. It is not for us as matrimonial attorneys to give accounting or investment advice, only to advise what a fair result is after discovery is complete. We should bring in financial advisers, if necessary, along with the accountants. The use of the experienced forensic accountant is more important now than ever because it is the attorney's job to lay out the options. The decision belongs to the clients and those advisors they choose to utilize.

Nothing in life or in the practice of matrimonial law is certain, other than the fact that as practitioners, the way the world is changing will affect what we do on a daily basis.

Lynne Strober, a member of this newsletter's Board of Editors, is an attorney with the New Jersey law firm, Mandelbaum, Salsburg, Gold, Lazris & Discenza, where she co-chairs the Family Law Department and handles all aspects of divorce litigation, including complex equitable distribution matters, alimony, child support, child custody, parenting time, pre-nuptial agreements and adoptions.

Perhaps I have been influenced by too many children's books, but it certainly does seem as if “Chicken Little” is afoot.

Very commonly, our clients are emotional. Recently, they have been even more upset. They are being affected by the current state of economic affairs on a conscious or subconscious level. It is harder to get people to focus, and as their advocates, we are dealing with resolving cases in a fluctuating, negative market. By the time an evaluation of an active asset, such as a business, is completed, it is no longer current. By the time a passive asset, such as a house, is appraised, it is worth significantly less than the appraisal.

Of course, it is easiest if the asset is sold; then you can use actual market value. In such a situation, you can use a floating scale, plugging in numbers with regard to the equitable distribution as the sales take place. Formulas for the division of the liquidated assets keep the percentages of asset distribution consistent while the values are allowed to be more mobile.

Today's Problems with Assets

The more difficult problems arise when assets are not divided “in kind.” This is the most common way of resolving cases; one party takes one asset and the other party takes the other. What happens when the value of one asset changes ' perhaps dramatically ' compared with the other? For example, if the proposed settlement is that the wife receives the marital home, which had an equity of $2 million, and the husband receives the brokerage account of the same value, what happens when soon after the divorce, or perhaps even before the divorce is finalized, the equity in the house goes down 20% but the investment account goes down 40%?

As it relates to alimony, what do we do about agreements in which, years ago, we would have had a waiver of a change in circumstances? In future years, can we agree to waive a client's Lepis rights? (In Lepis v. Lepis , 83 N.J. 139 (1980), the New Jersey Supreme Court held that child support, alimony, visitation, and other related issues are reviewable and modifiable. A prima facie case of a substantial change in circumstances must be shown.) Can or should agreements reflect a definition of when a change in circumstances would kick in? We know that historically the courts have taken the position that a temporary change in circumstances is not sufficient to trigger a review of a support obligation, despite the fact that if the family were still intact, the family's income and expenses would necessarily be quickly adjusted.

A New Paradigm

We are now in a new global economic paradigm. Lost jobs are hard to replace. As the economy, at this point, continues to spiral downward, can we continue to use imputed income based on prior earnings as a measure of actual earning capacity? That approach, in the past, allowed support to continue to be paid to dependent children and spouses as a way of creating stability and security. However, is this still proper when the economy is so unstable and savings that might have otherwise been available to meet support obligations are also being eradicated? Should agreements contain language clearly dealing with a waiver of any temporary change, but also a guidepost setting forth what would constitute a change in circumstances? In doing so, is the supported spouse giving up rights that he or she currently has? Are we moving to a change in the law where the support a spouse receives may be adjusted quicker than under the existing case law? Unemployment is at a recent record high. Shouldn't this reality be taken into account by parties negotiating an agreement and the courts?

If attorneys advise clients to agree to a waiver of their Lepis rights or to agree to be bound by the existing case law without carving out circumstances under which support would be subject to modification, are they opening a door to malpractice claims? Practicing attorneys will need to make sure that the client knows that any agreement to pay support is binding and unless there is language permitting a change in circumstances to be considered more quickly than allowed by the existing law, the payor may be obligated to continue payment after his income has stopped.

What Attorneys Should Do

Accordingly, attorneys should consider sending letters advising clients of the ramifications of a waiver of Lepis and explaining that they may not get very far asking the court to find that what may be a temporary change in circumstances should be sufficient to modify support.

Reaching an agreement on the value of assets, such as a house or a commercial property, is very difficult. Attorneys should continue to recognize that they are not appraisers or fortune tellers, and they should rely on experts to fix a value as of a given date and then utilize that figure. In the past, a value arrived at six months ago may be used for purposes of equitable distribution at settlement or at trial. Perhaps this time frame should be shortened and updated appraisals should be ordered if they are more than sixty days old.

Does this all encourage the return of the “quickie” divorce? Is it best to try to wrap a case up and divide what there is before the pot shrinks further? Is it worth paying for incredible amounts of discovery and obtaining formal valuations when a brush-stroke approach to a case may end it more quickly and cost-efficiently? Many experienced matrimonial attorneys can listen to the facts of a case and within certain narrow parameters come up with a solution before discovery has been completed. We must continue to balance our desire to put an end to the fighting between the parties and the issues of valuation by trying to come up with a quick answer. Such an approach may result, ultimately, in being charged with malpractice. After all, if the client was not told to value the assets and to measure them all up against each other, how can he or she be assured that they were treated in a fair way? Will disgruntled clients look to file claims against their attorney if there is only minimal discovery or will there will be more claims because we advised more thorough discovery, which delayed the division of assets during which time their values plummeted?

Litigants do not want unnecessary counsel fees incurred during a time when their assets are shrinking rapidly. Perhaps this is not a time for long, drawn-out trials and lengthy negotiations with real pressure being brought to bear on clients who will ultimately be served if their case is settled.

How do we protect our fees in this economy? Of course, we should charge significant retainers to ensure we are paid for the work we perform. On the one hand, you may lose clients and on the other hand, if it is a really big case, the amount of the retainer will likely not be sufficient to fund the entire case. Do we get third parties to co-sign retainers? Do we revisit allowing attorneys to obtain mortgages on houses to cover the cost of the litigation? How can those be secured in any event if the real estate market continues to decline?

New Jersey attorney John Paone, a Certified Matrimonial Law Attorney and Fellow of the American Academy of Matrimonial Lawyers, has considered the impact of the economy on his practice and advises that in representing the dependent spouse, it is best to obtain as much as possible in equitable distribution so as to eliminate the post-judgment litigation over changes of circumstances regarding alimony payments. He also opines that it is necessary for forensic accountants to go beyond reviewing the last five years in performing their analysis. The present circumstance must be factored in to any equitable opinion.

Conclusion

In this highly anxious time, our practices will not dry up, but we may have to adjust the way in which we practice and the way we draft our agreements. We can advise clients only as to the current law, not the law that may or may not change. It is not for us as matrimonial attorneys to give accounting or investment advice, only to advise what a fair result is after discovery is complete. We should bring in financial advisers, if necessary, along with the accountants. The use of the experienced forensic accountant is more important now than ever because it is the attorney's job to lay out the options. The decision belongs to the clients and those advisors they choose to utilize.

Nothing in life or in the practice of matrimonial law is certain, other than the fact that as practitioners, the way the world is changing will affect what we do on a daily basis.

Lynne Strober, a member of this newsletter's Board of Editors, is an attorney with the New Jersey law firm, Mandelbaum, Salsburg, Gold, Lazris & Discenza, where she co-chairs the Family Law Department and handles all aspects of divorce litigation, including complex equitable distribution matters, alimony, child support, child custody, parenting time, pre-nuptial agreements and adoptions.