'Rodriguez' Offers Common-Sense Revisiting of Double Dipping

After a few years of confusion, New York's Appellate Division, Second Department has brought some sanity back to the relationship between asset distribution and spousal support. Rodriguez v. Rodriguez, 'AD3d', 2010 NY Slip Op 00944 (2d Dept. 2010). Rodriguez reinstates a principle previously established by many courts, including the state's highest court, the Court of Appeals: Where an income stream is converted into an asset and distributed, the income used is no longer also available for spousal support ' it is classified as an impermissible “double dipping” or “double counting.“ McSparron v. McSparron, 87 NY2d 275 (1995); Grunfeld v. Grunfeld, 94 NY2d 696 (2000). That precept, which had also applied to business distributions, was later twisted and mangled by the Court of Appeals' Keane v. Keane, 8 N.Y.3d 115 (2006), and its progeny. It now returns in the decision in Rodriguez.

Keane v. Keane

In Keane, it was found that the court's consideration of the husband's monthly rental income from his body shop repair business in the computation of an award of maintenance to the wife did not constitute impermissible double counting. This was held even though the capitalization of income method was used to appraise the full market value of rental property in calculating the wife's distributive award of marital property, since the rental property could be readily distinguished from its income-producing capacity.

According to Keane, in the circumstances presented, even though a stream of income was already used and distributed, that very same income may still be separately used for the purpose of establishing spousal support. This would be true, notwithstanding prior holdings that once an income stream has been converted into an asset and distributed, the income used was no longer available for spousal support ' and is “double dipping.“ The Court of Appeals in Keane distinguishes itself from prior cases, holding that the “double dipping“ prohibition is limited to intangible assets (such as in enhanced earnings cases) and service businesses, not where the asset is tangible such as in Keane.

Double Counting

Double counting may occur when marital property includes intangible assets such as professional licenses or goodwill, or the value of a service business. As the court said in Grunfeld, “[i]n contrast to passive income-producing marital property having a market value, the value of a professional license as an asset of the marital partnership is a form of human capital dependent upon the future labor of the licensee“ (94 NY2d at 704). It is only where “[t]he asset is totally indistinguishable and has no existence separate from the [income stream] from which it is derived“ (Id.) that double counting results.

Keane made no sense to many matrimonial practitioners. After all, an income stream used is an income stream used ' whether the asset is tangible or intangible. In reality, the no-double-counting argument actually makes at least as much sense where the asset distributed is a real one rather than hypothesized as in the intangible case of “enhanced earnings.“ Just as Keane was decided, a trial court advanced a cogent argument trying to further elaborate upon its holding:

It should also be noted that the recent Court of Appeals decision in Keane v. Keane, (8 NY3d 115 [2006]), does not apply to the income derived from the businesses. It is distinguishable on its facts. Although the court held that rental income from property deemed a marital asset could be used in determining maintenance even after that same income was capitalized and distributed, it limited this double-dipping to passive assets, e.g., real estate.

The court went on to state that because a “service business“ is an active asset, it is still governed by the Grunfeld prohibition regarding double-dipping for maintenance and distributive awards.

As service businesses, Q.C. and D.S. are active assets and clearly distinguishable from a passive rental property as in Keane. Therefore, Keane does not apply to the present case and the husband's future income derived from his equity in Q.C. and D.S. cannot be double counted in awarding equitable distribution as well as maintenance. N.K. v. M.K., 17 Misc.3d 1123(A), (Supreme Court Kings County 2007).

Griggs v. Griggs

Notwithstanding the above common sense approach, however, the Appellate Division, Second Department, in Griggs v. Griggs, 44 AD3d 710 (2d Dept. 2007), a case involving a medical practice ' seemingly a “service business,“ and citing to Keane, held:

The plaintiff's contention that the court “double-counted“ his Practice is without merit. The Court of Appeals recently held that the prohibition against double counting does not apply where, as here, the asset to be distributed is a “tangible income-producing asset,“ rather than an intangible asset, such as a professional license, the value of which can only be determined based on projected earnings.

(The claim here was the alleged double counting in “asset distribution,“ yet the double-counting concept seems to be self-explanatory.)

Groesbeck v. Groesbeck

In 2008, the same Second Department in Groesbeck v. Groesbeck, 51 AD3d 722 (2d Dept 2008), involving a home “improvement contracting business,“ citing to Keane and Driggs, and specifically addressing the maintenance issue, held:

Furthermore, there is no merit to the defendant's contention that the court's maintenance award was improper because it “double counted“ the value of his business in violation of the rule articulated in Grunfeld v. Grunfeld, 94 N.Y.2d 696, 709 N.Y.S.2d 486, 731 N.E.2d 142. That rule is inapplicable here because the husband's business is a tangible, income-producing asset (see Keane v. Keane, 8 N.Y.3d 115, 828 N.Y.S.2d 283, 861 N.E.2d 98; Griggs v. Griggs, 44 A.D.3d 710, 844 N.Y.S.2d 351).

Restoring Clarity

It was not enough that Keane separated the tangible income-producing real estate asset out of the double-counting prohibition; what then did the Appellate Court do to the service business exemption? Well, without explanation of its prior decisions, we thankfully now have the Second Department's Rodriguez v. Rodriguez, restoring proper clarity to this issue. The Rodriguez court, on Feb. 9, 2010, reversed the lower court's use of the income stream from the husband's already valued and distributed medical practice for maintenance. Notably, neither Keane nor Driggs nor Groesbeck are mentioned:

Moreover, we agree with the defendant that the Supreme Court impermissibly engaged in the “double counting“ of income in valuing his medical practice, which was equitably distributed as marital property, and in awarding maintenance to the plaintiff (Grunfeld v. Grunfeld, 94 NY2d at 702; Murphy v. Murphy, 6 AD3d 678, 679). The valuation of the defendant's business involved calculating the defendant's projected future excess earnings. Thus, in valuing and distributing the value of the defendant's business, the Supreme Court converted a certain amount of the defendant's projected future income stream into an asset. However, the Supreme Court also calculated the amount of maintenance to which the plaintiff was entitled based on the defendant's total income, which necessarily included the excess earnings produced by his business. This was error. Since the Supreme Court has discretion in the manner in which it is to avoid such double counting of income (see Grunfeld v. Grunfeld, 94 NY2d at 705-706), we remit the matter to the Supreme Court, Richmond County, to recalculate the maintenance and cash distributive awards.

Conclusion

After Keane, Driggs and Groesbeck, how many trial decisions have been issued where the business' income was distributed and spousal support also awarded based upon the same distributed income stream? Anyone getting a refund?

Lee Rosenberg is a partner at Saltzman Chetkof & Rosenberg in Garden City, NY. He is a Fellow of the American Academy of Matrimonial Lawyers, and may be reached at [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.

After a few years of confusion, New York's Appellate Division, Second Department has brought some sanity back to the relationship between asset distribution and spousal support. Rodriguez v. Rodriguez, 'AD3d', 2010 NY Slip Op 00944 (2d Dept. 2010). Rodriguez reinstates a principle previously established by many courts, including the state's highest court, the Court of Appeals: Where an income stream is converted into an asset and distributed, the income used is no longer also available for spousal support ' it is classified as an impermissible “ double dipping” or “ double counting. “ McSparron v. McSparron , 87 NY2d 275 (1995); Grunfeld v. Grunfeld , 94 NY2d 696 (2000). That precept, which had also applied to business distributions, was later twisted and mangled by the Court of Appeals ' Keane v. Keane , 8 N.Y.3d 115 (2006), and its progeny. It now returns in the decision in Rodriguez.

Keane v. Keane

In Keane, it was found that the court's consideration of the husband's monthly rental income from his body shop repair business in the computation of an award of maintenance to the wife did not constitute impermissible double counting. This was held even though the capitalization of income method was used to appraise the full market value of rental property in calculating the wife's distributive award of marital property, since the rental property could be readily distinguished from its income-producing capacity.

According to Keane, in the circumstances presented, even though a stream of income was already used and distributed, that very same income may still be separately used for the purpose of establishing spousal support. This would be true, notwithstanding prior holdings that once an income stream has been converted into an asset and distributed, the income used was no longer available for spousal support ' and is “double dipping.“ The Court of Appeals in Keane distinguishes itself from prior cases, holding that the “double dipping“ prohibition is limited to intangible assets (such as in enhanced earnings cases) and service businesses, not where the asset is tangible such as in Keane.

Double Counting

Double counting may occur when marital property includes intangible assets such as professional licenses or goodwill, or the value of a service business. As the court said in Grunfeld, “[i]n contrast to passive income-producing marital property having a market value, the value of a professional license as an asset of the marital partnership is a form of human capital dependent upon the future labor of the licensee“ (94 NY2d at 704). It is only where “[t]he asset is totally indistinguishable and has no existence separate from the [income stream] from which it is derived“ (Id.) that double counting results.

Keane made no sense to many matrimonial practitioners. After all, an income stream used is an income stream used ' whether the asset is tangible or intangible. In reality, the no-double-counting argument actually makes at least as much sense where the asset distributed is a real one rather than hypothesized as in the intangible case of “enhanced earnings.“ Just as Keane was decided, a trial court advanced a cogent argument trying to further elaborate upon its holding:

It should also be noted that the recent Court of Appeals decision in Keane v. Keane, (8 NY3d 115 [2006]), does not apply to the income derived from the businesses. It is distinguishable on its facts. Although the court held that rental income from property deemed a marital asset could be used in determining maintenance even after that same income was capitalized and distributed, it limited this double-dipping to passive assets, e.g., real estate.

The court went on to state that because a “service business“ is an active asset, it is still governed by the Grunfeld prohibition regarding double-dipping for maintenance and distributive awards.

As service businesses, Q.C. and D.S. are active assets and clearly distinguishable from a passive rental property as in Keane. Therefore, Keane does not apply to the present case and the husband's future income derived from his equity in Q.C. and D.S. cannot be double counted in awarding equitable distribution as well as maintenance. N.K. v. M.K., 17 Misc.3d 1123(A), (Supreme Court Kings County 2007).

Griggs v. Griggs

Notwithstanding the above common sense approach, however, the Appellate Division, Second Department, in Griggs v. Griggs , 44 AD3d 710 (2d Dept. 2007), a case involving a medical practice ' seemingly a “ service business, “ and citing to Keane , held:

The plaintiff's contention that the court “double-counted“ his Practice is without merit. The Court of Appeals recently held that the prohibition against double counting does not apply where, as here, the asset to be distributed is a “tangible income-producing asset,“ rather than an intangible asset, such as a professional license, the value of which can only be determined based on projected earnings.

(The claim here was the alleged double counting in “asset distribution,“ yet the double-counting concept seems to be self-explanatory.)

Groesbeck v. Groesbeck

In 2008, the same Second Department in Groesbeck v. Groesbeck , 51 AD3d 722 (2d Dept 2008), involving a home “ improvement contracting business, “ citing to Keane and Driggs , and specifically addressing the maintenance issue, held:

Furthermore, there is no merit to the defendant ' s contention that the court ' s maintenance award was improper because it “ double counted “ the value of his business in violation of the rule articulated in Grunfeld v. Grunfeld , 94 N.Y.2d 696, 709 N.Y.S.2d 486, 731 N.E.2d 142. That rule is inapplicable here because the husband ' s business is a tangible, income-producing asset ( see Keane v. Keane , 8 N.Y.3d 115, 828 N.Y.S.2d 283, 861 N.E.2d 98; Griggs v. Griggs , 44 A.D.3d 710, 844 N.Y.S.2d 351).

Restoring Clarity

It was not enough that Keane separated the tangible income-producing real estate asset out of the double-counting prohibition; what then did the Appellate Court do to the service business exemption? Well, without explanation of its prior decisions, we thankfully now have the Second Department's Rodriguez v. Rodriguez, restoring proper clarity to this issue. The Rodriguez court, on Feb. 9, 2010, reversed the lower court's use of the income stream from the husband's already valued and distributed medical practice for maintenance. Notably, neither Keane nor Driggs nor Groesbeck are mentioned:

Moreover, we agree with the defendant that the Supreme Court impermissibly engaged in the “ double counting “ of income in valuing his medical practice, which was equitably distributed as marital property, and in awarding maintenance to the plaintiff ( Grunfeld v. Grunfeld , 94 NY2d at 702; Murphy v. Murphy, 6 AD3d 678, 679). The valuation of the defendant's business involved calculating the defendant's projected future excess earnings. Thus, in valuing and distributing the value of the defendant's business, the Supreme Court converted a certain amount of the defendant's projected future income stream into an asset. However, the Supreme Court also calculated the amount of maintenance to which the plaintiff was entitled based on the defendant's total income, which necessarily included the excess earnings produced by his business. This was error. Since the Supreme Court has discretion in the manner in which it is to avoid such double counting of income ( see Grunfeld v. Grunfeld , 94 NY2d at 705-706), we remit the matter to the Supreme Court, Richmond County, to recalculate the maintenance and cash distributive awards.

Conclusion

After Keane, Driggs and Groesbeck, how many trial decisions have been issued where the business' income was distributed and spousal support also awarded based upon the same distributed income stream? Anyone getting a refund?

Lee Rosenberg is a partner at Saltzman Chetkof & Rosenberg in Garden City, NY. He is a Fellow of the American Academy of Matrimonial Lawyers, and may be reached at [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.