Bad Law on Double Dipping

Without clear and concise decisions from our appellate courts that provide guidance to lawyers, clients and trial courts, we cannot have a proper understanding of exactly what the law is. While we are told that these cases are “fact-driven” ' and certainly they are, where the basic facts are similar ' the result on the law should be pretty close, especially where the law itself follows clear precedent rulings. Unfortunately, in two recent Second Department cases decided within 30 days of each other, the facts appear similar, yet one case gets the law right, the other gets it completely wrong. While bad law was corrected by the former, it was perpetuated by the latter.

Rodriguez Follows the Standard Enunciated by The Court of Appeals

In an article published in this newsletter's ALM sister publication, the New York Law Journal, on Feb. 26, 2010, entitled “'Rodriguez' Offers Common Sense Revisiting of Double Dipping” (NYLJ at 4, col 1), I discussed the Second Department's proper holding in Rodriguez v. Rodriguez, 70 AD3d 799 (2d Dept. 2010), which was issued on Feb. 9, 2010. The gist of the article was as follows: The Second
Department, in Griggs v. Griggs, 44 AD3d 710 (2d Dept. 2007) and Groesbeck v. Groesbeck, 51 AD3d 722 (2d Dept 2008), had grievously misapplied the law that had been earlier established by the Court of Appeals. The Court of Appeals' rule held that where an income stream is: 1) converted into an asset in the form of an intangible asset (such as enhanced earning capacity) or a service business; and it is 2) distributed, the income used is no longer also available for spousal support ' it would be classified as an impermissible “double dipping” or “double counting.” See Keane v. Keane, 8 NY3d 115 (2006); Grunfeld v. Grunfeld, 94 N.Y.2d 696 (2000); McSparron v. McSparron 87 NY2d 275 (1995). The Keane court expounded upon the prior Grunfeld and McSparron holdings and excluded tangible income-producing assets from the double counting prohibition, holding that:

Double counting may occur when marital property includes intangible assets such as professional licenses or goodwill, or the value of a service business. As we 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 dependant 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. (Emphasis partially in original).

Griggs and Groesbeck

In Griggs (medical practice) and Groesbeck (home improvement contracting business), the Second Department inconceivably ignored the “service business” aspect of the anti-double-dipping rule, and proceeded to distribute the service business value while awarding spousal support on the same income stream. Then, finally, in February 2010, the same court issued the Rodriguez decision, reversing the trial court and righting the ship again. In Rodriguez, the court said:

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 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 excess earnings produced by his business. This was error.

The Rodriguez court was correct, and so we could finally move forward, with the errors of Griggs and Groesbeck now fading in the rear view mirror despite the damage already done. All was now again right with the world, yes? Not so fast '

Conclusion

In next month's edition we will explore the implications of another case, decided soon after Rodriguez by the same appellate court (although a different panel), in which the court reverted to double counting the service business income of one of the parties.

Lee Rosenberg, a member of this newsletter's Board of Editors, is a partner at Saltzman Chetkof & Rosenberg LLP in Garden City, and a Fellow of the American Academy of Matrimonial Lawyers. E-mail: [email protected].

Without clear and concise decisions from our appellate courts that provide guidance to lawyers, clients and trial courts, we cannot have a proper understanding of exactly what the law is. While we are told that these cases are “fact-driven” ' and certainly they are, where the basic facts are similar ' the result on the law should be pretty close, especially where the law itself follows clear precedent rulings. Unfortunately, in two recent Second Department cases decided within 30 days of each other, the facts appear similar, yet one case gets the law right, the other gets it completely wrong. While bad law was corrected by the former, it was perpetuated by the latter.

Rodriguez Follows the Standard Enunciated by The Court of Appeals

In an article published in this newsletter's ALM sister publication, the New York Law Journal , on Feb. 26, 2010, entitled “' Rodriguez ' Offers Common Sense Revisiting of Double Dipping” ( NYLJ at 4, col 1), I discussed the Second Department's proper holding in Rodriguez v. Rodriguez , 70 AD3d 799 (2d Dept. 2010), which was issued on Feb. 9, 2010. The gist of the article was as follows: The Second
Department, in Griggs v. Griggs , 44 AD3d 710 (2d Dept. 2007) and Groesbeck v. Groesbeck , 51 AD3d 722 (2d Dept 2008), had grievously misapplied the law that had been earlier established by the Court of Appeals. The Court of Appeals' rule held that where an income stream is: 1) converted into an asset in the form of an intangible asset (such as enhanced earning capacity) or a service business; and it is 2) distributed, the income used is no longer also available for spousal support ' it would be classified as an impermissible “double dipping” or “double counting.” See Keane v. Keane , 8 NY3d 115 (2006); Grunfeld v. Grunfeld , 94 N.Y.2d 696 (2000); McSparron v. McSparron 87 NY2d 275 (1995). The Keane court expounded upon the prior Grunfeld and McSparron holdings and excluded tangible income-producing assets from the double counting prohibition, holding that:

Double counting may occur when marital property includes intangible assets such as professional licenses or goodwill, or the value of a service business. As we 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 dependant 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. (Emphasis partially in original).

Griggs and Groesbeck

In Griggs (medical practice) and Groesbeck (home improvement contracting business), the Second Department inconceivably ignored the “service business” aspect of the anti-double-dipping rule, and proceeded to distribute the service business value while awarding spousal support on the same income stream. Then, finally, in February 2010, the same court issued the Rodriguez decision, reversing the trial court and righting the ship again. In Rodriguez, the court said:

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 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 excess earnings produced by his business. This was error.

The Rodriguez court was correct, and so we could finally move forward, with the errors of Griggs and Groesbeck now fading in the rear view mirror despite the damage already done. All was now again right with the world, yes? Not so fast '

Conclusion

In next month's edition we will explore the implications of another case, decided soon after Rodriguez by the same appellate court (although a different panel), in which the court reverted to double counting the service business income of one of the parties.

Lee Rosenberg, a member of this newsletter's Board of Editors, is a partner at Saltzman Chetkof & Rosenberg LLP in Garden City, and a Fellow of the American Academy of Matrimonial Lawyers. E-mail: [email protected].