April 18, 1999
Appellate Division, First Department
Rochelle Grunfeld v. Harold M. Grunfeld **
SUPREME COURT, APPELLATE DIVISION
First Department, October 1998
Eugene Nardelli, J.P.
Milton L. Williams
Peter Tom
David B. Saxe, JJ.
_______________________________________x
Rochelle Grunfeld,
Plaintiff-Appellant-Respondent,
-against- 2657-2658
Harold M. Grunfeld,
Defendant-Respondent-Appellant.
_______________________________________x
Cross appeals from a judgment and resettled
judgment of the Supreme Court, New York County (Lewis Friedman, J.),
entered December 23, 1996 and June 18, 1997, respectively, which,
inter alia, equitably distributed the property of the parties.
Franklin S. Bonem, of counsel (Amy F. Sandgrund, on the brief,
Proskauer Rose LLP, attorneys) for plaintiff-appellant-respondent,
Stanley Plesent, of counsel (Robert C. Klein, on the brief,
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, attorneys) for
defendant-respondent-appellant.
SAXE, J.
Since the enactment of the Equitable Distribution Law (Domestic
Relations Law º 236[B]), and the subsequent holding of the Court of
Appeals in O'Brien v O'Brien (66 NY2d 576), that professional
licenses are marital property, our trial courts have struggled with
the complications of distributing the value of a spouse's
professional license and professional practice. One concern that
arose almost immediately was how to distribute those two
non-tangible assets, as well as awarding maintenance, without
directing double (or triple) payment out of the same assets. It is
this concern, and the trial court's attempt to address it, that we
primarily address on this appeal.
The term "double counting" is frequently used to refer to the use of
the same stream of income to calculate the value of more than one
asset (see, Wadsworth v Wadsworth, 219 AD2d 410, 414-415, citing
Scheinkman, 1995 Supp Practice Commentary, McKinney's Cons Laws of
NY, Book 14, Domestic Relations Law C236B:6, 1996 Supp Pamph, at
46). The slightly different term "double dipping" is sometimes used
to refer to the court-ordered payment of more than one financial
obligation from the same source (see, e.g., Semans v Semans, 199
AD2d 790, lv denied 83 NY2d 758; Hartog v Hartog, 194 AD2d 286, mod
85 NY2d 36). The possibility of both problems exists in cases such
as this, where a spouse is a long-time partner in a law practice.
The potential for double counting arises because in determining the
value of a spouse's interest in a law practice, we take into account
not only the practice's tangible assets and liabilities, such as
accounts receivable and inventory, but also the intangible value of
the practice, that is, its "goodwill" (see, Scheinkman, New York Law
of Domestic Relations º 14.23, at 458; Brandes and Weidman, The
Valuing of Law Practices, NYLJ November 22, 1994, at 3). Goodwill is
best understood as the amount a buyer would pay for the practice
above and beyond the market value of its net tangible assets; it
generally is considered to include such items as established
customer base and business reputation (see, Cohen and Ciampi,
Goodwill, Though Intangible, Can Be Assigned Value, NYLJ March 3,
1997, S2, S8; Gara and Langstraat, Property Valuation for Transfer
Taxes, 12 Akron Tax J 125, 141 [1996]).
The value of goodwill is often determined, as it was in this case,
by the "excess earnings" approach. To arrive at it, we subtract from
the spouse's actual earnings (using a weighted average of past
annual earnings) the "reasonable compensation" for a similar
attorney, and then multiply the difference, i.e., the "excess
earnings," by a factor, which, for these purposes, is usually
between 1 and 3. This factor is called the capitalization rate. In
applying a capitalization rate, what is being calculated is the
present value of the expected future stream of income (see, Note,
Valuation Problems in the Appraisal Remedy, 16 Cardozo L Rev 649,
658 [1994]).
The future stream of expected income, reduced to present value, is
also the basis for determining the value of a professional license.
That value is obtained by reducing to present value, after taxes,
the enhanced earning capacity created by the license or degree
during the lifetime of the licensee (see, O'Brien v O'Brien, supra,
at 582; 2 McCahey, Valuation & Distribution of Marital Property º
30.03[3], at 30-19, 30-20; Scheinkman, New York Law of Domestic
Relations º 14.25, at 465). Thus, to determine the value of a
professional license, an expert will typically prepare a projection
of the licenseeÆs lifetime earnings; if there is already an earnings
history, that projection will be founded upon the past earnings
history (see, McSparron v McSparron, 87 NY2d 275, 286).
The specter of double recovery was first raised soon after the
O'Brien decision held that licenses were marital assets available
for equitable distribution:
Care must be taken in viewing the O'Brien decision where the
licensed professional does engage in the practice of the profession.
The difficulty is that there is the potentiality for a double, or
even triple, recovery. In O'Brien, the husband had not engaged in a
private practice; he was a surgical resident. Hence, the Court did
not have to grapple with whether an award can be made for the
license and for an interest in a professional practice. Nor, because
the wife's request was for a property distribution, did the Court
have to consider whether the licensed spouse's enhanced earning
capacity was being tapped to value the license and tapped again in
fixing a maintenance award.
(Scheinkman, Practice Commentary, McKinney's Cons Laws of NY, Book
14, Domestic Relations Law C236B:6, at 203.)
Although the potential for double counting was not actually present
in O'Brien, the issue was squarely presented in Marcus v Marcus (137
AD2d 131). Unlike the O'Brien scenario, in Marcus, the husband,
after obtaining his medical license, had spent the following 30
years developing his psychiatric practice. The Second Department
concluded that the plaintiff wife was not entitled to two separate
awards for the husband's license and for his psychiatric practice,
since under such circumstances the value of the professional license
is subsumed in the value of the practice (see, Marcus, supra at
139); this ruling was thereafter referred to as the "merger
doctrine." The court explicitly recognized that in other
circumstances the doctrine would not apply, such as where the
licensed spouse's practice had not yet developed to its full
potential, or where an ongoing practice is sold, with the intent to
move and begin anew (id. at 140).
Seven years after Marcus and the subsequent cases in which its
merger doctrine was developed and refined (see, e.g., Duffey v
Duffey, 198 AD2d 581; Maher v Maher, 196 AD2d 530), the Court of
Appeals rejected the entire concept of the merger doctrine, holding
that "the merger doctrine should be discarded in favor of a
commonsense approach that recognizes the ongoing independent
vitality that a professional license may have and focuses solely on
the problem of valuing that asset in a way that avoids duplicative
awards" (McSparron v McSparron, 87 NY2d 275, 285). It explained that
"[e]ven after the licensee has had the time and opportunity to
exploit the license and to realize a portion of the enhanced earning
potential it affords, the license itself retains some residual
economic value, although in particular cases it may be nominal" (id.
at 285-286). The Court went on to warn that,
care must be taken to ensure that the monetary value assigned to the
license does not overlap with the value assigned to other marital
assets that are derived from the license such as the licensed
spouse's professional practice. The courts must also be meticulous
in guarding against duplication in the form of maintenance awards
that are premised on earnings derived from professional licenses.
(McSparron v McSparron, supra, at 286.)
In the matter now before us, the trial court made a valiant attempt
to render a determination that complied with these warnings to avoid
double payments. It properly rendered valuations of both defendantÆs
law practice and his license to practice law. However, in its
attempt to avoid "double dipping" the court inequitably diminished
the wife's entitlement. For that reason, and others that follow, we
modify the judgment in several respects.
The parties met at City College of New York in 1965, and were
married on December 26, 1971. Plaintiff worked as an elementary
school teacher in the New York City public schools for eight years
following her graduation from college, until shortly before the
birth of the parties' first child in 1976. She is now 52 years of
age. Defendant is a founder and managing partner of Grunfeld,
Desiderio, Lebowitz & Silverman, a 26-attorney law firm specializing
in customs law; he is 50 years old. The parties have two sons, now
ages 22 and 17.
Turning first to the equitable distribution of defendant's law
practice, we conclude that the adoption of a value as of the
commencement date of the action was an appropriate exercise of the
trial court's discretion. The practice was an active, ongoing
business, which type of asset is generally valued as of the date of
commencement (see, McSparron v McSparron, 87 NY2d 275, 287-288;
Panasci v Panasci, 187 AD2d 928, 929; Heine v Heine, 176 AD2d 77,
87, lv denied 80 NY2d 753). Under certain circumstances, a
date-of-trial valuation of a business may be justified by the loss
of the business's major client and resultant loss of the business's
value during the pendency of the litigation (see, e.g., La Barre v
La Barre, __ AD2d __, 674 NYS2d 235), or by other losses due to
adverse forces outside the spouse's control (see, Sagarin v Sagarin,
__ AD2d __, 674 NYS2d 127). Here, however, given the nature of the
law firm's practice, its loss of several clients in the years
following commencement of this action was not the type of unusual
post-commencement event as would necessarily have a substantial,
long-lasting effect on its value.
As the trial court correctly reasoned, had the value of the practice
increased following commencement of the action based upon a large,
unexpected fee from a new client, defendant would have been
justified in arguing that this type of post-commencement windfall
should not be considered in valuing the practice. By the same token,
the diminishment of the firm's income due to the loss of a client
need not be considered in arriving at an appropriate valuation date.
Nor did the asserted recent changes in the practice of customs law
require a later valuation date.
Other than the choice of valuation date, there is no challenge to
the method by which the court arrived at the value of defendant's
interest in his law firm as of that date. It employed the
previously-mentioned capitalization of earnings approach to arrive
at a value of $2,581,760 for defendant's interest in his law firm,
of which 50% was awarded to plaintiff.
Nor is there a challenge to the methodology adopted by the trial
court in arriving at a value for defendantÆs license to practice
law. To arrive at this valuation, the court considered and combined
two components. First, it determined the value of the "bare
license," that is, the value of the license in the hands of the
average licensee, by calculating the difference between (1) the
present value of the remaining average lifetime earnings of a law
firm associate in 1992 who was admitted to the bar in 1974,
practicing law in a locality with a population of over one million,
and (2) that of an employed white male in the same locality with a
bachelor's degree. Based upon that difference, the court calculated
the present value of the enhanced earnings resulting from the
acquisition of a law degree by an average white male in a large
city, to amount to $330,239. To this total the court applied a 50%
"coverture fraction", to account for the portion of law school that
defendant completed prior to the marriage.
The second component of the license taken into account by the court
was the enhanced earning potential created by the license in the
hands of this particular licensee. To avoid duplication, the court
removed from consideration that portion of defendant's expected
lifetime compensation that was already considered in calculating the
goodwill portion of the value of defendant's share of the law
practice. "To avoid a double count, the income used in determining
the present value of the practice must be deducted from the
calculation of future enhanced earning capacity" (Wadsworth v
Wadsworth, 219 AD2d 410, 414, citing Scheinkman, 1995 Supp Practice
Commentary, McKinney's Cons Laws of NY, Book 14, Domestic Relations
Law C236B:6, 1996 Supp Pamph, at 46).
The trial court had already used defendant's "excess earnings", i.e.
his earnings beyond reasonable compensation of $294,860, to
calculate the value of his interest in the practice. Thus, the
court's calculation of the defendant's enhanced earning potential,
for purposes of valuing his law license, was properly based on the
difference between the remaining earnings of $294,860 per year and
the median income of an average attorney in a law firm who was
admitted to the bar in 1974, that is, $94,021. The difference was
projected forward to obtain a lifetime earnings figure, which was
then tax-impacted, after which a mortality figure was applied, and
finally the total was reduced to present value with a 3% "true
interest" rate. This calculation brought the court to a figure of
$1,486,000 for the second component of the license; it then reduced
that figure by 7% or $104,030 to reflect the pre-marital separate
property component of that figure, leaving the "license"
contemplated by McSparron available for distribution as a marital
asset worth $1,547,000.
Plaintiff does not challenge the value assigned to defendant's law
license by the trial court, but instead, the failure of the court to
award her any portion of the value of that license in its
distributive award.
In declining to award plaintiff any share of defendant's license,
the trial court was mindful of the warning in McSparron against
"duplication in the form of maintenance awards that are premised on
earnings derived from professional licenses" (87 NY2d at 286,
supra). Indeed, the trial court expressly relied upon the holding of
the Fourth Department that "the court is obliged to reduce the value
of the enhanced earnings by the amount awarded in maintenance"
(Wadsworth v Wadsworth, 219 AD2d 410, 415, citing Scheinkman, 1995
Supp Practice Commentary, McKinney's Cons Laws of NY, Book 14,
Domestic Relations Law C236B:6, 1996 Supp Pamph, at 46).
Specifically, the trial court remarked that, given the substantial
maintenance and other distributions to plaintiff, including half of
defendantÆs interest in his law practice, any additional
distribution based upon the license would be duplicative.
For the following reasons, we conclude that this constituted error,
unnecessarily creating an inequity.
It has been said that property distribution and maintenance should
not be treated as two separate and discrete items, but rather should
each be considered "with a view toward the other in an effort to
arrive at a fully integrated and complete financial resolution that
is best suited to the parties' particular financial situation" (see,
Mullin v Mullin, 187 AD2d 913, 914, citing Scheinkman, 1987 Supp
Practice Commentaries, McKinney's Cons Laws of NY, Book 14, Domestic
Relations Law C236B:36, 1992 Pocket Part, at 90). However, when
considering the appropriate remedy to employ as between spousal
maintenance and equitable distribution, we should keep in mind their
two distinct purposes. Equitable distribution is the division of
martial property that, having been acquired by either member of the
"economic partnership" during the marriage, belongs to both spouses,
regardless of who is in possession or holds title (see, O'Brien v
O'Brien, 66 NY2d 576, 585; Scheinkman, New York Law of Domestic
Relations, º 14.15, p.433). This distribution amounts to an
entitlement in favor of the non-titled spouse to an appropriate
share of property held by the other spouse, keeping in mind the
contribution of the non-titled spouse (see, McSparron v McSparron,
supra, 87 NY2d, at 282).
Maintenance, on the other hand, is merely a payment awarded in the
discretion of the court to ensure the support of the non-earner
spouse, keeping in mind, to the extent possible and appropriate, the
standard of living enjoyed during the marriage (Domestic Relations
Law º 236[B][6]; Hartog v Hartog, 85 NY2d 36). The right to receive
maintenance, and the responsibility to pay it, is conditioned upon
many events: it ends with the death of either spouse, or the
remarriage of the recipient (Domestic Relations Law º 236[B][1][a]).
In contrast, in the event of the death of either party, any unpaid
equitable distribution is the right or responsibility of the estate
of the deceased ex-spouse (see, Peterson v Goldberg, 180 AD2d 260,
263, lv dismissed 81 NY2d 835).
Moreover, the recipient of spousal maintenance bears the obligation
to pay taxes on that income (unless provision is made to the
contrary), whereas receipt of a distributive award is not considered
income for taxation purposes (see, Cohen v Cohen, 184 AD2d 347, 348,
citing Scheinkman, Practice Commentary, McKinney's Cons Laws of NY,
Book 14, Domestic Relations Law C236B:9, at 223). Since the dollar
value assigned to defendant's law license was computed based upon
projected after-tax earnings, a distribution of that asset would
already have been tax impacted. To substitute an award of
maintenance for a distribution of that asset, which maintenance is
then subject to income tax, is tantamount to making plaintiff the
victim of double taxation.
"[R]educ[ing] the value of the enhanced earnings by the amount
awarded in maintenance" (Wadsworth v Wadsworth, supra, 219 AD2d, at
415), is not the only way to avoid double dipping. Another viable
option is for the court to grant a distributive award based upon the
enhanced earnings, and then adjust the payor's other obligations
accordingly (see, Seeman v Seeman, __ AD2d __, 674 NYS2d 423,
424-25).
We conclude that plaintiff is therefore entitled to be awarded an
appropriate share--here, 50%--of that part of defendant's law
license earned during the marriage. The distributive award is
therefore increased by $773,500, which, like the portion of the
distributive award attributable to defendant's law practice, shall
be paid out by means of the continuing annual installment payments
of $250,000.
Nor does this additional award do away with any and all needs of
plaintiff for maintenance. An award of maintenance may still be
warranted even where a non-earning spouse has been awarded an
appropriate part of the value of defendant's future earnings in the
context of equitable distribution. The court must consider, in
particular, the marital standard of living, the extent of the estate
possessed by each party, and the extent of the earner's remaining
stream of actual and potential future income, after deducting the
sums already subject to court order.
In the matter before us, defendant's future earnings are expected to
exceed $1 million yearly, and he is possessed of other resources,
the income from which could provide an additional source for at
least a portion of the maintenance: a substantial stock portfolio,
the proceeds of successful litigation against his former law
partner, and limited partnership interests. It must also be recalled
that the distributive award, payable in installments, will not be
completely in plaintiff's possession for years to come. Clearly, an
award of maintenance is called for.
Along these lines, it must be noted that while the trial court
awarded plaintiff an award of maintenance in the appropriate sum of
$15,000 per month, it then reduced that amount to $8,500 per month
following the contemplated sale of the marital residence. This
reduction of maintenance at that point in time is not justifiable.
It cannot be accounted for by termination of the monthly carrying
costs of the marital residence, which in any case were only
approximately $4,000 per month. Nor can the decrease be accounted
for by the reduction in plaintiff's housing costs following sale of
the marital residence, since the cost of replacement housing can be
expected to be commensurate with the carrying costs on the
residence--in this regard, it is noteworthy that the defendant's net
worth statement indicated that he paid $6,100 per month on his
housing costs following the parties' separation. Furthermore, the
court could not properly assume that plaintiff could use her share
of the net proceeds of the sale of the residence to acquire
alternative housing and thereby defray some of her support needs,
since the trial court directed that plaintiff's share of those net
proceeds (which it estimated at $500,000) must be used to repay
defendant for certain marital liabilities (plaintiff's share of
which totaled $576,000). Lastly, to the extent the reduction was
based upon the assumption that plaintiff would have received a
substantial part of her distributive award by the time the house was
sold, that assumption has proved false.
While plaintiff will receive an additional distributive award, when
we take into account the amount of time it will take for plaintiff
to gain possession of it, the award of lifetime maintenance to
plaintiff shall initially remain as set, at $15,000 per month, with
no reduction at the time the marital residence is sold. However, in
view of the income plaintiff can be expected to garner from the
amounts she ultimately receives as a distributive aware, maintenance
shall be reduced to $8,500 per month beginning the month following
the date when the distributive award has been paid in full.
That aspect of the decision declining to give retroactive effect to
the maintenance award was a proper exercise of discretion, in view
of the nature of the pendente lite payments directed by the court as
well as the payments voluntarily made by defendant.
We reject the claim raised by plaintiff that defendant is chargeable
with wasteful dissipation of assets due to his trading in
commodities and securities during the marriage. The trial court
correctly declined to award to the wife the value of marital assets
no longer in existence based upon the losses that resulted from that
trading. As the trial judge cogently explained, defendant's original
allocation of risk capital was reasonable, as was his initial
increase of risk capital by the amount of his trading profits.
Furthermore, the record demonstrated that when he entered into the
now-challenged transactions, he had a good faith belief in the
profitability of this type of aggressive short-term trading.
Moreover, the expert testimony by which plaintiff challenged the
reasonableness of
defendant's investments concerned only defendant's commodities
trading, for which his final net loss came to only $350,000. He lost
far greater sums in the more standard investment area of equities
trading, and plaintiff offered no expert analysis directed at the
reasonableness of those investment decisions.
Consequently, the tax liabilities and loan repayment liabilities
caused by those losses were properly treated as marital debt, just
as any profits derived in the process were marital assets.
As to defendant's claim of error regarding a securities account
attributable to post-separation earnings, the trial court properly
disallowed this adjustment, since defendant failed to offer at trial
evidence as to the amount of post-commencement earnings added to the
account.
Finally, plaintiff is entitled to interest on the unpaid balance of
the distributive award, which the trial court properly determined
should be paid in installments (see, Selinger v Selinger, 232 AD2d
471, 473, lv dismissed, 90 NY2d 842; Maharam v Maharam, 245 AD2d
94).
We have considered the parties' other arguments and find no basis to
disturb the trial court's determination with respect to
the balance of the judgment.
Accordingly, the resettled judgment of the Supreme Court, New York
County (Lewis Friedman, J.), entered June 18, 1997, inter alia,
equitably distributing the parties' property, should be modified, on
the law and the facts, (1) to add to the sixteenth decretal
paragraph awarding plaintiff a distributive share of the value of
defendant's interest in his law firm, a provision awarding plaintiff
one-half the value of defendant's license to practice law, i.e.
$773,500, to be added to her distributive award, payable by the
continued annual payments of $250,000 ordered therein; (2) to delete
the provision of the third decretal paragraph reducing maintenance
following sale of the marital residence, and substitute therefor a
provision reducing maintenance to $8,500 per month beginning the
month following full payment of the distributive award; and (3) to
award plaintiff interest on the unpaid balance of the distributive
award at the statutory rate; and as so modified, affirmed, without
costs. Cross appeals from judgment, same court and Justice, entered
December 23, 1996, should be dismissed,
without costs, as superseded by the cross appeals from the resettled
judgment.
All concur.
THIS CONSTITUTES THE DECISION AND ORDER
OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.
ENTERED: APRIL 15, 1999
_______________________
CLERK
