Joel R. Brandes and Carole L. Weidman
IN THE LANDMARK O'Brien case, [FN1] the Court of Appeals held
that the enhanced earning capacity attributable to the attainment of a medical
license, was "marital property"; it affirmed the trial court's valuation of
the husband's "enhanced earning capacity" at $472,000. The trial court
accepted the valuation methodology of Stanley Goodman, the wife's expert, the
only expert to testify at trial.
Mr. Goodman explained at trial how he arrived at this value.
He assumed that 1985 was the date that Dr. O'Brien was going to enter practice
and that he would remain in practice until 2012, when he would become 65. The
"measuring stick" was the average income of a college graduate, age 35,
against the average income of a surgeon. [FN2] Mr. Goodman projected that
difference in income throughout Dr. O'Brien's working life and then factored
in inflation at 10 percent, a real interest rate of 3 percent and income
taxes, to arrive at a figure that was the present value of the difference
between what a college graduate's expected income and a surgeon's.
How Calculations Were Made
The data that he used were derived from 1977 government
statistics. The statistics for a person 35 to 45 indicated that the average
earnings of a college graduate in 1977 was $28,000 a year. At the time of the
marriage Dr. O'Brien had almost completed college, so Mr. Goodman used
earnings figures as if he had. He ascertained from Medical Economics,
September 1981 edition, that the average income of a general surgeon for 1980
was $83,300. He then brought the $28,000 average earnings of a college
graduate in 1977, and the $83,300 of a general surgeon in 1980, to 1985, by
adjusting them upward in each year.
Mr. Goodman used government statistics for the prior three
years, indicating an average annual increase in gross earnings throughout the
country of 8 percent. In bringing the figures to 1985 levels he used 10
percent a year as an inflation factor. He then took into account federal
income taxes. He testified that the Emergency Recovery Tax Act of 1981
promulgated income tax rates through 1984 and provided that, starting in 1985,
the income tax tables would be indexed to the Consumer Price Index, so that
the percentage of after- tax income in 1984 would be continued through the
foreseeable future.
This approach made it statistically dependable to determine
what percentage of after-tax income a college graduate would have in 1984, to
figure what the surgeon would have at the same time and to apply that ratio on
through his working career. The "real interest rate" was defined as that rate
that is the nominal interest rate beyond the inflation rate, which had been 3
to 4 percent. He assumed that the trends were going to continue. He projected
those rates and used them to arrive at present value.
Mr. Goodman stated that he gave no consideration to early or
late retirement or to pre-retirement disability. State taxes were not taken
into account because he could not project what they would be or where an
individual would live. FICA was not taken into account because at the level of
income he was talking about it would affect both workers equally. [FN3]
At the time of the marriage, the husband had completed 3 1/2
years of college. [FN4] He was licensed to practice medicine in October 1980.
The action for divorce was commenced two months later. At the time of trial,
in 1982, he was in surgical residency and did not expect to complete the
requirements to be a general surgeon until 1985.
The Court of Appeals in O'Brien recognized that fixing the
present value of enhanced earning capacity may present problems. [FN5] Even
Mrs. O'Brien's expert acknowledged that his assumptions and calculations were
speculative. [FN6] And the Court ignored the fact that the methodology used to
value the doctor's enhanced earning capacity as a surgeon was based, in part,
on his post-commencement efforts to become a surgeon. The value of these
efforts would be his separate property under the Equitable Distribution Law,
which limits "marital property" to "property acquired during the marriage and
before the commencement of a matrimonial action. [FN7]
Rejecting Doctrine of 'Merger'
The Court of Appeals opinion in McSparron v. McSparron [FN8]
was its second venture into this area. The McSparron Court created havoc for
the matrimonial bar when it rejected the doctrine of "merger." It held it was
error to find that the husband's law license "merged" into his career, and
remitted the action to the Supreme Court so that a new distribution of the
marital assets could be made "taking into account the residual value of the
defendant's law license, independent of his career."
The Court stated that O'Brien permits the court to include in
the marital estate the present value of any increased earning capacity
attributable to a professional license earned during the marriage, which
continues to exist throughout the life of the license. The Court specifically
referred to and approved of the O'Brien valuation methodology, holding that
the value of a newly earned license may be measured by simply comparing the
average lifetime income of a college graduate and the average lifetime
earnings of a person holding such a license and reducing the difference to its
present value.
Where the licensee has already embarked on his or her career
and has acquired a history of actual earnings, the foregoing theoretical
valuation method must be discarded in favor of a more pragmatic and
individualized analysis based on the particular licensee's remaining
professional earning potential.
The court cautioned that care must be taken to ensure that the
value given to the license "does not overlap with the valuation of other
marital assets that are derived from the license such as a spouse's
professional practice." It also cautioned that courts must "guard against
duplication in the form of maintenance awards that are premised on earnings
derived from professional licenses."
As a consequence it has been held that earnings attributable
to the licenses of professionals must be deducted from a spouse's income
before fixing maintenance awards. [FN9] We question why the earnings derived
from the license of a professional are excluded from that spouse's income
before fixing a maintenance award but earnings derived from other businesses
are not similarly excluded from a spouse's income before fixing maintenance
awards. It appears that professionals are being treated unequally by this
aspect of the McSparron decision.
Surprisingly, the McSparron court apparently expanded the
discretion of the trial court to consider in its valuation methodology
post-commencement, post- trial and even post-judgment events. Recognizing that
the question of valuation would probably have to be tried de novo, the Court
turned "... to the question of whether the trial court may consider the
post-commencement events which may have affected the value of defendant's
license."
The Court went on to state that "..
whether the unusual post commencement events that led to
defendant's job loss should be considered in assessing the residual value of
his law license is a question that lies squarely within the trial court's
discretion," and it held "only that the timing of these events should not by
itself be a legal impediment to such consideration." [FN10]
The Court stated that "Domestic Relations Law s236 B (1)(c)
provides that the classification of property as "marital" or "separate" is
governed by the date on which the matrimonial action was commenced or the
parties' separation agreement executed. However,
the equitable distribution statute does not specify the date
that is to be used as the touchstone for measuring the value of the marital
property .... Thus, the appropriate date for measuring the value of marital
property has been left to the sound discretion of the trial courts, which
should make their determinations with due regard for all of the relevant facts
and circumstances ....
By stating that the trial court had the discretion to consider
the post- commencement events that may have affected the value of defendant's
license, specifically referring to the husband's 1992 job loss as one of these
events, and that their timing should not by itself be a legal impediment to
such consideration, the court appears to have held that the trial court can
consider post-trial and post-judgment events in arriving at the value of the
enhanced earning capacity attributable to defendant's law licensee.
DRL Provision
If the court held that post-trial and post-judgment events may
be considered in fixing the value of the enhanced earning capacity
attributable to defendant's law license, it overlooked that part of DRL
s236(B)(4)(b) that provides that the date or dates the parties shall use for
the valuation of each asset, "... may be anytime from the date of commencement
of the action to the date of trial."
The McSparron action was commenced in 1989 and a judgment of
divorce was granted, after trial, in 1991. The husband's 1992 job loss
occurred more than a year after the trial and after the judgment of divorce
was entered. DRL s 236(B)(4)(b) requires that the valuation date of the
enhanced earning capacity attributable to his law license must be between the
date of commencement in 1989 and the date of trial in 1991. In light of the
statute and the lack of statutory authority to modify an equitable
distribution or distributive award made in a final judgment, it would be
improper to consider the husband's post- judgment efforts in the valuation
methodology.
We believe that the Court of Appeals overlooked DRL
s236(B)(4)(b) and the definition of "marital property" when it concluded that
post-commencement events may be considered by the trial court in valuing the
enhanced earning capacity attributable to a professional license. We believe
that, contrary to the apparent holding in McSparron, existing statutory law
does not permit post- trial and post-judgment events to be considered by the
trial court in valuing an asset or making an equitable distribution award.
FN1. 114 Misc2d 233 (2d Dept.) 106 AD2d 223, 66 NY2d 576, 498,
NE2d 712 (1985).
FN2. Dr. O'Brien was employed as a resident general surgeon at
the time of trial, earning $17,000 a year, under contract until 1985.
FN3. Trial Transcript.
FN4. 452 NYS2d 802.
FN5. In his concurring opinion Judge Meyer expressed his
concern for the "potential for unfairness involved in distributive awards
based upon a license of a professional still in training."
FN6. He testified: "*** I mean, there is a degree of
speculation. That speculative aspect is no more to be taken into account,
cannot be taken into account, and it's a question, again, *** not for the
expert but for the courts to decide. It's not my function nor could it be."
FN7. DRL s236(B)(1)(c).
FN8. 87 NY2d 275.
FN9. See Cadet v. Cadet, New York Law Journal, Dec. 11, 1996,
p. 31, col. 6, Sup.Ct., Rockland Co. (Miller, J.); Wadsworth v. Wadsworth, ___
AD2d ___, 641 NYS2d 779.
FN10. 87 NY2d 275.
Joel R. Brandes and Carole L. Weidman have law offices in New
York City and Garden City. They co-authored, with the late Doris Jonas Freed
and Henry H. Foster, Law and the Family New York, and co-authored Law and the
Family New York Forms (both, Lawyers Cooperative Publishing).
12/24/96 NYLJ 3, (col. 1)
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