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New Jersey divorce article
Enhanced Earning Capacity:
By: David M. Wildstein, Esq. 2001 INTRODUCTION
Individuals enter a marriage with certain skills, talents, education and
training which they acquired prior to their marriage.
Economists and sociologists often refer to these personal attributes,
which may lead to future income, as “human capital.”
Although both spouses enter a marriage with their distinct human capital,
the attainment of additional human capital during the marriage will often lead
to “enhanced earning capacity” for
only one spouse.[i]
Typically, as one spouse (the “enhanced spouse”) acquires enhanced
earning capacity, the other spouse (the “investing spouse”), may defer
his or her own career opportunities and accept a temporary reduction in her
standard of living to support the enhanced spouse.[ii]
In expectation of future income to be derived from her investment in her
spouse’s human capital, the wife may be fully prepared to endure these
sacrifices. When, however, the
marriage ends due to divorce, the investing spouse will be left without a return
on her investment unless the enhanced earning capacity of the other spouse is valued as an asset
subject to equitable distribution.
Under New Jersey law a spouse’s enhanced
earning capacity is typically subsumed in the valuation of a business
entity. However, the enhanced earnings of a ___________ *The
Authors acknowledge the assistance and contributions of Risa A. Kleiner, Esq.
and Derry Riverdale, Esq. wage earner,
whose income is not derived from a business entity in which he has an interest,
is not subject to equitable distribution. To
some scholars and courts, this disparity may be a distinction without a
difference.
This article will explore and analyze the concept of valuing the enhanced
earning capacity of a wage earner as an asset subject to equitable
distribution. I.
SOCIAL AND ECONOMIC THEORY UNDERLYING THE CONCEPT OF ENHANCED
EARNING CAPACITY
The concept of an enhanced earning capacity and the rationale for distributing it as
property at the time of a divorce is rooted in both social and economic policy.
Viewing the marital enterprise as a socio-economic unit, it is clear that
the efforts of both parties during the marriage lead to the creation of marital
property whether tangible like a bank account, or intangible like goodwill.
All wealth is a product of investment, and those investments made during
marriage represent a sacrifice of current consumption power (capital) in
anticipation of greater future income gained as a result of that sacrifice.
When a spouse invests in stocks, she gives up her current capital
consumption power in exchange for a better return tomorrow.
Similarly, a spouse who enters a graduate school program, a union
apprenticeship, or a business training program invests not only the cost and
fees of tuition, but also sacrifices other opportunities by spending her time
gaining necessary tools for future advancement.
These tuition and opportunity costs are invested with the expectation
that the asset acquired from the training will yield future income gains above
and beyond what would have otherwise been earned.
Thus the spouses’ investment in human capital represents the diversion
of income from their present needs in anticipation of future economic gains.
“To the extent that an investment in such a program results in an
identifiable or quantifiable increase in earning capacity, this enhanced
earning capacity, whether it be a professional license or a certificate of
membership in a recognized business society, may be valued as human capital.”[iii]
In some cases, the enhanced earning capacity may be the only real economic asset which
the parties accumulate during their marriage.[iv]
Joyce Davis explicates the typical pattern: For either
party to acquire the knowledge, skills or education required to enhance their
earning capacity, both spouses must contribute marital resources to the
undertaking. These contributions
may be financial as when the wife provides income from her employment while the
husband works full or part-time toward an advanced degree.
Alternatively, these contributions may be non-financial as when the wife
cares for the home and children while the husband is improving his career.
Often the wife also endures a lower standard of living during the
marriage expressly to permit marital resources to be expended on enhancing the
husband’s earning capacity. The
wife who stays home and cares for the family does not create an asset that can
be divided at the time of the divorce. The
husband, on the other hand, may leave a marriage with enhanced education, skills
and experience that permit him to function at a much higher economic level after
the divorce.[v]
The argument, Ms. Davis concludes, can therefore be made that since
marital resources were used to acquire the enhanced
earning capacity of one spouse, the other spouse should be entitled to share
in this asset at the time of the divorce.[vi]
Human capital, it has been argued, has enough of the attributes of
property to fit comfortably within the traditional view of property.
The physical manifestation of earning capacity, such as a professional
degree or license, however, cannot be sold; only the capacity can be sold.
For, “just as one can alienate the manual labor of one’s body, one
can also alienate the abilities, skills, thoughts, ideas, i.e., the
intellectual labor of one’s mind . . . so that a wife has a claim on future
earnings because, in Lockean terms she owns the results of her labor, just at
the husband does.”[vii]
Allen M. Parkman has commented: The
transformation of the American economy has made the traditional notions of what
items should be treated as property in divorce settlements inappropriate.
The wealth of an individual is the value
of the income stream that he can anticipate from the assets that he owns.[viii]
“Alimony should reflect, along with Equitable Distribution, the nature
of the marital partnership, how each party contributed to the success of the
partnership and the sacrifices made to achieve partnership goals.
The responsibilities of raising children and the consequent absence from
the marketplace result in a measurable economic loss to the custodial parent.”[ix]
At least one commentator has argued from an employment perspective that a
woman’s disadvantaged position in the labor market is not caused by
discrimination, but instead by family responsibility.
“Children depress women’s wages for three reasons: (1) child bearing
frequently leads to interruptions in employment, which affect experience and
training; (2) the responsibilities of mothers who are frequently not the primary
wage earner forces them to find jobs compatible with the responsibilities of
being both a homemaker and a parent; and (3) women who have a disproportionate
share of housework and child care responsibilities are forced to make sacrifices
in their employment, such as more frequent absences and time off, which
adversely effects their advancement.”[x]
When wives are employed outside the home they frequently restrict their
job hours, limit the geographic range of employment options, and forego
opportunities for advancement to be available for homemaking and child care
services, all in an attempt to accommodate the demands of their spouse’s
employment.[xi]
According to the Bureau of Labor Statistics, approximately one-third of
all employed married women with children have only part time jobs.[xii]
Statistics confirm that each year a woman remains out of the labor force
results in a 1.5% reduction in life-term earning power for a woman with a high
school education and 4.3% per year if the woman is college educated.[xiii]
Numerous studies were cited by the Crews Court which confirm that
following a divorce, women and their children suffer a 30% decline in their
standard of living while men enjoy an average increase of 10% in their living
standard.[xiv]
“Marriage gives men the opportunity, support and time to invest in
their own careers; thus marriage itself builds and enhances the husband’s
earning capacity. For women, in
contrast, marriage is more likely to act as a career liability.”[xv]
“Despite hopes that reliance on the qualified market principles of
equitable distribution would address women’s financial needs at divorce, the
years since the enactment of the initial no-fault divorce reforms have made it
clear that women tend to fair far worse financially as a result of divorce than
men.”[xvi]
Although women have historically suffered economically following a
divorce, it was not until the 1970’s that many state legislatures, including
New Jersey, began to focus on the economic disparity between the parties at the
time of a divorce. According to the
New Jersey Divorce Study Commission, the equitable distribution statute, N.J.S.A.
2A:34-23, was intended to focus on the economic impact of the marriage on the
parties.
The public policy of equitable distribution was enunciated by Justice
Mountain in Rothman v. Rothman: The public
policies sought to be served is at least twofold. Hitherto future financial support for a divorced wife has
been available only by a grant of alimony.
Such support has always been inherently precarious.
It ceases upon the death of the former husband and will cease or falter
upon his experiencing financial misfortune, disabling him from continuing his
regular payments. This may result in serious misfortunate to the wife and in
some cases will compel her to become a public charge. An allocation of property to the wife at the time of the
divorce is at lease some protection against such an eventuality.
In the second place the enactment seeks to right what many have felt to
be a grave wrong. It
gives recognition to the essential supportive role played by the wife in the
home, acknowledging that as a homemaker, wife, and mother, she should clearly be
entitled to a share of family assets accumulated during the marriage.
Thus the division of property upon divorce is responsive to the concept
that marriage is a shared enterprise, a joint undertaking, that in many ways is
akin to a partnership. Only if
it is clearly understood that far more than economic factors are involved, will
the resulting distribution be equitable within the true intent and meaning of
the statute.[xvii]
The public policy was further amplified six years later by the Appellate
Division in Gibbons v. Gibbons: . . . The
extent to which each of the parties contributes to the marriage is not
measurable only by the amount of money contributed to it during the period of
its endurance but rather by the whole complex of financial and non-financial
components contributed. The
function of equitable distribution is to recognize that when the marriage ends,
each of the spouses, based upon the totality of the contribution made to it, has
a stake in and a right to a share of the family assets accumulated while it
endured, not because that share is needed but because those assets represent the
capital product of what was
essentially a partnership entity.[xviii]
Although the concept of valuing enhanced
earning capacity is rooted in economic and social policy, the real question
is whether it is “property” subject to equitable distribution pursuant to N.J.S.A.
2A:34-23. II.
LEGAL ARGUMENTS IN FAVOR OF VALUING ENHANCED
EARNING CAPACITY AS AN ASSET UNDER NEW JERSEY LAW A.
Expansive interpretation of N.J.S.A. 2A:34-23 - Painter v. Painter
Pursuant to N.J.S.A. 2A:34-23, originally enacted in 1971, New
Jersey courts were granted the power to equitably distribute property, real and
personal, “which was legally and beneficially acquired by them or either of
them during the marriage.” Neither
the statute nor the legislative history provides guidance as to the definition
of property or assets that were subject to distribution.[xix]
In the seminal case of Painter v. Painter,[xx]
the Supreme Court expansively interpreted the statute to encompass the equitable
distribution of gifts and inherited assets from a third party.
The Court interpreted the statute in an expansive manner and noted,
“had . . . a more restricted meaning been intended, we believe that some
confining language would have been employed to manifest this purpose.”[xxi]
Accordingly, the Painter Court held that “all property,
regardless of its source, in which a spouse acquires an interest during the
marriage shall be eligible for distribution. . . . “[xxii]
In interpreting this new statute, the Court made the following insightful
comment: We are
under no illusion that what we have said above will provide certain and ready
answers to all questions which may arise as to whether a particular property is
eligible for distribution. We have
sought only to implement the legislative intent as we discern it, by setting
forth what we believe should be the general governing rules.
Individual problems must be solved as they arise within the context of
particular cases.[xxiii]
Painter further held that premarital property would not be subject
to equitable distribution except for premarital assets that increased in value
due to the “value contributed by the other spouse . . .”[xxiv]
Moreover, any property acquired during coverture, attributable to the
efforts of either party, qualified as a distributable asset.
Significantly, the Court noted that, “We
have principally in mind the earnings of husband or wife; such assets are
certainly comprehended by the statute.”[xxv]
Was the court saying that assets derived from earned income during the
coveture are subject to equitable distribution or that income may be viewed as
an asset?
Although the legislature amended 2A:34-23 to exempt inherited property
from equitable distribution, with few exceptions, the progeny of Painter
have interpreted N.J.S.A. 2A:34-23 in a comprehensive and expansive
manner. Clearly, property subject
to equitable distribution includes tangible and intangible assets, pensions and
other retirement benefits.[xxvi]
In Moore v. Moore, the Court ruled that post-retirement cost of
living increases were included in equitable distribution awards.[xxvii]
The Court reasoned that “the right to receive monies in the future is
unquestionably . . . an economic resource subject to equitable distribution.”[xxviii]
The Court, relying upon a plethora of cases, emphasized that post-divorce
benefits received by a spouse are subject to equitable distribution if they are
related to joint efforts.
The Moore Court, relying on Whitfield v. Whitfield, held
that “the includability of property in the marital estate does not depend on
when, during the marriage, the acquisition took place . . . but depends upon the
nature of the interest and how it was earned.”[xxix]
The Court observed that there would be no post-retirement cost-of-living
increases if there were not past contributions and services by both parties.
The concept of valuing a future flow of income which had its origin in
marital contribution and efforts was also addressed in Kruger v. Kruger.[xxx]
A military retirement plan, in pay status, was deemed property subject to
equitable distribution and not considered income that would be available for
support. The Court held that all
property acquired during the marriage, regardless of its source, is
distributable. Justice Schreiber,
in an effort to define property observed that: . . . a
contract entitling a person to a certain number of dollars per week for services
to be rendered over a fixed period is a valuable right and an asset, though the
receipt of the weekly sum represents income.
The equitable distribution provision is not concerned with income but
with a person’s assets in an economic sense on a date certain.
He noted that the right to receive future monies is an enormous resource
which can be valued.[xxxi]
Therefore, Painter and its progeny, along with the line of pension
cases, supports the characterization of enhanced
earning capacity as an asset subject to equitable distribution. B.
Celebrity Goodwill - Piscopo v. Piscopo
In the landmark decision of Piscopo v. Piscopo,[xxxii]
celebrity goodwill attributable to Joe Piscopo’s celebrity status was deemed
an asset subject to equitable distribution.[xxxiii]
Although Piscopo, decided in 1989, is frequently cited by foreign
states and scholars, it has not been cited by any New Jersey courts except for Seiler
v. Seiler.[xxxiv]
Joe and Nancy Piscopo met in college and were married for 12 years.
At the time of the divorce complaint, Joe was a successful entertainer
and comedian. The parties
stipulated that Nancy had contributed to his success by performing homemaking
and custodial responsibilities and serving as a sounding board for his ideas.
All of Joe’s income flowed through J.P. Productions, Inc., a
corporation owned 51% by Joe and 49% by Nancy.
The Court-appointed expert valued the celebrity goodwill by calculating
25% of Joe’s average gross earnings over a three-year period.
According to the expert, this method was commonly used in the industry
when valuing celebrity goodwill. The
trial court did not apply an excess earnings analysis pursuant to Dugan,[xxxv]
since it had insufficient testimony or evidence in the record to draw
conclusions related to either the average earning rate of an entertainer of
plaintiff’s age and experience or an appropriate discount rate for a person of
plaintiff’s level of stardom.[xxxvi]
At trial, plaintiff claimed that the goodwill attributed to his celebrity
status was not an asset subject to distribution.
However, on appeal, he conceded that celebrity goodwill could be a
distributable marital asset but, that in his case, it was too personal in nature
and his reputation as a celebrity could not be related to probable future
earnings but only to possible future earnings.
In essence, he argued that his income as a celebrity was too volatile. Nancy argued that Joe’s celebrity status was an intangible
asset and that the goodwill generated by his reputation could be valued in a
manner analogous to Dugan,[xxxvii]
where the court valued and distributed a sole practitioner’s law practice
despite the ethical restraints prohibiting the sale of the practice and the
dependency of the practice upon the personal skills of one person.
The Court also concluded that Joe’s history of prior earnings made it
probable to assume he would acquire future earnings.
Although Joe attempted to make a distinction between professional
goodwill and from celebrity goodwill, this distinction was rejected by the
Court. The trial court’s opinion
is particularly insightful: Plaintiff
contends that professional goodwill is distinguishable from celebrity goodwill.
He points out that the former has educational and regulatory
prerequisites which any person with acumen can attain while the latter requires
ineffable talent which can have no “average” against which to measure.
Contrary to plaintiff’s assertions, neither an education nor a license
is per se an asset in New Jersey . . .
Rather it is the person with
particular and uncommon aptitude for some specialized discipline whether law,
medicine or entertainment that transforms the average professional or
entertainer into one with measurable goodwill.[xxxviii]
The Court reasoned that Joe had the legal right, in a non-matrimonial
context, to protect his property rights related to his celebrity status.
If someone tried to appropriate his acts or material without his consent,
he could seek relief from the Court. Therefore,
the Court aptly stated: “The
Court cannot countenance the anomaly that would result if one branch of Chancery
vigorously protected plaintiff’s person and business from another’s
‘unjust enrichment by the theft of . . . goodwill,’ while another branch
deprived a spouse from sharing in that very same protectible interest.”[xxxix]
In essence, the Piscopo Court valued the personal skills, talents
and experience of Joe Piscopo that were enhanced during the marriage by valuing
probable future income that flowed through his corporation. C.
The Valuation Of A Sole Practitioner’s Law Practice - Dugan v. Dugan
In Dugan,[xl]
the husband and wife were married for twenty years. The husband, a member of the New Jersey bar and sole
practitioner, maintained his practice as a professional corporation.
The wife worked as a secretary in the husband’s law office.
The Court held that the goodwill of the husband’s law practice was
subject to equitable distribution, notwithstanding the fact that the husband was
a sole practitioner and there were ethical restraints which prohibited the sale
of his practice. The Court
supported its decision by the following conclusions of law:
(1) The
equitable distribution statute N.J.S.A. 2A:34-23; 23.1 should be
comprehensively interpreted. Goodwill
is property and is an intangible asset that can be valued regardless of the
nature of the enterprise, partnership, corporation, joint venture, individual,
proprietorship.
(2) “Future
earning capacity per se is not goodwill.
However, when that future earning capacity has been enhanced because
reputation leads to probable future patronage from existing and potential
clients, goodwill may exist and have value.”[xli]
The Court noted that, “After divorce, the law practice will continue to
benefit from that goodwill as it had during the marriage.
Much of the economic value produced during an attorney’s marriage will
inhere in the goodwill of the law practice.
It would be inequitable to ignore the contribution of the non-attorney
spouse to the development of that economic resource.”[xlii]
Since the wife contributed to the value of the husband’s practice, she
should be compensated “as if it were represented by the increased value of
stock in a family business.”[xliii]
“When goodwill exists, it has value and may well be the most lucrative
asset of some enterprises.”[xliv]
(3) Most significantly, an
“individual practitioner’s inability to sell a law practice does not
eliminate existence of goodwill and its value as an asset to be considered in
equitable distribution.”[xlv]
D.
The Statutory Factors Set Forth In 2a:34-23.1 Mandate That The Court
Consider Enhanced earning capacity As
A Factor In Awarding Equitable Distribution
Pursuant to N.J.S.A. 2A:34-23.1, enacted in 1988 and amended in
1997, the court shall consider various factors in making an equitable
distribution award. The relevant
statutory factors, if read in pari materia, require the court to
consider enhanced earning capacity as
a factor in awarding equitable distribution.
The most significant factors are: g.
the income and earning capacity of
each party, including educational background, training, employment skills, work
experience, length of absence from the job market, custodial responsibilities
for children, and the time and expense necessary to acquire sufficient
education or training to enable a party to become self supporting at a standard
of living reasonably comparable to that enjoyed during the marriage; h.
the contribution by each party to
the education training or earning power of the other ; i.
the contribution of each party to the acquisition, dissipation,
preservation, depreciation or appreciation in the amount or value of the martial
property as well as the contribution of a party as a homemaker; *
* * o.
the extent to which a party deferred achieving their career goals. . . .[xlvi]
The relevant portions of this statue indicate a desire on the part of the
legislature to consider earning capacity and the contributions of the parties to
earning capacity as a factor in distributing assets.
If the statute is interpreted in an expansive manner, it can be argued
that the Legislature intended the court to consider these statutory factors in
determining an asset’s eligibility
as well as for guidance in distributing the assets to each party.
Without quantifying enhanced earning capacity, how can the court properly consider the
above statutory factors?
Moreover, the statute provides, “in every case, the court shall make
specific findings of fact on the evidence relevant to all issues pertaining to
asset eligibility or ineligibility, asset valuation, and equitable distribution,
including specifically, but not limited to, the factors set forth in this
section.” Hence, it can be argued
that the legislature intended that the asset eligibility should be considered in
the context of the statutory factors.”[xlvii]
Whether the statute is given a broad or narrow interpretation, the
litigants and the court have an obligation to present proofs pertaining to the
relevant statutory factors. In
presenting proofs to the court with respect to equitable distribution, enhanced
earning capacity should be valued and presented as an asset.
At the very least, if enhanced earnings are not viewed as an asset, the
court should consider the quantification of earning capacity as a factor in
distributing the other assets. III.
THE DECISIONAL LAW OF NEW YORK ALLOWS ENHANCED
EARNING CAPACITY TO BE VALUED AS AN ASSET SUBJECT TO EQUITABLE DISTRIBUTION
New York State has been virtually alone in case law development
concerning the classification, valuation and division of enhanced earnings.[xlviii]
New York's decisional law concerning the valuation of enhanced earnings
began with the Court of Appeals’ landmark decision in O'Brien v. O'Brien,[xlix]
which addressed “professional licenses.”
O’Brien has evolved into a broader valuation of “enhanced
earnings,” as illustrated in the cases following O’Brien, up through
last year’s decision in Grunfeld v. Grunfeld.[l]
It is noteworthy that the New York statute, that lists various factors
relevant to equitable distribution, does not include “earning capacity.”[li]
A.
Expansive Definition of Property and Downplaying of Alimony
The line of cases running from O'Brien to Grunfeld are
unique in the nation because, to a large extent, the New York legislature
deliberately went beyond traditional property concepts when it formulated the
Equitable Distribution Law.[lii]
The New York statute recognizes that spouses have an equitable claim to
things of value arising out of the marital relationship and classifies them as
subject to distribution by focusing on the marital status of the parties at the
time of acquisition.[liii]
“Those things acquired during marriage and subject to distribution have
been classified as ‘marital property’ although, as one commentator has
observed, they hardly fall within the traditional property concepts because
there is no common law property interest remotely resembling marital
property.”[liv]
The key cases in New York are summarized as follows: O'Brien
v. O'Brien,[lv]
held that the enhanced earnings associated with a professional license is
property for equitable distribution purposes.
The professional license involved was the husband's newly acquired
license to practice medicine. Golub v.
Golub,[lvi]
involved the “renowned and celebrated film and television actress and model”
Marisa Berenson. In that case, the
New York Supreme Court held that the skills of artisans, actors, professional
athletes or any person whose expertise in his or her career has enabled him or
her to become an exceptional wage earner should be valued as marital property
subject to equitable distribution. The
Court valued and distributed the increase in value of Ms. Berenson’s career
over the time of the marriage, in view of the husband's contributions thereto.
Elkus v.
Elkus,[lvii]
held that the wife's career as an opera singer and/or celebrity status
constituted marital property subject to equitable distribution to the extent
that her husband's contributions and efforts led to an increase in the value of
her career. The court held that
even though certain "things of value" may fall outside the scope of
"traditional property concepts" they still may be considered property
subject to distribution. Further,
even though enhanced skills may grow out of an innate talent, thereby enabling
an artist to become an exceptional earner, those skills may be valued as marital
property subject to distribution. McSparron
v. McSparron,[lviii]
addressed the issue of whether a license that had been exploited by the licensee
(i.e., a license to practice law) to establish and maintain a career may be
deemed to have "merged" with the career and thereby lost its character
as a separate distributable asset. To
the extent that any "merger rule" existed, the McSparron court
eliminated the concept and held that the merger doctrine should be discarded in
favor of the common sense 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.
Hougie
v. Hougie,[lix]
is a one page decision, yet one of the most intriguing.
New York Appellate Court held that a husband's "enhanced
earning capacity" as an “investment banker” was subject to
equitable distribution. Grunfeld
v. Grunfeld,[lx]
held that it was error to base both equitable distribution of one half of
husband’s law license and his obligation to pay maintenance on the same
projected professional earnings. B.
Analysis of O’Brien
The parties in O'Brien were married in 1971, but the husband did
not obtain his license to practice medicine until 1980.
Two months after he was granted said license, he commenced his action for
divorce. Notwithstanding this chronology, the court felt it
appropriate to view the husband's license as an asset subject to distribution
because of the wife’s contributions to the efforts expended in achieving said
asset. It is important to note that
the O'Brien Court emphasized the contributions by each party to their
respective living and educational expenses during the marriage.
The wife's expert valued the husband's medical license at $472,000.
He arrived at this figure by comparing the projected average income of a
college graduate and that of a general surgeon between 1985, when plaintiff's
residency would end, and 2012, when he would reach age 65.
After considering federal income taxes, an inflation rate of ten percent
and a real interest rate of three percent, he capitalized the difference in
average earnings and reduced the amount to present value.
He also gave his opinion that the present value of the wife's
contribution to the husband's medical education was $103,390.[lxi]
The lower court, after considering the lifestyle the husband would enjoy
from the "enhanced earning potential" his medical license would bring
and the wife's contribution and efforts toward attainment of it, made a
distributive award to the wife of $188,800, representing forty percent (40%) of
the value of the license, and ordered it paid in eleven annual installments of
varying amounts beginning November 1, 1982 and ending November 1, 1992.
The O’Brien Court took into consideration the legislative intent
to make an effort to sever the economic ties between the parties by an equitable
distribution of the marital assets. Thus,
the concept of alimony, which often served as a means of lifetime support and
dependence for one spouse upon the other, long after the marriage was over, was
replaced with the concept of maintenance, which seeks to allow "the
recipient spouse an opportunity to achieve [economic] independence."[lxii]
The O'Brien Court noted that: few
undertakings during a marriage better qualify as the type of joint effort that
the statute's economic partnership theory is intended to address than
contributions toward one spouse's acquisition of a professional license. Working spouses are often required to contribute substantial
income as wage earners, sacrifice their own educational or career goals and
opportunities for child rearing, perform the bulk of household duties and
responsibilities and forego the acquisition of marital assets that could have
been accumulated if the professional spouse had been employed rather than
occupied with the study and training necessary to acquire a professional
license.[lxiii]
Additionally, the New York court did not place any weight on the fact
that Dr. O'Brien had not yet started his practice.
The Court continued , "An established practice merely represents the
exercise of the privileges conferred upon the professional spouse by the license
and the income flowing from that practice represents the receipt of the enhanced
earning capacity that licensure allows.”[lxiv]
However, outside the framework of the New York statute, the O'Brien
Court did note that "a professional license is a valuable property right,
reflected in the money, effort and lost opportunity for employment expended in
its acquisition, and also in the enhanced earning capacity it affords its
holder, which may not be revoked without due process of law.”[lxv]
The New York Court entertained the concept of "rehabilitative
maintenance or reimbursement for direct financial contributions" as an
alternative remedy to recognizing the license as property and distributing it in
a divorce case. The Court responded by stating that "the statute does
not expressly authorize retrospective maintenance or rehabilitative awards and
we have no occasion to decide in this case whether the authority to do so may
ever be implied from its provisions. . . .
It is sufficient to observe that normally a working spouse should not be
restricted to that relief because to do so frustrates the purposes underlying
the Equitable Distribution Law."[lxvi]
In opposing the concept that an award of spousal maintenance could
compensate the non-professional spouse, the O'Brien Court stated, Maintenance
is subject to termination upon the recipient's remarriage and a working spouse
may never receive adequate compensation for his or her contribution and may even
be penalized for the decision to remarry if that is the only method of
compensating the contribution. By parity
of reasoning, a spouse's down payment on real estate or contribution to the
purchase of securities would be limited to the money contributed, without any
remuneration for any incremental value in the asset because of price
appreciation. Such a result is
completely at odds with the statute's requirement that the court give full
consideration to both direct and indirect contributions ‘made to the
acquisition of such marital property by the party not having title, including
joint efforts or expenditures and contributions in services as a spouse, parent,
wage earner and homemaker’.[lxvii] C. Celebrity Status Under NY Law
The parties in Golub were married on February 14, 1982.
At the time of the marriage, Marisa Berenson enjoyed enormous entree to
the world of arts and fashion both in her own right and as the granddaughter of
Elsa Schiaparelli, the celebrated couturier. [lxviii]
The Court recognized that throughout the marriage the wife appeared to
have been engaged in pursuing her career both in the United States and abroad,
concededly successfully.[lxix]
The Court recognized that the husband made the following contributions: a)
supervising the home making services; b)
supervising renovations made to marital real estate, as well as the
negotiations and litigation necessary to vacate the rental apartments that were
contained therein; c)
assisting the wife, inter alia, by getting her personal
financial affairs in order at the inception of the marriage and making efforts
throughout the marriage to advance her career.
Specifically,
the Court stated: “Indeed,
plaintiff’s income has significantly increased during the marriage to a point
where she earned in excess of $150,000 in 1987.”[lxx]
The wife opposed the characterization of the increase in value in her
career as an asset by stating that “her celebrity status is neither
‘professional’ nor a ‘license’ and hence not an ‘investment in human
capital subject to equitable distribution.’”[lxxi]
Moreover, the wife in Golub argued that because a career in show
business is subject to substantial fluctuation, it should not be considered.
In disagreeing with the plaintiff’s position, the Court cited to the
decisions in O’Brien and McGowan.[lxxii]
The next celebrity case involved Frederica von Stade Elkus.[lxxiii]
The parties were married for seventeen years and had two children.
Ms. Elkus moved for an order determining, prior to trial, whether her
career and/or celebrity status constituted marital property subject to equitable
distribution. The Appellate Court
held that the wife’s career as an opera singer and/or her celebrity status
constituted marital property subject to equitable distribution to the extent
that the husband’s contribution and efforts led to an increase in the value of
her career. Contrary to the facts
in Golub, at the time of the Elkuses’ marriage, the wife had just
embarked on her career, performing minor roles with the Metropolitan Opera
Company. During the course of the
marriage, her career succeeded dramatically and her income rose accordingly.
In the first year of the marriage, she earned $2,250; in 1989, she earned
$621,878.[lxxiv]
She had become a celebrated artist with the Metropolitan Opera, as well
as an international recording artist and concert and television performer.[lxxv]
The Court noted the husband’s contributions to his wife’s career: a)
Traveling with his wife throughout the world, attending and critiquing
her performances and rehearsals; b)
photographing her for album covers and magazine articles; c)
acting as her voice coach and teacher for ten years of the marriage; d.
sacrificing his own career as a singer and teacher to devote himself to
his wife’s career and to the lives of their young children. The husband
claimed that these efforts enabled her to become one of the most celebrated
opera singers of the world.[lxxvi]
In rejecting Ms. Elkus’s arguments and relying on the cases of O’Brien,
Golub and the New Jersey decision of Piscopo, the Court found that
the enhanced skills of an artist such as Ms. Elkus, albeit growing from an
innate talent, enabling her to acquire exceptional earning capacity which may be
valued as marital property subject to equitable distribution.
Ms. Elkus argued that she had already become successful prior to her
marriage. However, the Court noted
that in the first year of marriage only she earned $2,250.
By 1989, however, her earnings had increased more than 275- fold.[lxxvii]
The Court found that although Ms. Elkus was born with talent, during the
course of the marriage the defendant’s active involvement in the plaintiff’s
career in teaching, coaching, and critiquing her, as well as caring for their
children, clearly contributed to the increase in its value.
Accordingly, to the extent the appreciation in her career was due to the
husband’s efforts and contributions, this appreciation constituted marital
property.[lxxviii]
It is noteworthy that the Court does not provide a valuation methodology
to effectuate their ruling. D. New York Valuation Methodologies
There is truly a paucity of decisional authority giving precise and clear
valuation approaches concerning enhanced earnings.
When addressing valuation, the O'Brien Court stated that although
fixing the present value of the enhanced earning capacity may present problems,
the problems are not insurmountable.[lxxix]
The Court likened the valuation process to those involved when computing
tort damages for wrongful death or diminished earning capacity resulting from
injury. Unfortunately, the high
Court in O'Brien did not provide detail concerning the methodology used
by the wife's expert in determining a value for her husband’s medical license.
After discarding the concept of “merger,” the McSparron Court
also commented upon valuation methodology.
The first admonition is that any valuation must avoid “duplicative
awards.”[lxxx]
The McSparron Court noted that “even 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.”[lxxxi]
As to the precise valuation method, the McSparron Court stated: That value
can be measured and distributed just as a newly acquired license is valued
through various actuarial techniques that are well known to valuation experts.[lxxxii]
The Court provided the following guidance: a)
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; or b)
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 more pragmatic and individualized analysis
based on the particular licensee’s remaining professional earning potential.
The McSparron Court provided the following caveat:
Care must be taken to ensure that the monetary value assigned to the
licensee does not overlap the value assigned to other marital assets that are
derived from the license, such as the licensed spouse’s professional practice. The Court must also be meticulous in guarding against
duplication in the form of maintenance awards that are premised on earnings
derived from professional licenses.[lxxxiii]
This admonition would later be repeated in the Grunfeld decision.
As the Court of Appeals reasoned in O’Brien over 15 years ago,
the complexity of calculating the present value of a partially exploited
professional license is no more difficult than the problem of computing wrongful
death damages where the loss of earning potential that is occasioned by a
particular injury.[lxxxiv]
Nor does it lead to significantly more speculation than which is involved
in the now routine task of valuing a professional practice for the purpose of
making a distributive award.[lxxxv]
Unfortunately, the McSparron court noted that the matter had to be
remanded to the trial court so that a new distribution of the marital assets
taking into account the value of the husband’s law license, could be made.
The intricacies of valuation of enhanced earnings under New York case law
was addressed in an article entitled “Enhanced Earnings Capacity in View of
Grunfeld,” submitted in the course of the Fall 2000 Matrimonial Seminar by
John R. Johnson, CPA, CBA, BCFA. To
paraphrase Mr. Johnson, the challenge of an enhanced earnings valuation has been
to properly convert a future earning stream into property subject to equitable
distribution and then to assure that the value of other items of property, as
well as maintenance and support awards, do not incorporate the same earnings in
their determination.
Mr. Johnson delineated the valuation process as follows: a)
determining the tax impacted enhanced earnings capacity of the holder
attributable to the license or degree, and (b)
the calculation of the present value of these enhanced earnings over the
expected work life of the holder.
Mr. Johnson notes that the preferred practice in New York is to value the
professional practice first and to value the professional license second.
Since the value of the professional practice can be determined within the
parameters of actual practice sale transactions and the risks associated with
the professional practice are more easily identified, the valuation of the
practice is somewhat less subjective than the valuation of enhanced earnings
associated with licenses and degrees. IV.
ARGUMENTS AGAINST THE CONCEPT OF VALUING ENHANCED
EARNING
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