Senators Warren and Cotton Misled by Misleading Report on Broker Check

Two US Senators recently demanded that FINRA explain how it plans to minimize the high rate of brokers who are involved in criminal activity or have been the subject of customer complaints.

Clearly Senators Warren and Cotton are not familiar with how the FINRA U-4 and U-5 process works. In addition, they are probably not overly familiar with the history of federal securities laws. As a brief background, the federal securities laws have been built on and continue to operate on the theory that “sunlight is the greatest disinfectant.” The laws have been built and we continue to operate under a fair market where people are free to make their own informed decisions. Senators Warren and Cotton should look past this misleading data and understand some common realities.

Broker Check lives up to the protections of federal securities law because nearly everyone has access to the internet these days. Before entrusting wealth to another person, every single investor should be smart enough to search the internet and research their investment professional.

The Senators cited a National Bureau of Economic Research (“BER”) working paper that suggested that one in thirteen advisors has a misconduct-related disclosure on their record. However, these Senators have been misled by the statistics.

The reporting process on Broker Check is controlled entirely by the broker-dealer or investment advisory firm and not the employee. The employer has every incentive to over-disclose complaints and rules violations for fear of subjecting the firm to a regulatory investigation by FINRA or their respective state regulator for failing to disclose an otherwise reportable event. I see this every day in my practice. The two most common issues that skew the NBER data are hyper-technical rule violations and bogus customer complaints.

For example, if an employee commits even the most minor rule violation, the employer may discharge an employee and then the firm must disclose the rule violation on the employee’s Form U5. Based on experience, the large broker dealers (Merrill Lynch, Morgan Stanley, and UBS) will protect their brands and images at all costs and get rid of an employee for minor rule violations. In addition, it doesn’t hurt that the firm gets to re-assign the terminated employee’s accounts to the house and reduce their payroll expense.

A perfect example of such minor violation was brought to my attention a couple of weeks ago. A client of mine inadvertently forgot to disclose to their employer that they were named a co-beneficiary to a client’s trust and were not related to the client. This is technically a violation of “industry standards of conduct” and the employee was discharged and the employer disclosed the event on her Broker Check. There were absolutely no allegations of fraud or undue influence that forced the grantor of the trust to name my client as a beneficiary. My client simply failed to read and comprehend a 500 page policies and procedures manual that required her employer’s consent before accepting this gift.

In addition to hyper-technical rule violations the most common events that make the NBER data misleading are spurious customer complaints. Form U4 and U5 require an employer to disclose every single written or verbal complaint made by a client where the client alleges losses over $5,000 subject to certain conditions. For example, assume that a client has a million dollars invested in the market and the market loses one-half-of-one-percent (.5%) overnight. Now assume that client is unhappy with his adviser. The client complains that his portfolio was unsuitable because he should not have been invested in a broad based market ETF. Now that advisor has an ugly disclosure on his Broker Check that will follow him the rest of his career.

If FINRA and its members and the advisor community had a bit more flexibility to determine whether complaints and rules violations actually had merit or whether an employee’s actions needed to be disclosed to the public, the NBER data would not appear so frightening.

Neither Senators Warren nor Cotton is subject to this ridiculous regime. As a former legislative aide myself, I know from experience. There wouldn’t be enough servers in the world if politicians had to disclose every constituent or lobbyist complaint to the public on a specific website. At some point, we need to take a sensible approach and place our trust back in humanity and people.

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When a Bus Company Won a Constitutional Challenge to a Tax, But Still Lost

Thiry years ago today, the Supreme Court decided Continental Trailways, Inc. v. Director, Div. of Motor Vehicles, 102 N.J. 526 (1986). Trailways, a large bus company, sued to declare New Jersey’s Bus Excise Tax, N.J.S.A. 48:4-20, unconstitutional as unlawfully discriminating against interstate commerce. The purpose of the tax, as summarized in Justice Garibaldi’s majority opinion, “was […]

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n a Big Taxpayer Won a Constitutional Challenge to a Tax, But Still Lost

Thiry years ago today, the Supreme Court decided Continental Trailways, Inc. v. Director, Div. of Motor Vehicles, 102 N.J. 526 (1986).  Trailways, a large interstate bus company, sued to declare New Jersey’s Bus Excise Tax, N.J.S.A. 48:4-20, unconstitutional as unlawfully discriminating against interstate commerce.  The Tax Court and the Appellate Division agreed with trailways, invalidated the […]

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An Important Religion Case for the Supreme Court

American Civil Liberties Union of New Jersey v. Hendricks, ___ N.J. Super. ___ (App. Div. 2016).  In 1978, the Supreme Court decided Resnick v. East Brunswick Bd. of Educ., 77 N.J. 88 (1978).  That case found unconstitutional for public schools to allow religious organizations to use school facilities at night or on weekends for religious […]

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Gun Control Act is Constitutional as Applied to Machine Guns, and a Trust That Owns a Machine Gun is Subject to That Law

United States v. One Palmetto State Armory PA-15 Machinegun, ___ F.3d ___ (3d Cir. 2016).  Constitutional challenges to gun regulations are frequently filed, and most of them are without basis.  This decision, written by Judge Thompson, who was sitting in the Third Circuit by designation, is another one of those cases.  It arose out of […]

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A Tour Through the Federal Rules, and Dismissal of an Appeal as Untimely

State Nat’l Ins. Co. v. County of Camden, ___ F.3d ___ (3d Cir. 2016).  The case underlying today’s 2-1 decision involved claims of legal malpractice.  The procedural history was a tortuous one.  Ultimately, applying a “strict” view of a number of rules of procedure, the majority (Judge Fisher authored the opinion, in which Judge Chagares […]

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Distribution of Personal Injury Proceeds to Heirs of a Decedent’s Estate

In general, if there is a personal injury action concerning the death of the Decedent it is typical that two types of claims are asserted in this action. The first claim is typically a wrongful death claim, and the second claim may be a survivorship claim. In general, the survivorship claim is distributed in accordance with the Decedent’s Last Will and Testament. Thus, the proceeds from the settlement or judgment are typically paid to the beneficiaries of the Decedent’s Estate in the percentage set forth under the Last Will and Testament. That is because the survivorship claim is deemed to be property of the Decedent’s Estate. The other claim which is brought, the wrongful death claim is not distributed in the same fashion to heirs of the Estate.

In a wrongful death claim, the proceeds realized from the personal injury lawsuit are not distributed in accordance with the terms of the Will. Instead, these proceeds are distributed in the same fashion as if the Decedent had died without a Will. This may result in a different distribution of the proceeds had they been distributed pursuant to the Last Will and Testament, as an heir or a child of the Decedent may not be a beneficiary under the Will, however, they would nonetheless receive a pro rata share of the proceeds from the wrongful death claim.

As such, in determining how the proceeds from a personal injury lawsuit may be distributed to the heirs or children of a Decedent, is important that both the Will, as well as all potential heirs of the Decedent’s Estate be considered. If there are any questions as to whether a beneficiary and/or heir of the Decedent should receive proceeds from a personal injury action, it is suggested that you consult with an attorney.

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“All I Really Need to Know I Learned in Kindergarten” and the New Jersey Supreme Court Committee on Character

In 1989, Robert Fulghum came out with a book titled “All I Really Need to Know I Learned in Kindergarten.”  The book became a best-seller.  It contained such wisdom as “Play fair,” “Don’t hit people,” and “Say you’re sorry when you hurt somebody.”  Twenty years ago today, the Supreme Court emphasized the importance of those […]

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Judge Hardiman on Trump’s Supreme Court Short List

Presumptive Republican Presidential nominee Donald Trump had promised months ago to announce a “short list” of his potential United States Supreme Court nominees.  Especially in recent days, conservatives concerned about Trump’s bona fides as a “true conservative” have been pressing him to fulfill that commitment. Today, Trump announced a list of eleven names.  He said […]

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Third Circuit Calls for Full Briefing and Oral Argument as to Disclosure of Bridgegate Unindicted Co-Conspirator List

In connection with the upcoming Bridgegate trial of Bill Baroni and Bridget Kelly, news outlets had asked Judge Wigenton, who is handling the matter in the District Court, to release to the public a list of names of unindicted co-conspirators.  That list has been provided to defense counsel.  Judge Wigenton ordered that the list be […]

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The U.S. Supreme Court Has Spokeo, and Class Action Defendants’ Fondest Hopes Have Been Dashed

Spokeo, Inc. v. Robins, ___ U.S. ___ (2016).  Class action defendants often label cases seeking statutory damages as “no-injury class actions.”  Those defendants do not like statutes such as the Fair Credit Reporting Act, 15 U.S.C. §1681 et seq. (“FCRA”), which was at issue in yesterday’s Supreme Court decision.  Defendants hoped that this case would wipe out […]

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Divorce Arbitration—The Time Is Now

The bad news:

The Courts are backlogged; Judges are overworked; decisions are delayed; and appeals can take years.

The good news:

You can opt out of the above by submitting your case to divorce arbitration; a forward-looking method of dispute resolution which has gained popularity in New Jersey and many other states.

The most important benefits of divorce arbitration are:

1. The case is heard by an experienced retired Judge or a practicing family law attorney who has been trained (and in some cases certified) as a divorce arbitrator instead of a Superior Court Judge who, in addition to dealing with the problems outlined above, may very well have no experience in family law.
2. The case is presented in accordance with the Rules of Evidence as if it were a courtroom trial. The arbitrator is empowered to make findings of fact and conclusions of law just as a Judge would do.
3. The case is presented more efficiently since there are no delays.
4. The arbitrator’s decision is rendered in a timely manner.
5. Except in very limited circumstances, the arbitrator’s decision is binding.

My experience as an attorney in divorce arbitration cases and as a divorce arbitrator is overwhelmingly positive. Of course there are issues to resolve before arbitration can commence, such as arrangements for payment of the arbitrator’s fees; however, these issues are usually not difficult to resolve in light of the numerous benefits afforded by the process. Divorce arbitration—the time is now.

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A “Chicken-and-Egg Problem” of Subject Matter Jurisdiction in an Estate Case

In re Estate of Byung-Tae Oh, ___ N.J. Super. ___ (App. Div. 2016).  In 2001, the decedent in this estate matter, Byung-Tae Oh, at all times a citizen of South Korea, wired $900,000 of his money into the business account of B&H Consulting and Development Company, LLC.  One of the decedent’s sons, Hyung Kee Oh, […]

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Common Pitfalls Made by Executors of Estates

Typically the Executor of an Estate named by a Will has little or no prior experience in administering an Estate. As such, this somewhat complex process leads to the possibility of errors being made by the Executor or Executrix—and that could result in litigation. The purpose of this blog is to advise you of potential pitfalls to avoid if you are the Executor or Executrix of an Estate.

The first major pitfall is that the Executor/Executrix must make sure that they are properly qualified by the County Surrogate to serve as the Executor/Executrix of the Will prior to taking any actions. This is done by delivering a copy of both the Last Will and Testament and a Death Certificate to the County Surrogate; thereafter qualifying as the Executor of the Estate. Afterward, the Executor must be careful to notify all potential heirs of the Estate, not just those referenced under the Last Will and Testament. Sometimes the Executor may neglect to notify all potential heirs which results in complications. This is a typical error which could result in litigation if these individuals are not notified but have a claim.

Another important task an Executor must undertake is to open an Estate account which is solely for the Estate. At times, an Executor/Executrix will make the error of combining an Estate account with his/her own personal account. This comingling of Estate assets with personal assets could result in unnecessary litigation and confusion in the Administration of the Estate. As such, a separate Estate account must be opened. Prior to making any distributions, an Executor/Executrix must ensure that all appropriate and necessary state and federal taxes have been paid. A common mistake occurs when partial distributions are made prior to taxes being finalized. Should this occur and there is a shortfall, this can result in penalties being assessed against the Estate, or disgruntled heirs of the Estate refusing to pay back the mis-distributed bequests.

The final point that will be discussed during this post, and one that is often rife with conflict in the context of estate litigation, involves Executors keeping appropriate records. In administering an Estate it is essential that the Executor maintain meticulous records, consisting of receipts, checks, and other documents evidencing payments made on behalf of the Estate. If this is not done it is almost guaranteed that the formal or informal accounting will be challenged by beneficiaries of the Estate. This may result in litigation that could have been easily avoided had these records been preserved.

The information above serves as a partial guide to potential pitfalls that may be experienced when one functions as Executor/Executrix of an Estate. It is suggested that if you are appointed an Executor you consult with an experienced attorney to seek their counsel on serving as Executor of the Estate.

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U.S. Senate Committee on Finance Hearing Discusses Combatting the Counterfeiting Industry

On Wednesday, May 11, 2016, the United States Senate Committee on Finance held a hearing on the oversight of the U.S. Customs and Boarder Protection Agency. Amongst several other subjects, the hearing discussed the ongoing efforts to dismantle the extremely costly counterfeiting industry. Attorneys across the country have been working tirelessly to protect and defend companies against copyright infringement from perpetrators who are typically located on the other side of the globe. One such attorney is Stark & Stark Shareholder Craig S. Hilliard, who has spent the past several years defending businesses in the bridal and wedding industry against these same counterfeiters.

At the hearing, U.S. Senator Robert Menendez (NJ) explained that, according to the Organization for Economic Co-operation and Development (OECD), of “the half a trillion dollars made of counterfeited goods, the U.S. is the biggest victim.” Approximately 20% of these goods are purchased and sent to the U.S., and most are typically sent as postal parcels, so as to remain undetected.

Senator Menendez also announced that a customs bill he co-authored had been passed by the Senate, and included language to “raise enforcement priority for parcels, especially those marked as ‘gifts’ to evade customs duties and detection.” In this explanation, Senator Menendez showed two DHL and FedEx packages, which were case exhibits used in litigation that Mr. Hilliard has been handling on behalf of the Bridal and Prom Industry Association. The exhibits were used by Senator Menendez to illustrate the point that offshore distributors have been utilizing parcel post methods to traffic counterfeit products into the United States by disguising them as “gifts,” citing his own New Jersey constituents as victims of this fraud.

Mr. Hilliard is a member of the Commercial Litigation Group and Chair of the Intellectual Property Group at Stark & Stark. He specializes his practice in the area of federal civil litigation.

You can watch the full recording of the U.S. Senate Committee hearing on the Committee on Finance website.

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The “Installment Contract” Approach to the Statute of Limitations

In re Estate of Balk, ___ N.J. Super. ___ (App. Div. 2016).  Mark Roseman was the executor of a decedent’s estate.  The decedent’s two sons sued Roseman for breach of fiduciary duty in connection with his activities regarding the estate.  In 2007, Roseman and the sons reached a settlement agreement, under which Roseman signed a […]

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45 Years Since Donadio v. Cunningham

In the federal system, Justice Brandeis’ concurrence in Ashwander v. TVA, 297 U.S. 288 (1936), has been the source most often cited for the principle that courts will avoid reaching constitutional issues when cases can be decided on other grounds.  That concurrence catalogued a series of prior statements by the Court or individual Justices that […]

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The Facts Require Reversal of a Summary Judgment of Qualified Immunity

Winberry Realty Partnership v. Borough of Rutherford, 2016 N.J. Super. Unpub. LEXIS 1019 (App. Div. May 4, 2016).  [Disclosure:  I represented the successful plaintiffs-appellants on this appeal].  Qualified immunity is a significant defense that is available to defendants in cases under the federal Civil Rights Act, 42 U.S.C. §1983, and the New Jersey Civil Rights […]

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Uniform Federal Protection for Trade Secrets Under the Newly Passed Defend Trade Secrets Act Of 2016

Trade secrets, amorphously defined as any confidential business information which gives an enterprise a competitive edge, have not had much federal protection as compared to other intellectual property vehicles such as copyrights, trademarks and patents. Traditionally, trade secret misappropriation cases have been litigated in state court using state law. Even though the majority of states have adopted the Uniform Trade Secrets Act (“UTSA”), there are still notable differences among the various version of the UTSA implemented by the individual states. This has resulted in inconsistent and sometimes contradictory decisions regarding what a state court considers a “trade secret,” what constitutes “misappropriation” of a trade secret, and what the proper recourse is for a proven misappropriation.

In April 2016, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA” or “Act”), which creates a private cause of action in federal court for companies and individuals seeking to stop potential trade secret misappropriation or to recover damages for actual misappropriation. Most significantly, the DTSA creates uniformity in an arena riddled with uncertainty and state court scrimmages over which state’s law applies and how. The Act creates a level playing field for trade secret litigants and ensures a level of consistency and reliability for adjudication of claims brought in the federal district courts across the country.

The DTSA provides an owner of a trade secret a powerful new mechanism for physically reclaiming trade secrets from a party accused of misappropriation. Upon a showing of “extraordinary circumstances” and only when traditional injunctive relief would be inadequate to protect the owner’s interests, a plaintiff may obtain a seizure order to prevent “dissemination of the trade secret.” The seizure applicant must put up security to obtain the order of seizure and a party who suffers damage as a result of a wrongful seizure has a private cause of action against the seizure applicant for actual damages sustained.

While the DTSA provides for injunctive relief, such relief is limited in order to not hinder employee mobility. Specifically, injunctive relief is not available “to prevent a person from entering into an employment relationship,” unless there is clear evidence of actual or threatened misappropriation. Sensitive business information known to the employee is not enough to trigger injunctive relief – there must be proof of actual or potential misappropriation of that information. Any injunctive restrictions placed on an employee must be tailored to protect against misappropriation and cannot be used as a back door alternative to enforcing a non-compete. Finally, the Act does not allow injunctions that “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

In addition to injunctive relief, the DTSA provides for compensatory damages, exemplary damages, and attorney’s fees, but makes an award of exemplary damages and attorney’s fees contingent on an employer’s disclosure to its employees of the DTSA’s immunity provision, which permits an employee to disclose a trade secret to a government official or to an attorney as part of an anti-retaliation suit or as part of an investigation into suspected wrongdoing. Employers are therefore encouraged to update their employee handbooks and employment contracts to reflect the immunity notice requirements of the DTSA.

Finally, while the Act provides a new federal cause of action for trade secret misappropriation, it does not preempt or supersede current state laws or state court actions on trade secrets. This means a trade secret owner will have the option of bringing state law claims in state court or proceeding in federal court under the DTSA. This procedural dichotomy will undoubtedly result in forum shopping and may give plaintiffs the ability to choose the most favorable forum for their needs.

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Catching Up With the Supreme Court

This has been a busy past ten days for the Supreme Court.  Unfortunately, that busy period coincided with one of my own busy periods.  So here is a very brief recap of some of the actions that the Court took since April 26: In Innes v. Marzano-Lesnevich, ___ N.J. ___ (2016), a closely-watched case, the […]

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Stark & Stark Sponsors the 2016 Central New Jersey Kidney Walk

Stark & Stark is pleased to sponsor the 2016 Central New Jersey Kidney Walk.  This year the walk will take place on May 22, 2016 in Mercer County Park in West Windsor Township.  Check-in time for the event is 8:30 a.m.   Stark & Stark attorneys Joseph Lemkin and Rachel Stark will be participating in the walk with a client-supported team.

The Kidney Walk is held nationwide every year to raise awareness and funds to fight kidney disease.  Donations are used for community screenings, patient services and education on kidney conditions, diseases, and cures. Eighty percent (80%) of all funds raised are directed to these programs.  The fundraising goal this year is $120,000.  Signing up to join a team or as an individual walker is simple and free.   Volunteers are appreciated as well—for more information contact mary.sullivan@kidney.org or sign up online.

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Say What You Mean – 3 Easy Steps to Avoid Ambiguous Agreements

Have you ever read a confusing contract and scratched your head? Whether it is a lease, operating agreement, or other contract, it is imperative to understand what you want. It is also important to negotiate and draft agreements quickly to avoid losing opportunities. Failure to clearly say what you mean can result in unexpected costs, disputes and lawsuits.

1. Avoid Ambiguous Words

Black’s Law Dictionary states that language in a contract is “ambiguous” when it is reasonably capable of being understood in more than one sense. An easy tip is to avoid ambiguous words. However, this can be a challenge, since even words that seem clear to you, may not be clear to others.

For example, Black’s Law Dictionary includes two (2) different definitions of the word “shall.” The first definition is generally mandatory and can mean “must,” but the second definition is merely permissive and can mean “may.” These different definitions of the same word can lead to confusion. Even one small ambiguity with a word like “shall,” could be a big problem, since it is often used many times in many agreements. To prevent problems, some businesses, government agencies, and others, have recently replaced or defined ambiguous words in their agreements to ensure that their agreements say exactly what they mean.

2. Avoid Ambiguous Drafting

Another way to avoid ambiguity is to ensure that all of the language in your agreements is clear. In addition to carefully choosing your words, you can also ensure that your other language is capable of clearly being understood. For example, an agreement that simply states that one party “must make repairs” can be ambiguous if it is not clear exactly what repairs are required, and whether maintenance and replacements are also required.

3. Include Adequate Legal Language

It is also important to include adequate protections in your agreements to reduce risks and limit losses. For example, you can include a clause with sufficient language to ensure that any ambiguity will not be interpreted against you as the drafter of the document. You can also seek to include other protections, such as a remedy in the event a portion of your agreement is deemed invalid or unenforceable, and protections to limit your liability, legal fees and expenses in the event of a dispute.

If you want to avoid any ambiguity, you can improve and update your agreements. This is a good idea, since avoiding ambiguity can prevent problems, save time and money, and strengthen relationships. Experienced counsel can help you to avoid ambiguities and achieve your goals.

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When it Comes to Enforcement, Act NOW Not Later

A recent unpublished decision, Strunck v. Figueroa, serves as a not-so-gentle reminder that sometimes an enforcement application can be “too little, too late,” and that it is imperative to be proactive to protect your rights under a divorce decree or agreement, especially when your adversary acts in bad faith.  In Strunck, a 2011 divorce decree awarded the plaintiff $23,369, which was to be transferred from the defendant’s retirement account.  Before the plaintiff could act to collect the $23,369, however, the defendant withdrew the money from the retirement account.  In fact, the funds were withdrawn by the defendant before the divorce decree was entered, and the defendant did not disclose this.

Any family law attorneys out there may be thinking that this is an “easy” enforcement motion given there was a clear violation of the decree and an obvious bad faith attempt to shortchange the plaintiff his $23,369.  And that may have been true but for what happened next.

The defendant in Strunck didn’t just keep the money and go on her merry way.  About four months after the entry of the divorce decree, she filed for bankruptcy and, significantly, listed the plaintiff as a creditor with a claim of $23,269 incurred as a result of the August 2011 divorce decree.  The plaintiff was appropriately notified of the bankruptcy petition and the inclusion of the $23,369 as an unsecured claim in that petition.  He sought the counsel of a bankruptcy attorney, and claimed that the bankruptcy attorney told him not to pursue legal action against the defendant.  If the plaintiff is to be believed in this regard, then, incredibly, the bankruptcy attorney failed to advise him that the Federal Rules of Bankruptcy Procedure, Rule 4004(b), allow a creditor to contest the dischargeability of a debt by filing “a complaint . . . objecting to the debtor’s discharge . . . no later than 60 days after the first date set for the meeting of creditors under section 341(a)” or as extended by the Court.  In other words, the plaintiff had the opportunity to contest the discharge of the debt the defendant owed him in the amount of $23,369, but did nothing to prevent the discharge of the debt.  As a result of his failure to contest it, the debt was discharged by the Bankruptcy Court.

Despite doing nothing to contest the bankruptcy petition in December 2011, the plaintiff filed a complaint against the defendant in the Law Division in July 2013.  By this time, over a year had passed after the debt was discharged.  The complaint was dismissed.  Not finding any relief in the Law Division, the plaintiff then filed a motion to enforce the divorce decree in the Family Division.  Apparently ignoring the fact that the debt had already been discharged, the plaintiff argued that the debt COULDN’T be discharged.  He argued that the defendant made a false statement on her bankruptcy petition when she alleged that she was not “holding the property of another.”  The plaintiff contended that, actually, she was holding his property, or the $23,369 that should have been his under the divorce decree…even though the debt to him no longer existed…because it had been discharged…because of his failure to contest the bankruptcy petition.  The plaintiff’s application was denied (actually, it was denied twice; not accepting the Court’s decision, the plaintiff re-filed his application a second time and the Family Court denied it a second time).

As the Appellate Division succinctly put it:  “Plaintiff’s argument rests upon the flawed premise that he could utterly ignore the bankruptcy proceeding and pursue the funds awarded to him in the divorce decree through enforcement proceedings in the family court.”  The Appellate Division reasoned that the plaintiff ignored his recourse to do anything about the bankruptcy proceeding, and he can’t now enforce a debt that was discharged.  It was simply too little, too late.

In this case, try as the plaintiff might, he could not win given his failure to preserve the debt.  Had the plaintiff contested the bankruptcy petition when he was notified of it, he may not only have been able to get the $23,369 he was owed, but perhaps could have obtained sanctions against the defendant for her bad faith theft of the money.  The lesson here is that it is important to proactively preserve your rights under a divorce decree or agreement; it is not enough to later say that you were owed money or that something should have been done pursuant to the agreement, when you ignored your earlier recourse to preserve your rights.

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Jessica C. Diamond is an associate in the firm’s Family Law Practice, resident in the Morristown, NJ, office. You can reach Jessica at (973) 994.7517 or jdiamond@foxrothschild.com.

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If You Agree that Alimony Terminates on Cohabitation, It Really Terminates on Cohabitation, Even If the Cohabitation Ends

The impact of cohabitation on alimony is often one of the most difficult clauses to negotiate in a marital settlement agreement.  The payor always wants the agreement to read that alimony shall terminate upon cohabitation, while the recipient, if they are allowed to agree to anything, might agree to allow the payor to seek to modify alimony “in accordance with the law”.  Generally, “the law” would be an economic benefits test – i.e. is the alimony recipient receiving an economic benefit by virtue of the cohabitation and/or is she providing one to her cohabitant.

That said, at least since 1999, when the Konzelman case came was decided by the Supreme Court, that agreements to terminate alimony based upon cohabitation are enforceable if cohabitation is proven and the “the cohabitation provision of the marital settlement agreement [sic] was voluntary, knowing and consensual.”

But what happens in a case with a clear cohabitation clause requiring termination, where the cohabitation ends, perhaps because of the litigation, or simply because the relationship ran its course?  Should the alimony recipient be entitled to start receiving alimony again?  Today, the Supreme Court answered that question in the negative in the case of Quinn v. Quinn.  Put another way, the law is now clear that if you have a termination clause and you cohabit, alimony is over, even if the cohabitation ends.

In Quinn, the parties divorced in 2006 after a 23 year marriage.  Per their Property Settlement Agreement (PSA), the wife was to receive permanent alimony of approximately $68,000 per year plus Cost of Living Increases.  The PSA stated that “alimony shall terminate upon the Wife’s death, the Husband’s death, the Wife’s remarriage, or the Wife’s cohabitation, per case or statutory law, whichever event shall first occur.”  The wife started cohabiting in January 2008.  The cohabitation included all of the usual indicia of cohabitation – including the fact that the cohabitant maintained his own home – apparently for appearances only.  PRACTICE NOTE:   Finally a case that seemingly looks past the fiction of a separate residence that the cohabitant has access to but really doesn’t live at.

About a month after the motion to terminate alimony was filed, the cohabitation allegedly ended.  Though cohabitation was found to occur, the trial court’s decision deviated from the PSA.  Specifically,

Having determined that Cathleen and Warholak had cohabited, the trial court invoked its equitable powers and suspended alimony for the period of cohabitation — from January 2008 until April 2010 — but declined to terminate alimony permanently. The trial court based its decision on the great difference in incomes between Cathleen and David, concluding that Cathleen was “entirely dependent on her alimony for her support.”

 

However, because the court found her not credible in her testimony, that she had litigated in bad faith, and that she had falsely denied cohabitation, the payor was awarded $145,536.74 in legal fees.  Both parties appealed but the Appellate Division affirmed.  Both parties sought Certification from the Supreme Court but only the payer’s Petition was granted on the issue of “whether the trial court properly invoked its equitable power to modify the clear and unequivocal terms of a PSA entered knowingly and voluntarily by both parties.”

The Supreme Court reversed deciding:

In sum, we reiterate today that an agreement to terminate alimony upon cohabitation entered by fully informed parties, represented by independent counsel, and without any evidence of overreaching, fraud, or coercion is enforceable. It is irrelevant that the cohabitation ceased during trial when that relationship had existed for a considerable period of time. Under those circumstances, when a judge finds that the spouse receiving alimony has cohabited, the obligor spouse is entitled to full enforcement of the parties’ agreement. When a court alters an agreement in the absence of a compelling reason, the court eviscerates the certitude the parties thought they had secured, and in the long run undermines this Court’s preference for settlement of all, including marital, disputes. Here, there were no compelling reasons to depart from the clear, unambiguous, and mutually understood terms of the PSA. We therefore reverse the judgment of the Appellate Division.

In noting that Courts have greater discretion in interpreting marital agreements, the Supreme Court reiterated that, “An agreement that resolves a matrimonial dispute is no less a contract than an agreement to resolve a business dispute.”  Of course, the court failed to correlate this statement with the famous quote from the landmark Lepis case that “contract principles has no place in the law of domestic relations” but I digress.

The Supreme Court was clear to point out that this case was decided based upon the law in effect at the time of the Agreement, not the 2014 amendments to the alimony statute.  It bears repeating that under the new statute, alimony may be suspended or terminated if there is cohabitation.

In equating this to remarriage, the Supreme Court noted:

Furthermore, Cathleen continued to cohabit with Warholak after David filed the motion to terminate alimony and still cohabited with him when the trial commenced. This record presents a situation no different from a remarriage that terminates by death or divorce. In light of the parties’ agreement that alimony would terminate upon cohabitation, the circumstances here do not call for a different result.

The Supreme Court rejected the notion that this type of provision allows a payor to control the alimony recipient, holding:

Finally, we reject the suggestion that enforcement of this cohabitation agreement permits a former spouse to control the post-marital conduct of the other spouse. Such a contention misconstrues the purpose of identifying cohabitation as an alimony-termination event and also misconstrues this record. When parties to a matrimonial settlement agreement have agreed to permit termination of alimony on remarriage or cohabitation, they have recognized that each are equivalent events. In each situation the couple has formed an enduring and committed relationship. In each situation, the couple has combined forces to mutually comfort and assist the other. The only distinction between remarriage and cohabitation is a license and the recitation of vows in the presence of others. When the facts support no conclusion other than that the relationship has all the hallmarks of a marriage, the lack of official recognition offers no principled basis to treat cohabitation differently from remarriage as an alimony-terminating event.

We do not today suggest that a romantic relationship between an alimony recipient and another, characterized by regular meetings, participation in mutually appreciated activities, and some overnight stays in the home of one or the other, rises to the level of cohabitation. We agree that this level of control over a former spouse would be unwarranted and might violate the no-obligation clause found in many divorce agreements.  However, the romantic relationship described above is not the long-term relationship presented in this voluminous record.

Finally, this case is unusual in that Justice Albin filed a strong dissent (which will be the subject of a separate post on this blog), about the harsh result on the recipient here.  The majority responded:

Our dissenting colleagues highlight the financial consequences of this decision to Cathleen. To be sure, those consequences are serious. Yet the record demonstrates that she knew that cohabitation would risk the loss of her primary source of income and, recognizing the consequences, she proceeded to cohabit with Warholak. She, not the Court or her former husband, exacerbated her financial situation by quitting her job and fashioning a defense that was found baseless by the trial court.  (Emphasis added)

In rejecting the dissent’s feeling that an economic benefit test should always be applied, the majority noted:

We also cannot subscribe to the view advanced by our dissenting colleagues that applying the Gayet economic reliance or dependence rule is somehow less intrusive in the personal life of the former spouse. There are few exercises more intrusive than the need to identify every expenditure and the source of the funds for each expenditure. Such an inquiry reveals a vast amount of personal information about the daily life of the former spouse that is of no concern to the obligor spouse. Moreover, sixteen years ago in Konzelman, this Court declined to import the Gayet economic dependence or reliance rule when the parties have agreed in a marital settlement agreement that cohabitation is an alimony-termination event. We discern no basis to depart from that determination. (Emphasis added)

In the past, and maybe even currently, far too many cases settled with vague language requiring termination in accordance with the law – without setting forth which law.  Quinn evidences that that was a dangerous practice for the recipient.

_________________________________________________________

Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Roseland and Morristown, New Jersey offices though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com. Connect with Eric:  

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Michael G. Donahue, III, Esq. Elected Managing Shareholder of Stark & Stark

Stark & Stark is pleased to announce the election of Michael G. Donahue, III, Esq. as Managing Shareholder of the firm, effective May 1, 2016.  In this new leadership role, Mr. Donahue will oversee the day-to-day operations and long-term strategic planning of the firm.  His election to Managing Shareholder coincides with his upcoming June installation as President of the New Jersey Association for Justice (NJAJ) for the 2016-2017 term, where he also serves as co-chair of NJAJ’s Amicus Curiae Committee.

Mr. Donahue, who has been with the firm since 1995, is certified by the Supreme Court of New Jersey as a Civil Trial Attorney and focuses his practice on products liability and serious personal injury litigation. He is a prolific legal presenter, a member of several New Jersey-based law associations, and very active in area charitable and philanthropic organizations, including Boheme Opera New Jersey, the Trenton Area YMCA, the Greater Princeton Youth Orchestra, and Theater Exile in Philadelphia, Pennsylvania.

On his role in helping shape the future of Stark & Stark, Mr. Donahue said, “I’ve spent my entire professional life as a lawyer at Stark & Stark.  I sincerely believe that our strength comes from the values and vision we commonly share—hard work, compassion, unparalleled client service, and extraordinary client results.”

“Michael has a long and distinguished history with the firm, and he has proven time and time again his devotion to our work and our clients,” remarked Shareholder John A. Sakson, chair of the firm’s Personal Injury practice.

“As the firm looks to the future, poised for growth and prosperity, selecting Michael as our new Managing Shareholder was both an obvious and a smart decision for the firm,” said Lewis J. Pepperman, Shareholder and chair of the firm’s Business Group practices.

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Supreme Court Will Review Firemen’s Association OPRA Case

The Supreme Court announced on Friday that it had granted review in In re New Jersey State Fireman’s Ass’n Obligation to Provide Relief Application, 443 N.J. Super. 238 (App. Div. 2015).  The Appellate Division’s decision is discussed here.  The case is also known as New Jersey Fireman’s Ass’n v. Doe.  The question presented, as phrased […]

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