Debunking the Myth That Percentage Used in the So-Called “Alimony Rule of Thumb” Should Go Down as the Payer’s Income Goes Up

It has been said over and over again that there are no formula’s to determine alimony.  As I have blogged in the past, other than one legal malpractice referencing the formula or “rule of thumb”, virtually every time the Appellate Division gets a case where a formula was used, the case is reversed because the use of formulas is not permitted.  Rather, courts are required to analyze the statutory factors which are as follows;

 (1)The actual need and ability of the parties to pay;

(2)The duration of the marriage or civil union;

(3)The age, physical and emotional health of the parties;

(4)The standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other;

(5)The earning capacities, educational levels, vocational skills, and employability of the parties;

(6)The length of absence from the job market of the party seeking maintenance;

(7)The parental responsibilities for the children;

(8)The time and expense necessary to acquire sufficient education or training to enable the party seeking maintenance to find appropriate employment, the availability of the training and employment, and the opportunity for future acquisitions of capital assets and income;

(9)The history of the financial or non-financial contributions to the marriage or civil union by each party including contributions to the care and education of the children and interruption of personal careers or educational opportunities;

(10) The equitable distribution of property ordered and any payouts on equitable distribution, directly or indirectly, out of current income, to the extent this consideration is reasonable, just and fair;

(11) The income available to either party through investment of any assets held by that party;

(12) The tax treatment and consequences to both parties of any alimony award, including the designation of all or a portion of the payment as a non-taxable payment;

(13) The nature, amount, and length of pendente lite support paid, if any; and

(14) Any other factors which the court may deem relevant.

That said, the rule of thumb, or as I have called it, the “dirty little secret”, still exists in practice.  Prior to the 2019 change in the taxability/deductability of alimony that was part of the Tax Cut and Jobs Act, you would commonly see the rule of thumb being applied as one-third of the difference between the payer’s income and the recipient’s income (or imputed income), though supposedly a lower percentage was used in South Jersey for some unknown reason.  That said, and by way of example, if the payer earned $350,000 and the recipient earned $50,000, the alimony under the “rule of thumb” was $100,000 per year.

Query how any rule of thumb squares with factor 4, “The standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other.”  Necessarily, the payer will have the ability to have the greater lifestyle than the recipient because they will have more net after tax dollars, whether the alimony is taxable, or not.  When the parties have no children or the children are grown, the results of the “rule of thumb look more stark when juxtaposed against this factor.  When there is child support paid to the recipient, it would not be uncommon for the parties’ net after tax cash flows to look similar – ignoring for a moment that on the payer’s side, that cash flow is meant to support one person, while on the recipient side, the cash flow would be to support the recipient and the children.

Aside from the tax issue addressed herein (and people used to say 1/3 for the husband, 1/3 for the wife and 1/3 for the government – though the numbers never actually worked that way), what is the justification for giving the income earner more than the recipient in light of Crews v. Crews (the seminal Supreme Court case addressing marital lifestyle) and factor #4?  For more than two decades, I have heard things like “you have to give the guy a reason to get out of bed in the morning” or “he’s the one earning the money” as reasons given by judges and mediators.  Additionally, now that the issue of a “savings component” of alimony is more of a consideration in high income/high asset cases after the Lombardi case in 2016, when combined with Crews and factor #4, shouldn’t the recipient be arguing for an alimony award that puts the parties in equipoise?  That said, despite that statement in the statute, there is no case at this point that stands for the proposition of income equalization – though I have heard the argument since factor #4 was amended in 2014.

But back to these thorny rules of thumb.  Since January 1, 2019, when the changes in the tax code began to affect alimony making it no longer deductible to the payer or includable in the recipient’s income, practitioners began clamoring for the new “rule of thumb.”  I have heard, 22%, 25%, 27%, somewhere between 22% and 27%, and even as low as 20% of the difference between the incomes (or imputed income).  I then began to hear that the higher the income, the lower the percentage because of the higher tax rates.  At first, that seemed plausible, but when put to the test – especially when compared to factor 4 – that myth can be debunked.

Lets start with the same incomes from above – $350,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $75,000 per year; using 22%, it is $66,000.  At 25%, the net after tax split is 55%-45%; at 22%, it is 58%-42%.  In this case at 22%, the payor has $148,644 net after tax cash flow per year and the recipient has $106,668 or $41,976 less ($3,498 per month).  At 25%, the difference is only approximately $24,000 ($2,000 per month).

If we use $500,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $112,500 per year; using 22%, it is $99,000.  At 25%, the net after tax split is still 55%-45%; at 22%, it goes to 59%-41%.  In this case at 22%, the payor has $199,056 net after tax cash flow per year and the recipient has $139,668 or $59,388 less ($4,949 per month).  At 25%, the difference is only approximately $32,388 ($2,699  per month).

If we use $750,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $175,000 per year; using 22%, it is $154,000.  At 25%, the net after tax split is still 54%-46%; at 22%, the spread widens to 58%-42%.  In this case at 22%, the payor has $273,072 net after tax cash flow per year and the recipient has $194,664 or $78,408 less ($6,534 per month).  At 25%, the difference is only approximately $36,408 ($3,034 per month).

If we use $1,000,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $237,500 per year; using 22%, it is $209,000.  At 25%, the net after tax split moves to 53%-47%; at 22%, it is 58%-42%.   However, in this case at 22%, the payor has $345,744 net after tax cash flow per year and the recipient has $249,672 or $96,072 less ($8,006 per month).  At 25%, the difference is only approximately $39,072 ($3,256 per month).

If we use $1,250,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $300,000 per year; using 22%, it is $264,000.  At 25%, the net after tax split stays at 53%-47%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $418,416 net after tax cash flow per year and the recipient has $304,668 or $113,748 less ($9,479 per month).  At 25%, the difference is only approximately $41,748 ($3,479 per month).

If we use $1,500,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $362,500 per year; using 22%, it is $319,000.  At 25%, the net after tax split stays at 53%-47%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $481,088 net after tax cash flow per year and the recipient has $359,664 or $121,424 less ($10,119 per month).  At 25%, the difference is only $44,424 ($3,702 per month).

If we use $2,000,000 for the payer and $50,000 for the recipient:  using 25%, the rule of thumb alimony is $487,500 per year; using 22%, it is $429,000.  At 25%, the net after tax split goes to 52%-48%; at 22%, it stays at 58%-42%.  However, in this case at 22%, the payor has $636,672 net after tax cash flow per year and the recipient has $469,668 or $167,000 less ($13,917 per month).  At 25%, the difference is only $49,764 ($4,147 per month).

So it seems clear that the rationale that the higher the income, then lower the percentage for the rule of thumb doesn’t really add up.  One reason is that the marginal tax rate is 35$ for income between $207,151 and $518,400.  After $518,400, it goes up to 37%.  That said, virtually all of the above scenarios, basically everything $518,400 and above fall into the highest tax bracket.  I think that most people who propose a variable rule of thumb wouldn’t apply the lower rate to $500,000, $600,000, $700,000 – maybe even not until income more than $1,000,000.  (And yes I understand that there may be a difference when discussing effective rates but query whether it is enough to justify using a lower percentage for the “rule of thumb.”)

Also, looking at the differences from a percentage basis is misleading as the income goes up.  While the use a 22% rule of thumb provided a consistent 58%-42% across the board (I did not know this until doing the calculations for this blog, and quite frankly was surprised by it and it almost blew my theory), looking at the percentages is misleading.  You actually have to look at the net after tax dollars to gauge the fairness or unfairness – especially if factor #4 is really a consideration.  Again, what the courts and practitioners should do is actually analyze the alimony factors.  But if people are still going to use these “rules of thumb” as a guide, care should be taken to show where the net after tax cash flows shake out for each party to see if result of the formula is fair and resembles in some way the goals and objectives of the alimony statute.

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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 Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

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Employee’s Cost of Medical Marijuana to Treat Work Place Injury Reimbursable by Employer

In a case of first impression, the New Jersey Appellate Division held in January 2020 that an employee’s costs to use medical marijuana to treat chronic pain resulting from a work place injury is reimbursable by his employer.

This case arose out of a construction accident in 2001. Vincent Hager was working on a construction site when a truck delivering concrete dumped its load on him. Following the accident, Hager immediately experienced lower back pain that radiated down both legs, which he described as a “shooting and stabbing pain.” Initially, Hager’s employer, M&K, denied Hager’s workers’ compensation claim. While the claim was pending, Hager began to treat his injuries/pain with marijuana, as made available by New Jersey’s Compassionate Use Medical Marijuana Act (MMA), and sued M&K for reimbursement.

Considering whether M&K should have to reimburse Hager for the cost associated with using medical marijuana as part of his pain management regimen, the trial court determined those costs were related to reasonable and necessary treatment of Hager’s on-the-job injuries and were therefore reimbursable under New Jersey’s workers’ compensation law. M&K appealed and the Appellate Division affirmed.

The Appellate Division considered four main issues:

• whether the federal Controlled Substances Act (CSA) preempts the MMA;
• whether reimbursement of Hager’s purchase of medical marijuana would expose M&K to federal prosecution;
• whether employer/workers’ compensation insurer should be treated the same under the MMA as a private health insurer; and
• whether medical marijuana can be a “reasonable and necessary” treatment of a form of treatment because it is illegal under the CSA.

First, in affirming the trial court’s decision, the Appellate Division found that the CSA does not preempt the MMA because there was no “positive conflict” between the CSA and the MMA such “that the two cannot consistently stand together.” The Appellate Division noted the CSA, “only preempts a state law that requires the performance of an action specifically forbidden by the federal statute.” In this regard, the CSA prohibits possession, manufacture, and distribution of marijuana. Thus, an employer’s reimbursement of an employee’s purchase of medical marijuana is not an action prohibited under the CSA, and therefore it is not preempted.

Second, M&K argued the MMA should be preempted because reimbursement would amount to aiding and abetting the employee in the commission of a crime. Here, the Appellate Division disagreed, finding that reimbursing a person for the legal use of medical marijuana under the New Jersey law would not make M&K a participant in the commission of a crime.

Third, the Appellate Division noted that in New Jersey there are two categories of entities that may not be required to reimburse the costs of medical marijuana: government medical assistance programs and private health insurers. N.J.S.A. 24:6I-14. Under the plain language of N.J.S.A. 24:6I-14, if the Legislature wished to relieve workers’ compensation insurers from any obligation to pay the costs of medical marijuana, it would have done so explicitly, and therefore rejected M&K’s arguments.

Fourth, the Appellate Division addressed M&K’s argument that other, legal means of treatment were available. Here, the Appellate Division relied on the testimony and evidence presented at trial as to the efficacy of medical marijuana in Hager’s case, which included “competent medical testimony” on the benefits and dangers of medical marijuana as compared to the proposed opoid alternatives. Interestingly, the Appellate Division noted Hager’s history of opioid addiction in concluding that “medical marijuana was reasonable and necessary for the treatment of [Hager’s] chronic pain.”

While Hager v. M & K Constr. is only one of a few reported cases dealing with medical marijuana related issues, it is in line with a national trend towards tolerance and acceptance of marijuana as a legitimate medicine to be treated no different than doctor-prescribed drugs and treatments.

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Disrespectful & Unfairly Dispropriate Treatment of a Female Shareholder by Male Majority Shareholders in Closely Held Corporation Constituted Oppression

An Erie County, New York Supreme Court Justice recently held that the disrespectful and unfair dispropriate treatment of a female shareholder based upon her gender in a closely held corporation constituted oppression. In re Matter of Diane M. Straka, Index No. 807308-2017 (citing, Bus. Law. §1104(a)-(1).

In that case, the Plaintiff, Ms. Straka (a 25% shareholder in a closely held New York corporation) was able to prove at trial that she was subjected to disrespectful treatment based upon her gender. The other three shareholders were men. The Court found among other things, that:

• When she first met one of the other shareholders, he asked Ms. Straka “…are you the one who makes the coffee;”
• One of the shareholder’s posted a cartoon on his door that was deeming to women;
• The Plaintiff stopped eating in the lunchroom because she was subjected to offensive comments; and,
• One of the male shareholder asked if he could sit in her lap.

The Court held that a “female shareholder reasonably expects to be treated with equal dignity and respect as male shareholder forming the majority.” The Court found that the Plaintiff demonstrated that she was not treated with the same dignity and respect as the male shareholders. Furthermore, the Court held that the shareholders slow and inadequate responses to demeaning behavior marginalized and oppressed the Plaintiff.

I believe the outcome would be the same in New Jersey. Like New York, New Jersey uses the “reasonable expectations of the shareholder test” when determining whether or not a shareholder in a closely held corporation or limited liability company was subjected to unlawful oppression. See, Brenner v. Berkowitz, 134 N.J. 488 (1993); N.J.S.A. 14A:12-7(c); N.J.S.A. 42:2C-48(5).

Further, New Jersey’s Law Against Discrimination (“LAD”) prohibits intentional discrimination based upon race, creed, color, national origin, nationality, ancestry, age, sex (including pregnancy and sexual harassment), marital status, domestic partnership, or civil union status, affectional or sexual orientation, gender identity, or expression, military service, or mental or physical disability. See, N.J.S.A. 10:5-1, et. seq.

When enacting the LAD, the New Jersey Legislature mandated that Courts broadly and liberally construe the law because they recognized that discrimination causes personal hardships and is against public policy. N.J.S.A. 10:5-3. I believe that minority shareholders have a reasonable expectation to not be treated differently or unfairly based upon the aforementioned covered classifications. Hence, I agree that discrimination against minority members based upon their gender, age, color, religion, or other enumerated classification constitutes shareholder oppression.

New Jersey minority shareholders, like all employees who are discriminated against should also assert LAD claims. The LAD offers additional remedies, like mandatory counsel fees, pain and suffering, lost compensation, and punitive damages (under certain circumstances).

Most states, including New York have state statutes that offer protections to employees who are subjected to sexual harassment or other forms of unlawful discrimination.

In situations where the employee shareholder is also subjected to unlawful discrimination, those claims should also be raised in the litigation.

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Business Judgement Rule Inapplicable if Director is Engaged in Self-Dealing, Unconscionable, or Fraudulent Activities/Decisions

Pursuant to New Jersey corporate law, directors are trustees for the entire body of the owners. Directors owe loyalties to all shareholders. If they disregard the rights of the majority shareholders, minority shareholders, or the corporation itself they could be liable for a breach of fiduciary obligations or duties.

New Jersey law affords directors certain protections if their decision making falls within the Business Judgement Rule. In re PSE&G Shareholder Litigation, 173 N.J. 258, 276 (2002); Daloisio v. Penunsual Land Co., 43 N.J. Super. 79, 93-94 (App. Div. 1956). Under that rule, individual shareholders cannot question, in a judicial proceeding the corporate acts of directors, if those decisions/acts are within the powers of the corporation and in furtherance of the corporation’s purposes. They must not be an unlawful exercise of judgment. That is because to hold otherwise would result in the substitution of the director’s judgement and discretion in the scheme of the corporation.

Although the Business Judgement Rule may serve as a defense to directors, it is inapplicable if the Court were to determine that the decisions/actions are fraudulent, unconscionable, or that the director is engaged in self-dealing. Not only will the court not apply the Business Judgement Rule in cases where it finds that the plaintiff has made a prima facie case that a director has engaged in self-dealing, fraudulent, or unconscionable decisions/actions, the law requires that the Director must demonstrate by “clear and convincing evidence” that the entire transaction is “entirely fair and not inimical” to the corporation and all of its shareholders. Daloisio v. Penunsual Land Co., 43 N.J. at 94.

When rendering decisions on behalf of a corporation, directors must always put the interests of the corporation and its shareholders first. If the director does that, they will enjoy protections under the Business Judgement Rule. If they award themselves favorable contracts, grant themselves excessive salaries, and make other decisions that are deemed “self-dealing” by the Court, then they will have the burden of proof to demonstrate that their decision making was entirely fair to all shareholders and the corporation. Because the “clear and convincing” burden is so high, it will is likely to be extremely difficult to convince a Court not to find that they breached fiduciary duties or acted oppressively.

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Growing, Processing, and Handling Hemp Now Legal in New Jersey – Apply Today

New Jersey is now among the first three states to have its Hemp Program approved by the United States Department of Agriculture (the “USDA”). The 2018 Farm Bill legalized industrial hemp production nationwide by removing hemp and its derivatives, such as CBD, from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp.

Now that New Jersey’s Hemp Program is approved, the New Jersey Department of Agriculture (the “NJDA”) can accept licensing applications for review and approval. Leading the way in an ever growing national hemp industry, New Jersey’s Hemp Program allows individuals and businesses to legally engage in the following activities:

Hemp Producer: any person or business entity authorized by NJDA to cultivate, process, or handle hemp in the State.

Farmers: any person who cultivates hemp.

Handlers: any person who means to possess or store a hemp plant on premises owned, operated, or controlled by a hemp producer for any period of time or in a vehicle for any period of time other than during the actual transport. Examples of “handlers” include, but are not limited to: seed cleaners, analytical labs, traders, harvesting entities, brokers and other service providers. “Handle” does not mean possession or storage of finished hemp products.

Processors: include, but are not limited to, entities acquiring raw hemp materials and processing them into products.

In order to participate in New Jersey’s Hemp Program, prospective farmers, handlers, and/or processors must submit an application to NJDA with the appropriate fees:

2020 New Jersey Hemp Program Fees
Application Fee	$50
Hemp Farmers	$300 annually plus $15 per acre
Hemp Handlers	$450 annually
Hemp Grain Processors	$450 annually
Hemp CBD Processors	$1,000 annually
Hemp Grain and CBD Processors	$1,450 annually

NJDA will only accept and review applications that are complete, accurate, and legible. Incomplete answers may result in the application’s removal from consideration. Please also keep in mind that all “key participants” must undergo a New Jersey State Police background check before an application can be approved.

Even though New Jersey’s Hemp Program is at the forefront of the national hemp industry, New Jersey has placed reasonable restrictions on hemp farmers, handlers, and processors, which include:

NJDA requires a site modification fee any time a growing site is altered or added to an existing license so NJDA can submit accurate records to keep the USDA apprised of the status of all hemp producers and awards of all land being used to produce hemp (N.J.A.C. 2:25-2.2);

NJDA prohibits public access to hemp, such as hemp mazes or any other recreational activity (N.J.A.C. 2:25-2.2);

NJDA may prohibit any hemp, seeds, plantlets or propagules for any reason, i.e. NJDA may ban a particular strain or source for hemp if it is unreliable with regards to THC content (N.J.A.C. 2:25-3.2).

This is an exciting time to join the growing billion dollar hemp industry. Last year alone, 500,000 acres of hemp were planted nationally. The hemp industry is full of new economic opportunities for industry participants and entrants as hemp cultivation and processing pave the way for new environmentally friendly products and markets.

To learn more about the application process or if you are interested in submitting an application to farm, handle, or process hemp in New Jersey, please contact Gene Markin, Esq. at (609) 895-7248 or gmarkin@stark-stark.com.

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Enforceability of Arbitration Clause in Construction Agreement

As most contractors are aware, it is common to have an Arbitration Clause within a typical AIA Construction Agreement that requires the parties to the contract to participate in arbitration in lieu of Court proceedings in the event of a dispute.

Most contractors simply take for granted that the clause is enforceable, and therefore, believe that their only remedy is before an Arbitration Panel. The reality, however, is that many of these clauses are unenforceable due to improper construction.

This blog will focus on what is required for an Arbitration Clause to be found enforceable before the Courts.

Despite the New Jersey Court’s favorable view of Arbitration Clauses, the Arbitration Clause must nonetheless unequivocally demonstrate the mutual agreement of the contractors to participate in Arbitration. Further, there must be direct and clear language that by agreeing to the Arbitration Clause, that the parties are waiving their right to file an action in State Court. Finally, in order to ensure the enforceability of an Arbitration Clause, there must be waiver of the right to a Trial by jury. Thus, in order for the Arbitration Clause to be enforceable, it must be clear that the parties mutually agreed to Arbitration as an alternate forum, that the parties are affirmatively waiving any right to proceed in State Court, and finally, that the parties are waiving a right to a Trial by jury.

While Arbitration may be a preferred way to resolve a dispute, at times it is not always the best forum. As such, a contractor should be keenly aware whether an Arbitration Clause within a construction agreement is enforceable in light of the above requirements.

If the clause is unenforceable, the contractor can proceed with a State Court action, and thereafter, can seek to defeat any motion to transfer the matter to Arbitration. As I indicated in a previous blog, Arbitration is not always the best way to resolve a dispute. For these reasons, a contractor must be aware as to whether the Arbitration clause is enforceable. Further, if a contractor strongly wants to proceed with Arbitration on all of its matters, than the Arbitration clause should be appropriately worded to withstand any previous challenge.

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New York Courts Will Not Dissolve Out-of-State Corporate Entity

New York Courts do not have the power to order the dissolution of a corporate entity that operates in the State of New York, but was formed under the laws of another state. In Re Matter of Raharney Capital, LLC v. Capital Stock, LLC, 138 A.D. 3d 83 (1^st Dept. 2016).

In that case, Plaintiff, Raharney Capital, LLC, (“Raharney”) a Delaware limited liability company with a principal place of business located in the State of New York filed an action against Capital Stock, LLC, (“Capital Stock”) in the State of New York seeking juridical dissolution pursuant to Section 18-802 of Delaware’s Limited Liability Act of a Delaware entity formed by Raharney and Capital Stock. That entity, Daily Funder was a Delaware Limited Liability Company, with a principal place of business in New York City. Raharney and Capital Stock each owned 50% of Daily Funder.

According to Raharney, the members of Daily Funder were unable to agree upon their respective roles and duties, the terms of an Operating Agreement, and the terms for withdrawal of either members. Moreover, Raharney alleged that the parties were hopelessly deadlocked, and that it was not reasonably practicable for the Daily Funder to continue operating. Raharney filed in an action in the Supreme Court of New York, New York County, seeking a judicial judgement dissolving Daily Funder and compelling its members to wind up the company’s affairs.

Capital Stock filed a pre-answer motion to dismiss pursuant to C.P.L.R. 3211, asserting that the New York Court did not have subject matter jurisdiction to dissolve a foreign corporation. The trial court agreed and dismissed the case.

Raharney appealed the trial court’s decision.

The New York Appellate Division, First Department affirmed the trial court. The Appellate Court looked at other New York Appellate Division decisions who have addressed this issue and “concluded that courts in New York do not have subject matter jurisdiction to dissolve an out-of-state forum entity.” Citing, Rimawi v. Atkins, 42 A.D. 3d 799 (3d Dept. 2007); Matter of MHS Venture Mgt. Corp. v. Utilsave, LLC 63 A.D.3d 840, 841 (2^nd Dept. 2009).

Furthermore, in affirming the trial court’s decision, the Appellate Court looked to other states’ courts’ decisions on the issue. In doing so, the Court found that a majority of courts outside of New York have also found that they do not have subject matter jurisdiction to dissolve a foreign corporation.

New Jersey does not follow the majority approach. A New Jersey Court may dissolve or adjudicate issues related to the internal affairs of a foreign corporate entity, if it finds that there are enough contacts with the Garden State. New Jersey courts would adjudicate a case if the foreign corporation has a principal place of business in New Jersey; a significant percentage of the members are New Jersey residents; and/or the result of the litigation could affect a substantial number of New Jersey employees. That, of course is not to say that New Jersey will adjudicate every dispute involving a foreign corporation. Rather, New Jersey courts will apply an equitable determination before it decides the issue.

The same is untrue in New York. Courts in the Empire State do not have subject matter jurisdiction to order the dissolution of a foreign corporate entity. Those disputes must be adjudicated in the place of formation/incorporation or possibly in a State, like New Jersey if there are enough contacts where the Court feels it has the equitable and legal powers to adjudicate the dispute.

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Does the Marital Lifestyle Matter When it Comes to Enforcing a Pre-nuptial Agreement?

A recent unpublished (non-precedential) decision, Steffens v. Steffens, suggests that the answer to the above question is “no.”

In Steffens, the Wife sought to set aside a prenuptial agreement, arguing that it was unconscionable, in large part because the alimony payments she was to receive under the agreement would not allow her to maintain the marital lifestyle.  At trial, the Court excluded evidence of the marital lifestyle.  On appeal, the Wife argued that the Court erred by excluding such evidence which, she claimed, should have been a part of the analysis when the Court decided whether enforcement would leave her “without a means of reasonable support.”

The trial court, however, had good reason to exclude this evidence, because the parties had specified in the prenuptial agreement itself that neither of them would have the right to assert a claim against the other to maintain the marital standard of leaving.  Therefore, the trial court only considered the question of whether the Wife would have a means of “reasonable” support if the agreement were enforced – not whether she would have a means of support that would enable her to continue to leave at or reasonably close to the marital lifestyle.  Put another way, she made her deal as to the specific amounts of support she would be entitled to in the event of a divorce at the time of the prenuptial agreement, and because she had means of support vis a vis the agreement and other financial resources, the Court enforced; it did not matter that her lifestyle would be diminished.  The Appellate Division found that this analysis was proper.

Interestingly, the Appellate Division touched upon the relatively recent amendments to the New Jersey statute related to prenuptial agreements, noting that for agreements executed after the effective date of the amendments (June 27, 2013), the question of whether a spouse will be left with a reasonable means of support is no longer relevant.  The prenuptial agreement in Steffen pre-dated the effective date.  However, for later agreements, these amendments make it even harder to set aside prenuptial agreements because those who seek to set them aside can no longer argue that they will be left without reasonable means of support if the agreement is enforced.  Instead, they can only advance arguments about the agreement being unconscionable from inception as a result of lack of full and fair disclosure, involuntariness, or lack of independent counsel.

This recent decision serves as food for thought for anyone considering entering into a prenuptial agreement applying New Jersey law.  Absent a future change in the law, the level of fairness of the result of enforcement of the prenuptial agreement matters little, if at all, and as the supported spouse you may have no recourse if the prenuptial agreement leads you to live a dramatically lessor lifestyle post-divorce than you enjoyed during the marriage.

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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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Decision of Errors – Imputation, Disability, Need for Support and Deviating from Guidelines

The recent unpublished decision of Gormley v. Gormley serves as a good reminder for four polestar issues in matrimonial litigation, below, as well as to put on your best evidence in an effort to ensure that the trial court enters the appropriate decision and, ultimately, to not stop litigating up the ladder when it fails to do so:

• Imputation of income to a party who receives Social Security Disability Income;
• Imputation of income to a party who is voluntarily under or unemployed;
• Determining the need for support;
• Deviating from the Child Support Guidelines particularly in a case where the child does not have a relationship with the non-custodial parent

Relevant to each issue are the following facts:

• The parties married in 2000, separated in 2012 and the divorce complaint was filed by Plaintiff/husband in 2015.  They had one child born in 2004, who did not have a relationship with Plaintiff at the time of trial in or around 2018.
• Defendant/wife received Social Security Disability (SSD) benefits due to her diagnosis of Multiple Sclerosis, which diagnoses she had since prior to the parties’ marriage.  Defendant was determined disabled by the Social Security Administration (SSA) in 2002 and was out of the workforce since that time.
• Plaintiff earned $150,000 gross per year in the two years leading up to the divorce trial through his commission-based employment, but then purposefully reduced his hours in order to study psychology and parental alienation, and to prepare for trial.

Based upon these facts, the trial court imputed income to Defendant because she did not produce further evidence of her disability beyond her SSA determination and testimony, and because of the court’s observations of Defendant during trial; did not impute income to Plaintiff for his admitted voluntary underemployment and, rather, used a six-year average of his pre-separation income – which was five years prior to trial – and totaled less than $100,000 per year as compared to $150,000 he earned in the two years leading to trial; reduced Defendant’s budget without any reasoning on the record; and, entered child support deviating from the New Jersey Child Support Guidelines primarily because Plaintiff did not have a relationship with the child.  All of the foregoing was subject to a Motion for Reconsideration that the trial court denied and then became subject of this appeal, which lead to reversal, remand and vacating those aspects of the decision.

The Appellate Division reviewed each area of the trial court’s decision and correctly found flaws in all, as follows:

• Imputation of income to a litigant who receives Social Security Disability Income – Golian v. Golian remains the controlling case on this issue and holds that the litigant who was declared disabled is subject to a rebuttable presumption that he/she is unable to work, and the opposing party then bears the burden to rebut that presumption.  The court in the instant matter confirmed that to the extent the trial court decision of Gilligan v. Gilligan has contrary holdings to Golian, Golian prevails.  Specifically, Gilligan requires the disabled party to first produce more evidence beyond the SSA disability determination before the adverse party is required to rebut the presumption.   In Gormley, the Plaintiff failed to rebut Defendant’s disability and, thus, the Appellate Division found the the trial court erred in imputing income to Defendant based upon its own observations of Defendant.
• Imputation of income to an underemployed litigant – The Appellate Division again found error in the trial court’s decision, this time by calculating Plaintiff’s income for purposes of paying support using a six-year, pre-separation average – ending five years prior to trial – and ignoring his last two years of income prior to trial, when failing to consider whether Plaintiff was earning at his full capacity.  The Appellate Division, citing to Lynn v. Lynn, specifically noted that it is a fatal error to leave out the amount of the payor’s income leading to the trial when averaging income to determine an ability to pay support.  Thus, it is an obvious error to average income over the six years prior to separation, particularly when that time period was five years prior to trial, and to ignore his income for the two years leading to trial.
• Need for Support – In the third error in this matter, the trial court failed to explain why it reduced Defendant’s budget from $7,700 per month for $4,300 per month, which is undoubtedly erroneous and leaves the Appellate Division without a specified decision to review.  This issue was remanded (sent back) to the trial court for an explanation as to is calculation for this budget reduction.
• Deviating from the Child Support Guidelines – To add icing on the cake, the trial court deviated from the Child Support Guidelines because Plaintiff did not have parenting time with the child (noting, however, that prior to the reconsideration decision the trial court did not place any findings on the record as to why it deviated from the Guidelines).  First, the Guidelines include the amount of overnights a parent does/does not have so this should not even be an issue.  Moreover, as the Appellate Division reiterated, the Guidelines allow for deviation when the non-custodial parent spends more time with the child than contemplated in the Guidelines calculation but not in the manner as the trial court ordered in Gormley.  Most Notably, the Appellate Division found error by the trial court’s failure to consider the best interests of the child when deviating from the Guidelines, which is arguably the material consideration when determining a child support award and, frankly, when evaluating any child-related issue.

Gormley serves as another lesson regarding the importance to lay out all relevant facts for the trial court to absorb and have at the ready to incorporate into a decision (including in pre- and post-trial memoranda) and to not stop litigating upon receipt of a poor decision when the trial court has provided the groundwork for a successful appeal.

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Lindsay A. Heller is an associate in the firm’s Family Law practice, based in its Morristown, NJ office. You can reach Lindsay at 973.548.3318 or lheller@foxrothschild.com.

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Hidden Risks and Costs of Naming Minors as Direct Beneficiaries of an IRA or Qualified Retirement Plan

A valuable feature of an Individual Retirement Account (IRA) or a Qualified Retirement Plan (401k, 403b, etc.)(QRP) is the ability to invest without incurring contemporaneous taxes on the investments held in the account. This benefit is available to both the original owner of the account and to designated beneficiaries who inherit the account after the owner’s death. For this reason and others, it is very important to name appropriate beneficiaries for an IRA or a QRP account.

The beneficiaries of an IRA or QRP often include one or more minors, who are defined under New Jersey law as individuals under the age of 18 years. There are hidden costs and risks associated with naming minors[1] as direct beneficiaries that can have substantial adverse effects on the value of the account. To address these issues and provide greater structure for your beneficiaries, a trust should be considered to hold and manage the assets for the minor’s best interest.

Minor Beneficiaries Will Likely Require a Guardian and a Bond

The first issue with designating a minor beneficiary is that the minor’s guardian will likely be required to post a bond for the account. This is the case even if the guardian is a surviving parent of the minor child. Suppose that a 12 year-old child’s parent dies after designating the child as beneficiary of a $100,000 401k account. The child’s surviving parent will be required to be appointed as guardian by the Surrogate and post a bond for the value of the account – even though the surviving parent is the child’s natural guardian.

The purpose of the bond is to protect the assets of the minor beneficiary. Certain issues affecting the minor’s account may result in a court requiring the bonding company to reimburse the minor’s account for the loss. Many minor’s accounts have no such issues and no recourse to the bond is necessary. However, the surety company providing the bond will need to be paid even if no issues arise. The cost of the bond will depend on the value of the account and the number of years for which a bond is required. In our example, the minor inherited the 401k at age 12 and the bond premium is typically paid on an annual basis for a period of 6 years (i.e. until age 18). The cost of a bond, over time, can be expensive.

If the guardian has credit or other issues, the guardian may not qualify for a bond. In these circumstances, the guardian may be required to withdraw the entire account and deposit it to the Surrogate’s Intermingled Trust Fund. This option results in the loss of any remaining tax deferral period and management of the account by the Surrogate. If the IRA or QRP is a traditional account, then the withdrawal of these funds from the account will also incur an up-front income tax obligation.

Unrestricted Access Can Have Substantial Adverse Results

The single biggest issue with designating a minor beneficiary is that the minor will have full, unrestricted access to the assets at age 18. Unless the minor beneficiary has special needs, a guardianship terminates at age 18 and the guardian is required to pay-over all of the minor’s assets. Similarly, the minor is entitled to request and receive all of the funds held by the Surrogate upon reaching age 18.

Many beneficiaries are not ready to responsibly handle valuable assets at age 18, and unrestricted access may result in losses that are regretted later. In some instances the costs of these decisions can result in expenditures that far exceed the taxes or administration costs of the account.

Trusts Can be Implemented for IRAs and QRPs

To address these issues, a trust designed to manage these assets can be designated as the beneficiary. The trust names a trustee to undertake the investment, management, and distribution functions on the minor’s behalf. The trustee will control the account for the minor’s benefit, and the trust instrument can provide for the timing and manner of distributions for the minor’s benefit – eliminating the issues associated with underage persons managing valuable assets. Unlike a guardian, the trust instrument can waive the requirement of a bond for the trustee, saving this cost and expense.

In summary, there are hidden risks and costs associated with designating minor beneficiaries to an IRA or QRP. Depending on the value of the account and the number of years for which a bond is required, the costs can be substantial. The administration and management issues posed by designating a minor as beneficiary can, in some instances, be even more concerning than the costs and administrative expenses. A trust drafted to manage IRAs and QRPs should be closely evaluated as an alternative to designating a minor beneficiary for the account.

 

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[1] Similar issues apply to other beneficiaries who have creditor issues, an inability to manage assets, or who face divorce or addiction problems.

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Retailers to Watch for a Bankruptcy Filing in 2020

Retail and restaurant Chapter 11 bankruptcy filings continued to grab headlines in 2019. According to CNBC, there were 23 retail bankruptcies in 2019, compared with 17 in 2018.

Six (6) retailers and one (1) restaurant chain that were on our “Watch List” in 2019 filed for Chapter 11 protection – Charming Charlie (Part 2), Forever 21, Payless (Part 2), Charlotte Russe, Things Remembered, Gymboree (Part 2), and Perkins & Marie Callender.

As the New Year unfolds, following are 10 retailers to watch for possible Chapter 11 filing(s) in the year ahead.

• Pier 1 Imports – a Filing this Month? Gone are the days when shoppers would go to Pier 1 for a unique product. Now those items can be purchased online or at another retailers. According to CNBC, the company plans to close up to 450 of its 936 stores, cut 40% of its headquarters staff, and shutter distribution centers as part of cost-cutting measures. The company has had a string of quarters with declining sales. Recently, it reported its third-quarter loss at $59 million, after same store sales declined more than 13% last year. Bloomberg reports that the company is preparing for a bankruptcy filing.
• Fairway Markets – Chapter 22 Filing? The company filed for Chapter 11 in May 2016, successfully emerging in less than three (3) months in July that year. The New York Post reports that the company is preparing another bankruptcy filing after failing to find a buyer for its 14 stores in the New York tri-state area, including four (4) liquor stores, making it a Chapter 22 bankruptcy filing (two Chapter 11s in a row). Fairway recently closed its Nanuet, New York store in September. Currently, the company has more than $170 million in debt that matures in 2023/2024.
• Bed Bath & Beyond – With more than 1,500 stores in the U.S. and Canada, including buybuy BABY and Cost Plus World Market brands, the retailer has reported that it will close about 60 stores in 2020, according to The Motely Fool. The big-box retailer saw a slide in its stock from $70.00 a share in 2013 to $7.34 in 2019. In November 2019, the company began internal moves that helped raise the share price. However, fundamentally, the company has been unsuccessful in battling online retailers, unlike its competitors The Home Depot, Target, and The TJX Companies.
• Ascena Retail Group – Last year, with more than 3,400 stores, the owner of women’s clothing brands (including Loft, Ann Taylor, Justice, Lane Bryant, and Catherines) continued belt-tightening with turn-over in the c-suite, selling a majority stake in Maurices and its shuttering of Dressbarn. At the end of 2019, the company reported that sales declined 4%, it maintains $1.3 billion in long-term debt, and had an operating loss of $354 million. Although, according to Chain Store Age, the CEO announced in October that bankruptcy was not being considered as an option. Still, the women’s retail clothing market is difficult with online sales and competition. Unless a turnaround occurs soon, bankruptcy may be the only option.
• GameStop – Going the Way of Blockbuster Video? Retail Dive reports that the company was on pace to close about 200 of its 5,000 stores worldwide by the end of 2019. In a press release, the company cited second quarter global sales decreasing by more than 14%. With more than 3,500 stores in the U.S., the company continues to adjust to changing purchasing habits of consumers. Could GameStop be the next Blockbuster, now that gamers can purchase games easily online through their consoles?
• Francesca’s – According to Alpha Street, the Houston-based, boutique women’s apparel and accessory retailer continued to cut costs by closing more than 10 of its 700-plus stores and laying off a sizeable chunk of its corporate staff. However, last summer, the company secured $10 million in new financing. Despite the belt tightening, the company appears poised for a possible Chapter 11 filing as it struggles to both drive traffic towards its key fashion trends and compete due to the continuing shift in customer demand away from physical stores to online venues.
• Crew – A Sense of “Ennui” in Stores, According to Vanity Fair? The privately held retailer continues trying to make itself an upscale retailer, yet it also introduced an athleisure line as well as a separate denim line – Madewell – to the mix. The Wall Street Journal reported that it spun off Madewell, the denim line, permitting a deleveraged balance sheet that may assist in the short term. However, the company’s more than $120 million in losses during the last two (2) years, its identity crisis, and the sense of boredom in any of its stores, as noted by Vanity Fair, is a challenge.
• JC Penney – According to Business Insider, despite the fact that the company stabilized its profitability in 2019, it still struggles to create an experience for consumers. The 117-year old company has more than $4 billion in debt, the majority which is due in 2021 according to Bisnow. Although the company has been taking on initiatives to reinvent its more than 800 stores, it may be a little too late – much like Sears? The Observer recently opined that a purchase by Best Buy, Wayfair, or Lowes might actually make the company relevant again.
• Stein Mart – Retail Dive reports that despite a positive profit in first quarter 2019, the company’s top sales have fallen for the past few years. The company has taken steps to install self-service Amazon lockers in about 200 of its 283 stores in an effort to drive traffic. With tight margins and online retailers, the company faces difficulties and could be forced to file for bankruptcy protection.
• Rite Aid – Investor Place reports with more than 2,400 stores, Rite-Aid remains challenged and is engaged in a never-ending turnaround plan. Although the bankruptcy filing of Fred’s retail pharmacy may have freed up some market share, the company continues to fight for survival in a competitive pharmacy environment. A bankruptcy may be the only way to reduce footprint to truly turn the company around.

If you are an owner, developer, and/or landlord, it is important to know and understand how these changes will affect your shopping center. Stark & Stark’s Shopping Center and Retail Development Group can help.

Our bankruptcy attorneys regularly represent owners, developers, and/or landlords throughout the country in leasing, buying/selling, 1031 Exchanges, refinancing, as well as enforcement activities. One of our specialties is bankruptcy representation for owners, developers, and/or landlords nationally.

Currently, our team is providing value-added services to landlords in a number of Chapter 11 cases including: Sears, Toys R Us, Houlihan’s, Shopko, Charming Charlie Part 2, and A&P.

For more information on how Stark & Stark can assist you, please contact Thomas Onder, Shareholder, at (609) 219-7458 or tonder@stark-stark.com or Joseph Lemkin at (609) 791-7022 or jlemkin@stark-stark.com. Both regularly write on commercial real estate issues and are both active members of ICSC. Mr. Onder is State Chair for ICSC PA/NJ/DE region.

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Major Changes are Impacting IRAs and QRPs – How is your Estate Plan Affected?

Recently, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was enacted into law. The SECURE Act makes significant changes to the administration of Individual Retirement Account (“IRA”) and Qualified Retirement Plan (401k, 403b, etc.)(“QRP”), and was effective on January 1, 2020. For many people, an IRA or QRP is one of their most valuable assets. Because these assets result from hard work to create and maintain the account, owners should be aware of the changes found in the SECURE Act and how they may affect the owner’s estate plan.

Amongst other provisions, the SECURE Act:

• Raises the standard age for required minimum distributions (RMDs) for plan participants and traditional IRAs from 70 ½ to 72;
• Repeals the maximum age for contributions to traditional IRAs (Roth IRAs have no contribution age limits); and
• Authorizes penalty free withdrawals of up to $5,000 by each parent in the year of a child’s birth or adoption.

For estate planning purposes, the most significant change in the SECURE ACT is the elimination of the “stretch,” also known as the “life expectancy,” payout option for many beneficiaries. Simply stated, the stretch payout option permits the deceased owner’s account to be slowly distributed over the life expectancy of a designated beneficiary.

A stretch payout option allows beneficiaries to more fully utilize the favorable tax treatment of IRAs and QRPs: investment of the account without contemporary taxation. A stretch payout involved smaller distributions from the account over a longer period of time; minimizing the distributions delayed the income taxes on the assets that were retained in the account, which continued to appreciate on a tax-deferred basis. This increased the rewards of investing both the contributions to the account and the taxable share of the account. The tax-deferral benefit, if properly managed, made IRAs and QRPs potentially more valuable for a designated beneficiary than other forms of inheritance.

The SECURE Act changes these rules for decedents dying after December 31, 2019. Most non-spouse beneficiaries, with some exceptions, must withdraw the entire inherited account within ten (10) years of the owner’s death. The SECURE Act contains exceptions to the general ten-year payout rule, including:

• The account owner’s children who have not attained the “age of majority”;
• Disabled individuals,
• Beneficiaries who are less than ten years younger than the decedent; and
• Chronically ill individuals.

The shorter ten-year payout will likely result in accelerated income taxes on distributions from traditional accounts and reduced benefits from the taxable portion of the account.

From a planning perspective, the SECURE Act may make certain types of trusts more desirable. An accumulation trust authorizes the trustee to retain distributions from an account in trust, and gives the trustee discretion as to when, and how much, of the distributions are applied for the beneficiary. These types of trusts provide increased flexibility to deal with issues relating to creditors, substance abuse/addiction issues, divorce, or other concerns.

In addition to accumulation trusts, other options such as Roth conversions and charitable giving should be evaluated in consultation with a tax advisor. Because of the substantial change in the way distributions these accounts are required, it is important that account owners be aware of the changes contained in the SECURE Act as well as the potential impact on their overall estate plan. If you have any questions concerning this article, please contact Robert Morris at (609)945-7617.

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Don’t Throw Away That Old Calendar – It Could Be Helpful in Your Divorce

As the year comes to an end, a new calendar was likely a present received during the holiday season. Many of us instinctively throw out an old calendar. But wait; it can be so much more than a trip down memory lane!

If you are one of the many people who will be filing for divorce from your spouse, or will be filing for custody of your child, don’t throw out one of the most important pieces of evidence that can help you prove your case.

In custody actions, you will be asked to replicate your child’s sports and activity schedule, health history, as well as important events. During the stress of litigation, many people suffer from brain fog. It’s a thing – really. A lawyer will be peppering a client with countless questions spanning many, many issues, and oftentimes, it is hard to remember details. Yet, in litigation, details are what can make or break your case.

Looking at an old calendar helps a parent remember the activities that need to be considered in a custody schedule. It helps a parent remember how many birthday parties a child attended, which in turn helps the parent create an accurate budget. Indeed, one of the most common areas of a budget that I question my clients on is the “gifts” section. Constant birthday parties gets expensive, and it is a child centric expense. It also jogs the memory for travel expenses for children on higher level sports teams. How many games were 100 miles from home that necessitated a hotel stay?

Visits to professionals are another category that is easy to forget. Does the child have a therapist or doctor that he or she sees regularly? How many times during the year did the child go (and how many co-pays were there)? This is yet another category of items that are easy to overlook.

The other issue is the consistency of a parenting time schedule. Child support is calculated, in part, by the time both parents spend with the children. If there is a significant deviation from the intended parenting schedule, this may be cause for an increase or decrease in child support. The best way to prove the case? Last year’s calendar.

In divorce actions, the calendar can provide important information about expenses to take into consideration for support. Support in a divorce is based on, above all else, the lifestyle during the marriage. What better place to go when describing life style then the calendar? It’s easy to remember the big trips you took to Disney World or the Caribbean. But what about the 5 trips into New York for dinner and a show? To Philadelphia to see the historic sites? To high end restaurants just for the heck of it? Saying you did it is one thing. Proving it with specific dates is another. Similarly, refuting a claim is easier with the calendar.

If there are extraordinary circumstance which suggest a deviation from what may be a more typical support or equitable distribution scenario, facts to back up a claim can often be gleaned from an old calendar.

So take some advice – don’t part with the old calendar just yet!

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