Basics of Pennsylvania Law: Double Dip, Part IV

This is the fourth in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

McFadden v. McFadden, 563 A.2d 180 (Pa.Super.1989).

            McFadden was a post-divorce alimony modification proceeding.  In this case, the husband’s pension annuity benefit was in pay status, and he was receiving the entire pension benefit. Yet, the court found that the husband’s pension had not been identified as marital property at the time of equitable distribution. Therefore, the Superior Court did not reverse the trial court’s calculation of the husband’s income, which included the pension benefit. Most troubling, in dicta, the Superior Court held (per Popovich, J.): “[I]t is equally clear that income from a pension is to be considered when fashioning an alimony award, even if the pension was previously subjected to equitable distribution. See 23 Pa.S.A. § 501(b)(3), (10), (13); Pacella v. Pacella, 342 Pa.Super. 178, 190, 2492 A.2d 707, 711-712 (1985)(court did not err in consideration earlier equitable distribution property in fashioning alimony); Braderman, 488 A.2d at 620 (pension subject to equitable distribution also may be used to calculate alimony award).”

Basics of Pennsylvania Law: Double Dip, Part III

This is the third in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

Miller v. Miller, 783 A.2d 832 (Pa. Super. 2001)

In Miller, the parties settled their division of property, and Wife subsequently sought a modification of child support based on the income that Husband derived from the sale of his share of marital assets. The Superior Court held that the proceeds from the sale of assets were not “income” within the statutory definition. The Superior Court affirmed the trial court’s refusal to modify child support when the payor received proceeds from the sale of marital assets after the divorce and division of property. The double dip in Miller was another reason for the Court’s decision.

Rohrer v. Rohrer, 715 A.2d 463, 465 (Pa. Super. 1998).

            Rohrer was the first published decision to prohibit double dipping in Pennsylvania. (Interestingly, the opinion was written by Judge Popovich, who had held in McFadden that double dipping was permitted.) In Rohrer, the husband was an owner of a business organized as a Subchapter “S” corporation. At an early stage of the proceedings, the pass-through earnings of the business were included in the husband’s income when calculating his support obligations. At equitable distribution, the husband asked the master to exclude retained earnings from the value of the business, in order to avoid double dipping. Husband’s request was granted by the master, but only to the extent that retained earnings from the date of the support order forward into the future were excluded. The retained earnings that accrued prior to the support order were counted as part of the value of the business.

            The trial court reversed the master’s decision and excluded all of the retained earnings. On appeal, the Superior Court reversed and adopted the master’s finding. The Superior Court held that “money included in an individual’s income for the purpose of calculating support payments may not also be labeled as a marital asset subject to equitable distribution.” Rohrer, at 465.

Basics of Pennsylvania Law: Double Dip, Part II

This is the second in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

Cerny v. Cerny, 656 A.2d 507 (Pa.Super.1995).

            Prior to separation, the husband received a cash severance payment, which was counted as income in determining his support obligation. The severance payment was excluded (in a prior, unpublished Superior Court decision) from the marital estate to avoid double dipping. Subsequently, the IRS issued a tax refund to the husband, as the severance payment was not taxable income. The trial court held that the tax refund should be counted as marital property. On appeal, the Superior Court reversed, holding that the tax refund retained the same nonmarital nature as the income from which it was derived. The opinion does not reveal whether the tax was deducted from the payor’s income when determining his support obligation, but if so, then the result may have been inequitable.

Basics of Pennsylvania Law: Double Dip, Part I

The concept of a “double dip” is logical and intuitive. If an income-producing asset has been awarded to a party in equitable distribution, the same asset cannot be counted as a source of income from which alimony may be paid. For instance, a pension in pay status cannot be counted as income for alimony purposes if it was also a marital asset that has been divided in equitable distribution. This concept has been recognized and adopted by the Pennsylvania courts at the trial and appellate levels. Butler v. Butler, 541 Pa. 364, 663 A.2d 148, 156 (1995)(professional goodwill); Diament v. Diament, 816 A.2d 256, 277 (Pa.Super.2003)(advance of marital assets); Miller v. Miller, 783 A.2d 832 (Pa.Super. 2001)(proceeds from sale of marital property); Rohrer v. Rohrer, 715 A.2d 463 (Pa.Super. 1998)(retained earnings of a business); Kokolis v. Kokolis, 83 Pa.D. & C.4th 214 (Ally. 2006)(pension in pay status), affirmed, 927 A.2d 663 (Pa.Super. 2007); cf. McFadden v. McFadden, 563 A.2d 180 (Pa.Super.1989)(pension in pay status).

This post is the first of a series describing Pennsylvania case law concerning the double dip.

Berry v. Berry, 898 A.2d 110 (Pa.Super.2006).

The husband in this case was terminated from his employment as a partner in an accounting firm just weeks after the commencement of a support claim within a divorce action. Upon his termination, the husband received a distribution of his partnership capital account plus a cash severance payment equal to seven months’ base salary. The wife argued at the trial court level that neither of these items should be included in the husband’s income when determining his child support obligation. (The husband had secured other employment paying a salary sufficient to justify a Melzer analysis.) The trial court held that the capital account distribution and cash severance were income for support purposes. The wife appealed, prompting the Superior Court to vacate and remand the case.

The Superior Court held that the partnership capital account was marital property which should not have been included in the husband’s income because doing so would constitute a double dip.  On the other hand, the Superior Court held that the cash severance payment was strictly income. In its decision, the Court distinguished between money earned prior to the marital separation (in this case, a partnership capital account) and money acquired after separation (in this case, a severance payment). Since the partnership capital account was acquired prior to separation, it fell within the statutory definition of marital property. The cash severance acquired after separation did not.  The Superior Court held that the capital account was marital property while the severance payment was income. In both of its findings, the Superior Court refused to double dip.

Can the Court Award Legal Fees in a Child Suppot Modification Proceeding?

An interesting, and perhaps unanswered, question which may arise in a child support modification proceeding is, “Can the court award legal fees to the prevailing party?” Since 1997, there has been statutory authority for awarding legal fees in a child support case. Previously, no statutory authority existed.

23 Pa.C.S. 4351 authorizes an award of legal fees where “an obligee prevails in a proceeding to establish paternity or to obtain a support order.” Soon after the enactment of this law, it was tested in the Pennsylvania Supreme Court by a lawyer who advocated an automatic award of legal fees to all support recipients, based on a simple disparity in their net incomes.

The Supreme Court rejected that notion in Bowser v. Blom, a case that established several criteria for determining whether a support recipient should receive reimbursement of legal fees.

Factors which the court may consider include: (1) whether the obligor’s unreasonable or obstreperous conduct impeded the determination of an appropriate support order; (2) whether the obligor mounted a fair and reasonable defense in a child support order; (3) whether the obligor’s failure to fulfill his moral and financial obligation to support his children required legal action to force him to accept his responsibilities; and (4) whether the financial positions and financial needs of the parties are disparate.

Subsequently, the Superior Court was asked to determine, in Krebs v. Krebs, whether the trial court should have forced a father to reimburse the mother’s legal fees, in a case where child support was modified retroactively for several years because the father had concealed an increase in his income. The Superior Court vacated and remanded the case, instructing the trial court to consider whether the mother’s claim for legal fees was appropriate under 23 Pa.C.S. 4351 or 42 Pa.C.S. 2503 (a different statute authorizing an award of legal fees as a sanction for dilatory, obdurate or vexatious conduct by a litigant).

More recently, in Sirio v. Sirio, the Superior Court was again asked to decide whether the mother should have been awarded legal fees in a child support modification proceeding. Once again, the Superior Court vacated and remanded the trial court’s decision not to award fees, instructing the trial court to consider 23 Pa.C.S. 4351 as well as 42 Pa.C.S. 2503. The Sirio Court alluded to Krebs, suggesting that it answered the question of whether fees could be awarded in a modification proceeding (despite statutory language that refers to “establishing” paternity or “obtaining” a support order).

I think both Krebs and Sirio have asked the question, but I have yet to see an authoritative decision (or, for that matter, a strong policy argument).

Basics of Pennsylvania Divorce: Kulko

 Pennsylvania has jurisdiction over its own citizens as well as those who have signficant contacts with our state. The law that extends Pennsylvania’s jurisdiction over non-citizens who have significant contacts is known as the “long-arm” statute (as in “long arm of the law”).

Long-arm jurisdiction over non-residents in divorce actions is limited, as in all actions, by the due process requirements of the Fourteenth Amendment of the U.S. Constitution, which requires that the forum state have personal jurisdiction over the defendant. The residence of a plaintiff in this state is not, by itself, sufficient to constitute “significant contacts” to a defendant who has never resided here under the standards enunciated by the U.S. Supreme Court in International Shoe Co. v. Washington, 326 U.S. 310 (1945). See Kulko v. Superior Court, 436 U.S. 84 (1978).

In Kulko, the husband and wife resided throughout their marriage in New York, although they were married in California during a brief stopover while the husband was en route to overseas military duty. The parties’ children were born in New York, and husband returned to New York after his tour of duty. Upon separation, the wife moved to California, where the parties’ two children eventually joined her. The wife obtained a divorce decree in Haiti and then filed an action in California to register and modify the Haitian divorce decree. Husband contested the California action for lack of personal jurisdiction. The California Supreme Court held that there were sufficient contacts, under the standards enunciated in International Shoe Co. v. Washington, 326 U.S. 310 (1945), to confer personal jurisdiction over the defendant. Specifically, the California Supreme Court looked to the parties’ marriage in California and the husband’s consent to sending the children to live with their mother in California.

On appeal, the U.S. Supreme Court reversed, finding there was no personal jurisdiction over the defendant in California. The Supreme Court held:

            The Due Process Clause of the Fourteenth Amendment operates as a limitation on the jurisdiction of state courts to enter judgments affecting rights or interests of nonresident defendants. See Shaffer v. Heitner, 433 U.S. 186, 198-200, 97 S.Ct. 2569, 2577, 53 L.Ed.2d 683 (1977). It has long been the rule that a valid judgment imposing a personal obligation or duty in favor of the plaintiff may be entered only by a court having jurisdiction over the person of the defendant. Pennoyer v. Neff, 95 U.S. 714, 732-733, 24 L.Ed. 565, 572 (1878); International Shoe Co. v. Washington, 326 U.S., at 316, 66 S.Ct., at 158. The existence of personal jurisdiction, in turn, depends upon the presence of reasonable notice to the defendant that an action has been brought. Mullane v. Central Hanover Trust Co., 339 U.S. 306, 313-314, 70 S.Ct. 652, 656-657, 94 L.Ed. 865 (1950), and a sufficient connection between the defendant and the forum State to make it fair to require defense of the action in the forum. Milliken v. Meyer, 311 U.S. 457, 463-464, 61 S.Ct. 339, 342-343, 85 L.Ed. 278 (1940). . .

            The parties are in agreement that the constitutional standard for determining whether the State may enter a binding judgment against appellant here is that set forth in this Court’s opinion in International Shoe Co. v. Washington, supra: that a defendant “have certain minimum contacts with [the forum State] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial **1697 justice.’ ” 326 U.S., at 316, 66 S.Ct., at 158, quoting Milliken v. Meyer, supra, 311 U.S., at 463, 61 S.Ct., at 342. While the interests of the forum State and of the plaintiff in proceeding with the cause in the plaintiff’s forum of choice are, of course, to be considered, see McGee v. International Life Insurance Co., 355 U.S. 220, 223, 78 S.Ct. 199, 201, 2 L.Ed.2d 223 (1957), an essential criterion in all cases is whether the “quality and nature” of the defendant’s activity is such that it is “reasonable” and “fair” to require him to conduct his defense in that State. International Shoe Co. v. Washington, supra, 326 U.S., at 316-317, 319, 66 S.Ct., at 158, 159. Accord, Shaffer v. Heitner, supra, 433 U.S., at 207-212, 97 S.Ct., at 2581-2584; Perkins v. Benguet Mining Co., 342 U.S. 437, 445, 72 S.Ct. 413, 418, 96 L.Ed. 485 (1952).

            Like any standard that requires a determination of “reasonableness,” the “minimum contacts” test of International Shoe is not susceptible of mechanical application; rather, the facts of each case must be weighed to determine whether the requisite “affiliating circumstances” are present. Hanson v. Denckla, 357 U.S. 235, 246, 78 S.Ct. 1228, 1235, 2 L.Ed.2d 1283 (1958). We recognize that this determination is one in which few answers will be written “in black and white. The greys are dominant and even among them the shades are innumerable.” Estin v. Estin, 334 U.S. 541, 545, 68 S.Ct. 1213, 1216, 92 L.Ed. 1561 (1948). But we believe that the California Supreme Court’s application of the minimum-contacts test in this case represents an unwarranted extension of International Shoe and would, if sustained, sanction a result that is neither fair, just, nor reasonable.

            In reaching its result, the California Supreme Court did not rely on appellant’s glancing presence in the State some 13 *93 years before the events that led to this controversy, nor could it have. Appellant has been in California on only two occasions, once in 1959 for a three-day military stopover on his way to Korea, see supra, at 1694, and again in 1960 for a 24-hour stopover on his return from Korean service. To hold such temporary visits to a State a basis for the assertion of in personam jurisdiction over unrelated actions arising in the future would make a mockery of the limitations on state jurisdiction imposed by the Fourteenth Amendment. Nor did the California court rely on the fact that appellant was actually married in California on one of his two brief visits. We agree that where two New York domiciliaries, for reasons of convenience, marry in the State of California and thereafter spend their entire married life in New York, the fact of their California marriage by itself cannot support a California court’s exercise of jurisdiction over a spouse who remains a New York resident in an action relating to child support.

            Finally, in holding that personal jurisdiction existed, the court below carefully disclaimed reliance on the fact that appellant had agreed at the time of separation to allow his children to live with their mother three months a year and that he had sent them to California each year pursuant to this agreement. As was noted below, 19 Cal.3d, at 523-524, 138 Cal.Rptr., at 590, 564 P.2d, at 357, to find personal jurisdiction in a State on this basis, merely because the mother was residing there, would discourage parents from entering into reasonable visitation agreements. Moreover, it could arbitrarily subject one parent to suit in any State of the Union where the other parent chose to spend time while having custody of their offspring pursuant to a separation agreement.

Kulko, at 92-93.

 

The Kulko decision has been adopted and applied by our courts in Pennsylvania. See, e.g., Wagner v. Wagner, 564 Pa. 448, 768 A.2d 1112 (2001); Scoggins v. Scoggins, 555 A.2d 1314 (Pa.Super. 1989). Pennsylvania’s jurisdiction is limited by the same principles and considerations as described in Kulko.

Shadle – NAV Accepted by Divorce Court

In Shadle v. Shadle (108 PDDRR 102), a Bucks County divorce decision, the main issue was the valuation of an HVAC contracting business owned by the husband. The contracting business generated revenues from two primary sources: prepaid service contracts, and residential repair and replacement of HVAC systems. The company employed seven technicians, including the parties’ two adult sons. An ancillary issue was whether the husband had made an enforceable agreement with his sons to transfer the business to them upon his retirement.

On the latter issue, the trial court found no consideration for the promise made by husband to transfer the business to his sons. The trial court noted that each son had received adequate compensation for his services in the course of employment. The suggestion that the sons may have sacrificed other career opportunities in exchange for the promise was deemed speculative.

On the issue of valuation, there was a battle of experts. Wife’s expert considered three valuation approaches and concluded that the value of the business was $200,000. (The opinion does not reveal which approach(es) yielded this result.) The net asset approach, which is utilized when “liquidation is contemplated in the not-too-distant future,” as Wife’s expert explained, would yield a value of $130,000.

The testimony of Husband’s expert is not discussed at all in the opinion.

The trial court found that the fair market value of the HVAC business was equal to the NAV of $130,000, reasoning that “Husband will likely transfer the business to his sons rather than an independent buyer at some point in the future.” The trial court thus demonstrated a misunderstanding of valuation concepts, overlooking the fact that all parties contemplated an ongoing concern, not liquidation. It will be interesting to see whether the Superior Court of Pennsylvania reverses this erroneous decision, and whether, on remand, the issue of personal goodwill is raised.