One of the most financially impactful events in life can be the possibility of a divorce. New Jersey is not a community property state, but rather, an equitable distribution state. This means that, under New Jersey equitable distribution law, the courts have the discretion to divide marital property in an equitable manner – meaning the split between you and your spouse will be fair but not necessarily equal.
The recent Slutsky v Slutsky case provides a good application of New Jersey equitable distribution law after a party appealed their final decree of divorce. This case illustrates the idea that dividing up property in a divorce is very often complex, and not straightforward. Nancy Slutsky filed for divorce from Kenneth Slutksy after 30 years of marriage. The court case was long and difficult, and eventually, a trial was conducted over 19 days. Both parties challenged various provisions of the final judgment, and Kenneth ultimately appealed. There were nine issues he brought before the court, but for our purposes, this article will focus only on the equitable distribution issues. Essentially, Kenneth claimed there were factual flaws in what the judge found, and argues that the calculations of the division should be reversed.
Defendant was a lawyer, having graduated from Harvard Law School. He was a tax law specialist, became an equity partner in his firm, and owned one share of stock. Shortly before the divorce was filed, the firm changed its payment structure, from a corporation to a limited liability partnership. As capital, Kenneth provided $300,000 to the firm, which was financed through a four-year promissory note. Plenty of evidence was presented concerning Kenneth’s compensation, including the payout for his stock, estimated earnings until retirement, value to the company and his contributions to the firm in general, in order to determine the value of his ‘termination credit account’ (TCA), or what his interest in the firm was. Nancy’s expert initially found the TCA value was $350,830 – but on cross-examination, he admitted the value was likely closer to $292,908, excluding goodwill. Not surprisingly, Kenneth’s expert found the value of the TCA to be $285,000. However, Nancy’s expert estimated goodwill in the firm to be over $1 million, resulting in a revised TCA value of $1,185,304. Kenneth’s expert denied there was any goodwill, to the judge’s dismay. The judge accepted Nancy’s expert’s valuation, finding that Kenneth shared in the firm’s goodwill and awarded plaintiff one-half of the value as her equitable interest.
The appellate court engaged the jurisprudence of New Jersey equitable distribution law, emphasizing that the goal is to affect a fair and just division of marital property. The appellate court has the ability to reverse a decision if it is clear that the trial judge abused their discretion. In this case, the court agreed that intangible good will can attach to an attorney’s interest in a professional practice, and therefore, it is subject to the New Jersey equitable distribution laws, and can be given to the other spouse. However, the question of goodwill is not easily resolved, and in this case, the trial judge asserted only the existence of goodwill, rather than any specific factual findings which supported the existence of any goodwill. Additionally, the judge failed to take into account the expert’s own admissions that his calculations of goodwill were somewhat flawed, and took the original calculations at face value. The judge also neglected to analyze the differences in each of the experts’ opinions. The judge failed to partake in basic fact-finding, to the detriment of both parties and the justice system. Therefore, the appellate court reversed the court on this issue.
Additionally, the appellate court drew on previous cases dealing with New Jersey’s equitable distribution laws on goodwill in a professional firm. The case, Stern v. Stern, held that it was a mistake that one spouse’s potential earning capacity should be a factor in distribution, but it should not be dealt with as a separate item of property to be distributed under the law. Importantly, this is because an individual can’t sell the goodwill as part of the law firm; however, this does not reduce its value to the firm and ability to earn more, and should therefore not be totally discounted in the non-professional spouse’s distribution of property, because they contributed to this goodwill by virtue of being a supportive spouse.
The court then looked to the Dugan case, which provided guidance on how to properly value goodwill of a law practice. The calculation should be done by fixing the amount by which that attorney’s earnings surpass that which would have been earned as an employee by someone with similar qualifications in education, experience and capacity. If the attorney’s average earnings exceed the total of the employee’s normal earnings as well as a return on the investment in physical assets, then any excess could form the basis for evaluating goodwill. However, this method was not deemed to be dispositive, and the court found that a more nuanced method was required for an equity partner in a larger firm, bound by a shareholder agreement. This was a crucial point, with the court determining that any analysis of goodwill in a firm must be guided by the shareholder’s agreement to determine whether it is an appropriate measure of the total firm value – including goodwill. The formula should account for the exiting partner’s interest, taken as part of the firm’s excess earnings.
Ultimately, the appellate court determined that the judge misapprehended Kenneth’s experts opinion when it was suggested there was no goodwill in the firm. Rather, his opinion said that the TCA balance already included the goodwill, and recognized that Kenneth was not a ‘rainmaker,’ and brought clients in, but rather was highly skilled in his specialized legal area. His compensation was based strictly on his earning capacity, and nothing more (like goodwill). As part of a judge’s duty in determining division of property under New Jersey equitable distribution laws, the court must make specific findings of fact on all issues relating to assets paying special attention to the factors listed specifically in the statute of N.J.S.A. 2A:34-23.1(p). This issue was thus reversed and remanded to the trial court to determine the actual value of the TCA under this new criterion.
The final issue presented was the division of Kenneth’s two IRA’s, as he argues they were funded with separate money from a premarital bank account. First, the judge accepted the evidence, and stated they were exempt from distribution. Then, upon a motion for reconsideration by the plaintiff, the judge changed his mind, finding there was no believable evidence from the defendant. These findings were inadequate, according to the appellate court. The evidence presented were some checks, and defendant’s testimony, which was initially characterized as ‘forthcoming’ and ‘non-evasive’ by the judge – who then claimed there was no believable evidence. The trial judge failed to list his reasons adequately, and thus the issue was reversed.
This case stands first for the premise that judges must clearly state their rationale and holdings for their decisions on equitable distribution of property. However, it also recognizes that the valuation and division of assets is not so straightforward as finding the fair market value and dividing it in half. Many factors go into the analysis of New Jersey equitable distribution laws, particularly when it comes to valuing a professional’s share in a company’s equity. If you have questions about issues that you might face should you choose to get a divorce, call experienced NJ divorce attorneys at the Law Offices of Peter Van Aulen at (201) 845 – 7400 for a free 30 minute in office consultation.