NY Parents Hit Between the Eyes

In a blow to divorcing New York parents with professional licenses, the Court of Appeals of New York recently upheld the decision of the Appellate Division, 3rd Department, that found no statutory authority for deducting enhanced earning contributions from the child support equation. The appellate court's majority concluded that the legislature “did not wish to have a child's lifestyle and support altered based on a distributive award.”

The case was Holterman v. Holterman, No. 73, 2004 N.Y. LEXIS 1520 (6/10/04) (Graffeo, J.), in which plaintiff wife Amy Holterman was awarded a 35% share of the present value of her husband's medical license, which amounts to $21,288 per year. In addition, she was given yearly child support of $34,876, based on her husband's income excluding spousal maintenance, but including the value of his medical license. The result is that the husband must pay his ex-wife approximately two-thirds of his income because the child support award does not take into account the fact that the wife is receiving a separate amount representing her share of the value of the medical license.

The Facts

The Holtermans, who were divorced in October 2000, were married for 19 years. When they married in 1981, the husband was a third-year student at a medical school in Philadelphia. The wife, who had a Masters degree in business administration, was employed full-time as a program analyst and her income contributed to the support of the household. The husband graduated from medical school in 1983 and got his license to practice medicine the following year. In the mid-1980s, the wife began experiencing significant health problems and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia. In part due to these health problems, the couple agreed that the wife would become a homemaker. Their first child was born in 1985, and a second child was born in 1991.

Over the years, the husband continued to advance his professional credentials, becoming board-certified in emergency medicine in 1987. By 2000, he had become an emergency room physician at a hospital, earning a salary of $181,837.

The parties were divorced in 2000 on grounds of the husband's constructive abandonment of his wife. By stipulation, the parties agreed to joint custody of the children, with the wife having primary physical custody. The wife was awarded maintenance of $35,000 per year for 5 years and $20,000 per year thereafter for the remainder of her life. The Supreme Court determined that the wife was entitled to $214,200 as her equitable share of husband's enhanced earnings, based on his medical license, and also ordered the husband to pay child support for their two children in the amount of $34,875.65 annually.

The Appellate Division affirmed, with one modification affecting the husband's obligation to maintain life insurance coverage. He then appealed to the Court of Appeals.

The Case Before the Court of Appeals

On appeal, the husband raised several challenges relating to the equitable distribution of the value of his medical license, the present value of which had been determined to be $612,000. The trial court had found that the wife was entitled to 35% of the value of the husband's enhanced earning capacity as a licensed physician: $214,200. After deducting $29,268.48 from that figure (representing the credit due the husband for the conveyance of his interest in the marital residence) the final net distributive award due to the wife was $184,931. The husband's contention on appeal was that Supreme Court abused its discretion by awarding the wife 35% of the marital portion of the enhanced earning capacity derived from his medical license, and asserted that his ex-wife's share should be reduced to no more than 10%.

Citing to D.R.L. ' 236, the opinion, written by Judge Victoria Graffeo (and joined Chief Judge Judith Kaye and judges Carmen Beauchamp Ciparick, George Bundy Smith and Albert M. Rosenblatt), noted that the factors to consider in equitable distribution are the income and property of each party at the time of marriage and at the time of commencement of the divorce action; the duration of the marriage; the age and health of the parties; any maintenance award; and the nontitled spouse's direct or indirect contributions to the marriage, including services as a spouse, parent, wage earner and homemaker. In addition, in light of the holdings of O'Brien v. O'Brien, 66 NY2d 576, these considerations are to be given particular relevance when evaluating the parties' respective contributions to the attainment of a professional license by one spouse. The Court of Appeals found that Supreme Court had addressed all the relevant statutory factors in making its award of part of the value of the medical license to the wife and had therefore not abused its discretion. As such, the award was affirmed.

The husband next argued that the payment of $21,288 per year — the annual installment payment of the wife's distributive award of her share of enhanced earnings from his medical license — should be deducted from the computation of his income in determining his child support obligation under the Child Support Standards Act (CSSA) and, concomitantly, that amount should be included as income attributable to wife. He claimed that the failure of the courts below to perform such reassignment of income resulted in “double dipping” from the same income stream by awarding both child support and equitable distribution of his future enhanced earnings from the same income source, his salary as a physician. He therefore claimed that the court below erred as a matter of law in violating the anti-duplication principles enunciated in McSparron v. McSparron, 87 NY2d 275 (1995) and Grunfeld v. Grunfeld, 94 NY2d 696 (2000).

In calculating the parties' income, the Supreme Court used the husband's 2000 gross income of $181,837 and deducted his maintenance obligation and FICA contribution to arrive at a combined parental income of $139,502.60, all of which was attributable to the husband. Applying the child-support mandated percentage of 25% for two children to this sum, the court determined that husband must pay $34,875.65 annually in child support. The husband asserted, however, that his annual $21,288 installment payment of the wife's distributive award should also be deducted from his income and included as income attributed to his wife for purposes of the CSSA computations. (In fact, the wife's own expert opined that a reassignment of income adjustment should be undertaken to avoid double dipping of the husband's income stream.)

The Ruling

The Court of Appeals noted at the outset that after computing income under the CSSA guidelines, only eight categories of deductions from that income are allowed under the statute. Receipt of distributive award payments is not considered a category of income, nor is the payment of a distributive award recognized as a deduction from income under the CSSA guidelines. This lack of inclusion in either the list of permissible statutory deductions or the definition of income, the court said, was due to the fact that distributive awards are considered under law to “reflect, not income, but a property distribution” of the marital assets. Scheinkman, New York Law of Domestic Relations ' 14.36, 2003 Pocket Part, at 131 (11 West's NY Prac Series 1996). The cases the husband had cited in support of his case against double dipping – Grunfeld and McSparron – were inapposite because they dealt not with child support but with spousal maintenance. The court held that husband's proposed reallocation formula — or, indeed, any formula that would require a deduction of a distributive award paid over a period of years from the licensed spouse's income for purposes of calculating child support — would be impermissible under the CSSA. “Had the Legislature intended to make distributive awards deductible from one parent's income and includable in the other's, it could easily have so provided. Simply put, it appears that the Legislature did not wish to have a child's lifestyle and support altered based on a distributive award,” the court wrote.

The court also found no error in Supreme Court's decision to require the husband to pay 25% of his income over $80,000 in child support. The lower court had given good reasons for its holding on this issue (including the children's upper middle-class lifestyle before the divorce), so the court could not find a basis for holding that Supreme Court had abused its discretion in making the award.

The Dissent

Judge Robert S. Smith penned a detailed dissenting opinion, with which Judge Susan Phillips concurred. Judge Smith charged that the majority's decision worked too much of a hardship on the husband, who, after all deductions of taxes, child support and the other court-ordered payments, would be left for several years with only $36,000 of his annual pre-tax earnings of $181,000. Additionally, his first year's net income would be only $16,000, as a one-time payment toward his ex-wife's attorney fees was ordered by Supreme Court. Although the income the husband would retain for his own use would increase over time due to the emancipation of his children and the decrease in maintenance after a set period, the dissent pointed out that until the tenth year following the decision, the husband would be paying out at least half of his after-tax income to his ex-wife and children.

Second, in calculating child support, Supreme Court began by considering the income of each party, but then proceeded to complete the calculation on the assumption that the income of each (prior to making the deductions permitted by statute) would be what it was before the divorce. The dissent found this methodology faulty because after distribution, the wife – who had previously had no income of her own – would now have an annual income of $21,288 per year (her 35% of the value of the income-producing asset, the medical license). The husband's income would go down by the same amount. Comparing the professional license to other income-producing assets, such as real property held for investment, the dissent noted, “When income-producing property is owned by a husband or wife who is divorced, it is often appropriate to order part or even all of it equitably distributed to the other spouse. When that is done, however, it makes no sense at all to calculate child support as though no such distribution had occurred – as though the transferring spouse still owned the asset and received the income it generated. Yet the majority concludes that this irrational procedure is required by the CSSA — as indeed it would be, except that the CSSA expressly permits departure from its formula to avoid an 'unjust or inappropriate' result.” Judge Smith was referring to D.R.L. ' 240 (1-b), which says that the non-custodial parent must pay his or her “pro-rata share of the basic child support obligation,” based on “income” as defined in the statute, “unless the court finds that the non-custodial parent's pro-rata share of the basic child support obligation is unjust or inappropriate.” The statute lists ten factors to be considered in making a departure, of which the first is “the financial resources of the custodial and non-custodial parent, and those of the child.” Smith wrote, “Where an income-producing asset changes hands as part of the divorce, the 'financial resources' of one party are greater, and those of the other are less, than the statutory formula assumes. If this is not an instance where the parties' 'financial resources' render the 'pro-rata share' as calculated by statute 'unjust or inappropriate' I find it hard to imagine what such a case would be.”

Conclusion

With the decision in O'Brien v. O'Brien 19 years ago, New York became the first (and only) state to treat professional licenses as marital property to be divided at dissolution of the marriage. Although other states often do consider the enhanced earning capacity a professional license entails in setting alimony and maintenance awards, the license itself isn't treated as asset of the marital estate. The Holterman case illustrates why perhaps the other 49 states have not fallen into line with New York's precedent.

As the dissent pointed out in Holterman, the facts of O'Brien were far different from those in this recent case because the Holtermans were married toward the end of Dr. Holterman's schooling, they shared the fruits of the enhanced earning capacity of his license through many years of marriage, and there was no evidence that Dr. Holterman's income would be going up significantly in the future. In contrast, the parties in O'Brien were married when the husband began pursuing his advanced degree studies, the wife put aside her own opportunities for advancing her career in order to put her husband through school, and the husband filed for divorce just 2 months after attaining his license, while his income was still low but had the potential to rise a great deal in future. O'Brien sought to remedy the obvious inequity that was produced when one spouse used the other for financial and other support and then ditched the marriage just when the family finances were poised to see a great increase that had not yet materialized. Basing such questions as how much maintenance or child support to award on the low income of the recent license attainee would fall far short of compensating the non-licensed spouse for his or her contributions to that license. As Judge Smith concluded, perhaps the holding in O'Brien should be applied only to those cases involving the classic student spouse/working spouse syndrome, not to a case like Holterman, in which the income potential of the professional license is already being realized.

For the present time, however, the Holterman decision is the law of New York and will undoubtedly generate much consternation (or glee), depending on which side of the license holding equation divorcing parties fall into. Expect vigorous debate at the trial level on the CSSA's permission for courts to depart from the standards in order to avoid an “unjust and inappropriate result” because trying to prove abuse of discretion at the appellate level is going to be hard in light of this case.

In a blow to divorcing New York parents with professional licenses, the Court of Appeals of New York recently upheld the decision of the Appellate Division, 3rd Department, that found no statutory authority for deducting enhanced earning contributions from the child support equation. The appellate court's majority concluded that the legislature “did not wish to have a child's lifestyle and support altered based on a distributive award.”

The case was Holterman v. Holterman, No. 73, 2004 N.Y. LEXIS 1520 (6/10/04) (Graffeo, J.), in which plaintiff wife Amy Holterman was awarded a 35% share of the present value of her husband's medical license, which amounts to $21,288 per year. In addition, she was given yearly child support of $34,876, based on her husband's income excluding spousal maintenance, but including the value of his medical license. The result is that the husband must pay his ex-wife approximately two-thirds of his income because the child support award does not take into account the fact that the wife is receiving a separate amount representing her share of the value of the medical license.

The Facts

The Holtermans, who were divorced in October 2000, were married for 19 years. When they married in 1981, the husband was a third-year student at a medical school in Philadelphia. The wife, who had a Masters degree in business administration, was employed full-time as a program analyst and her income contributed to the support of the household. The husband graduated from medical school in 1983 and got his license to practice medicine the following year. In the mid-1980s, the wife began experiencing significant health problems and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia. In part due to these health problems, the couple agreed that the wife would become a homemaker. Their first child was born in 1985, and a second child was born in 1991.

Over the years, the husband continued to advance his professional credentials, becoming board-certified in emergency medicine in 1987. By 2000, he had become an emergency room physician at a hospital, earning a salary of $181,837.

The parties were divorced in 2000 on grounds of the husband's constructive abandonment of his wife. By stipulation, the parties agreed to joint custody of the children, with the wife having primary physical custody. The wife was awarded maintenance of $35,000 per year for 5 years and $20,000 per year thereafter for the remainder of her life. The Supreme Court determined that the wife was entitled to $214,200 as her equitable share of husband's enhanced earnings, based on his medical license, and also ordered the husband to pay child support for their two children in the amount of $34,875.65 annually.

The Appellate Division affirmed, with one modification affecting the husband's obligation to maintain life insurance coverage. He then appealed to the Court of Appeals.

The Case Before the Court of Appeals

On appeal, the husband raised several challenges relating to the equitable distribution of the value of his medical license, the present value of which had been determined to be $612,000. The trial court had found that the wife was entitled to 35% of the value of the husband's enhanced earning capacity as a licensed physician: $214,200. After deducting $29,268.48 from that figure (representing the credit due the husband for the conveyance of his interest in the marital residence) the final net distributive award due to the wife was $184,931. The husband's contention on appeal was that Supreme Court abused its discretion by awarding the wife 35% of the marital portion of the enhanced earning capacity derived from his medical license, and asserted that his ex-wife's share should be reduced to no more than 10%.

Citing to D.R.L. ' 236, the opinion, written by Judge Victoria Graffeo (and joined Chief Judge Judith Kaye and judges Carmen Beauchamp Ciparick, George Bundy Smith and Albert M. Rosenblatt), noted that the factors to consider in equitable distribution are the income and property of each party at the time of marriage and at the time of commencement of the divorce action; the duration of the marriage; the age and health of the parties; any maintenance award; and the nontitled spouse's direct or indirect contributions to the marriage, including services as a spouse, parent, wage earner and homemaker. In addition, in light of the holdings of O'Brien v. O'Brien , 66 NY2d 576, these considerations are to be given particular relevance when evaluating the parties' respective contributions to the attainment of a professional license by one spouse. The Court of Appeals found that Supreme Court had addressed all the relevant statutory factors in making its award of part of the value of the medical license to the wife and had therefore not abused its discretion. As such, the award was affirmed.

The husband next argued that the payment of $21,288 per year — the annual installment payment of the wife's distributive award of her share of enhanced earnings from his medical license — should be deducted from the computation of his income in determining his child support obligation under the Child Support Standards Act (CSSA) and, concomitantly, that amount should be included as income attributable to wife. He claimed that the failure of the courts below to perform such reassignment of income resulted in “double dipping” from the same income stream by awarding both child support and equitable distribution of his future enhanced earnings from the same income source, his salary as a physician. He therefore claimed that the court below erred as a matter of law in violating the anti-duplication principles enunciated in McSparron v. McSparron , 87 NY2d 275 (1995) and Grunfeld v. Grunfeld , 94 NY2d 696 (2000).

In calculating the parties' income, the Supreme Court used the husband's 2000 gross income of $181,837 and deducted his maintenance obligation and FICA contribution to arrive at a combined parental income of $139,502.60, all of which was attributable to the husband. Applying the child-support mandated percentage of 25% for two children to this sum, the court determined that husband must pay $34,875.65 annually in child support. The husband asserted, however, that his annual $21,288 installment payment of the wife's distributive award should also be deducted from his income and included as income attributed to his wife for purposes of the CSSA computations. (In fact, the wife's own expert opined that a reassignment of income adjustment should be undertaken to avoid double dipping of the husband's income stream.)

The Ruling

The Court of Appeals noted at the outset that after computing income under the CSSA guidelines, only eight categories of deductions from that income are allowed under the statute. Receipt of distributive award payments is not considered a category of income, nor is the payment of a distributive award recognized as a deduction from income under the CSSA guidelines. This lack of inclusion in either the list of permissible statutory deductions or the definition of income, the court said, was due to the fact that distributive awards are considered under law to “reflect, not income, but a property distribution” of the marital assets. Scheinkman, New York Law of Domestic Relations ' 14.36, 2003 Pocket Part, at 131 (11 West's NY Prac Series 1996). The cases the husband had cited in support of his case against double dipping – Grunfeld and McSparron – were inapposite because they dealt not with child support but with spousal maintenance. The court held that husband's proposed reallocation formula — or, indeed, any formula that would require a deduction of a distributive award paid over a period of years from the licensed spouse's income for purposes of calculating child support — would be impermissible under the CSSA. “Had the Legislature intended to make distributive awards deductible from one parent's income and includable in the other's, it could easily have so provided. Simply put, it appears that the Legislature did not wish to have a child's lifestyle and support altered based on a distributive award,” the court wrote.

The court also found no error in Supreme Court's decision to require the husband to pay 25% of his income over $80,000 in child support. The lower court had given good reasons for its holding on this issue (including the children's upper middle-class lifestyle before the divorce), so the court could not find a basis for holding that Supreme Court had abused its discretion in making the award.

The Dissent

Judge Robert S. Smith penned a detailed dissenting opinion, with which Judge Susan Phillips concurred. Judge Smith charged that the majority's decision worked too much of a hardship on the husband, who, after all deductions of taxes, child support and the other court-ordered payments, would be left for several years with only $36,000 of his annual pre-tax earnings of $181,000. Additionally, his first year's net income would be only $16,000, as a one-time payment toward his ex-wife's attorney fees was ordered by Supreme Court. Although the income the husband would retain for his own use would increase over time due to the emancipation of his children and the decrease in maintenance after a set period, the dissent pointed out that until the tenth year following the decision, the husband would be paying out at least half of his after-tax income to his ex-wife and children.

Second, in calculating child support, Supreme Court began by considering the income of each party, but then proceeded to complete the calculation on the assumption that the income of each (prior to making the deductions permitted by statute) would be what it was before the divorce. The dissent found this methodology faulty because after distribution, the wife – who had previously had no income of her own – would now have an annual income of $21,288 per year (her 35% of the value of the income-producing asset, the medical license). The husband's income would go down by the same amount. Comparing the professional license to other income-producing assets, such as real property held for investment, the dissent noted, “When income-producing property is owned by a husband or wife who is divorced, it is often appropriate to order part or even all of it equitably distributed to the other spouse. When that is done, however, it makes no sense at all to calculate child support as though no such distribution had occurred – as though the transferring spouse still owned the asset and received the income it generated. Yet the majority concludes that this irrational procedure is required by the CSSA — as indeed it would be, except that the CSSA expressly permits departure from its formula to avoid an 'unjust or inappropriate' result.” Judge Smith was referring to D.R.L. ' 240 (1-b), which says that the non-custodial parent must pay his or her “pro-rata share of the basic child support obligation,” based on “income” as defined in the statute, “unless the court finds that the non-custodial parent's pro-rata share of the basic child support obligation is unjust or inappropriate.” The statute lists ten factors to be considered in making a departure, of which the first is “the financial resources of the custodial and non-custodial parent, and those of the child.” Smith wrote, “Where an income-producing asset changes hands as part of the divorce, the 'financial resources' of one party are greater, and those of the other are less, than the statutory formula assumes. If this is not an instance where the parties' 'financial resources' render the 'pro-rata share' as calculated by statute 'unjust or inappropriate' I find it hard to imagine what such a case would be.”

Conclusion

With the decision in O'Brien v. O'Brien 19 years ago, New York became the first (and only) state to treat professional licenses as marital property to be divided at dissolution of the marriage. Although other states often do consider the enhanced earning capacity a professional license entails in setting alimony and maintenance awards, the license itself isn't treated as asset of the marital estate. The Holterman case illustrates why perhaps the other 49 states have not fallen into line with New York's precedent.

As the dissent pointed out in Holterman, the facts of O'Brien were far different from those in this recent case because the Holtermans were married toward the end of Dr. Holterman's schooling, they shared the fruits of the enhanced earning capacity of his license through many years of marriage, and there was no evidence that Dr. Holterman's income would be going up significantly in the future. In contrast, the parties in O'Brien were married when the husband began pursuing his advanced degree studies, the wife put aside her own opportunities for advancing her career in order to put her husband through school, and the husband filed for divorce just 2 months after attaining his license, while his income was still low but had the potential to rise a great deal in future. O'Brien sought to remedy the obvious inequity that was produced when one spouse used the other for financial and other support and then ditched the marriage just when the family finances were poised to see a great increase that had not yet materialized. Basing such questions as how much maintenance or child support to award on the low income of the recent license attainee would fall far short of compensating the non-licensed spouse for his or her contributions to that license. As Judge Smith concluded, perhaps the holding in O'Brien should be applied only to those cases involving the classic student spouse/working spouse syndrome, not to a case like Holterman, in which the income potential of the professional license is already being realized.

For the present time, however, the Holterman decision is the law of New York and will undoubtedly generate much consternation (or glee), depending on which side of the license holding equation divorcing parties fall into. Expect vigorous debate at the trial level on the CSSA's permission for courts to depart from the standards in order to avoid an “unjust and inappropriate result” because trying to prove abuse of discretion at the appellate level is going to be hard in light of this case.