Keane v. Keane

I have spent some considerable time reading and re-reading the Court of Appeals' decision in Keane v. Keane, 3 NY3d 115 (2006), but have to report that I cannot quite get it. I realize fully that the court's word on this is the final one ' to quote the finale of 'Avenue Q' ' 'for now.'

However, I trust that another opportunity to re-examine this decision, as well as the one that sent us down this path, McSparron v McSparron, 87 NY2d 275 (1995), will arise and, when it does, I can, respectfully, hope that the Court of Appeals as well as the other courts of this State will find some use in them.

McSparron As Prime Mover

I referred to McSparron as the prime mover. That decision, you will recall, overruled the 'merger doctrine' (see Marcus v. Marcus, 135 AD2d 216 (2nd Dept. 1988)) that the lower courts had regularly applied. Pursuant to this, a license ceased to have any independent value once the practice had matured enough so that the ultimate, real-world, value of the license had been determined and delimited by the value of the practice. In that case, the Court of Appeals held that the license persisted in having a residual value outside of the professional practice that had to be valued and distributed separately. The court also stated, correctly I believe, that 'real values' with regard to what the professional actually did with the license were to be used ' as opposed to the theoretical average.

The court in McSparron also cautioned the Bench and Bar not to engage in double counting by considering the same income twice ' once in terms of the valuation of the asset and once more for determining spousal maintenance. (The court said nothing about child support in that context and I predicted that, because of the wording of the statute, the trial court would be compelled to ignore the double count when awarding child support, a prediction which turned out to be precisely correct. See Holterman v. Holterman, 3 NY3d 1 (2004), and my columns of Jan. 8, 1996 and May 10, 1999, in each case NYLJ, p. 3, col. 1)).

In Keane, the court reached the conclusion that the concerns about double counting only arise when the 'income stream' in question is the asset. A professional license, of course, has no value except through the income that it can generate for the license holder practicing the profession. In so far as this sort of asset is concerned, double counting is impermissible and Keane makes that important point clearly. In so far as double counting inevitably occurs in that situation, the conclusion is correct.

The Keane Issue

Now, the problem with Keane. In that case, the husband owned a company that had two assets: a mortgage, and a rental property leased to a body shop. Both components threw off income on a monthly basis. The trial court awarded both the wife and husband 50% of the mortgage income.

At trial, the body shop rental property was valued by the husband's appraiser at $290,000 using the capitalization of earnings method. A market value approach came to $324,000. After trial, the body shop property was awarded to the husband. It is this asset that created the issue.

The court first summarized the history of McSparron, as I set forth above. The court noted that it applied the principle for the first time in Grunfeld v. Grunfeld, 94 NY2d 696 (2000). It stated that the Keane appellate division had applied the double counting rule as setting forth the proposition that 'any' (sic) income-producing asset distributed as marital property may not also be considered a source of income for maintenance purposes. The appellate division held that some of the husband's income from the rental property had also been considered for maintenance purposes and that this was improper. The Court of Appeals reversed.

The Court of Appeals wrote: 'We do not see why an inquiry as to double counting should depend on the valuation method used.' It went on to justify that assertion by stating that any other conclusion would hamstring the trial court in the exercise of discretion in equitably distributing marital property and awarding maintenance.

Let's begin with simple situations. Let's start with the person who runs a Web site from home. That business has no conceivable value apart from the income it generates. There are no brick and mortar assets. Let's look at the person who owns fallow land; it generates no income but has significant value because 'land' has a multitude of uses to which it could be put ' each of which could generate income. For example, the owner could sell it, rent it to someone who wants to build on it, build on it himself and rent the buildings out to someone who can utilize them in her own business and who pays rent to the landowner. I dare say that the value of the asset will be quite different in each case.

However, unless the choice is to sell the asset entirely, these other potential uses the owner makes of it will throw off the income in the form of regular, periodic, cash receipts. I think that it is obvious that the income from renting the fallow land will be vastly different than that received from renting space in a fully developed building on that land ' if for no other reason than the fact that the renter's other costs will be so vastly different.

The economic value of property (tangible or intangible), at the end of the day, lies in its economic utility ' how much money can I make from it? What else can economic value be? If I choose to be a full-time novelist, my law license has no value. As I do practice law and make a living from it, it does have value. The land we just discussed, too, has no monetary value unless the owner does something to generate income from it.

Now, no one enters into any business for any reason except to receive income from it either on a regular basis (renting out the property; proceeds from sales of merchandise to customers) or by ultimately selling the business' hard assets after they have appreciated (liquor; corn). As I am fond of noting, no one buys a liquor store on the eve of prohibition. It is only the income that counts.

Whatever value that garage had to Mr. Keane lay in two things and two things only: 1) the income he received monthly from the tenant or a future tenant; and 2) what he could obtain by selling the building and land. Any appraisal of the business would necessarily break down the two items. Similarly, a standard appraisal of a law partnership would involve capitalization of the lawyer's excess earnings plus his share of the firm's hard assets.

That income stream is necessarily included in the valuation. I cannot tell from the opinion but the difference between the capitalized earnings and 'market' value was likely the difference between selling and retaining the land portion of the garage property.

Now, no matter which business model Mr. Keane chooses to obtain his income from the garage, he is going to receive that money and is going to pay taxes on it (a standard reduction in the valuation process). There is going to be one pile of money ' just one. Nothing anyone says or does will convert it into two piles. That is the reality. Mr. Keane does not earn income from the property that he can spend twice.

The Cart Before the Horse

So, when the Court of Appeals asserts that the inquiry into double counting shouldn't depend upon the valuation method used, to me, and with the greatest respect, it is essentially saying that the double-counting analysis is independent of the very existence of the asset. The court's argument that to do otherwise would inhibit the trial courts in making their determinations puts the cart before the horse, I believe. The purpose of Domestic Relations Law ' 236 was not to impart discretion to the trial courts, it was to provide for property distribution and maintenance in an equitable manner.

The owner of an asset that one spouse receives in equitable distribution has, by definition, not received some other marital asset that was assigned to the other spouse. Property A was awarded to H, and property B to W. Assuredly the trial judge took into account the 'values' of the two properties when deciding how to divvy them up. That valuation of Property A, as I hope I have shown, necessarily entailed some consideration of the income that the asset could give to the owner spouse. Thus, when the assets are balanced against each other at trial, the income of that asset has already been distributed to the nontitled spouse ' not in the form of income, per se, but in the form of Property B or perhaps a cash distributive award. (A distributive award is, analytically, the same as a payment equivalent to the payee spouse's share of a particular asset which asset cannot be physically distributed to him or her.)

But, if the spouse receiving Property B already has received (in this indirect but indisputably real manner) his or her share of the income of Property A, then that income has already been counted. There is always going to be a double counting when properties are distributed between the spouses. Can't be helped.

If there were only the one marital asset and W had to have it as hers (it was her medical practice), H would get a distributive award that (because of the way the practice had been valued) would have included the income of the practice, and H would have received his interest in that income through the determination of the amount of the distributive award. Again, can't be helped.

Conclusion

So, where does this take us? If Keane means what it seems to say, then I suggest that all initial valuations be done simply of the after-tax, liquidation value of the hard assets owned by a business with no consideration of the actual income of the business.

Next, the trial court would use the business' income to award maintenance in the appropriate amount. What if the income exceeds reasonable maintenance? Good point. Then, the court would consider the rest of the income to be an asset in its own right, capitalize that income, and then equitably distribute that capitalized sum. There will never be a double counting that way, I believe.

Presumably, most of you have noticed that I have to some degree just rearranged the order of most of the post-McSparron analyses of the situation. I actually like my approach better, but, even if I assume that the standard approach is more economically sensible as a valuation method in the accounting world, I think it is the only logical approach after Keane if we are not going to distribute the same asset (i.e., a business' income) twice. The only two alternatives I see are for a party to refuse to be awarded an ongoing business or for us all to learn the trick of making exactly the same, literally the same, money (the income) exist both outside as well as inside our divorce courts.

Leonard G. Florescue is a partner at Blank Rome. This article first appeared in the New York Law Journal, a sister publication of this newsletter.

I have spent some considerable time reading and re-reading the Court of Appeals' decision in Keane v. Keane , 3 NY3d 115 (2006), but have to report that I cannot quite get it. I realize fully that the court's word on this is the final one ' to quote the finale of 'Avenue Q' ' 'for now.'

However, I trust that another opportunity to re-examine this decision, as well as the one that sent us down this path, McSparron v McSparron, 87 NY2d 275 (1995), will arise and, when it does, I can, respectfully, hope that the Court of Appeals as well as the other courts of this State will find some use in them.

McSparron As Prime Mover

I referred to McSparron as the prime mover. That decision, you will recall, overruled the 'merger doctrine' ( see Marcus v. Marcus, 135 AD2d 216 (2nd Dept. 1988)) that the lower courts had regularly applied. Pursuant to this, a license ceased to have any independent value once the practice had matured enough so that the ultimate, real-world, value of the license had been determined and delimited by the value of the practice. In that case, the Court of Appeals held that the license persisted in having a residual value outside of the professional practice that had to be valued and distributed separately. The court also stated, correctly I believe, that 'real values' with regard to what the professional actually did with the license were to be used ' as opposed to the theoretical average.

The court in McSparron also cautioned the Bench and Bar not to engage in double counting by considering the same income twice ' once in terms of the valuation of the asset and once more for determining spousal maintenance. (The court said nothing about child support in that context and I predicted that, because of the wording of the statute, the trial court would be compelled to ignore the double count when awarding child support, a prediction which turned out to be precisely correct. See Holterman v. Holterman , 3 NY3d 1 (2004), and my columns of Jan. 8, 1996 and May 10, 1999, in each case NYLJ, p. 3, col. 1)).

In Keane, the court reached the conclusion that the concerns about double counting only arise when the 'income stream' in question is the asset. A professional license, of course, has no value except through the income that it can generate for the license holder practicing the profession. In so far as this sort of asset is concerned, double counting is impermissible and Keane makes that important point clearly. In so far as double counting inevitably occurs in that situation, the conclusion is correct.

The Keane Issue

Now, the problem with Keane. In that case, the husband owned a company that had two assets: a mortgage, and a rental property leased to a body shop. Both components threw off income on a monthly basis. The trial court awarded both the wife and husband 50% of the mortgage income.

At trial, the body shop rental property was valued by the husband's appraiser at $290,000 using the capitalization of earnings method. A market value approach came to $324,000. After trial, the body shop property was awarded to the husband. It is this asset that created the issue.

The court first summarized the history of McSparron, as I set forth above. The court noted that it applied the principle for the first time in Grunfeld v. Grunfeld , 94 NY2d 696 (2000). It stated that the Keane appellate division had applied the double counting rule as setting forth the proposition that 'any' (sic) income-producing asset distributed as marital property may not also be considered a source of income for maintenance purposes. The appellate division held that some of the husband's income from the rental property had also been considered for maintenance purposes and that this was improper. The Court of Appeals reversed.

The Court of Appeals wrote: 'We do not see why an inquiry as to double counting should depend on the valuation method used.' It went on to justify that assertion by stating that any other conclusion would hamstring the trial court in the exercise of discretion in equitably distributing marital property and awarding maintenance.

Let's begin with simple situations. Let's start with the person who runs a Web site from home. That business has no conceivable value apart from the income it generates. There are no brick and mortar assets. Let's look at the person who owns fallow land; it generates no income but has significant value because 'land' has a multitude of uses to which it could be put ' each of which could generate income. For example, the owner could sell it, rent it to someone who wants to build on it, build on it himself and rent the buildings out to someone who can utilize them in her own business and who pays rent to the landowner. I dare say that the value of the asset will be quite different in each case.

However, unless the choice is to sell the asset entirely, these other potential uses the owner makes of it will throw off the income in the form of regular, periodic, cash receipts. I think that it is obvious that the income from renting the fallow land will be vastly different than that received from renting space in a fully developed building on that land ' if for no other reason than the fact that the renter's other costs will be so vastly different.

The economic value of property (tangible or intangible), at the end of the day, lies in its economic utility ' how much money can I make from it? What else can economic value be? If I choose to be a full-time novelist, my law license has no value. As I do practice law and make a living from it, it does have value. The land we just discussed, too, has no monetary value unless the owner does something to generate income from it.

Now, no one enters into any business for any reason except to receive income from it either on a regular basis (renting out the property; proceeds from sales of merchandise to customers) or by ultimately selling the business' hard assets after they have appreciated (liquor; corn). As I am fond of noting, no one buys a liquor store on the eve of prohibition. It is only the income that counts.

Whatever value that garage had to Mr. Keane lay in two things and two things only: 1) the income he received monthly from the tenant or a future tenant; and 2) what he could obtain by selling the building and land. Any appraisal of the business would necessarily break down the two items. Similarly, a standard appraisal of a law partnership would involve capitalization of the lawyer's excess earnings plus his share of the firm's hard assets.

That income stream is necessarily included in the valuation. I cannot tell from the opinion but the difference between the capitalized earnings and 'market' value was likely the difference between selling and retaining the land portion of the garage property.

Now, no matter which business model Mr. Keane chooses to obtain his income from the garage, he is going to receive that money and is going to pay taxes on it (a standard reduction in the valuation process). There is going to be one pile of money ' just one. Nothing anyone says or does will convert it into two piles. That is the reality. Mr. Keane does not earn income from the property that he can spend twice.

The Cart Before the Horse

So, when the Court of Appeals asserts that the inquiry into double counting shouldn't depend upon the valuation method used, to me, and with the greatest respect, it is essentially saying that the double-counting analysis is independent of the very existence of the asset. The court's argument that to do otherwise would inhibit the trial courts in making their determinations puts the cart before the horse, I believe. The purpose of Domestic Relations Law ' 236 was not to impart discretion to the trial courts, it was to provide for property distribution and maintenance in an equitable manner.

The owner of an asset that one spouse receives in equitable distribution has, by definition, not received some other marital asset that was assigned to the other spouse. Property A was awarded to H, and property B to W. Assuredly the trial judge took into account the 'values' of the two properties when deciding how to divvy them up. That valuation of Property A, as I hope I have shown, necessarily entailed some consideration of the income that the asset could give to the owner spouse. Thus, when the assets are balanced against each other at trial, the income of that asset has already been distributed to the nontitled spouse ' not in the form of income, per se, but in the form of Property B or perhaps a cash distributive award. (A distributive award is, analytically, the same as a payment equivalent to the payee spouse's share of a particular asset which asset cannot be physically distributed to him or her.)

But, if the spouse receiving Property B already has received (in this indirect but indisputably real manner) his or her share of the income of Property A, then that income has already been counted. There is always going to be a double counting when properties are distributed between the spouses. Can't be helped.

If there were only the one marital asset and W had to have it as hers (it was her medical practice), H would get a distributive award that (because of the way the practice had been valued) would have included the income of the practice, and H would have received his interest in that income through the determination of the amount of the distributive award. Again, can't be helped.

Conclusion

So, where does this take us? If Keane means what it seems to say, then I suggest that all initial valuations be done simply of the after-tax, liquidation value of the hard assets owned by a business with no consideration of the actual income of the business.

Next, the trial court would use the business' income to award maintenance in the appropriate amount. What if the income exceeds reasonable maintenance? Good point. Then, the court would consider the rest of the income to be an asset in its own right, capitalize that income, and then equitably distribute that capitalized sum. There will never be a double counting that way, I believe.

Presumably, most of you have noticed that I have to some degree just rearranged the order of most of the post-McSparron analyses of the situation. I actually like my approach better, but, even if I assume that the standard approach is more economically sensible as a valuation method in the accounting world, I think it is the only logical approach after Keane if we are not going to distribute the same asset (i.e., a business' income) twice. The only two alternatives I see are for a party to refuse to be awarded an ongoing business or for us all to learn the trick of making exactly the same, literally the same, money (the income) exist both outside as well as inside our divorce courts.

Leonard G. Florescue is a partner at Blank Rome. This article first appeared in the New York Law Journal, a sister publication of this newsletter.