Inadequate Discovery in Matrimonial Actions

With the advent of fee dispute arbitration, many litigants are quickly becoming more informed about their lawyers' responsibilities. This has led to significant court actions with regard to discharging attorneys 'for cause,' where the attorneys forfeit their fees. In the context of inadequate financial discovery, at least one court has already allowed a client to discharge an attorney for cause, despite the court's view that the attorney did not commit actionable malpractice. Smith v. Smith, Index No. 01-07091 (Sup. Ct., Suffolk Cty., 2007).

Obviously, it is the rare case in which financial discovery is not warranted. For example, where one party to the action is engaged in a professional practice or a business, the value of that practice or business becomes extremely important. This is especially true where the titled spouse claims that some or all of the practice, license or business valuation is separate property.

Oftentimes, the fringe benefits of owning and operating a practice or a business are not readily apparent on the surface. For instance, there may be various additional benefits and personal expenses that the practice or business paid on behalf of the titled spouse. These extras often included premiums for family medical insurance coverage, unreimbursed family medical expenses, automobile expenses (including lease and installment loan payments, insurance, repairs and maintenance), travel expenses, dining and entertainment expenses, telephone and cell phone expenses for personal and home telephones, life insurance premiums, retirement accounts, withdrawals for petty cash, and other expenses, including salaries to family members. In many of these situations, the non-titled spouse often subsumes his or her career to the practice or business 'owner' who likely is the more significant earner of the two.

In these cases, the non-titled spouse will likely seek an equitable distribution of the marital portion of the business, in addition to seeking an arrangement for the children, if any, including custody and child support. Additionally, it is likely that
the savvy practitioner will seek interim fee awards to allow the non-titled spouse to pursue a reasonable settlement or, if necessary, trial. As any matrimonial practitioner is aware, it is oftentimes extremely difficult, even with full and detailed financial discovery, to estimate a businessperson's complete income and asset picture. The titled spouse's true disposable earnings ' including salary, 'perks' and other personal expenses the business pays ' are all extremely relevant to a court's determination of a proper award of maintenance and the calculation of child support under statutory Child Support Standards Act guidelines. Domestic Relations Law (DRL) ' 240 (1-b).

Moreover, the equitable distribution issues in these cases often are intimately entangled with the titled spouse's claim of a separate property interest in erstwhile marital property. Expert testimony would be required to appropriately value a professional license, practice or the business, all of which is necessary to allow the court to render a determination regarding any distributive award.

It is obvious that the best way to properly represent your client is to vigorously pursue financial discovery to ensure the fullest possible picture, both for settlement negotiations and for trial. The potential harm and prejudice to a party, especially the non-monied spouse who forgoes financial discovery, is obvious and enormous, and it is difficult, if not impossible, to contrast a case where refraining from financial discovery is a winning strategy. For example, there remain obvious advantages to conducting depositions of an adverse party and non-party witnesses with relevant knowledge concerning financial matters in divorce cases.

The Importance of Financial Information to Matrimonial Cases

The overriding importance of financial disclosure in matrimonial actions was made clear by the Second Department many years ago, in Ahern v. Ahern, 94 AD.2d 53 (2d Dept. 1983). That court found that the parties must be prepared to present evidence concerning the exact nature and value of the marital property in order to assist the court in reaching its determination. Accordingly, it held that both parties in the matrimonial action governed by the then new Equitable Distribution Law were entitled to a searching exploration of each other's assets and dealings at the time of and during the marriage. This would help them to delineate the extent of marital property, distinguish it from separate property, uncover hidden assets that constitute marital property, discover waste of possible marital property, and in general, gain any information that might bear on the issue of equitable distribution, maintenance and child support. The entire financial history of the marriage must be open for inspection by both parties, opined the court, and it was simply no longer true that the financial status of the parties at the time of divorce was all that counted. See also Corsel v. Corsel, 133 AD2d 604 (2d Dept. 1987); Colella v. Colella, 99 AD2d 794 (2d Dept., 1984) (reversing lower court and allowing wife to take late deposition of husband, theorizing that discovery is extremely important to full information in case).

The failure even to complete on-going discovery in a timely manner can result in discharge for cause. Cohen v. Cohen, 183 AD2d 802 (2d Dept., 1992).

There are many reasons that detailed financial discovery is the proper course to follow:

Burden of Proof on Non-Marital Assets: It is true that the spouse seeking a declaration that certain assets are separate and non-marital in nature bears the heavy burden of proving this claim by clear and convincing evidence. Stavans v. Stavans, 207 AD2d 392; Waldman v. Waldman, 196 AD2d 650. Nevertheless, there are no valid grounds for completely failing to conduct discovery. This 'strategy' would leave the non-titled spouse bereft of any means to propose or respond to settlement offers and no evidence to present to a judge at a trial. In such a case, if the titled spouse meets the initial, prima facie burden to establish that the contested property is separate and not marital, the non-titled spouse, having conducted no discovery, would be unprepared and unable to establish a marital property component, particularly as it relates to increases in the value of separate property or the transmutation of separate property by commingling it with marital property.

Transmuting Separate Property by Commingling: It is well-established law that separate property can be transmuted into marital property by commingling it with marital property. Sherman v. Sherman, 304 AD2d 744 (2d Dept., 2003). Once separate property is commingled with marital funds, it becomes marital property. Walasek v. Walasek, 243 AD2d 851 (3d Dept. 1997). This rule is so strict that the formerly separate property does not resume its status as separate even if all marital funds are later removed from the account. Chiotti v. Chiotti, 12 AD3d 995 (3d Dept., 2004); see also Mahony v. Mahony, N.Y.L.J. June 30, 1994, p.28 col. 1 (Sup. Ct. N.Y.) (where records not clear, funds deemed marital). However, the burden can be met by demonstrating that there is no other possible source for the funds. Kenney v. Lureman, 8 AD3d 1099 (4^th Dept. 2004); Zanger v. Zanger, 1 AD3d 865, 867 (3d Dept. 2003); Sarafian v. Sirafian, 140 AD2d 801, 804 (3d Dept. 1988) (all holding that evidence must rebut even unsupported testimony that the asset was separate property). Obviously, the only way to discern the funds' nature is to follow the trail of financial records. This is especially true with regard to a marital residence, where funds may come from a variety of different sources, including gifts, inheritances, or even the sale of a former marital residence.

Increases in the Value of Separate Property As Marital Property Due to Direct or Indirect Contributions of the Non-titled Spouse: The case law has always given a broad interpretation to the statutory requirement that increases in a non-titled spouse's separate property are subject to equitable distribution as marital property 'to the extent that such appreciation is due in part to the contributions or efforts of the other spouse,' including indirect contributions that allow the titled spouse to devote time and effort to the separate property. D.R.L. ' 236 (B)(1)(d)(3); Price v. Price, 69 NY2d 8 (1986); Majauskas v. Majauskas, 61 NY2d 481 (1984); see also Hartog v. Hartog, 85 NY2d 36 (1995) (emphasizing that appreciation must be due in its entirety to others' efforts or market forces before increase can be removed from marital estate; even a 'small degree' renders the increase marital). Nevertheless, the non-titled spouse does possess a burden to establish the nature of any contribution. Tzanopolous v. Tzanopolous, 18 AD3d 464 (2d Dept., 2005); Carnoil v. Carnoil, 306 AD2d 366 (2d Dept., 2003). Results often depend on the factual circumstances of the individual cases, as demonstrated by two opinions from the First and Second Departments, respectively, in two cases that reached different results. In the first, the titled spouse controlled the asset, and the non-titled spouse demonstrated that her efforts allowed her husband to invest time and effort into growing the account, seeded with his inheritance money. Spencer v. Spencer, 230 AD2d 645 (1^st Dept. 1996). In the other, a manager had sole discretion to handle the titled spouse's inheritance account, rendering it non-marital property. Robertson v. Robertson, 186 AD2d 124 (2d Dept. 1992). Additionally, it is well settled that a court may distribute an asset, such as a business or residence, only where an expert values the property. Feldman v. Feldman, 194 AD2d 207, 217 (2d Dept. 1993); Mutt v. Mutt, 242 AD2d 612 (2d Dept., 1997).Thus, financial discovery must include resort to an expert in order to obtain the proper information and a sound basis for your client's position at trial.

What Is 'Cause'?

The attorney who does not conduct discovery risks being discharged for cause. A concise definition of what constitutes discharge 'for cause' can be found in the Federal District Court case of Garcia v. Teitler, 2004 U.S. Dist. LEXIS 13854, 2004 WL 1636982 (E.D.N.Y. 2004), which includes many examples. The court there proclaimed the New York standard for discharge for cause to be 'unreasonably lax in pursuing the client's case.' The federal court cited to 31 Am. Jur. Proof of Facts 2d 125, ' 7 (Aug. 2003): 'An examination of the appellate decisions dealing with the question of just cause for dismissal of an attorney reveals that the courts have been fairly consistent in finding just cause to exist where one or more of the following elements is present in the factual picture: 1) the attorney's failure to perform under the employment contract; 2) his lack of diligence in so performing; 3) his lack of ordinary skill or care in so performing; 4) his making of demands on the client wthat violate the terms or exceed the scope of the contract; 5) his taking of actions contrary to the client's interests or objectives; 6) his indulging in some sort of unprofessional conduct while handling the client's affairs; 7) his venting of personal or economic hostility toward the client; and 8) his loss of the client's trust and confidence.'

A 'strategy' that includes no financial discovery will likely lead to a bad result for the attorney. As is well known, the Lawyer's Code of Professional Responsibility requires an attorney to represent a client competently (Canon 6) and zealously (Canon 7). The abandonment of all pre-trial discovery in a matter is likely inconsistent with proper representation, zealous or otherwise. Failing to conduct financial discovery sufficient to protect your client allows a client to discharge 'for cause' the offending attorney.

Discharge for Cause: Is Proof of Malpractice Required?

An interesting question arises concerning the interplay between discharge for cause and attorney malpractice. What, if any, is the relationship between the two? It would appear that an attorney should be discharged for cause in every case where actionable malpractice is proved. It is important to consider the elements of a malpractice claim. As one court noted, an action for legal malpractice requires proof of three elements: 1) that the attorney was negligent; 2) that such negligence was proximate cause of plaintiff's losses; and 3) that actual damages can be proved. Brooks v. Lewin, 21 AD3d 731 (1^st Dept. 2005).

Certainly, if the attorney's conduct falls to such a level that a judge or jury find losses and damages, the client should not have to then turn around and pay that attorney for the slipshod service. (For malpractice cases, see Rosner v. Paley, 65 NY2d 736 (1985); Flanery v. Goldsmith, 268 AD2d 267 (1^st Dept 2000); Phillips Smith Specialty Retail Group v. Parker Chapin Flattau & Klimpl, 265 AD2d 208 (1^st Dept. 1999); Morrison Cohen Singer & Weinstein v. Zuker, 203 AD2d 119 (1^st Dept 1994); Holmberg, Galbraith, Holmberg, Orkin & Bennett v. Koury, 176 AD2d 1045 (3^d Dept 1991); Perini v. Perini, 154 AD2d 360 (2d Dept 1989).

A more interesting inquiry is whether a client can avoid paying an attorney even where losses and damages cannot be proved.

It would appear that cases concerning legal malpractice alone, without mentioning discharge for cause, are not helpful in solving this inquiry. They do not provide proof that malpractice is a required element in every discharge for cause case.

An additional reason why damages ' and therefore actionable malpractice ' do not form an essential part of a discharge for cause claim is that an attorney may seek a 'for cause' hearing immediately. See Jud. Law
' 457. Meanwhile, the trial of the underlying action that led to a discharge claim may be months away. This would lead to an untenable situation, where a client would be forced to speculate as to damages, which would remain unknown when the parties conduct a 'for cause' hearing.

Lessons Learned

There are a number of lessons to be learned from the case of Smith v. Smith. First and foremost is do not ignore your clients. It cannot be stressed enough that, while it is true that every client thinks you work only for him or her, no client can be shunted aside and ignored. This is the complaint perhaps heard most from clients. Second, do not try exotic 'strategies' without first speaking with experienced litigators in your practice area to ascertain their effectiveness and potential downside, including malpractice and fee forfeiture. Third, if you choose to adopt a new strategy, get your client's written consent.

Michael B. Solomon, a member of this newsletter's Board of Editors, is a principal with Sanders & Solomon in Huntington Station. Itamar Yeager is counsel to the Rockland County Legislature and a private practitioner.

With the advent of fee dispute arbitration, many litigants are quickly becoming more informed about their lawyers' responsibilities. This has led to significant court actions with regard to discharging attorneys 'for cause,' where the attorneys forfeit their fees. In the context of inadequate financial discovery, at least one court has already allowed a client to discharge an attorney for cause, despite the court's view that the attorney did not commit actionable malpractice. Smith v. Smith, Index No. 01-07091 (Sup. Ct., Suffolk Cty., 2007).

Obviously, it is the rare case in which financial discovery is not warranted. For example, where one party to the action is engaged in a professional practice or a business, the value of that practice or business becomes extremely important. This is especially true where the titled spouse claims that some or all of the practice, license or business valuation is separate property.

Oftentimes, the fringe benefits of owning and operating a practice or a business are not readily apparent on the surface. For instance, there may be various additional benefits and personal expenses that the practice or business paid on behalf of the titled spouse. These extras often included premiums for family medical insurance coverage, unreimbursed family medical expenses, automobile expenses (including lease and installment loan payments, insurance, repairs and maintenance), travel expenses, dining and entertainment expenses, telephone and cell phone expenses for personal and home telephones, life insurance premiums, retirement accounts, withdrawals for petty cash, and other expenses, including salaries to family members. In many of these situations, the non-titled spouse often subsumes his or her career to the practice or business 'owner' who likely is the more significant earner of the two.

In these cases, the non-titled spouse will likely seek an equitable distribution of the marital portion of the business, in addition to seeking an arrangement for the children, if any, including custody and child support. Additionally, it is likely that
the savvy practitioner will seek interim fee awards to allow the non-titled spouse to pursue a reasonable settlement or, if necessary, trial. As any matrimonial practitioner is aware, it is oftentimes extremely difficult, even with full and detailed financial discovery, to estimate a businessperson's complete income and asset picture. The titled spouse's true disposable earnings ' including salary, 'perks' and other personal expenses the business pays ' are all extremely relevant to a court's determination of a proper award of maintenance and the calculation of child support under statutory Child Support Standards Act guidelines. Domestic Relations Law (DRL) ' 240 (1-b).

Moreover, the equitable distribution issues in these cases often are intimately entangled with the titled spouse's claim of a separate property interest in erstwhile marital property. Expert testimony would be required to appropriately value a professional license, practice or the business, all of which is necessary to allow the court to render a determination regarding any distributive award.

It is obvious that the best way to properly represent your client is to vigorously pursue financial discovery to ensure the fullest possible picture, both for settlement negotiations and for trial. The potential harm and prejudice to a party, especially the non-monied spouse who forgoes financial discovery, is obvious and enormous, and it is difficult, if not impossible, to contrast a case where refraining from financial discovery is a winning strategy. For example, there remain obvious advantages to conducting depositions of an adverse party and non-party witnesses with relevant knowledge concerning financial matters in divorce cases.

The Importance of Financial Information to Matrimonial Cases

The overriding importance of financial disclosure in matrimonial actions was made clear by the Second Department many years ago, in Ahern v. Ahern , 94 AD.2d 53 (2d Dept. 1983). That court found that the parties must be prepared to present evidence concerning the exact nature and value of the marital property in order to assist the court in reaching its determination. Accordingly, it held that both parties in the matrimonial action governed by the then new Equitable Distribution Law were entitled to a searching exploration of each other's assets and dealings at the time of and during the marriage. This would help them to delineate the extent of marital property, distinguish it from separate property, uncover hidden assets that constitute marital property, discover waste of possible marital property, and in general, gain any information that might bear on the issue of equitable distribution, maintenance and child support. The entire financial history of the marriage must be open for inspection by both parties, opined the court, and it was simply no longer true that the financial status of the parties at the time of divorce was all that counted. See also Corsel v. Corsel , 133 AD2d 604 (2d Dept. 1987); Colella v. Colella , 99 AD2d 794 (2d Dept., 1984) (reversing lower court and allowing wife to take late deposition of husband, theorizing that discovery is extremely important to full information in case).

The failure even to complete on-going discovery in a timely manner can result in discharge for cause. Cohen v. Cohen, 183 AD2d 802 (2d Dept., 1992).

There are many reasons that detailed financial discovery is the proper course to follow:

Burden of Proof on Non-Marital Assets: It is true that the spouse seeking a declaration that certain assets are separate and non-marital in nature bears the heavy burden of proving this claim by clear and convincing evidence. Stavans v. Stavans , 207 AD2d 392; Waldman v. Waldman , 196 AD2d 650. Nevertheless, there are no valid grounds for completely failing to conduct discovery. This 'strategy' would leave the non-titled spouse bereft of any means to propose or respond to settlement offers and no evidence to present to a judge at a trial. In such a case, if the titled spouse meets the initial, prima facie burden to establish that the contested property is separate and not marital, the non-titled spouse, having conducted no discovery, would be unprepared and unable to establish a marital property component, particularly as it relates to increases in the value of separate property or the transmutation of separate property by commingling it with marital property.

Transmuting Separate Property by Commingling: It is well-established law that separate property can be transmuted into marital property by commingling it with marital property. Sherman v. Sherman , 304 AD2d 744 (2d Dept., 2003). Once separate property is commingled with marital funds, it becomes marital property. Walasek v. Walasek , 243 AD2d 851 (3d Dept. 1997). This rule is so strict that the formerly separate property does not resume its status as separate even if all marital funds are later removed from the account. Chiotti v. Chiotti , 12 AD3d 995 (3d Dept., 2004); see also Mahony v. Mahony, N.Y.L.J. June 30, 1994, p.28 col. 1 (Sup. Ct. N.Y.) (where records not clear, funds deemed marital). However, the burden can be met by demonstrating that there is no other possible source for the funds. Kenney v. Lureman , 8 AD3d 1099 (4 th Dept. 2004); Zanger v. Zanger , 1 AD3d 865, 867 (3d Dept. 2003); Sarafian v. Sirafian , 140 AD2d 801, 804 (3d Dept. 1988) (all holding that evidence must rebut even unsupported testimony that the asset was separate property). Obviously, the only way to discern the funds' nature is to follow the trail of financial records. This is especially true with regard to a marital residence, where funds may come from a variety of different sources, including gifts, inheritances, or even the sale of a former marital residence.

Increases in the Value of Separate Property As Marital Property Due to Direct or Indirect Contributions of the Non-titled Spouse: The case law has always given a broad interpretation to the statutory requirement that increases in a non-titled spouse's separate property are subject to equitable distribution as marital property 'to the extent that such appreciation is due in part to the contributions or efforts of the other spouse,' including indirect contributions that allow the titled spouse to devote time and effort to the separate property. D.R.L. ' 236 (B)(1)(d)(3); Price v. Price , 69 NY2d 8 (1986); Majauskas v. Majauskas , 61 NY2d 481 (1984); see also Hartog v. Hartog , 85 NY2d 36 (1995) (emphasizing that appreciation must be due in its entirety to others' efforts or market forces before increase can be removed from marital estate; even a 'small degree' renders the increase marital). Nevertheless, the non-titled spouse does possess a burden to establish the nature of any contribution. Tzanopolous v. Tzanopolous , 18 AD3d 464 (2d Dept., 2005); Carnoil v. Carnoil , 306 AD2d 366 (2d Dept., 2003). Results often depend on the factual circumstances of the individual cases, as demonstrated by two opinions from the First and Second Departments, respectively, in two cases that reached different results. In the first, the titled spouse controlled the asset, and the non-titled spouse demonstrated that her efforts allowed her husband to invest time and effort into growing the account, seeded with his inheritance money. Spencer v. Spencer, 230 AD2d 645 (1 st Dept. 1996). In the other, a manager had sole discretion to handle the titled spouse's inheritance account, rendering it non-marital property. Robertson v. Robertson , 186 AD2d 124 (2d Dept. 1992). Additionally, it is well settled that a court may distribute an asset, such as a business or residence, only where an expert values the property. Feldman v. Feldman , 194 AD2d 207, 217 (2d Dept. 1993); Mutt v. Mutt , 242 AD2d 612 (2d Dept., 1997).Thus, financial discovery must include resort to an expert in order to obtain the proper information and a sound basis for your client's position at trial.

What Is 'Cause'?

The attorney who does not conduct discovery risks being discharged for cause. A concise definition of what constitutes discharge 'for cause' can be found in the Federal District Court case of Garcia v. Teitler, 2004 U.S. Dist. LEXIS 13854, 2004 WL 1636982 (E.D.N.Y. 2004), which includes many examples. The court there proclaimed the New York standard for discharge for cause to be 'unreasonably lax in pursuing the client's case.' The federal court cited to 31 Am. Jur. Proof of Facts 2d 125, ' 7 (Aug. 2003): 'An examination of the appellate decisions dealing with the question of just cause for dismissal of an attorney reveals that the courts have been fairly consistent in finding just cause to exist where one or more of the following elements is present in the factual picture: 1) the attorney's failure to perform under the employment contract; 2) his lack of diligence in so performing; 3) his lack of ordinary skill or care in so performing; 4) his making of demands on the client wthat violate the terms or exceed the scope of the contract; 5) his taking of actions contrary to the client's interests or objectives; 6) his indulging in some sort of unprofessional conduct while handling the client's affairs; 7) his venting of personal or economic hostility toward the client; and 8) his loss of the client's trust and confidence.'

A 'strategy' that includes no financial discovery will likely lead to a bad result for the attorney. As is well known, the Lawyer's Code of Professional Responsibility requires an attorney to represent a client competently (Canon 6) and zealously (Canon 7). The abandonment of all pre-trial discovery in a matter is likely inconsistent with proper representation, zealous or otherwise. Failing to conduct financial discovery sufficient to protect your client allows a client to discharge 'for cause' the offending attorney.

Discharge for Cause: Is Proof of Malpractice Required?

An interesting question arises concerning the interplay between discharge for cause and attorney malpractice. What, if any, is the relationship between the two? It would appear that an attorney should be discharged for cause in every case where actionable malpractice is proved. It is important to consider the elements of a malpractice claim. As one court noted, an action for legal malpractice requires proof of three elements: 1) that the attorney was negligent; 2) that such negligence was proximate cause of plaintiff's losses; and 3) that actual damages can be proved. Brooks v. Lewin , 21 AD3d 731 (1 st Dept. 2005).

Certainly, if the attorney's conduct falls to such a level that a judge or jury find losses and damages, the client should not have to then turn around and pay that attorney for the slipshod service. (For malpractice cases, see Rosner v. Paley , 65 NY2d 736 (1985); Flanery v. Goldsmith , 268 AD2d 267 (1 st Dept 2000 ); Phillips Smith Specialty Retail Group v. Parker Chapin Flattau & Klimpl , 265 AD2d 208 (1 st Dept. 1999); Morrison Cohen Singer & Weinstein v. Zuker , 203 AD2d 119 (1 st Dept 1994); Holmberg, Galbraith, Holmberg, Orkin & Bennett v. Koury , 176 AD2d 1045 (3 d Dept 1991); Perini v. Perini , 154 AD2d 360 (2d Dept 1989).

A more interesting inquiry is whether a client can avoid paying an attorney even where losses and damages cannot be proved.

It would appear that cases concerning legal malpractice alone, without mentioning discharge for cause, are not helpful in solving this inquiry. They do not provide proof that malpractice is a required element in every discharge for cause case.

An additional reason why damages ' and therefore actionable malpractice ' do not form an essential part of a discharge for cause claim is that an attorney may seek a 'for cause' hearing immediately. See Jud. Law
' 457. Meanwhile, the trial of the underlying action that led to a discharge claim may be months away. This would lead to an untenable situation, where a client would be forced to speculate as to damages, which would remain unknown when the parties conduct a 'for cause' hearing.

Lessons Learned

There are a number of lessons to be learned from the case of Smith v. Smith. First and foremost is do not ignore your clients. It cannot be stressed enough that, while it is true that every client thinks you work only for him or her, no client can be shunted aside and ignored. This is the complaint perhaps heard most from clients. Second, do not try exotic 'strategies' without first speaking with experienced litigators in your practice area to ascertain their effectiveness and potential downside, including malpractice and fee forfeiture. Third, if you choose to adopt a new strategy, get your client's written consent.

Michael B. Solomon, a member of this newsletter's Board of Editors, is a principal with Sanders & Solomon in Huntington Station. Itamar Yeager is counsel to the Rockland County Legislature and a private practitioner.