Bad Law on Double Dipping

The Trial Decision

A review of the underlying trial decision in Kerrigan reveals that the business at issue was the husband's 50% interest in Industrial Chem Labs & Services Inc. It was, in effect, a premarital business that distributed industrial maintenance products to various industries. The company purchased chemicals from various manufacturers, then repackaged and distributed the chemicals to its customers. It had minimal fixed assets, and almost no inventory. Most of its employees were paid salary plus commission. The business was valued to determine the extent of its separate property appreciation for distribution purposes. Both experts relied on the capitalization of income method of valuation and the excess earnings method of valuation. And both rejected the asset-based and market approaches. Quite clearly then, the business income stream was the basis of the valuation.

The court distributed 35% of the appreciated value, or $409,779, to the wife. Spousal support was then calculated and awarded based on the husband's annual income, which was found to be $1 million. This amount was derived “from his salary and distributions which is around $1,000,000,” as well as real estate investments and stocks and bonds. Elsewhere, the trial decision indicates the husband “earns in excess of $900,000 per year in income from wages, income and prerequisites [sic] from ICLS and various other investments.” The trial court further noted, in crediting the wife's valuation expert's testimony, the husband's salary of $383,000, perquisites of $121,000 and pre-tax distributions from the business of $434,000, all of which totaled $938,000 in income. The court also stated that the husband “takes almost $1,000,000 in salary and perqs every year for at least five years.” It seems then, that despite the trial court's reference to real estate investments, stocks and bonds, that the husband's approximately $1 million in income, upon which maintenance was awarded, derived from the business' income stream, which was already distributed. That this occurred and was not corrected by the Appellate Court, particularly since Rodriguez was first decided, remains a mystery.

Re-Examination of Keane

Going back to the statement in Keane, that it is only where “[t]he asset is totally indistinguishable and has no existence separate from the [income stream] from which it is derived” that double counting results, the record in Kerrigan, indicates that the business had little in tangible assets and earned much of its income through the servicing of its clients through a commissioned sales force. It did not engage in manufacturing. So, is a business in which income derives from its ability to sell not a service business, even if it is not a “personal” or “professional” service business? Keane does not make that distinction. In my New York Law Journal article's citation to Justice Jeffrey S. Sunshine's decision in N.K. v M.K., 17 Misc.3d 1123(A), (Supreme Court Kings County 2007), the court therein properly analyzed Keane's holding thusly:

It should also be noted that the recent Court of Appeals decision in Keane v. Keane, (8 NY3d 115 (2006)), does not apply to the income derived from the businesses. It is distinguishable on its facts. Although the court held that rental income from property deemed a marital asset could be used in determining maintenance even after that same income was capitalized and distributed, it limited this double-dipping to passive assets, e.g., real estate. In Keane, the court specifically excluded active assets, such as a professional practice, because the asset's value is “totally indistinguishable from and has no existence separate from the [income stream] from which it is derived. Keane v. Keane, 8 NY3d at 122, supra, citing Grunfeld v. Grunfeld, 94 N.Y.2d at 704, 709, supra). Because a “service business” is an active asset, it is still governed by the Grunfeld prohibition regarding double-dipping for maintenance and distributive awards (Id., see also testimony Jan 2, 2007 p. 52-53, [defendant's expert Randisi agrees that Keane does not apply to the instant case] ). [footnote omitted] As service businesses, Q.C. and D.S. are active assets and clearly distinguishable from a passive rental property as in Keane. Therefore, Keane does not apply to the present case and the husband's future income derived from his equity in Q.C. and D.S. cannot be double counted in awarding equitable distribution as well as maintenance.

The court's reasoning in N.K. v M.K. makes perfect sense, as did the Second Department's ruling in Rodriguez.

Consistency and Clarity Are Required

We cannot have this confusion. There are now two classes of litigants: those who are fortunate enough to have a court that recognizes the service business aspect of the Keane ruling, and those who will get an unfair windfall or loss (depending on who is the business owner), by appearing before a court that is erroneously following Groesbeck, Griggs and Kerrigan. Hopefully, Kerrigan will be further appealed or reconsidered so we are all governed by the same rule, although at this time I do not believe leave to appeal to the Court of Appeals is being pursued.

Notwithstanding the “fact sensitivity” of each individual case, when the law says there is no double counting on the distribution of a service business, and you have a service business, the issue should end there.

Lee Rosenberg, a partner at Saltzman Chetkof & Rosenberg LLP in Garden City, is a Fellow of the American Academy of Matrimonial Lawyers and a member of this newsletter's Board of Editors. E-mail: [email protected].

In last month's newsletter, we looked at the case of Rodriguez v. Rodriguez , 70 AD3d 799 (2d Dept. 2010), in which the Appellate Division, Second Department, correctly found Supreme Court had erred by distributing the value of a service business and awarding spousal support from the income stream from that business, amounting to impermissible “double dipping.” A month later, a different panel of the Second Department came to the opposite conclusion, throwing the issue into confusion.

Kerrigan Takes a Giant Leap Backwards

On March 9, 2010, less than 30 days after the Rodriguez decision, the same appellate court (with a different panel) decided Kerrigan v. Kerrigan, AD3d, 2010 NY Slip Op 01929 (2nd Dept 2010). Notwithstanding Keane and the Rodriguez decisions, the Kerrigan court inexplicably took us in reverse. It cited back to the incorrect Griggs decision, misapplied the Keane holding again and double counted the service business income. The Second Department in Kerrigan held:

The award of maintenance to the defendant in the sum of $1,500 per week for a period of five years was appropriate ( see Kriftcher v. Kriftcher , 59 AD3d 392, 393-394). The plaintiff's contention that the Supreme Court engaged in “double dipping” with respect to the award of maintenance is without merit, as the plaintiff's business constitutes a tangible, income-producing asset, rather than an intangible asset ( see Keane v. Keane , 8 NY3d 115, 119; Griggs v. Griggs , 44 AD3d 710, 713). (Emphasis added)

The Appellate Court's failure to find an impermissible double counting is not only error, it creates a complete dichotomy, within the span of one month, in its two decisions on this issue. Citing to Griggs was wrong. Keane has the service business exception that is ignored in Kerrigan, as it was in Griggs and Groesbeck. The “no double dipping” rule is not limited to intangible assets; it includes service businesses as, was correctly stated in Rodriguez.

The Trial Decision

A review of the underlying trial decision in Kerrigan reveals that the business at issue was the husband's 50% interest in Industrial Chem Labs & Services Inc. It was, in effect, a premarital business that distributed industrial maintenance products to various industries. The company purchased chemicals from various manufacturers, then repackaged and distributed the chemicals to its customers. It had minimal fixed assets, and almost no inventory. Most of its employees were paid salary plus commission. The business was valued to determine the extent of its separate property appreciation for distribution purposes. Both experts relied on the capitalization of income method of valuation and the excess earnings method of valuation. And both rejected the asset-based and market approaches. Quite clearly then, the business income stream was the basis of the valuation.

The court distributed 35% of the appreciated value, or $409,779, to the wife. Spousal support was then calculated and awarded based on the husband's annual income, which was found to be $1 million. This amount was derived “from his salary and distributions which is around $1,000,000,” as well as real estate investments and stocks and bonds. Elsewhere, the trial decision indicates the husband “earns in excess of $900,000 per year in income from wages, income and prerequisites [sic] from ICLS and various other investments.” The trial court further noted, in crediting the wife's valuation expert's testimony, the husband's salary of $383,000, perquisites of $121,000 and pre-tax distributions from the business of $434,000, all of which totaled $938,000 in income. The court also stated that the husband “takes almost $1,000,000 in salary and perqs every year for at least five years.” It seems then, that despite the trial court's reference to real estate investments, stocks and bonds, that the husband's approximately $1 million in income, upon which maintenance was awarded, derived from the business' income stream, which was already distributed. That this occurred and was not corrected by the Appellate Court, particularly since Rodriguez was first decided, remains a mystery.

Re-Examination of Keane

Going back to the statement in Keane, that it is only where “[t]he asset is totally indistinguishable and has no existence separate from the [income stream] from which it is derived” that double counting results, the record in Kerrigan, indicates that the business had little in tangible assets and earned much of its income through the servicing of its clients through a commissioned sales force. It did not engage in manufacturing. So, is a business in which income derives from its ability to sell not a service business, even if it is not a “personal” or “professional” service business? Keane does not make that distinction. In my New York Law Journal article's citation to Justice Jeffrey S. Sunshine's decision in N.K. v M.K., 17 Misc.3d 1123(A), (Supreme Court Kings County 2007), the court therein properly analyzed Keane's holding thusly:

It should also be noted that the recent Court of Appeals decision in Keane v. Keane, (8 NY3d 115 (2006)), does not apply to the income derived from the businesses. It is distinguishable on its facts. Although the court held that rental income from property deemed a marital asset could be used in determining maintenance even after that same income was capitalized and distributed, it limited this double-dipping to passive assets, e.g., real estate. In Keane, the court specifically excluded active assets, such as a professional practice, because the asset's value is “totally indistinguishable from and has no existence separate from the [income stream] from which it is derived. Keane v. Keane , 8 NY3d at 122, supra , citing Grunfeld v. Grunfeld , 94 N.Y.2d at 704, 709, supra ). Because a “service business” is an active asset, it is still governed by the Grunfeld prohibition regarding double-dipping for maintenance and distributive awards (Id., see also testimony Jan 2, 2007 p. 52-53, [defendant's expert Randisi agrees that Keane does not apply to the instant case] ). [footnote omitted] As service businesses, Q.C. and D.S. are active assets and clearly distinguishable from a passive rental property as in Keane. Therefore, Keane does not apply to the present case and the husband's future income derived from his equity in Q.C. and D.S. cannot be double counted in awarding equitable distribution as well as maintenance.

The court's reasoning in N.K. v M.K. makes perfect sense, as did the Second Department's ruling in Rodriguez.

Consistency and Clarity Are Required

We cannot have this confusion. There are now two classes of litigants: those who are fortunate enough to have a court that recognizes the service business aspect of the Keane ruling, and those who will get an unfair windfall or loss (depending on who is the business owner), by appearing before a court that is erroneously following Groesbeck, Griggs and Kerrigan. Hopefully, Kerrigan will be further appealed or reconsidered so we are all governed by the same rule, although at this time I do not believe leave to appeal to the Court of Appeals is being pursued.

Notwithstanding the “fact sensitivity” of each individual case, when the law says there is no double counting on the distribution of a service business, and you have a service business, the issue should end there.

Lee Rosenberg, a partner at Saltzman Chetkof & Rosenberg LLP in Garden City, is a Fellow of the American Academy of Matrimonial Lawyers and a member of this newsletter's Board of Editors. E-mail: [email protected].