Counsel Fees: A Tipping Point

It has long been the doctrine of New York courts to “create a level playing field” (Silverman v. Silverman, 304 AD2d 41, 48 (1st Dep't 2003)) between the parties to a divorce action. Specifically, the courts look to “provide a rough equality in the resources available to each party in the course of the [divorce action]” (Wolf v. Wolf, 160 A.D.2d 555 (1st Dep't 1990)) by ensuring that the monied spouse is responsible for the payment of the non-monied spouse's counsel fees.

Under the unamended DRL ' 237, courts were charged with the discretion to award counsel fees in a matrimonial action as “justice requires, having regard to the circumstances of the case and of the respective parties.” In 2010, however, the Legislature amended DRL ' 237 to create a “rebuttable presumption that counsel fees shall be awarded to the less monied spouse,” while still requiring the court to make such award “as, in the court's discretion, justice requires, having regard to the circumstances of the case and of the respective parties.” The current version of DRL ' 237 further directs that the courts “shall seek to assure that each party shall be adequately represented and that where fees and expenses are to be awarded, they shall be awarded on a timely basis, pendente lite, so as to enable adequate representation from the commencement of the proceeding.” Although the courts retain discretion to award counsel fees to the non-monied spouse ' a necessary term the statute fails to define ' the burden has essentially shifted to the monied spouse to demonstrate why such counsel fees should not be awarded to the non-monied spouse. It is under this presumption that the court in Sykes analyzed the husband's application that the wife be required to utilize marital assets to pay her own counsel fees.

Despite a reasonably well-developed body of case law regarding the awarding of counsel fees in matrimonial actions, there is little persuasive guidance on how a court is to define which party is the monied spouse and what amount of evidence would rebut the presumption that the non-monied spouse is entitled to have the monied spouse continue to pay his or her counsel fees. These are the primary questions that linger both before and after the Sykes decision and that require further inquiry, especially prior to considering whether to make an application for a court to reverse its previous determination of who is the monied spouse in order to ensure that both parties have some “skin in the game.”

Facts of Sykes

The facts of the Sykes case undoubtedly shaped the court's ultimate conclusion. The husband in Syke, a millionaire hedge fund manager, filed for divorce in 2010. As noted by the court in a previous decision in the matter, the parties had an estimated marital estate of nearly $16 million, $12 million of which was held in liquid assets upon the commencement of the divorce action. See Sykes v. Sykes, 35 Misc.3d 591, 594 (Sup. Ct., N.Y. Cty. 2013). In fact, as noted by the court, the parties' wealth was such that the husband was able to buy a $3.8 million home and a $70,000 engagement ring for his new fianc'e with marital funds without impairing the wife's potential right to receive at most one-half of the marital estate ' or $8 million ' after trial. Both parties, in the court's own words, were also represented “by [law] firms at the apex of the New York matrimonial lawyer hierarchy.” Syke, 41 Misc.3d at 1065.

From the date of commencement through February 2013, the parties engaged in discovery and motion practice costing upwards of $1 million in counsel fees, all paid for by the husband. For the months of March and April 2013, the husband paid the wife's counsel fees to the tune of $668,378 for a month of trial preparation and motion practice, eight days of trial, and her separately retained expert fees; all in addition to his own counsel and expert fees for this same period. In addition to payment of the wife's counsel and expert fees, the husband also paid her $75,000 per month in temporary maintenance and child support.

Having paid nearly $2 million in counsel fees, a continuing support obligation of $75,000 a month until the entry of a divorce judgment, and with untold days of trial remaining, the husband brought a motion for the court to direct the release of $1 million in liquid marital funds ' frozen as a result of the automatic restraining orders that go into effect upon commencement of a divorce action ' to each party for payment of legal fees throughout trial and so the wife could proceed with some “skin in the game.” Id. at 1063.

In support of his application, the husband argued that for the court to deny his application and permit the wife to “proceed without 'skin in the game' will enable [the wife] to push forward with the litigation without any concern for its cost or any eye towards settlement.” Id. The wife, however, argued that her lack of income, other than the $75,000 monthly temporary support payments, classified her as the non-monied spouse and “therefore entitled [her] under statutory and case law to have the husband, the monied spouse, pay her interim legal fees.” Id. at 1064. The court granted the husband's application and directed the release of $1 million of marital assets to each party for the payment of “his or her own outstanding and prospective counsel and expert fees.” Id. at 1069.

Assessment

The court's willingness to grant the husband's motion in Sykes poses numerous questions for matrimonial practitioners that must be considered prior to bringing a similar application. The most glaring of these is how a court will determine who is the monied spouse in a divorce action under DRL ' 237. The answer to this question is not as academic as it may appear.

The most authoritative, yet still nebulous, assessment of the monied versus non-monied spouse debate was set forth by the Court of Appeals in O'Shea v. O'Shea, 93 N.Y.2d 187 (1999):

[r]ecognizing that the financial strength of matrimonial litigants is often unequal ” working most typically against the wife ” the Legislature invested Trial Judges with the discretion to make the more affluent spouse pay for legal expenses of the needier one. The courts are to see to it that the matrimonial scales of justice are not unbalanced by the weight of the wealthier litigant's wallet.

It would appear that the best guidance on this issue is that there is no guidance at all and that the ultimate decision is left to the sound discretion of the trial court.

That being said, however, what can be gleaned from the O'Shea decision is that the court is to look to the litigants' “wallet” ' read as available assets and income ' to level the playing field effectively. Although marital assets may be used by the parties during the course of litigation in certain circumstances (see 22 NYCRR ' 202.16-a), the courts in a counsel fee application generally assess the parties' wallets by looking to their separate property assets, including, and most-likely, their post-commencement earnings. Although the courts are also permitted to consider “the relative merits of the parties' claims and their respective financial positions” ( Lyman v. Lyman, 108 A.D.3d 653 (2d Dep't 2013) (quoting Levy v. Levy, 4 A.D.3d 398 (2d Dep't 2004) when making a determination on counsel fees, in practice, it is and has been the case more often than not that a party's post-commencement earnings and separate property assets will, inevitably, guide the court in making its determination as to who is the monied spouse. See, e.g., Fredericks v. Frederick, 85 A.D.3d 1107 (2d Dep't 2011); Guzzo v. Guzzo, 110 A.D.3d 765 (2d Dep't 2013).

As demonstrated in Sykes , typically the parties' post-commencement incomes and assets initially carry the day regarding the determination of who is the nonmonied spouse. However, after more than two years of litigation and the depletion of $2.5 million in the husband's separate property assets, the court in Sykes , after assessing the parties' incomes, separate property, and marital property, ultimately rested its conclusion on the discretion inherent in the court's authority under DRL ' 237 and the equities of the case. The “equities” in Sykes, akin to the concept of moral hazard in the financial industry, consisted of the fact that the husband was the only party paying the ongoing costs of litigation and support for the wife and children and that, “without any 'skin in the game,' [the wife] does not have the same incentive [to settle] insofar as her litigation costs are being paid for completely by her adversary.” 41 Misc.3d at 1069.

Conclusion

While courts should ensure that a spouse is not able to “unlevel” the playing field by outspending the other party in a divorce, it should also act to ensure that both parties have a financial incentive to resolve the action. Unlike most litigation, divorce litigation is often driven by emotion. When a party to a divorce action has no financial incentive to act prudently, the results can be disastrous not just for that party, but for that party's former spouse and children: college tuitions, retirement funds, and any other available assets may all be liquidated to pay for attorneys' fees to continue the feud, all in the name of harming a person that he or she once claimed to love for better or for worse.

The delicate balance for the court in any attorney fee application is to first ensure that the party with less available separate property assets can afford an attorney to represent his or her interests adequately ' another conveniently undefined term. The court must then ensure that the litigation is progressing reasonably and that assets are not being depleted imprudently. But where the litigation continues for years and one party has significant post-commencement assets and income and also bears sole responsibility for attorneys' fees, it stands to reason that where a “skin in the game” application is made, the court must take action to ensure that both parties have some financial incentive to progress the case and not permit feelings of “animosity, betrayal and abandonment” (id. at 1069) to govern litigation tactics.

From the practitioner's perspective, it is difficult to take any explicit predictive lessons from the court's holdings in Sykes with regard to when a “skin in the game” application would be appropriate, except that an argument for granting such application may lie where the divorce litigation has dragged on for years, the monied spouse has spent significant separate property assets on attorneys' fees, and the non-monied spouse is due to receive significant sums in equitable distribution at the conclusion of the divorce. Though this may mean few cases will meet this standard, the court in Sykes should be applauded for “creating a more level playing field” by ensuring that both parties have an incentive to resolve the action and bringing this issue to the forefront of discussion.

Joshua H. Pike is an associate in the Family Law Group at Pryor Cashman LLP and can be reached at [email protected] or 212-326-0431. Judith L. Poller , a member of this newsletter's Board of Editors, is a partner and Co-Chair of the Family Law Group at Pryor Cashman LLP and is a frequent lecturer as a family law expert. She can be reached at [email protected] or 212-326-0130.

The recent decision in Sykes v. Sykes , 41 Misc.3d 1061 (Sup. Ct. N.Y. Cty. 2013), sent shock waves reverberating throughout the New York matrimonial bar for its direction that during the pendency of a divorce litigation, the less monied spouse may be required to use a portion of her share of the marital estate to pay her legal fees, rather than continue to have such fees paid by the wealthier spouse. The court's rationale in Sykes , as more fully detailed herein, was that because the wife was receiving significant pendente lite maintenance and child support, unless she was responsible for her own counsel fees, she had no incentive to resolve or move the case forward due to her lack of “skin in the game.”

As a result of the decision in Sykes, matrimonial practitioners are left contemplating when a court might apply this principal of “skin in the game.” This article addresses when and why a case may reach the tipping point that pushes it over the equal playing field presumption inherent in Domestic Relations Law (DRL) ' 237 to the “skin in the game” analysis, as described in Sykes. As will be explained, this different approach appears to depend largely on several factors, including the length of the action, the animosity between the parties, the parties' separate property assets, the legal fees the monied spouse has already paid, and the marital assets at issue.

Background

It has long been the doctrine of New York courts to “create a level playing field” ( Silverman v. Silverman , 304 AD2d 41, 48 (1st Dep't 2003)) between the parties to a divorce action. Specifically, the courts look to “provide a rough equality in the resources available to each party in the course of the [divorce action]” ( Wolf v. Wolf , 160 A.D.2d 555 (1st Dep't 1990)) by ensuring that the monied spouse is responsible for the payment of the non-monied spouse's counsel fees.

Under the unamended DRL ' 237, courts were charged with the discretion to award counsel fees in a matrimonial action as “justice requires, having regard to the circumstances of the case and of the respective parties.” In 2010, however, the Legislature amended DRL ' 237 to create a “rebuttable presumption that counsel fees shall be awarded to the less monied spouse,” while still requiring the court to make such award “as, in the court's discretion, justice requires, having regard to the circumstances of the case and of the respective parties.” The current version of DRL ' 237 further directs that the courts “shall seek to assure that each party shall be adequately represented and that where fees and expenses are to be awarded, they shall be awarded on a timely basis, pendente lite, so as to enable adequate representation from the commencement of the proceeding.” Although the courts retain discretion to award counsel fees to the non-monied spouse ' a necessary term the statute fails to define ' the burden has essentially shifted to the monied spouse to demonstrate why such counsel fees should not be awarded to the non-monied spouse. It is under this presumption that the court in Sykes analyzed the husband's application that the wife be required to utilize marital assets to pay her own counsel fees.

Despite a reasonably well-developed body of case law regarding the awarding of counsel fees in matrimonial actions, there is little persuasive guidance on how a court is to define which party is the monied spouse and what amount of evidence would rebut the presumption that the non-monied spouse is entitled to have the monied spouse continue to pay his or her counsel fees. These are the primary questions that linger both before and after the Sykes decision and that require further inquiry, especially prior to considering whether to make an application for a court to reverse its previous determination of who is the monied spouse in order to ensure that both parties have some “skin in the game.”

Facts of Sykes

The facts of the Sykes case undoubtedly shaped the court's ultimate conclusion. The husband in Syke, a millionaire hedge fund manager, filed for divorce in 2010. As noted by the court in a previous decision in the matter, the parties had an estimated marital estate of nearly $16 million, $12 million of which was held in liquid assets upon the commencement of the divorce action. See Sykes v. Sykes , 35 Misc.3d 591, 594 (Sup. Ct., N.Y. Cty. 2013). In fact, as noted by the court, the parties' wealth was such that the husband was able to buy a $3.8 million home and a $70,000 engagement ring for his new fianc'e with marital funds without impairing the wife's potential right to receive at most one-half of the marital estate ' or $8 million ' after trial. Both parties, in the court's own words, were also represented “by [law] firms at the apex of the New York matrimonial lawyer hierarchy.” Syke, 41 Misc.3d at 1065.

From the date of commencement through February 2013, the parties engaged in discovery and motion practice costing upwards of $1 million in counsel fees, all paid for by the husband. For the months of March and April 2013, the husband paid the wife's counsel fees to the tune of $668,378 for a month of trial preparation and motion practice, eight days of trial, and her separately retained expert fees; all in addition to his own counsel and expert fees for this same period. In addition to payment of the wife's counsel and expert fees, the husband also paid her $75,000 per month in temporary maintenance and child support.

Having paid nearly $2 million in counsel fees, a continuing support obligation of $75,000 a month until the entry of a divorce judgment, and with untold days of trial remaining, the husband brought a motion for the court to direct the release of $1 million in liquid marital funds ' frozen as a result of the automatic restraining orders that go into effect upon commencement of a divorce action ' to each party for payment of legal fees throughout trial and so the wife could proceed with some “skin in the game.” Id. at 1063.

In support of his application, the husband argued that for the court to deny his application and permit the wife to “proceed without 'skin in the game' will enable [the wife] to push forward with the litigation without any concern for its cost or any eye towards settlement.” Id. The wife, however, argued that her lack of income, other than the $75,000 monthly temporary support payments, classified her as the non-monied spouse and “therefore entitled [her] under statutory and case law to have the husband, the monied spouse, pay her interim legal fees.” Id. at 1064. The court granted the husband's application and directed the release of $1 million of marital assets to each party for the payment of “his or her own outstanding and prospective counsel and expert fees.” Id. at 1069.

Assessment

The court's willingness to grant the husband's motion in Sykes poses numerous questions for matrimonial practitioners that must be considered prior to bringing a similar application. The most glaring of these is how a court will determine who is the monied spouse in a divorce action under DRL ' 237. The answer to this question is not as academic as it may appear.

The most authoritative, yet still nebulous, assessment of the monied versus non-monied spouse debate was set forth by the Court of Appeals in O'Shea v. O'Shea , 93 N.Y.2d 187 (1999):

[r]ecognizing that the financial strength of matrimonial litigants is often unequal ” working most typically against the wife ” the Legislature invested Trial Judges with the discretion to make the more affluent spouse pay for legal expenses of the needier one. The courts are to see to it that the matrimonial scales of justice are not unbalanced by the weight of the wealthier litigant's wallet.

It would appear that the best guidance on this issue is that there is no guidance at all and that the ultimate decision is left to the sound discretion of the trial court.

That being said, however, what can be gleaned from the O'Shea decision is that the court is to look to the litigants' “wallet” ' read as available assets and income ' to level the playing field effectively. Although marital assets may be used by the parties during the course of litigation in certain circumstances (see 22 NYCRR ' 202.16-a), the courts in a counsel fee application generally assess the parties' wallets by looking to their separate property assets, including, and most-likely, their post-commencement earnings. Although the courts are also permitted to consider “the relative merits of the parties' claims and their respective financial positions” ( Lyman v. Lyman , 108 A.D.3d 653 (2d Dep't 2013) (quoting Levy v. Levy , 4 A.D.3d 398 (2d Dep't 2004) when making a determination on counsel fees, in practice, it is and has been the case more often than not that a party's post-commencement earnings and separate property assets will, inevitably, guide the court in making its determination as to who is the monied spouse. See, e.g., Fredericks v. Frederick , 85 A.D.3d 1107 (2d Dep't 2011); Guzzo v. Guzzo , 110 A.D.3d 765 (2d Dep't 2013).

As demonstrated in Sykes , typically the parties' post-commencement incomes and assets initially carry the day regarding the determination of who is the nonmonied spouse. However, after more than two years of litigation and the depletion of $2.5 million in the husband's separate property assets, the court in Sykes , after assessing the parties' incomes, separate property, and marital property, ultimately rested its conclusion on the discretion inherent in the court's authority under DRL ' 237 and the equities of the case. The “equities” in Sykes, akin to the concept of moral hazard in the financial industry, consisted of the fact that the husband was the only party paying the ongoing costs of litigation and support for the wife and children and that, “without any 'skin in the game,' [the wife] does not have the same incentive [to settle] insofar as her litigation costs are being paid for completely by her adversary.” 41 Misc.3d at 1069.

Conclusion

While courts should ensure that a spouse is not able to “unlevel” the playing field by outspending the other party in a divorce, it should also act to ensure that both parties have a financial incentive to resolve the action. Unlike most litigation, divorce litigation is often driven by emotion. When a party to a divorce action has no financial incentive to act prudently, the results can be disastrous not just for that party, but for that party's former spouse and children: college tuitions, retirement funds, and any other available assets may all be liquidated to pay for attorneys' fees to continue the feud, all in the name of harming a person that he or she once claimed to love for better or for worse.

The delicate balance for the court in any attorney fee application is to first ensure that the party with less available separate property assets can afford an attorney to represent his or her interests adequately ' another conveniently undefined term. The court must then ensure that the litigation is progressing reasonably and that assets are not being depleted imprudently. But where the litigation continues for years and one party has significant post-commencement assets and income and also bears sole responsibility for attorneys' fees, it stands to reason that where a “skin in the game” application is made, the court must take action to ensure that both parties have some financial incentive to progress the case and not permit feelings of “animosity, betrayal and abandonment” (id. at 1069) to govern litigation tactics.

From the practitioner's perspective, it is difficult to take any explicit predictive lessons from the court's holdings in Sykes with regard to when a “skin in the game” application would be appropriate, except that an argument for granting such application may lie where the divorce litigation has dragged on for years, the monied spouse has spent significant separate property assets on attorneys' fees, and the non-monied spouse is due to receive significant sums in equitable distribution at the conclusion of the divorce. Though this may mean few cases will meet this standard, the court in Sykes should be applauded for “creating a more level playing field” by ensuring that both parties have an incentive to resolve the action and bringing this issue to the forefront of discussion.

Joshua H. Pike is an associate in the Family Law Group at Pryor Cashman LLP and can be reached at [email protected] or 212-326-0431. Judith L. Poller , a member of this newsletter's Board of Editors, is a partner and Co-Chair of the Family Law Group at Pryor Cashman LLP and is a frequent lecturer as a family law expert. She can be reached at [email protected] or 212-326-0130.