The Billion-Dollar Divorce

Headlines across the country proclaimed, “Harold Hamm to Pay One of the Biggest Divorce Settlements in History,” and “Sue Ann Hamm: One Billion Dollar Divorce Settlement Is Not Enough.” The Oklahoma City divorce case of Sue Ann Hamm and Harold Hamm (a 68% owner of publicly traded oil company Continental Resources Inc.) garnered widespread attention due to the approximately $16 billion of assets at issue. Sue Ann Hamm's award of approximately $1 billion of the $16 billion of potential assets has been the focal point of stories and discussions about the case; however, the details of the decision, as well as the manner in which the case was handled, serve as important reminders of how large-asset divorce cases are litigated across the country and in Pennsylvania in particular.

The Case

Both Sue Ann Hamm and Harold Hamm have appealed the Oklahoma City trial court's decision, each arguing that they received too little of the marital estate (and the other party too much). Although at first blush Sue Ann Hamm's award of $1 billion might seem to some observers like good cause for an appeal by her, the actual distribution of what the Oklahoma City court determined were the marital assets was equal. As noted on page 71 of the court's opinion, Harold Hamm was ordered to pay his ex-wife just under $1 billion to effectuate an equal division of the marital assets. His receipt of the majority of the $16 billion of assets at issue was based on the fact that he held his interest in the majority of his assets before they married. Under Oklahoma law, only the increase in value of premarital assets that are attributed to “active” or “nonpassive” forces is marital property. The Oklahoma City court, therefore, reviewed the manner by which Harold Hamm's premarital property increased in value, including the appreciation in corporate stock and changes to the nature of his business interests, and determined that the vast majority of the increase in value was attributed to passive forces, or forces independent of his involvement. Therefore, the trial court held that those assets were his nonmarital property that could not be awarded to Sue Ann Hamm.

In the States

As evidence of how states differ substantially in their handling of divorce cases, Pennsylvania law does not distinguish between active and passive increases in value. Section 3501 of the Pennsylvania Divorce Code includes all of “the increase in value of any nonmarital property” in its definition of marital property. Nevertheless, Pennsylvania courts can still decline to award a significant portion, or any, of the increase in the value of nonmarital assets to the other party based on its consideration of the parties' respective efforts in increasing the value of nonmarital property. Specifically, factor 7 of the enumerated factors that Pennsylvania courts must consider in all equitable distribution decisions is the “contribution” that each party made to the “acquisition” and “appreciation” of marital property, including the contribution of a party as a homemaker. Therefore, a Pennsylvania court can conclude that only one of the parties, or neither of the parties, contributed to the increase in value of a nonmarital asset, and divide the increase in value of one spouse's nonmarital assets accordingly.

Attorneys advocating for divorcing parties, therefore, make the competing arguments that: 1) the spouse who worked tirelessly to create the couple's wealth, or to increase the value of an asset, should be awarded a greater share of the assets; or 2) the opposing spouse's efforts as a homemaker enabled the other spouse to focus on his or her work efforts and create the wealth on behalf of both parties as the marriage was a partnership, each partner fulfilling his or her respective role.

When Divorce Becomes Public

Unlike arguments traditionally made in Pennsylvania courts regarding the spouses' respective contributions to creating the wealth, Harold Hamm's case was centered on proving that he made minimal or no contributions during the marriage to creating the couple's wealth. In fact, he went so far as to rewrite portions of his company's website and amend the company's Securities and Exchange Commission (SEC) filings to recharacterize Continental Resource's history to suggest that any efforts made by him to grow the company took place prior to the marriage and that increases in value during the marriage were due to market forces.

Although his goal was the opposite of a Pennsylvania divorce litigant's goal, Harold Hamm's efforts remind Pennsylvania and other state litigants, in particular litigants in large-estate divorces involving parties with public personas or public companies, that representations to the public can have an impact on a private divorce matter.

Therefore, when engaging in divorce planning, it is important to keep in mind the possible impact that actions being taken in public (including making statements as innocuous as introducing your spouse as “loving and supportive”) or with regard to privately held business interests (such as making the decision to launch an initial public offering for the company) might become relevant and even determinative in a divorce matter.

Due to Harold Hamm's concern that disclosure of sensitive corporate information could harm the company, the majority of the Hamms' courtroom proceedings were closed to the public, excluding reporters and any interested or curious parties. Closing courtrooms to the public is not done as a matter of right, even in divorce proceedings, and it is in fact contrary to the general concept that court trials must be open to the public.

As noted in the 1986 Pennsylvania Superior Court case, Katz v. Katz, 356 Pa.Super. 461, 514 A.2d 1374 (1986), in which Harold Katz, owner of the Philadelphia 76ers and Nutri/System Inc., sought closure of his divorce case, divorce proceedings will be closed to the public only upon showing “good cause” and, specifically, proof that “disclosure will work a clearly defined and serious injury to the party seeking closure.” Like Harold Hamm, Katz was concerned that public access to information disclosed in the divorce proceedings related to Nutri/System could affect investors' perception of the company. The superior court affirmed the ability of parties to seek closure of the courtroom to the press and public and remanded the case to the trial court.

Conclusion

Although it might feel intrusive to divorce litigants that the public has a right to know the details of their private lives, absent good cause, the decision to ask a court to decide a personal matter will make a private matter public. For that reason, as well as the uncertainty in relying upon a judge to make critical decisions about one's private, personal matters, many divorcing parties, in particular litigants with public personas and large estates, often settle their cases out of court or submit their cases to other, less public, dispute resolution forums, such as arbitration.

David N. Hofstein and Scott J.G. Finger are attorneys at the Philadelphia-based domestic relations firm of Hofstein Weiner & Meyer. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.

Headlines across the country proclaimed, “Harold Hamm to Pay One of the Biggest Divorce Settlements in History,” and “Sue Ann Hamm: One Billion Dollar Divorce Settlement Is Not Enough.” The Oklahoma City divorce case of Sue Ann Hamm and Harold Hamm (a 68% owner of publicly traded oil company Continental Resources Inc.) garnered widespread attention due to the approximately $16 billion of assets at issue. Sue Ann Hamm's award of approximately $1 billion of the $16 billion of potential assets has been the focal point of stories and discussions about the case; however, the details of the decision, as well as the manner in which the case was handled, serve as important reminders of how large-asset divorce cases are litigated across the country and in Pennsylvania in particular.

The Case

Both Sue Ann Hamm and Harold Hamm have appealed the Oklahoma City trial court's decision, each arguing that they received too little of the marital estate (and the other party too much). Although at first blush Sue Ann Hamm's award of $1 billion might seem to some observers like good cause for an appeal by her, the actual distribution of what the Oklahoma City court determined were the marital assets was equal. As noted on page 71 of the court's opinion, Harold Hamm was ordered to pay his ex-wife just under $1 billion to effectuate an equal division of the marital assets. His receipt of the majority of the $16 billion of assets at issue was based on the fact that he held his interest in the majority of his assets before they married. Under Oklahoma law, only the increase in value of premarital assets that are attributed to “active” or “nonpassive” forces is marital property. The Oklahoma City court, therefore, reviewed the manner by which Harold Hamm's premarital property increased in value, including the appreciation in corporate stock and changes to the nature of his business interests, and determined that the vast majority of the increase in value was attributed to passive forces, or forces independent of his involvement. Therefore, the trial court held that those assets were his nonmarital property that could not be awarded to Sue Ann Hamm.

In the States

As evidence of how states differ substantially in their handling of divorce cases, Pennsylvania law does not distinguish between active and passive increases in value. Section 3501 of the Pennsylvania Divorce Code includes all of “the increase in value of any nonmarital property” in its definition of marital property. Nevertheless, Pennsylvania courts can still decline to award a significant portion, or any, of the increase in the value of nonmarital assets to the other party based on its consideration of the parties' respective efforts in increasing the value of nonmarital property. Specifically, factor 7 of the enumerated factors that Pennsylvania courts must consider in all equitable distribution decisions is the “contribution” that each party made to the “acquisition” and “appreciation” of marital property, including the contribution of a party as a homemaker. Therefore, a Pennsylvania court can conclude that only one of the parties, or neither of the parties, contributed to the increase in value of a nonmarital asset, and divide the increase in value of one spouse's nonmarital assets accordingly.

Attorneys advocating for divorcing parties, therefore, make the competing arguments that: 1) the spouse who worked tirelessly to create the couple's wealth, or to increase the value of an asset, should be awarded a greater share of the assets; or 2) the opposing spouse's efforts as a homemaker enabled the other spouse to focus on his or her work efforts and create the wealth on behalf of both parties as the marriage was a partnership, each partner fulfilling his or her respective role.

When Divorce Becomes Public

Unlike arguments traditionally made in Pennsylvania courts regarding the spouses' respective contributions to creating the wealth, Harold Hamm's case was centered on proving that he made minimal or no contributions during the marriage to creating the couple's wealth. In fact, he went so far as to rewrite portions of his company's website and amend the company's Securities and Exchange Commission (SEC) filings to recharacterize Continental Resource's history to suggest that any efforts made by him to grow the company took place prior to the marriage and that increases in value during the marriage were due to market forces.

Although his goal was the opposite of a Pennsylvania divorce litigant's goal, Harold Hamm's efforts remind Pennsylvania and other state litigants, in particular litigants in large-estate divorces involving parties with public personas or public companies, that representations to the public can have an impact on a private divorce matter.

Therefore, when engaging in divorce planning, it is important to keep in mind the possible impact that actions being taken in public (including making statements as innocuous as introducing your spouse as “loving and supportive”) or with regard to privately held business interests (such as making the decision to launch an initial public offering for the company) might become relevant and even determinative in a divorce matter.

Due to Harold Hamm's concern that disclosure of sensitive corporate information could harm the company, the majority of the Hamms' courtroom proceedings were closed to the public, excluding reporters and any interested or curious parties. Closing courtrooms to the public is not done as a matter of right, even in divorce proceedings, and it is in fact contrary to the general concept that court trials must be open to the public.

As noted in the 1986 Pennsylvania Superior Court case, Katz v. Katz , 356 Pa.Super. 461, 514 A.2d 1374 (1986), in which Harold Katz, owner of the Philadelphia 76ers and Nutri/System Inc., sought closure of his divorce case, divorce proceedings will be closed to the public only upon showing “good cause” and, specifically, proof that “disclosure will work a clearly defined and serious injury to the party seeking closure.” Like Harold Hamm, Katz was concerned that public access to information disclosed in the divorce proceedings related to Nutri/System could affect investors' perception of the company. The superior court affirmed the ability of parties to seek closure of the courtroom to the press and public and remanded the case to the trial court.

Conclusion

Although it might feel intrusive to divorce litigants that the public has a right to know the details of their private lives, absent good cause, the decision to ask a court to decide a personal matter will make a private matter public. For that reason, as well as the uncertainty in relying upon a judge to make critical decisions about one's private, personal matters, many divorcing parties, in particular litigants with public personas and large estates, often settle their cases out of court or submit their cases to other, less public, dispute resolution forums, such as arbitration.

David N. Hofstein and Scott J.G. Finger are attorneys at the Philadelphia-based domestic relations firm of Hofstein Weiner & Meyer. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.