Win: Clarification of standard for temporary orders in modification suit

The 2nd Court of Appeals in Fort Worth issued a very important opinion today in a big win for O’Neil Wysocki’s appellate team on Michelle O’Neil and Karri Bertrand. The underlying order awarded Father the exclusive right to determine the children’s primary residence without regard to geographic restriction and gave each parent the independent right to make educational decisions. Mother filed to modify the orders and sought temporary orders in the modification suit. The trial court left the primary designation with Father but ordered the children to be enrolled in the Mother’s school district. In the intial hearing, the trial court made no finding of significant impairment, but later entered such finding.

This issue has been an open question in modification litigation, as to the meaning of Texas Family Code section 156.006, but is now determined.

In 2017, the Legislature changed 156.006 to include “or the effect of changing or eliminating the geographic area within which a conservator must maintain the child’s primary residence”. Based on this language, the 2nd Court of Appeals held today that limiting the school district within which the children must attend school such order had the effect of changing the primary designation. Thus, the elevated standard — significant impairment — would apply to make such changes in a temporary hearing in a modification suit.

Because section 156.006(b) precludes a trial court from issuing
an order effecting a change in the designation of the person having the right to
designate the children’s primary residence without evidence triggering a statutory
exception to this prohibition, the trial court abused its discretion by effectively
creating a geographic area in which Father must maintain the children’s primary
residence [by restricting the designation of the school].

Read the entire opinion here: Wells opinion

6 steps to adulting and not hating your ex

I enjoyed this article in the Washington Post by Lisa Bonos. Is it possible to get divorced and not hate your ex? A divorce necessarily comes after a lot of emotion and turmoil in the relationship. Sorting through that emotion and processing to the other side of the hatred river takes emotional maturity and “adulting” (as the new millennial lingo goes).  The bottom line is that you have to love your kids more than you hate your ex. The article suggests six principles to keep in mind:

  1. Divorce can still involve compassion. Remember that you are both still people with feelings and hurts. Focus on the person, not the ego or anger. The person you married is not the same as the person you are divorcing. People change.
  2. Do not expect emotional closure. There are questions in life that have no answers. The issues underlying the divorce may fall in that category. A divorce is a transition, not an arrival. Treat divorce like a business deal, not an emotional deal.
  3. Settle the kid stuff then work on finances. Resolve the kid issues as quickly as possible to avoid using the kids as leverage in the money decisions.
  4. Avoid going to court. Settling is a lot less costly in both money and emotion. Going to court costs money in attorneys fees, but there is also a time factor and an emotional cost. Use mediation or other alternatives to litigation to stay out of the courtroom.
  5. Don’t talk badly about the other parent around the children. The children are in the middle and didn’t ask to be put there. Both parents are still going to be the parents. Don’t even call the other parent the “ex” around them – that’s negative. She’s still their mother and he’s still their father – not the kids’ “ex-parent”.
  6. Don’t let others influence your opinion. Be wary of seeking the counsel of your family and friends. While they are well-meaning, their job as family and friends is to be your cheerleader. In making the hard decisions about your divorce, you don’t need a cheerleader who will advocate your cause at all cost. You need a level head and logic. You will still have to co-parent with your spouse long after the divorce, no matter what your family and friends think. In fact, your former spouse will still be your child’s family, and therefore, by extension, your family, long into the future. Your best friend, sister, or mother will hate your ex way more than you do, that’s their job, but it is not your’s.

International child abduction remedies

What remedies are available to left-behind parents when a child is removed from the child’s primary country to another country?

There has been a recent uptick in the number of cases where a parent unilaterally removes a child from the child’s place of residence to another country in an attempt to be the child’s sole parent. The Hague Convention on the Civil Aspects of Child Abduction (read the text of the treaty here) is a multilateral treaty ratified by 98 countries as of May 2018 providing an expeditious protocol for the return of a child unilaterally removed from the home country. The treaty requires the country to return a child when wrongfully removed in breach of the custody rights of the left-behind parent. The law of the state/country where the child resided determines the “custody rights”, which provides some fluidity in the laws.

Determination of the country of the child’s habitual residence is the first key to relief. This is the last place the child habitually lived. So, for example, Ireland issued a custody decision in favor of father, but the child and mother lived in Illinois for three years prior to and after the Ireland proceedings. The habitual residence was determined to be Illinois because the mother lawfully moved to Illinois at the time she did, prior to the Ireland proceedings. Thus, the law of Illinois would determine the custody of the child.

Unmarried parents must be extremely careful when it comes to international child custody. Many countries do not provide paternity rights to unwed fathers, limiting their rights to prevent a mother from moving a child to another country.

Procedurally, a Hague Convention case is mandated to be finalized within 6 weeks of the date filed, although that ideal often is not achieved. The first step is to file the petition in the federal court. While state and federal courts have concurrent jurisdiction over Hague cases, the federal court is usually the better forum due to the nature of federal focus on jurisdiction. State courts are more accustomed to equity and discretion in cases and may confuse its role. The conventional standard of best interest of the child has no place in a Hague case. The sole question is one of jurisdiction because the court in a Hague case is not permitted to alter any substantive rights of custody. It is barred from considering any merits of a custody dispute. Another reason federal court is a better forum is due to the backlog often encountered in state courts compared to the availability of the federal court to expeditiously hear the Hague case.

The next step in a Hague cases is to evaluate the availability of injunctive relief. If filing in federal court, the standards for ex parte relief are strenuous and require attention to detail.

To succeed under a Hague case, the petition must prove that the removal of the child was “wrongful”. Once shown, the burden shifts to the respondent to prove any affirmative defenses. One example of such an affirmative defense is whether the child is at grave risk of physical or psychological harm if returned. The standard of proof is clear and convincing evidence of any affirmative defense.

Note than Hague remedies only apply between countries who are signatories to the treaty. Many countries have not signed off on the treaty and refuse to acknowledge international laws regarding child custody. Remedies in countries that do not comply with the Hague Convention are very limited. (click here for a list of subscribing countries)

Hat tip to Molshree A. Sharma for her article International Child Custody and the Hague Convention in the January 2019 Family Lawyer Magazine as well as Gerissa Conforti and John Rice for their article Child Abduction Cases Under the Hague Convention in the July 2018 Family Lawyer Magazine.

Non-cash compensation in a Texas divorce

Highly compensated individuals may have a laundry-list of deferred compensation awards going out over many years. Sometimes these compensation methods require negotiation transactions during a divorce that may or may not be legally permitted without full transparency. In most Texas courts, there are “standing orders” that automatically apply to every divorce that prohibit certain types of transactions. It is important to understand the marital assets in order to prevent the client from inadvertently violating one of these rules.

Some types of non-cash compensation include incentive or employee stock options, employee stock purchase plans, and restricted stock options. Understanding the nuances of each of these types of awards is critical and hiring a financial expert may be warranted.

Stock option exercise patterns vary but typically are exercises at least annually but can be as often as quarterly. Consider whether the client has the authority under the prevailing orders to exercise the options or execute a sale of the newly acquired stock. Having knowledge of the vesting schedule and marking the dates for discussion with the client may be critical to keeping the client out of hot water with the court. It may be necessary to preemptively file and set a motion for hearing to address these matters and get early permission to act.

It may be necessary to have a plan and strategy in place to advise the client in the event of market volatility, especially if the client is heavily invested in one particular stock.

Sometimes it may be easiest to seek spousal consent to the actions necessary to protect the marital estate. Reaching an agreement is usually less costly than litigating when possible.

 

Hat tip to Vincent J. Fiorentino and Alexandra Mililli for their article 6 Ways to prepare clients with non-cash compensation in the Family Lawyer Magazine.

 

Start up company valuations in divorce

Most business valuations in the divorce context are performed upon long-standing businesses. Valuing an early-stage start-up company poses some challenges. In 2013 the AICPA released a guide detailing a framework for assessing the six typical stages of a business’ lifecycle.

Stage 1: The enterprise has no product revenue, limited expense history, incomplete management team, and initial product development.

Stage 2: The enterprise has no product revenue, substantial expense history related to product development, and an awareness for business challenges.

Stage 3: The enterprise has made significant progress in product development, key milestones have been met, and product development is near completion.

Stage 4: Initial sales have been made but the enterprise is still operating at a loss.

Stage 5: Product sales have grown and initial financial success has been attained with positive cash flows and profits.

Stage 6: The enterprise has an established financial history of profitable operations.

Most business valuations are performed on a mature company well into Stage 6. But when valuing an early stage company, there will not be historical data to consider. Some indicators of value apart from traditional financial data includes: the company’s business plan, correspondence with investors, financial forecasts, management’s history of success in other companies, market studies and surveys, interviews with management,  expected pricing model, and what are the unknown factors that will affect value. Additionally, understanding the non-traditional methods of compensation that could affect a particular owner or investor’s value is important. For example, in some industries, it is common to offer stock options to investors in early stages which can dilute the ownership of current stockholders in the future.

Having a financial expert skilled and knowledgeable in valuing early-stage entities is important to presenting the client’s best position in the divorce case. An unfamiliar expert may over or under value such an entity and cause a problem for the client in the division of property.

 

Hat tip to David Witherspoon’s article Valuing an Early Stage Company in Marital Dissolution from Family Lawyer Magazine.

Evaluating a valuation report

Because business entities are often a large part of a marital estate for divorce, family lawyers and clients should understand how to review the report and spot issues even before hiring or relying upon the party’s own expert for review.

1.Professional standards and credentials – Along the lines of starting at the very beginning (channeling my best Julie Andrews), begin with an analysis of the qualifications and credentials of the person performing the analysis. There are three professional associations in the U.S. that issue valuation standards – American Society of Appraisers (ASA), American Society of Certified Public Accountants (AICPA), and National Society of Certified Valuation Analysts (NACVA). Also, the Uniform Standards for Professional Appraisal Practice (USPAP) provides the accepted standards for all appraisals. Ensuring that the expert has one of these credentials will show a minimum quality standard for the credentials of the expert.

2. Clear Assignment – the valuation report should be clear on what the assignment is; in other words, what is the purpose of the report? The valuation methodology and the conclusion are driven by the parameters in the assignment. The assignment should contain information such as the subject property to be valued, the ownership characteristics to be valued, the valuation date, the purpose of the valuation, and the standard of the valuation.

3. Is the report comprehensive? Look for statements in the valuation report that indicate certain procedures were not performed because of a lack of data. Look for the following informationin the valuation as a quick checklist:

Identification of the property

  • Effective valuation date
  • Definition of value
  • Purpose of appraisal
  • Actual or assumed ownership characteristic such as marketability and/or lack of control
  • Basic company information
  • Economic and industry outlook
  • Sources of information
  • Financial statement analysis
  • Valuation methodology – income approach, market approach, or asset approach
  • Valuation synthesis and conclusion
  • Appraiser’s qualifications
  • Contingent and limiting conditions

4. Does the report consider alternate methods of value? Three valuation approaches are generally considered in an valuation – income, market, and asset approaches. A typical valuation report considers at least two of these methods of value. Each method should be close in value. If there are huge swings in the value indicated by each methodology, it could indicate an error in the valuation. These errors could include an assumption error or math error.

5. Are the financial projections reasonable? Most valuations consider the future financial projections of the business. However, these projections must be reasonable. Some considerations to look for in evaluating the reasonableness of the projections include:

  • Whether they present the most likely picture of the business in the future considering all available information
  • Whether they appear credible considering the historical performance, the industry, and economy as a whole
  • Neither too optimistic or pessimistic
  • Do not include upward or downward bias based on the desire for future performance.

6. Sources of Information – Is the report based on information that is known as of the valuation date? Use of outdated or old information would not be reliable as of the current valuation date and would be a red flag.

7. Bias – does the report show objective analysis based on reasonable methodology and credible data sources? Consider whether the report contains unsupported input that causes a swing in the conclusion.

 

Hat tip to Alina Niculita’s article Red Flags in Valuation Reports in Family Lawyer Magazine.

Valuation of company for divorce

Often in divorces, a spouse or both spouses may own a closely-held business. While the business itself may not be divisible in the divorce, the value of the business entity as an asset of the marital estate can be an important component to the division. There are several considerations at play when valuing a business entity for divorce purposes.

The first question is the gross entity value. This considers the total capital structure or the overall value of the operations without considering the impact of the cash and debt being carried. Investment bankers consider this value in determining EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and revenue-based multiples. Basically, for the gross value purposes, the debt and cash are operational decisions and not relevant to gross value. Included in this consideration are the gross revenue figures, as well as asset values and intangible values such as entity goodwill and workforce in place.

The next consideration is the equity value. This involves the netting of the debt against the gross entity value.

Valuation of an entity for investment or purchase purposes differs from valuation in the divorce context. Investment considerations primarily use the gross entity value. On the other hand, for purposes of the divorce context, the net equity value is the appropriate measure. Most often, this is not a value that can be simply and easily calculated without the assistance of an expert in divorce valuation issues. The method of applying discounts to the gross entity value for lack of marketability or reputation of the individual owner are areas for much disagreement and will require expert testimony in most scenarios.

Hat tip to Sean Saari and his article All Company Values Are Not Created Equal in Family Lawyer Magazine.

Online impersonation in Texas divorce suits

Interesting article in Texas Lawyer this week about the effect of online impersonation having growing relevance in Texas family law. People are increasingly impersonating spouses, paramours, and others online out of spite or to gain leverage. In 2009, Texas made it illegal to pretend to be another person online to harass, stalk, or defraud someone. For example, it would be illegal to create a fake website in an ex’s name and provide personal details about sexual acts. The law says a person commits an offense if he or she, without obtaining the person’s consent, uses the name or persona of another person with the intent to harm, defraud, intimidate, or threaten by (1) creating a page on a website or other commercial social networking site, or (2) sending messages through an existing website or social networking site. This offense is a third degree felony, punishable by 2-10 years in prison.

Distinguish these two scenarios, one illegal and one not. In the first, a husband learns that his wife frequents online dating sites and communicates with another man. In an effort to prove her guilty of cheating and to gain an advantage in the divorce, husband creates a facebook page as the other man, exports a picture of the man and puts it onto the page. Then, acting as the other man, the husband has a dialog with wife about getting together. This is illegal. On the other hand, consider that husband creates a website called “thisguyisahomewrecker”, posts the picture of the man and details the affair. The husband is not impersonating the man, but merely exercising free speech about the conduct. Assuming that the accusations are true so no defamation suit is viable, this conduct is not illegal.

Changes from 2018 and looking ahead to 2019 for Texas family law

2018-2019 change represents the new year 2019 three-dimensional rendering 3D illustration

The Texas Legislature convenes every two years, with 2019 being one of those. Each session, proposed new laws get introduced that will affect family law in Texas. It is expected that a bill will be introduced to remove no fault divorce and require proof of fault grounds for all Texas divorce and extend the waiting period to finalize a divorce (currently 60 days). Neither of these proposals are expected to gain much traction. Reform of the child protective services system will, however, be a hot topic for the legislative session given all of the litigation there has been criticizing how CPS handles matters ineffectively.

From 2018, most of the big changes in Texas family law came from the courts. The Texas Supreme Court clarified a conflict between the courts of appeals in various parts of the state on the right of a nonparent to intervene and ask for custody of a child. In re H.S. involved grandparents who sought standing to sue for custody due to the actual care, control and possession of the child for at least 6 months. The Texas Supreme Court gave a broader definition of “control” than some of the intermediate courts had been using, making it easier for a nonparent (like grandparent, step-parent, etc) to sue for custody.

Another significant change in 2018, also from the Texas Supreme Court, reinforced the binding nature of a premarital agreement. In re Marriage of I.C. determined that a clause allowing for forfeiture of all rights under a premarital agreement if a spouse challenged the agreement was a valid and enforceable provision.

The Texas Supreme Court has two justices with family law backgrounds, unusual in the history of the Court. The effect is that the justices are more comfortable hearing family law matters and are accepting discretionary review more often in family law cases. We expect this trend to continue for 2019.

 

New tax laws impact divorce

The Tax Cuts and Jobs Act passed Congress last December and there is a lot of talk about how it will impact the tax situation for individuals. Few have considered the impact that the new law will have on divorce and child custody. (See  How Will the New Tax Law Affect Your Divorce? )

Much of the commentary centers around the elimination of the tax deduction for alimony payments. The new law eliminated the deduction for alimony payments from taxable income. Likewise, the recipient of the alimony no longer must claim the payments as income. This new law only applies to divorce finalized after 2018. For alimony orders predating the law, any modification of the alimony order requires a statement as to whether the new law applies for deductibility/income inclusion. While this sounds like a win for alimony recipients,  it actually demotivates a higher-earning spouse from agreeing to make alimony payments as part of a divorce settlement. Alimony payments were a useful tool in resolving divorces where one spouse was high wage earner and the other spouse was a lower wage earner. The paying spouse was motivated to receive the tax deduction where the receiving spouse would not be as heavily tax impacted. Additionally, the new law will effect premarital and postmarital agreements that predate the law because there is no consideration under the new law for agreements reached before the effective date of the law. The law applies based on the date of the divorce judgment.

Another issue arising from the new tax laws in the effect on valuation of a business interest in divorce. In many divorces, the business interest may be the main asset in the property division. However, the new law increase the cash flow of certain kinds of businesses due to lower C Corp tax rates (reduced from adjustable rates up to 35% to a flat rate of 21%).  If all else is equal, the effect of this should raise net after tax income for the difference in the taxes. The exact effect of this on corporate valuation won’t be known until a new business tax return is filed under the new law.

Additionally, for pass through entities, owners of the business may now deduct up to 20% of income defined as “qualified business income” without limit for taxpayers whose taxable income does not exceed $315,000 for married joint filers and phased out up to $415,000. If income is above that level, the deduction is limited to the greater of 50% of W2 wages or the sum of 25% of W2 wages plus 2.5% of the unadjusted basis of all qualified property. For valuation purposes, the TCJA has widened the differences in the tax rates for corporate entities versus pass-through income, which may require adjustments to some of the assumptions applied for valuation purposes.

The new law allows 529 plans to be used to pay for elementary or secondary private school tuition, not just college. There is no change in the tax benefits of a 529 plan, but for 2018, up to $10,000 per beneficiary may be distributed to pay for schooling.  This would raise an issue that needs to be addressed in the divorce settlement.

Personal exemptions have been suspended for tax years 2018 through 2025. During this 8-year period, divorcing parents cannot use personal exemptions for dependent children and do not need to negotiate over which parent gets to use the exemption. If the children are young enough, the exemption may return after the suspension period.

The TCJA significantly changed the child tax credit. It doubled the tax credit to $2,000 for each qualifying dependent child and make $1400 of the credit refundable. But, the credit phases out for married taxpayers earning more than $400,000. and, it expires in 2026. The phase-out threshold under the old law made the child tax credit irrelevant in many divorces, so increasing the phase-out threshold will make this a more significant issue.

The standard deduction has been doubled under the TCJA to $24,000 for married joint filers. The objective for this increase is to reduce taxes and simplify the filing process.Effectively this eliminated itemized deduction for most taxpayers. The limits on itemized deductions have been eliminated, which probably benefits higher wage earners. But the new law reduces the availability of the deduction for state and local taxes for individuals (but not businesses). So, for example, property taxes on a marital residence are deductible up to the cap of $10,000 for married joint filers, making much of property taxes on a high value home not deductible. The new law limits the deductibility of mortgage interest for loans originated after 12/15/17. It also eliminates the deduction for interest on home equity loans. This provision is set to expire after 2025. This increases the cost of financing a home by limiting the tax benefits.

 

 

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