Grunfeld v. Grunfeld

Decision Date11 May 2000
PartiesROCHELLE GRUNFELD, Respondent, v. HAROLD M. GRUNFELD, Appellant.
CourtNew York Court of Appeals Court of Appeals

Squadron, Ellenoff, Plesent & Sheinfeld, L. L. P., New York City (Stanley Plesent of counsel), and Mintz & Gold, L. L. P. (Steven G. Mintz of counsel), for appellant.

Proskauer Rose, L. L. P., New York City (Franklin S. Bonem and Jeremy R. Feinberg of counsel), for respondent.

Bruce J. Wagner, Albany, Kenneth David Burrows and Terri L. Weiss for American Academy of Matrimonial Lawyers, New York Chapter, amicus curiae.

Judges BELLACOSA, SMITH, CIPARICK, WESLEY and ROSENBLATT concur; Chief Judge KAYE taking no part.

OPINION OF THE COURT

LEVINE, J.

The primary issue on appeal in this divorce action is whether the Appellate Division erroneously based both its equitable distribution award of one half of the value of defendant's law license and his obligation to pay maintenance on the same projected professional earnings. McSparron v McSparron (87 NY2d 275, 286) prescribed a rule against such double counting of income. For the reasons that follow, we conclude that the Appellate Division erred and we remit to Supreme Court for further proceedings.

Plaintiff Rochelle Grunfeld and defendant Harold Grunfeld were married in December 1971, while defendant was in the middle of his second year of law school. After graduating, defendant began working as a customs lawyer and later became a partner in the firm of Mandel & Grunfeld. Plaintiff worked as a school teacher but gave up her professional career when the couple's first child was born. The Grunfelds purchased a home in Scarsdale and had a second child. In the 1980's, defendant's former law firm was dissolved, and defendant started his current firm, of which he is the managing partner.

As defendant's practice grew, the couple's lifestyle included imported luxury cars, live-in help, numerous Caribbean and European vacations and membership at a Westchester country club. By the early 1990's, defendant was earning approximately $1.2 million per year. The Grunfelds, however, began experiencing serious marital difficulties, with defendant spending increasing amounts of time away from home. The parties separated in 1991. In July 1992, plaintiff commenced this action for divorce. Supreme Court, in a comprehensive opinion by the late Justice Lewis R. Friedman (170 Misc 2d 808), dissolved the couple's marriage by reason of defendant's abandonment of plaintiff, awarded plaintiff custody of the child still living at home and ordered defendant to pay child support. The court also ordered defendant to pay maintenance of $15,000 per month until the sale of the marital home one year after the younger child was to enter college, in 2000. Thereafter, maintenance was to be reduced to $8,500 per month.

Before determining the equitable distribution of the marital assets, Supreme Court addressed a number of issues in connection with the valuation of defendant's legal practice and law license. The court valued defendant's practice as of the date of commencement of the matrimonial action, not the date of trial. Using the "excess earnings method" (see, Scheinkman, Practice Commentaries, McKinney's Cons Laws of NY, Book 14, Domestic Relations Law C236B:5, at 276; Kelly, Sharing a Piece of the Future Post-Divorce: Toward a More Equitable Distribution of Professional Goodwill, 51 Rutgers L Rev 569, 610-612), the court first determined the amount that defendant actually earned in excess of "reasonable compensation," the amount paid to an attorney of similar age and background in the same geographic area without any ownership interest in a law practice. After subtracting taxes and the income theoretically derived from defendant's share of the firm's tangible assets ("return on equity"), by agreement of the parties, the resulting amount was capitalized using a multiple of three. Then, defendant's interest in the firm's tangible assets was added to the capitalized earnings to arrive at defendant's interest in his practice, which Supreme Court found to be $2,581,760.

In response to our then recent decision in McSparron (supra), Supreme Court also made a determination of the value of defendant's license to practice law for equitable distribution purposes. The court first computed the value of the "bare license," the present value of the difference between the average earnings of a first-year associate at a law firm and a person holding an undergraduate degree, for the remainder of defendant's work-lifetime, with an adjustment to take into consideration the possibility of defendant's death before reaching 65, his anticipated age at retirement. Because the parties did not marry until defendant was halfway through law school, only one half of the bare license was a marital asset. Thus, its value was multiplied by a 50% "coverture fraction." Next, the court added the "enhanced earnings potential" created by the license (see, McSparron v McSparron, supra, at 286-287

). To avoid double counting, since defendant's income in excess of "reasonable compensation" had already been considered in determining the value of defendant's interest in the practice, the court excluded that portion of defendant's future earnings from consideration (see, Scheinkman, op. cit., at 299-304). Thus, the enhanced earnings attributable to the license alone were the difference between reasonable compensation and the earnings of a first-year associate. Again, the court calculated the present value of these earnings from the commencement date until the date of defendant's expected retirement, taking actuarial factors into account. The result was then reduced by 7% "to reflect the premarital, separate property component of that figure" (170 Misc 2d, at 819). The sum of the license's bare value and enhanced earnings potential was found to be $1,547,000.

Thus, Supreme Court determined the value of both defendant's law practice and license by calculating the current worth of different components of defendant's projected future income of $1.2 million per year. To the extent that these "assets" were acquired during the marriage, they were correctly considered to be available for equitable distribution.

Supreme Court next set out to avoid double counting the same anticipated future income stream in making the determination of the amount of maintenance and in fixing the distributive award of the law license (see, McSparron v McSparron, supra, at 286

). The court specifically recited that it had considered all of defendant's future income in setting the maintenance award. It noted that the methodology of determining the value of defendant's license was based on the earnings differential between reasonable compensation and the income of a nonlicensed college graduate. The court then explained that it would violate the McSparron rule against double counting to actually award one half the value of the license, since the foregoing earnings differential upon which it was based had already been considered in fixing the award of maintenance.

"Since wife is to receive 50% of the license value, an award to the extent of one half of the earnings differential would clearly be duplicative. The maintenance award here, including the reduced amount after the sale of the house, clearly exceeds that figure. Alternatively the court could reduce the maintenance award to present value * * * and compare that figure to 50% of the `license' value. The numbers in the case still show that the maintenance award would exceed the distribution of the `license'" (170 Misc 2d, at 821).

To avoid giving plaintiff two separate awards derived from the same stream of future income, the court thus excluded the license from the marital assets in determining the distributive award.

Supreme Court distributed 50% of the remainder of defendant's assets. Because it could not actually distribute half of his law practice, it ordered defendant to pay plaintiff a sum of money equal to half the value of the practice, to be paid in amounts no less than $250,000 per year (see, Domestic Relations Law § 236 [B] [5] [e]). No interest was ordered to be paid on any unpaid balance of the distributive award "if the amounts due are paid in a timely fashion."

The Appellate Division modified (255 AD2d 12), holding that one half the value of defendant's professional license, $773,500, should also have been distributed to plaintiff. The court held that the reduction of maintenance from $15,000 to $8,500 per month should begin following full payment of the distributive award, not following the sale of the marital residence, but it did not otherwise adjust the maintenance award. The Appellate Division also ordered defendant to pay plaintiff interest on the unpaid balance of the distributive award at the statutory rate. We granted leave and now modify, because we conclude that the Appellate Division double counted defendant's income in ordering that plaintiff should receive both undiminished maintenance and the full distributive award of one half the value of plaintiff's law license.

Analysis

In O'Brien v O'Brien (66 NY2d 576), this Court ruled that, to the extent that it is acquired during marriage, a professional license is marital property subject to equitable distribution (id., at 584). In addressing the issue of valuation, we held that "[t]he trial court retains the flexibility and discretion to structure the distributive award equitably * * * and, once it has received evidence of the present value of the license and the working spouse's contributions toward its acquisition and considered the remaining factors mandated by the statute (see, Domestic Relations Law § 236 [B] [5] [d] [1]-[10]), it may then make an appropriate distribution of the marital property including a distributive award for the professional license if such an award is warranted" (id., at 588 [emphasis supplied]).

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