Forensic Accounting Perspectives : New York Business Valuation, Divorce, Business Disputes, Shareholder Disputes, Litigation Support & Accounting Forensics in Connecticut, New York & New Jersey

In recent years, we have seen an increasing number of cases dealing with palimony filed in the New Jersey courts. Palimony has long been based on the law of contracts, where an oral promise can be enforced if a party relies and acts on it to their detriment. But a new law came into being during the last days of the Corzine Administration, requiring that in order for a palimony agreement to be enforceable, it must now be in writing and be executed with the independent advice of legal counsel.

Recently, forensic accounting expert, Mark S. Gottlieb,  met with Stephanie Hagan, a Family Law attorney and Partner in the firm Donohue, Hagan, Klein, Newsome and O'Donnell PC, to discuss the enactment of the Statute and its effect on couples. Both of these professionals have extensive experience in matrimonial and family law matters.

Although early palimony decisions found that cohabitation was a necessary element in a palimony action, this concept was eventually overruled by the New Jersey Supreme Court in 2008 when the Court ruled in Devaney v. Esperance .  In this case cohabitation was no longer a required factor. The Court found that a marital-type relationship is essential to any palimony claim; however, cohabitation is not essential to a determination of a marital-type relationship.  In many instances married couples may be separated by employment, military, or educational opportunities. Hence, not all married couples live together on a full-time basis.

According to Ms. Hagan, there is no doubt that the L'Esperance decision was the catalyst for the Legislature in passing the new law. Effective January 2010, the law requires all "promises" of support to be made in writing. As a result, many people who have entered into a long-term committed relationships without being married may find themselves in financial jeopardy.  Ms. Hagan emphasizes this issue for those of modest means. Without recourse, many individuals, regardless of financial capacity, may find themselves vulnerable when living with someone without a written agreement..

These written agreements are still considered "contracts" between two parties and can be held invalid for any number of reasons--including being "unconscionable" or "void" as against public policy. The legislation also says the written promise will not be binding unless it was made with independent legal advice for both parties.

To learn more about the new palimony law in New Jersey, please listen to Mark S. Gottlieb's  podcast with Stephanie Hagan.

We welcome your thoughts and comments on this issue.

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Over on New Jersey Family Legal Blog, I saw a post that editor Eric Solotoff, a family law attorney at Fox Rothschild wrote that struck my interest.

Upon reading the post, Madoff Mess Hits Divorce Court, I knew I had to sit down with Eric for a podcast, to discuss what all this means in respect to forensic accounting.

For context, Justice Saralee Evans in Manhattan recently decided on a case regarding a divorcing spouse who attempted to revise his agreement with his wife.

First, some background for our readers who may not be that familiar with the case:

After thirty years of marriage, a husband and his ex-wife spent nearly two years debating the value of their home in Scarsdale, The husband's law partnership, and their Manhattan apartment. The two agreed on at least one thing: an account they opened during their marriage with Bernard Madoff Investment Securities LLC was worth $5.4 million.

As part of a 2006 equitable distribution agreement, the husband claimed he paid his wife some $2.7 million, which represented what he thought was his ex-wife's fair share of their investments with Madoff. But after Madoff's arrest in December 2008, the husband attempted to redo the agreement, claiming it was based on a "material, mutual mistake" and resulted in a windfall for his ex-wife.

After the husband learned that he and his wife had "been tricked by a sophisticated fraudster," he sought to reform the divorce agreement. The husband claimed the agreement did not accomplish the parties' goal of ensuring that each would keep approximately half of the marital assets.

The husband alleged that because the Madoff account turned out to be valueless, the spirit of the agreement was broken. But according to Justice Evans, there was no evidence that defendant was unjustly enriched.

Justice Evans last December held that while the husband's decision to hold on to the Madoff account may have been "improvident," that did not give the Court an equitable basis to set the agreement aside. In dismissing the suit, Justice Evans wrote, "There is no evidence that defendant was unjustly enriched. In 2006, at the time of their agreement, each of the parties received the benefit of his or her bargain."

Justice Evans rejected the husband's argument that the mutual releases of both parties signed as part of their divorce agreement were based on a mutual mistake. The husband had liquidated part of his Madoff investment to fund his wife's equitable entitlement. So in 2006, and several years after, that the husband maintained this investment, the account could have been redeemed for cash, presumably in excess of its 2004 value. The wife's attorneys said Justice Evans' ruling underscored the importance of ensuring that both sides in a divorce agreement waive future claims against each other.

The lesson of this case is that clients and their divorce attorneys should be very careful in fashioning settlement agreements. Even when significant mistakes are made at the time the agreements are entered into, it's very difficult to set them aside--even in such extreme circumstances as being a victim of a historic scam.

To learn more about this decision please listen to our podcast with Eric.

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Since the Federal Rule of Civil Procedure 26 was last amended in 1993, it has required parties to submit expert reports for all testifying experts. Those amendments have been interpreted by some courts to allow discovery of all draft expert witness reports and all communications between counsel and testifying expert witnesses. In the view of many litigators, the experience under those changes revealed significant practical problems.

Allowing such broad discovery significantly expanded expert discovery; it also irrevocably led attorneys and experts to take counteractive measures. However the steps taken to avoid creating discoverable drafts or communications has predictably resulted in inefficient and costly litigation. According to Charles S. Fax in Litigation News, Rule 26, “has bedeviled lawyers in dealings with expert witnesses. However, proposed amendments promise to resolve the difficulties caused by the present rule.”

These proposed amendments, the first major revision in nearly two decades, are to take effect in December of this year. No longer would Rule 26 allow full discovery of draft expert reports and require broad disclosure of any communications between an expert and trial counsel. Instead, those communications would come under the protection of the work-product doctrine. The amendments specifically extend work-product protections to drafts of both expert reports and expert party disclosures under Rule 26, and to attorney-expert communications.

With the prohibition of discovery about who said what to whom—a matter of no interest to jurors—depositions would now be allowed to focus on the expert’s analysis of the case. What will still be allowed, however, would be full discovery of the expert’s opinions and of the facts or data used to support them.

Plaintiff and defense lawyers agree on the need to apply work-product protection to expert draft reports, and that the revisions are an important step towards reducing the cost and contentiousness of litigation. Interrogating an expert about his or her conversations with counsel and prior report drafts is regarded by many as an utter waste of time. No longer would attorneys and experts feel compelled to avoid written communications; and well-funded litigants would no longer hire two sets of experts—one to consult in case development and the other to testify.

Congress has until December 1, 2010 to override the change, and if that does not happen, it becomes law on that day.

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As most forensic accountants and business valuators know, post-acquisition disputes between an acquirer and target company are on the rise. These conflicts can be disruptive, time-consuming and expensive. To help in successfully resolving a dispute, the post-acquisition advisor needs to be extremely well versed in accounting, business valuation, economics, finance and litigation. In times when bank failures and bankruptcies are not uncommon, resolving post-acquisition disputes can be a formidable challenge.

The most common disputes involve post-closing adjustments for working capital or net assets, indemnity or fraud claims, and earnout disputes. In a dispute involving both working capital and indemnity claims, for example, working capital claims are typically measured on a dollar-for-dollar basis while indemnity claims can be measured dollar for dollar, over a finite period or into perpetuity.

The measurement of damages into future periods is predicated on assessing whether the misstatement will affect future periods; the buyer’s expectations were based on future performance; the business was significantly devalued after the acquisition; and the misstatement would have been “material” to a “willing buyer.”

Potential disputes in mergers and acquisition transactions can often be just as complex as the deals themselves. It is the acquirer that instigates a dispute on the grounds that it’s unable to complete the deal because of financial shortfalls, although there are exceptions.

In a 2009 roundtable discussion published in Financier Worldwide, one participant commented:

“The economic downturn has significantly increased the number of commercial disputes, and it has changed the nature of dispute resolution. Where once parties could resolve their differences through negotiation because they sought to preserve an ongoing business relationship, they are now realizing that there is not a next transaction on the horizon, so that litigation and arbitration, as opposed to mediation or reconciliation, become more likely.”

Throughout history we have seen that challenging economic times inevitably lead to a significant rise in conflicts between organizations. In attempting to resolve post-acquisition disputes, even the financial expert comes to terms with the fact that there is a finite amount of ways to resolve it, and each approach has its benefits and downsides.

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