Court Rejects Double-Dip Claim, Emphasizing Owner’s General Earning Capacity

Double counting (often called “double dipping”) was one of the key issues the Connecticut appellate court discussed in this contentious divorce proceedings involving several financial consulting companies that the ex-spouses had established. The husband said the trial court’s order to pay the wife a significant sum of money in alimony per month was impermissible double dipping because the alimony was income from the very companies of which the court had awarded the wife a portion. The wife countered there was no double dipping as the alimony calculation was based on the husband’s general earning capacity. The appellate court agreed with the wife.

Husband’s earnings capacity. During the marriage, in 1995, the husband and wife created three related companies that provided financial and investment consulting. The companies were structured so that the wife owned 51% of each of the three companies and the husband the remaining 49%. Further, the husband owned 100% of a fourth related company. In 2009, the wife resigned formally from the positions she held at the companies and the spouses separated. The wife then filed for divorce.

Before the husband worked for the couple’s companies, he had held positions on Wall Street and had worked in London. During the divorce proceedings, in the spring of 2012, the wife’s forensic valuation expert arrived at a combined value of the companies of not less than $11.7 million. The expert noted that comparable compensation for the husband, as a key person working on Wall Street, would be in the $1 million-to-$2 million range annually. The wife’s expert attributed 50% of the pretax profits to the husband. For 2010, the adjusted compensation was nearly $2 million. As of the completion of the second quarter of 2011, adjusted compensation attributable to the husband was nearly $685,000, the expert said. The husband did not offer contradicting evidence.

In its May 2012 memorandum of decision, the trial court called the valuation methodology of the wife’s expert, and the adjustments he made, “a sound and reasonable approach to valuation” and adopted the expert’s conclusions.

Both parties came to agree that the companies should be sold. The trial court ordered the wife to transfer to the husband the titles and all rights to the companies. And it ordered the husband to sign a promissory note for $6 million payable to the wife at $1 million per year for six years. If the husband were to sell the companies within six months, he was to pay the wife 55% of the sale proceeds; the wife was to receive no less than $4 million from the sale, the trial court ordered.

Further, the court awarded the wife $60,000 per month in alimony until the death of either party, the remarriage of the wife, “or as determined by the court.” The court said it based alimony on “earnings, including member distributions to the defendant up to $2,0000,000 per year.” The court particularly noted the statement from the wife’s expert regarding the husband’s ability to make at least $1 million to $2 million per year, operating as a key person on Wall Street. The court said: “Accordingly, finding earnings attributable to the defendant in the amount of $2,000,000 gross is conservative, the court adopts it as a finding of fact as to the present earning capacity of the defendant at [the companies].”

The husband subsequently filed various motions in which he asked the trial court to reopen the dissolution judgment and related financial orders. In November 2012, the trial court granted the husband’s motion and ordered an evidentiary hearing related to the husband’s claims that the wife had appropriated funds from the companies and engaged in conduct that negatively affected the value of the businesses. At an evidentiary hearing, the parties presented expert testimony as to the husband’s value-related claims.

The trial court concluded that the “deleterious conduct” of the wife undermined the husband’s ability to operate the companies and caused the value of the companies to drop from $11.7 million to $6.3 million. Finding a new trial was not necessary, the court issued substitute financial orders in which it reduced the amount the wife would receive for her interest in the companies from $4 million to $3 million.

Both parties appealed various aspects of the trial court’s findings.

Challenge to alimony. The husband claimed the trial court’s alimony determination was error because the court considered income generated by the companies while also awarding the wife a portion of the value of the companies. The trial court double dipped, the husband argued. In a related argument, the husband contended the trial court did not make a finding as to the husband’s general earning capacity but only as to the husband’s earning capacity at the companies. Further, if the trial court had found the husband’s earning capacity was independent of the income he earned at the companies, the trial court erred because it did not have evidence that the husband had earnings from an independent source of $2 million per year. Nor did the court have evidence of the husband’s earning capacity. The husband’s argument was based on a claim that the trial court had stricken testimony from the wife’s expert as to potential earnings on Wall Street for procedural reasons.

The wife contended the trial court based its decision on the husband’s general earning capacity. She argued the trial court referenced the husband’s educational background, experience, and qualification when finding earning capacity of at least $1 million to $2 million, “irrespective of his income from the companies.” Moreover, under case law, it was not improper for the trial court to use a spouse’s income derived from a closely held business as some evidence of the spouse’s general earning capacity, the wife said. This was what the trial court did here.

The state appellate court agreed with the wife. It first noted the general principle that “a court may not take an income producing asset into account in its property division and also award alimony based on that same income.” The appellate court found the trial court here made fact findings as to the husband’s earning capacity “independent of his employment at the companies.” The trial court both determined that the husband’s “present [gross] earning capacity” at the companies was $2 million per year. But, according to the appellate court, there also was additional evidence that the trial court considered in fashioning its order for alimony. The reviewing court pointed to the trial court’s crediting the approach the wife’s expert used for the valuation and the expert’s comment as to the husband’s earning capacity on Wall Street. In addition, the appellate court said, the trial court had evidence regarding the husband’s educational background and his employment prior to working for the companies, “which included various positions on Wall Street and in London.”

Therefore, there was evidence to support the trial court’s finding as to the husband’s general earning capacity, “independent of his position [at the companies],” the appellate court said. It concluded the trial court did not engage in improper double dipping.

Improper post-judgment revaluation. The wife challenged the trial court’s decision to revisit the dissolution judgment and change its earlier financial orders based on the husband’s allegations of post-judgment misconduct by the wife. The appellate court agreed with the wife that the trial court did not have the authority to undertake a do-over. In a nutshell, as the appellate court explained, under the controlling law, the circumstances in which a court may reopen or set aside a judgment are limited because of the important principle of achieving finality in judgments. Basically, a court may open a judgment if a motion is filed within four months following the judgment date and where there is “a good and compelling reason for its modification or vacation.”

The husband had filed the motion within four months of the judgment. But the wife contended, and the appellate court agreed, that a post-judgment change in the value of a marital asset was not a valid reason to revisit a judgment. Under case law, the trial court’s decision to reopen a judgment must relate to prejudgment conduct, the wife said. The appellate court noted that the trial court improperly considered post-judgment withdrawals by the wife. “Neither party has identified precedent wherein the trial court opened a marital dissolution judgment to revalue an asset subject to equitable distribution on the basis of post-judgment conduct by one of the parties,” the court said. It went to on say that the applicable statutes did not “vest the trial court with authority to revisit a judgment dividing marital property where post-judgment conduct, conditions, or changes affect the value of a marital asset.”

The appellate court reversed the modified judgment of the trial court and reinstated the trial court’s original financial orders “in their entirety.”

Callahan v. Callahan, 157 Conn. App. 78 (May 5, 2015)