by Amy J. Amundsen and Carolyn Moran Zack

Introduction

In the 1989 classic film “Field of Dreams,” Iowa corn farmer Ray Kinsella envisions a baseball diamond in his cornfield with baseball legend “Shoeless” Joe Jackson standing in the middle and then hears a voice whispering, “If you build it, he will come.” After Ray and his wife Annie plow under their corn crop to build a baseball field, they risk financial hardship, but with the support of some imaginary and real-life characters, they persevere. In addition to reconnecting with his father, Ray finds economic success and personal fulfillment as hundreds of people arrive and pay to watch the National Pastime.

The phrase “If you build it …” has become a metaphor for the law of attraction, which suggests that using long-term goals to make specific, concrete changes in the present will help you to achieve those goals. Achieving resolution of family law disputes privately, more quickly, more cheaply, and with less adversarial posturing, are goals shared by family lawyers and their clients. Family law arbitration, which is the process by which parties voluntarily submit their claims for adjudication to a third-party neutral, allows parties to effectuate these goals.1 By recognizing the benefits of family law arbitration and encouraging clients to use this process routinely, family lawyers can shift away from the litigation forum into a trend-setting confidential forum of arbitration. With more family lawyers striving to reap the myriad benefits resulting from family law arbitration, trying it out in their cases, and working together to improve the applicable laws and rules, this method of resolving disputes may become the new field of dreams.

This article will help family lawyers guide clients who are trying to decide whether arbitration is appropriate for their case. Part I discusses what lawyers need to know to propose arbitration to their clients and opposing lawyers, including trends and research in favor of arbitration, the laws applicable to arbitration, the cases or issues that are appropriate for arbitration, and its advantages and disadvantages. Part II addresses the essential components of an arbitration agreement, including considerations for child-related awards, and distinguishes private judging. Part III gives an overview of the arbitration process. Part IV discusses techniques that can be used, including final-offer arbitration, mediation-arbitration, singleissue arbitration, and a panel of arbitrators. Finally, Part V argues in favor of the need for family law-specific legislation or rules to provide more reliability in the process and to protect the interests of family law participants. 

View the full article here, beginning on page 65.

AAML Pennsylvania Chapter Fellows Robb Bunde and Carolyn Zack attended the ceremonial signing of the Pennsylvania Family Law Arbitration Act by Governor Josh Shapiro on October 22, 2024. Also pictured are Anna King (Director of Legislative Affairs for the PBA); Representative Melissa Shusterman (prime sponsor of the bill); David Vitali; Tim Clawges (House Judiciary Committee Executive Director); Representative Liz Hanbidge; Representative Kate Klunk; and Representative Tina Davis. Robb and Carolyn led a four-year effort by the Pennsylvania Bar Association’s Family Law Section to promote family law-specific arbitration legislation to improve the arbitration process for family law participants. On March 14, 2024, the AAML Board of Governors adopted a resolution to, among other things, encourage each state’s AAML chapter to work with their legislature to introduce the Uniform Family Law Arbitration Act (“UFLAA”), with modifications as appropriate to codify or incorporate any established family law arbitration caselaw, statutes, policies or procedures, and with the goal of helping family law litigants resolve their matters expeditiously, competently, cost efficiently, and confidentially in this alternative dispute forum. Pennsylvania is the latest state to adopt the UFLAA.

By Gregory Kohr, Partner, Marcum LLP and Noel Capuano, Director, Marcum LLP | AAML Pennsylvania Platinum Partner

Imagine you and your client have spent countless hours attempting to negotiate a settlement in their matrimonial matter, and FINALLY, a resolution has been reached. Now is a chance to breathe since the hard part is over, right? Unfortunately, that may be far from the case. 

While it may seem that the preparation of the Marital Settlement Agreement (“MSA”) is a straightforward process memorializing the terms that the parties agreed to, the fact is “the devil is in the details.” Choice of terminology, references to specific calculations/methods (or omission of same), and a variety of potential pitfalls can, and have, caused misunderstandings and misinterpretations, landing the parties back to where they started - in litigation. Cases with complex financial issues frequently utilize a forensic accounting expert to bring clarity to the process. In almost all of these cases, leveraging the services of a financial expert is an invaluable but often underutilized resource when preparing the MSA.

The following are sections of the MSA, but certainly not all, where vague or missing language may lead to unforeseen complications down the road:

Business Valuation

When one spouse owns an interest in a business, all or part of the business is considered part of the marital estate and may be subject to equitable distribution. In almost all of these instances, a business valuation, whether formal or informal, is necessary for several reasons. First and foremost, while the owner spouse will likely retain the business, the non-recipient spouse needs an understanding of what their equitable "share" of the business is worth to understand what they will receive. The MSA should reference the business value and the value of the asset(s) the non-recipient spouse will receive

in lieu of the business interest. The terms should be explicitly referenced in the agreement in order to preclude the parties from having "selective memory" years down the road.

It should also be noted that some businesses have no value; they provide a job for the owner and nothing more. This does not mean the business should not be referenced in the MSA; instead, it should be noted that 1) the business was considered, but 2) it was determined to have no value and was therefore not considered in determining the marital estate.

Alimony/Income Determination

Careful consideration should be taken when defining "income" for purposes of calculating alimony, and each component should be clearly laid out in the MSA. If one or both parties are W-2 wage earners, determining alimony should be relatively straightforward. The challenge comes when a spouse is self-employed or has a more complex compensation structure. 

If a spouse is self-employed, their income may be derived in the form of various expenses paid through the business, such as auto, personal credit cards, life insurance, etc. (known as perquisites). They may also own the building from which the company operates, giving rise to rental income. All of these economic benefits need to be considered for alimony purposes. Additionally, recognition needs to be given to the fact that the business owner can potentially manipulate their income in the process of what is commonly referred to as "divorce planning." An example would be a sudden decline in revenue that the owner attributes to external factors (competition, economy, etc.) when, in reality, they are simply working less. An accountant is frequently engaged in these cases to determine the business owners’ true economic benefit. 

Equity-Based Compensation

This issue comes up so frequently that it deserves further discussion. It is imperative to understand the type of equity-based compensation, how it is awarded/granted, how/when it vests, and how it is ultimately received. We have seen instances where equity-based compensation was defined incorrectly in the MSA, leading to complications when facilitating equitable distribution. Further, it should be noted that the existence of a grant/award of stock options or RSUs does not guarantee receipt of the same, as these forms of equity-based compensation can be subject to both vesting schedules and forfeitures. If the recipient spouse’s employment is terminated prior to vesting, they cannot monetize the awards, and alimony or equitable distribution could be impacted. The MSA should include language that explicitly addresses these potential situations to avoid surprises in the years to come.

Tax True-up Calculation

There are instances where one spouse has an asset that cannot be easily liquidated or divided for equitable distribution. In those cases, the non-asset-owning spouse will likely have to "ride along" until the asset is disposed of. When this occurs, there is often a tax consequence due to the owner spouse reporting pass-through taxable income. This gives rise to an inequity in that the asset-owning spouse will be responsible for 100% of the tax obligation for an asset that was to be divided as part of equitable distribution. Language is necessary in the MSA to lay out how a tax true-up will be calculated. The language should be detailed and specific to avoid misinterpretation, and the non-asset-owning spouse's personal tax preparer can verify the calculations are correct. Utilizing your financial expert will make this process easier for counsel and the parties to understand.

While accountants are often involved in determining business value and income, their experience and familiarity with the case can be a valuable resource when drafting the MSA and minimizing the potential for post-judgment disputes in the future.

AAML Pennsylvania recently filed a friend-of-the-court brief for Glover v. Junior, urging the Pennsylvania Supreme Court to issue a ruling protecting a lesbian mother’s parental status. This brief was cited in an article recently published by GLBTQ Legal Advocates & Defenders (GLAD).

Read the full article here.

THE AAML ERIC D. TURNER AWARD is sponsored by the Pennsylvania Chapter of the American Academy of Matrimonial Lawyers. A $1,000 cash award is given to one third year law student from each of Pennsylvania’s law schools who, in the opinion of the Law School’s faculty, best demonstrates the positive attributes of a matrimonial lawyer: academic excellence; competence as practitioner; commitment to the practice and development of family law, including assisting the indigent and improving the quality of the administration of justice in the field of family law; and meeting the highest standards for ethical behavior.

This Award was created to honor and remember Eric D. Turner, a highly respected and beloved Fellow of the Pennsylvania Chapter of the American Academy of Matrimonial Lawyers. Since its inception in 2000, following Eric’s untimely passing, the Pennsylvania Chapter of the AAML has awarded over $80,000 in scholarships to third year law students attending schools in Pennsylvania.

Our purpose in creating and maintaining this award is to encourage law students to enter the field of family law. Many of our award recipients have in fact obtained employment with prestigious family law firms and have successful careers in family law.

The award is administered by Fellows Stephanie H. Winegrad of Obermayer Rebmann Maxwell & Hippel and Colleen M. Neary, Esquire, of Media, PA. Ms. Neary has been a Fellow of the American Academy since 2003 and practices primarily in Delaware County, PA. Ms. Winegrad has been a Fellow of the American Academy since 2013 and practices family law in Montgomery County, PA.

By Syndey Weber, Marcum LLP | AAML Pennsylvania Platinum Partner

Normalization adjustments are an essential component of any business valuation. They are necessary to ensure that the operational results and financial position as reflected on the subject company’s financial statements or tax returns accurately indicate the anticipated profit or loss on a going-forward basis. Valuation experts make normalization adjustments to the income statement to eliminate expenses that are non-recurring or unrelated to the business, as well as to properly account for expenses such as rent or officer compensation that may not be accurately reflected. Adjustments may also be made to the balance sheet in order to remove non-operating assets or adjust assets to fair market value. This article focuses on adjustments commonly made to the income statement. 

The first step in normalizing the income statement is to determine the unadjusted Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA, a key indicator of the profitability of a business. To do so, all interest, tax, depreciation, and amortization expenses are added back to the business’s reported net income. Once these preliminary adjustments are complete, the normalization adjustments are made to reach normalized EBITDA. 

Following are some of the more common income statement normalization adjustments:

1. Reasonable Compensation: In closely-held businesses, the owner typically draws a salary that may be considered “discretionary”. If the business is a sole proprietorship, the owner does not receive a salary at all. To ensure the business’s normalized EBITDA is accurately represented, it is necessary to make an adjustment reflecting the market rate that would be paid to a non-owner providing the same services. In this adjustment, the officer’s compensation reported on the income statement is added back to net income, and the reasonable compensation determined by the valuation expert through industry research is deducted. This adjustment removes the impact caused by a business owner receiving profits as a salary. It ensures EBITDA is not overstated by reflecting the appropriate market rate of compensation for the owner’s services.

2. Discretionary Expenses: Adjustments need to be made for expenses paid through the business that are not essential to its operations. Generally, any expense that would not be necessary for a potential buyer to incur to maintain the business’s operations should be added back to the reported net income. The types of discretionary disbursements that are adjusted can vary depending on the nature of the business. They may include all or a portion of travel and auto, meals, entertainment, club dues, and credit card charges. Following discussions with the business owner, expenses may be deemed partially discretionary in certain circumstances. In this case, a percentage is often applied. Additionally, discretionary expenses that may not be immediately apparent to the valuation expert can usually be identified through discussions with the business owner. It is important to note that an expense that may be deductible for tax purposes could still be classified as discretionary for valuation purposes.

3. Rent Expense: When the real estate from which the business operates is owned by the business owner personally or through a related entity, the rent charged to the business may not be representative of the fair market, meaning the business is paying either more or less than would be paid to an independent third party. A real estate appraiser generally determines fair market rent. If the business pays an amount over fair market rent, the excess would be added back to net income. Conversely, the differential would reduce net income if the amount paid is below fair market rent.

4. Non-Recurring Income and Expenses: Any reported income or expenses that are not expected to recur in the future can skew EBITDA and should be adjusted. The adjustment for a non-recurring income or expense item would decrease or increase net income, respectively. Examples of non-recurring income and expenses include settlement fees for legal actions, one-time expenses for repairs or maintenance, income or loss from discontinued operations, and gains or losses on sales of assets or other investments.

Income statement normalization adjustments play a vital role in determining a business’s expected ongoing operational performance. These adjustments help ensure the conclusion of value is both reasonable and adequately supported.

American Academy of Matrimonial Lawyers (AAML) Issues Resolution: Endorses Family Law Arbitration as Vital Alternative to Traditional Litigation

CHICAGO, April 17, 2024 ― The American Academy of Matrimonial Lawyers (AAML) has issued a resolution reaffirming its support for the use of arbitration in divorce and family law matters. The endorsement comes as part of a resolution adopted by the AAML Board of Governors on March 14, 2024.

Founded in 1962, AAML has been a leader in the field of family law, committed to promoting professionalism and excellence. President J. Benjamin Stevens emphasizes, "Arbitration offers families a quicker, more cost-effective and flexible alternative to traditional litigation. It empowers them to resolve disputes with greater efficiency and privacy."

The resolution underscores AAML’s commitment to advocating for legislation that addresses the unique needs of vulnerable family law participants. President Stevens noted, "Our endorsement of the Uniform Family Law Arbitration Act highlights our dedication to ensuring that arbitration processes safeguard the rights of all parties involved."

AAML’s resolution encourages states without family law-specific arbitration statutes to consider adopting the Uniform Family Law Arbitration Act. "We urge states to align their legislation with established caselaw and procedures to provide families with fair and efficient avenues for resolving their legal matters," said President Stevens.

AAML calls upon the judiciary across the nation to support and encourage the use of arbitration in family law cases. "By embracing arbitration, we can expedite proceedings and minimize the emotional toll on families involved," added President Stevens.

The AAML's endorsement of family law arbitration reflects its ongoing commitment to advancing the practice of family law and ensuring access to justice for all families. The full AAML resolution can be found here on the AAML website.

About the American Academy of Matrimonial Lawyers

Founded in 1962, the mission of the American Academy of Matrimonial Lawyers (AAML) is to provide leadership that promotes the highest degree of professionalism and excellence in the practice of family law. Comprised of the top 1,200+ matrimonial attorneys throughout the nation, members are recognized experts in the specialized areas of matrimonial law, including divorce, prenuptial agreements, legal separation, annulment, custody, property valuation and division, support and the rights of unmarried couples. For more information, visit www.aaml.org.

By Zachary Petersen, CPA, CVA, CFE, Marcum LLP | AAML Pennsylvania Platinum Partner

Imagine you are the owner of a famous and well-respected restaurant. In your employ are master chefs and culinary experts covering a range of different backgrounds and techniques. Among them are a saucier, creating various sauces used throughout the menu, and a pasta chef, responsible for imagining and delivering some of the menu’s entrees. There is also a pastry chef and a chocolatier, together creating beautiful and imaginative desserts. And, of course, you have a sommelier to select the perfect wines to pair with each dish. 

Each night, the kitchen is tasked with providing a top-notch experience to the guests, with a menu that changes regularly. Every dish is thoughtful and well-executed. Each specialist works together to build a memorable experience and must know their role in relation to each other to deliver excellence.

Now imagine each dining experience is its own case, and you, as the owner, are the attorney responsible for delivering excellence to your customers (clients). You must direct your team and understand the capabilities and limitations of each member to produce an effective and cohesive approach.

Likewise, litigation can require several different experts in different fields to build the arguments necessary to prevail. Experts are necessary to review the facts, parse the technical requirements in their field, and provide an analysis or opinion based on their work. A chocolatier will not be qualified to present wine pairings for the guests in the same way that a financial expert cannot opine on the adequacy of manufacturing safeguards. Generally, professional standards expressly prohibit opinions on matters outside the expert’s scope. Although the expert may have a general understanding of how effective manufacturing safeguards can reduce overall risk to a business, they cannot be expected to deliver an opinion on what policies, procedures, and equipment are considered effective.

Depending on the facts of the case, much like our imaginary kitchen, several different experts may be needed to provide analyses within their specialties to provide a comprehensive and effective service to the client. Although a financial expert can certainly serve as your only expert if all relevant issues fall within the scope of that individual’s field of expertise, you should still consider carefully. Some issues may seem like concepts on which your expert can provide an opinion, but sometimes, they fall outside that scope of expertise or veer into legal determinations.

It is also vital that each expert is informed of their specific role for what they are being asked to do, even if the task is already within their field of expertise. If the kitchen has a theme for the evening, such as “An Evening in Tokyo," you probably wouldn’t want your pasta chef delivering authentic German spaetzle that night. Similarly, although a valuation expert can provide the value of a business under the fair market value standard, complete with a formalized report, if the jurisdiction governing the dispute only allows the use of the fair value standard or if valuation schedules would have sufficed for settlement purposes, the expert will have ultimately spent extra time developing valuation discounts or writing a report, to provide a conclusion of value that would not be appropriate for the client’s needs.

Experts, particularly financial experts, are a powerful tool for litigants and their attorneys. However, we, as experts, must be careful in providing opinions that are within the realm of our expertise. It is required, both from a legal standpoint and from the rules set forth by the associations we are members of. It is essential that experts, attorneys, and clients are all on the same page regarding what we can and cannot address. Being as specific as possible helps ensure our work is unambiguous, appropriate for the client's needs, and within the confines of our expertise and professional requirements. 

So, next time you engage an expert or are engaged as an expert, make sure the expectations are clear to all parties, both verbally and in an engagement letter, as to what the expert is being asked to do. You’ll find better client outcomes and just might save everyone a headache.

By Marcum LLP | AAML Pennsylvania Platinum Partner

The marital lifestyle or the standard of living experienced when a couple resides together during marriage can be a crucial element in divorce proceedings. Financially, how did the couple live while they were married? What amount and type of income support this lifestyle? How much alimony/child support should be awarded to sustain this lifestyle? These questions can be answered by engaging a forensic accountant to perform a lifestyle analysis.

What is a Lifestyle Analysis, and What Does it Provide?

A Lifestyle Analysis is a thorough examination of the standard of living that a couple enjoyed during their marriage. This analysis is crucial to help establish a factual basis for the couple’s spending and saving patterns and overall financial status. Forensic accountants can paint a factual picture of the marital lifestyle and expected future spending through a diligent review of historical financial records such as bank, credit card, and investment account statements, as well as tax returns, property records, and loan documents, to name a few.

By reviewing the above documents and interviewing the spouse who manages the financials (if that is a feasible option), a Lifestyle Analysis can play a crucial role in the divorce process, especially when it comes to the calculation of alimony/child support, uncovering hidden assets, and identifying various sources of income.

Spending:

A look into historical spending from a party’s marriage can provide a benchmark for the future spending of each person. A review of the bank statements allows a forensic accountant to categorize individual transactions into the income and expense categories identified from the Case Information Sheet, taking into consideration the following:

• Spending of the parties both individually and jointly.
• Recurring and non-recurring expenses.
• Dissipation of marital assets (depletion of marital funds), if any.

All of the above considerations can paint a picture of the amount required to maintain a similar standard of living post-divorce to help the parties and their attorneys determine alimony and/or child support payments.

Hidden Assets:

During a divorce, it is not unusual for one party to attempt to conceal certain assets from the equitable distribution process. Through a review of bank statements provided, forensic accountants can uncover various hidden assets by analyzing transactions within the account statements, such as the following:

• Transfers to additional bank/investment accounts not known by one of the parties.
• Payments to loan institutions uncovering additional assets purchased during the marriage.
• Transfers of money to corporations or entities for investment in their business.

Uncovering hidden assets is essential to ensure a fair and equitable division of property during a divorce. Even though parties are required to be transparent in their financial disclosure, a thorough lifestyle analysis is an essential step in ensuring that all assets are on the table and considered during divorce proceedings.

Other Sources of Income / Earning Habits:

The Lifestyle Analysis can also provide insight into additional sources of income that may not have been disclosed, including but not limited to the following:

• Spending in excess of reported income without accumulating debt can indicate additional, undisclosed sources of income or assets.
• Review of the income tax returns can identify investment income such as interest, dividends, and capital gains. These income sources can also be identified and confirmed through analysis of bank statements.
• Direct deposits from additional employment unknown to one party.

Once the entirety of income is disclosed, there is a clearer picture of the true funds required to support the standard of living of the parties.

The above discussion is a glimpse of why a well-prepared lifestyle analysis can be essential in ensuring all income and expenses are identified during divorce proceedings. It helps to ensure the likelihood of an equitable settlement by revealing any discrepancies between the lifestyle maintained and the income and assets reported. It can also help the court make informed decisions based on the true economic partnership of the marriage, ensuring the dissolution process is not only legally sound but also adheres to the principles of fairness and equity for both individuals as they transition to their new, independent lives.

By Christopher Byrnes, MBA, Marcum LLP | AAML Pennsylvania Platinum Partner

Accuracy is not just a goal in business valuation—it's a necessity. Marcum LLP performs valuations regularly and understands that precise calculations and judicious adjustments are essential for reliable valuations. One of the most critical adjustments we make is determining 'reasonable compensation' for business owners, an aspect often overlooked yet vital for presenting an authentic financial portrait. This article delves into the nuances of reasonable compensation and its profound impact on business valuation, sharing why it must be carefully assessed to reflect the true economic health of a company.

Reasonable compensation is a critical adjustment in a business valuation as it ensures that the profit/loss recorded by the business reflects the true economic picture by adjusting for the appropriate level of compensation for the business owner. If an owner is over-compensated, the business might appear less profitable than it actually is, as would under-compensation inflate its profitability. Both scenarios would lead to inaccurate valuations.

Numerous resources can be utilized to provide a guideline for reasonable compensation, as would using industry statistics of compensation within the owner’s industry. However, reasonable compensation is not simply based on job title and hours worked; it must also consider the annual performance. For example, the CEO of a consulting firm whose revenue is $5,000,000, where the CEO generates a small portion of the business revenues as compared to a CEO who brings in almost all $5,000,000 in revenue. If valuation experts were to utilize statistics based solely on the industry, the revenue of the company, and hours worked, they would have arrived at the same reasonable compensation for both CEOs listed above. However, this would not portray an accurate picture as an owner who generates $5,000,000 of revenue would obviously be entitled to a much higher compensation level than that of a CEO who originates very little in revenue. In this scenario, replacement compensation should consider what benefits the CEO brings to the company instead of only focusing on their hours worked and job title.

For example, let’s compare the reasonable compensation levels of professional athletes. There are thirty-two teams in the National Football League, each with a starting quarterback. Over the course of a season and career, there will be significant differences in their statistics and success despite all having the same job and working the same hours within the same industry. If an athlete were hypothetically replaced, the amount paid would vary based on their actual accomplishments. The same approach must be utilized when considering each business owner’s reasonable compensation.

The art of business valuation hinges on the fine balance between numbers and judgment, and nowhere is this more evident than in establishing reasonable compensation. As we have seen, this is not a simple arithmetic or a one-size-fits-all approach but a complex consideration of individual contribution and industry standards. This is why choosing a firm with the experience of having valued thousands of businesses, such as Marcum, is paramount.