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O’Brien Revisited: Impermissible Separate Property Capture Exacerbates Reality Gap

By Timothy M. Tippins, Esq.

 

Copyright 2001 by MatLaw Systems Corp.

The Court of Appeals decision in O’Brien v. O’Brien,[i] declaring a professional license, together with the enhanced earning capacity imputed to it, to be marital property, presents a plethora of doctrinal and practical difficulties that have largely fallen to the trial courts and practicing bar to accommodate in fashioning equitable case resolutions.

Classification Flaw Inflates Marital Property Value

One doctrinal flaw is that the valuation methodology adopted in O’Brien captures separate property elements that do not properly belong in the marital estate.

The valuation technique computes the present value of the likely future earnings of the professional spouse to an assumed retirement date. These are referred to as the “top-line” earnings. It also calculates the present value of the earnings that probably would have been realized without the license, referred to as “baseline” earnings. The difference between the two represents the enhanced earning capacity attributed to the license.[ii]

This valuation method fails, at least in part, to segregate separate property components of enhanced future earnings. There are two separate property elements that the valuation process fails to fully consider: (1) the innate talent and ability that the professional spouse brings to bear on the educational process, and (2) the post-commencement effort required to produce the post-commencement earnings.

Everyone brings certain innate qualities to bear upon their life activities. These are the talents, skills, energy and motivation with which one is born or which one acquires early in life. These separate property attributes are often brought to bear on activities that enhance one’s earning capacity. Accordingly, they should be factored out fully from any equitable distribution award based on an enhanced earning capacity claim.

While subtraction of the baseline earnings ostensibly excludes premarital separate property elements, the assumption that it does so fully is dubious at best. The baseline earnings stream is generally based on database derived “averages”. For example, in O’Brien, the husband was credited with having a Bachelor’s Degree as of the date of marriage. His baseline was computed on what an “average” Bachelor’s Degree holder would presumably have earned over the course of the husband’s work-life. But is it fair to assume that someone who has proven himself possessed of the intellect, the drive and the stamina to complete a medical education is only “average?” Does not the fact of that accomplishment compel the conclusion, a fortiori, that the professional spouse is above average?

Take another example. Suppose Bill Gates, one of the wealthiest people on the planet, had not dropped out of college. Assume further that after attaining a Bachelor’s Degree, he had married and then gone on and received an advanced degree or professional license. Under O’Brien, his baseline would have been predicated upon the projected earnings of the average Bachelor’s Degree holder, yet he has proven himself to be anything but average. By holding his baseline to such an average, the value of his innate abilities, clearly his separate “property,” is suppressed. As a result of this suppression, a separate property value is improperly included in the valuation of the enhanced earning capacity attributed to the degree or license. And, to the extent that the courts make no effort to adjust the value to account for this suppression, they impermissibly classify it as marital property. It stretches neither logic nor common sense to suggest that many who achieve educational credentials would have achieved above average success if their talents had led them in directions that did not require a degree or license.

This issue could be dealt with either in the valuation process, by adjusting the baseline upwards, to reflect the above average attributes the spouse brought to the educational endeavor, or by a classification adjustment to factor them out of the marital estate.

The same is true with respect to post-commencement factors. The O’Brien methodology makes no adjustment for post-commencement efforts that should be classified as separate property. In contexts other than enhanced earnings analysis, every penny earned after commencement of a matrimonial action through post-commencement effort is separate property.[iii] Because the O’Brien computation embraces earnings that extend past the commencement of the action, i.e., earnings actualized by post-commencement effort, it shepherds separate property into the marital estate. Only if one were to indulge the fiction that the license produces the earnings automatically, almost mystically, without any post-commencement effort, would those earnings truly be marital property.

While one might argue that the post-commencement separate property component is factored out because the baseline earnings are also computed to retirement, the argument fails unless one is willing to assume that the effort and risk assumption of generating baseline earnings is identical to that required to realize the top-line earnings. This is not necessarily so. The baseline “average” may well include government employees who generate their earnings by working 37˝ hours per week, as well others who bask in relatively secure employment. This is decidedly different from the time, effort and risk assumption typically required to build and maintain the professional careers that are included in the top-line earnings stream.

The optimal solution to this classification anomaly is for the courts to carefully segregate the post-commencement earnings attributable to the license, per se, from those that spring from post-commencement effort. In other words, deal directly with the problem as the classification issue that it is. To date, the courts have not done so, possibly because of the failure of practitioners to diligently develop the record with respect to the issue.

Conclusion

As most experienced practitioners and many trial judges are aware, enhanced earnings cases present special challenges. Because the valuation methodology is driven by work-life expectancy, it produces its h





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