Financial Agreement

Arbitration and Mediation in California: What’s The Difference in These Forms of Dispute Resolution?

June 28, 2017 By CDSOC

by Diana L. Martinez Collaborative Lawyer and Mediator, Law and Mediation Office of Diana L. Martinez

As a family law lawyer, I really look forward to my time on duty to volunteer at Riverside County Superior Court for VSC (Voluntary Settlement Conference) day. It is offered two Fridays per month and is THE most successful mediation program in the nation with an over 90 percent success rate!

Why? Because, in order to be a mediator on this panel, you must have the highest training and qualifications as both a family law lawyer and as a mediator. Not only do we donate our time, we must be in practice at least 10 years and have hundreds of hours of mediation training and practice under our belts. Other family law mediation programs that either do not have a structured program with high mediator qualifications, or that pay retired judges to do this work, enjoy a success rate below 60 percent.

Judges have an incredibly difficult job. It takes very specific skill sets to be a good judge. But being a talented judge does not, in and of itself, make you a good mediator.

I also volunteer as a fee arbitrator in attorney-client fee disputes for the California State Bar and for the San Bernardino County Bar Association. My role as an arbitrator is that of a judge: to listen to testimony, review the evidence, and make a ruling based on the law. There is no facilitation or brainstorming to help the parties create agreements together. As a result, the parties tend to stay polarized, hoping I will rule in their favor.

In contrast, a mediator works to find common ground, and assists the parties in bridging gaps, focusing on their goals and the reality of the benefits and risks of resolving versus litigation.

During a recent mediation in Riverside*, I had to use my skills as an arbitrator to attempt to resolve a divorce dispute in mediation. In this particular case, the husband was represented by counsel. The wife was not. The couple was married in the Netherlands and moved to California two years prior to the divorce. They had been married for 15 years. They had already agreed to the division of their assets and debts. The final item preventing them from resolving their divorce for nearly two years (yes, they had been divorcing for two years) was spousal support. The wife was not a legal U.S. resident and had struggled finding employment. During the marriage, she worked as a babysitter. The husband ran his own consulting business and was always the higher income earner.

As an arbitrator, looking at the evidence presented, the ruling is quite simple. Based on California law, Husband would be required to pay spousal support until one of the normal, terminating factors in a long term (over 10 years) marriage: 1) death of either party; 2) remarriage of wife; or 3) further order of the court. Wife, however, would have to make reasonable, good faith efforts to become self-supporting, in order to continue to receive support.

As a mediator, it is important to help both husband and wife craft an agreement that factors in wife’s financial needs and goals, as well as husband’s sense of unfairness of having to pay for so long a time. In this case, wife appreciated this and proposed that husband pay her only what she was short in rent each month ($200) for five years. This would give her time allowing her to get her legal resident papers in order and find a stable job, as she explained it, after which she would agree to “terminate” support.

Relying on a judge for a “fair” decision on your financial settlement during divorce is an expensive roll of the dice.

In a long-term marriage, courts do not, generally, terminate support; they may reduce it to zero dollars, but they will leave open the ability to request it in the future. This proposal, legally, put a lot of value on the table for the husband. As a neutral, and especially given that wife was unrepresented, I did have to educate both parties about that legal value and the implications of a spousal support termination. To all knowledgeable in family law, this proposal was golden.

Husband’s attorney instructed him to reject the offer as completely unreasonable. His argument? In the Netherlands, his wife would not have received spousal support at all. Since the parties lived there for most of their marriage, wife should not be allowed to benefit from California spousal support laws. They argued the wife should agree to no more than six months of spousal support, which would then end. This sounded logical to husband.

Sadly, the husband’s “logic” is not the basis upon which family law judges issue orders. My inner arbitrator asked husband’s lawyer to explain the legal basis for this argument. It was a novel argument to me, and I’ve been in practice for nearly 20 years. His response: “Yes, it is a case of first impression, so I have to research this more.”

Excuse me? You have no legal basis for this argument, which means your client will be paying you for research that will very likely not result in the expected outcome. In addition to this expense, Husband’s lawyer planned on having a vocational evaluation done on wife to determine how much she could reasonably be earning. Really? She’s undocumented, and lawyer wants to do a vocational evaluation. Husband, as the sole income earning, would have to front this cost.

The court had already told the litigants prior to sending them off with their mediators that, if they do not resolve their matters, the next available court date would not be for another six months. This meant that husband will continue to pay his lawyer during that time, for research on an issue that has no support in law. If we calculate the legal fees at $1,750/month (lawyer rate of $350/hour, at five hours of legal work per month, including research on the foreign marriage issue, gathering information on wife’s earning ability, history of income during the marriage, and so forth), for six months, it will cost the husband $10,500 prior to his trial readiness conference. This is not the trial itself. It is a court hearing to confirm you are ready for trial.

The trial would likely be set within the following one or two months after that hearing, and trial preparation by his attorney would be far greater than five hours. But let’s keep it conservative for this discussion and add only another $1,750 to finish this case through trial. Now we have $11,750 in legal fees for the husband, in the hopes the judge will side with him and terminate spousal support, despite the law.

Let’s compare this with the wife’s proposal to resolve their case through mediation, six months before trial readiness. She proposed $200/month for five years = $12,000, and a signed, binding, agreement to terminate spousal support. That’s a guarantee, folks. Remember, by terminating, no court, in any state, would have the legal ability to order more support, ever!

Sadly, husband trusted his lawyer in the above mediation. The parties will end up going to trial, based on his lawyer adding to husband’s sense of unfairness, rather than educating his client as to the reality of the law. Logic would dictate that it would be better to take a sure bet for $250 more, than pay almost the same amount and risk the judge applying the law, as they are required to do.

In mediation, husband had the ability to cut his losses and be done. As a judge, there is no such flexibility. The judge or arbitrator (same function) is required to apply the law. But when emotion (that sense of unfairness) takes over, and a lawyer creates a false hope by feeding into that emotion, the only “winners” are the lawyers. There is no benefit to either spouse. There is no benefit to their families. The court battle continues.

If you expect a judge or arbitrator to “do the right thing” because he or she will see and understand the unfairness of it all, you will be disappointed. A judge does not have that kind of flexibility. They may find one argument more persuasive than another, but that means it follows the law more closely than the other. It does not factor in emotion or “fairness.”

In the above example, the law does not look at where you were married and apply the rules of a foreign country. If you lived in California six months prior to filing your petition for divorce, you fall under the laws of California – no exceptions based on “it’s not fair.” A judge must render decisions based on the law and the evidence properly presented. Don’t forget to factor in the financial and family relationship costs of the continued battle.

*I’ve changed certain facts of the case to protect confidential information, but have kept the substance the same.

Why a Collaborative Pre-nup Makes Cents

April 24, 2017 By CDSOC

by Suanne I. Honey Attorney at Law, CFLS, Mediator and Collaborative Attorney

Sorry for the silly pun when this is such a serious topic. Seriously, though, pre-nuptial agreements are hot topics which give rise to many emotions.

“It paints the Devil on the wall.”

“It is anticipating failure of the marriage.”

“If he or she really loved me, this would not be necessary.”

“I am uncomfortable talking about finances.”

The list can go on and on. Sometimes emotions are an unnecessary waste of energy. Other times emotions have some benefits, even negative emotions. For example, fear in a dark alley in a dangerous neighborhood will cause you to be zealously vigilant about your surroundings which will lead you into taking appropriate steps for your safety … much like the pre-nuptial agreement itself.

Unfortunately, statistics today are not favorable for a lasting marriage. If and when there is a decision to get divorced, the person you once loved turns into the enemy. There is often a total lack of trust at the time of a divorce. There are fights over money, property, and other issues creating stress for both partners. This stress almost always filters down to the children.

Collaborative Law is a process where couples work with a team of expert professionals.

The mental-health professionals work individually with each partner to a marriage (or a potential marriage). They help curb their emotions and phrase their individual needs and wants in a positive, cooperative and logical way, allowing those needs and wants to really be heard and understood by the other partner.

The financial professional will be able to identify and sort out the financial and property issues of concern to the couple in a transparent and logical way.

The Collborative Practice attorneys will help guide their clients through the legal quagmire. This can all be done in a much less stressful, more cooperative way in the collaborative arena.

While important, none of that is the real reason that Collaborative pre-nups make the most “cents.”

The biggest reason for marriages to fail is the breakdown in communication. Having gone through a divorce in the Collaborative law process, many (if not most) participants say if they’d gone through this process before the marriage, the divorce would be much less likely.

So it makes “cents” to have your pre-nuptial agreement created in the Collaborative setting. Because of the communication skills learned by the couple during the process, it may help avoid a future divorce altogether. This saves a great deal of “cents” paid to attorneys and litigation, or future Collaborative Divorce costs.

Even if the unthinkable happens and there is a future divorce, you will come out ahead. Having learned how to conduct difficult conversations in a way that allows your spouse to hear and understand your position, even discussing issues in the divorce process that were not part of the original prenup will save many “cents.”

Most importantly, the stress level exposed to any children during your divorce will be significantly reduced. This is an outcome which is “priceless.”

12 Reasons To Create Your Premarital Agreement Using the Collaborative Process

March 6, 2017 By CDSOC

by Leslee J. Newman, CFL-S, Family Law Attorney
Orange, California

Each premarital partner selects their own Collaborative attorney to represent him or her from the very beginning of the premarital Collaborative Process. You and your Collaborative attorney work together until the premarital agreement is completed and signed.
Neutral professionals such as a financial planner and/or a Collaborative coach may also be added to your Collaborative team to help you and your partner develop and fully understand your goals as a couple, and the legal and financial ramifications of your decisions.
Before any drafting takes place, you and your partner are encouraged to express your thoughts and concerns about what you plan to build together as joint property and what you want to maintain as separate property.
Full disclosure of the property and debts of each premarital partner is exchanged including some verification of each asset and each debt.
After full discussion, disclosure, and agreement is reached by the premarital couple, the agreement is drafted through the participation of both Collaborative attorneys.
After the draft of the premarital agreement is completed, the draft is fully discussed and explained to each premarital partner by his or her Collaborative attorney.
Additional drafts and revisions are encouraged by the Collaborative team until both members of the premarital couple are fully educated and satisfied with your agreement.
The Collaborative Process takes most of the stress out of the creation of a premarital agreement at a time when you are undergoing the tension and burden of planning your wedding.
With the premarital agreement completed, you can concentrate on your wedding plans, the joy of your wedding day, and your honeymoon.
After you are married, if there are any changes you wish to make to your property or financial planning, you can return to any of the members of your Collaborative team for assistance.
If you should divorce, your premarital agreement should be enforceable by California law because of the guidance of your Collaborative professionals, and the multiple opportunities you each had to discuss, question, and revise your agreement.
In the event a divorce occus, the Agreement should serve as a roadmap to simplify your divorce, make it move along more quickly and in most cases make it less expensive. Additionally, you may stay in the Collaborative Process for your divorce agreement, with some or all of the original Collaborative professionals assisting you who already know you and your spouse.

Dividing Stock Options and Restricted Stock In Divorce

September 1, 2016 By CDSOC

by Thea Glazer, CFP®, CDFA™, MS Accounting
Glazer Financial Advisors, Laguna Hills, California

Stock options and restricted stock may be part of the marital estate. And they are some of the more complex assets. This brief overview provides a basic understanding of the factors you need to take into consideration. It does not go into all the many tax and technical issues that are aspects of equity compensation. Seeking professional guidance for your specific circumstances is always a good idea.

Many companies grant their employees equity compensation in addition to their salaries, commissions and cash bonuses. Equity compensation is non-cash compensation representing a form of ownership interest in a company. Among the most common are employee stock options and restricted stock or restricted stock units. In divorce, stock options and restricted stock are property to be divided. The employee’s separate shares are often also considered as income in the calculations of support.

Employee Stock Options (ESOs)

An employee stock option is the right given by an employee to purchase a specified number of shares of the employer’s stock for a specified price and for a specified time. There are two types of ESOs, Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQs). The primary difference is that ISOs have an advantageous tax treatment explained below.

Stock options have a Grant Date, Exercise Price, Vesting Schedule and Expiration date. Example: Company ABC grants John Smith 3,000 non-qualified options on January 4, 2015 at a grant price of $10.50, a four-year annual vesting schedule and an expiration date of January 4, 2025. That means that John can exercise (buy) the 750 shares of stock annually on January 4 from 2016 through 2019. He does not have to exercise any shares until January 3, 2025. If he doesn’t exercise by the date of expiration, they will expire and be worthless.

Taxation of Stock Options Nonqualified stock options are taxed at the time of exercise as ordinary income. The amount taxed is the difference between the grant price and the fair market price. Most companies sell enough shares to cover the withholding tax and release the net shares or proceeds if the shares were simultaneously sold. If the shares are held once exercised and sold later, there may be capital gains tax as well. Unless shares are about to expire, most people exercise and sell simultaneously.

Incentive stock options are not taxed when they are exercised. If the shares are held for at least one year from exercise and two years from grant date, the gain is taxed at the advantageous long term capital gains rate.

Restricted Stock (RS) and Restricted Stock Units (RSUs)

Unlike stock options, restricted stock and restricted stock units are actual stock. There is usually no purchase price and, if there is, it is very, very nominal (one cent). Holders of restricted stock have voting rights while holders of restricted stock units do not. Restricted stock units cannot be “underwater” which happens to options when the grant price exceeds the fair market price so they are much less risky. Grants of restricted stock usually have about one-third as many shares as do options. Restricted stock grants have a grant date and vesting schedule. There is no expiration date and usually no grant price.

Taxation of Restricted Stock

Once a share of restricted stock vests, it is released. Upon release, the fair market value less any purchase price is taxed as ordinary income. Most companies sell enough shares to cover the withholding taxes and release the net shares. There is no decision making needed by the employee like there is regarding when to exercise options. Once restricted stock vests, it is automatically released. Many employees continue to hold the net shares until a time they need the cash, feel the stock has reached a good selling price or want to diversify their portfolios.

Transferability of Stock Options and Restricted Stock

Some plans allow NQs to be transferred to the former spouse of the employee, but the majority do not. It is very rare to see ISOs transferable. If they are transferred, they may lose their status as ISOs and fall under the tax rules for NQs.

RS and RSUs are not transferrable.

For non-transferable shares of options or restricted stock, the employee holds the shares on behalf of the non-employee spouse and exercises on his/her behalf or transfers released shares. There are IRS acceptable ways to allocate the taxation so the non-employee spouse is taxed at his/her rate rather than that of the employee.

Division of Equity Compensation in Divorce

Both stock options and restricted stock shares are divided by formulas. The most commonly used ones are Nelson and Hug.

The Nelson formula is: Date of grant to date of separation ÷

Date of grant to date of exercise or release

The Hug formula is: Date of hire to date of separation ÷

Date of hire to date of exercise or release

The reason the grants were awarded determines which formula is applicable.

Valuation of Stock Options and Restricted Stock

It is rare to value the options rather than to divide the shares. That is because the value is constantly changing so it is imprecise at best. In order to correctly value the options, the following factors are in the variables of a complex formula, the Black-Scholes formula that is used in valuing stock options:

Grant price
Grant date
Date of expiration
Vesting schedule
Current stock price
Volatility of the stock price

Sometimes valuing the options is the only way to effectuate the property division by offsetting another asset. However, dividing the shares divides both the risk and reward to both spouses. I believe it is preferable when possible.

Collaborative Divorce Offers Flexibility

In Collaborative or mediated divorce cases, there is far more flexibility in dividing assets. Unequal divisions are also acceptable if the parties agree and have reasons to do so. In court, such flexibility is not nearly as possible. This is another great reason to consider alternative dispute resolution such as Collaborative Divorce to allow you to make the best decision possible for your circumstances, rather than a decision forced upon you by a judge.

The Most Important Decision You Will Make in Your Divorce

April 30, 2016 By CDSOC

by Brian Don Levy, Esq., Collaborative Attorney & Mediator

The case history: John first came to see me looking for an attorney to represent him in his divorce case in family court. This is the most important choice he will have to make in the entire divorce process: choosing the process for his divorce case.

As a firm believer in the Collaborative Divorce Process, we discussed why John should consider the Collaborative Divorce process, which is part of every initial divorce consultation – when I meet with clients – I discuss divorce process options.

John then disclosed he had already been in mediation with some of my legal colleagues. John’s wife, Mary, withdrew from the process. He was distrustful of the process and not inclined to give it another try.

In spite of John and Mary’s failure, I still believed the Collaborative Process would serve them well. Nearly a year later, the divorce case was successfully concluded through the Collaborative Process.

How did we make this work?

I suggested that this would be a different experience because we would build a more complete team of collaborative professionals. I also suggested that I would ask the team to implement a protocol of reducing each and every agreement to a Collaborative Stipulation & Order to be signed by the parties and submitted to the Court for a Judge’s signature, thus creating a safety net – if either party withdrew, there would be the underlying agreements that have become Court Orders, thus the failed history would not be repeated. John became enrolled in the process that I envisioned for him.

The Family

John is a successful and employed individual who works in the entertainment industry. Mary, his wife, lacks trust in John because of John’s history of drug abuse and failed attempts at sobriety.

John lacks trust in Mary due to her history of making agreements and refusing to honor them. Mary believes that John is not worthy of being a father to their five-year-old twins and cannot be trusted due to his history of serious drug use. John believes that Mary is smothering the children and won’t let go. John has been practicing sober living for approximately 18 months and believes that as long as he is willing to evidence his sober living, he should not be kept away from his children.

The Collaborative Divorce Team

The Collaborative Practice Professional Team consisted of two collaborative lawyers, a neutral financial professional, and three very strong mental health professionals – two serving as coaches for John and Mary, and one serving as the Neutral Child Specialist.

Our Professional Team relied upon each other time and again, and the channels of communications were constant and open. The final electronic file for this case contained nearly 1,300 Professional Team e-mails.

John and Mary both had their respective coaches, and the children had a gifted Neutral Child Specialist whom the team relied upon to keep the parents focused on their children to the greatest extent possible instead of the own individual agendas. The Professional Team worked diligently and often times conducted three-way telephone conferences to remove temporary impediments and roadblocks created by the parties. The very first time that Mary made an agreement on visitation and then refused to honor it, a series of teleconferences ensued late on a Friday afternoon, resulting in an honoring of the agreement and John’s first overnight with his children.

Our Working Agreements

Three process agreements were co-created and agreed to by the parties. John agreed that given his history, he had the burden of proving his sober living as a condition precedent to being an involved parent to his twin children. John submitted random urine tests twice a week to his coach, who then sent the results to the rest of the Professional Team members. The second protocol was that every agreement would be and was reduced to a collaborative stipulation and order that was filed with the Court, and became an enforceable court order. The Third team protocol was that the Professional Team exchanged their personal cell phone numbers and committed to be available to all Professional Team members as needed and dictated by the family problems as they occurred.

The First Crisis

After several months of negative random drug tests, John tested positive for opiates!

When confronted by his coach, he broke down and cried; swearing that he had not fallen and had not used any drugs. What to do? John’s Coach and lawyer, and Mary’s Coach agreed that before reacting to the “dirty test” the possibility of a false positive had to be explored first. The urine test was re-submitted for additional testing, and John was asked to take a hair follicle test. The hair follicle test and the re-test of the urine test both concluded that John had in fact continued on his path of sober living, and the prior positive test was in fact a false positive. Eventually, John was moved from twice a week random urine tests to quarterly hair follicle tests, then to every six months.

The Second Crisis

Mary fired her collaborative Lawyer, and John saw that she once again reneging on her commitment. As it turned out, Mary replaced her collaborative lawyer with another collaborative lawyer, and I was able to point out to John that in so doing, she evidenced her commitment to the collaborative process. Confidence was rebuilt quickly, trust was re-enforced, and we proceeded forward.

The Victory for the Children

As John moved through the process of providing proof of his sober living in an irrefutable manner, the team worked with Mary in making her more comfortable moving from John having very little contact with the twins to being a truly involved parent who enjoyed equal time share with the twins and lots of overnight visits. The children benefited from the more normal and less restricted contact with their father, and now enjoy having two parents and two homes to grow in.

The Victory for the Clients

John and Mary’s divorce case is finished. But the coping and negotiating skills both of them learned through their Collaborative coaches will always be with them and will serve them in many situations for the rest of their lives as they effectively co-parent their children.

The Victory for the Process

The process which was originally described as “failed” succeeded in a significant way in that this very high conflict and contentious case was successful after the collaborative team was assembled, an accurate and detailed assessment was made, and a plan for success was carried out by all of the Professional Team members.

Many other Collaborative Practice professionals believe cases with chemical or alcohol dependency are not well suited for the Collaborative Process. While that may or may not be true for all cases, this case demonstrates that each divorce case is unique. The essential ingredient for a successful Collaborative Law case is an initial in-depth assessment by the Professional Team so it can determine what the family dynamics require, and how to position the parties for success.

My experience on this team has been invaluable in my journey as a Collaborative lawyer, as well as serving as an impressive and hopeful example of what we can do together.