Depending on state law, the issue of “double dipping” may arise when one spouse owns a business and the court awards half of its value to the other spouse plus spousal maintenance based on future business income. The argument against such an award is that the value of a business is derived from its future income, so basing maintenance on the same income stream constitutes an impermissible double recovery.

In Cheng, however, the court found a critical distinction between a business that’s a going concern and one that’s a “diminishing asset.” Here’s how that distinction affected the property settlement.

A lucrative consulting business

The husband owns a consulting business, Fast Forward Media (FFM), which grew considerably in the years before the divorce. FFM’s gross revenue increased from $275,000 in 2009 to $1.545 million by 2013. The husband took home more than $940,000 from the business in 2013.

At trial, both spouses presented expert testimony on the value of FFM. The experts used the capitalization of excess earnings method, applying four steps to determine value:

  1. Project future income.
  2. Subtract the husband’s replacement income (that is, market compensation for his services).
  3. Subtract other operating expenses and taxes.
  4. Divide by a capitalization rate.

The trial court split the difference between the experts’ conclusions, valuing FFM at $3.6 million. The wife was awarded half of that value to be paid in installments over 15 years. The court also awarded her $20,000 of monthly maintenance for eight months, followed by $15,000 for two years and $10,000 for another year.

No double dipping

On appeal, the husband argued that the maintenance award constituted an improper double recovery because both maintenance and the property distribution were based on FFM’s future income. The appellate court for the state of Washington disagreed.

It clarified that double dipping occurred in two previous divorce cases because the marital estates included “diminishing assets” (a salvage business and a retirement account) that wouldn’t generate significant future income. With no other source of funds, those owner-spouses would be unable to pay the maintenance award without eroding their interests in the assets.

Conversely, in Cheng, FFM was a going concern entity that was expected to continue growing. The husband would have ample income to pay maintenance without eroding FFM’s value.

A matter of fairness

Like many issues in divorce, double dipping ultimately boils down to the concept of fairness. In Washington and many other states, courts have broad discretion to determine the amount and duration of a maintenance award as long as the outcome is equitable to both sides. Experts and attorneys closely review applicable state laws and relevant court cases to ensure this issue is handled properly.

© 2017

Return to the Litigation & Valuation Report – July/August 2017