Divorce Court

]> The art world is filled with married couples who work together. But what happens to the business in the event of a divorce? The summer 2003 issue of The Art of

April 6, 2018

Divorce Court

]>The art world is filled with married couples who work together. But what happens to the business in the event of a divorce? The summer 2003 issue of The Art of Licensing contained an article entitled "Mixing Business with Marriage" about couples who work together, describing one wonderful relationship after another and ending with one couple referencing "afternoon delight." But as a lawyer, I often find myself playing the spoiler, particularly in view of the fact that 50 percent of all marriages end in divorce. Divorces are difficult enough when they deal with children, marital homes, visitation, splitting up the furniture, alimony, friends, family, and the family dog, but when a couple also works together, it makes a difficult situation even more complex. Business partnerships are in many ways like marriages, so, in a sense, when a couple who works together gets divorced, they are really getting divorced twice.Divorce law has changed a great deal over the last generation. The courts, for better or worse, have recognized the fact that most families are two-income families and both parties contribute in different yet substantial ways to the accumulation of the family's assets. The contributions to the family unit are both financial and indirect. Today, most jurisdictions ignore whose name assets are in (title) when assessing ownership, or if they are among the states that cannot transfer title of property in a divorce proceeding, balance out the equities through the transfer of other assets. Also, the days of life-long alimony are long gone for most couples. Property DistributionThere are two types of legal theories behind the distribution of property in a divorce in the U.S.: community property and equitable distribution. The majority of the states follow the equitable distribution process, in which the courts endeavor to equitably distribute the assets so each party obtains roughly the same value of marital assets. But the devil is in the details, i.e., who gets which assets. Community property states such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have a much more rigid division policy of splitting assets down the middle.

In most equitable distribution jurisdictions, the courts and statutes do not consider property acquired before the marriage such as gifts and inheritance to be marital property subject to division in a divorce-unless they have been made "a gift to the marriage" or they have been commingled in a way in which they lose their individual identity. Therefore, if someone were running a licensing business before the marriage in his or her own name, upon divorce, the licensing business probably would remain his or hers. However, if the value of the business increased during the period of the marriage, a court might consider the appreciation in value of the business that accumulated during the course of the marriage to be a marital asset even if the underlying business were not. The spouse who "owns" the business may still have to pay the other spouse his or her share of the business' appreciation. If marital assets were used to help improve or grow the business, the whole business might be transformed into marital property, even though it's still in only one spouse's name.

What

about the scenario in which the licensing business was owned and run by two partners who, during the course of working as business associates, fell in love and married? All things being equal, the business would properly become marital property. But what if the parties had a premarital partnership agreement in which they determined not to have equal ownership of the business? The question becomes: Will the court honor the partnership agreement rather than equitably dividing the property as if it were straight marital property? For instance, if the partnership agreement stated that the business was owned 80/20, would that ratio prevail in a divorce proceeding? Since divorce is based on state law, even in states that follow "equitable distribution" philosophy, the rulings in matters such as these very likely could produce different answers in various states. Another potential situation that could arise is if one person were an employee and had an employment agreement and then the couple married. How would the employment agreement be viewed vis-a-vis is an equitable distribution in the case of a divorce?

Today, many couples sign antenuptial (or prenuptial) agreements outlining the division of assets, particularly pre-existing assets. But what if after the marriage, a business that was owned and run by just one spouse and covered by an antenuptial agreement is joined by the other spouse? While antenuptial agreements are honored and recognized by the courts, the fact that the other spouse now has become a partner in the business might have an impact on the enforceability of the antenuptial agreement. Again, state law would determine whether or not the antenuptial agreement would trump the post-marriage interest developed in the business.

One circumstance often found in the art world is where one spouse starts an art-related business (as an artist, publisher, or agent) and the other spouse wants nothing to do with this endeavor, even going so far as to criticize or demean the artwork or business. Then, when divorce time comes, the uninvolved party suddenly discovers the virtues and value of the artwork or art-related business and seeks to put a high price tag on them. Why? The spouse expects that the art-involved member of the family will want to keep the works or business he or she has worked so hard to build. The higher the value put on the art or art-related business, the more of the other marital assets the non-art spouse gets to keep (i.e., the house, furniture, etc.) in order to achieve the "equitably balanced division of assets."

Separation Scenarios

To my surprise, I have several clients who worked together as married couples and continued as business partners after their divorce. Somehow, they were able to separate their domestic disagreements from their professional lives to such a degree that they could keep working together, even through the more difficult stages of their divorce. Generally speaking, however, if a couple who is working together gets divorced, the business becomes part of the marital assets and is subject to division.

Assuming the parties cannot work together after their divorce, one of several scenarios could play out. The first is that the business will be sold and the proceeds equitably divided between the parties. However, since so many art and licensing businesses are dependent on the individuals who own them, there is often not a market even for successful businesses without the principals, as the value simply doesn't transfer to a new owner. The other option is that the business could end up owned by one party either through a negotiated buyout or court division. A court could award the business to one of the spouses and balance the value against the other assets. For example, one spouse could get the business and the other spouse could get the car, vacation home, and pension fund in order to equalize the values of the various assets. On the other hand, the parties could, as part of their settlement in a divorce, divide the business up, with each spouse taking certain clients, artists, and/or customers. For example, if the business is a licensing agency, the artists who signed on with the agency could be divided (of course, the artists' consent would be needed), and two separate licensing agencies could evolve from the one.

Couples who work together before marriage should enter into an antenuptial agreement that is linked to a partnership agreement, with both of them being cross-referenced one to the other in the hopes of maximizing the enforceability of the agreements in the case of divorce. If a married couple forms a business after the wedding, they should still enter into a partnership agreement as if they were dealing with outsiders. The agreement could cover such matters as business responsibilities and how the income is divided. (Many couples keep their funds separate; this would provide a guideline for the division of revenues in those situations.) In the event the parties divorced, what would be done with the business could be agreed to at the outset. While it might be a bizarre conversation for a happily married couple to have, it would be easier for them to come up with reasonable solutions beforehand instead of in the midst of the acrimony that usually accompanies divorce.

Joshua Kaufman, Esq., is a partner in the law firm of Venable, LLP. Based in Washington, D.C., his practice is national in scope. One of the country's foremost attorneys in the field of art and licensing law, he has published more than 200 articles on various topics in the field. He is also an adjunct professor of law at American University Law School. Many of his articles can be read and downloaded from www.jjkaufman.com. Special thanks to Rockville, MD, divorce lawyer Beth Weisberg for her refresher course in Domestic Relations law.

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