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Stern v. Stern

New Jersey Supreme Court

Decided: January 23, 1975.


For affirmance in part and reversal and remandment in part -- Chief Justice Hughes and Justices Jacobs, Hall, Mountain, Sullivan, Pashman and Clifford. Opposed -- None. The opinion of the Court was delivered by Mountain, J.


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In this matrimonial action plaintiff, Susanne H. Stern, was granted a divorce on the ground of adultery from her husband, the defendant, Milton H. Stern. The court likewise awarded the plaintiff alimony and child support and effected an equitable distribution of property pursuant to N.J.S.A. 2A:34-23. 123 N.J. Super. 566 (Ch. Div. 1973).*fn1 The Appellate Division affirmed. 128 N.J. Super. 198 (1974). We granted certification at the instance of the defendant. 65 N.J. 568 (1974).

There is no challenge to the grant of a divorce. Defendant does, however, contend that the amounts of alimony and

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child support are excessive and that the trial judge acted improperly in the manner in which he identified and thereafter allocated marital assets between the spouses.

We perceive no error either in the amount of alimony or of child support. In respect to each of these awards the determination of the court below finds ample support in the record. The nature of the property that the trial court was called upon to examine in effecting distribution, and the manner in which the allocation of these assets was made, do present issues which this Court has not heretofore considered.

Defendant was ordered to pay to the plaintiff $36,000 annually as alimony and $4,000 a year as support of a minor child. Additionally, by way of distribution of marital property, he was directed to pay the plaintiff $100,000 in forty equal consecutive quarterly installments.*fn2

Defendant is a partner in a very successful, well-known and highly respected law firm. As an attorney his personal earning capacity is thoroughly proven. He concedes that his partnership interest is an asset eligible for distribution pursuant to N.J.S.A. 2A:34-23. He objects, however -- chiefly upon two particular grounds -- to the property distribution made by the trial judge. First, he disputes the inclusion and method of valuation of certain assets in determining partnership worth; secondly, he contests the propriety of considering his earning capacity as being a separately identified and distinct item of property, and as such eligible for apportionment under the statute.

We first consider the latter objection. In undertaking the statutory allocation of marital assets, the trial judge included, apparently as a separate item of property, defendant's earning capacity. The opinion states,

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His ability [earning capacity] is an amorphous asset of this marriage in the absence of other assets. It consists of natural ability, undergraduate and postgraduate education, marriage to the daughter of a man of high standing and lucrative income in the area of his professional activity, entree' to his office and ultimate partnership, subsequent management of the firm, with advancement in the esteem of his professional peers. [123 N.J. Super. at 568]

We agree with defendant's contention that a person's earning capacity, even where its development has been aided and enhanced by the other spouse, as is here the case, should not be recognized as a separate, particular item of property within the meaning of N.J.S.A. 2A:34-23.*fn3 Potential earning capacity is doubtless a factor to be considered by a trial judge in determining what distribution will be "equitable" and it is even more obviously relevant upon the issue of alimony. But it should not be deemed property as such within the meaning of the statute.

As we have indicated, defendant readily concedes that his partnership interest is an asset that has been acquired during marriage and that it qualifies and is eligible for equitable distribution. He disputes, however, the manner in which this property interest has been valued and objects to the size of the share allocated to the plaintiff.

Placing a precise or even an approximately accurate value upon an interest in a professional partnership, when the partner whose interest is in question intends to continue as a member of the firm is no easy matter. Circumstances preclude our customary resort to market value. Some other method of determining worth must be employed. Here the terms of the partnership agreement are of help. There appear in this document four quite distinct payment plans applicable

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with respect to a partner who withdraws from the firm, becomes disabled, dies or retires. Of these, probably the most accurate and certainly the most useful for present purposes is the formula for the calculation and payment of a partner's interest to his personal representative upon death. In such an event, according to the articles of partnership, his estate is to receive the then value of his capital account, readily determinable from the partnership books, together with a fixed sum appearing after the partner's name on a schedule appended to the partnership agreement. This schedule is revised quarterly. It is obviously intended to reflect those elements of partnership worth other than the member's capital account. The testimony reveals that these payments, occasioned by death, are to be funded with the proceeds of life insurance on the lives of the several partners, the policies being owned by and the proceeds payable to the firm. The amount appearing after defendant's name on the schedule attached to the copy of the partership agreement which was received in evidence was $167,500. We think the trial court would be justified in adding to this sum the value of defendant's capital account and treating the total as the presumptive value of defendant's partnership interest in the firm. We say presumptive value only, because either plaintiff or defendant will be entirely at liberty to challenge the figure so determined as not being reflective of true value.

Generally speaking the monetary worth of this type of professional partnership will consist of the total value of the partners' capital accounts,*fn4 accounts receivable, the value of work in progress, any appreciation in the true worth of tangible personalty over and above book value, together with good will,*fn5 should there in fact be any; the total so arrived

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at to be diminished by the amount of accounts payable as well as any other liabilities not reflected on the partnership books. Once it is established that the books of the firm are well kept and that the value of partners' interests are in fact periodically and carefully reviewed, then the presumption to which we have referred should be subject to effective attack only upon the submission of clear and convincing proofs.*fn6

Defendant offers a number of objections to the consideration of partnership accounts receivable in connection with the proposed equitable distribution. Most of his argument rests upon the mistaken assumption that the court is directing the apportionment of the accounts themselves. This is not the case. The accounts receivable are not the subject matter of any proposed distribution; they are being examined and valued simply as one element to be included in determining the entire worth of defendant's partnership interest. It is the latter asset that is being allocated between the parties.

The further contention is made that if accounts receivable are to be considered at all, then their value should be diminished by the estimated amount of federal income tax that defendant will be required to pay in respect of these accounts, or some part thereof, as they reach him in the form of later partnership distributions. This argument also misconceives the purpose for which the accounts receivable are

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being considered -- to fix a total value of defendant's partnership interest. The value of the latter asset is in no way diminished by the fact that defendant may thereafter be called upon to pay an income tax resulting in substantial part from his receipt of income from the partnership. The fact that he will pay a tax on these receipts may be a relevant consideration when considering whether a distribution is equitable and it is clearly relevant with respect to the determination of alimony, but it does not affect the value of defendant's interest in the law firm.

Finally, it is urged that the accounts receivable should be excluded from consideration because they are not a property interest that has "vested" in the defendant. What we have already said would seem an adequate answer to this argument. We take the opportunity, however, to suggest that the concept of vesting should probably find no significant place in the developing law of equitable distribution. The notion of a vested interest came into being in a feudal society and was intimately associated with the medieval concept of seisin. Holdsworth, An Historical Introduction to the Land Law, (1927) 68; Jenks, A Short History of English Law, (4th ed. 1928) 84-5. It has played an important part in the development of the law of future interests, and early assumed a crucial role in the portion of that law dealing with the rule against perpetuities. On the other hand and in a quite different context the phrase, "vested rights," is occasionally used to denote something to which constitutional guaranties may apply. 1 Simes and Smith, The Law of Future Interests (2nd ed. 1956) sec. 136, 116-18; Rothman v. Rothman, 65 N.J. 219, 225 (1974). These now customary usages of the concept of vesting are clearly in no way relevant to the question of effecting an equitable distribution upon the occasion of a divorce. Our statute requires, in order that property be available for distribution incident to a divorce, that it shall have been acquired during marriage. There is no reference to vesting. With only this brief word upon the subject, which is not really before us, we leave for another day any

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further discussion of the important and possibly difficult question as to what future interests may qualify as "property" within the meaning of N.J.S.A. 2A:34-23.

Subject to what immediately follows, those portions of the judgment below that pertain to the award of alimony and child support are affirmed; those portions pertaining to the distribution of marital assets are vacated and set aside and the case is remanded for further proceedings consistent with this opinion and with the opinions of this Court in Chalmers v. Chalmers, 65 N.J. 186 (1974); Painter v. Painter, 65 N.J. 196 (1974) and Rothman v. Rothman, supra, 65 N.J. 219 (1974), all of which were decided subsequent to the entry of the judgment from which this appeal was taken and which in some respects announced rules contrary to those followed by the trial judge in this case.*fn7 The amount of alimony may be reviewed should the trial judge, on remand, conclude that his then disposition of the issue of equitable distribution requires some change in this award.

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