On appeal from the Superior Court of New Jersey, Chancery Division, Family Part, Essex County, FM-07-464-96.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Parrillo, S.L. Reisner and Baxter.
Plaintiff Karen Mendelsohn appeals, and defendant Eliezer Mendelsohn*fn1 cross-appeals, from a Dual Final Judgment of Divorce dated February 21, 2006, entered after a very lengthy trial.
We have reviewed the voluminous record including the transcripts, and with the exception of two issues, we affirm the decision of the trial court, substantially for the reasons set forth in the trial judge's cogent oral opinion set forth on the record on January 8, 2003, and his comprehensive and equally cogent sixty-one page written opinion dated December 16, 2005.
As to the two issues on which we part company with the trial court: we conclude that the trial judge, now retired, mistakenly exercised discretion in awarding plaintiff only 25% of the parties' active assets; we exercise our original jurisdiction to award her 30% of those assets. We also conclude that the court made a mathematical error in calculating plaintiff's share of the couple's marital bank accounts, other than the Bear Stearns account; again we exercise original jurisdiction to correct the error. We remand to the Family Part for the limited purpose of issuing an amended judgment consistent with this opinion.
The primary disputes in this case revolve around a series of nursing homes which Elie was involved in managing and in which the parties owned percentage shares. The divorce complaint was filed in July 1995. However, because the nursing homes were also the subject of an extensive and bitterly-fought commercial litigation involving Karen and Elie, Karen's father Jacob Pineles, and numerous other parties, the divorce trial was delayed for several years until the commercial case was settled.*fn2
This appeal cannot be understood without a fairly detailed discussion of the family's business interests, in which Karen's father played a significant role. However, before discussing the nursing homes, we briefly outline the parties' lifestyle over the course of their twenty-year marriage.
Plaintiff, born in 1951, and defendant, born in 1946, were married in 1976, and had two daughters both of whom were emancipated at the time of trial.*fn3 Karen has a Masters degree in mathematics and worked as a budget coordinator for about three years; however, with Elie's agreement, she left the workforce before the birth of the parties' first child, and, except for occasionally teaching aerobics classes, she did not work thereafter. Elie has a Masters degree in hotel administration from Cornell.
During the first few years of their marriage the parties lived in a studio apartment in New York City, and then moved to one-bedroom apartments in New Jersey. Plaintiff's parents paid for the parties' furniture. In 1981, plaintiff's parents moved out of their three-bedroom home in Clifton, and gave plaintiff and defendant the house and all of the furnishings. The parties completely renovated the house in 1987, and later sold it for approximately $340,000.
Plaintiff was primarily responsible for managing the household and caring for the children. She transported the children to their numerous activities, organized social activities, arranged for tutoring and summer camps, assisted with homework and was active in the girls' private schools, volunteering as a class mother and becoming involved with the parents' association.
Plaintiff cooked, cleaned, maintained the house, and supervised the various household help employed by the parties, including au pairs, nannies, and live-in and daily housekeepers. The parties also hired individuals to do yard work, snow removal, painting, and other home maintenance. Plaintiff handled many of the social arrangements for the family, planned vacations, and hosted parties for family and friends. She did not, however, work in the nursing homes, nor did she make any direct contributions or show any interest in the businesses.
In September 1992, the parties purchased a 10,000 square foot home in North Caldwell. They purchased new furniture, drove expensive cars, vacationed in Israel, Hawaii, Aruba, Puerto Rico, California, and New Mexico, frequently ate at expensive restaurants, spent thousands of dollars a month on clothes, and joined an expensive country club. They also purchased a vacation home in Florida, which they sold prior to trial, and spent about $90,000 for their older daughter's bat mitzvah.
Defendant moved out of the marital home in April 1995, and plaintiff filed for divorce in July 1995. From 1995 to 2002, defendant paid plaintiff more than $1.2 million in support. Plaintiff also received $2500 per month in distributions from the parties' West Caldwell nursing home.
C. Nursing Homes and Assisted Living Facilities
In November 1976, five months after the parties were married, defendant began working for plaintiff's father, Jacob Pineles, an established builder and developer of nursing homes. Defendant worked as an assistant administrator for Franklin Convalescent Center (Franklin), also referred to as Tuschak-Jacobson, Inc., a facility in which Pineles held a 66.67% interest. It was undisputed that Pineles was instrumental in bringing defendant into the nursing home business.
In 1977, defendant obtained his nursing home administrator's license, and took over the operation of the Franklin facility, where he substantially increased profits. As a result, Pineles decided to expand. Defendant assisted Pineles in obtaining the certificate of need (CON) from the Department of Health (DOH) for the expansion, worked on the design of the building and performed the necessary administrative tasks, including hiring new personnel. Pineles, who had experience as a developer, and defendant, who had management experience, then began looking for more sites. Pineles and defendant had a close relationship at that time and even shared an office.
In the late 1980's, Pineles, assisted by defendant, developed three other senior care centers: West Caldwell Care Center, Regent Care Center, Inc. (Regent), and Browertown Associates (Browertown). Defendant assisted Pineles by obtaining zoning approvals and CONs, and worked on the design, decor, furnishings, and equipment for the facilities. Once the centers opened, defendant was responsible for operation and administration, including implementing procedures, hiring personnel, marketing, and negotiating contracts. Pineles, who owned 50% of West Caldwell, gave Elie and Karen a 16.23% interest in the business. According to defendant, the ownership interest was compensation for his "sweat equity."
Shortly thereafter, Pineles, who owned 25% of Regent, gave the parties a 15% ownership interest in that facility. However, according to defendant, Richard Pineles, plaintiff's brother, complained that his father was favoring defendant, and as a result Pineles gave defendant's interest in Regent to Richard. At that point, defendant realized that in spite of his close relationship with Pineles, he had to develop his own business.
At approximately the same time, defendant and his friend Herbert Heflich, who also owned and operated nursing homes, discussed going into business together. Defendant and Heflich formed Long Term Care Management, Co., Inc. (LTCM), a limited liability company, owned equally by defendant through Elcare, Inc. and by Heflich through Hefcare, to manage the nursing homes. In 1988, the two men, assisted by Pineles, acquired Bey Lea, a nursing home under construction in Toms River.*fn4 Because defendant lacked the cash to fund the acquisition, Pineles paid plaintiff and defendant's capital contribution, and then gifted the ownership interest to them.
Defendant and Heflich structured ownership of Bey Lea through general and limited partnership agreements, because they wanted to maintain control over the business while at the same time limiting their personal liability exposure. To that end, the limited partners held ownership interests in the facility and received profit distributions in direct proportion to their interests. The limited partners had no management authority over the day-to-day operation of the business, and in exchange, their liability exposure was limited to the amount of their investment. As limited partners, plaintiff and defendant, jointly, and Heflich, individually, each held an 18.72% ownership interest in Bey Lea. Ten other limited partners, but not Pineles, held varying smaller percentages of interest.
Management control of Bey Lea was held by the general partner, RAKRAM GP, Inc., a corporation owned equally by defendant and Heflich. RAKRAM was also a limited partner, and it held a 1.03% ownership interest. As general partners, defendant and Heflich exercised the powers authorized under the partnership agreement, including, among other responsibilities, hiring personnel, developing and implementing budgets, maintaining bank accounts, conducting marketing, entering into contracts, borrowing funds, hiring suppliers, and hiring professionals including attorneys and accountants. They also were authorized to enter into an agreement with a management company, subject to approval by a majority of the limited partners. As a result, defendant and Heflich, through their business entities, entered into a three-year management contract with LTCM. Heflich testified that he and defendant decided to manage the nursing homes through LTCM because it afforded them tax benefits and additional "corporate shielding." The day-today management services rendered by defendant and Heflich through LTCM were somewhat distinct from the services they rendered as general partners.
In 1989, defendant and Heflich acquired Laurelton, a nursing home under construction in Bricktown. Although Pineles provided defendant and Heflich with advice on the contract negotiations, Pineles was not directly involved in the negotiation of the deal, nor did he provide financing. Ownership was structured similarly to Bey Lea, except the parties added a third tier. The first layer general partner in Laurelton was HERBEL, a partnership controlled by defendant (40%), Heflich (40%) and BRICK GP, Inc. (BRICK) (20%). BRICK, the general partner of HERBEL, was owned equally by defendant and Heflich. As general partners, defendant and Heflich retained management control over the day-to-day operation of the facility, and through their business entities, they entered into a three-year management agreement with LTCM. HERBEL was also a limited partner, and thus, defendant and Heflich jointly held a 27.5% ownership interest in Laurelton.
In 1992, defendant and Heflich acquired Inglemoor, an existing nursing home in Livingston. The land and building were leased, not owned by the business. Ownership was structured in the same manner as Laurelton.
Like Bey Lea and Laurelton, defendant and Heflich retained management control over the day-to-day operation of Inglemoor, and through their business entities, they entered into a five-year management agreement with LTCM. Several witnesses confirmed that defendant and Heflich had an active role in management of the three facilities; these included David Kostinas, a consultant, Barbara Fyfe, assistant administrator of Laurelton, and Lowell Fein, administrator of Regent.
In 1994, LTCM entered into three five-year management contracts with the senior care centers controlled by Pineles: West Caldwell, Regent, and Franklin. Plaintiff and defendant held a 16.33% interest in West Caldwell, but had no ownership interest in Franklin or Regent. The separate management agreements for the six facilities (West Caldwell, Regent, Franklin, Bey Lea, Laurelton, and Inglemoor) provided that in compensation for its services LTCM would receive a management fee equal to a percentage of the gross revenues of the facility, plus expenses. LTCM received fees equal to 3% of gross yearly revenues from West Caldwell, Regent, and Franklin.
In late 1994, defendant and Heflich, through LTCM, investigated developing senior assisted living facilities. Pineles did not invest in the new venture because he believed that the assisted living business was too "risky," since assisted living services were not guaranteed by government insurance reimbursement. After the divorce complaint was filed, defendant and Heflich eventually developed a series of assisted living facilities. However, because the trial judge ultimately determined that the facilities were not assets subject to equitable distribution, a decision plaintiff has not appealed, no further discussion of these facilities is required.
Meanwhile, on September 3, 1996, Pineles, whose relationship with defendant had cooled when plaintiff filed for divorce, cancelled the West Caldwell, Regent, and Franklin, contracts with LTCM, although plaintiff and defendant continued to receive profit distributions from West Caldwell. In July 1997, defendant and Heflich sold Bey Lea and Laurelton for approximately $36 million. They agreed to sell, despite Pineles's and plaintiff's opposition, because they had received a "very good price" and because the deal was simply too good to refuse, especially in view of their belief that the nursing home business was declining in profitability. As expected, the new owners managed the facility themselves and did not enter into management agreements with LTCM.
Before discussing valuation in detail, we pause to summarize the most pertinent issues. At the trial, as on appeal, the parties main disputes centered on three issues: the value of the nursing homes and other assets; whether the assets were active or passive, that is, whether Elie actively managed them and hence was entitled to a larger share of the profits and was chargeable with a larger share of the losses; and Karen's appropriate share of any active assets.
On July 21, 1995, the date the complaint was filed, the parties had $1,214,098 in a Bear Stearns brokerage account, an account opened on December 30, 1994, in the name of defendant's father, Valerian Mendelsohn. Plaintiff testified that she had not known about the account, did not authorize defendant to place funds in his father's name, and had not participated in any investment decisions. David Smith, plaintiff's forensic accounting expert, traced the source of the funds and found that the money had originated from funds contained in a Valley National Bank money market account held in the parties' names. Marital funds had been invested in the Valley National account for about five years prior to the transfer to Bear Stearns.
Defendant admitted that he transferred the funds from Valley National to a Bear Stearns account managed by Avi Rojany, his cousin, who was a successful broker in Beverly Hills. Defendant said he did so because he was not satisfied with the return on the money market account, and not to hide the funds from plaintiff; although, there was some indication that defendant had intended that at least some of the funds be transferred to his father in repayment of educational expenses. It was undisputed that during the marriage the parties generally invested in money market and checking accounts, not brokerage accounts.
In any event, once the money was transferred, more than $20 million in trades were made from the Bear Stearns account over a five-year period. A few months before plaintiff filed the divorce complaint, defendant, for the first time, began trading on margin, ultimately incurring over $337,636 in interest on the margin borrowing, with the margin ratio on the account sometimes exceeding 200%. At times defendant was forced to liquidate stocks to meet margin calls.
Although Smith admitted he had no direct knowledge that defendant had directed the trades, based on Smith's experience with similar accounts, he surmised that defendant had done so, given the large number of trades. And, Smith noted that defendant had never produced written authorization granting Rojany permission to trade on defendant's behalf without direction; written authorization was required for such trades. Still, defendant denied directing stock trades, denied discussing investment strategies with Rojany, and said he was unfamiliar with the market. And, although defendant could not recall if he had given Bear Stearns written authorization to trade on margin, he claimed he had given Rojany verbal authorization to do so.
Although the funds in the Bear Stearns account had at one point increased to approximately $2 million, at the time of trial only $273,098 remained in the account, primarily as a result of margin trading, but also because the parties had withdrawn $475,000 pursuant to various pendente lite court orders. Defendant received monthly statements detailing the decline in value of the account, but he did not stop the trading or transfer the funds.
Plaintiff argued that given defendant's direct involvement in the risky margin trading, the Bear Stearns account should be considered an active asset for designating the date of valuation. Plaintiff claimed she was entitled to $369,549 ($1,214,098 (funds in account at time of filing) - $475,000 (court-ordered withdrawals) = $739,098 x 50% (marital share)). Conversely, defendant argued that the account was a passive asset and should be valued at the time of trial; and alternatively if it were an active asset, plaintiff was entitled to only $184,775, or 25% of $739,098.
As of the date the divorce complaint was filed, the balance in the parties' other bank accounts, which were passive assets, totaled $992,855. Smith, plaintiff's expert, and Alan Dunninger, defendant's expert, agreed that appreciation, dividends, and interest on the accounts from July 1995 to August 31, 2002, totaled $136,462. Court-ordered withdrawals totaled $828,898, of which $226,523 was for the children's school expenses, $70,000 was for defendant's support arrears, and $532,375 had been distributed equally to the parties, leaving a balance of $163,957.
Plaintiff argued that the school expenses and support arrears should be charged to defendant's share of the distribution, and claimed she was entitled to $298,471 ($163,957 (balance) $136,462 (appreciation and interest) $226,523 (school expenses) $70,000 (support) = $596,942 x 50%).
Defendant argued that the entire amount of court-ordered withdrawals, including the school expenses and arrears, should be deducted from the agreed-upon balance, and thus he maintained that plaintiff was entitled to $153,126 ($992,855 - $828,898 (withdrawals) $136,462 (interest) $5832 (additional interest) = $306,251 x 50%).
The parties stipulated that their interest in West Caldwell was a passive asset. The 180 bed long-term care facility, located on Fairfield Avenue, was situated on a 5.88-acre parcel of land. In 1997, the court appointed Larry Biel, a Certified Public Accountant, to prepare a balance sheet of assets and liabilities of the marital estate. Biel retained Capital, a firm specializing in senior living appraisals, to appraise West Caldwell. Mark Roth of Capital valued the operating fixed assets, as of July 1, 1995, at $19.3 million, and as of June 1, 1999, at $16.4 million. The 2003 tax-assessed value of the land and improvements was $7.9 million. By order entered on December 9, 2003, the court granted defendant's request to submit updated valuation reports.
Plaintiff retained Louis S. Izenberg, an appraiser, who valued West Caldwell as of May 4, 2004, at $7.5 million, an approximately 62% decrease in value from 1995. The ...