Sunday, February 25 , 2018, 1:20 am | Fair 48º

 
 
 
 

Brian Burke

Relationships

Brian Burke: About Your Divorce (Letter 141) — After $1 Billion, What Do $2, $3 or $4 Million Mean

Oblique Strategy #35 — Is the $2 billion version of myself better than the $1 billion version of myself

Over 95 percent of divorces in our jurisdiction are resolved by the parties when their case becomes “ripe for settlement,” which typically occurs 18-36 months after separation.

When a court imposes a resolution upon the parties after a trial or when the parties settle at the mandatory settlement conference under duress of a looming trial date, the imposition of closure will meet resistance.

When a case has been settled prematurely and one party is still interested in goring the other, she can call him the day after they announce their deal in open court and say, “I just wanted to tell you how pleased I am with our settlement. Thank you.”

The husband’s next call will, of course, be to his lawyer. “You sold me out. Why did you let me agree to all those things in her favor? How can I get out of it?”

•        •        •

After an extended trial in the marriage of Harold and Sue Ann Hamm, the judge decided that Sue Ann’s interest in the marital estate was worth $1 billion. Some valuable property had already been transferred to her, so the cash balance due from Harold to Sue Ann was $974,790,317.77.

At the heart of the Hamm case was that elusive quality we call “fairness” — unless we are trying to resolve a divorce, then “fairness” is the “F-word.”

Although Harold Hamm’s formal education stopped when he graduated from high school, he is the major shareholder and CEO of Continental Resources, Inc., which he started before his marriage to Sue Ann (who also worked as one of the company’s lawyers for 17 years).

During their 23-year marriage, the value of Continental Resources increased by about $50 billion. The value of Harold’s interest increased by about $16 billon.

California and Oklahoma have different rules for the characterizing (defining), valuing and dividing of a marital estate upon divorce, but in this instance their rules are essentially the same.

Sue Ann is entitled to half the increased value of Harold’s Continental stock that’s attributable to Harold’s skill, talent, energy and labor. She’s entitled to none of the increased value attributable to “natural” appreciation.

If your immediate reaction to the last paragraph is, “How can they make a distinction like that?” your intuition is working well.

There is no natural or obvious way to do it. The judge can approach the task in one of two ways. He can follow a formulaic procedure that sort of makes sense but relies on the insertion of arbitrary values that will determine the outcome, or he can decide on the outcome and insert the necessary values into a formula so it comes out the way he wants it to.

If all of the $16 billion increase in the value of Harold’s stock was due to his talent, effort, etc., Sue Ann could have received as much as $8 billion.

The court found that Harold’s talent and energy accounted for a $2 billion increase in value and awarded half of that amount to Sue Ann.

A billion is a lot of money, so the court allowed Harold to make installment payments. The sum of $322.7 million was to be paid by the end of 2015. Thereafter, Harold would have to pay Sue Ann $7 million per month until the principle (and presumably some interest) was paid in full.

The decision gave Sue Ann a lot of money, but it was at the low end of the range. She knew the company from the inside, and in their most intimate moments, Harold had opportunities to speak from his heart and to tell her how damn smart he was. She felt cheated, but $1 billion is still a lot of money.

Semi-technical point No. 2: The court was surely presented with various formulae for differentiating gain attributable to effort versus gain attributable to “natural” appreciation. This kind of formula requires the determination of several variables, which are then added, subtracted, multiplied or divided as required by the formula. The outcome will be preceded by a “$” and “forced” by the amounts used for each variable and by the arithmetical operations prescribed by the formula.

The output appears to be objective and precise, but it’s not. While the input numbers can be (legitimately) manipulated to affect the final value, the formula will include something called the “capitalization rate,” which multiplies the other values, and its effect is huge.

Loosely defined, a “cap rate” is a presumed return on investment. It requires a prediction of future economic conditions so there is room for a wide range of opinion. A cap rate of 50 percent multiplies the other combined factors by 2; a cap rate of 10 percent multiplies them by 10.

The court has very wide discretion when selecting a capitalization rate. Even lawyers and judges can work any of these typical formulae backward in order to determine the value of the cap rate that will produce the final answer/value they feel is appropriate.

I’m reminded of the most amazingly fantastic, awesome (sorry for the hyper-rhetoric; it’s in the air and it’s contagious) three-minute video that tells you everything you need to know about divorce and capitalization rates, and it will make you laugh. Here’s the link.

Harold and Sue Ann must have known from the outset that the court’s decision had to be essentially arbitrary. If Harold had said nothing when it was announced, Sue Ann might have been able to get on with her billion dollars.

But he told the world that a decision equal to 25 percent of Sue Ann’s claim was fair and equitable. Sue Ann was left with no real choice but to say that it was not fair and equitable, which meant she had to file an appeal and prolong the case for at least another year or more.

Harold’s fair and equitable announcement pushed Sue Ann into a new round of ultimatum. By rejecting the $1 billion to $15 billion division, she asked for another court to propose another division that would give her the same or a lot more (or a lot less) than what she received from the first court.

Harold could live with the $1 billion award, and he was done with the judicial ultimatum game, so he got smart.

Just look at his check again.

It’s brilliant for these reasons:

» It is written to Sue Ann Arnall, Sue Ann’s birth name. She asked the court to restore her former name as part of the divorce. Harold honors her request and respectfully writes her name in a way that doesn’t include him. He could have written something like “Sue Ann Arnall aka Hamm” or many variations on that theme.

» The check is for the entire amount. No installments. He’s saying with action, words and numbers, “Take this and it’s over.”

» It turned out that there was enough money in Harold’s account to make the check good.

» He resisted any temptation to write something after the word “For_____.” I’ve seen lines like “For: the worst years of my life.” Such a note doesn’t affect the negotiability of the check, but the recipient can’t help feeling that by accepting the check she is implicitly agreeing to the sentiment expressed by the comment.

Sue Ann got the check after she announced her intent to appeal. Then she said that she wouldn’t accept the balance of the billion-dollar judgment because one can’t pursue an appeal of a judgment after the benefits have been accepted — A legal form of “You can’t have (keep) your cake and eat it too.”

But she didn’t send the check back.

Many, maybe most, people would be uncomfortable having a $1 billion check (with enough money in the account to honor it) “out there floating around” after its payee announced that she wasn’t going to accept it.

Harold thought about calling Morgan Stanley to stop payment on his $1 billion check, but he’s smart and he knew Sue Ann, so he didn’t do it.

•        •        •

For Sue Ann, the check represented a resolution that she felt was unfair and unjust, but she didn’t return the check. She held it for one day, then another and on to a third.

During this period she had emotional responses to the unfairness of it all — only a billion! But remember, she was also a lawyer trained to see a case from the perspective of the person making the decision.

First, she should come to the full realization that the judge didn’t know her, and he didn’t care about her feelings or her thoughts about what was fair or unfair. He was being asked to ponder the imponderable.

Next, she’d realize that a normal person wasn’t going to lose one minute of sleep worrying about whether she should get $1 billion or $5 billon. There aren’t many people in the world who know first-hand what it’s like.

Then, with check in hand, she could try to ponder an imponderable question: Would she be a better person if she had $5 billion instead of only $1 billion?

And, finally, she had to wonder if Harold’s check was any good.

Sue Ann decided, probably against her lawyers’ advice, to get an answer to the last question by depositing Harold’s check into her account to see what happened to her balance. It soared.

Semi-technical point No. 3: After cashing the check, Sue Ann’s lawyers attempted to continue with her appeal. Harold objected, citing Oklahoma law that prohibits pursuit of an appeal if you’ve taken advantage of the judgment under appeal.

Cashing a check for the amount of the judgment is accepting the benefit of the judgment. Sue Ann’s lawyers argued that this was an unfair application of the law, but at least two of her lawyers told the press at the time the check was received that Sue Ann could not cash it if she wanted to continue with the appeal. What happened in Sue Ann’s camp is a story that’s gone unreported.

One judge, within the bosom of my own family, avoided the task of writing opinions, sometimes in major cases, to explain his decisions.

“It’s hard enough to be right without trying to explain why.”

While a statement like this is antithetical to the notion of a rational legal system, it’s brutally honest and accurate.

Oblique Strategy #36: What can you learn about your divorce from Brexit?

— Brian H. Burke is a certified family law specialist practicing family law and mediation in Santa Barbara. A researcher and educator in the field of divorce and family conflicts, he is also the creator of the Legal Road Map™. Click here for more information, call 805.965.2888 or e-mail [email protected]. Click here to read previous columns. The opinions expressed are his own.

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