On April 27, 2021, the Connecticut Supreme Court handed down a landmark decision when it ruled the double dip permissible. But what is the double dip and why is it such a big deal?
In matrimonial cases, often a closely held business is one of the most valuable assets of the marital estate. Once values have been ascribed to assets in the marital estate, the court equitably divides those assets. Frequently, the business-owning spouse wishes to retain the closely held business and “buys out” the non-business owning spouse (i.e., is ordered to compensate the non-business owning spouse for the latter’s equitable share of the business’ value). The double dip occurs where the business-owning spouse has paid some portion of the value of the entity to the non-business owning spouse and, in conjunction with that payment, is also required to pay support to the non-business owning spouse based on the earnings generated by that same closely held business. This can be a particularly acute problem when the closely held business is a service-based business and the vast majority of revenues are generated from the provision of personal services.
What Happened
Let’s look at what happened in the Oudheusden case’s long and lengthy travel through the Connecticut court system.
The husband owned two closely held businesses collectively valued at $904,000, from which he earned compensation of $550,000. The businesses represented the primary component of value in the marital estate. The Trial Court ordered the husband to pay the wife $452,000, representing 50% of the value of the closely held businesses, and awarded the two businesses solely to the husband. The Court then awarded the wife lifetime alimony of $18,000 per month, or $216,000 annually, based on husband’s annual earnings of $550,000.
After the Trial Court’s decision, the husband appealed to the Appellate Court, claiming that the Trial Court impermissibly double counted his income in utilizing it both in the determination of the value of the closely held businesses and the support award. The Appellate Court agreed and reversed and remanded for a new hearing on financial issues. The wife then petitioned for certification to appeal to the Supreme Court. The wife’s petition for certification was granted and included the issue of whether the Appellate Court correctly concluded that the Trial Court had erroneously engaged in double dipping by awarding income generated from the husband’s businesses as well as a percentage of those same businesses in the division of property.
The Ruling
The Supreme Court ultimately ruled that the Trial Court did not improperly double count the value of the husband’s businesses because, “…any rule against double counting does not apply when the distributed asset is the value of a business and the alimony is based on income earned from that business.” The Supreme Court then outlined its decision in greater detail, ultimately concluding that the prohibition against double counting exists for pensions, retirement assets, bank accounts, vested stock and, notably, stock in a closely held business, but not when the asset in question is a business whose value is being distributed.
The Supreme Court looked to other states’ case law in fashioning its orders, particularly New York and New Jersey, concluding that “…it is not double counting for a trial court to award a spouse a lump sum representing a portion of the value of a business and also award the spouse alimony that is based on the paying spouse’s actual income from that business.” However, the Supreme Court noted that trial courts must still be diligent in considering all statutory factors in crafting awards and further admonished the courts to ensure that their awards were fair and equitable.
The Supreme Court concluded its opinion by noting that the Trial Court’s alimony award was an abuse of discretion and, thus, did not make a ruling as to whether the award as a whole was fair. The Supreme Court directed the Trial Court to hold a new hearing on the financial issues. Thus, the Oudheusden saga continues, to be revisited on these same issues again in a future column!
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