Win-Win Simple Solution or Financial Disaster?
Under the right set of circumstances, mediation may be a successful way to resolve conflicts in a divorce. The main determinants are the attitudes and motivations of the parties and the complexity of the issues. There are many potential risks and pitfalls to mediation and thus the parties opting for mediation need to enter into it with a full awareness of the issues.
It should be clearly understood that a divorce is often a complex matter even when it appears to be rather straight forward. Even determining the amount of child support and spousal support (which many people believe are determined by simply using a computer program) may be extremely complex. A divorce is a financial transaction — a division of a financial partnership. A mistake made in the transaction may have long term and devastating consequences that are irrevocable. Many people are attracted to the concept of mediation because of a misunderstanding as to the level of complexity involved in the divorce transaction. Often, there is a lack of appreciation of the nuanced and sophisticated issues involved.
Many people believe that mediation is the easiest and fairest way to resolve the issues. It should be understood that, generally, at least one spouse has opted for mediation because of a belief that he or she will obtain a more favorable result in mediation than would have resulted had both sides been represented by divorce lawyers. Notwithstanding what many people believe, mediation is not always a "play nice" experience. We consult with many clients who elect to go to mediation as a strategy to obtain a favorable result and to take advantage of the other spouse by perpetuating the power structure of the couple that existed during the marriage through the mediation process.
There are many situations where parties elect to mediate their divorce to avoid spending money on divorce lawyers, an understandable objective. In certain situations, this is not only wise, it may be a necessity due to a lack of funds. However, where the parties do have funds available for legal representation, pursuing mediation (without the assistance of a divorce lawyer) may end up being a very expensive mistake - "penny wise and pound foolish" as the saying goes.
Candidates For Mediation
In order for a mediation to be successful, the parties must both be good “candidates” for the mediation process. Being a good "candidate" means that the parties:
- ARE BOTH WILLING TO LET THE OTHER SIDE HAVE 51% OF THE ASSETS & NEITHER PARTY HAS A NEED TO WIN;
- Trust each other. Mediation is not a process that is designed to verify facts, investigate financial issues and question suspect expenditures. If there is a lack of trust, mediation is not the correct forum;
- Are not hostile personality types. If one party is essentially a bully, mediation will not be "successful," unless the other spouse gives in to the bully. In that case, the mediation is "successful" because it resolved the issues, not because a fair settlement was agreed to;
- Are both ready to end the relationship. If both spouses are not ready to move on in life, mediation will be a waste of time and money. A mediator does not have the power to force a settlement. To reach an agreement both spouses must have a desire to reach a solution on all issues;
- Are both ready to resolve the issues. If either spouse is angry with the other or has a need to delay the termination of the relationship, mediation will most likely not be successful. Anger on the part of a spouse makes mediation, essentially a non-starter;
- Have not been a victim of abuse in the relationship;
- Have essentially equal personal power in the relationship. Mediation is about negotiation. Generally, the parties do not have lawyers in the mediation conferences and thus the party with more power and the better negotiating skills prevails.
- Have essentially equal access to and understanding of the finances. Except in the area of child custody, a divorce is a financial transaction. The party with less knowledge and less experience with financial issues is at a severe disadvantage in mediation. Failing to understand the financial aspects of a divorce may result in an award of less child support and less spousal support than should be awarded and it may result in an unfair property settlement.
- Define “fair” in a similar way. Everyone proclaims a desire to want a fair deal. However, many people differ on what they feel is fair. In fact, the definitions can be and usually are extraordinarily different.
The mediator’s role is not to provide legal advice – it is to assist the parties in resolving the issues and to reach a full global settlement. A mediator should consider any “deal” intrinsically good. The terms should not be important to the mediator. A mediator's role is not to protect one side from the other or to steer the terms of the deal to be the equivalent of the results that would have been achieved after a trial. Rarely does a mediation result in a 50/50 settlement unless the estate is comprised of assets easily divided and easily valued like bank accounts and credit card debt. A 50/50 deal is not the goal of mediation. The goal is reaching an agreement.
Divorce Lawyer As Consultant / Coach
Mediators advise the parties that they should consult with a divorce lawyer. Divorce lawyers function as consultants or coaches for clients who wish to mediate their cases. To provide meaningful and targeted advice, a divorce lawyer needs all of the relevant facts. Without the facts, the family law attorney will only be in a position to provide basic and general comments which may be more detrimental than beneficial. A party should not have the false security of thinking they have a divorce lawyer representing them while they are in mediation, if the divorce lawyer does not have sufficient information to provide protection from a meditated financial disaster. Having all of the facts and being kept apprised of the events occurring during the mediation process allows the divorce lawyer to assist a client throughout the mediation and increase the chances of a successful and fair mediation.
Conferring with a divorce lawyer before and during mediation is important so that mistakes are not made in arriving at a settlement. It is critical to reach an equitable and acceptable settlement the first time around and not be in a position of being forced to attempt to fix a bad deal. Attempting to renegotiate a mediated settlement is generally unsuccessful. Before negotiating the terms of a settlement or agreeing to a final settlement, consult with a divorce lawyer. Retain a divorce lawyer before the first mediation appointment. It is critical to understand the issues, the law, and a range of reasonable results before the process commences. Calling a family law attorney for the first time after the terms of a deal have been agreed to is not the best way to achieve a successful and fair mediated settlement.
It is also important to determine whether you have a detailed sufficient understanding of the issues that is clear enough to place you in a position to be able to articulate to your spouse and the mediator, the concepts and settlement positions proposed by your divorce lawyer.
A common error is for a party to meet with a divorce lawyer once, participate in the mediation, reach an agreement on all of the terms and bring the finished (but unsigned) judgment to the divorce lawyer for his or her input. At this point, the value of the divorce lawyer is minimized in that the party did not allow the divorce lawyer to help craft the settlement terms.
Preparation for Mediation
There are actions that can be taken to maximize the chances of a successful mediation before the mediation commences:
Meet with an experienced divorce lawyer and discuss, in detail, any sophisticated financial issues.
Make certain that the divorce lawyer has sufficient facts to be in a position to advise as to the range of reasonable settlement positions for each contested issue. For example:
- Child support should be set at between $1,000 to $1,200 per month;
- Spousal support should be set at between $5,000 to $6,500 per month for four to five years;
- The vehicles should be valued using mid-Kelley Blue Book values;
- Household furniture and furnishings should be valued at garage sale prices;
- If the house is not sold, it should be appraised;
- Collections should be equally divided or appraised; and
- Custody – parenting plan alternatives should be explained.
The divorce lawyer should explain the smaller and more nuanced issues that may not be addressed in mediation if a spouse does not raise them. A few such items may include:
- Post-separation accounting;
- Marital standard of living findings;
- Gavron notice;
- Security for child support;
- Child care cost allocation;
- Ostler-Smith support orders;
- Tax basis issues;
- Imputation of income;
- Reimbursements, charges, and credits; and
- Life insurance as security for support.
Before the first mediation appointment, a spouse should ask the divorce lawyer to prepare a rough balance sheet showing the approximate values of the assets, the amount of the debts and the proposed alternative scenarios for a division of the community property assets and debts. It is critical to have a proposed solution before mediation commences.
Most Divorce Lawyers Settle The Vast Majority of Their Cases
Frequently, one party will attempt to force mediation by pushing onto the other spouse, the agenda that all divorces are necessarily difficult, contentious, and expensive. That it simply not true.
An alternative to mediation can be achieved by each party retaining a reasonable divorce lawyer who is proactive and solution oriented. If the parties follow this approach they can obtain a mediated result that is cost effective and fair to both sides. This can result in the functional equivalent of a mediation without a mediator. Divorce lawyers often serve as mediators.
Retaining a divorce lawyer does not mean that you are going to trial. If you are referred to a divorce lawyer who has the reputation of being aggressive, the odds are you will not have a peaceful and amicable settlement. The selection of a divorce lawyer dictates, to a large degree, how the case will be resolved: trial or settlement. The section in our website, selecting a divorce lawyer, is designed to help you find the type of lawyer that you desire to retain.
If there is a business, complex tax issues, complicated trust or life insurance issues, separate property or tracing issues, or other complex financial issues, mediation may be particularly problematic.
- How is a business valued in mediation? Experts are necessary to value a business unless the parties simply elect to guess at the value. The mediator will not have the skill required in this area. Will the parties understand the nuanced financial issues in the business appraisal?
- Is the family CPA “loyal” to a particular party, or will he or she fairly assess tax and other issues? The family CPA will most likely not have experience in family law valuations (which are very different than valuations in the real world) and he or she will almost certainly know which spouse he or she will work with after the divorce, which may impact his opinions.
- Do both parties have access to the same financial records and have the skill and sophistication necessary to interpret the records?
- Do both parties have the financial knowledge and experience to understand the nuances existing in the family law issues? The divorce transaction is often complex. Our firm spends approximately $100,000 annually to educate our lawyers. Family law is not simply dividing assets 50/50.
- Do both parties have comparable negotiating skills? Mediation is a negotiation. There is a reason why tens of thousands of books have been written and countless courses have been taught about negotiation and negotiation theory.
The divorce lawyer needs to know what assets were owned by a party on the date of marriage and whether a party received any assets during the marriage by way of gift or inheritance. These types of assets may be characterized as separate property. If either party has commingled separate property with community property, a forensic accountant may be needed to trace the separate property for the asset to be characterized as separate property. Community property is divided equally between the parties whereas separate property is confirmed to one party.
Settlements are often driven, in part, by psychological dynamics that result in inequitable settlements. A divorce lawyer can provide a buffer or sounding board that minimizes the pressure to accept an inequitable settlement based on pressure from the other spouse, guilt, or other related issues.
The more financially savvy party or the party with more power in the relationship generally achieves a better result. The party who is pushing hard for mediation is often the party telling their spouse:
- Don’t hire a divorce lawyer;
- We don’t need divorce lawyers;
- Divorce lawyers will just waste our money;
- We can arrive at a fair solution in a few sessions; and/or
- This is simple, it just 50/50 and there are formulas.
Other times, the party pushing for mediation, expressly or impliedly threatens generally or specifically, that if their spouse does not agree to mediation, there will be consequences.
Consider the Possibility That the Mediation May Not be Successful
One should consider the consequences if mediation is opted for and it does not result in a successful and fair settlement.
We have had many cases over the years where a client consults with us after a failed mediation. In some matters we learn during the initial conference that the client walked away from an amazingly advantageous settlement due to a lack of understanding as to why the terms were so favorable to his or her position.
We have had other cases, where a client entered into a disastrous settlement that they were seeking to set aside.
Mediation can be used as a delay tactic by a strategic spouse. A delay in the resolution of a case can be a very significant benefit to one side or the other. During a delay, a party can make financial decisions or position assets that may impact the ultimate property settlement. The timing of a divorce may be the most important component of a settlement. The use of mediation to delay a settlement is a common tactic. For example: if the parties own a business, the delaying of the settlement or trial, will most likely, change the time frame over which the financial performance of the business will be measured. A different time frame may result in a significantly different valuation.
If a settlement is arrived at, the terms must be documented in a judgment. Significant skill is required to properly draft a divorce judgment and a minor drafting error can result in a financial disaster. No judgment leaves our office without two lawyers reviewing it. Many lawyers and many mediators are not skilled in drafting judgments.
In a recent case, the parties arrived at an agreement on all terms in the mediation. The parties agreed that the wife would be awarded the majority of the assets but spousal support would be terminated in a few years. The judgment was poorly drafted and the divorce court later ruled that the terms of the judgment did not terminate spousal support and allowed the wife to extend spousal support until her death or remarriage. The court order resulted in the unintended consequences of the wife receiving the majority of the property and a very favorable long-term spousal support order.
Often, in mediation, one party receives a disproportionate share of the assets or an unreasonably high or low amount of support. It is not the mediator’s role to protect the weaker or less informed party. Unfair results may occur due to a variety of factors:
- Intimidation of one party;
- Lack of an understanding of financial matters;
- A party wants it "over” at all costs;
- A party has severe guilt;
- One or both parties fail to fully understand the meaning and consequences of the terms in the settlement agreement (Judgment);
- One or both parties have a lack of understanding of their rights under the law; and/or
- A party has superior negotiation skills.
It is accurate to say that often one party receives a significantly better result in mediation than would have occurred if the matter had been resolved with each side being represented by divorce lawyers. Necessarily, if one side receives a significantly better result than a 50/50 deal, then the other side necessarily receives a significantly worse result than he or she would have received had divorce lawyers been involved.
You may want to avoid real life mediated results like the following:
- The community had significant assets and the husband operated a community property manufacturing company. The husband achieved a mediated settlement where he received 90% of the assets in exchange for paying wife slightly more than reasonable spousal support. The wife did not understand the law or the value of the business.
- Husband, a CEO of a publicly traded company, agreed to pay to his wife 50% of his salary, bonuses, stock options and all other compensation until his wife’s remarriage or the death of either party. He believed this was a normal main stream solution and that this is what was meant by 50/50. A reasonable settlement would have resulted in a far lower support level and a termination of support in four years after the eight-year marriage.
- An actor mediated his divorce and agreed to pay his wife approximately $7,000 per month in spousal support and approximately $7,000 per month in child support. He also agreed to pay 75% of all income over $750,000 per year. His income increased to approximately $2,000,000 per year which resulted in him paying more in support than he received in net, after tax, income. The settlement resulted in him having a net negative cashflow after paying his taxes and support.
- After a long-term marriage, the parties mediated the divorce. The property was liquid and equally divided. The husband was relatively young and unemployed due to a recent sale of his business. The wife received substantial assets but would be living well below the marital standard of living after the settlement. She agreed to waive spousal support which meant that if the husband went back to work or formed the next business, she would not be able to seek spousal support and would not be able to return to the prior marital standard of living. Had she wanted to waive spousal support, she most likely could have "sold" the waiver for a substantial sum of money.
- The parties mediated their divorce and divided the extensive stock and bond portfolio equally between them on a 50/50 basis. A year after the divorce, when the wife sold a substantial portion of her stock, she learned that her 50% of the securities portfolio contained the low tax basis stock and bonds, meaning that after tax, she received far less than 50% of the community assets.
- In a mediation, the husband agreed to be awarded a universal life insurance policy, with a very substantial cash value, that the parties had owned for many years. After the mediated settlement, the husband elected to cancel the policy and then learned that securities held inside the policy had increased substantially in value creating a capital gain. The cancellation of the policy triggered a surprise capital gains tax. Had he known of the tax, he could have insisted that the policy be cancelled as a part of the settlement and that the parties equally share the tax burden.
- The parties mediated their divorce and agreed to a full settlement. The agreement was documented by the mediator in a judgment. The judgment was reviewed by one of the party's advisors who caught a significant error made by the mediator. The judgment provided that one party was to pay the other $250,000 more than had been agreed to in the mediation.
In a perfect world, the parties would meet with a mediator and settle all of their issues in two or three meetings in a three-week period. However, there are many times when the result looks more like this:
- The mediation consumes months;
- The cost is many time the projected fee;
- No deal is reached; and/or
- The parties are more polarized than they were before the mediation commenced.
Decisions as to how to and whether to end a marriage and resolve the issues in a divorce are certainly critical in a person's life. It is reasonable to consider all options, including mediation, before embarking on a particular path to end a marriage. If a spouse is informed of the potential risks and pitfalls of mediation and has the guidance of a divorce lawyer, mediation may be a good viable or even the best option. However, it is a mistake to believe that mediation is always the right solution, is always the inexpensive solution or always results in a fair settlement.