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 in divorce mediation and thus the parties opting for mediation should enter into it with a keen 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 divorce mediation because of a misunderstanding as to the level of complexity involved in their divorce. Often, there is a lack of appreciation of the nuanced and sophisticated issues involved. Electing to opt for divorce mediation is an important strategic decision and should be made with great care.
It is often thought that mediating a divorce is the easiest and fairest way to resolve the issues and sometimes it is. It should be understood that, generally, at least one spouse has opted for divorce mediation because of a belief that he or she will obtain a more favorable result in mediation than would have resulted had their spouse been represented by a divorce lawyer. Divorce mediation is not always a "play nice" event. We consult with many clients who elect to go to mediation as part of a strategy to take advantage of the other spouse by perpetuating the power structure of the couple that existed during the marriage through the divorce mediation process.
There are many situations where parties elect to mediate their divorce in an effort to avoid spending money on divorce lawyers, a very 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 divorce 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.
Divorce Attorney's Fees: Expenditure or Investment
Spending money for a divorce lawyer is not the way most people would elect to use any portion of their hard-earned savings. If a divorce is truly a simple matter, the importance of a divorce lawyer may be less significant than in a more complex matter. The problem is that even less complex divorces often have complex and nuanced issues that are not seen by the parties.
The fees paid to a divorce lawyer should be viewed as an investment. If the divorce lawyer cannot provide a return on the investment, the client most likely hired the wrong divorce lawyer.
In a recent Orange County matter, a party negotiated a full settlement in divorce mediation. After learning from her divorce lawyer that she had made a significant error in agreeing to the terms of the settlement, she renegotiated the deal and was able to obtain an additional $275,000. She commented that the lawyer's time spent helping her renegotiate the deal and redraft the judgment cost her $10,000 in additional attorney's fees. It was explained to her that it did not cost her $10,000. She insisted that it did. The divorce lawyer pointed out that she profited by a net of $265,000 ($275,000 - $10,000 = $265,000). The client invested $10,000 in fees and the return on the investment was net $265,000, not a bad return on investment.
Candidates For Divorce Mediation
In order for a divorce mediation to be successful, the parties must both be good “candidates” for the mediation process. Being a good "candidate" generally means that the parties:
- ARE BOTH WILLING TO ALLOW THE OTHER PERSON RECEIVE 51% OF THE ASSETS;
- Do not have a psychological need to WIN;
- Trust each other. Divorce 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, divorce 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 divorce 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 people are not ready to move on with life, divorce mediation will be a waste of time and money. A divorce mediator does not have the power to force a settlement. To reach an agreement both people must have a desire to reach a fair resolution on all issues;
- Are both ready to resolve the issues. If either party is angry with the other or has a need to delay the resolution, divorce mediation will most likely not be successful. Anger on the part of a spouse makes mediation, essentially a non-starter;
- Have not been victims of abuse in the relationship;
- Have essentially equal personal power in the relationship. Divorce mediation involves negotiation. Generally, the parties do not have lawyers physically present in the divorce mediation sessions and thus generally the party with more power and 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 divorce mediation. Failing to understand the financial aspects of a divorce may result in the receipt of less child support and less spousal support than should have been agreed to and it may result in an unequal property settlement.
- Define “fair” in a similar way. Many people proclaim 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 in the context of a divorce.
Divorce Mediator’s Role
The divorce 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 divorce mediator should consider any “deal” intrinsically good and the actual terms should not be important him or her. 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 divorce trial. Rarely does a divorce 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 settlement is not the goal of divorce mediation. The goal in divorce mediation is reaching an agreement.
Divorce Lawyer As Consultant / Coach
It is not true that hiring a mediator eliminates the need for a divorce lawyer.
Divorce mediators must ethically advise the parties that they should consult with a divorce lawyer. Divorce lawyers may function as consultants or coaches for clients who wish to mediate their divorces. To provide meaningful and targeted advice, a divorce lawyer needs all of the relevant facts. Without the facts, the divorce lawyer 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 protecting them while they are in divorce mediation, if the divorce lawyer does not have all of the relevant facts. He or she cannot provide protection from a meditated financial disaster without the facts. Having all of the facts and being kept apprised of the events occurring during the divorce mediation process allows the divorce lawyer to assist a client throughout the mediation and increase the chances of a successful and fair divorce 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. In other words, a person needs a strategic plan before the mediation commences. Calling a divorce lawyer 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 important to have a clear and detailed understanding of the issues and settlement objectives. A party must be in a position to be able to articulate the desired settlement positions and the basis for the positions. Without this information, it is almost impossible to negotiate the desired settlement.
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 approval. At that point, the value of the divorce lawyer may be minimal in that the client did not allow the divorce lawyer to assist in the crafting of the actual settlement terms.
Preparation for Divorce Mediation
There are steps that can be taken to maximize the chances of a successful and fair mediation before the divorce mediation commences:
Meet with an experienced divorce lawyer and discuss, in detail, any sophisticated financial issues.
Create a strategic settlement plan for each issue.
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 a period of 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 or divided on an alternate selection basis;
- If the house is not sold, it should be appraised by an appraiser recognized by the divorce courts. The last bank refinance appraisal should not be used to value the house for a variety of reasons;
- Art and collections should be equally divided or appraised; and
- Parenting plan alternatives should be developed for any custody conflicts.
The divorce lawyer should explain the secondary terms that are often not addressed in a divorce mediation if a spouse does not raise them. A few such terms may include:
- Post-separation accounting to obtain reimbursement from a party who spent community funds disproportionately after separation;
- Marital standard of living findings relative to the amount of spousal support;
- Gavron Notice to put a party on notice of an expectation of becoming self-supporting at a point in the future;
- Child care cost allocation;
- Imputation of income relative to a party that is unemployed or underemployed;
- Tax basis issues;
- Ostler-Smith support orders relative to irregular income (bonuses, commissions, RSUs, etc.);
- Reimbursements, charges, and credits; and/or
- Life insurance as security for spousal support or child support.
Before the first divorce mediation appointment, a spouse should ask the divorce lawyer to prepare a rough balance sheet showing the approximate values of the assets, the debts and the proposed alternative scenarios for a division of the community property assets and debts. It is critical to have proposed solutions before divorce mediation commences.
Most Divorce Lawyers Settle The Vast Majority of Their Cases
Frequently, one party will attempt to force divorce mediation by pushing onto the other spouse, the agenda that all divorces are necessarily difficult, contentious, expensive and result in a trial. That it simply not true.
An alternative to divorce mediation can be achieved by each party retaining a reasonable and settlement oriented 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 approach can result in the functional equivalent of a divorce mediation without a divorce mediator. Divorce lawyers often serve as mediators for their clients.
Retaining a divorce lawyer does not mean that you are going to trial. However, if you are referred to a divorce lawyer who has the reputation of being hyper-aggressive, the odds are that 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 divorce lawyer that you desire to retain.
Complex Issues in a Divorce
If there is a business, complex tax issue, trust income, separate property, tracing issue, or other complex financial issue, divorce mediation may be particularly problematic.
- How is a business valued in divorce mediation? Experts are necessary to value a business unless the parties simply elect to guess at the value. The divorce mediator will not have the skill required to value the business. Even if the business is valued by an impartial and qualified expert, will both parties understand the nuanced financial issues related to the business appraisal?
- Will the family CPA be required to assist with financial issues in the divorce mediation? Is the family CPA “loyal” to one party, or will he or she impartially assess tax and other financial issues? The family CPA will most likely not have experience in divorce 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 or her opinions.
- Do both parties have access to the same financial records and have the skill and sophistication necessary to understand the records?
- Do both parties have the financial knowledge and experience necessary to understand the nuances existing in the divorce issues? Do both understand issues like the definition of separate property? A divorce transaction is often complex. Our firm spends approximately $100,000 annually to educate our divorce lawyers. Family law is generally not simply dividing assets 50/50 and plugging numbers into a support computer program.
- Do both parties have comparable negotiating experience and skills? Divorce 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.
A critical part of every divorce settlement is the negotiation of the terms. Often times, parties going through a divorce underestimate the importance of this issue and believe that the divorce laws will dictate the results of the settlement. The laws provide the general structure of a settlement but the laws are often very nuanced and the facts of each case must be applied correctly to the laws. It is a mistake to think that the fact that a divorce mediator is involved, minimizes the importance of negotiation. The parties negotiate with each other, face to face, in the mediation process. In fact, often times the divorce mediator will intentionally or inadvertently be negotiating in favor or against one party or the other in order to get a deal. A party not experienced or trained in negotiation will generally be at a significant disadvantage.
How can a party negotiate a reasonable or fair divorce settlement if they do not know the divorce laws and nuances? How can a party know which issues to push and which issues to concede? When negotiators are hired in business, politics, sports or any other field, the person hired is an expert in that particular field. You would not hire a sports agent to negotiate the sale of a business. Likewise, it would not be the wisest course of action to attempt to negotiate a divorce settlement if you do not have insight from an experienced divorce lawyer.
Psychological Dynamics in Divorce Mediation
Settlements are often driven, in part, by psychological dynamics that result in unequal settlements. A divorce lawyer can provide a buffer or sounding board that minimizes the pressure to accept an unequal 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 in the divorce mediation. The party who is pushing hard for divorce 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 of divorce mediation; and/or
- This is simple, it just 50/50 and there are formulas for support.
Other times, the party pushing for divorce 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 Divorce Mediation May Not be Successful
One should consider the fall out of a divorce mediation that does not result in a successful and fair settlement.
Over the years, we have had many cases where clients have consulted with us after a failed divorce mediation. In some matters we learn 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 attempting to change.
Divorce mediation can be used as a very successful delay tactic by a strategic spouse. A delay in the resolution of a case can be a significant benefit to one side or the other. During a delay, a party may make financial decisions or position assets that may impact the ultimate divorce settlement. The timing of a divorce may be one of the most important components of a settlement. The use of divorce mediation to delay a settlement can be a successful 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 will most likely result in a different valuation.
Divorce Judgment Drafting Issues
The terms of a divorce settlement must be documented in a judgment that is filed with the divorce court. Significant skill is required to properly draft a divorce Judgment. A minor drafting error can result in a financial disaster. Because of the complexity and nuances of divorce Judgments, no Judgment leaves our offices without two lawyers reviewing it. Many divorce lawyers and many mediators are not trained or skilled in the drafting of these judgments.
In a recent case, the parties arrived at an agreement on all terms in the divorce 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 divorce court's order resulted in the unintended consequences of the wife receiving the majority of the property and a very favorable long-term spousal support order.
The words in a divorce judgment do not always mean what they appear to mean. The law can be very nuanced and can provide unexpected results. For example, a provision that states: "Husband shall pay Wife spousal support in the amount of $5,000 per month for five (5) years" would appear to mean that spousal support terminates in five years. It may not mean that. It may mean that the wife may return to the divorce court before the end of the five-year term and ask the court to extend support indefinitely. This is just one of many examples of common sense interpretation issues.
Often, in divorce 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 just 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 specific terms in the divorce 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 divorce mediation than would have occurred if the matter had been resolved with each side being represented by a divorce lawyer. If one side receives a significantly better result than a 50/50 settlement, then the other side, necessarily, receives a significantly worse result than he or she would have received had he or she been consulting with a divorce lawyer.
You may want to avoid real life mediated results like the following (depending on what side you are on):
- In one Orange County divorce case, the community had significant assets including a manufacturing company. The husband achieved a mediated settlement with an Orange County divorce mediation where he received 90% of the assets in exchange for paying his wife slightly more than reasonable spousal support. The wife did not understand the law or the value of the business.
- In another Orange County divorce case, the 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 fair and reasonable settlement would have resulted in a far lower support level and a termination of support in four years after the eight-year marriage.
- Husband 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 the unreasonably high support.
- After a long-term marriage, the parties mediated their divorce with an experienced Orange County mediator. The property was mostly liquid and was equally divided. The husband was relatively young and unemployed due to a recent sale of the 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 another 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. In the initial mediated settlement, she received nothing in exchange for the waiver.
- In another Orange County case, the parties mediated their divorce successfully - meaning that they agreed to the terms of a settlement and executed a divorce Judgment. Several years later, the husband called the retirement administrator of a pension that he and his wife had agreed in mediation would be awarded to him. The administrator requested a copy of the divorce Judgment. When the husband reviewed the divorce Judgment, he learned that the mediator had failed to include the pension as an asset awarded to husband. As a result of the omission, the wife owns 50% of the omitted pension.
- The parties mediated their Orange County 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 another Orange County divorce 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 divorce, the husband elected to cancel the policy and then learned that the 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 Orange County divorce and agreed to a full settlement. The agreement was documented by the divorce mediator in a judgment. The divorce Judgment was reviewed by one of the party's advisors who caught a significant mathematical error made by the mediator. The Judgment erroneously provided that one party was to pay the other $250,000 more than had been agreed to in the mediation.
In a perfect world, parties going through a divorce would meet with a divorce mediator and settle all of their issues in two or three meetings in a three-week period. However, there are many times where the result looks more like this:
- The divorce mediation consumes many months;
- The cost is many times the projected fees;
- No deal is reached; and
- The parties are more polarized than they were before the divorce mediation commenced.
Decisions as to whether to and how to end a marriage and resolve the issues in a divorce are certainly among the most important decisions in a person's life. It is appropriate to consider all options, including divorce mediation, before embarking on a particular path to end a marriage. If a spouse is informed of the potential risks and pitfalls of divorce mediation and has the guidance of a divorce lawyer, mediation may be a good and viable or even the best option. However, it is a mistake to believe that divorce mediation is always the right solution, is always the inexpensive solution or always results in an equitable and equal settlement.