Reprise: Avoiding an Expensive Error

May 27, 2015 § Leave a comment

Reprise replays posts from the past that you may find useful today.

AVOIDING AN EXPENSIVE ERROR

October 12, 2010 § Leave a comment

Imagine having this nightmare:

You represent the husband. He has $376,000 in his securities account. You negotiate a property settlement agreement by which the wife will receive $203,200 from the account, and he will own the remaining $172,800. Couldn’t be plainer or more clear-cut. A few months drag by before you finally get the QDRO drafted and approved by the court. You ship it off to the plan manager, who calls you and tells you that the account is now only worth $204,000, and what exactly is it that you would like her to do. At this point in the nightmare, you wake up in a cold sweat.

Unfortunately for the parties in In re Dissolution of  Marriage of Wood, 35 So.3d 507 (Miss. 2010), the nightmare was all too real. The facts set out above are the facts in their case. The former Mrs. Wood sued to collect her entire amount due under the agreement, and Mr. Wood took the position that sticking with the numbers in the property settlement agreement was an impossibility, and to grant Mrs. Wood her relief would produce an unfair and inequitable result.

Chancellor Dorothy Colomb ruled that the parties had actually negotiated an agreement whereby Mrs. Wood would receive 54% of the account balance at the time of the divorce, and Mr. Wood would receive 46%.

In affirming the chancellor, the Supreme Court addressed valuation dates, impossibility of performance and canons of construction. You can read the decision to get an appreciation for the complexity of legal issues that the draftsmanship created in this case.

The cardinal point for practitioners, however, is best summed up in the court’s own language at page 515:

“As this case illustrates, incorporating an estimate of an asset’s value into a property settlement agreement can cause problems when the parties later try to divide the asset, and the estimate turns out to be incorrect or inaccurate. Therefore, we make the following recommendations for the benefit of the bar. Where the value of an asset must be estimated because of the inherently indefinite or fluctuating nature of the asset itself, we recommend the use of percentages when setting forth the asset’s intended distribution in a property settlement agreement. Where the value of an asset remains sufficiently concrete or static, however, we recommend the use of specific dollar amounts.”

Mrs. Wood expected to get $203,000, and that’s what she negotiated for.  Instead, she got $110,160, or $93,000 less than what she expected. The lesson is to think about what you’re doing and what could or might go wrong, and how you can guard against it.

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