Case studies: Family Law
#1: Business Valuation, Forensic Accounting, Discovery, Settlement
A law firm representing the non-moneyed spouse in a divorce retained Chris Hamilton Forensics to assist in identifying and valuing assets as well as establishing income for the moneyed spouse. The marital estate consisted of a newly built home and non-control interests in two high profile businesses (high volume of cash) with celebrity control owners. There was enormous pressure on the moneyed spouse to keep the divorce low-profile and away from the businesses. The moneyed spouse was attempting to use that as leverage to make no disclosures and hide income.
Our client claimed that there were wall safes built into the home that contained enormous amounts of cash and jewels. There were also claims of an extravagant lifestyle. The opposing counsel and experts denied all such claims and continued to play hide-the-ball.
At the direction of Chris Hamilton Forensics, subpoenas were issued to the lender on the new home (construction loan). Additionally, copies of tax returns for the previous three years were obtained directly from the IRS and analysis was done on the income and expense declarations filed with the court compared to bank statements. The result of comparing the loan application, the tax returns, and income and expense disclosures exposed a number of profound discrepancies. For example, the tax returns submitted with the loan application, the I&E disclosures, and the IRS were all different. Additionally, the income claimed in support of the construction loan was multiples of what was reported to the IRS or to the court.
Rather than explain these discrepancies, and many others, the moneyed spouse settled on terms that were very satisfactory to our client.
#2: Criminal Contempt – Charges Dropped, Family Court, Settlement
A husband had, for several years, ignored the legal process surrounding his divorce. He admittedly failed to disclose assets, income, and significant economic activity in court filings and depositions. He had control of the marital assets and believed he could keep it that way. Once the legal process began to close in on him he realized it was time to take the process seriously and “come clean.”
Chris Hamilton Forensics was recommended to him as the firm that “shoots straight” and had the credibility to communicate to the judge and opposing counsel that the litigation was now being taken seriously and that the disclosures were complete and accurate. What followed was a series of meetings with opposing counsel and experts where full and complete disclosure was made. The pending criminal contempt charges were dropped and the case settled. Chris Hamilton Forensics was credited with providing the proper information in clear and simple terms that allowed all parties to recognize that the “games” were over and the case could be resolved with reliable information.
#3: Business Valuation, Hidden Assets, Forensic Accounting, Settlement
In one of the more complex divorce cases many of the participants had ever seen 12 businesses were involved in a scheme to hide assets, mask true economic activity, and divert income. Three accounting firms were retained to handle the forensic accounting that was required and each of them either gave up or were terminated because of their inability to understand and effectively sort out the data.
Chris Hamilton Forensics was the fourth firm hired and immediately began a painstaking process of “following the money.” It became immediately obvious that the accounting records were incomplete, inaccurate, and purposefully manipulated to satisfy the goals of the divorce litigation. Cash transactions for all 12 entities were recorded from source documents and merged into a single database. Then the transactions were traced back to bank statements to verify date and amount of each transaction. What emerged from the work was a true picture of what actually happened and the obvious observation that the records previously provided to the court were fraudulent. The result was a settlement of the significant financial issues without a trial.
#4: Shareholder Income from an S Corporation
In a recent family law matter, Chris Hamilton Forensics was retained by a spouse to establish her ex-husband’s income because he had petitioned the court for termination of spousal support. The husband claimed negative income (loss) of over $15,000 per month, while the wife claimed (based on our work) that husband’s income was over $11,000 per month, a difference of over $26,000 per month ($192,000 per year).
The difficulty in this case came from the fact that we were dealing with an S corporation. The husband is a shareholder and works for the business. Chris Hamilton Forensics showed total income that included salary plus cash distributions from the S corporation. The opposing expert showed total income (loss in this case) that included salary minus losses reported on the K-1. The only difference between the expert’s opinion was how the cash distributions from the S corporation should be handled.
The cross-examination was vigorous. It allowed Chris Hamilton Forensics to establish that our position in this case not necessarily applicable to every S corporation. Analysis of income from an S corporation is a facts-and-circumstances analysis.
Result: The court rejected the husband’s request to eliminate or reduce monthly spousal support. The court also indicated that, had the request been made, the evidence supported an increase in monthly support.
#5: Real Estate Investment Analysis Related to Marriage Dissolution
Summary of issue: Chris Hamilton Forensics was retained in a family court matter that had dragged on for over 10 years. The couple was divorced a long time ago but the financial matters were never resolved. The marital estate consisted of over 20 residential rental properties including homes and single-family homes. Both parties over the years were alternatively motivated to stall the resolution process because of improving or declining market conditions. The crash of the real estate market and the general economy, starting in 2007, finally motivated both parties to come to the table to try to close the matter
Chris Hamilton Forensics work: Chris Hamilton Forensics was retained in 2012 to prepare an analysis of property cash flows, tax basis, and imbedded gains. The economy had degraded so much that decisions regarding sell or hold were necessary. This was a complete reversal of prior years where the values were increasing so rapidly that capital gain taxes seemed like the biggest problem. Additionally, one spouse had control of the properties and the cash flow generated by the properties. Therefore, work had to be dome to trace proceeds and calculate reimbursement claims.
Result: Fortunately, economic conditions drove the parties towards settlement and the end of a very long divorce. Settlement was based on the analysis of net equity and annual cash flow for each property that allowed the parties to balance their respective needs for assets and income. The pie was divided – but it was a much smaller pie in current economic conditions.
#6: Comparative Analysis for Family Law Dispute
Issue: Chris Hamilton Forensics was contacted to assist in a family court matter involving complex tracing matters. There was an ongoing dispute regarding whether certain material assets were separate or community. Determining the nature of the assets affected the division of assets and, because the cash flow associated with those activities were substantial, reimbursement claims would be significantly affected. Both parties came into the marriage with considerable separate assets.
Chris Hamilton Forensics work: The case had been active for over a year before Chris Hamilton Forensics was brought into the matter. The correspondence in that year included settlement offers from both sides. Both offers were immediately rejected as preposterous and even insulting. After this “attempt” to settle, forensic accountants were retained and the forces were being marshalled for battle in court. Each side made substantial commitments to preparing tracings to prove respective claims in trial.
Chris Hamilton Forensics immediately began the work of preparing the tracings for several bank accounts covering the period of the marriage and the year since separation. Based on some of the data and the conclusions becoming evident from the records, Chris Hamilton Forensics suspended the tracing work and analyzed the two rejected settlement proposals more closely. To understand the two offers, side-by-side marital balance sheets were prepared. On the left was the Petitioner’s version of assets, debts, and reimbursement claims as reflected in their Section 1152 offer letter. Similarly, on the right was Respondent’s version of assets, debt, and reimbursement claims. At the bottom of each balance sheet was a calculation of the net equalization payment due based on each party’s assumptions and conclusions.
Amazingly, what the parties perceived to be a massive gap between the two positions (millions of dollars) was actually, when put in a side-by-side analysis, a relatively narrow difference of a couple hundred thousand dollars. The emotional attachment to some of the issues by both parties and the enormous accounting complexity had masked the proximity of potential compromise.
Result: Chris Hamilton Forensics approached our client and presented the prospect that staggering legal and accounting fees could be saved if there was an openness to compromise on a much smaller difference than the litigants previously perceived. Our client approached opposing counsel and requested a settlement conference with both sets of attorneys and forensic accountants. It took most of an eight hour day, but the case settled. The two litigants were initially stunned at how close their two seemingly opposite positions actually were. Significant fees were saved and it is likely that at least two years were cut from the dispute resolution process.