Blogs > The Law Blogger

The Law Blogger is a law-related blog that informs and discusses current matters of legal interest to readers of The Oakland Press and to consumers of legal services in the community. We hope readers will  find it entertaining but also informative. The Law Blogger does not, however, impart legal advice, as only attorneys are licensed to provide legal counsel.
For more information email: tflynn@clarkstonlegal.com

Sunday, April 28, 2019

Geofence Warrants and Privacy Rights

Geofence warrants, also known as reverse location warrants, are new to the law enforcement toolbox. Now these warrants are quickly becoming recognized by law enforcement as an effective method to gathering evidence of crime.

In some cases, evidence gathered by multi-step reverse location warrants is the only evidence available in the case. These warrants are also getting attention from the national media and soon could be heading to the SCOTUS for a show-down with our privacy rights and the Fourth Amendment's probable cause requirement.

What is a Geofence Warrant?

In recent years, police, investigating a crime with few or no clues, have increasingly turned to almighty Google to help them find the perpetrator. First, law enforcement issues a warrant to Google requesting data about any and all devices present within certain spatial and temporal parameters matching an unsolved crime.

Google then responds to the multi-step warrant by transmitting to the requesting agency a log designating -anonymously- all registered devices that fit the warrant's parameters. Law enforcement then takes that anonymous raw data and determines which code-designated devices merit further information. These suspect devices then become the subject of a second warrant to Google; more personal and identifying information is requested. [Note: the SCOTUS has already held that law enforcement must first obtain a search warrant pursuant to the Fourth Amendment prior to forcing access to a suspect's password protected cell phone.]

After providing lip service to their policy of narrowly construing such warrant requests, Google responds by tapping into its Sensorvault database, created in 2009. Sensorvault is connected to Google's "Location History" service, as well as other location-based apps such as the Web & App Activity; a separate database.

We've all noticed when our iPhones or Android devices prompt us to enable the location history function. This allows Google to provide you with directions to anywhere in the world along with many other spatially-related information services.

The first-known Geofence warrant was issued in 2017 in North Carolina. The case related to the suspected arson of a 7-story apartment complex. Raleigh Police had no leads to bolster their suspicions; for a year, their investigation bore no fruit until they requested a warrant for information from Google.

Often, judges issue such warrants under seal to protect the privacy of the many users having nothing to do with the crime being investigated. The Raleigh Police, for example, have made reverse location warrant requests in murder and sexual assault cases in addition to the arson suspect.

Google now processes hundreds of such multi-step warrants weekly; that number is expected to rise significantly as law enforcement agencies become aware of this new investigative practice. You don't have to be a tech genius to realize the significance of such warrants for law enforcement.

One of the drawbacks to securing such warrants are the significant processing delays. The multi-step reverse location warrant requests have become so numerous, Google has a separate division dealing exclusively with such requests. 8-weeks to six-month delays are not uncommon; there are also two components to the request.

Geofence Warrants Provide Circumstantial Evidence of Crime.


Law enforcement has been securing location data from a specific suspect’s or witness’ digital devices for over a decade. Reverse location warrants, however, constitute a relatively new digital dragnet for when a case has gone cold, or has no viable clues.

This new multi-step warrant process is much more comprehensive than a cell tower data dump. For decades, police and prosecutors have been using data pulled from cell phone towers to solve crimes. 

Data from cell towers is limited and incomplete relative to the Sensorvault and Web & Activity App databases. For example, Google's data is ultra-precise and historically detailed, even when a suspect or witness does not place a call on their cell. In other words, Google's data depicts every aspect of our lives, not just the patterns elicited when actual calls are placed.

Such comprehensive information about suspects and witnesses constitute a veritable treasure trove of circumstantial evidence for law enforcement. Digital location tracking of a specific Android or iPhone device can produce circumstantial evidence of a suspect’s relationship to an unsolved crime. 

In every criminal jury trial here in Michigan, circumstantial evidence is commonly defined as: 

  • Facts can be proved by direct evidence from a witness or an exhibit. Direct evidence is evidence about what we actually see or hear. For example, if you look outside and see rain falling, that is direct evidence that it is raining.
  • Facts can also be proved by indirect, or circumstantialevidenceCircumstantial evidence is evidence that normally or reasonably leads to other facts. So, for example, if you see a person come in from outside wearing a raincoat covered with small drops of water, that would be circumstantial evidence that it is raining.
  • You may consider circumstantial evidenceCircumstantial evidence by itself, or a combination of circumstantial evidence and direct evidence, can be used to prove the elements of a crime. In other words, you should consider all the evidence that you believe.

Judges always instruct juries that an accused can be convicted solely on the basis of circumstantial evidence. Direct evidence tends to be higher-quality evidence, but circumstantial evidence is often sufficient to convict the accused.

There are no known cases, however, where a suspect has been charged solely on the basis of a geofence warrant. An independent criminal investigation must still be conducted using the reverse location data. 

Over time, however, a case based solely on circumstantial evidence cultivated from a geofence warrant is sure to present itself to the court's. In the proper judicial and appellate hands, a sensible policy can be fashioned going forward. At present, privacy concerns, relative to the law enforcement process -as envisioned by the drafters of the 4th Amendment- is at risk

Geofence Warrants Raise Privacy Concerns.


There can be many legitimate –non-criminal- reasons for an individual’s presence within the parameters of a reverse location warrant. In fact, usually, all but one device has a legitimate and potentially relevant reason for leaving a particular digital footprint.

Sensorvault and the Web & Activity App contains an enormous amount of our personal data. The database contains detailed historic records of our locations -both temporal and virtual- the products we use, the products we view, the identities of our friends, and it can match-up times associated with each of these and many other minutia of our daily lives. This, of course, raises significant privacy concerns.
Sometimes, however, law enforcement simply gets it wrong. This was the case for Jorge Molina who was mistakenly charged with murder in Phoenix, Arizona a few months ago. Mr. Molina’s case was recently profiled in the New York Times.

Turns out, Molina’s mother’s boyfriend used his vehicle on occasion. So while the reverse location warrant yielded some eventual fruit for law enforcement, it disrupted Mr. Molina’s life first by violating his privacy and precipitating a week-long incarceration.

Once you are identified as a witness or suspect, turning-off your Location History, opting out, or deleting the history can also be viewed as circumstantial evidence of guilt. Such acts can be held against a suspect, just as wiping a hard drive clean is often used against an accused. Covering your tracks constitutes circumstantial evidence of guilt; or at least it will be portrayed as such by the prosecutor.

Are Multi-Step Reverse Location Warrants Constitutional?


The Fourth Amendment to the United States Constitution states that, "no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized."  One concern with multi-step reverse location warrants is their wide spatial temporal breadth. 

Particularity is required under the Fourth Amendment, which calls for a limited search based on probable cause. Most geofence warrants, on the other hand, by their nature, seek raw data covering potentially thousands of individuals over a wide-span of time. 

In addition, the two-step warrant process scoops-up scores of innocent bystanders within its dragnet. Courts usually abhor the fishing-expedition technique for issuing warrants for the main reason that fishing expeditions are not based on probable cause.

Multi-step reverse location warrants can also be technical in nature. A neutral magistrate or judge, as well as law enforcement personnel, defer to Big Data technicians to properly tailor such warrant requests and the raw data resulting from the requests. 

The NYT examined initial warrants used the first-step of the geofence warrant process. Those warrants merely sited the fact that: a) most Americans have cell phones; and b) Google possessed location data for many of those phones.

Geofence Warrants Will Become A Pervasive Law Enforcement Technique.


Reverse location warrants are becoming a well-known jackpot among federal and state criminal investigators. In addition to the increased requests, it will not take long for law enforcement to overreach, placing the process squarely before the appellate courts, on its way to the SCOTUS.

Last year’s series of bombings around Austin, Texas presented a perfect opportunity to utilize geofence warrants. A series of geofence warrants for each bomb site would yield raw anonymous data pertaining to devices around those specific bombing locations at or about the time-frame of the explosions.

This data could then be mined for patterns of activity and for the presence of a common device appearing in several locations. Federal investigators could then bring the resources of the United States to bear on identifying the patterns or the commonly present devices.

This, of course, presumes that the bomber would be simple enough to have a geo-tracking device on his or her possession when committing these crimes. These days, however, try getting off the data grid. Data is collected when your phone is turned-off; when your vehicle is turned on; and with your every key-stroke tracked.

Even if a suspect does not carry a geo-tracking device, or has an older model vehicle not wired to the Internet, the presence of potential witnesses also can be identified. Some witnesses may not even realize they were near the scene of a crime until confronted by law enforcement investigators.


We here at the Law Blogger don't see these warrant requests going away anytime soon. Nor do we anticipate Google changing its stated policy of only providing information they are required by law to provide.


We Can Help.

Our criminal defense and appellate practices have provided us with decades of experience in such matters. If you or a family member are the subject of such a warrant request, or have intersected with law enforcement in any way, give us a call to discuss your options. 

www.clarkstonlegal.com
Post #625


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Saturday, March 23, 2019

State Fines & Forfeitures May be Excessive

Last month, the SCOTUS ruled in Timbs v Indiana that a state's fine or forfeiture scheme may be excessive and thus unconstitutional under the 8th Amendment of the United States Constitution. This ruling means that persons convicted of crimes under state law, or found responsible under a municipal ordinance, can challenge the ultimate fine on the new-found constitutional grounds that the fine is excessive.

Tyson Timbs, an Indiana man, was convicted by his own plea of dealing in a controlled substance and conspiracy to commit theft. After he was arrested and charged, the police seized his Land Rover SUV for which he paid approximately $44,000. This forfeiture seemed unfair considering the express prohibition of excessive fines in the 8th Amendment.

Ill-Gotten Gains Can Be Forfeited

The uncontested facts in the case are that Timbs used proceeds he received from his father's life insurance policy to purchase the vehicle. One of the chief rationales underpinning state forfeiture laws is to punish felons for using ill-gotten gains to purchase assets that often assist them in their chosen criminal enterprise.

In this case, Timbs successfully challenged Indiana's forfeiture statute that allowed the state to attach his expensive Land Rover SUV. Timbs argued that the forfeiture was excessive relative to his drug conviction.

The state court agreed that taking the Land Rover was excessive considering that the maximum fine for heroin possession was less than 25% of the value of the vehicle. Of course, the State of Indiana appealed but the trial court was affirmed; the forfeiture was deemed excessive. At the Indiana Supreme Court, however, Timbs lost when the trial court and intermediate appellate court were reversed.

In granting certiorari, the SCOTUS examined whether the 8th Amendment's prohibition against "excessive fines". The 8th Amendment reads, "[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted."

Application to States as well as the Federal Government

During oral argument in the case last November, Indiana's Solicitor General went toe-to-toe with Justices Gorsuch and Kavanaugh. Indiana argued that the 8th Amendment ban on "excessive fines" applied only to the federal government; not to the states. Gorsuch and Kavanaugh we not having it, asserting that in 2019, all of the rights contained in the Bill of Rights -the first 10 amendments to the Constitution- applied to states as well as to the federal government.

Indiana also asserted that a "forfeiture" was distinct from a fine or other sanction. The SCOTUS shot that argument down too, but on technical grounds. 

Justice Ruth Bader Ginsburg wrote the majority opinion, noting that the State of Indiana did not raise the forfeiture vs fine argument in its brief filed in the Indiana Supreme Court thus, it could not argue the point to the SCOTUS. We here at the Law Blogger are thinking that the proverbial heads rolled in Indianapolis over that non-preserved argument. The SCOTUS routinely avoids deciding weighty issues on technical grounds.

Whenever litigants pose weighty issues that can be decided narrowly, without a constitutional basis or rationale, the SCOTUS usually takes the bait and declines to make momentous constitutional decisions. 

Justice Ruth Bader Ginsburg's Opinion

This case was an example of this principle. In her opinion, Justice Ginsburg, having recovered from her lung operation, put together a veritable tour de force to frame the issue:
The Excessive Fines Clause traces its venerable lineage back to at least 1215, when Magna Carta guaranteed that “[a] Free-man shall not be amerced for a small fault, but after the manner of the fault; and for a great fault after the greatness thereof, saving to him his contenement . . . .” As relevant here, Magna Carta required that economic sanctions “be proportioned to the wrong” and “not be so large as to deprive [an offender] of his livelihood.” "[N]o man shall have a larger amercement imposed upon him, than his circumstances or personal estate will bear . . . .”). Despite Magna Carta, imposition of excessive fines persisted. The 17th century Stuart kings, in particular, were criticized for using large fines to raise revenue, harass their political foes, and indefinitely detain those unable to pay. When James II was overthrown in the Glorious Revolution, the  attendant English Bill of Rights reaffirmed Magna Carta’s guarantee by providing that “excessive Bail ought not to be required, nor excessive Fines imposed; nor cruel and unusual Punishments inflicted.” Across the Atlantic, this familiar language was adopted almost verbatim, first in the Virginia Declaration of Rights, then in the Eighth Amendment, which states: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Adoption of the Excessive Fines Clause was in tune not only with English law; the Clause resonated as well with similar colonial-era provisions. (“[A]ll fines shall be moderate, and saving men’s contenements, merchandize, or wainage.”). In 1787, the constitutions of eight States—accounting for 70% of the U. S. population—forbade excessive fines. [Citations omitted.]
Justice Ginsburg next examined several instances of state law schemes over the centuries and in more recent decades where fines seemed excessive, despite the 8th Amendment. She cited to the excessive post-Civil War fines in the South designed to subjugate newly freed slaves and maintain the racial hierarchy.

Citing the landmark case, Harmelin v Michigan, Justice Ginsburg continued:
For good reason, the protection against excessive fines has been a constant shield throughout Anglo-American history: Exorbitant tolls undermine other constitutional liberties. Excessive fines can be used, for example, to retaliate against or chill the speech of political enemies, as the Stuarts’ critics learned several centuries ago. Even absent a political motive, fines may be employed “in a measure out of accord with the penal goals of retribution and deterrence,” for “fines are a source of revenue,” while other forms of punishment “cost a State money.” [Citations also omitted.]
Her opinion next focused on the 14th Amendment's Due Process clause, which requires that the Bill of Rights, the first 10 amendments to the U.S. Constitution, apply to the states. She rejected Indiana's argument that the forfeiture law was civil in nature and, as such, was not a fundamental right.

The bottom line: Indiana's civil forfeiture laws are invalidated. This holding has implications for forfeitures here in Michigan. Justices Gorsuch and Thomas concurred in the result but wrote separately.

We Can Help

We here at the Law Blogger have had many cases where, as a part of a felony arrest, cash, a vehicle, or other asset -even a house- was forfeited under Michigan's forfeiture statute. The SCOTUS' Timbs decision will now throw some shade on the forfeiture process here in Michigan.

If you or a family member have experienced an excessive fine or a similar forfeiture like in the Timbs case, contact our law firm for a free consultation. We can assess your legal options.

Post #623
www.clarkstonlegal.com





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Thursday, January 31, 2019

Arctic Man Goes to SCOTUS

As extreme sports go, Arctic Man must be a trip. To paraphrase Chief Justice John Roberts, when you put 10,000 mostly drunk people in the middle of nowhere, 8 cops are just not enough to keep the peace.

We here at the Law Blogger would add: the object of the event is to determine who can ski the fastest being pulled behind a snowmobile. Physical limitations and judgment come into play from the outset, to be sure.

Nevertheless, that was the situation in central Alaska that led to Nieves v Bartlett which has been winding its way to the SCOTUS for the past 4-years. The state troopers perhaps best set the stage in their petition for certiorari:
Every spring, thousands of extreme skiers, snowmobilers, and spectators gather in the remote Hoodoo Mountains of interior Alaska for Arctic Man, a multi-day festival centered around a high-speed ski and snowmobile race. Campers congregate at night to drink and party, and rampant alcohol use compounds safety concerns at the event.
On the last day of Arctic Man in 2014, Troopers Luis Nieves and Bryce Weight were on duty, patrolling a large outdoor party where minors appeared to be drinking alcohol. Nieves encountered respondent Russell Bartlett at the party and attempted to speak with him, but Bartlett declined to talk to Nieves. Meanwhile, Trooper Weight spotted a minor who appeared to be drinking alcohol and began speaking to him at the edge of the crowd. Bartlett marched up to Weight, loudly demanding that Weight stop talking to the minor.
Trooper Nieves asked Bartlett to identify himself and requested that he move a tapped keg inside his tent. Instead, Bartlett refused the trooper's commands exhibiting belligerent behavior toward the troopers.

In front of the troopers, Bartlett instructed the minor not to answer their questions; no parents or guardians of the boy were anywhere to be located.

Bartlett's conduct resulted in resisting arrest and disorderly person charges. When his criminal charges were dismissed, Bartlett filed suit against the troopers.

His separate civil rights law suit was filed in a federal court under 42 USC 1983; now, the case has made it all the way to the SCOTUS. Oral arguments were presented last November; a decision will be issued this spring.

This case is the latest in a series of what is known as "contempt of cop" or "retaliatory arrest" cases: an arrest based on an officer's perceived slight, with the occasional emphasis on the content of the accused's speech. The collateral civil litigation in Arctic Man claims that the subject of such an arrest was merely exercising his right to free speech under the First Amendment to the United States Constitution. To arrest someone under such circumstances, the claim goes, violates the speaker's fundamental right to free speech and thus constitutes an illegal seizure under the Constitution.

On the other hand, the petitioners, Alaska State Troopers, assert an age-old common law principle that law enforcement officers are immune from civil liability wherever probable cause to arrest exists. The troopers argue they had probable cause to arrest Bartlett on multiple charges thus, they are immune from his civil rights law suit.

The civil rights law at issue in the case, 42 USC 1983, provides a cause of action where a state actor, under the color of state law, subject a person to the deprivation of any right provided by the Constitution; in this case, the First Amendment and its attendant right to free speech.

How far can you go in your speech when interacting with a peace officer? Can you insult, challenge, disparage, offend, mischaracterize, or demean the officer?

Not to put too fine a point on it, but the precise issue argued at the SCOTUS was whether Bartlett, the declarant, had the affirmative duty in his civil lawsuit to demonstrate that the troopers lacked probable cause to make an arrest. Which party shoulders the burden of evidence production affects the trajectory of the case.

Alaska argues that under the civil rights statute, Bartlett must prove a negative [i.e. that no probable cause existed allowing the officers to intervene] or he must prove his arrest was executed pursuant to a municipal policy of retaliation.

The Troopers' reply brief frames the issue posed in this case, facing officers each and every day as they go about fulfilling their duties:
A policeman’s lot is not so unhappy that he must choose between being charged with dereliction of duty if he does not arrest when he has probable cause, and being mulcted in damages if he does.
Of course, the officer must have the power to exercise his professional discretion to make an arrest in light of probable cause that a crime is being committed. Our safe society depends on this basic law enforcement power.

Against this tapestry is also the backdrop of the Roberts Court's vigorous protection of First Amendment freedom of speech, and its contrasting penchant to defer to law enforcement's discretion of how they do their job, assuming probable cause exists to intervene with the citizenry.

We here at the Law Blogger will anxiously await the Supreme Court's decision.

Post #623
www.clarkstonlegal.com





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Sunday, January 13, 2019

The Bezos' High-Value Divorce

This post was primarily authored by Austin Probst of the Clarkston Legal law firm.

After a Quarter-Century of marriage, one of world's wealthiest and best known couples, MacKenzie and Jeff Bezos filed for divorce. Jeff announced the split on his Twitter feed: "After a period of loving exploriation and trial separation, we have decided to divorce and continue our shared lives as friends."


As two of the wealthiest individuals in the world, the property division in this divorce will be complex. This complexity could deepen given the couple's desire to continue as business partners in joint ventures and other projects. 

The World's Wealthiest Couple

According to Forbes, Jeff Bezos is estimated to be worth $137 billion dollars. His wealth thus eclipses Warren Buffet and Bill Gates; Bezos is arguably the world’s richest man. The Bezos marital estate will undoubtedly be comprised of complex stock grants, vesting schedules and shareholder agreements. The marital estate will also include business interests separate and apart from Amazon, like the aerospace company Blue Origin, the venture capital firm Bezos Expeditions, and The Washington Post

While Michigan is a separate property state, and the law differs from the state of Washington, the Bezos' divorce is nevertheless instructive. This divorce is instructive here in Michigan from a high-value property division perspective. 

Lack of a Prenuptial Agreement

Much already has been written about this inchoate divorce in the press. Monday morning analysts remark how strange it is that the world's richest couple purportedly do not have a post-nuptial agreement. Well, when you think about the fact that this couple was relatively young when they met, that neither was wealthy, Amazon did not exist, and that they may have been in love, the lack of a post-nuptial agreement is really not surprising. Even if Amazon was around at the time of the Bezos nuptials, MacKenzie was a laboring oar during the company's early years and added value during the marriage. Thus, any pre-nuptial agreement would have come under close scrutiny in the court of equity that is the family court.

Property Division in Divorce

The key issue for resolution in a high-asset divorce is the division of property. Different states have different rules relating to the division of the marital estate. Michigan, unlike Washington, is a separate property state, which operates on a principle of equitable distribution. Equitable does not mean equal. While often times a marital estate is divided approximately 50/50, this is not always the case.

As a practical matter, most stock has some value. In the case of Amazon, the stock has significant value; its value has increased markedly over the past 3-years.

Jeff Bezos owns approximately 16% of Amazon stock, worth over $130 billion. Unlike a traditional financial instrument like a 401k or IRA, this stock position often complicates the property division in divorce. 

Generally, stock acquired during marriage is subject to division. Often, however, such stock is neither marketable nor liquid at the time of a divorce. 

In the Bezos’ divorce, the couple was married at the time Jeff began developing Amazon. Little known fact: MacKenzie helped Jeff grow and develop the company when they moved to Seattle in 1994 during the first year of their marriage; MacKenzie functioned as Amazon's first controller.

Since both spouses added value to the venture during the marriage, they each have an interest in Jeff's stock position. This begs the question, how should the Bezos' Amazon stock be divided? The answer: it depends. There are a number of legal and equitable considerations that must go into the division of the Amazon stock. These considerations present a set of pros and cons that may benefit or detract from a spouse's position. 

Stock Split

One approach splits the stock in like kind. This would result in Mackenzie being awarded about $65 Billion in Amazon stock. It would make her the second-largest shareholder in the company and the world’s richest woman in front of Alice Walton of Walmart, Laurene Powell Jobs of Apple and Disney Co., as well as Francoise Bettencourt Meyers of L’Oreal. 

Such a stock transfer could significantly impact the value of Amazon. However, this seat change may have an effect on the stock value as a whole. Recall the fervor resulting from Steve Jobs’ untimely death and the ensuing mania regarding the future of the company and its value devoid of one of its key founders.

A second option is a buy-out of value whereby Jeff transfers value, but not Amazon stock, to MacKenzie. In this scenario, Mackenzie receives cash and other assets in place of the stock. The limitation of this approach is the couple's liquidity. Is there sufficient cash to make this work? This is a common concern in most high-asset divorces.

The buy-out approach allows Jeff to retain his 16% stock position in Amazon while Mackenzie would be made whole via cash payments and other asset transfers. Here in Michigan, ‘equitable distribution’ is the key principle. In that way, separate property interests can be deducted and taken into account, assuming those interests and their value can be appropriately traced and that the assets have not been co-mingled. 

A third option transfers the entirety of the Amazon stock into a single entity or trust under which the couple would have joint control along with a neutral advisor -a trustee- acting as a deciding vote on all issues related to corporate decisions. In this way, negative investment perception can be assuaged in that, there would not be two separate shareholders with separate agendas and voting rights relative to the company. This would alleviate concerns that there could be an injection of potential divorce-drama within the operations of the company. However, the equity-transfer option is rare and requires the right type of company and divorcing couple to be viable. 

Even with these options, complications often persist. Emotional turpitude, behavioral variants, and the overall relationship history often cause aberrant results. Domestic violence, infidelity, and substance abuse skew a parties’ perception of what is ‘fair’ and ‘equitable’. 

Unfortunately, emotional damage is not well compensated in divorce. Notably, Michigan has a no-fault divorce system which minimizes infidelity and devalues the most of the gain by the faithful party over the adulterer. 

As such, though the process can be difficult, it is to the parties’ advantage to remain as level-headed and financially forward looking as possible. An acrimonious divorce, especially in the Bezos case, could be bad for business. 

Business Ownership in Divorce

Related to stock interests in a publicly traded company is business ownership. Although the Bezos divorce does not exactly present this issue, often times high net worth individuals own separate pass-through companies such as an S-corporations or variants of sole-proprietorships. These business assets are usually subject to a high degree of emotional attachment. Family businesses often pass from one generation to the next. An S-corporation is the brain-child of a spouse, constituting her life work. 

Emotional attachment to a business asset poses the potential for an increase in acrimony, bitterness, antagonism, and even hostility for the divorce. And yes, it also frequently distorts the true value of an asset.

For example, A enters into an agreement to purchase his father’s widget business 6 months into A’s marriage to his new wife, B. A has worked with widgets and his father for 12 years in the company and finally can make the improvements he wishes to implement while his Father can happily retire. Over the next 15 years, A negotiates a myriad of successful contracts, resulting in a spike in business revenue. However, in the sixteenth year, a new administration threatens the price and marketability of widgets. At the same time, B decides that she needs to divorce A.

The problem here is obvious: the business itself is a marital asset. As such, it needs to be valued and equitably divided. However, A has a deep emotional connection to the business and B has never contributed to the businesses success in the eyes of A. Spouse A has a difficult time rationalizing the fact that B will likely need to be compensated for her interest in the widget business. But just how much is that interest?

Often times, parties will engage their own respective business evaluators in an attempt to numerically value a complex asset. However, these evaluations can sometimes lack integral information. In the example, A is the key employee of the widget business. He has negotiated contracts, built relationships, and increased value. Without A, the business may not be as lucrative. Additionally, the new administration guidelines may cause a forecast of the business revenue to substantially decrease given negative market constraints on widgets. There are a number of ways to analyze the division of an asset like this.

First, the business may be valued and A would buy B out of her 50% interest with some other value offset or cash. This option is straightforward and provides B with the comfort of additional liquid assets or otherwise. Meanwhile, A continues to run the business in an attempt to further revenue generation.

Another option would make A and B joint owners, much like the Bezos example of the 16% Amazon stock position. However, this arrangement will likely require ongoing cooperative efforts and a stable relationship between the parties which is, sometimes, unattainable. It can also compromise the integrity and continuing operation of the business. Of course, investor perception is not a consideration in this case as it is assumed the business in this example is a closely-held concern.

Yet another option may be to sell the business, assuming it is marketable. Often times though, a closely held family business has little market value if any. The point here is that these complex assets need to be dealt with appropriately and professionally. There are no ‘hard and fast’ rules. Whether dealing with closely held corporations, stock ownership, or traditional financial vehicles, when it comes to equitable division, there are a million ways to shear a sheep.


Child and Spousal Support

The Bezos couple has four children. The children have yet to reach the age of majority which generally means child support would be an issue in the divorce. Child support, in Michigan is calculated pursuant to the Michigan Child Support Formula. The formula takes into account several factors: parenting time (calculated numerically by the number of overnights the parents have with the children); the relative incomes of the parties, insurance costs, daycare costs, and other factors. However, it should be noted that given the relative wealth that both parties will undoubtedly see at the conclusion of their divorce, child support should be a minor issue.

Coupled with the discussion of child support is spousal support, traditionally known as alimony. Spousal support is an equitable consideration and is often calculated based upon factors such as length of marriage, income of the parties, ability to pay, and the like. 

In the Bezos case, spousal support may not be a consideration, even with a lengthy marriage, given that Mackenzie will be awarded substantial assets [i.e., in the billions]. In many cases, however, a spouse is not expected to use a property award to provide for their own support. In the Bezos case, the sheer size of the estate distorts these principles.

In many divorce cases spousal support is a highly contested issue. This is particularly relevant given the changes imparted by the new Tax Cuts and Jobs Act.


Beginning January 1, 2019, support payments are no longer deductible to the payer and no longer includable as taxable gross income to the payee. While this may initially shock the conscience of potential higher-earning payer spouses, there are persuasive interpretations and arguments that support formula should adjust for the inclusion of this fact. Thus, the net effect would be that the total obligation is lower than what it would have been had the tax laws remained the same.  

We Can Help


If you have a high-asset divorce with complex holdings, consider scheduling a free consultation with our law firm. This way, you can assess your options.




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Monday, November 12, 2018

Revenge of the Stoners

Of the 33 states that have passed some form of lenient marijuana-use legislation, 10 of those, most recently Michigan, have legalized marijuana for recreational use. The District of Colombia is also in both groups of states.

In Michigan, beginning next month, persons over 21-years of age may purchase,possess and use recreational-use marijuana. The era of prohibition, although not over, is deteriorating rapidly.

Coincidentally, one of the collateral consequences of President Trump’s brusque dismissal of Attorney General Jeff Sessions last week removes from the USDOJ -at least temporarily- an outspoken opponent of pot legalization. In the "old days" of the Obama Administration, the USDOJ's official policy was set forth in the so-called Cole Memo where United States Attorneys were instructed not to pursue federal prosecutions for marijuana possession in states that had some form of lenient marijuana legislation.

Mind you, having just returned from California last week [a state that is a half-decade ahead of Michigan relative to dispensing product] this is not your father’s marijuana; the products are diverse, potent, cheaply and locally produced.

Michiganders must keep in mind that, despite the new recreational marijuana law, it still remains illegal: a) at the federal “Schedule 1” level; b) to smoke marijuana in public places; and c) to drive under the influence of active THC in your bloodstream.

Highlights of Recreational Use of Marijuana

The new recreational marijuana law allows:
  • Persons 21 and older to purchase, possess and use up to a dozen plants;
  • Keep up to 2.5 ounces of marijuana in a locked container at one’s residence;
  • The promulgation of regulations for all aspects of the marijuana business [i.e. growth, testing, dispensing, and transportation];
  • Commercial sales of marijuana-infused products via state-licensed dispensaries; and
  • Municipalities to promulgate ordinances to ban, restrict or otherwise regulate the distribution of marijuana.
Content has exploded across the local press with all sorts of useful tips on how to ride the recreational pot wave. Here are examples from the Freep [which even went so far as publishing a handy stoner's glossary of sorts] and the Detroit News.

Here Come the Regulations

If the regulations accompanying last year’s expansion of medical marijuana licenses are any example, you can expect similar recreational-use state regulations and local ordinances that: a) favor heavily-capitalized producers; b) segregate different phases of the process [i.e. testing, growth, dispensary and transport]; and c) tax the hell out of the still-cash-only revenue stream; a very healthy revenue stream predicted to be on the par with liquor and tobacco combined.

If Colorado, California and the State of Washington are comparable examples, Michigan can expect well-run, fun stores that adopt the Apple mode of retailing their in-demand products. It’s as if a “50-Shades of Grey” mentality has taken over the populace now that these goods are so smartly distributed at the retail level. Just as you can browse for a fine –and expensive- cigar in a smoke-friendly cigar store environment, you can now browse the isles and wall display units for a $25 doobie. With taxes, you’ll part with nearly $30 for a high-quality joint.

Michigan’s Department of Licensing and Regulatory Affairs [LARA] seems proactively positioned to utilize what our state government has learned from the medical marijuana regulations for this next quantum leap. LARA certainly recognizes the revenue potential to such the cash crop that is marijuana, whether medicinal or recreational.

Expungement of Prior Marijuana Convictions

Now that both medical and recreational use of marijuana are legal in Michigan, some county circuit court judges may favorably consider petitions to remove marijuana-based convictions from a person’s criminal record. Currently, the state legislature has a bill pending to require judges to consider such expungements. Also, governor-elect Gretchen Whitmer has already indicated her willingness to utilize her clemency powers to expunge low-level marijuana-based convictions and remove scores of inmates doing prison time for such offenses.

Here is a link to the Law Blogger post detailing how a twice-convicted marijuana possessor and distributor is serving a life-sentence in Missouri.

This must come as good news to the 3600 marijuana-based felons and the nearly 50,000 people convicted of marijuana-related misdemeanors over the past 5-years.

Getting Off Schedule 1

Getting off Schedule 1 will be complicated. There will have to be a Democratic majority in both houses of Congress for the stars to align for this prospect. Some Republican legislators acknowledge the job-growth and tax revenue attributes to a strong marijuana industry. So far, however, the political will to make this happen has not been exhibited.

Complications, no doubt, arise in the context of the war on drugs which has its roots back to the 1971 Controlled Substance Act which listed marijuana on Schedule 1 in the first place. In the decades since, many of the United States' multilateral treaties have marijuana prohibition as one of its central policy planks. A few referendums spread across a few states are not -yet- strong enough to derail these long-standing treaties.

Yes, it is very complex. To the North, Canada has legalized marijuana across all nine of her provinces. In Central and South America, to our South, multilateral treaties have provided the framework for the decades-long war on drugs, with military style interdiction of drug manufactures and couriers.

Until marijuana is off schedule 1, the industry has certain distinct risks. For example, do not look for marijuana-based business transactions to be conducted within banks for the next half-decade or so. Same for insurance.

Therefore, in the short term, marijuana will continue to be a strictly-cash business. This will slow down its growth. Some people don't think this is a bad thing.

We Can Help

Marijuana prohibition is a thing of the past. The new law in Michigan, and the general decriminalization process, will create some interesting opportunities for those individuals who have been burned by now-outdated laws.

If you or someone you know has a marijuana-based conviction, simply click on the link below and give our office a call to schedule a free consultation to assess your options under the new landscape.

Post #621
www.clarkstonlegal.com


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