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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.
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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

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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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