As Corrected March 24. 2015.
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APPEAL FROM THE FAMILY COURT OF THE THIRD CIRCUIT. FC-D NO. 08-1-281K.
On the briefs: Michael S. Zola, for Defendant-Appellant/Cross-Appellee.
Peter Van Name Esser and Ira Leitel, for Plaintiff-Appellee/Cross-Appellant.
NAKAMURA, CHIEF JUDGE, LEONARD and GINOZA, JJ.
[134 Hawai'i 436] OPINION
Defendant-Appellant/Cross-Appellee Bennett Jacoby (Bennett) appeals from an April 14, 2011 Family Court of the Third Circuit (Family Court) Order Re: Divorce Trial (Order) and a July 5, 2011 Decree Granting Absolute Divorce and Awarding Child Custody (Divorce Decree) that dissolved Bennett's marriage with Plaintiff-Appellee/Cross-Appellant Nicoleta Jacoby (Nicoleta). Nicoleta cross-appeals from the Divorce Decree.
Bennett raises sixteen points of error, arguing the Family Court erred, inter alia, in its valuation of Bennett's intellectual property (IP) for his capital contribution, its deviation from marital partnership principles and waiver of Nicoleta's equalization payment, its permanent alimony and child support awards, and its requirement that Bennett maintain life insurance in an amount far greater than necessary to give reasonable security for his support obligations.
On cross-appeal, Nicoleta raises three points of error, challenging the Family Court's decision to: (1) include an automatic termination clause for her permanent alimony upon her cohabitation; (2) include Bennett's tax-free disability earnings as " Monthly Gross Income" on the Child Support Guidelines (CSG) worksheet; and (3) not award her one-half of Bennett's future disability benefits, if we conclude that the Family Court erred by awarding Nicoleta permanent alimony or by waiving her equalization payment.
On December 9, 2008, Nicoleta filed a complaint for divorce against Bennett.
On February 18, 2009, the parties filed a Stipulation of the Parties Re: Temporary Custody, Visitation, Support, and Other Matters (Pre-trial Stipulation). Bennett and Nicoleta agreed temporarily to joint legal and physical custody of their two minor children and set forth temporary terms and conditions of their joint custody.
On October 12, 2009, Bennett filed a motion for a pre-trial determination regarding whether his future disability benefits are marital property subject to equitable distribution. No separate order was filed.
Bennett and Nicoleta's divorce trial was held on November 12, 13, 19, and 27, 2009. The date of the conclusion of the evidentiary portion of the trial (DOCOEPOT) was November 27, 2009. Nicoleta and Bennett both testified at trial, and each called an expert to testify about the value of Bennett's IP.
Nicoleta testified that she was born in Romania in 1969, and in 1985, she had surgery to remove an arterio-venous malformation in her brain. Following surgery, she was paralyzed on her " whole right side." When she came to the United States in 1990, she was still experiencing weakness in her right leg and hand.
Nicoleta stated that she met Bennett in California around May 1992, and they moved in together in June 1992. Nicoleta was twenty-three years old and Bennett was thirty-one years old at the time. Bennett was separated, but not yet divorced, from his former wife ( Mary Ann ) when he began living with Nicoleta. Nicoleta worked at Bennett's periodontist clinic in California, but Bennett did not pay her. She believed that they had a joint bank account, and she reported [134 Hawai'i 437] that Bennett had been " paying for everything."
Nicoleta and Bennett were married on June 12, 1993 (date of marriage, DOM), and Nicoleta continued to work in Bennett's office thereafter. Their son was born in June 1995, and their daughter was born in January 1997.
In late 1997, Nicoleta was diagnosed with multiple sclerosis (MS). Nicoleta reported that she underwent steroid treatments, which caused numbness.
The family moved to Hawai'i in May 1998. Bennett and Nicoleta purchased a home in August 1998. Nicoleta testified that she continued to have MS flare-ups, which required steroid treatments. She continued to consult with her neurologist in California until 2007, and she also saw a neurologist in Hawai'i.
Nicoleta testified that her illness impacted her employment. In 1999, she worked part time at Hualalai Academy for its after-school program from about 2:30 to 5:00 p.m., five days a week. However, she had to quit " because after a while, my numbness and my MS was flaring up, and I had to go to the hospital to have the IV steroids." In 2005, she tried to work with Bennett as his assistant when he started " working on the charity van, . . . but I did not last." She worked for less than a week before her MS caused her to quit. At the time of trial, she felt that she was unable to work because " [m]y shoulder hurts. My arm -- I cannot be on the computer too long. . . . I'm very tired."
Nicoleta also testified that she has optic neuritis, which might cause her to go blind. In April 2009, she was diagnosed with brain hemorrhaging and must have an annual CT scan " to watch that aneurysm that broke that is in my brain." She stated that, in May 2009, she was " diagnosed with carpal tunnel syndrome, the nerve on my left hand, my good hand, . . . the nerve is damaged" and that her left shoulder problems require surgery. Nicoleta's medical problems require numerous medications that are very costly. Even with insurance, Nicoleta testified that she spent about $885 per month for her medications.
At DOCOEPOT, Nicoleta was receiving about $5,500 per month in alimony and $1,970 per month in child support. Nicoleta requested that Bennett maintain his $1.5 million life insurance policy, which he had initiated during their marriage.
Nicoleta further testified that the climate, single-story design, and pool at the parties' marital residence helped her cope with her MS. If Nicoleta does go blind, the familiarity with the house would be " very good for [her]" because she knows " how to get around [the house] and everything." However, she stated that the upkeep of the house is costly.
Bennett testified that he married Mary Ann around May 1989. In December 1992, a judgment of divorce from Mary Ann was filed in California, and he signed a marital termination agreement or agreement incident to divorce (AITD). The AITD included a $10,000 settlement payment to Mary Ann to " sign off on" his IP or " in effect release any claims that she might have to an interest in it."
Bennett testified that his IP stemmed from the ideas that resulted in his periodontal endoscope, which utilized fiber optics to allow dentists to view beneath teeth without surgery, and which came to him in 1987. Bennett's attorney filed patent applications for his ideas. Bennett created a successful working prototype in late 1992, and used it on patients in late 1992 or early 1993. Bennett testified that " a tremendous amount of development" occurred between when Mary Ann released claims on his IP in December 1992, and the DOM in June 1993. Thus, " what I brought into the marriage with Nicoleta was different from what Mary Ann signed off on." His patent allowance was issued in February 1993, two months after the AITD and four months before DOM.
At DOCOEPOT, Bennett was receiving disability payments in the amount of about $16,334 per month, tax-free. Bennett's disability insurance policy provides for five-percent annual increases. Bennett testified that he paid annual premiums for the policy during his marriage to Nicoleta, until his premiums were waived when he was found to be disabled after a diagnosis of myofascial pain [134 Hawai'i 438] dysfunction syndrome following a 1996 surfing accident.
At DOCOEPOT, Bennett was earning about $1,500 per month working part-time as a periodontist.. He was also receiving about $1,000 per month in royalties from his invention until December 2011, and about $9,000 per month from various investments.
Bennett testified that the expenses for Bennett, Nicoleta, and their two children from January 2007 to June 2008, averaged $9,348 per month.
Both parties offered expert testimony on the value of Bennett's IP asset. Bennett's valuation expert was Gary Kuba (Kuba). Nicoleta's expert was Christian Tregillis (Tregillis).
Kuba valued Bennett's periodontal endoscopy device patent applications as of DOM at $4,648,000. To arrive at his valuation, Kuba " ultimately relied on . . . a projection prepared by Wendell Ebling [(Ebling)], who was the president of a company back in 1993 called Bioview, who had dental sheaths among other products." Kuba explained his basic valuation model as follows:
You start off with cash flows. What's the expected cash flows? You apply a discount rate to it. Cash flows divided by this discount rate gives you what the value is, so it's pretty straightforward.
You're dealing with two variables. If cash flows go higher and the discount rate is constant, you get a higher value. If the cash flows remain the same, the discount rate goes down, you get a higher value. Conversely, if the discount rate goes up, you get a lower value. So, you know, the fundamentals is [sic] pretty straightforward. We're dealing with two variables here.
Kuba used Ebling's projected cash flow and a twenty percent discount rate. Kuba said " there's no evidence that I'm aware of" that indicated that Ebling's projections were inflated. However, he acknowledged that Ebling's projections may have been " overinflat[ed]" to " entice" Bennett into a partnership. Kuba acknowledged that " the only relevant person that we were able to talk to was [Bennett]" because Ebling had since passed away.
Kuba based the twenty percent discount rate " on what's called a capital asset pricing model." He explained how this model arrives at a discount rate. Kuba's arrival at a twenty percent discount rate " widely varies" from Tregillis's.
Kuba explained why he thought Tregillis's valuation of $101,000 was unreasonable. Kuba further disagreed with Tregillis's opinion that the property equalization of $10,000 to Mary Ann in the AITD should be considered in the valuation because " clearly there was no analysis establishing that it was fair market value."
Tregillis valued the IP asset at $101,000. He explained that consideration of " future information is limited" and that he considered " information which gives insight into what would have been expected by [a willing] buyer and [a willing] seller as of the valuation date." Thus, he limited his analysis " to what was known or knowable in establishing what expectations were on the valuation date [DOM]." He explained:
[U]ltimately I wanted to look at what was expected or knowable, what a willing buyer and a willing seller would have expected as of the date of transaction. And looking at that range of possibilities, success, middle of the road, not so successful, or complete failure, those possibilities, ultimately that's what the value is. When you do a weighted average, combining the probabilities of each of those things playing out, that's what drives the value.
Tregillis explained that he used the actual stream of total revenues as the expected scenario instead of the Ebling projections, which Kuba used. Tregillis thought that the Ebling projections were inflated because they were created by Ebling with the intention of attracting Bennett into a partnership. He also explained that his 42.5 percent discount rate was " conservative" due to Bennett's early stage of investment at DOM.
On April 14, 2011, the Family Court filed the Order Re: Divorce Trial, which set forth its findings of fact ( FOFs ) and conclusions of law ( COLs ). In the Order, the Family Court [134 Hawai'i 439] found, inter alia, that: (1) Bennett and Nicoleta had formed a Premarital Economic Partnership (PEP) in June 1992 that had lasted until DOM on June 12, 1993, and the fact that Bennett was married to Mary Ann " at the commencement of the parties' PEP has no bearing on whether a PEP was formed" ; (2) " Tregillis' findings and conclusions are more persuasive" than Kuba's regarding the value of Bennett's IP, and " Tregillis' opinion of the value of [Bennett's] IP at DOM of $101,000 is reasonable, trustworthy, and credible" ; (3) " it would be just and equitable to award [Nicoleta] permanent spousal support of $4,000 per month" that will " terminate upon the death of either party or upon the remarriage or cohabitation of [Nicoleta]" ; (4) Bennett should pay Nicoleta $2,069 per month in child support; (5) Bennett " has stipulated that he will pay the premiums" for Nicoleta's Kaiser HIPAA Platinum Plan health plan or a " reasonable equivalent if it is not available" ; (6) Bennett must maintain his $1.5 million life insurance policy with Nicoleta " being the exclusive primary beneficiary for so long as he has an obligation to pay child support or alimony" ; (7) Nicoleta should be awarded the marital residence; and (8) " sufficient valid and relevant considerations [(VARCs)] to deviate from marital partnership principles" exist, and " [i]t would be just and equitable to not require [Nicoleta] to pay the equalization payment."
On July 5, 2011, the Family Court entered the Divorce Decree, which, among other things: (1) ordered Bennett to directly pay Nicoleta $4,000 per month in permanent alimony; (2) awarded joint legal and physical custody of their two minor children; (3) ordered that Bennett maintain existing levels of medical insurance for the two children; (4) awarded the marital residence to Nicoleta, who is responsible for the real property taxes upon transfer of title to her; and (5) ordered that Bennett pay off Nicoleta's car loan on her 2008 Honda with existing marital assets.
On August 3, 2011, Bennett filed a timely notice of appeal. On August 16, 2011, Nicoleta filed a timely notice of cross-appeal.
On October 17, 2011, Nicoleta filed a post-decree motion to enforce the Divorce Decree, requesting, inter alia, that Bennett pay for a different medical insurance plan with a higher monthly premium of $429.13 because the original Kaiser HIPPA Platinum Plan (with a premium of $290) no longer existed. The Family Court granted the motion and filed an order on November 28, 2011 (Post-Decree Enforcement Order), stating that " [t]he Kaiser HIPPA Plan 20/RX (as opposed to the Kaiser HIPPA Plan 30/RX) is a reasonable equivalent to the Kaiser HIPPA Platinum Plan." The Family Court also ordered Bennett to pay interest on the sum of $594,805 from July 5, 2011 through October 5, 2011.
II. POINTS OF ERROR
Bennett raises the following points of error on appeal:
(1) The Family Court clearly erred by finding that Bennett and Nicoleta had formed a PEP in June 1992 while he was still married to Mary Ann.
(2) The Family Court clearly erred in its IP valuation of Bennett's periodontal endoscope. The Family Court further erred in not applying Teller v. Teller, 99 Hawai'i 101, 53 P.3d 240 (2002).
(3) The Family Court abused its discretion by awarding Nicoleta permanent spousal and child support without considering the effect of property division on the parties' gross [134 Hawai'i 440] monthly incomes and clearly erred in its FOFs:
(a) FOF 108: " [Nicoleta's] present household and transportation expenses, excluding her automobile loan payments, are $3,327 ($4,153 - $826). . . . These expenses are reasonable."
(b) FOF 109: " [Nicoleta's] personal monthly expenses, including medical and dental, is [sic] $2,910. . . . Given the parties [sic] present life style, these expenses are reasonable."
(c) FOF 114: " [Bennett] also receives about $9,064 per month income from his bonds and Certificates of Deposit accrued interest."
(d) FOF 117: " [Bennett's] total gross monthly income (without considering the increase calculation of the monthly tax free disability payments; [Bennett] opines that gross monthly income would be $28,375 on the $15,343 now being received) is $29,402."
(e) FOF 122: " Under the circumstances of this case, it would be just and equitable to award [Nicoleta] permanent spousal support of $4,000 per month."
(4) The Family Court abused its discretion by deviating from marital partnership principles and waiving Nicoleta's $588,677 equalization payment.
(5) The Family Court abused its discretion by extending Nicoleta!s inflated temporary support orders for nineteen months between DOCOEPOT on November 27, 2009 and the filing of the Divorce Decree on July 5, 2011.
(6) The Family Court clearly erred by undervaluing a 2008 Honda vehicle awarded to Nicoleta at $2,488 with regard to its allocation of the parties' assets, as follows:
(a) The Family Court failed to account for Bennett's payoff of the vehicle when dividing the parties' cash marital assets, resulting in Bennett paying off the vehicle not out of the total pre-division marital assets, as he agreed to do, but out of his own one-half share of post-division assets.
(b) The Allocation Chart, which was part of FOF 141, incorrectly valued the vehicle at $2,488 when Nicoleta's testimony at trial and her Asset and Debt statement, filed October 19, 2009, indicated that the vehicle was worth $24,300.
(7) The Family Court abused its discretion by allowing Nicoleta to take the 2011 real property tax deductions when Bennett made the payments even after the Divorce Decree was filed on July 5, 2011.
(8) The Family Court abused its discretion by ordering Bennett to maintain his life insurance policy because doing so was excessive, unduly burdensome, and not consistent with the Family Court's other financial orders, as follows:
(a) In the event that Bennett dies without the required insurance, his estate should only be held liable for the actual dollar amount of any outstanding child support obligation, not the full insured value of $1.5 million as ordered.
(9) The Family Court abused its discretion by ordering Bennett to pay Nicoleta's increased medical insurance premiums and by not re-calculating its original child and alimony awards, as follows:
(a) The Family Court did not have jurisdiction to grant Nicoleta's motion for increased monthly payments pending appeal.
(b) FOFs 124-125 are erroneous because the Family Court did not adjust its original child support calculation to reflect the increased monthly premium payments.
(10) The Family Court erred by ordering Bennett to pay child support directly to Nicoleta in the Divorce Decree where the decree did not include certain required findings and statutory language.
(11) The Family Court abused its discretion by ordering Bennett to " maintain existing levels of [health] insurance for the parties' minor children" when he was also ordered to pay for all of their uncovered medical and dental costs.
(12) The Family Court abused its discretion by providing for equalization of unforeseen tax consequences of property division in the Divorce Decree, as follows:
(a) Neither Bennett nor his counsel signed Nicoleta's proposed divorce decree, agreed to this language, or indicated that Bennett assumed [134 Hawai'i 441] or intended there to be no tax consequences of property division.
(b) Bennett did not agree to be responsible for the tax consequences arising out of any of Nicoleta's decisions as to the assets she received pursuant to the orders.
(13) The Family Court clearly erred by awarding Bennett and Nicoleta their individual bank savings and checking accounts, but then including those same assets as part of the Accounts on the Allocation Chart as ...