Corporate divorce brings heartbreak to a family
As the spinning quarter struck the glass covering the wooden table in the conference room of a suburban law office, a plunking sound disturbed the somber silence reining among the lawyers and the opposing clients—a brother and sister, “Hal” and “Joan”—sitting at opposite sides of the table. That sound was followed by a tinny grinding noise made by the quarter as it rolled on its edge in a meandering fashion until it fell, tails-up, directly in front of Joan. Tails, she loses. As a result of the coin toss, she lost the final remaining dispute in her years-long corporate divorce litigation against her brother.
One heart attack, two years of trading bitter court filings, and hundreds of thousands of dollars in legal and expert fees were just some of the costs incurred by the people involved in this scene. It marked the culmination of a lifetime of Hal and Joan’s perceived persecution or ingratitude toward each other as they lived through what for years was the good fortune of growing up in a successful family business.
The legal slugfest that ended with that coin toss made Hal and Joan question who they were. By the end of the case, it changed who they were.
Hal and Joan’s parents were immigrants and some of the parents’ Old World sexism was ingrained in Hal’s DNA, but Hal had two daughters and had shed any outward chauvinism. Nevertheless, Joan’s lawyer exploited the assignment of the case to a female judge and used his skills as an advocate to paint Hal as having Taliban-like views on women. Any generosity Hal showed to his sister was painted as patronizing sexism; any wealth he neglected to share with Joan was portrayed as part of his keeping her “in her place.” Reading numerous court filings that marked him as a villain left Hal wondering who he was. That the judge appeared to credit some of the allegations made it worse.
The case was no easier on Joan. The bile stirred up by attacking her brother put such stress on her family that her husband had a heart attack. She was also subject to intrusive discovery demands into her personal business affairs. Ultimately, Joan’s lawyer had to push the case into mediation because Joan had altered documents to cover up her tax evasion, a rash and foolish act she had committed in her eagerness to hide her sins and stay on the attack against her brother. Her credibility was destroyed. I wrote and filed the court papers that destroyed it.
Both parties were tired, sick and heartbroken when the coin toss resolved the only issue that a mediator, billing at $500 per hour, could not get the parties to settle on their own. I felt no better than Hal or Joan.
The ferocity of this case was not an anomaly. Anyone with children or siblings knows that the level of competition and perhaps bitterness can run higher among family rivals than with rivals from outside the family. Based on my experience as a trial lawyer handling these cases for nearly two decades, I feel compelled to offer some thoughts to anyone in a family business. My overarching advice is that you should not enter into family corporate divorce litigation unless you are prepared to risk coming out of the case as a different, depleted person.
The opening line in Tolstoy’s Anna Karenina is, “Happy families are all alike; every unhappy family is unhappy in its own way.” Not every family corporate litigation has the drama and intrigue of Anna Karenina, but each case inflicts its own particular brand of harm or leads family members to commit unique outrages upon each other. Even with this variety, all cases carry similar risks and have some of the same damaging characteristics that frustrate the litigants.
The biggest risk is that people in your family probably know many of your secrets—even if you did not share secrets with the family member you are fighting with—and the secrets that are particularly harmful can be used as weapons in litigation. A brother might not have told his sister about a youthful guilty plea to dealing drugs. But their mom might have shared the secret. Worse, your brother might know about the affair you had several years ago, which you ended and did not reveal to your spouse. The rules of evidence might not allow these secrets to be introduced at trial, but that will not stop an enraged litigant from disclosing the facts in pre-trial filings, all of which will likely be public documents. It is critical that those secrets, no matter how embarrassing or damaging, be revealed to your lawyer prior to engaging in this kind of litigation. That is the only way to at least start to manage the emotional toll of this kind of litigation.
Family members involved in these cases are often eager to put before the court the most scandalous and lurid allegations, but the irony is that the kinds of secrets discussed above typically have no bearing on how these cases turn out. Courts resolve family corporate divorces based upon shareholder agreements, share valuations and executive compensation expert reports. Legal documents and numbers matter. Smut does not. Not only do the rules of evidence take irrelevant scandals out of the decision-making process, but also, on a personal level, judges typically do not care about that material. Family members involved in these cases spend emotional energy and dollars channeling their anger into vengeful court filings, but those filings are just so much static to the judge. They cause only personal damage to the attacker and the attacked.
There is one kind of secret, however, that can cause legal harm and will interest the judge: tax crimes. Most citizens pay their taxes, but most everyone does so unwillingly. There may have been instances in a family business when corners were cut, expenses were mischaracterized or revenues were hidden so that taxes were unlawfully evaded. If that is a known “secret” among the family, then all family members will enter the case with the financial equivalent of a loaded gun to their heads.
Tax crimes have a particular potency within litigation for a fundamental reason. If a family member makes a well-substantiated claim that another family member has evaded taxes and that claim is made in a court submission, then judges in many jurisdictions are obligated to notify the tax authorities. Once the taxman is involved all other issues are dwarfed. The tax authorities can pressure people with credible threats of interest, penalties and possible criminal prosecution. Again, it is in a client’s best interest to reveal these secrets to the client’s lawyer at the outset of the case.
These are just some of the typical dangers of litigating a family corporate dispute, but each case has a twist. Maybe your children will stop talking to you because you are suing their favorite aunt. Maybe your brother will serve subpoenas on your friends or the company’s top customer and damage the business and your reputation. These cases always have a corrosive effect upon a family and a business.
I still meet Hal at a local diner for lunch from time to time. He has moved on with his life, welcomed grandchildren and regularly takes vacations with his wife. He still laughs at the fact that the coin toss at the end of the case decided one of the issues his way. Outwardly, he seems fine. But his sister is still out of his life. So are her children. And every time we meet he pauses at least once, puts down his fork, shakes his head and expresses disbelief at what his decision to litigate did to him, his family and his business. Knowing what he knows now he still might have gone forward with the case, but he might have benefited from having a sense of how fundamentally this experience could alter his life.
Anyone facing this kind of litigation owes it to himself or herself to discuss with a trusted adviser what the experience will do emotionally to the family.
Eric A. Inglis is a partner in the New Jersey law firm of Schenck, Price Smith & King LLP and chairs the firm’s Commercial Litigation Practices Group (www.spsk.com).
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