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Family Law: Transferring Private Company Interest in Divorce—Going Beyond the Basics to Ensure Continued Success and Avoid Conflicts

Family Law: Transferring Private Company Interest in Divorce—Going Beyond the Basics to Ensure Continued Success and Avoid Conflicts

Originally published by Winstead.

There has been considerable speculation that one consequence of the Coronavirus will be an increase in the divorce rate resulting from togetherness imposed by the quarantine that push marriages already on shaky ground over the brink.  Whether divorces will increase in the future due to Covid-19 remains an open question, but what is certain is that a sizable number of future divorces will involve the transfer of a business ownership interest between spouses as part of the divorce.  To address this situation, this post focuses on key business issues that arise when one spouse (the “Divesting Spouse”) transfers an ownership interest in a business to the other spouse (the “Recipient Spouse”) as part of a divorce settlement.  Addressing these issues will help the Recipient Spouse continue to run the business successfully and also avoid future conflicts with the Divesting Spouse, as well as with future investors and potential buyers of the business.

1. Don’t Rely on Divorce Decree or Settlement Agreement to Document the Transfer of a Business Ownership Interest Between Spouses

A divorce decree and settlement agreement will document the terms of the divorce and the division of property between spouses, but it is not a good idea to rely on the decree or the divorce settlement to memorialize the transfer of a business interest between spouses.  There are a number of reasons for the Recipient Spouse to insist on securing a stock transfer agreement (or its equivalent), including the fact that the Recipient Spouse will likely be required to show the transfer document to third parties in the future, including banks or other lenders, new investors, company officers or managers, and potential future buyers.  The Recipient Spouse will not want to show the decree or settlement agreement to these third parties, however, because they include private matters unrelated to the business.  This will therefore require the Recipient Spouse to prepare a heavily redacted document for review by third parties.  It is more efficient to simply require a transfer document to be signed that is limited solely to issues related to the business.

Another reason for the use of a transfer document is that it will include many provisions that are not normally part of a settlement agreement.  The decree or settlement agreement will become a very lengthy document if it includes all of the provision that are traditionally set forth in a separate document that covers the transfer of a business interest.

2. Secure a Separate Release of the Divesting Spouse’s Claims Against the Business

After the business is transferred and the divorce becomes final, the Recipient Spouse will not want to defend claims that are brought by the Divesting Spouse against the business.  This requires the Recipient Spouse to secure a broad release of claims against the business from the Divesting Spouse.  This release of the business is separate from and in addition to the release that the Divesting Spouse provides to the Recipient Spouse, individually.

For example, if the Divesting Spouse was an officer, employee, director or manager of the company, the Divesting Spouse’s release needs to include a release of all employment claims, such as claims for unpaid wages/back pay, vacation time, unpaid expenses, and commissions.  The release will also include the Divesting Spouse’s release all claims for wrongful termination, claims related to the distribution of any profits generated by the company and all other business related claims.  The release will also confirm that the Divesting Spouse has resigned from all positions with the company and has no further right or authority to take any action for or make any statements on behalf of the company.

3. Confirm Broad Transfer of All Rights by Divesting Spouse

The provisions that confirm the transfer of ownership in the business by the Divesting Spouse need to be broadly described in the transfer agreement to include all rights, title and interest of every kind related in any way to the business.  This includes all rights of the Divesting Spouse in any and all intellectual property of the company, such as company names, trademarks, trade secrets and patent rights.  This is particularly important if the Divesting Spouse worked in the business, because the Recipient Spouse does not want to be faced with a situation in the future where the Divesting Spouse later claims that he or she developed some software, designs or other intellectual property rights that are not owned by the business, and which are now being used by the Divesting Spouse in direct competition with the company.

4. Consider Requesting Divesting Spouse to Accept Restrictive Covenants

In a normal M&A transaction, a company buyer secures a set of restrictive covenants from the seller as part of the purchase agreement to prevent the seller from competing in any way with the company after the sale takes place.  The buyer will require the seller to provide all of the following restrictive covenants that will last for two to five years:  (i) a covenant not to compete, restricting any involvement by the Divesting Spouse — whether as an owner, employee, consultant, etc., — in a business that is competitive with the subject business for a reasonable period of time within a reasonable geographic area, (ii) an agreement not to interfere with the business’s relationship with its customers and vendors or to solicit customers, or attempt to persuade the business’s customers and vendors to cease doing business with the company, and (iii) an agreement not to hire or solicit the hiring of any of the employees of the business, or otherwise attempt to persuade any of the employees of the business to cease their employment relationship with the company.

If the Recipient Spouse is concerned that the Divesting Spouse may compete in business against the company after the divorce, the Recipient Spouse may want to request the Divesting Spouse to agree to accept some or all of these restrictions.  The Divesting Spouse will not agree to accept these post-divorce restrictions, however, without a corresponding commitment from the Recipient Spouse to provide some amount of additional consideration in the divorce settlement.

5. Request Confidentiality Agreement from Divesting Spouse

Confidentiality agreements are similar to restrictive covenants in that they prevent the person who is subject to the agreement from taking actions that are harmful to the business.  The confidentiality agreement is specific, however, in prohibiting the individual officer or employee from using or transferring any of the company’s confidential information or trade secrets.  All of the company’s officers and employees are subject to a common law duty not to use or misuse any of the company’s confidential information, but a written confidentiality agreement makes this prohibition clearer on the use of confidential information and trade secrets.

If the Divesting Spouse has not already entered into a confidentiality agreement with the company, the Recipient Spouse will want to request the Divesting Spouse to accept and sign a confidentiality agreement to protect the company’s valuable confidential information and trade secrets.  The Recipient Spouse wants to make sure that the company’s confidential information, technology and trade secrets are maintained in strict confidence.

6. Secure “Tail Coverage” of Divesting Spouse From D&O Carrier

 If the company has a directors and officers liability insurance policy (a “D&O Policy”) that provides protection for officers and directors from third party claims, these polices will generally remain for one or two years after the company’s officers and directors are no longer affiliated with the company.  The Recipient Spouse will therefore want to secure “tail coverage” to provide continuing insurance coverage for claims made against the Divesting Spouse.  In this regard, the Recipient Spouse may want to secure a tail policy will extend the D&O coverage over former officers and directors for a total period of five years.

The Recipient Spouse may feel like securing a tail policy that extends coverage for third party claims against the Divesting Spouse is unnecessary because it provides a benefit solely for the Divesting Spouse.  In fact, a tail policy provides insurance protection that protects both the Recipient Spouse and the Divesting Spouse, and it is also a benefit to the company.  If third party claim is made against the Divesting Spouse after the divorce related to the business, the Divesting Spouse will likely demand that the company indemnify him or her.  If the D&O policy is still in place, however, the tail policy will enable the company tender a defense of the claim against the Divesting Spouse, because the D&O carrier will cover all of these legal defense costs.  Fortunately, a tail policy that extends D&O coverage is often not too expensive to secure.

7. Specify Treatment of Future Tax Filings

Dealing with all of the tax issues involved in the transfer of the business is an extensive subject that goes beyond the scope of this post, and spouses engaging in the transfer of a business interest are strongly advised to consult with a tax advisor during their divorce.  But there is one tax issue that the Recipient Spouse should consider addressing up front.  Many businesses held in marriages are structured as pass through entities (i.e., LLC’s partnerships, Sub S corporations), which means that the owners pay the taxes on all profits that are generated by the company.  As a result, in the year following the divorce, Recipient Spouse may be required to issue a K-1 to the Divesting Spouse based on the ownership interest held in the business by the Divesting Spouse during the year in which the divorce took place.

If the K-1 issued in the year after the divorce reflects any income that is apportioned to the Divesting Spouse, he or she may expect to receive a cash distribution from the company that is sufficient to cover the Divesting Spouse’s federal tax liability based on this income.  If the company does not issue any distribution to the Divesting Spouse, that would create what is known as “phantom income” because the Divesting Spouse has to pay taxes on this income even though no distribution was issued by the Company.  The issuance of phantom income to the Divesting Spouse is likely to provoke a heated dispute at that point.

The Recipient Spouse will therefore want to address in the divorce settlement how the future K-1 that will be issued to the Divesting Spouse will address any income generated by the business in the year of the divorce.  If the Recipient Spouse is prepared to issue a distribution to the Divesting Spouse, that will take care of the issue.  If the Recipient Spouse has no intention of authorizing the company to issue any distributions in the future to the Divesting Spouse, however, this issue will need to be dealt with by the Recipient Spouse a manner that will not lead to a future legal dispute with the Divesting Spouse.

Conclusion

The transfer of ownership interests in business is common in divorce settlements.  But if business issues related to the transfer of this type of interest are not considered at the time of the divorce, the parties may find themselves engaging in continuing disputes they did not anticipate.  The Recipient Spouse, in particular, needs to take steps to ensure that the transfer takes place in a manner that allows the business to continue to run successfully, and to head off potential future conflicts with the Divesting Spouse and others after the divorce.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.



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Divorce Attorney Elise Mitchell's Private Files Document Blow Jobs to Judges

Divorce Attorney Elise Mitchell's Private Files Document Blow Jobs to Judges

James Towery sexually harassed the legal secretary in his own law firm. The problem for Towery was that the secretary kept notes, and his wife, Marilyn Morgan , a partner in the firm with her husband, James Towery, and father, found out. That landed James Towery in divorce court, which he and Marilyn quickly shifted out of the county with the help of Marilyn’s father, a well connected lawyer with the local Bar. 

Judge James L. Stoelker has been using his contacts from representing big banks in a money laundering scheme designed to kick back money from the sale of homes in local divorce cases.

Judge Manley has been rigging outcomes in drug court, while getting kickbacks from the pharmaceutical industry. 

Judge Roberta Hayashi has used non-profit cancer organizations to launder money to her campaigns  and has done so at some of the most elite fundraisers in the Los Gatos homes of Silicon Valley’s top CEOs and tech industry executives. 

For the past 20 years women lawyers, clerks and secretaries have been keeping records of lawyers gone wrong. Those records are now cropping up and being shared. Just as former President Bill Clinton had to deal with Monica’s Blue Dress problem, local lawyers and judges are no longer able to contain the secrets they hoped would remain buried in secret settlements and court files that the local  media never wanted to touch. 

Divorce Attorney Elise Mitchell’s high turnover in her office may come back to bite her as one former employee kept secret recordings that outline collusion with the local district attorney’s office and the courts. 

Papers recovered from Notre Dame High School  show Mitchell as holding the notes and secrets of some of Santa Clara  County’s most powerful judges and lawyers. 

Notes contained in the papers show  elaborate schemes that involve Santa Clara University, Stanford, Presentation , Norte Dame and St Mary’s in San Jose where divorce lawyers were using  local courts to assure a steady stream of young women and boys  to sex trafficking rings. Payments from local law firms were also linked to the court clerk of Judge Matthew Gary in Sacramento. The clerk was then running payments through court reporters to private supervision centers  and real estate businesses where spouses and relatives own interests. Lists explain the scheme launders money through the relatives of judges overseeing divorce and custody cases. 

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Divorce Attorney Elise Mitchell's Private Files Show Payments for Sex Favors to Judges Arranged by BJ Fadem and Family Court Services Own Jason Magers

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BJ Fadem is first openly Transgender lawyer regularly appointed to represent children in Silicon Valley courts. Papers reportedly left by Elise Mitchell at Norte Dame in San Jose show Fadem as part of a huge child and sex trafficking ring involving judges and custody experts.

Transgender: Abuses Mothers in Family Court 
For those who remember BJ Fadem as a woman, the notes and confidential papers left at Notre Dame high school in San Jose came as no surprise. Fadem,  who was never comfortable being a woman and reportedly hated his own mother  has unleashed years of torment on local children whose parents  are divorcing in Santa Clara family courts. Worse, confidential papers left at San Jose’s elite Catholic High School show Fadem was also involved in the criminal trafficking of children and laundering money through the local courts in the form of court orders and appointments. The notes show Fadem working to protect Stanford professors, and high tech executives who sexually molested children and arranged sex favors including blow jobs to some of Santa Clara County’s most prominent judges. Fadem is linked to Family Court Services MFT Jason Magers, also transgender, who is known for taking children from mothers as a form of grooming in the sex trafficking rings. 

Many believe the papers were left at the high school by controversial divorce attorney Elise Mitchell, who has recently experienced high staff turnover and is rumored to be frazzled purchasing a home with her husband using money laundered through the courts and payoffs from the 49ers. Payments reportedly arranged through attorney Eric Scott Geffon, now a Santa Clara County superior court judge. 

Selling the Homes of Families to Pay the Lawyers and Sex Traffickers

​James Towery, another lawyer turned bad judge, was known for  sexually harassing  the legal secretary in his own law firm. The problem for Towery was that the secretary kept notes, and his wife, Marilyn Morgan , a partner in the firm with her father, found the notes and took Towery to divorce court.

After he was appointed to the family court, Judge James Towery began using his elected office to sell the properties of families involved in local divorces in order to assure payments to court appointed lawyers, private judges and custody evaluators  who use rigged reports and junk science to separate children from their families and put them into the criminal justice or foster care systems where they are ripe for sex trafficking and abuse. 
 

Banks Funding Trafficking Through the Courts

 The papers show Judge James L. Stoelker has been using his contacts where he formerly represented big banks to assist the  money laundering scheme  using local real estate transactions and help from county assessor Larry Stone’s confidential secretary.  Stone’s office has coordinated the scheme through the district attorney’s office where prosecutors including Deborah Medved, Terry Harman and Allison Filo have helped the trafficking ring after  Medved became a family law attorney regularly appointed to represent children in cases with judges she knew from the DAs office, including Amber Rosen, the wife of District Attorney Jeff Rosen. Medved was known for protecting Stanford professors and Silicon Valley tech executives who were part of sex trafficking rings and where many abused their own children, with impunity. 

Notes show Medved,  was arranging cash payments with the help of DDA John Chase to DA Mark Peterson in Contra Costa County. Other judges involved in the scam include: 
Santa Clara County; Patricia Lucas, Mary Arand, Julie Emede, Vincent Chiarello, Mark Pierce, Joshua Weinstein and Roberta Hayashi, all  assisted by government lawyers Lisa Herrick and Los Gatos Councilwoman Barbara Spector, formerly of Hoge Fenton. Private lawyers known for watching porn and trying to trade representation for sex include Nat Hales, Neville Spadafore, and Catherine Gallagher who are regularly appointed as private judges to keep the scam out of the public eye. 

Judges have been repaid for their rulings with mysterious payoffs on their homes and rental properties using Los Gatos based Orange Title company and connections to Intero real estate agents to do so.  

Judges Putting Kids on Drugs for Profit

Judge Manley has been rigging outcomes in drug court, while “investing” in drug companies through relatives and friends.  Court ordered drug rehab and probation monitoring  programs listed in Mitchell’s notes show area lawyers and judges getting kickbacks from large drug companies and big players in local marijuana businesses. Mitchell was recently heard by a staffer bragging to clients she could get a former spouse criminally prosecuted due to her connections with John Chase and Michael Moreno in the DA’s office.

Unity Care, the corporation charged with caring for foster kids in the San Jose area, is highly linked to Judge James Towery,  Judge Amber Rosen, Kayrn Sininu Towery and  Supervisor Cindy Chavez, all who profited from the drugging and abusing of children caught in Santa Clara County’s juvenile system. 

Drugging of children based on recommendations and orders of court appointed lawyers appear to be key to the scam. Hundreds of CP cases and court files that are kept confidential by the courts, and state law, show the most egregious  offenses according to notes and records found at the high school. 

Judge Roberta Hayashi, one of the judges documented in Mitchell’s notes reportedly  used non-profit cancer organizations to launder money to her campaigns and kickback favors to Silicon Valley’s top tech industry executives whose divorces come before her in family court. Hayashi, a former judge in criminal court, has reportedly received unreported campaign contributions, and repayments on real estate owned in the upscale Los Gatos community. Hayashi’s connection to the Los Gatos Police indicate much of the sex trafficking has gone through law enforcement officers tied to the Los Gatos and San Jose police. 

Disappearing Families

Sex trafficking in Silicon Valley  has been  concealed by  local media that has secret deals to kill stories related to the local courts. Judges drag out divorces to isolate children in order to traffic them. Once a divorce drags out for five years, children become isolated from their extended families and neighbors, allowing them to disappear without raising eyebrows.  

Erasing children to traffic them begins with court orders that  appoint lawyers to make decisions for a judge. Decisions are rarely based on the BEST INTEREST OF THE CHILD  and more for the best interest of the pocketbooks of judges and lawyers. Soon after an appointment,  lawyers will claim  to need appointment of custody evaluators. Most nefarious include Phil Stahl, Leslie Packer, Michael Sullivan and Ken Perlmutter, whom BJ Fadem is known to coordinate with in order to rig report outcomes in favor of a parent in on the sex trafficking scam. 

Judge Steve Austin of Contra Costa, Judge Patricia Lucas of Santa Clara and Judge Mathew Gary of Sacramento  appeared to be ring leaders of the operation, where their positions in the state courts provided them assured immunity. 

Connection to Sacramento 
One diagram in the Mitchell notes indicate Sacramento judge Mathew Gary arranged  part of the  payment  scheme  through court clerks and court reporters who were able to launder money disguised as cash payments for transcripts that were   buried in fee awards made to lawyers throughout the state. The diagram additionally shows connections and protections through local governments including elected district attorney Mark Peterson, whose sex scandals and coverups are now being reported in the press following his indictment and disbarment. District Attorney Jeff Rosen is reportedly the target of the next indictment, and recall waive resulting in the failure of his office to prosecute the undocumented immigrant who killed Willow Glen mom Bambi Larson, and the homeless man who raped a San Martin woman early in 2019. 

Children Who Escape
Several children, now grown, have come forward to describe how they were groomed for sex trafficking. Therapists appointed by the court used gaslighting and torcher to get them to hate protective parents. Once the protective parent has been legally removed by the courts, the children report being offered drugs by their court appointed lawyers and abusive parents.  Therapists also recommend prescription drugs that are forcibly given to children by court order, over the objections of protective parents.  Kids describe losing friends who don’t understand the court process, slipping grades, and dropping out because they felt invisible and lost their family support system. Some become incarcerated only to find their family gone when they are released. Once the children have been isolated from their  family and community, they are ripe for the trafficking rings being operated by a core group of judges and lawyers in our family courts. 

In addition to family courts, Mitchell’s papers indicate area lawyers have been secretly settling sex abuse cases against judges, high profile prosecutors,  as well as teachers and administrators at Notre Dame, Presentation and Mitty high schools. Students from those schools were told to hire lawyers and then were gaged from talking about the abuse. Robert Allard, a close friend of the DA’s office,  appeared to be negotiating many of these settlements in a manner that would prevent the DA’s office from prosecuting the most heinous sex abuses of children that involved connections to local lawyers, judges and custody evaluators working in Silicon Valley’s criminal and family courts. 

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