A Spouse’s Bad Conduct and its Impact on Property Division in a Massachusetts Divorce

By Jonathan Fields, Esq.

One of the most frequent questions clients ask divorce attorneys is whether a spouse’s bad conduct will impact the financial settlement in a divorce.  This article explores the Massachusetts law in this area.

The Massachusetts property division statute, G.L. c.208 s.34, requires courts to examine multiple factors in determining the division of the marital estate upon divorce.  The statute articulates mandatory and non-mandatory considerations.  Practically speaking, the length of the marriage may be the most important consideration upon which all further analyses depends.[1]  The relative economic and non-economic contributions of the parties (paradoxically, a non-mandatory consideration under the statute) has been elevated by the case law to be the “touchstone of an equitable division of the marital estate.”  Moriarty v. Stone, 41 Mass. App. Ct. 151, 157 (1996).  The character of an asset (whether it was inherited and/or premarital) is another prominent consideration.  Rice v. Rice, 372 Mass. 398 (1977).

The statute also includes, as a mandatory consideration, “the conduct of the parties during the marriage.”  On the far end of the spectrum of conduct affecting a property division is a case in which the wife solicited the husband’s murder.  The trial court awarded the husband 90% of the marital estate and the Appeals Court upheld the division.  Wolcott v. Wolcott, 78 Mass. App. Ct. 539 (2011).

Obviously, conduct less egregious than that in Wolcott can also form the basis of a disparate division.  Johnson v. Johnson, 22 Mass. App. Ct. 955, 956 (1986) (judge properly considered “husband’s abusive conduct, both physical and mental”); Bacon v. Bacon, 26 Mass. App. Ct. 117, 120 (1988) (judgment affirmed where judge considered fact that “[a]t times, early in the marriage, the husband was abusive to the wife”).

[1] As a leading article describing the theory underlying the enactment of G.L. c.208 s.34 in 1974 puts it, the “length of the marriage is a critical consideration in assignment of property.  The equities of assigning to one party a portion of the other’s estate are clearly diminished where the marriage is only of brief duration …” Inker, Walsh and Perocchi, Alimony and the Assignment of Property, X Suffolk Univ.Law.Rev 1 (1975).

Read full article here.

 

Removal of Children to Another Jurisdiction: What Every Parent Should Know

By Jonathan E. Fields, Esq.

When a parent wants to move with the child outside of Massachusetts, and the other parent does not consent to the removal, a complex legal analysis must be undertaken in order to determine the rights and responsibilities of the parents and the child.  If the parties cannot come to an agreement themselves, a Guardian Ad Litem (GAL), usually an attorney, is often appointed to investigate and report on the matter.  The parties might settle after the GAL report but, if not, each has a right to pursue the case to trial and have a judge decide the matter.

This article seeks to explain the law of removal – and to be of use to both parties and practitioners.

Read article here.

For all relevant Massachusetts cases on removal, go here and scroll down for “Removal.”

Alimony and the TCJA: Common Misconceptions Every Divorcing Parent Should Know

By Jonathan Fields, Esq.

Under the Tax Cuts and Jobs Act of 2017 (TCJA), alimony will no longer be tax deductible to the payor and no longer tax includable to the payee effective January 1, 2019.  The law was a shock to many, particularly divorce lawyers, most of whom had gotten quite used to the way things had been for the last 75 years.  There is a saving grace in the TCJA, however — qualifying agreements and modifications can be grandfathered into the old taxability treatment subject to certain requirements.  Specifically, unless the parties opt-in to the new law, the TCJA applies to “decree[s] of divorce or separate maintenance or written instrument[s] incident to such … decree[s]” executed after January 1, 2019.  To unwind this legislative convolution:  the old taxability provisions can apply to your qualifying pre-2019 agreement unless you both agree that you don’t want them to.  Still a mouthful, but that’s the way Congress wrote it.

The biggest misconception about alimony and the TCJA, frequently repeated in the lay media, and even by legal commentators, is that the qualifying instrument must be a final divorce judgment.  It does not.  You do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.  Lawyers, who like to be “better safe than sorry” may prefer to have a divorce judgment but, when you are fighting this issue out in December of this year without the luxury of time, it’s worthwhile to take a closer look at what is actually required.

Procrastinators can rejoice. TCJA continued the requirement from IRC s.71 that a payment made to or on behalf of a spouse or ex-spouse pursuant to a “written instrument incident to [a divorce decree]” qualifies for alimony treatment.  TCJA further sets forth that such instruments are “as defined in s.71… as in effect before” TCJA.   Presumably, the case law from the past several decades interpreting the clause remains relevant and binding.

So, basically, in many instances, all a couple may need to qualify for grandfathered alimony treatment is a contract by December 31, 2018 that is a “written instrument incident to [a divorce decree]” pursuant to the statute. The “contract” here is no more prescriptive than a common law “meeting of the minds” contract – except that, unlike in the common law, it must be in writing.  A separation agreement signed by the parties and approved by the court should do – no need to wait for a final judgment of divorce 90 to 120 days later.  A separation agreement not yet approved by the court should also suffice.  But it doesn’t even have to be that formal.  Two Tax Court opinions illustrate the flexibility of the “written instrument incident to a divorce” requirement.

A Tax Court Memorandum Opinion, Leventhal, T.C. Memo. 2000-92, made clear a “meeting of the minds” requirement, particularly that there be a “clear statement in written form memorializing the terms of the support between the parties.”  In this case, one spouse’s written assent to a letter proposal of support by the other spouse was a sufficient writing to bring it within IRC s.71.  Moreover, Leventhal tells us, it was not necessary to articulate a specific amount of support so long as “there is an ascertainable standard with which to calculate support amounts.”

A Tax Court Summary Opinion, Micek, T. C. Summ. Op. 2011-45 (2011), is also instructive for our purposes.  Here, the couple separated in 1997 and entered into an oral agreement in 1999 that the husband pay the wife alimony of $1,250 per week.  Later that year, the husband signed a “spousal support affidavit” agreeing, or reaffirming, the payment of alimony in the same amount.  In 2003, the husband stopped paying because he became disabled and, presumably, was unable to earn income. The wife’s attorney then wrote to the husband, inquiring as to why the alimony has stopped.  Think about this: there is still no divorce pending at this point, the wife hasn’t signed anything yet, and the wife’s lawyer wrote the letter described above four years after the husband started paying alimony.

A few more years go by.  At some point – the opinion does not make clear when – the husband filed for divorce. Presumably satisfied that neither party had the means to support the other, the parties’ agreement incorporated in the divorce judgment mutual waivers of present and future alimony. In 2009, the IRS filed a notice of deficiency disallowing husband’s alimony deductions for the years 2000 to 2003 – the period prior to the divorce during which the husband was paying alimony to the wife.  All of the payments at issue were made prior to the filing of the divorce.

The husband took the matter to Tax Court.  The issue before the court was whether the alimony was paid pursuant to a “written instrument incident to [a divorce decree].”  The Tax Court agreed with the taxpayer, finding that alimony was paid pursuant to such an instrument and, therefore, deductible to him and includible to his ex-wife.  The Tax Court reasoned that (1) the so-called “spousal support affidavit” signed by the husband in combination with (2) the letter from wife’s attorney inquiring as to why he had stopped paying alimony (which evidenced her client’s understanding that alimony was to be paid) was sufficient to qualify under IRC s.71.  That is, a written instrument (the affidavit) signed by one party and the letter from wife’s attorney was together a sufficient “written instrument” that evidenced the meeting of the minds between the parties.

Considering the significant time gap between the instrument and the divorce filing, it is striking that Micek did not focus on the requirement that the “written instrument” be “incident to [a divorce decree].”  We might deduce from Micek that timing is not dispositive to the “incident to” requirement but that it is, rather, a sort of “totality of the circumstances” analysis.  Indeed, the parties had been living separately and the husband had been paying alimony for several years and, eventually, they got around to making de jure what had been de facto. From this, it would appear a logical construction that the alimony payments at issue, though made several years before a complaint for divorce, were “incident to” a divorce.

In any event, to play it safe, the practitioner should endeavor to have the contract executed while a divorce is pending or imminent in order to meet the “incident to divorce” requirement – so, unlike Mr. Micek, nobody is relying on the Tax Court to save the day.  Bottom line: a divorce judgment is not the only way, under the TCJA, to get the preferential tax treatment that alimony judgments today can enjoy.

In the context of Micek and the “incident to” discussion above, consider prenuptial or postnuptial agreements.  Although there is no case law on the issue, these do not appear to be qualifying agreements pursuant to IRC s.71.  They are not, in the same sense as the Micek agreement, “incident to” a divorce decree – even if one of the parties filed for divorce shortly after signing.

Two additional issues merit consideration. (1) Must a 2018 agreement contain a present award of alimony and (2) How should the practitioner handle 2018 temporary orders of alimony followed by a 2019 (or later) divorce judgment?

As for (1), it is unclear whether a 2018 agreement that contains no present award of alimony but preserves the rights of the parties to future alimony would qualify for preferential retroactive treatment.  On the one hand, TCJA’s new alimony rules exempt from its application “any divorce or separation instrument” executed before 2019.  That would suggest that any agreement would suffice – whether or not it includes a present award of alimony.  On the other hand, elsewhere in TCJA, alimony is defined, subject to other conditions, as payments made to or on behalf of a spouse pursuant to a “divorce or separation instrument.”  Arguably, read together, there needs to be a present award of alimony – actual payments must be made (or required).  In light of the uncertainty, the cautious practitioner would do well to include a requirement of a present payment of alimony, if only a nominal amount, and a statement in the agreement to the effect that the parties intend the agreement to qualify for tax preferential treatment per the TCJA.

As for (2), temporary orders pose challenges when dealing with TCJA and retroactivity.  If there is a 2018 temporary order of alimony followed by a 2019 divorce judgment, the temporary order is extinguished.  With that, the link to retroactivity may be severed.  That is not clear, of course, but it is a possibility.  Therefore, the practitioner may want the judgment to incorporate the temporary order so as to preserve best as possible the benefits of a qualifying retroactive instrument.

This position is generally consistent with the IRS regulations for alimony pursuant to the Tax Reform Act of 1984 – which also dealt with the issue of the retroactive application of that law to instruments entered prior to that Act’s effective date of January 1, 1985.  Those regulations (which, by the way, have been “temporary” for 34 years) made clear, for example, that if a 1985 divorce judgment incorporated without change the terms of a 1984 instrument, that 1985 judgment would be grandfathered under the then pre-existing tax law. 26 CFR s1.71-1T (Q-A #26).

The 1984 regulations do have one caveat that the practitioner may wish to consider – the subsequent judgment must incorporate the terms of the prior instrument “without change.”  Clearly, we don’t know if the IRS will interpret the TCJA’s alimony provisions in the same way but it may be worthwhile to at least consider these regulations as we venture into uncharted territory.  If the IRS were to adopt this position with respect to TCJA, it would certainly be problematic in the event a 2018 judgment provides for a nominal alimony payment and a post-2018 judgment calls for a larger payment.

In the months ahead, while many labor to complete agreements by year’s end, we can hope for clarifying guidance from the IRS.  In the meantime, especially in the gray areas, practitioners would do well to let clients know, in writing, where there are uncertainties as to whether their agreements will be grandfathered.

Taxation of Property Division in Divorce: What You Need to Know

By Jonathan Fields, Esq.

I.  General Rules

Under §1041 of the Internal Revenue Code (IRC), the general rule is that neither gain nor loss is recognized on transfers of property between spouses or ex-spouses “incident to a divorce.”   A transfer “incident to a divorce” is one that occurs within one year of the divorce and not more than six years from the divorce.  If it occurs after six years but it is clear from the divorce agreement that the transfer is related to the divorce, §1041 still applies.

Under §1041, the gain or loss is deferred and the transferee former spouse gets a “carryover basis” – that is, the transferee assumes the transferor’s tax basis in the property at the time of transfer and such tax basis is carried over for income tax purposes.

A caveat — the deferral benefits of §1041 do not apply where the transferee spouse is a “non-resident alien.”  A spouse who is not a U.S. citizen and has no permanent resident (“green card”) status may be considered a non-resident alien if they do not meet the “substantial presence” test.  IRS Publication 519 (2018).

Simple enough.  But there are multiple exceptions to §1041’s non-recognition rule – each of which should be carefully scrutinized when dividing assets in a divorce.

II.  Exceptions

       A.   Sale of Marital Home

In dealing with the sale of the principal marital residence in the context of a divorce, §1041 does not apply. Rather, we look to IRC §121 — which provides that a taxpayer can exclude up to $250,000 of capital gain from the sale of the principal residence if filing a separate tax return, or up to $500,000 for a joint return, provided the following requirements are met:

  • During the five-year period ending on the date of the sale or exchange, the residence must have been owned by either spouse and used by both spouses as their principal residence for periods aggregating two years or more.
  • An individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument.
  • If a residence is transferred to a taxpayer incident to a dissolution of marriage, the time the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership.
  • The exclusion can only be applied to one residence every two years.

      B. Retirement Assets

Retirement assets such as a 401-k or 403-b are not covered by §1041 but, rather, by a law called ERISA; as such, they cannot be divided except by a qualified domestic relations order (QDRO) incident to a divorce.  The division, which creates an account for the non-participant spouse (called the “alternate payee”), does not trigger tax consequences so long as no distribution is made.

IRA’s, on the other hand, are not covered by ERISA and, therefore, do not require a QDRO in order to be divided.  In dividing an IRA, be certain not to liquidate the account.  Instead, do a trustee-to-trustee transfer (a direct transfer) of the IRA funds, moving them directly from one spouse’s IRA to the other spouse’s account. That way, the IRA will be split and there will be no tax liability for either spouse.

In most cases, post-division distributions from ERISA and non-ERISA plans will trigger tax consequences to the distributee at ordinary income rates.  For recipients under 59½ years of age, an additional ten percent early distribution penalty will also apply.  The early distribution penalty is an amount equal to ten percent of the early distribution.

Alternate payee spouses who require immediate cash from a retirement plan post-divorce can look to IRC 72(t) for relief.  Under that provision, distributions to a former spouse from an ERISA plan pursuant to a QDRO will be subject to ordinary income tax — but are exempt from the ten percent penalty tax even if the recipient is younger than 59½ years of age.

     C.  Assignment of Income Doctrine

Another exception to the non-recognition rule of §1041 is the assignment of income doctrine.  A bedrock principle of tax law is that the person who earned the income is taxed on it regardless of who receives the proceeds.   The assignment of income doctrine is implicated when the right to receive the income has already accrued, and the parties assign that right to the spouse who did not earn the income.

           1.   Income Producing Property

Consider a divorce where the husband owns income-producing rental property and he assigns the rental income to the wife on the assumption that this will shift the income to her and she, then, will pay taxes at her lower tax rate.  Under the assignment of income doctrine, that will not work.  In order to achieve the objective that she pays taxes on the rental income at her tax rate, she would have to own the property.  Another income-shifting strategy, of course, would be to pay alimony which will continue to be deductible to the payor and includable to the payee for agreements through the end of 2018.

            2.   Savings Bonds

An ostensibly simple transfer of savings bonds is anything but simple.  A spouse who transfers U.S. savings bonds to a former spouse incident to a divorce must recognize as income in the year of transfer the deferred, accrued, and unpaid interest attributed to the bonds.

            3.   Other Assets Not Capable of Being Assigned

Particularly with highly compensated employees, a variety of other income-producing assets are typically not permitted to be assigned to others. Examples of these include: non-qualified deferred compensation plans, stock options, and restricted stock units.  With these assets, the owner is liable for taxes based on the realization of income.  And the support is usually paid to the non-owner spouse when the income is realized as well.

     D.  Corporate Redemptions

As noted, §1041’s non-recognition rules apply to transfers of property between spouses in a divorce. Therefore, a transfer of ownership of a closely held business in divorce does not trigger gain or loss if it is directly between the spouses.  Alternatively, a transaction involving a spouse who transfers shares to the corporation in exchange for redemption proceeds triggers rules that are much more complex.

In the event a transfer directly between spouses is not feasible or appropriate and a corporate redemption is necessary, one of the spouses must pay the taxes.  The good news is that the regulations allow divorcing couples to elect the tax treatment they want — to decide how (and to whom) the stock redemptions will be taxed.  For example, depending on certain factors, the couple can either elect to have the transferor or transferee spouse taxed on the redemption proceeds.  26 C.F.R. §§ 1.1041­2(c).

IV.   Conclusion

Tax issues in divorce can be complex and mistakes costly.  Make sure your attorney has a grasp of these laws before you decide to hire them.

 

Inheritance, Trusts & Divorce – Examining their complex relationship

Attorney Jonathan Fields will be speaking at MCLE about Inheritance, Trusts & Divorce on 09/23/2020.  Learn more about the program here http://www.mcle.org/product/catalog/code/2210108P01. We hope you’ll join him!

The interplay between inheritance, trusts, and divorce raises a series of issues every estate planning and family law attorney must be prepared to address. What steps should estate planning attorneys take to protect assets prior to or in anticipation of divorce? What is the procedure for courts to value a trust interest for purposes of equitable distribution and/or support payments? What are the recent legal decisions that influence practices related to inheritance, trusts interests, or divorce? Attend this program to hear expert faculty answer these questions and others that arise when these topics collide.

Tele-Mediation: A Game Changer For Divorcing Couples — Part I

by Vicki L. Shemin, J.D., LICSW, ACSW

Breaking the news to divorcing clients that courts are closed indefinitely (except for the most extreme of emergencies) has added yet another layer of stress and strain to the avalanche of burdens clients already bear.

It has not been easy to absorb the news that the trajectory of their divorce has been indefinitely derailed. In the old normal, trying as it was to go through the process, at least the promise of having had an end in sight engendered more than a small measure of hope.

For clients who have successfully negotiated and signed their divorce agreements, until they can have the judge’s blessing that their agreement passes muster and they are officially divorced, they are left with a pervasive sense that finality is outside their grasp. And, on the opposite end of the spectrum, for those clients who are well into the heart of the process but still far from settlement, the fact that the courts will be unavailable — and then certainly backlogged — brings on a different host of far-reaching concerns.

Fortunately, those of us who are trained mediators have been able to offer clients an efficient and effective alternative: tele-mediation. In short, tele-mediation is the distribution of mediation services and information through various telecommunication technologies. Most notable of these have been Zoom and Microsoft Teams, modalities that offer document-sharing capabilities and private breakout rooms.

Click to read more..

How Divorced Couples Can Keep Co-Parenting During Coronavirus

Attorney Wendie Murstein

By Wendie Murstein, Esq.

Parents may be wondering if there are any specific rules of shared custody while following stay-at-home orders? It is important to remember there are no specific rules for what to do with regard to parenting plans in times of a pandemic. The courts have advised that parenting plans are to follow the status quo so long as parents are able to.

This makes it difficult when parents live out of state or if one parent is a doctor or nurse, for example, and are exposed to the pandemic; in cases such as those, the exposed parent should make the other party aware.

It becomes difficult when one party is not social distancing and hasn’t informed the other. In such cases where one party may be exposed, or showing symptoms, the rule of thumb is that the other parent should keep the children so as to prevent their exposure. Ideally, the exposed parent would be allowed make-up time in the future.

There are parents, unfortunately, who have taken it upon themselves to withhold parenting time simply because they don’t trust their ex-spouses (no surprise on trust issues given the parents are divorced); in cases such as those, the courts will hear those cases, and, for the most part, the withholding parent is ordered to allow the other’s parenting time with the idea that every parent has their children’s best interests at the forefront. In the rare situation, we have heard of parents social distancing and living together in one home for the benefit of the children.

Compassion and Guidance Through the Attorney’s Eyes with Andrea E. DeLaney, Esq

Compassion and Guidance Through the Attorney’s Eyes with Guest, Andrea E. DeLaney, Esq. Andrea specializes in family law and divorce, including child custody, child support, paternity, alimony and asset division. Together with Host, Cece Shatz on Going Solo with Cece Show, they chatted about the asset division process and various legal steps in divorce. WGSN-DB Going Solo Network, Radio, TV & Podcasts (www.goingsolomedia.com)

(Not) Burning Out While Staying In – New Article by Attorney Vicki L. Shemin Published in Lawyers Weekly

A SURVIVAL GUIDE FOR LAWYERS

by Vicki L. Shemin, J.D., LICSW, ACSW

For most of us, we have compartmentalized well our work/family life so that when we leave the office, well – we have left the office.

Fast forward to stay-at-home orders.

In order to carry on with our work lives, the boundaries have blurred – literally – as many of us find that our computers and printers are set up on the kitchen/dining room table or in our bedrooms. Harkening back to the days of college dorm living, there is that pervasive sense of guilt and burden: I could be working longer instead of watching Netflix after dinner; I should not go to bed yet because I could probably work for another hour or two.

In order not to extinguish our Mojo flame, here are my top 10 survival tips:

1. Gratitude

Ask not what has been taken from you, but reflect on what you have to be grateful for as you start each day. Enough said.

2. Routine, Ritual, Repeat

Establish new routines to offset the new normal. For me, I have inverted my usual routine (which was – TMI -showering in the morning to be fresh to start the day); now, once my work for the day is complete, I shower to psychologically and physically demarcate the clear boundary between ending the work day and beginning the evening. Conversely, mark the beginning of your work day by getting out of your pajamas and actually getting dressed in garb you would wear outside. I don’t watch television during the day while I work (well, okay, except for the news during my lunch break).

3. Dress for Success

For Zoom meetings, it’s an occasion to do something different than jeans and a T-shirt! I don earrings, choose an outfit I would wear to the office, and apply some makeup in an attempt to recapture looking professional while sitting at the dining room table.

Read more of the article at https://masslawyersweekly.com/2020/04/23/not-burning-out-while-staying-in-a-survival-guide/

Attorney Sheryl Dennis Quoted in Lawyers Weekly about Paycheck Protection Program

Terms make PPP loan program ‘no brainer’ for firms, experts say

From Lawyers Weekly – Editor’s note: On April 16, the SBA announced that the PPP loan funding originally authorized by Congress had been exhausted and the agency would no longer be accepting PPP applications. A deal had yet to be reached by lawmakers to replenish funding for the program.

Law firms should act quickly to apply for small business loans under a new federal program designed to forestall layoffs by employers struggling to make ends meet during the coronavirus pandemic, experts say.

The $349 billion Paycheck Protection Program was created under the federal Coronavirus Aid, Relief, and Economic Security Act signed into law on March 27. Launched on April 3, the new U.S. Small Business Administration program provides small business job-retention loans to pay for eight weeks of payroll expenses and certain overhead to keep workers employed.

Wendell G. Davis, regional administrator for the SBA’s Region I, which encompasses the New England states, says the program is “tailor-made” for professionals such as attorneys.

“As long as the law firm spends the money on paycheck-related items, it essentially turns into a grant,” says Davis, an attorney himself. “It would be crazy not to apply. There’s no downside.”

Calling PPP a “good program” that’s “keeping paychecks flowing,” Providence business lawyer Michael F. Sweeney is advising his clients to apply for the loans.

“I don’t see law firms any differently than other eligible small businesses,” Sweeney adds. “So I’d advise other law firms, other accounting firms, and other service firms to go ahead and seek PPP funding if they are eligible.”

Boston banking attorney Charles H. DeBevoise has one piece of advice for law firms considering applying for a PPP loan.

“Don’t ‘self-select’ yourself out of the opportunity,” DeBevoise says. “Let the banker or the SBA tell you you’re not eligible.”

Not too late

Wellesley lawyer Sheryl J. Dennis filed for a PPP loan on the first day of the program. She says her loan application was approved within six to seven days and she’s awaiting disbursement of the proceeds. While her six-attorney family law firm, Fields & Dennis, is busy now, Dennis sees the loan as providing a much-needed backstop in the event that business takes a downturn in the coming months.

“Don’t ‘self-select’ yourself out of the opportunity. Let the banker or the SBA tell you you’re not eligible.”

— Charles H. DeBevoise, Boston

“If we can use this money properly — 75 percent of what you get is to cover salaries over the next two months — that amount is forgiven,” Dennis says. “That means you can use other money that you have saved or coming in for paying your other bills. If 75 percent of the loan is forgiven, why wouldn’t you do it?”

Likewise, Andrew J. Garcia has applied for a PPP loan for his two-attorney general practice, Phillips Garcia. The firm has six employees total, and the Dartmouth lawyer says he’s determined to keep his team together.

“Attorneys need to jump on this as quickly as possible,” says Garcia, who teaches small firm management at Suffolk University Law School.

According to the SBA’s Davis, as of April 14 just over $245 billion of the $349 billion Congress authorized for the program had been committed to loans. In addition, more than 1 million PPP loan applications had been filed through the more than 4,500 lenders participating in the program.

Congress is currently considering a bill that would provide an additional $250 billion for PPP loans. That should be enough to satisfy the demand, according to William A. Farrell, legal counsel for the Rhode Island Bankers Association.

The loans are administered at the local level by banks, credit unions and other lenders. Farrell says that, to his knowledge, all the banks in Rhode Island are participating in the SBA loan program, although there have been challenges.

“Many of the banks are overwhelmed,” Farrell says. “The number of loan applications that are being filed is something the industry has never seen.”

Garcia says he’s experienced logjams first-hand. His firm filed a PPP loan application the morning of Monday, April 6, only to learn later that his bank had suspended consideration of loan applications on April 5 at 2 p.m.

“Everybody else who submitted applications has been put in queue for [future] consideration,” Garcia says.

Finding the right lender

Davis says the level of participation in PPP can vary between lenders.

“Each lender has their own appetite in terms of how many applications they want to accept and how much volume they can handle,” he says. “If someone’s particular bank is no longer accepting applications, they should definitely look to other lenders.”

“As long as the law firm spends the money on paycheck-related items, [the loan] essentially turns into a grant. It would be crazy not to apply. There’s no downside.”

— Wendell G. Davis, SBA regional administrator

The best way for a law firm to start the application process typically is to contact the local bank the firm ordinarily does business with, DeBevoise advises.

“It’s a whole lot easier to go to a bank with whom you’ve already established a banking relationship,” he says.

In terms of documents, Farrell says applicants should have on hand payroll records for 2019 as well as 2020 payroll records up until March 30. Tax returns for 2018 and 2019, if filed, should also be readily available.

“You should have a breakdown of utilities, rent and any mortgage interest the entity is responsible for,” he adds. “You should also have a summary of [employment] benefits that will come into play in calculating the loan request.”

Loans are issued on a first-come, first-serve basis. For that reason, Davis says it is important for law firms and other small businesses to act immediately.

“Applications and approvals have been getting in very quickly, so just get in line, [and] get your application on file,” Davis says.

Dennis says her firm obtained loan approval through a local bank that doesn’t typically administer SBA loans after the “large regional bank” it usually does business with was slow to help.

“We didn’t hear back from [the large bank] with information on how to apply until after we were approved at the other bank,” Dennis says. The Wellesley attorney adds that, with the benefit of the SBA’s simplified application form, the PPP loan process went smoothly — once she found the right lender.

“It was very easy,” she says. “You can complete the application online.”

Details, details

The SBA is in the process of formulating rules and guidance for the new loan program. Just the day before the program launched on April 2, the SBA issued its PPP final interim rule for public comment. On April 8, the agency issued important guidance in the form of answers to frequently asked questions by lenders and borrowers.

While the details of the program are being hammered out, the basic outline is in place. Section 1102 of the CARES Act temporarily permits the SBA to guarantee 100 percent of loans under the program. Section 1106 of the act provides for forgiveness of up to the full principal amount of those loans.

The program, retroactive to Feb. 15 to enable employers to rehire laid-off employees, continues through June 30.

Generally, small businesses with less than 500 employees are eligible for PPP loans. Qualifying nonprofits, sole proprietorships, self-employed individuals and independent contractors can apply for loans.

The maximum loan amount is $10 million with a fixed 1 percent interest rate and maturity of two years. The loans do not require collateral or personal guarantees, and the first payment is deferred for six months during which no interest accrues.

Under the interim rule, the loan amount is generally calculated by multiplying the applicant’s average monthly payroll for 2019 by 2.5. The average monthly payroll calculation excludes an employee’s annual salary in excess of $100,000 and includes commissions, tips and benefits such as sick leave and health insurance.

Under the program, the SBA forgives that portion of a loan used for payroll costs and other designated operating expenses for up to eight weeks from the date the loan is disbursed — but only if at least 75 percent of loan proceeds are used for payroll costs. Other expenses eligible for forgiveness include mortgage interest, rent payments and utilities, but payment of those non-payroll costs may constitute no more than 25 percent of the eligible loan forgiveness amount.

“If you spend the loan on the eligible purposes, it’s not a loan, it’s forgiven,” Sweeney says. “It becomes a non-taxable grant.”

Dennis says her firm plans to open a separate account for PPP loan proceeds. That will make it easier to track “every penny” of the loan in order to document its use for payroll and other covered expenses for the purpose of maximizing the firm’s eligibility for loan forgiveness, she says.

Keeping PPP loan proceeds in a separate account is a wise move, particularly if the money isn’t bearing any monthly service charges, according to Christopher J. Ryan, who teaches business law at Roger Williams University School of Law in Rhode Island.

Ryan adds that it should be fairly easy for law firms to satisfy the so-called “75/25 Rule” for loan forgiveness. However, given that the rules governing the program are still being developed, he suggests that a law firm play it safe by using 80 to 85 percent of loan proceeds for payroll purposes to ensure staying above the 75 percent threshold.

Despite such caveats, Ryan sees the loan program as a “tremendous boon” for smaller employers, including law firms.

“Why you wouldn’t want to pursue this is beyond me,” Ryan says. “It’s a wonderful program to help smaller firms bridge the gap between now and whenever the courts open back up and folks can return to business as usual.”

As BigLaw slashes payroll, small firms weather storm – Attorney Sheryl Dennis Featured in Lawyers Weekly

Though the Boston market has been rocked by reports of BigLaw firms cutting pay and staff in response to the coronavirus emergency, pink slips seem to be few and far between for some smaller firms with niche practices.

The public health emergency has kept Sheryl J. Dennis and five other attorneys at the Wellesley Hills firm of Fields & Dennis plenty busy handling family law and estate planning matters. According to Dennis, her firm had one of its most profitable months in March — despite the coronavirus outbreak.

“We’re busy. We’re getting calls,” she reports.

The intellectual property firm Lando & Anastasi moved its offices from Cambridge to the heart of Boston’s Financial District on March 1 — just as the American public was beginning to grasp the scope of the coronavirus threat.

Founding partner Peter C. Lando says the pandemic hasn’t altered the firm’s plans to hire more attorneys. In fact, Lando anticipates his firm will be the beneficiary of BigLaw rashly letting go of IP talent.

“We’re not thinking of any cuts,” Lando says. “Things look strong, given the circumstances. We’re open to hiring. We’re in discussions with folks at the moment.”

Meanwhile, news of belt-tightening at BigLaw firms with Boston offices is coming at an accelerated pace.

Above the Law reported on April 7 that Brown Rudnick was furloughing a number of associates, cutting associate pay for several months by “7.5 percent on an annualized basis,” and deferring payment of 2019 associate bonuses. The firm reportedly was also cutting equity draws by partners.

“Brown Rudnick has taken expense management steps during these uncertain times,” Chairman and CEO William R. Baldiga said in an emailed statement to Lawyers Weekly. “The firm is dedicated to its lawyers and staff and has implemented a proactive plan to maintain the strong financial standing of the firm that does not involve layoffs.”

On March 30, the ATL website reported that Womble, Bond, Dickinson had implemented a number of cost-cutting measures, including laying off associates and furloughing staff. The steps reportedly included 10 percent pay cuts for anyone making over $100,000, with smaller reductions for employees in lower salary ranges.

In an emailed statement to Lawyers Weekly, the firm confirmed that it had made the “hard decision” to furlough some employees and “let go” others.

“In addition, we are temporarily instituting a 10 percent or less pay reduction (with lower levels of compensation reduced by smaller percentages) for our remaining staff and attorneys, in addition to a more substantial partner compensation reduction,” the Womble statement said. “Decisions like these are never easy, but we believe taking these steps now will curb the negative economic impact of the COVID-19 pandemic and keep our firm strong and well-positioned to continue serving our clients at the highest level.”

On April 1, the ATL website reported that the March equity partner distributions at Arent Fox had been reduced by 60 percent. Meanwhile, the firm reportedly had reduced by 30 percent the salaries of nonequity partners and counsel, and cut by 25 percent the pay of associates and staff.

In a statement, the firm confirmed it had made “temporary adjustments” to its business operations in responding to the “economic disruption” caused by COVID-19.

“Firm leadership is closely following these significant events and recognizes that the biggest financial risk to a law firm is underreacting,” the Arent Fox statement said. “In response to the economic slowdown, the firm is instituting a temporary pay cut for all attorneys, professionals, and staff.”

Nixon Peabody made the headlines on April 3, reportedly furloughing 25 percent of staff effective April 6. Nixon Peabody did not respond to a request for comment.

Lando attributes his own firm’s strong position to having a diversified practice.

“We have a good, diversified portfolio in our client mix,” Lando says. “That helps in these times.”

Lando says he sometimes finds large firms to be “over-reactive” in responding to the market on issues such as associate pay and raising rates. He questions whether the recent wave of layoffs and pay cuts may also represent an over-reaction in a time of crisis.

“I was surprised by the quick and drastic action that many have taken,” Lando says, noting that BigLaw firms tend to take their cue from what others in the market are doing.

“They follow one another,” Lando says. “It’s as if one firm takes the lead and they all chase. They’re deferring partner pay, cutting expenses, and cutting head count across the board. These are pretty drastic measures.”

What’s often “missing in the picture,” he adds, is the fact the decisions impact individuals with families.

“I trust that they’re not making these decisions cavalierly, but I do get concerned about the wild swings I see,” Lando says.

Dennis admits she has concerns for her practice should the public health emergency last for more than three months. But assuming the coronavirus crisis is of relatively short duration, Dennis is confident that her firm will “weather the storm.”

“And on the other side of it, I think we’re going to be busier than ever,” she says.

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The Boston metro family law, divorce and estate planning attorneys at the law firm of Fields and Dennis LLP are based in the Newton Wellesley area and serve the city of Newton: Auburndale, Chestnut Hill, Newton Centre, Newton Corner, Newton Upper Falls, Newton Lower Falls, Nonantum, Oak Hill, Waban and West Newton and town of Wellesley: Babson Park, Wellesley Hills, Wellesley Square Fields and Dennis also serves many clients in the Greater Boston and Massachusetts region including Ashland, Dover, Holliston, Medfield, Needham, Sherborn, Westwood, and all of Massachusetts.

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