The billion dollars of premarital property Oklahoma divorce

Friends of mine who know that I’m working with co-authors on a book about divorce laws in the 50 states have been emailing me for thoughts on Harold Hamm’s $1 billion loss after a trial in Oklahoma (nytimes story).

Certainly the case proves what one lawyer told us, i.e., that it is “the American dream” to marry someone with money and then sue them for divorce.

The New York Times article is interesting because of the subhead: “Harold Hamm to Pay One of the Biggest Divorce Settlements in History”. The implication from the subhead is that there was a “settlement,” i.e., a voluntary payment from the defendant to the plaintiff in this lawsuit. In fact, there was a nine-week trial in the lawsuit started by Ann Hamm and the $1 billion is what the court ordered the defendant to pay. Somehow Americans don’t seem to understand that a divorce is a lawsuit, albeit one where the defendant is guaranteed to lose (since nearly all states have no-fault divorce) and one where the defendant is, in many states, much more likely to be ordered to pay the plaintiff’s legal fees (which enables the case to proceed until both parties’ assets are exhausted).

Angie Hallier, a top Arizona divorce litigator, explains this in the new book The Wiser Divorce:

the legal process itself is still designed to make divorce a battleground. Existing divorce law in the United States says the only way to end your marriage is for one party to file a lawsuit against the other. … you have to sue the person who has shared your bed, trusted you with life’s deepest secrets, and maybe even made babies with you. Divorce, by law, starts as an adversarial act. File a lawsuit. With that as the starting point, it’s easy to think the only outcome is: you will win, or you will lose.

Our legal system was set up to address wrongs. It deals with criminals. It decides who’s in the wrong when there’s a car wreck, or whether someone is guilty of medical malpractice when healthcare goes awry. When divorce laws were first written, somebody had to be in the wrong before a divorce could be granted. Somebody had to be cheating or abusing or otherwise be some kind of evil scoundrel before the other person — who was presumed to be the innocent victim — could file a lawsuit to be released from their marital hell. So historically divorce, like most other legal proceedings, addressed a wrong. Today, the litigation model of divorce still stands, despite the fact that no-fault divorce is the norm. … for the most part, the legal system, families, communities, and society still tend to treat the act of ending a marriage like something to be won or lost. This adversarial system helps no one in the end.

(Ann Hamm, with an additional $1 billion in her checking account after two years of litigation, might disagree with that last sentence…)

The Times article is also interesting for its misleading presentation of the legal issue:

The money a spouse earns while married can be part of a divorce settlement if it is made through skill. If, on the other hand, the increase is attributable to “changing economic conditions, or circumstances beyond the parties’ control,” as the state’s Supreme Court put it in a 1995 case, then that money is off the table.

If in fact he had earned this money while married in a conventional W-2 sense, there would have been no question that the petitioner (what Oklahoma calls the person who starts a divorce lawsuit; a “plaintiff” in most states) was entitled to a substantial share. From reading the Memorandum Order (linked to from the Times article) the issue seems to be that the property which the plaintiff sought a share of was acquired prior to her marriage. In Germany, a simple checkbox at the time of marriage would have sufficed to keep this separate at the time of the divorce. In Wisconsin, on the other hand, Ann could have married Harold on a Sunday morning and sued him for 50% of his pre-marital savings on the following Monday morning. Oklahoma is like a lot of other Western states in saying that generally the separate property should remain separate but appreciation in that property can be divided. Oklahoma has an addition exclusion that if the appreciation is purely due to market forces then it can’t be divided (see paragraphs 409-413 of the Memo).

Under these rules, inflation and market volatility can lead to tremendously increased profits for a plaintiff. Let’s consider volatility first. Here’s a section from our forthcoming book:

Attorney John Eckelberry of Colorado: “In a divorce case the court has to consider an increase in separate property. If it goes up $500,000 she is entitled to an equitable share. If it goes down $500,000 the court can just look at it as an economic circumstance. In reality the court doesn’t take the loss into account. Another way to look at it is the $500,000 in appreciation has to be on a property spreadsheet but an equivalent loss cannot be placed on the property spreadsheet.”

In states where a divorce plaintiff is entitled to a share of any increase in the value of a premarital asset during the marriage, random movements in asset prices can lead to large profits. Consider a plaintiff who marries a defendant with three $1 million investments. In a zero-volatility and zero-inflation environment, if she sues him for divorce after five years she gets nothing from these assets. However, suppose that the value of the investments is volatile. One goes to zero. One stays at $1 million. The third goes up to $2 million. After five years, the plaintiff gets 50 percent of the $1 million in appreciation or $500,000 net. This is much more lucrative even though the defendant’s three investments are worth a total of $3 million in both cases. Judson Kidd of Arkansas said “If I were representing the defendant I would argue that the losses should be figured against the profits, but it could go either way.”

Inflation is helpful to plaintiffs because courts work with nominal dollars, not real dollars. If an asset goes from $1 million to $10 million during a marriage but is actually worth less in real terms, that means 90 percent of the asset can be divided. So a plaintiff who would have gotten nothing in a zero-inflation environment gets $4.5 million in an inflationary environment. How did inflation play a role here? Oil was about $12 per barrel in 1988 when these litigants were married. At the time of the trial it was about $90 per barrel.

An interesting angle here is the care with which money is handled by America’s family courts compared with what happens to children. Attorneys told us that custody cases, in which a child may essentially lose one parent (once a court declares that Parent A is “primary” (the modern name for “custodial”), a typical outcome, the officially “secondary” Parent B usually begins to fade from the child’s life (according to academic psychologists’ studies)), are decided in motion hearings as short as 10 minutes. No witnesses testify, just attorneys speaking on each side. Assuming that a nine-week trial was 30 hours per week on the record, as much time was devoted to figuring out exactly how rich these two rich people should be as would be devoted to the custody decisions for about 2000 children (1620 motion hearings; assume just over 1 child per hearing (sometimes siblings are disposed of together)).

[Note that if the custody decisions were made in Massachusetts, using the child support guidelines, this would be about the same amount of court time per dollar in dispute. If the average custody and child support defendant in Massachusetts was earning $100,000 per year (higher than average, but it is hardly sensible to sue someone who earns less than average), the children would yield about $20,696 (tax-free) per year times 23 years, or $476,000 total. The cash value of the disputed children would then be $952,016,000, pretty close to the $995 million in “property division alimony” that Ann Hamm won from her lawsuit. In Oklahoma, however, obtaining custody of a child is not as profitable. The same $100,000 per year defendant yields about $11,172 per year in tax-free child support (table) and only for 18 years, a total of $201,096 for one child. So the 2000 children that the Oklahoma court could have allocated in nine weeks of judge time would have had a total value of about $402.2 million.]

I don’t think this case is too surprising. There was a lot of money and, due to the length of the marriage and Oklahoma’s subjective statutes, ownership of the money was uncertain.

What has been more surprising to us (authors) is the amount of resources that family courts will devote to the question of child support to be paid to from one rich or high-income person to another rich or high-income person. Here are a couple of excerpts from our book:

Maryanne Sorge sued her husband Joe Sorge [later the director of the movie Divorce Corp.] in Wyoming in 2000. She got assets that were worth about $14 million, joint custody of children, and $96,000 per year in child support. Seven years later Maryanne, who had remarried (to a husband of unknown wealth and income), sued her ex-husband in California seeking “to modify the child custody and visitation arrangement” for a 14-year-old (i.e., a child who had only 4 more years in the child support system in Wyoming and California). Part of her lawsuit was that the former husband should have been disclosing to her, on a continuing basis, any changes in his income. After three years of litigation, in 2010, Maryanne won an order for $216,000 per year in child support plus payment of $200,000 in her legal fees. Assuming the child support order was retroactive, and compared to the $48,000 per year that she had been receiving for the single child, she netted $672,000 on the lawsuit. In upholding this award, the appeals court noted “California has a strong public policy in favor of adequate child support” and talked about the “needs of the child.” The IN RE: the MARRIAGE OF Joseph and Maryanne K. SORGE case was finally decided in 2012, when the child yielding the support payments was presumably 19 years old and no longer a child. I.e., the litigation over how much money a person with $14 million in assets (and a new husband) needs to support a part-time child lasted longer than the kid’s childhood.

From “Men Receiving Alimony Want A Little Respect” (Anita Raghavan, April 1, 2008, Wall Street Journal): “Sara Lee Chief Executive Brenda Barnes is paying no alimony to her ex-husband … Until their youngest child recently turned 18, Ms. Barnes, who earned a total of $8.7 million in fiscal 2007, was receiving child-support payments from her former husband, according to court records.”

Why is the Sorge case is more interesting than the Hamm case? You have two parents each of whom is worth literally tens of millions of dollars. Yet somehow the divorce industry was able to keep them as customers (albeit one of them unwillingly) for 12 years to answer the question of “Who will pay for a 14-year-old’s T-shirts and skateboard?” And legislators and judges will tell you that it is “in a child’s best interest” to have a system where the child can generate enough cash to interest someone with $14 million and where the parents can continue to fight over who owns the cash generator (using time, energy, and money that, in an intact family, would be devoted to actual child-rearing).