L.K.F v. M.T.F

2024 NY Slip Op 50369(U)

L.K.F, Plaintiff, v. M.T.F, Defendant.

Index No. XXXXXX/2021

Supreme Court, Nassau County

April 4, 2024

Unpublished Opinion

Attorney for Plaintiff: Firm Name: Mulhern & Klein

Attorney for Defendant: Firm Name: Gassman Baiamonte Gruner P.C.

EDMUND M. DANE, J.

PRELIMINARY STATEMENT

The Plaintiff moved by Order to Show Cause dated October 26, 2022 ^[1] seeking an Order: (1) That plaintiff's interest in XXXX LLC is and be declared to be her separate property; (2) That defendant has no claim to the appreciation of plaintiff's separate property, inasmuch as plaintiff has made no contribution towards it.

The Defendant cross-moved by Notice of Cross-Motion dated November 22, 2022 ^[2] seeking an Order: (1) That Plaintiff's interest in the XXXX, LLC is and be declared marital property for purposes of this action; or, in the alternative (2) That Defendant has a valid claim of marital appreciation of the value of Plaintiff's interest in XXXX, LLC; and (3) Directing an appraisal of the Plaintiff's interest in XXXX, LLC to ascertain the value of said interest and/or the appreciation in value of said interest during the parties' marriage, as the case may be; (4) Denying all of the relief requested in the Plaintiff's Order to Show Cause; and (5) Such other and further relief as may appear just and proper to this Court.

BACKGROUND

Most of the procedural background of this case is more fully recited and set forth in this Court's Decision and Order dated February 7, 2023, L.F. v. M.F., 78 Misc.3d 810 (Supreme Court Nassau County 2023) (hereinafter referred to as the "February 2023 Order"). In short summary Branches (1) and (2) of the Plaintiff's Order to Show Cause dated October 26, 2022 (see supra), and Branches (1), (2) and (4) of the Defendant's Notice of Cross-Motion dated November 22, 2022 (see supra) were referred to a hearing. This matter proceeded to a five (5) day plenary hearing, commencing on April 27, 2023, which continued thereafter on May 8, 2023, May 30, 2023, June 20 2023 and July 18, 2023 (hereinafter collectively referred to as the "Hearing"). Written post-hearing Memorandum(s) of Law were submitted by the parties on September 11, 2023. The Defendant was granted permission by this Court to submit a Supplemental Memorandum of Law on October 18, 2023 (hereinafter referred to as the "Husband's Supplemental Memorandum") and the Plaintiff was granted permission by this Court to submit a responsive Supplemental Memorandum of Law on November 22, 2023 (hereinafter referred to as the "Wife's Supplemental Memorandum").

THE HEARING TESTIMONY

The sum and substance of the testimony of the parties is summarized as follows and all as more fully set forth herein. The Plaintiff will hereinafter be referred to as the "Wife" and the Defendant will hereinafter be referred to as the "Husband". ^[3]

A. Wife's Case:

1. Testimony of R.O.

Direct Examination

R.O. (hereinafter referred to as "Mr. O") is the Wife's father. He testified as to background and familial information. He has two other children - siblings of the Wife - A and B Mr. O graduated from St. John's University School of Law, holds a law license, and also holds a Master's Degree in Taxation which he received from New York University. Mr. O is employed by "RRR" (hereinafter referred to as "R") as Executive Vice President. He has been employed with R since 2005. Mr. O was previously a tax Partner with P.H. from 2000 to 2005.

Mr. O testified about the formation of XXXX, LLC (hereinafter referred to as "XXXX"), which is a Delaware Limited Liability Company. XXXX was formed in 2015. Mr. O's initials are "XXXX". The Certificate of Formation of XXXX ^[4] was filed on February 26, 2015. Mr. O formed XXXX in Delaware, as the State is "user friendly". The LLC Agreement of XXXX dated March 1, 2015 ^[5] (hereinafter referred to as the "LLC Agreement") reflects a registered office in Delaware. The Principal Office is listed as "R".

Mr. O described why XXXX was formed and XXXX's "structure". In 2015, he had a tumor in his esophagus. That tumor could have been fatal. Mr. O wanted to form an LLC to hold certain investments and to facilitate estate planning. XXXX is comprised of five (5) people: Mr. O, Mr. O's wife, and his three (3) children. His three (3) children each hold a thirty (30%) percent interest. Mr. O holds a five (5%) percent interest. Mr. O's wife holds a five (5%) percent interest.

Mr. O testified about XXXX's initial capitalization and the execution of the LLC Agreement. The total initial capitalization was $10,004.00. ^[6] Mr. O provided $10,000.00. The other $4.00 capitalization was allocated $1.00 to each of the other members of XXXX. However, the $1.00 from each of the other four members was never actually contributed. The Wife accepted her thirty (30%) percent interest in XXXX by signing the LLC Agreement.

Mr. O testified about the absence of any gift tax returns. No gift tax returns were filed in 2015 for the Wife's gift in XXXX as there was no need to file a gift tax return. No gift tax return were ever filed in the future.

Mr. O testified about the value of XXXX and, in effect, how XXXX is operated. The value of XXXX from its inception has grown "quite a bit". XXXX owns interests in investments in businesses due to Mr. O's participation in XXXX. Mr. O selects the investments for XXXX based upon his work with R. Any companies that XXXX invested in were selected by Mr. O, without involvement from his spouse, the Wife or the Wife's siblings. The cost of the investment in the companies reflect zero. XXXX received interest(s) in such companies because Mr. O received the interest(s) through his work with R. Mr. O then gave the interest(s) to XXXX. Mr. O never sought the opinions of the other members of XXXX and they did not volunteer any opinions relating to these investments. The consent of the other members of XXXX was never sought, nor did Mr. O notify the other Members of XXXX of these purchases; this is because he is the sole decision-maker. While the LLC Agreement of XXXX provides that XXXX is managed by its Members, Mr. O nonetheless makes all of the decisions relating to XXXX. The Wife provides no managerial services for XXXX. While the other members of XXXX have the full right to operate, manage, control and make decisions, the Wife provides no operational services for XXXX. Mr. O testified that the Wife has not made any contribution towards XXXX. Mr. O testified that the Husband has made no contribution towards XXXX.

Mr. O prepared and testified about a summary chart. ^[7] The cost of investment column shows mostly "zero's". The source of capital to acquire was from Mr. O, or returns from other investments generated by XXXX's prior investments.

Mr. O testified regarding certain "zoom" meetings he had with the members of his family. At his examination before trial, Mr. O testified these "zoom" meetings, which generally began in 2020, at the onset of the COVID-19 global health pandemic. Those meetings generally continued once per month thereafter. Mr. O and his spouse were not seeing the Wife and their other two (2) children, so he suggested a "zoom" meeting to get together as a family (albeit virtually) and to address tax information which his children needed information about. Mr. O taught a tax course at Columbia graduate school. He discussed this on the "zoom" calls with his family. In sum, Mr. O would discuss how taxes "work" using his notes, then how the stock market works, how inflation works and the concept of interest rates. XXXX was discussed at one of these "zoom" meetings to give the family a sense of the investments. He additionally explained how partnership tax works. Generally speaking, on these zoom meetings, the family would spend time talking, then Mr. O would lecture for approximately thirty (30) to forty (40) minutes, and then he answered any questions. Prior to the family meetings, Mr. O felt as if the Wife had little or no knowledge of XXXX's operations. After these meetings, he felt as if the Wife knew more about tax ramifications.

Mr. O testified about XXXX and taxes. XXXX receives K-1 statements from companies that it invests in. Then, Mr. O prepares tax returns. After XXXX invests in a company, XXXX plays no role, other than making the investment. XXXX also has no board of directors. Schedule K-1's are issued to XXXX's members. Six (6) years of K-1 statements were issued to the Wife ^[8] which reflect varying percentages in ownership: 30% in 2015, 30% in 2016, 10% in 2017, 20% in 2018, 15% in 2019 and 15% in 2020. Mr. O prepared the Schedule K-1's. Mr. O explained that the differences in the six (6) years of Schedule K-1 statements were because of taxable income of XXXX and the distributions to its members.

Cross-Examination

Mr. O acknowledged that XXXX has grown "quite a bit" since its inception. Mr. O also acknowledged that the initial capital contribution of $10,000.00 was not a gift. The $10,000.00 at formation is worth at least $15,000,000.00 or more today. Mr. O performed valuations in 2022. While XXXX keeps Schedule K-1 statements, it does not keep journals. XXXX does not invest in any "controlling interest" other than one (1) investment.

The LLC Agreement was drafted by a paralegal at the direction of Mr O. Mr. O thought this was the appropriate vehicle for his family due to his health issues and that there were tax benefits. The appreciation is for his children, which is why it is not included in his estate. This vehicle minimized his capital gains if an asset was sold during his lifetime. There are also estate tax advantages with respect to the appreciation. Mr. O saved money for himself and his estate using the LLC Agreement. Third parties manage some of the investments of...