MEMO TO:
Alexsei Demo US
RESEARCH ID:
#400052188f2497
JURISDICTION:
State
STATE/FORUM:
New York, United States of America
ANSWERED ON:
December 28, 2021
CLASSIFICATION:
Family law

Issue:

How does the receipt of passive investment income affect a payor's obligation to continue paying spousal support upon retirement?

Facts:

Parties were married for 25 years and have been divorced now for about 18 years. Husband has been paying spousal support since the divorce but is now 71 years old and retired. He continues to receive passive income from investments.

Conclusion:

Per Domestic Relations Law § 236(B)(9)(b)(1), a court may annul or modify any prior order or judgment regarding maintenance if the payor fully or partially retires and the retirement results in a substantial change in the payor's financial circumstances. Domestic Relations Law § 236(B)(6)(f)(4) further provides that full or partial retirement of the payor with substantial diminution of income is a basis for a modification of an award of post-divorce maintenance. 

"Income" includes investment income. (Domestic Relations Law § 240, Domestic Relations Law § 236)

No New York cases were identified that specifically considered the impact of passive investment income on a payor's obligation to continue paying spousal support upon or after retirement. However, the principles of modification of spousal support orders and decisions discussing situations where the payor retains other sources of income may be instructive.

The ability of a court to modify the duration or quantum of spousal support is dependant on whether spousal maintenance was determined by court order/judgment or by a separation agreement. A court order or judgment with respect to maintenance may be modified if there is a "change in circumstances" that warrants modification. However, in order for a court to modify spousal maintenance set out in a separation agreement, the party seeking the modification must show "extreme hardship". (Leo v. Leo, Connor v. Connor, Abdelrahman v. El Mahdi)

In determining if there is a substantial change in circumstances to justify a downward modification, the change is measured by comparing the payor's financial circumstances at the time of the motion for downward modification and at the time of the divorce or the time when the order sought to be modified was made. (Watrous v. Watrous, Connor v. Connor)

The standard of proof for showing a substantial change in circumstances is clear and convincing proof. (Watrous v. Watrous)

In Wight v. Wight, the plaintiff's early retirement was found not to constitute a substantial change in circumstances such that modification of maintenance was warranted. The payor husband had earned approximately $73,000 annually prior to retiring. After retiring he received net annual pension payments of $37,620 (after deduction of the payee's share), he had rental income of $1,800 per year, and was married to a woman who earned an annual salary of $33,000. Immediately prior to bringing a motion for reduction in maintenance, the payor transferred real property valued at $114,000 and cash assets valued at over $90,000 to his second wife. The payee owned no real estate, earned less than $20,000 per year, and was entitled to $18,000 as her annual share of the defendant's pension.

A finding of extreme hardship is necessarily fact-based and varies with the circumstances of each case; however, extreme hardship has been found when a party is unable to be self-supporting, unable to work due to physical disability, or experiences a substantial decrease in income following the time of the separation agreement due to factors outside of the party's control. (Gardner v. Zammit)

Law:

Per Domestic Relations Law § 236(B)(9)(b)(1), if the payor fully or partially retires and the retirement results in a substantial change in the payor's financial circumstances, the court may annul or modify any prior order or judgment regarding maintenance:

9. Enforcement and modification of orders and judgments in matrimonial actions.

[...]

b.

(1) Upon application by either party, the court may annul or modify any prior order or judgment made after trial as to maintenance, upon a showing of the payee's inability to be self-supporting or upon a showing of a substantial change in circumstance, including financial hardship or upon actual full or partial retirement of the payor if the retirement results in a substantial change in financial circumstances. Where, after the effective date of this part, an agreement remains in force, no modification of an order or judgment incorporating the terms of said agreement shall be made as to maintenance without a showing of extreme hardship on either party, in which event the judgment or order as modified shall supersede the terms of the prior agreement and judgment for such period of time and under such circumstances as the court determines. [...]

Domestic Relations Law § 236(B)(6)(f)(4) further provides that full or partial retirement of the payor with substantial diminution of income is a basis for a modification of the award of post-divorce maintenance:

6. Post-divorce maintenance awards.

[...]

f. The duration of post-divorce maintenance may be determined as follows:

[...]

(4) Notwithstanding the provisions of subparagraph one of this paragraph, when determining duration of post-divorce maintenance, the court shall take into consideration anticipated retirement assets, benefits, and retirement eligibility age of both parties if ascertainable at the time of decision. If not ascertainable at the time of decision, the actual full or partial retirement of the payor with substantial diminution of income shall be a basis for a modification of the award.

"Income" is defined in subsection (B)(6)(b)(3) of Domestic Relations Law § 236 as:

6. Post-divorce maintenance awards.

[...]

b. For purposes of this subdivision, the following definitions shall be used:

[...]

(3) "Income" shall mean:

(a) income as defined in the child support standards act and codified in section two hundred forty of this article and section four hundred thirteen of the family court act, without subtracting alimony or maintenance actually paid or to be paid to a spouse that is a party to the instant action pursuant to subclause (C) of clause (vii) of subparagraph five of paragraph (b) of subdivision one-b of section two hundred forty of this article and subclause (C) of clause (vii) of subparagraph five of paragraph (b) of subdivision one of section four hundred thirteen of the family court act and without subtracting spousal support paid pursuant to section four hundred twelve of such act; and

(b) income from income-producing property distributed or to be distributed pursuant to subdivision five of this part.

Per Domestic Relations Law § 240(5)(ii), "income" includes investment income:

(5) "Income" shall mean, but shall not be limited to, the sum of the amounts determined by the application of clauses (i), (ii), (iii), (iv), (v) and (vi) of this subparagraph reduced by the amount determined by the application of clause (vii) of this subparagraph:

(i) gross (total) income as should have been or should be reported in the most recent federal income tax return. If an individual files his/her federal income tax return as a married person filing jointly, such person shall be required to prepare a form, sworn to under penalty of law, disclosing his/her gross income individually;

(ii) to the extent not already included in gross income in clause (i) of this subparagraph, investment income reduced by sums expended in connection with such investment;

[...]

No New York cases were identified that specifically considered the impact of passive investment income on a payor's obligation to continue paying spousal support upon or after retirement. However, decisions discussing the modification of spousal support orders generally and situations where the payor retains other sources of income may be instructive.

The ability of a court to modify the duration or quantum of spousal support is dependant on whether spousal maintenance was determined by court order or by the separation agreement. Courts may modify orders and judgments if there is a change in circumstances that warrants modification per the Domestic Relations Law § 236(B)(9)(b). However, except under certain circumstances, a court has no authority to modify a separation agreement. In Abdelrahman v. El Mahdi, 160 A.D.3d 1253, 74 N.Y.S.3d 672 (N.Y. App. Div. 2018), the husband sought to modify the terms of his separation agreement with respect to his child support and maintenance obligations on the ground that his loss of employment constituted a change in circumstances that warranted modification. The Appellate Division of the Supreme Court, Third Department refused to modify the agreement because it had no authority to make a modification (at 674-675):

"The case law distinguishes between modification of a separation agreement and that of a divorce decree. A separation agreement that is incorporated into but not merged with a divorce decree is an independent contract binding on the parties unless impeached or challenged for some cause recognized by law. Indeed, courts of this [s]tate enjoy only limited authority to disturb the terms of a separation agreement" (Merl v. Merl, 67 N.Y.2d 359, 362, 502 N.Y.S.2d 712, 493 N.E.2d 936 [1986] [internal quotation marks and citations omitted]; see

[74 N.Y.S.3d 675]

Makarchuk v. Makarchuk, 59 A.D.3d 1094 1094, 874 N.Y.S.2d 649 [2009]; Mills v. Mills, 22 A.D.3d 1003 1003, 802 N.Y.S.2d 796 [2005]; Talandis v. Talandis, 233 A.D.2d 689, 690, 650 N.Y.S.2d 345 [1996]; Murphy v. Murphy, 84 A.D.2d 873, 874, 444 N.Y.S.2d 742 [1981]).1 The husband sought modification of the terms of the agreement with respect to his child support and maintenance obligations, by motion, on the ground that his loss of employment constituted a change in circumstances that warranted modification—a standard that applies to modification of orders and judgments (see Domestic Relations Law § 236[B][9][b])—but he made no argument that the settlement agreement was invalid. Supreme Court may, upon a proper showing establishing a change in circumstances, modify an order or judgment of divorce that incorporates a settlement agreement. However, the court had no authority under the present circumstances to grant the husband's motion by modifying the settlement agreement.

The Appellate Division of the Supreme Court, Second Department stated in Connor v. Connor, 171 A.D.3d 746, 97 N.Y.S.3d 301 (N.Y. App. Div. 2019) ("Connor") that in determining if there is a substantial change in circumstances to justify a downward modification, the change is measured by comparing the payor's financial circumstances at the time of the motion for downward modification and at the time of the divorce or the time when the order sought to be modified was made (at 747-748):

The Family Court may modify any prior order or judgment with respect to maintenance (see Domestic Relations Law § 236[B][9][b]; Matter of Rodriguez v. Mendoza–Gonzalez, 96 A.D.3d 766, 766, 946 N.Y.S.2d 204). "The party seeking the modification of a maintenance award has the burden of establishing ‘the existence of the change in circumstances that warrants the modification’ " (Noren v. Babus, 144 A.D.3d 762, 764, 41 N.Y.S.3d 94, quoting Rabinovich v. Shevchenko, 120 A.D.3d 786, 786, 991 N.Y.S.2d 345). "Importantly, in determining if there is a substantial change in circumstances to justify a downward modification, the change is measured by comparing the payor's financial circumstances at the time of the motion for downward modification and at the time of the

[171 A.D.3d 748]

divorce or the time when the order sought to be modified was made" (Matter of Parascandola v. Aviles, 59 A.D.3d 449, 450, 874 N.Y.S.2d 150 [internal quotation marks omitted]; see Taylor v. Taylor, 107 A.D.3d 785, 785, 968 N.Y.S.2d 102 ).

In Connor, the Court held that the husband failed to establish that a substantial change in circumstances warranted a downward modification or termination of his spousal support obligation. Neither the reduction in the husband's income nor the increase in his wife's income was sufficient (at 748):

Here, the former husband failed to establish a substantial change in circumstances warranting a downward modification or termination of his spousal support obligation. Although the former husband provided the Support Magistrate with evidence concerning his income and other financial circumstances as of August 2017, when he filed his petition, he failed to offer any evidence regarding his financial status at the time of the parties' divorce (see Rabinovich v. Shevchenko, 159 A.D.3d 754, 755, 71 N.Y.S.3d 617; Matter of Nuesi v. Gago, 103 A.D.3d 897, 898, 960 N.Y.S.2d 186; Rooney v. Rooney, 99 A.D.3d 785, 786, 951 N.Y.S.2d 682; cf. Isichenko v. Isichenko, 161 A.D.3d 833, 834, 75 N.Y.S.3d 530). In addition, the reduction in the former husband's income from 2016 to 2017 did not constitute a substantial change in circumstances sufficient to warrant a downward modification of his spousal support payments (see Matter of Valverde v. Owens, 160 A.D.3d 753, 755, 71 N.Y.S.3d 374; Watrous v. Watrous, 292 A.D.2d 691, 693, 738 N.Y.S.2d 771). Furthermore, although there was evidence that the former wife's income had increased since the parties' divorce, the record demonstrated that the former husband's future earning prospects far exceed the former wife's, and that the former wife, although working two jobs earning minimum wage, was unable to maintain her own apartment, owned a 2002 Toyota Camry, and had not been on vacation since prior to the parties' divorce. Contrary to the former husband's contention, the Support Magistrate did not improvidently exercise his discretion in declining to adjourn the proceeding in the absence of complete financial disclosure by the former wife (see Family Ct Act § 424–a; Matter of Mata v. Nebesnik, 107 A.D.3d 1369 1370, 968 N.Y.S.2d 239 ). [...]

In Wight v. Wight, 648 N.Y.S.2d 799, 232 A.D.2d 844 (N.Y. App. Div. 1996), the Appellate Division of the Supreme Court of New York, Third Department took into account that the retired payor had rental income of $1,800 per month as well as pension income in affirming the lower court's refusal to hear the payor's application for a reduction in spousal maintenance (at 799-800):

We affirm. The parties' evidentiary submissions on the motion establish that although plaintiff has retired from his $72,920 administrative position and has no plans for future employment, preferring to "take it easy", he receives net annual pension payments of $37,620 (after deduction of defendant's share), has rental income of $1,800 per year and is currently married to a woman who earns an annual salary of $33,000. In addition, the record discloses that immediately prior to making the instant motion, plaintiff transferred to his second wife real property valued at $114,000 and cash assets valued at over $90,000. Defendant, on the other hand, owns no real estate, earns less than $20,000 per year and is entitled to $18,000 as her annual share of defendant's pension.

Page 800

In view of the fact that plaintiff's financial situation continues to be substantially more favorable than defendant's, we conclude that plaintiff has failed to make the requisite "clear and convincing showing of a substantial change in circumstances" in the 10 years since the entry of Supreme Court's original order (Matter of Hermans v. Hermans, 74 N.Y.2d 876, 878, 547 N.Y.S.2d 832, 547 N.E.2d 87; see, Domestic Relations Law § 236[B][9][b]), especially given that the change in plaintiff's financial status has been largely self-imposed by his retirement at age 55, his subsequent disinclination to find employment and by his transfer of the bulk of his assets to his second wife (see, Matter of Haviland v. Haviland, 216 A.D.2d 698, 627 N.Y.S.2d 854). In addition, because plaintiff has failed to make the threshold showing of a substantial change in circumstances warranting a reduction in spousal maintenance (see, Martin v. Martin, 194 A.D.2d 769, 770, 599 N.Y.S.2d 302) and the relevant facts are not in dispute (see, McGuire v. McGuire, 200 A.D.2d 825, 826, 606 N.Y.S.2d 440), Supreme Court did not err in rendering its determination without a hearing.

In Watrous v. Watrous, 292 A.D.2d 691, 738 N.Y.S.2d 771 (N.Y. App. Div. 2002), the plaintiff payor retired and then moved to terminate or reduce his spousal maintenance. The New York Supreme Court refused to terminate or reduce his maintenance obligations and the decision was affirmed by the Appellate Division of the Supreme Court, Third Department. The Appellate Court noted that a maintenance obligation established by a judgment of divorce will not be modified absent clear and convincing proof of a substantial change in circumstances. In determining whether there has been a change in financial circumstances sufficient to warrant any modification of maintenance, the change is measured by a comparison between the payor's financial circumstances at the time of divorce and at the time of the motion for downward modification. In this case, the payor did not bring proof that showed that his pension benefits would be less than had been anticipated at the time of divorce. Therefore, the roughly 22% reduction in his income due to retirement did not constitute a change warranting termination or modification of his maintenance obligation because the change was foreseeable (at 692-693):

In June 2000, at age 55, plaintiff voluntarily retired from state employment and, shortly thereafter, moved to terminate or, in the alternative, reduce his maintenance obligation, asserting as a substantial change in circumstances that he took early retirement due to his poor health and would be experiencing a significant reduction in income. A hearing was held and, at the close of plaintiff's proof, Supreme Court granted defendant's motion to dismiss, finding that plaintiff had failed to establish a sufficient change in circumstances. Plaintiff appeals, and we affirm.

A maintenance obligation established by a judgment of divorce will not be modified absent clear and convincing proof of a substantial change in circumstances (see, Domestic Relations Law § 236 [B] [9] [b]; see also, Matter of Hermans v Hermans, 74 NY2d 876, 878; Wight v Wight, 232 AD2d 844, 845; McGuire v McGuire, 200 AD2d 825, 826). The record reveals that prior to the 1995 divorce, plaintiff had a heart attack, suffered from severe hypertension and arterial sclerosis, and was medically approved to work but only with a restricted work load and no overtime. At the time of the divorce, Supreme Court was aware of both the medical restrictions on plaintiff's employment and the possibility that his poor health might cause him to retire early. At the modification hearing, plaintiff's treating physician of 15 years testified that, at the time of the 1995 divorce, he recommended to plaintiff that he retire and he continued to so advise plaintiff until his eventual retirement. The doctor opined that during the years following the divorce, plaintiff's hypertension became more difficult to treat, with plaintiff experiencing "intermittent mild angina" related to stress at work, that he developed type II diabetes and he suffered an occlusion of a retinal artery which caused some loss of sight in his right eye. Notably, however, by the time of the modification hearing, plaintiff's overall condition had stabilized.

We reject plaintiff's argument that because his health

[292 A.D.2d 693]

problems precipitated his voluntary retirement, the reduction in his income attributable to his anticipated retirement constitutes a sufficient change in circumstances, as the record reflects that he was in poor health at the time of the divorce. Moreover, in determining whether there has been a change in financial circumstances sufficient to warrant any modification of maintenance, the change is "measured by a comparison between the payor's financial circumstances at the time of the divorce and at the time of the motion for downward modification" (Schnoor v Schnoor, 189 AD2d 809, 810; see, Alexander v Alexander, 134 AD2d 796, 797). The record reflects that plaintiff's annual income at the time of the divorce was $34,638 and, even accepting as true plaintiff's testimony—based upon a pension report which was 17 months old—that his annual share of his pension will be $27,000 per year, the reduction in annual income as a result of his retirement is $7,638. Absent is any showing by plaintiff that his pension benefits will be less than had been anticipated at the time of the divorce. Hence, the roughly 22% reduction in income due to his retirement does not constitute a change warranting termination or modification of his maintenance obligation where, as here, the existing circumstances were foreseeable in 1995 (see, Matter of Hermans v Hermans, 74 NY2d 876, 879, supra; Block v Block, 277 AD2d 87, 87-88; Matter of Streit v Streit, 237 AD2d 662, 664).

While under different circumstances a reduction in income or assets might warrant a downward modification of a maintenance obligation (see, McGuire v McGuire, 200 AD2d 825, 826), plaintiff failed to establish the existence of such circumstances in this case. Although plaintiff claimed to have certain personal expenses, he did not testify to those expenses, nor has he included his net worth statement in the record. The record is also devoid of evidence that the reduction in his income will substantially diminish his standard of living or his ability to satisfy his maintenance obligation. On the other hand, defendant has shown by her sworn statement of net worth that she continued to be out of work on disability and was in debt as a result of the temporary cessation of her Social Security disability payments due to an overpayment. It is reasonable to conclude that plaintiff's financial situation will continue to be more favorable than defendant's during his retirement. On the record before us, plaintiff failed to establish a substantial change in circumstances (see, Matter of Streit v Streit, supra at 664; Wight v Wight, 232 AD2d 844, 845, supra; cf., Sitler v Sitler, 266 AD2d 202; Cameron v Cameron, 238 AD2d 925).

In contrast to the standard required to modify spousal maintenance set out in a court order to judgment, per Leo v. Leo, 2015 NY Slip Op 1026, 3 N.Y.S.3d 232, 125 A.D.3d 1319 (N.Y. App. Div. 2015), a court may modify spousal maintenance set out in a separation agreement if the party seeking the modification shows "extreme hardship" (at 1319):

Contrary to the parties' contentions with respect to the burden of proof to be applied when a party seeks to reduce the amount of maintenance set forth in a separation agreement that has been incorporated but not merged into a judgment of divorce, that party has the burden of establishing “extreme hardship” (Domestic Relations Law § 236[B][9][b][1]; see Marrano v. Marrano, 23 A.D.3d 1104 1105, 804 N.Y.S.2d 215; Mishrick v. Mishrick, 251 A.D.2d 558, 558, 674 N.Y.S.2d 746). Under the particular circumstances presented here, and giving due deference to the court's credibility determinations (see generally Quarty v. Quarty, 96 A.D.3d 1274 1277, 948 N.Y.S.2d 130), we perceive no error in the court's denial of plaintiff's motion to modify his obligations under the separation agreement (see Barden v. Barden, 245 A.D.2d 695, 696, 664 N.Y.S.2d 859; cf. Marrano, 23 A.D.3d at 1105, 804 N.Y.S.2d 215; Malaga v. Malaga, 17 A.D.3d 642, 643, 794 N.Y.S.2d 99).

As noted by the dissent in Gardner v. Zammit, 191 A.D.3d 1294, 141 N.Y.S.3d 590 (N.Y. App. Div. 2021), a finding of extreme hardship is necessarily fact-based and varies with the circumstances of each case; however, extreme hardship has been found when a party is unable to be self-supporting, unable to work due to physical disability, or experiences a substantial decrease in income following the time of the separation agreement due to factors outside of the party's control (at 593):

To modify a separation agreement that is incorporated but not merged into a divorce judgment, the party seeking the modification must "make ‘a showing of extreme hardship’ " (Marrano v. Marrano, 23 A.D.3d 1104 1105, 804 N.Y.S.2d 215 [4th Dept. 2005], quoting Domestic Relations Law § 236 [B] [9] [b] [1] ; see Leo v. Leo, 125 A.D.3d 1319 1319, 3 N.Y.S.3d 232 [4th Dept. 2015] ). "Extreme hardship" is not defined by the statute, and a finding of extreme hardship is necessarily fact-based and varies with the circumstances of each case. Prior case law, however, provides guidance on that issue. For example, extreme hardship has been determined to exist where a party is unable to be self-supporting or is likely to become a public charge (see Daye v. Daye, 170 A.D.2d 963, 964, 566 N.Y.S.2d 132 [4th Dept. 1991]; see also Cavallaro v. Cavallaro [appeal No. 2], 278 A.D.2d 812, 812, 718 N.Y.S.2d 538 [4th Dept. 2000], lv dismissed 96 N.Y.2d 792, 725 N.Y.S.2d 641, 749 N.E.2d 210 [2001]), is rendered unable to work due to physical disability (see Matter of Alexander v. Alexander, 203 A.D.2d 949, 950, 612 N.Y.S.2d 97 [4th Dept. 1994]), or experiences a substantial decrease in income following the time of the separation agreement due to factors outside of the party's control (see Marrano, 23 A.D.3d at 1104-1105, 804 N.Y.S.2d 215).

Authorities:
Domestic Relations Law § 236
Domestic Relations Law § 240
Abdelrahman v. El Mahdi, 160 A.D.3d 1253, 74 N.Y.S.3d 672 (N.Y. App. Div. 2018)
Connor v. Connor, 171 A.D.3d 746, 97 N.Y.S.3d 301 (N.Y. App. Div. 2019)
Wight v. Wight, 648 N.Y.S.2d 799, 232 A.D.2d 844 (N.Y. App. Div. 1996)
Watrous v. Watrous, 292 A.D.2d 691, 738 N.Y.S.2d 771 (N.Y. App. Div. 2002)
Leo v. Leo, 2015 NY Slip Op 1026, 3 N.Y.S.3d 232, 125 A.D.3d 1319 (N.Y. App. Div. 2015)
Gardner v. Zammit, 191 A.D.3d 1294, 141 N.Y.S.3d 590 (N.Y. App. Div. 2021)