VALUING PROFESSIONAL DEGREES IN EQUITABLE DISTRIBUTION PROCEEDINGS:
A CRITICAL ANALYSIS OF NORTH CAROLINA’S VALUATION METHOD IN GEER V. GEER

Jessica Peterson

Law & Valuation
Professor Palmiter
Spring, 1999

Abstract
Text of Paper
 

Abstract

States are divided as to whether graduate and professional degrees should be classified as marital property, with the majority finding that they should not.  However, most courts will provide some form of equitable relief to a non-degree-earning spouse.  Thus, regardless of how they are classified, graduate and professional degrees must be valued for equitable distribution purposes.

ISSUES
 
1.  How does North Carolina value graduate and professional degrees for equitable distribution purposes?
2.  How do other states value graduate and professional degrees for equitable distribution purposes?
RULES

 
1.  North Carolina has used a cost-reimbursement method where the non-degree-earning spouse is to be paid the out of pocket expenses of the education as restitution.
2.  Two basic methods used by other states are the share-of-the-benefits approach, where the non-degree earning spouse is awarded a share of future earnings by the degree-earning spouse and the cost-reimbursement approach, where the non-degree-earning spouse is reimbursed for his or her contributions to the education of the degree-earning spouse.
ANALYSIS

The main North Carolina case addressing valuation of direct and indirect contributions of a non-student spouse to a degree earning spouse is Geer v. Geer. In this case, a husband sacrificed his career so that his wife could go through medical school while he worked odd jobs to support the family.  After the wife completed her medical residency, the couple divorced.  North Carolina has a statute specifically stating that professional licenses are separate property, but the court found that there is a need to consider contributions of a spouse to helping the career of another, using twelve factors listed in the statute.  The court used a cost-reimbursement method to value the cost of the wife’s medical education by calculating out of pocket expenses caused by the wife’s education, and that that amount was due to the husband as restitution.

Other states generally use two basic methods. The first is the share-of-the-benefits approach, which assigns a value to the degree based on predicted future earnings of the degree-earning spouse, and then awards a share to the non-degree earning spouse.  The second is the cost-reimbursement approach, which requires the degree-earning spouse to compensate the non-degree-earning spouse for their contributions to the education of the former.

Michigan is one state that uses the share-of-the-benefits approach.  The state court of appeals determined that the non-degree-earning spouse should receive compensation based on a percentage of the value of future earnings attributable to the advanced degree.  Several factors are to be considered, including length of marriage after attainment of the degree, financial support given to the degree-earning spouse, and the overall division of the marital property.  Also, what the degree-holding spouse would have made without the degree should be subtracted from what they will make in their particular occupation with the degree.

New Jersey applies the cost-reimbursement approach, finding that the share-of-the-benefits approach is too speculative.  In the cost-reimbursement approach, the non-degree-earning spouse is reimbursed for direct and indirect financial contributions made to the degree-earning spouse during their education.   Indiana has a statute doing the same thing, but excluding indirect expenses.

Each of the methods used has both advantages and disadvantages.  Share-of-the-benefits valuation is speculative in nature, requiring analysis of numerous variables to determine what the degree-earning spouse may earn as a result of having the degree, but is not more speculative than damages for many other types of actions.  Cost-reimbursement also has positive and negative aspects, in that it may be more inequitable than share-of-the-benefits, but it is less speculative.  North Carolina’s cost-reimbursement method could benefit from using elements of the other methods, but at the very least should become more specific regarding which direct and indirect costs should be considered.


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INTRODUCTION

In Geer v. Geer[1], the North Carolina Court of Appeals addressed the issue of how to value the direct and indirect contributions of a nonstudent spouse towards the student spouse’s professional degree in equitable distribution proceedings.  At the time of this decision, this question had never been addressed in North Carolina by either the legislature or the courts.[2]
A majority of state appellate courts refuse to classify graduate or professional degrees as marital property subject to division in equitable division proceedings.[3]  However, a minority of state appellate courts hold that a professional degree or license does constitute marital property for the purposes of making a property settlement or awarding alimony.[4]  Only one state supreme court defines a professional degree as marital property subject to division.[5]
Although there is a division among state courts regarding the actual classification of graduate and professional degrees as marital property, many state courts, nonetheless, provide some form of equitable relief to the non-degree-earning spouse, regardless of whether the court actually classifies the professional degree as marital property.[6]  Rather than examining whether professional degrees should be classified as marital property, this paper will analyze the valuation methods used by state courts to determine the value of professional degrees and/or the remedial awards to non-degree-earning spouses, assuming that equity demands some form of compensation for the non-degree-earning spouse.
First, this paper will discuss the North Carolina approach to valuing professional degrees and the contributions of the non-degree earning spouse to the attainment of the degree as laid out in North Carolina’s equitable distribution statute and the North Carolina Court of Appeals decision in Geer v. Geer.  Second, this paper will survey valuation methods and formulas applied in other states to determine the value of professional degrees and compensation for non-degree earning spouses.  Third, this paper will provide a critical analysis of the valuation method applied by the North Carolina Court of Appeals in Geer, in light of valuation methods employed by other states.  Finally, this paper concludes that although the valuation method applied by the North Carolina Court of Appeals in Geer provides a starting point for valuing the contribution of non-degree earning spouses, integrating elements of other state’s valuation methods will result in more equitable results in future valuation cases in equitable distribution proceedings in North Carolina.
A.     The North Carolina Court of Appeals Decision in Geer:  Filling in Legislative Gaps by Providing Guidance on Valuing the Direct and Indirect Contributions of the Nonstudent Spouse

 
The parties in Geer v. Geer exemplified the common situation often referred to as the “university degree/divorce decree.”[7]  This situation arises where a non-degree seeking spouse agrees to support the degree-seeking spouse through school, expecting a better financial future for the family, only to have the degree-seeking spouse decide to leave the marriage soon after obtaining the degree.
In Geer, the husband gave up his job as a research and development chemist in Dayton, Ohio to move to Columbus, Ohio so his wife could attend medical school at Ohio State University.[8]  The couple’s two children moved as well.  After a month and a half of unsuccessfully trying to find work in Columbus, the husband took a job working from 11:00 pm to 7:00 am until he eventually found day work as a chemist.[9]
The husband once again gave up his job in Columbus to move the family to Chapel Hill so that his wife could obtain specialty in radiology at the University of North Carolina.[10]  In Chapel Hill, the husband worked at odd jobs to support the family for approximately six months until he found permanent work with a company as the manager of chemical products.[11]  The couple divorced shortly after the wife completed her residency and the wife remarried a radiologist and retained custody of the couple’s children.[12]  The parties agree that the husband was the primary financial provider for the family during the time the wife was obtaining her medical degree.[13]
The North Carolina Court of Appeals began its analysis of these facts with North Carolina’s Equitable Distribution Statute § 50-20(b)(2) which expressly provides that professional licenses are separate property not subject to valuation and distribution.[14]   However, the Court noted that the legislature does recognize the need to consider the contributions of a spouse that further the career of the other in equitable distribution proceedings via one of the twelve statutory factors which the court is required to consider under § 50-20(c)(7), namely, “[a]ny direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.”[15]
Noting that “[t]he legislature gives no guidance on thorny issue of how to value the direct and indirect contributions of the nonstudent spouse,”[16] the Court adopted its own method for valuing the cost of the wife’s medical education.  The Court used a cost-reimbursement method by calculating the total out of pocket payments directly attributable to plaintiff’s medical education as follows:
Costs of Medical Education
Costs Incurred in Sale of First Home and Move              $4,465.70
Costs Incurred in Sale of Second Home                            $5,126.04
Moving Expenses to Chapel Hill                                        $4,046.00
Extra Child Care                                                                     $4,756.09
Payments for Medical School                                           $10,736.67
Payments for Medical School Supplies                               $694.00
Total Out of Pocket Payments Directly
Attributable to Wife’s Medical Education                    $29,824.50[17]
Thus, the Court held that an equal distribution of the marital property would require the wife to pay the above stated amount in restitution to the husband as a distributive award to make an equal distribution of the marital property as required by N.C.G.S. § 50-20(c)(7).

B.  Valuation Methods Applied In Other States To Determine The Value Of Professional Degrees And Compensation For Non-Degree-Earning Spouses

There are two basic methods applied by the states to value professional degrees and/or compensation for non-degree-earning spouses in equitable distribution proceedings.  The first method, the share-of-the-benefits approach, assigns a value to the professional degree based on predicted future earnings of the degree-earning spouse and awards the non-degree-earning spouse a share of this amount.[18]  The second method, the cost-reimbursement approach, is restitutionary in nature and determines the value of the cost of obtaining the professional degree requiring the degree-earning spouse to compensate the non-degree-earning spouse for their contributions to the costs of obtaining the professional degree.[19]

1.  Share-of-the-Benefits Approach:  Woodworth v. Woodworth

In Woodworth v. Woodworth[20], the Michigan Court of Appeals addressed the issue of determining the value of compensation to be paid to a non-degree-earning spouse in an equitable distribution proceeding when the advanced degree was obtained during the marriage.[21]  The Court determined that the non-degree-earning spouse is entitled to compensation based on a valuation method which awards this party a percentage share of the present value of the future earnings attributable to the advanced degree.[22]  In justifying the adoption of this valuation method, the Court noted that,
…future earnings due to an advanced degree are not too speculative…[w]hile a degree holder spouse might change professions, earn less than projected at trial, or even die, courts have proved adept at measuring future earnings in such contexts as personal injury, wrongful death, and workers' compensation actions…[23]
The Court further provided that in determining the future earnings attributable to the degree, courts should consider the following factors:  the length of the marriage after the degree was obtained, the sources and extent of financial support given to the degree-earning spouse during their graduate education, and the overall division of the parties’ marital property.[24]  Furthermore, in determining the degree’s present value, the Court held that the appropriate valuation approach is to estimate what the degree-holding spouse is likely to make in their particular job market and subtract from that what he or she would probably have earned without the degree.[25]  Accordingly, the Court determined that the application of this valuation method reaches an equitable result for compensating the non-degree earning spouse.
2.  Cost-Reimbursement Approach:  Indiana Code § 31-15-7-6 and Mahoney v. Mahoney

 
Unlike the share-of-the-benefits approach applied in cases like Woodworth, the cost-reimbursement valuation approach does not attempt to determine the value of future earnings of the degree-earning spouse.  In Mahoney v. Mahoney[26], the Supreme Court of New Jersey awarded a non-degree-earning spouse cost-reimbursement for financial support she provided to her MBA-degree-earning husband while he obtained his advanced degree.[27]
The Court rejected the share-of-the-benefits approach as too speculative noting that,
[t]he admittedly speculative dollar amount of earnings in the enhanced career must be reduced by the…income the souse should be assumed to have been able to earn if otherwise employed…[t]his is ordinarily nothing but speculation, particularly when it is fair to assume that a person with the ability and motivation to complete professional training would probably utilize those attributes in concomitantly productive alternative endeavors.[28]
Instead, the Court adopted a cost-reimbursement valuation approach requiring that the non-degree-earning supporting spouse be reimbursed for the financial contributions he or she made to the degree-earning-spouse’s professional training including household expenses, educational costs, school travel expenses and any other contributions used by the degree-earning spouse in obtaining their advanced degree.[29]


A similar cost-reimbursement valuation approach was adopted in Indiana.  However, in Indiana, the legislature rather than the state courts expressly adopted a cost-reimbursement valuation method for equitable distribution proceedings via statute.  Indiana Code Section 31-15-7-6 provides that,

[i]f the court finds there is little or no marital property, the court may award either spouse a money judgment not limited to the property existing at the time of final separation.  [h]owever, this award may be made only for the financial contribution of one (1) spouse toward tuition, books, and laboratory fees for the higher education of the other spouse.[30]
Thus, the Indiana cost-reimbursement statute takes the cost-reimbursement approach one step further than the court in Mahoney by excluding cost-reimbursements to the non-degree earning spouse for indirect expenses contributed towards the degree-earning spouse’s advanced degree and explicitly limiting the scope of reimbursement costs to direct contributions toward tuition, books and laboratory fees.
C.  A Critical Analysis of the Valuation Method Applied by the North Carolina Court of Appeals in Geer in Light of The Two Basic Valuation Methods Applied In Other States

 
The North Carolina Court of Appeals in Geer adopts a valuation method which requires the student spouse to pay the nonstudent spouse a distributive award to make an equal distribution of the marital property under North Carolina’s equitable distribution statute.[31]  This valuation method is sound at a basic level but lacks depth and specificity and could be improved by incorporating elements of the share-of-the benefits and cost-reimbursement approaches adopted by other states.
The share-of-the benefits valuation approach has both positive and negative attributes.  Applying the share-of-the-benefits valuation method is speculative in nature, requiring the court to address numerous variables including whether the spouse may change professions or earn less than projected at trial in calculating the non-degree-earning spouse’s percentage share of the present value of the future earnings attributable to the degree.[32]  On the other hand, valuing the future earnings attributable to a professional degree requires no less speculation than is required in wrongful death actions, damages for pain and suffering, damages for loss of consortium and mental distress—all valuations which courts frequently are called upon to calculate.[33]
Although the cost-reimbursement approach to valuing professional degrees in equitable distribution proceedings requires the court to engage in less speculation than the share-of-the-benefits approach, this valuation method has drawbacks as well.  The cost-reimbursement valuation method arguably provides more predictable results than the share-of-the-benefits approach, but the cost-reimbursement valuation method also more often leads to a harsh, inequitable result for the non-degree-earning spouse, particularly where the marriage ends soon after the degree is obtained leaving little accumulated wealth from which to compensate the non-degree-earning spouse for the expenditures made for the education of the benefited spouse.[34]
The valuation method implemented by the North Carolina Court of Appeals in Geer more closely parallels the cost-reimbursement valuation approach than the share-of-the benefits valuation approach.  However, in future decisions, the North Carolina Court of Appeals should consider implementing elements of the share-of-the-benefits valuation approach to achieve the most equitable result for the non-degree-receiving spouse.  Although this valuation method involves some degree of speculation, courts are equipped to make these valuation calculations and do so successfully in many similar cases such as wrongful death actions, pain and suffering, loss of consortium and mental distress monetary awards.
Even if the North Carolina courts reject the share-of-the-benefits valuation approach as a viable method for valuing the compensation for a non-degree-earning spouse in equitable distribution proceedings, the courts should develop more specific criteria for implementing a cost-reimbursement valuation approach, namely by providing a specific list of which direct and indirect costs of obtaining the professional degree should be considered in calculating the cost-reimbursement for the non-degree-earning spouse in equitable distribution proceedings.  In addition, the North Carolina legislature should address the issue as well by providing guidance to the courts regarding the valuation of direct and indirect contributions of non-degree-earning spouses.

CONCLUSION

Although the valuation method applied by the North Carolina Court of Appeals in Geer provides a starting point for valuing the contribution of non-degree earning spouses, integrating elements of the share-of-the-benefits approach and the cost-reimbursement approach will result in more equitable results in future valuations of professional degrees and/or compensation to non-degree-earning spouses in equitable distribution proceedings in North Carolina.
 

[1] Geer v. Geer, 84 N.C. App. 471, 353 S.E.2d 427 (1987).
[2] See id. at 478, 353 S.E.2d at 431.
[3] See Michael G. Walsh, Annotation, Spouse’s Professional Degree or License as Marital Property for Purposes of Alimony, Support, or Property Settlement, 4 A.L.R. 4th 1294 (1981, Supp. 1998).  See, e.g., Pyeatte v. Pyeatte, 661 P.2d 196, 207 (Ariz. Ct. App. 1982) (holding that a law degree is not marital property); In re Marriage of Graham, 574 P.2d 75, 77 (Colo. 1978) (finding MBA is not classifiable as a marital asset); In re Marriage of Rubenstein, 495 N.E.2d 659, 664 (Ill. App. Ct. 1986) (holding that medical degree is not a marital asset).
[4] See id. at 1297.  See, e.g., In re Marriage of Horstmann, 263 N.W.2d 885, 891 (Iowa 1978) (holding that non-degree-earning spouse has a legal claim to the earned degree or generated future earnings as assets eligible for distribution by the court);  Woodworth v. Woodworth, 337 N.W.2d 332, 336 (Mich. Ct. App. 1983) (holding that an advanced degree is marital property subject to division and the value of the degree should be determined by the future earnings the degree would generate).
[5] See O’Brien v. O’Brien, 489 N.E.2d 712, 713 (N.Y. 1985).
[6] See, e.g., Mahoney v. Mahoney, 453 A.2d 527, 531 (N.J. 1982) (holding that although an advanced degree is not marital property subject to division, a remedial award is appropriate for the non-degree spouse to provide compensation for contributions to the attainment of the degree based on equitable principles).
[7] See Hargar v. Hargar, 357 N.W.2d 332, 334 (Mich. Ct. App. 1983).
[8] See Geer v. Geer, 84 N.C. App. 471, 473, 353 S.E.2d 427, 428 (1987).
[9] See id. at 474, 353 S.E.2d at 429.
[10] See id.
[11] See id.
[12] See id.
[13] See id.
[14] See N.C. Gen. Stat. § 50-20(b)(2) (1981).
[15] See N.C. Gen. Stat. § 50-20(c)(7) (1981).
[16] See Geer at 478, 353 S.E.2d at 431.
[17] Id. at 477, 353 S.E.2d at 430.  The Court modified the lower court calculation holding that on remand, the lower court should value the wife’s retirement contribution to the medical education expenses, to credit this contribution against the total amount of the husband’s contributions, and to value and subtract the costs of the sale of the Dayton home and Columbus home.  Seeid. at 481, 353 S.E.2d at 433.  The basic cost-reimbursement approach to determine the value of the medical education remains intact.
[18] See John R. Johnson, Basic Matrimonial Law and Practice:  Valuation Issues, 32 PLI/NY 365 (October 1998).
[19] See, Darnell A. Batton, The Professional Degree as Marital Property Under North Carolina’s Equitable Distribution Statute, Comment, 6 Campbell L. Rev. 101, 118-119 (1984).
[20]  337 N.W.2d 332, 334 (1983).
[21] See id. at 334.
[22] See id. at 337.
[23] Id. at 336.
[24] Id. at 337.
[25] Id.
[26]  453 A.2d 527 (N.J. 1982).
[27] See id. at 529.
[28] Id. at 531.
[29] See id. at 534.
[30]  Ind. Code § 31-15-7-6 (1998).
[31] See Geer, at 478, 353 S.E.2d at 431-432.
[32] See, e.g., Woodworth, 337 N.W.2d at 266-267.
[33] See, e.g., Batton at 118.
[34] See id.