September 2014 Archives

What Happens to Business Interests in a Divorce?

Most people who own businesses set up a corporation or a partnership from which to operate the business.  That gives the owner a layer of protection from liability arising out of the business and can result in some tax benefits as well.  In law, a corporation or a limited liability partnership, or any other registered and formalized entity is a "person" entitled to the same due process rights as a living being.  (No, this blog is not being written by Mitt Romney, but he was right about that!) The ownership interest in an entity is represented by the stock or the partnership interest stated in the entity formation documents.  So the character - as separate property or community property - is determined by when and how the interest was acquired.  If premarriage, then the entity will be owned by the spouse as his or her separate property.  If postmarriage, the character will depend upon the character of the money or other assets given as consideration for acquisition of the stock or partnership interest.  The initial contribution might consist of a spouse's separate property money, in which case the interest in the entity would be owned by that spouse as separate property, if the claim were proven; or it might consist of community property money, in which case the interest in the entity would be owned by the community estate. It all just gets a lot more complicated from there.  You may be driving around in a car owned by the business, you own the business, and you may think of the car as yours, but it's not.  The entity owns the car.  The court has no power to award you that car, unless you have brought the entity into the divorce case as a party to the law suit, by alleging a cause of action against the entity and serving its registered agent (which might be you!) with notice of the suit in the form of a citation, requiring the entity to file an answer to your divorce case and consent to the overall resolution of your divorce case.  If all of that happened, the court might order the entity to distribute the car to you, which would be a taxable event, reportable by the entity on its tax return and included in a K-1 to be reported on your personal income tax return.  Otherwise, the only thing a court can do is award the interest in the business, not the underlying assets or money of the business. All sounding inexplicable to you so far, even ridiculous?  Really, it is more than just a nefarious scheme by lawyers to validate and perpetuate their existence.  Many benefits flow to owners from the entity theory of property: if somebody trips and falls in your office or shop, you are not responsible or liable; your employees have to look to the entity to resolve their issues;  revenue gets passed through one or more entity returns in succession, usually resulting in a reduced overall amount of income taxes to pay, just to name a few. The fault is not with the entity theory of businesses, but with how it can best be made to fit with laws governing division of property at divorce so as to make the division just and right between the spouses.  Toward that goal, many theories of recovery have developed over the years and become part of Texas family law by the body of case law which has grown up around the issues.  Not surprisingly, there has been a lot of litigation on those theories of recovery.  Those will be discussed individually in future blogs.

Subpoenas for Clinical Records and Clinical Notes

In some states, attorneys have the legal authority to issue subpoenas to which you must comply. Texas is one of the states. This includes a subpoena duces tecum, whereby you have to bring the client' s records with you. Assuming this is true in your jurisdiction, you must appear in court at the time and date specified in the subpoena, even though one or more of the parties have breached their contractual obligation to pay your fees or are no longer under your care at the time the subpoena is issued. Furthermore, assuming you have consent from the parties who hired you to disclose their confidential or privileged information, you must give testimony and produce subpoenaed records. Clinical records must be maintained on every client. The therapist must take affirmative action to protect a file. Computer records are also subject to subpoena. If a licensing board issues a state license, the board usually publishes guidelines that set out the minimum standards necessary for clinical records and notes. A therapist can maintain only one set of records. Private records, including notations, are usually subject to subpoena. Court testimony indicating that the therapist had two sets of records, one for the client and the other for the therapist, can be embarrassing. HIPAA's Privacy Rule provides that psychotherapy notes (i.e., a therapist's notes on what was said by the client and therapist during a session) can be disclosed only with client authorization. If you are concerned about whether these records are protected, ask the court to order your testimony. The court ordered release of records is an exception to HIPAA rules. Because the therapist records, protects, and maintains the file, keep in mind that every note contained in the file should be written with the possibility of disclosure in court, under oath, with the judge, lawyers, parties, possibly members of the public, and the court reporter present. Clinical notes can never be fully protected, even when the may contain information detrimental to the client. Both clients and therapist must know the limits to confidentiality imposed under the law.

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