The Role of the Financial Neutral
In Collaborative Practice
Collaborative practice differs from arbitration, where a “private” judge decides the matter. It also differs from mediation where a mediator tries to steer/cajole the parties to a settlement. Under collaborative practice, the parties to a dispute, supported by a team, work together to reach a settlement that works for them. This article discusses the elements of collaborative practice and provides two examples of how this process has been used.
Some of you may be familiar with the concept of collaborative practice, also referred to as collaborative law. Collaborative practice is a voluntary structured dispute resolution process in which parties settle without resorting to litigation. Collaborative practice is something you can not only add to your portfolio of services offered but is also something you can counsel clients considering litigation. Collaborative law may be applied to family law cases, business disputes, and employer/employee disputes.
Collaborative practice differs from arbitration, where a “private” judge decides the matter. It also differs from mediation where a mediator tries to steer/cajole the parties to a settlement. Under collaborative practice, the parties to a dispute, supported by a team, work together to reach a settlement that works for them.
Under our legal system, attorneys represent clients in an adversarial process. Under this process, each side, usually represented by an attorney, present their evidence and arguments, and can challenge the evidence and arguments presented by the other side. A judge (or arbitrator) or jury decide the outcome. Disputes resolved in this manner rarely result in good feelings between the parties.
When we are involved as experts, we are not only defending our opinion, but trying to undermine the other expert’s opinion. All in the context of convincing the judges that we are not hired guns. There are those of you out there who probably think this is a great system and love knocking heads with other experts. However, this does not consider what might be in the best interest of the disputing parties.
For example, in a divorce where there are children of the marriage, do the parties want to stress every time there is an event involving their child, or grandchild? In a family business, do the parents and/or siblings want to feel alienated for the remainder of their lives? Some parties to contentious litigation reach a truce, but many never do fully recover. Fortunately, there is an alternative—collaborative practice.
The collaborative process is built around interest-based negotiations versus position-based negotiations. The story of the orange demonstrates this: A sister comes home after a rough day and decides just what she needs is an orange juice and vodka martini. Her brother comes home and wants to bake a cake that requires an orange. They both reach the refrigerator and there is only one orange. What to do—they both want the orange—and an argument breaks out. Mom intervenes and solves the problem.
Position: I want the orange! Give it to me!
Result: The person who gets the orange wins. It is a zero-sum game—one wins, the other loses.
Interest:
Sister: I just need the juice from the orange.
Brother: I just need the zest. (Zest is grated orange skin.)
Result: The brother can collect the zest and the sister gets the juice. It is Win-Win solution—both get what they want.
Position based negotiations:
- Are often driven by emotion,
- May not be based on sound information, and
- Can further damage relationships.
The adversarial legal system is position based. Each party seeks a specific solution—usually at the expense of the other party.
Interest-based negotiations:
- Seek a mutually beneficial resolution,
- The parties can work together with an expert to get the information they need to make informed decisions,
- Can repair damaged relationships, and
- Can facilitate preservation of ongoing working relationships.
The core elements of collaborative practice are:
- Legal representation is settlement focused,
- There is active participation by the parties—they speak for themselves,
- Participation is voluntary,
- The parties agree to be transparent—no withholding of needed information, and
- The parties are supported by a team that may include neutral experts.
The collaborative team usually consists of the attorneys for each of the parties, a coach to facilitate discussions between the parties, and relevant neutral experts, such as a financial neutral. A key component of the collaborative process is the attorneys, coach, and expert all agree that they will not continue to work with the parties should the parties decide to resolve their dispute through litigation. (Many attorneys hate this provision.)
The role of the attorneys is not to speak on behalf of their clients or to negotiate with the other attorney. Rather, it is to answer their client’s questions about the law and provide counsel. Many states also have the parties engage a coach. The role of the coach is to assist the parties and teams with how to approach and discuss difficult topics. The coach will also meet with the parties individually to help them determine their goals in the process. In divorce cases, the parties may also engage a child specialist to help them with designing a parenting plan and dealing with issues related to the children.
The parties and all or some of the team will meet over some number of meetings to try to reach a settlement. After the meetings, the team may meet to discuss any issues that came up during the meeting and how to handle them. The attorneys may also draft a memorandum (notes) on what was agreed upon.
In the collaborative process, the role of the financial expert is not to provide an opinion or propose a settlement. Rather, it is to provide information and options for settlement. For example, the parties may need a forensic accountant, valuation expert, tax specialist, or a CPA. In a divorce, the parties may need assistance understanding their financial position and the tax ramifications of proposed settlements.
The following are two real-life examples.
There were two brothers who ran a company in the construction trade. They bid and won the largest subcontract they had to date. Unfortunately, the contractor failed to pay them, and they had to litigate to collect what was due. This placed a heavy financial strain on the business. During this period, one of the brothers purchased a new plane and made additional real estate investments. To make matters worse, they suffered a computer drive crash and did not have backups. Brother A was convinced that Brother B was stealing from him, and that the computer crash was a cover up. Brother B hired a forensic accountant to reconstruct the lost records. At the point our firm was engaged, it was too late for us to perform a forensic audit. Instead, we visited the office of the forensic accountant and spent the day reviewing what he had done. We did not find any discrepancies in his work, and he was able to show that Brother B had sold his old plane and financed the new plane. He was also able to show where the money for the down payment on the new real estate investment came from and the financing supporting the purchase. Even though we found the forensic accountant to be credible, Brother A did not trust the results because Brother B was the one to hire the forensic accountant. The case settled without going to trial; however, the positive relationship between the two brothers ended with the brothers estranged from each other.
Had this case been approached collaboratively, the two brothers could have agreed on a joint forensic accountant who would serve as a financial neutral. Perhaps then the results might have been credible to Brother A and his relationship with Brother B may have been preserved.
In the second example, we were engaged as financial neutrals on a collaborative divorce case. The husband was involved in numerous real estate partnerships which comprised a significant portion of the marital estate. The husband could not transfer certain interests to the wife. We were able to propose an option that the husband could place these interests into an LLC in which he was the managing member and his wife a nonvoting member. This would provide accountability and transparency to her post-divorce. The wife felt that this would give her greater confidence she received her fair share and it worked for the husband. This solution was reached because the parties worked together to solve a problem in how to divide certain marital assets.
The cost of collaborative practice, while not inexpensive, is usually less expensive than litigating the matter. Even if the cost were the same as litigating, the parties are more likely to achieve a better result than what they would through litigation. Especially if they will need to continue to interact with each other.
Some states have adopted the Uniform Collaborative Law Act which mandates, among other things, that attorneys make potential clients aware of collaborative practice as an alternative to litigation. State collaborative organizations and the IACP do require you complete training in collaborative practice. If you want to learn more about collaborative practice, check out the International Academy of Collaborative Professionals at https://www.collaborativepractice.com/. You can also see if you have a state society of collaborative professionals.
David H. Goodman, MBA, CPA, CVA, of Jesson, Oslin & Associates, LLP, in Boston, has 25 years of experience in performing business valuations and forensic accounting services for family law and business disputes; as well as tax and buy-sell purposes. Mr. Goodman has an MBA from the Tuck School of Business at Dartmouth College. He is a past president of NACVA’s Massachusetts State Chapter, past chair of the Massachusetts Society of Certified Public Accountants Litigation and BV committee, and a past board member and Treasurer of the Massachusetts Collaborative Law Council.
Mr. Godman can be contacted at (617) 698-3950 or by e-mail to dgoodman@joacpa.com.
