Golden v. Cooper-Ellis (2005-065 & 2005-169)
2007 VT 15
[Filed 02-Mar-2007]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2007 VT 15
Nos. 2005-065 & 2005-169
Jo-Ellen Golden (Cooper-Ellis) Supreme Court
On Appeal from
v. Windham Family Court
Peter Cooper-Ellis February Term, 2006
Katherine A. Hayes, J.
Jeremy Dworkin, South Londonderry, for Plaintiff-Appellee and
Cross-Appellant.
Bettina V. Buehler of McCarty, Buehler & Bixby, P.C., Brattleboro, and Jill
Hersh of Hersh Family Law Practice, San Francisco, California, for
Defendant-Appellant and Cross-Appellee.
PRESENT: Reiber, C.J., Dooley, Johnson, Skoglund and Burgess, JJ.
¶ 1. DOOLEY, J. Husband Peter Cooper-Ellis appeals from both the
final divorce order dividing the parties' marital estate and orders denying
his subsequent motion to modify spousal maintenance and child support.
Husband makes numerous contentions of error. Most significantly, he claims
that the family court erred when it included all of his unvested stock
options in the marital estate. Husband also claims that the court erred in
its (1) determination of the present value of his unvested stock options at
the date of trial, (2) division of the assets of the marital estate based
on outdated valuations, (3) finding that he had an interest attributable to
the marital estate in a residence he co-owned with his brother, (4) setting
his maintenance and support obligations on annual income levels contrary to
previous findings, and (5) denial of his motion to modify the spousal
maintenance and child support awards. We affirm.
¶ 2. The parties were married on July 31, 1986, and have three
children, Molly, Jonathan, and Andrew, born in the marriage. Husband also
has an adult daughter from a prior marriage, and a baby daughter born to
his current partner with whom he resides in California. Although the
determination of the actual date of separation is complicated by the fact
that husband has been employed in California since 1999 while wife has
continued to reside in Vermont, the family court found that the parties
permanently separated, with no attempt to resume married life, in April
2002.
¶ 3. At the time the parties met and began their marriage, both were
employed and earning similar salaries. When the children were born, wife
originally continued working full-time and then worked part-time until the
spring of 1995 when she remained at home as their primary caregiver. The
parties' oldest child, Molly, suffers from Smith-Meginis Syndrome, which is
untreatable. Molly is also diagnosed as mildly retarded, and she has
difficulty regulating her temper and is physically aggressive. The parties
have agreed that wife will continue to be Molly's primary caregiver; Molly,
now eighteen years old, has a normal life-expectancy. Jonathan, now
seventeen years old, moved to California and resides there with husband.
Andrew is thirteen years old and continues to reside with wife in Vermont.
¶ 4. Husband lives in California and is currently employed by BEA
Systems as executive vice-president of engineering. The family court found
husband's total annual income excluding stock options to be $430,000.
Central to this dispute, however, the family court found that a significant
part of husband's income is provided to him through stock options in his
employer's company, and the court made findings of the income husband
receives from the exercise of those options and the value of those options.
The court's apportionment of the option shares constitutes the most
litigated aspect of the divorce.
¶ 5. Husband's employer provided him with groups of stock options
on twenty-three occasions from September 16, 1997 to the end of trial. The
options are a central, if irregular, part of husband's compensation
package. The options cannot be exercised immediately. Under the 1997
stock option plan adopted by the company, which generally applied after
that date, twenty-five percent of the amount could be exercised at the one
year anniversary of the date of the grant. At each monthly interval
thereafter 1/48th of the amount could be exercised until all are accounted
for at the four year anniversary. All options must be exercised within ten
years of the date they are granted. For purposes of analysis, we refer to
options that can be exercised as "vested."
¶ 6. Husband can exercise the options only if he is an employee of
BEA Systems on the date of exercise. The options consist of both
nonqualified options, which are transferable, and incentive options, which
are nontransferable and taxed at a much lower rate than nonqualified
options. Option exercise prices range from $3.45 per share to $62.13 per
share. At the time of the divorce hearing, some vested options were
underwater-that is, the price at which husband could purchase the stock was
higher than the market value price-so exercising those options would bring
no benefit. The period remaining for exercise of those options not yet
exercised ranged at trial from three and one-half years to nearly ten
years.
¶ 7. As of March 29, 2004, husband had been awarded stock options to
purchase 953,100 shares of BEA Systems stock and had exercised options as
to 267,352 of these shares, leaving options for 685,748 shares unexercised.
Options for 308,132 of the remaining shares were vested, although many were
underwater, and husband had between three and one-half and ten years to
exercise these options depending on when they were granted. The
rest-options on approximately 375,000 shares-remained unvested. From 2000
to 2004, husband received nearly $6,000,000 in profit from acquiring the
stock pursuant to the options. His average annual income from the exercise
of stock options has been $1,191,838.
¶ 8. At the conclusion of the final hearing, the family court
issued a lengthy order. Ultimately, the court divided the value of the
marital estate assets equally between the parties. It also set forth a
child support order and an order for husband to pay wife spousal
maintenance. The specifics of the contested issues are outlined below.
The most contested is the family court's inclusion of all of husband's
stock options, including the options that had not vested at the time of the
final hearing, in the marital estate for equitable division.
I. Stock Options
¶ 9. Husband argues that the family court erred in awarding wife
one-half of his employee stock options that were unvested at the time the
parties separated. He stipulates that some portion of the unvested options
may be considered marital property, but argues that the portion that is
marital property must be attributable to his work during the marriage and
most of the stock options were awarded for work in the future. He argues
that the family court should have divided the options according to a "time
rule" designed to determine what portion of the options can be included in
the marital estate and what part are his separate property. Additionally,
he argues that no options awarded after the date of separation should be
considered marital property.
A.
¶ 10. We start with husband's second argument and address whether
the family court erred by including in the marital estate options acquired
between the date of the parties' separation and the date of the final
divorce hearing. The governing statute regarding the distribution of
marital assets requires that "[a]ll property owned by either or both of the
parties however and whenever acquired . . . be subject to the jurisdiction
of the court." 15 V.S.A. § 751(a) (emphasis added). Assets are normally
valued for distribution as of the day of the final divorce hearing,
regardless of whether they were acquired during or after the parties
separated. Hayden v. Hayden, 2003 VT 97, ¶ 8, 176 Vt. 52, 838 A.2d 59;
see also Nuse v. Nuse, 158 Vt. 637, 638, 601 A.2d 985, 986 (1992) (mem.)
(upholding court's inclusion of house acquired after separation as marital
asset subject to division); Bero v. Bero, 134 Vt. 533, 535, 367 A.2d 165,
167 (1976) (affirming inclusion of tort settlement received after divorce
was filed as marital asset). Nothing in the statutory wording suggests
that the court's jurisdiction to divide property of the parties extends
only to property owned as of the date the parties separated. Thus, the
family court acted within its discretion in considering stock options
received by husband after the date of separation and including them in the
marital estate for division.
¶ 11. Husband's argument on this point is linked to his primary
argument that the family court should have included as marital property
only part of the unvested stock options, and that the appropriate cut-off
date for purposes of an allocation formula is the date of separation. For
this argument, as well as his larger argument, husband draws from our
pension cases which have sometimes used the date of separation as a
temporal dividing line. See, e.g., Russell v. Russell, 157 Vt. 295, 305,
597 A.2d 798, 804 (1991). Russell is based on the determination in that
case that the date of separation was the "date . . . most reflective of the
functional end of marriage." Id.
¶ 12. In Hayden, we explained that Russell dealt with how to
apportion pension funds, and not the definition of marital property, and in
any event, set no hard and fast rule. Hayden, 2003 VT 97, ¶¶ 12-13. That
caution about the use of Russell is particularly applicable here.
Apparently because of the overall performance of BEA Systems, the company
did not award stock options for an extended period, and many of the options
it had awarded were underwater. In part to make up for these shortfalls,
it awarded substantial options between the date the family court determined
that the parties "separated" and the date of dissolution of the marriage.
Using the date of separation as a cut-off date would fail to capture as
marital property a significant part of husband's compensation for the
marital period. See, e.g., Pascale v. Pascale, 660 A.2d 485, 498 (N.J.
1995) (stock options awarded after termination of marriage were properly
included as marital property). We conclude that the family court acted
within its discretion in determining that the stock options awarded after
separation were marital property subject to distribution.
B.
¶ 13. The crux of the issue on appeal is the court's treatment of
husband's unvested stock options, whether acquired before or after the
parties separated. As we noted above, husband concedes that some part of
these options may be considered marital property. We agree. Accord In re
Marriage of Hug, 201 Cal. Rptr. 676, 685 (Ct. App. 1984); In re Marriage of
Miller, 915 P.2d 1314, 1319 (Colo. 1996); Bornemann v. Bornemann, 752 A.2d
978, 985 (Conn. 1998); Batra v. Batra, 17 P.3d 889, 894 (Idaho Ct. App.
2001); Goodwyne v. Goodwyne, 639 So. 2d 1210, 1213 (La. Ct. App. 1994);
Otley v. Otley, 810 A.2d 1, 6 (Md. Ct. Spec. App. 2002); Baccanti v.
Morton, 752 N.E.2d 718, 727 (Mass. 2001); Salstrom v. Salstrom, 404 N.W.2d
848, 850-51 (Minn. Ct. App. 1987); Davidson v. Davidson, 578 N.W.2d 848,
855 (Neb. 1998); In re Valence, 798 A.2d 35, 39 (N.H. 2002); Callahan v.
Callahan, 361 A.2d 561, 563 (N.J. Super. Ct. Ch. Div.1976); Garcia v.
Mayer, 920 P.2d 522, 525 (N.M. Ct. App. 1996); DeJesus v. DeJesus, 687
N.E.2d 1319, 1323 (N.Y. 1997); Fisher v. Fisher, 769 A.2d 1165, 1169 (Pa.
2001); Bodin v. Bodin, 955 S.W.2d 380, 381 (Tex. Ct. App. 1997); In re
Marriage of Short, 890 P.2d 12, 15 (Wash. 1995) (en banc); Chen v. Chen,
416 N.W.2d 661, 663 (Wis. Ct. App. 1987), review denied, 419 N.W.2d 562
(Wis. 1988). But see Hann v. Hann, 655 N.E.2d 566, 569 (Ind. Ct. App.
1995); Hall v. Hall, 363 S.E.2d 189, 195-96 (N.C. Ct. App. 1987); Ettinger
v. Ettinger, 637 P.2d 63, 65 (Okla. 1981). Unlike the family court,
however, husband takes the position that some of the unvested options were
given as compensation for future work to occur after the dissolution of the
marriage, and these options cannot be considered part of the marital
estate. In making this argument, he draws on two sources in particular-the
factual record as to the purpose of the stock options, and our treatment of
employee pensions as part of marital property-as well as decisions from
other states. We first turn to his sources for his argument.
¶ 14. There is no question that as an upper level executive,
husband received stock options as part of his basic compensation package,
and the family court so found. The court summarized the evidence on the
purposes of the stock option plan as follows:
[I]n granting stock options to employees, employers have many
goals. They seek to retain employees whose work they value; they
seek to align the employees' interests with those of shareholders
in the company; they seek to motivate the employee to perform
better in the future; and they seek to give the employee the
incentive to stay. These purposes are overlapping and
inextricably entwined. . . .
Jeanne Wu, a senior vice-president for human resources at
BEA, testified that . . . such options are used to reward employees
for performance, and to retain them for the future. . . .
The [BEA] . . . compensation committee report confirmed that:
"Because of the direct relationship between the value of an option
and the stock price, the Compensation Committee believes that
options motivate executive officers to manage the Company in a
manner that is consistent with stockholder interests. Stock
option grants are intended to focus the attention of the recipient
on the Company's long term performance, which the Company believes
results in improved stockholder value, and to retain the service
of the executive officers in a competitive job market by providing
significant long-term earnings potential." . . . The Committee
noted finally that "the decision to grant an award is primarily
based upon a subjective evaluation of the past as well as future
anticipated performance."
Based on this evidence, husband argues that the main purpose of the stock
options is to reward future performance and to keep him working for the
company in the future. To the extent the unvested options are rewards for
future performance to occur after the dissolution of the marriage, he
argues that they cannot be considered marital property.
¶ 15. Husband's second source for his position is our treatment of
employment-related pensions. Our leading case is McDermott v. McDermott,
150 Vt. 258, 552 A.2d 786 (1988), in which we discussed how to value and
distribute a pension held by one of the spouses if it has vested but not
matured. We held that a pension is marital property. Id. at 259, 552 A.2d
at 788. We held, however, that the court could distribute only that part
of the pension that was earned during the marriage, and provided the basis
for making that calculation as follows:
[T]he court must determine what portion of the entitlement was
acquired during the marriage, and this is accomplished by
factoring in the so-called "coverture fraction." . . . The
numerator of the fraction is the number of months or years that
the employee participated in the plan during the marriage, and the
denominator is the total number of months or years that the
employee will have participated in the plan at retirement. Where
the immediate offset method is used, the present value of the
benefits is calculated, and this figure is then multiplied by the
coverture fraction. The result represents the present value of
the benefits attributable to the marriage, and the court
distributes the marital property on that basis.
Id. at 261, 552 A.2d at 789. We reversed the trial court's decision in
McDermott because the court valued the pension based on its full value at
the time of the employee's retirement "without acknowledging that a portion
of the calculated value reflect[ed] plaintiff's future earnings." Id. We
have reiterated the holding of McDermott in Hayden, 2003 VT 97, ¶ 11, and
Russell, 157 Vt. at 305, 597 A.2d at 804. ¶ 16. Terming the
apportionment formula in McDermott a "time rule," husband argues that the
pension cases are applicable to stock options and whenever present value of
an asset is based on future work, as well as current and past work, we are
required to use a "time rule" to apportion the value to ensure that
compensation for future work is not considered marital property. Thus, he
argues that, because the family court failed to apportion the unvested
options according to a time rule, we must reverse and remand for a proper
apportionment.
¶ 17. There is some merit to husband's argument, but it faces two
significant difficulties. Husband has relied on the family court's summary
of the evidence, as well as the testimonial and documentary evidence. The
court's summary is not, however, the equivalent of findings. See Embree v.
Balfanz, 174 Vt. 560, 562, 817 A.2d 6, 9 (2002) ("A recitation of the
evidence . . . is not a finding of the facts.") (quoting Krupp v. Krupp,
126 Vt. 511, 514, 236 A.2d 653, 655 (1967)). The only findings on this
issue are embedded in the conclusions as follows:
All of the stock options granted to the defendant through the date
of the final hearing are marital property, as all are awarded
during the marriage, and were attributable to his work during the
marriage. The fact that part of the employer's motivation in
awarding these options was to spur the defendant to greater
productivity or better performance in the future is not relevant
to the question of whether these options were property acquired
during the marriage.
Thus, the court's findings, while sparse, are directly contrary to
husband's position. If the findings are not clearly erroneous in light of
the evidence actually presented, we must uphold them. (FN1) Mizzi v.
Mizzi, 2005 VT 120, ¶ 7, ___ Vt. ___, 889 A.2d 753 (mem.). We consider
whether the findings are clearly erroneous below.
¶ 18. The second problem is more complicated and involves the
difference between apportionment of pension benefits and stock options. As
husband argues, courts from around the country have used principles
applicable to apportioning pensions in allocating stock options between
marital and separate property. At the level of general principles, we
agree with these decisions. There are, however, differences in the nature
of pensions and stock options that make allocation of stock options more
complicated.
¶ 19. Pensions are a form of deferred compensation typically based
on regular contributions made by the employer and employee. Because
regular contributions are made over time, it is relatively easy to
apportion between contributions made during the marriage and those made
after the marriage has ended so that contributions made following the end
of the marriage are not considered marital property and are not included in
the value of the pension available for distribution. Thus, in the pension
context, McDermott endorses the use of a "time rule" to apportion based on
the time of the contribution.
¶ 20. The purpose of the pension is clear-to provide income after
retirement. The purpose of awarding stock options is less clear, in part
because multiple motives are invariably involved. See Hug, 201 Cal. Rptr.
at 680. If we used a time rule exclusively to apportion stock options, we
would be holding that all options that become vested after the cut-off
time-here the date of the final divorce hearing-are awarded as compensation
for future work. While it is conceivable that the facts might support such
a conclusion in an individual case, such a case would be rare. Much more
common are circumstances in which some part of the options represent
deferred compensation for past or present performance, even though vesting
occurs in the future after the expiration of the temporal cut-off date.
Options that are deferred compensation for past and present performance
must be considered marital property even though vesting occurs in the
future.
¶ 21. Two additional points are important to the allocation issue.
First, the purpose of awarding stock options cannot be determined by
generalizations about the purpose of compensation. As the family court
noted, all compensation is given in part to keep employees productive and
thus to induce future desirable performance. It cannot be said that,
because the purpose of compensation is to ensure future productivity, such
compensation is given for future work.
¶ 22. Second, we have assumed for purposes of discussing husband's
position that only the purpose of the options and the time period for
vesting are relevant to allocate the options between marital and
nonmartial property. In some cases, there is another factor, as described
by the Supreme Judicial Court of Massachusetts in Baccanti:
In addition, there may be circumstances, such as a long-term
marriage in which both parties have contributed to the
"partnership" and the options are exercisable soon after the
divorce, where the judge finds that stock options should be deemed
wholly marital property even though the options were given for
services to be performed in part after dissolution of the
marriage. In these cases, the judge must determine the extent of
each spouses' contribution to the asset. . . . The trial judge
has discretion . . . to decide whether an asset should be included
in the marital estate based on the parties' joint efforts in
acquiring that asset and should not necessarily be confined by the
period of the marriage. However, the fact that only one party may
exert efforts after dissolution of the marriage to obtain the
asset should be taken into account when dividing property in a
divorce proceeding.
752 N.E.2d at 728-29 (internal citations omitted). The court provided
examples in a footnote, and specifically described a situation in which
"the value of the employee to the employer, which caused the employer to
reward the employee with stock options, may have come about as a result of
the marital partnership" and "[t]he nonemployee spouse may have contributed
to the employee spouse's ability to achieve the position for which the
options were given." Id. at 729 n.6; accord Pascale, 660 A.2d at 498-99.
(FN2) We mention this additional factor here because of its potential
applicability to this case as discussed infra.
¶ 23. We return to husband's position and our reasons for rejecting
it. Putting together the evidence and the pension cases, husband argues
that the family court should have allocated the unvested stock options
exclusively by use of a time formula derived from the pension cases.
Although there are variations in the details of such formulae, the typical
formula would, for each block of options, contain a numerator of the time
period between the date of the award of the options and the final hearing,
(FN3) and a denominator of the time period between the date of the award
of the options and the date of vesting. See Davidson, 578 N.W.2d at 857.
(FN4) The resulting percentage would be multiplied by the value of each
block of options to produce the value that is marital property. As our
analysis above makes clear, we cannot endorse husband's argument that
application of a time rule alone would produce a correct allocation. At
best, the evidence supports a conclusion that some part of husband's
unvested options are for past and present work and some are for future
work. The part for present and past work is marital property in its
entirety irrespective of when it becomes vested. The only stock options
that should be apportioned between marital and separate property are those
awarded as compensation for future services, and only if the nonemployee
spouse's contribution to acquiring those options is not a factor. For
those options, a "time rule" is used frequently, but not always, as an
appropriate method of apportionment.
¶ 24. Thus, with stock options, there are actually two levels of
apportionment. See Miller, 915 P.2d at 1319 (setting forth two-step
allocation analysis); Bornemann, 752 A.2d at 989 (outlining allocation
steps); Valence, 798 A.2d at 39 (directing that time rule applies only to
options found to be an incentive for future services); DeJesus, 687 N.E.2d
at 1323 (summarizing and adopting distinct allocation steps); Short, 890
P.2d at 16-17 (applying two-tired allocation analysis). The first is based
on the purpose of the stock option grant and seeks to separate out options
granted for future performance from those granted for present and past
performance. At this level, the court may also look at the contribution
made by the non-employee spouse to the acquisition of stock options in the
future. See Baccanti, 752 N.E.2d at 729 n.7. The second level apportions
only those options granted for future performance, and not attributable to
the non-employee spouse, to determine how much of that future performance
occurred within the marriage.
¶ 25. We recognize that the first level of apportionment does not
lend itself to a mathematical formula, and the family court should consider
all relevant factors. In this process, neither the language of the stock
option agreement nor the employer's testimony is dispositive. Davidson,
578 N.W.2d at 856. Among the relevant factors are:
whether the employee stock options . . . were intended to (1)
secure optimal tax treatment, (2) induce the employee to accept
employment, (3) induce the employee to remain with the employer,
(4) induce the employee to leave his or employment, (5) reward the
employee for completing a specific project or attaining a
particular goal, and (6) be granted on a regular or irregular
basis.
Id.
¶ 26. This case turns primarily on the first apportionment level
because the family court held that none of the options were awarded for
future services and considered all the awarded options as marital property.
Thus, the court never reached the second level where it might have applied
a time rule.
¶ 27. Although the findings are sparse, we conclude that they are
not clearly erroneous and the conclusion that the unvested stock options
are marital property is supported by the findings. By the time of the
trial, all pre-separation stock options had been exercised or were
underwater such that exercise of the options did not make economic sense.
In fact, although employer had awarded options to husband twice in 2000,
three times in 2001, and once in 2002 prior to the separation, none had
been exercised because they had no value in light of the stock price. In
July 2002, employer awarded options on 424,000 shares at very low option
prices, and most of these remain unvested. This amount of shares was
almost as many as employer had awarded to husband in all the years of his
employment. Although employer awarded options to husband in November 2002,
April 2002, and February 2004, the numbers of shares-61,000 in the
aggregate-and the option prices are far less favorable. Thus, the July
2002 options account for virtually all of the unvested stock option value
in dispute in this appeal.
¶ 28. The family court did make findings about the situation in
2002:
The defendant received a substantial award of stock options during
June 2002. At that time, BEA Systems and many other companies
were recovering from a significant downturn in the technology
stock market (a.k.a. "the dot com bust"), and were concerned about
retaining employees whose stock options were now largely worthless
(underwater). BEA's stock value had dropped from around $60 per
share to under $10. They therefore issued new stock options with
lower prices to the defendant and other key employees, in order to
encourage them to remain there.
These findings should be read in light of the court's earlier finding that
stock options had become a significant and essential component of the
compensation package for executives. Thus, they were being offered as an
alternative to fixed salary for upper level employees. See DeJesus, 687
N.E.2d at 1324 (one factor for apportionment is whether stock options are
offered as an alternative to fixed salaries). For two years, the highest
level employees in the company took a very large cut in compensation. When
the economic situation of the company improved, the company restored the
full compensation package. Based on these circumstances, the family court
could reasonably find that the July 2002 options were really a make-up
award for the employees maneuvering the company through the dot com bust to
a profitable future.
¶ 29. The court could also consider wife's contribution in
determining what was marital property as we discussed above. We think the
court could consider this factor because of wife's post-divorce commitment
to take care of the parties' disabled daughter even after the daughter
reached the age of majority. The family court found that the daughter
would always require significant adult supervision and would never be able
to live on her own. As the family court found, wife's assumption of the
role of caretaker for the disabled daughter is a "benefit to the defendant,
and has enabled him to pursue his career without concern about Molly's
welfare, and with very little direct involvement in her care." Central to
the stock option issue is the fact that wife continued to assume that
caretaking role after the divorce, and thus continued to contribute to
husband's ability to put long hours into his career without having to
participate in the care of the adult daughter.
¶ 30. Although factually somewhat different, we find comparable the
decision of the Connecticut Supreme Court in Bornemann, 752 A.2d 978. In
that case, husband received stock options as part of his hiring package,
and they vested over a five year period. Id. at 982. However, husband was
fired before the last two-fifths of the options vested in the fourth and
fifth year. Id. The termination agreement allowed husband to still
exercise the fourth and fifth year options as an employee as long as he
abided by the terms of the termination agreement-for example, that he not
obtain other employment that conflicted with the interests of the employer.
Id. at 983. Meanwhile, husband and wife separated, and wife asserted that
the unvested fourth and fifth year options were marital property. The
superior court agreed, and the Supreme Court affirmed against husband's
contention that the options were awarded for future performance of the
termination agreement. Id. at 986-87.
¶ 31. The court found that stock options "are analogous to pension
benefits in that they bestow a right upon the holder to receive a benefit
under prescribed conditions." Id. at 985. It went on to hold that "[i]n
determining when unvested stock options were earned, or will be earned, the
purpose for which the options were granted must be considered." Id. at
987. Finally, it upheld the superior court finding as not clearly
erroneous, concluding that the purpose of the stock option grant was to
reward husband for past services "and that it was in exchange for those
services that the defendant was paid his salary through December 1996, and
was offered the opportunity to retain the options." Id. at 991. In
response to husband's argument that the court should have, at the least,
used a time rule to apportion the options, the Supreme Court responded that
because "we have already determined that the options are marital property
in their entirety, there is no need to employ a time rule in this case."
Id. at 991 n.11.
¶ 32. Because the family court's finding is not clearly erroneous,
and the factor of wife's continuing contribution to husband's ability to
remain productive and earn options supports the decision as to what is
marital property, we affirm the family court's decision that all the
unvested stock options are marital property. Although the court could have
found, based on the evidence, that part of the purpose of the award of
options was as compensation for future performance, we act under a limited
standard of review that allows us to reverse only if findings are clearly
erroneous based on the evidence. Mizzi, 2005 VT 120, ¶ 5. In reaching
this conclusion, we stress that we are responding only to the issues raised
by husband both below and on appeal. Husband has not challenged the
sparseness of the court's findings and, although he sought use of a time
rule, he failed to recognize that application of a time rule was only a
secondary step to allocation based on the purpose of the stock option
awards and the contribution of wife. Although he had the burden of proof,
Baccanti, 752 N.E.2d at 730, he made no argument to the court as to how it
could determine the purposes of the options and how it should allocate
based on service. See id. at 731-32 (husband waived appeal issue where he
argued only that unvested options were separate property and did not
address allocation issue).
¶ 33. Looking at the family court's decision overall, we find it
more than fair to husband. While stock options are an essential component
of husband's compensation, the family court considered his future income as
if he would not be awarded stock options in the future as he had in the
past. As a result, the stock options in dispute represent only a
relatively small part of husband's future compensation, and the bulk of
that compensation will not be considered either in the property
distribution or in the maintenance award. See n.5 infra. To the extent
there is unfairness in the overall result, it has disadvantaged wife and
not husband.
C.
¶ 34. Next, husband claims the family court erred when it valued the
unvested stock options for purposes of distribution because the unvested
stock options are subject to forfeiture should he stop working for the
company. He argues that the court can distribute the options only in kind
without assigning a value to them.
¶ 35. At trial, both sides presented experts as to the valuation of
the stock options, and both experts presented testimony on whether a value
could be assigned with reasonable certainty. Based on the testimony, the
family court concluded that all of the stock options could be valued, and
further concluded that the parties actually "came close to an agreement on
[the stock option] value," differing only by about $308,000. It adopted a
valuation roughly in the middle of the values proffered by the expert
witnesses, setting the value of all the options, vested and unvested, at
$2,646,000. Based on that valuation, it split the transferable stock
options, giving each party fifty percent. It left the incentive stock
options, which cannot be transferred, with husband. In value terms, wife
received options, both vested and unvested, worth $1,226,421, and husband
received options, vested and unvested, worth $1,419,579. The value of the
additional options awarded to husband was offset by additional property
awarded to wife to reach a nearly exact fifty-fifty division of the marital
assets. The court noted, however, that the valuation of the
non-transferable options was probably low because they receive more
favorable capital gains tax treatment. Finally, the family court
specifically declined to set up a trust, as the court did in Callahan, 361
A.2d at 563, to distribute the stock options because "such a vehicle would
require these parties to continue to have contact and would also likely
require the court to continue . . . supervision or involvement in these
parties' affairs. This is not in anyone's interests."
¶ 36. We reject husband's contention that the family court erred in
its valuation of the unvested stock options. The family court's basis for
this valuation is well reasoned and based on adequate findings supported by
evidence in the record. See Kanaan v. Kanaan, 163 Vt. 402, 405, 659 A.2d
128, 131 (1995) ("[W]e will uphold the court's valuation conclusions as
long as they are supported by adequate findings, which are in turn
supported by sufficient evidence in the record."); Chilkott v. Chilkott,
158 Vt. 193, 197, 607 A.2d 883, 885 (1992) (use of expert testimony to
value a pension fund is the proper method). In fact, we have previously
affirmed valuing property despite the existence of contingencies that, if
not realized, would mean the property value could change in the future.
See Chilkott, 158 Vt. at 197, 607 A.2d at 885 (trust interest); McDermott,
150 Vt. at 260, 552 A.2d at 788 (pension fund). Specifically, we have
approved the valuation of pensions where the spouse, like husband here,
must continue to work to be able to exercise the asset. See, e.g.,
McDermott, 150 Vt. at 260, 552 A.2d at 788. As we noted in Chilkott, even
though the asset's value may be "contingent on the worker reaching
retirement, . . . [o]nce we accept the pension contingency, the
contingencies in the instant case do not defeat the applicability of §
751(a)." Chilkott, 158 Vt. at 197, 607 A.2d at 885.
¶ 37. We also note in this case that the consequence of an incorrect
valuation is relatively small. Except for the eight percent of the options
awarded solely to husband because they were nontransferable, all other
options were split equally between the parties so that the impact of a
misvaluation was shared equally. See McDermott, 150 Vt. at 261, 552 A.2d
at 789 (affirming trial court's method of property distribution where it
"ensures that the parties share the risk of forfeiture through unemployment
or death").
¶ 38. Finally, we note that other courts have addressed the issue of
valuation and authorized valuation of unvested options despite the
contingencies involved. See, e.g., Otley, 810 A.2d at 10-11. In Davidson,
the court specifically endorsed the Black/Sholes method of valuing unvested
options, the method used by wife's expert witness in this case. 578 N.W.2d
at 858.
¶ 39. The family court specifically determined that the stock
options could be valued, and that another method of distribution would be
unworkable for the parties and the court. See McDermott, 150 Vt. at
260-61, 552 A.2d at 788 (affirming distribution method that promotes
immediacy and finality). The court's decision to divide the property in
order to reach an equitable distribution was well within its broad
discretion to distribute property. See Cabot v. Cabot, 166 Vt. 485, 497,
697 A.2d 644, 652 (1997) (upholding family court's distribution and noting
irrelevance of possible inaccuracy of net estate value where both parties
would bear burden of inaccuracy and overall distribution would still be
just); McDermott, 150 Vt. at 261, 552 A.2d at 789. We affirm its decision.
II. Date of Valuations
¶ 40. Husband's next argument is that the court erred by valuing the
parties' assets as of the beginning of the final hearing and ignoring
evidence that those valuations had become inaccurate by the end of the
final hearing. Specifically, husband argues that the court (1) ignored the
fact that BEA Systems stock was dropping in value as the trial went on, and
the drop affected the valuation of the stock options, and (2) ignored the
distributions of money from a Merrill Lynch account that the court valued
and distributed. In making these arguments, husband relies on the
principle that the court should not "premise its division of marital
property on outdated valuations of the assets involved" and that equitable
division "cannot be achieved by reliance on stale valuation data."
Cleverly v. Cleverly, 151 Vt. 351, 355, 561 A.2d 99, 101 (1989).
¶ 41. Husband made these arguments in his motion to reconsider, and
the court responded as follows:
The defendant essentially argues that the court erred in making
its findings as to the value of the marital assets based upon
evidence presented at trial because those values fluctuated, as
the experts for both sides conceded, from week to week during
trial. However, the court has no realistic choice but to makes
such findings, using its best judgment. The court does not agree
that its figures were "stale." The court made its decisions based
on its best judgment and based upon the evidence presented by both
parties. The court is satisfied that, in the long term, the
valuation used by the court will, when all aspects of the property
division and valuation are taken into account, result in a just
and equitable division between the parties.
The merits hearing in this case took eight trial days, spread over three
months. In this context, constant updating of the value of assets is
practically impossible. We agree that the court acted well within its
discretion in its valuation and in denying the motion to modify.
¶ 42. Our precedents rejecting stale valuations involve time gaps
between valuation of assets and the distribution of those assets far longer
than is arguably involved here. Cleverly involves a gap of three years.
Id. at 354, 561 A.2d at 101. In Albarelli v. Albarelli, 152 Vt. 46, 48,
564 A.2d 598, 599 (1989), we added that "marital assets should be valued as
close to the date of trial as possible." The valuations in this case
easily met the timeliness standards of our precedents.
III. Real Property
¶ 43. Husband and his brother Fraser own, as tenants in common,
three lots of land in Putney, each with a building. One contains the
marital homestead in which wife lives. Another contains a house in which
Fraser lives. The third contains a cottage and barn. The evidence
indicated that Fraser built his house and made substantial improvements to
it thereafter. Because of that work, husband's evidence indicated that the
brothers made an oral agreement that Fraser would own outright his house
and the land on which it stands, and husband would own outright the third
parcel with the cottage and barn. This oral agreement was not
memorialized, and the record title reflects the ownership of all the lots
as tenants in common.
¶ 44. Husband claims that grounds exist to reform the deed in equity
to represent the oral agreement of the brothers, and that the family court
erred when it refused to enforce the oral agreement. He further argues
that Fraser owns the property based on adverse possession or quantum
meruit. He argues that as a result, the value of his interest in the
Putney property should be reduced by approximately $94,500.
¶ 45. The family court is a court of limited jurisdiction, 4 V.S.A.
§ 454, and that jurisdiction does not include reformation of deeds or
determination of actions for adverse possession or quantum meruit between
brothers. We recognize that husband does not actually want the family
court to reform the deed, but instead to act as if it had been reformed.
We find that procedure untenable. According to husband's argument, the
family court would have to take the house and building occupied by Fraser
out of the marital property, but husband could thereafter sell his half
interest in the same property to a bona fide purchaser because the record
title remains with him.
¶ 46. We are also concerned about burdening divorce proceedings with
additional ancillary litigation that delays resolution of the divorce
issues. See Ward v. Ward, 155 Vt. 242, 247, 583 A.2d 577, 581 (1990).
This concern is hardly theoretical in a divorce proceeding as complex as
this one and where wife contests husband's position both factually and
legally. If husband believes that the record title does not represent the
true ownership interests, he should have brought an action to reform the
deeds in superior court. We hold that the family court properly acted
within its discretion in determining husband's real property interests
based on the record title.
IV. Custody and Maintenance Award
¶ 47. The family court has considerable discretion in ruling on
maintenance, and the party seeking to overturn a maintenance award must
show there is no reasonable basis to support the award to succeed on
appeal. Sochin v. Sochin, 2004 VT 85, ¶ 10, 177 Vt. 540, 861 A.2d 1089
(mem.). Thus, this Court's review is limited to determining whether the
family court's exercise of discretion was proper and whether a reasonable
basis supports the award. See Kasser v. Kasser, 2006 VT 2, ¶ 16, 179 Vt.
259, 895 A.2d 134; Johnson v. Johnson, 155 Vt. 36, 40, 580 A.2d 503, 506
(1990).
¶ 48. Husband argues that the court made two errors in determining
his annual income on which the maintenance and child support award was
based. Generally, the family court concluded that husband's salary,
including wages and bonuses but not including stock options, was $430,000
per year. It also concluded that husband will continue to be awarded stock
options that would produce an income of roughly $60,000 annually, (FN5)
creating a total income of $490,000. Husband claims first that the base
amount is inconsistent with the evidence and the findings, and second, that
the stock option income is speculative and represents "double dipping" on
assets distributed as property. We begin with the first claim of error.
¶ 49. The court concluded that husband's "base salary as of the
conclusion of the hearing was $300,000 per year." The court further found
that since husband's employment with BEA Systems, he has received both
bonuses and stock options in addition to his base salary, and the base
salary increased each year of his employment. The court found that husband
"had the potential to receive additional bonuses each year of 30% of base
pay, and then from November 2001 to the present, he has had the potential
to receive bonuses of up to 60% of his base pay." Although the court
calculated that husband's average annual bonus from January 2000 through
May 2004 was only $76,492, it also found that "[h]is bonuses have shown a
trend of significant increases each year." In fact, it found that should
husband reach his potential of a bonus at the rate of sixty percent of his
current base pay, "this would amount to $180,000 in additional wages."
Considering husband's increasing base salary and the increasing amount of
bonuses, the court concluded that husband's annual income, excluding that
from stock options, is $430,000.
¶ 50. The family court's finding of husband's annual salary at
$430,000 is fully supported by the record. The court was not required to
use either the average of prior bonus awards or the current base salary to
determine husband's future income given the history of increases in both
amounts. We find that the court's income determination, apart from the
stock option income, was within its discretion. See Kohut v. Kohut, 164
Vt. 40, 44, 663 A.2d 942, 945 (1995) (court could determine obligor's
future income in part on his begining a new job that would produce a better
income).
¶ 51. We have already discussed the court's determination that
husband would earn $60,000 annually on the sale of stock options, as well
as our conclusion that this determination was low. We address here only
husband's arguments that the court "double dipped" by counting the options
as both assets and income, and that the court prematurely counted the
income from future stock option awards.
¶ 52. As we said above, the court appeared to derive the $60,000
additional annual income from future stock option awards. Since the stock
options had not yet been provided to husband, and were not part of the
property distribution, his "double dipping" argument does not apply.
¶ 53. We add, however, that husband's "double dipping" argument is
erroneous. In making it, he relies on a case that defined capital gains
for child support purposes to ensure that obligors in similar circumstances
were treated equally. See Mabee v. Mabee, 159 Vt. 282, 286, 617 A.2d 162,
164 (1992) (holding that capital gain resulting from appreciation in value
of property received in asset distribution could not also be considered
income for child support obligation). The situation is totally different
here. Husband was awarded stock options worth over $1,400,000, many of
which were vested, and it is reasonable to expect that these assets will
earn income. This income must be considered in determining an appropriate
maintenance award. See 15 V.S.A. § 752(b)(6). Indeed, the family court
considered the availability of income from the assets awarded to wife in
determining her need for maintenance.
¶ 54. Husband's other argument is that future awards of stock
options cannot be considered income because, as the court found, there will
be at least a year delay in husband's ability to exercise these options.
This argument calls for a fine tuning of maintenance awards that is
unrealistic and would keep the parties in court forever. As the court
found, stock options were a normal part of husband's compensation package,
and he received them on a regular basis. At the conclusion of the divorce
proceeding, he was holding options worth over $1,400,000. It is reasonable
to assume that he would generate at least $60,000 in income from these
options in the short term while the stream of income from future awards was
reestablished. See Hiett v. Hiett, 158 S.W.3d 720, 724 (Ark. Ct. App.
2004) (stock options anticipated in the future represent income for
purposes of setting an alimony level).
V. Changed Circumstances
¶ 55. This case comes to us after the consolidation of two separate
appeals. The first, considered above, involves the original divorce order.
The second, considered here, involves the denial of husband's subsequent
motion to modify his child support and spousal maintenance obligations
based on allegedly changed circumstances. Husband made the motion to
modify on March 5, 2005, only three months after the original divorce
decree was issued and less than two months after the denial of his motion
to modify and amend the divorce order. While the grounds were extensive,
they rely on two central points: (1) husband's income decreased from
$490,000-the court's finding as to his income-to $353,500, and (2) his
eldest son, Jonathan, made an "unanticipated permanent move to California"
greatly increasing his expenses and reducing wife's expenses. He argued
that either or both of these grounds constitute a real, substantial, and
unanticipated change of circumstances sufficient to modify the maintenance
and child support orders.
¶ 56. In a brief order issued on April 6, 2005, after a hearing, the
court denied the motion ruling:
The allegations in these motions consist almost entirely of
challenges to the court's findings of fact in the divorce decree.
These issues are to be resolved on appeal. The balance of the
motion consists largely of allegations regarding facts that could
have been presented at trial (e.g. the reasonably anticipated
expenses related to Jonathan's relocation), or that are very far
from being unanticipated or substantial in nature. The defendant
has failed to meet his burden of alleging a real, substantial, and
unanticipated change in material circumstances since the issuance
of the court's final order.
Husband's argument on appeal is that the decrease in income and increase in
expenses constitute unanticipated changes in circumstances as a matter of
law.
¶ 57. The family court may modify a child support or spousal
maintenance order only upon a showing of real, substantial, and
unanticipated change of circumstances. 15 V.S.A. § 660(a) (child support);
id. § 758 (spousal maintenance). A change in circumstances is a
jurisdictional prerequisite to such modifications, Harris v. Harris, 168
Vt. 13, 17, 714 A.2d 626, 629 (1998), and the burden is on the moving party
to establish the requisite change, Habecker v. Giard, 2003 VT 18, ¶ 5,
175 Vt. 489, 820 A.2d 215. "There are no fixed standards for determining
what meets this threshold," and we must evaluate whether a given change is
substantial "in the context of the surrounding circumstances." Taylor v.
Taylor, 175 Vt. 32, 36, 819 A.2d 684, 688 (2002). The ruling is
discretionary so we will not reverse a decision on whether the threshold
has been met unless the court's discretion "was erroneously exercised, or
was exercised upon unfounded considerations or to an extent clearly
unreasonable in light of the evidence." Id. (citation omitted).
¶ 58. The main grounds for the denial of the motion were that
husband was trying to relitigate decisions made in the divorce decision and
that he moved too soon to establish that circumstances had changed with
respect to his income or expenses. In addition, the court found that the
expenses for Jonathan were or should have been anticipated by the time of
the divorce hearing. Indeed, the divorce decision stated that the parties
had concluded that Jonathan, who was sixteen years old at the time of the
decision, "would spend this school year (2004-2005) in San Francisco,
living with the defendant and attending a day school there" and that costs
of schooling and child care for Jonathan "must be adjusted for the fact
that [husband] is now paying Jonathan's costs."
¶ 59. We recognize that, in circumstances where an obligor achieves
a substantially lower income than the projection upon which a maintenance
order is based, the family court can find changed circumstances. See
Stickney v. Stickney, 170 Vt. 547, 548, 742 A.2d 1228, 1231 (1999) (mem.).
This does not mean, however, that the court must find changed circumstances
if the obligor's income is underperforming the projection three months
after the maintenance order is issued. This case demonstrates why a family
court could require the obligor to show underperformance over a substantial
period of time to justify a downward modification in child support or
maintenance. Husband's income history showed great volatility from year to
year, but on average husband earned far more than the income figure on
which the court set the maintenance and child support awards. The court
acted well within its discretion to rule that husband's proffer of reduced
income was more a challenge to the divorce decision than a demonstration of
changed circumstances and, as a demonstration of changed circumstances, was
inadequate. Similarly, we affirm the family court's decision that the
additional expenses for Jonathan were not unanticipated and should have
been shown at the divorce hearing.
¶ 60. Finally, we consider wife's cross-appeal claims. Wife
cross-appealed from the original divorce decision raising three issues, but
added in her brief that she would waive consideration of the cross-appeal
issues if the divorce judgment were affirmed in response to husband's
claims on appeal. We have rejected husband's claims on appeal and have
affirmed the divorce decision as well as the rulings on the post-judgment
motions. Thus, in accordance with wife's contingent waiver, we dismiss her
cross-appeal.
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
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Footnotes
FN1. Husband has assumed that the court's finding that "all . . . [the
options] were attributable to his work during the marriage" is a conclusion
of law and argues that it is inconsistent with the court's findings. By
the court's findings, husband means the summary of the evidence, which does
not constitute findings as we noted in the text. We have treated husband's
argument as if he were arguing that the court's finding on this point is
clearly erroneous.
FN2. We recognize that this theory might support a conclusion that some part
of options granted after the dissolution of the marriage are marital
property. We are not going that far in this case. There is also an issue,
as discussed infra, whether options awarded in the future are better
considered either as income or as income-producing property in the
determination of maintenance and child support.
FN3. Consistent with our analysis above, we have substituted the date of the
final hearing for the date of separation-the date proposed by husband.
FN4. In some states, the applicable formula must exclude any stock option
that vested prior to the marriage and any portion of an unvested option
that reflects compensation for work prior to the marriage. Thus, Davidson
suggests three formulae depending on the circumstances. 578 N.W.2d at 857.
Under 15 V.S.A. § 751(a), marital property includes property brought into
the marriage by either spouse. See Colm v. Colm, 137 Vt. 487, 490-91, 407
A.2d 184, 186 (1979).
FN5. Although the family court did not specify how it derived this figure,
we infer that it represents the interest on the first year of stock options
awarded to husband under the property distribution. This figure ignores
the future vesting of stock options pursuant to awards made prior to the
final hearing and, more important, assumes that husband will never receive
future stock options, an assumption at variance with the facts found by the
court. If anything, the family court undervalued the income from husband's
stock option stream.