DeJesus v. DeJesus,  90 N.Y.2d 643 (Oct. 30, 1997).

MARITAL PROPERTY -- EQUITABLE DISTRIBUTION -- INTEREST IN UNVESTED STOCK OPTIONS

PORTIONS OF UNVESTED STOCK OPTION PLANS PROVIDED BY A SPOUSE'S EMPLOYER ARE MARITAL PROPERTY FOR PURPOSES OF EQUITABLE DISTRIBUTION IF FOUR FACTORS ARE SATISFIED.

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

The parties were married in October of 1979, seven months after Appellant Wilfred DeJesus began to work for Astoria Financial Corporation.  In November of 1993, Astoria granted Appellant two restricted stock benefit plans, the Incentive Stock Option Plan (ISOP) and the Recognition and Retention Plan (RRP).  The ISOP gave Appellant an option to purchase company stock, exercisable in three equal annual installments in January of 1997, 1998, and 1999.  The RRP gave Appellant a right to receive shares of company stock outright, also in three equal annual installments beginning in January of 1997.  Both stock option plans were contingent on Appellant's continued employment with the company and both were described by the employer as "incentives."

Respondent Nancy DeJesus filed for divorce in July 1994.  The trial court held that although the rights to the stock plans did not vest during the marriage and may never vest, they were "tangible benefits which were bestowed on [Appellant] during the marriage and [were marital property to be divided equally.]"  The Appellate Division affirmed the trial court, holding that the benefit plans constituted deferred compensation for employment during the term of the marriage and were marital property.

ISSUE & DISPOSITION

Issue

Whether stock plans provided by a spouse's employer constitute distributable marital property where the options are granted during the marriage, but vest after dissolution.

Disposition

Yes. Portions of unvested stock options are marital property subject to equitable distribution if the court, relying on sufficient factual evidence, finds that the options are compensation for work done during the marriage.

AUTHORITIES CITED

Cases Cited by the Court

Other Sources Cited by the Court

RELATED SOURCES

COMMENTARY

State of the Law Before DeJesus

Prior to DeJesus, the Court of Appeals had not dealt with the issue of whether or how stock options plans are distributed in a divorce. However, the court found in a similar case that a pension's value accrued over a period which included the marriage, not at the single point at which vesting occurred. See Burns v. Burns, 84 N.Y.2d 369, (N.Y. 1994).

Effect of DeJesus on Current Law

The court adheres to a presumption in favor of marital property which rests on the view of marriage as an economic partnership. DeJesus at para. 9. According to the Domestic Relations Law Section 236[B][1][c] (McKinney 1995), marital property is "all property acquired by either or both spouses during the marriage and before execution of a separation agreement or the commencement of a matrimonial action."  Once the court identifies marital property, it has discretion to determine the proportions of an equitable distribution. DeJesus at para. 6.

The court adopts a four-tiered analysis for determining spousal rights in unvested stock option plans.  The four steps are:

1. Differentiate shares traceable to past services from those traceable to future services.
2. Label as marital property portions of compensatory stock plans earned by the titled spouse during the marriage and before the time of the grant.
3. Label as marital property portions of incentive stock plans by a time rule like that employed in In re Nelson.
Nelson time rule:
numerator= time from date of the grant to the date of separation
denominator= time from date of the grant to the date of exercisability
4. Equitably distribute marital property.
 Thus, a court must first determine whether interests in stock plans were given as compensation for past employment services or as an incentive for future services. DeJesus at para. 22. Considerations include whether the stock plans were offered as a bonus, as an alternative to a fixed salary, have value tied to future performance, or aim to attract employees from other companies. Id.

Once the court classifies each portion as either compensation or incentive, two different time rules apply to offset value accrued as compensation before the date of the marriage and value of incentives that will vest after the end of the marriage.  The portion of the stock offered as compensation is offset by defining the numerator of the time rule as the time period between the beginning of the employment or the date of the marriage, whichever is later, and the time of the stock grant; the denominator is the time period between the date of employment and the date of the grant.

For the portion granted as incentive, the numerator is the time period from the date of the grant to the end of the marriage (the earlier of either the date of the separation agreement or the commencement of the matrimonial action), while the denominator is the period of time from the date of the grant until the maturation of the stock plan. DeJesus at para. 23. These time rules determine what is considered marital property for purposes of equitable distribution.  DeJesus at para. 24.

Unanswered Questions

The court indicates that the parties' submissions alone are insufficient evidence to demonstrate whether the benefits are deferred compensation or an incentive for future efforts.  What evidence sufficiently establishes this distinction remains unclear.  The court indicates that "sworn testimony or documentation from persons with knowledge of just how and why the stock plans came to be" would be crucial. Whether such evidence would be dispositive has yet to be seen.

Also unresolved is what formula trial courts should apply to apportion the stock plans where it appears from the relevant evidence that the stock options were offered to the employee as both deferred compensation for past services and an incentive for future effort.  While the court mentions that each plan within a particular employee's package may have a different purpose, it does not address the possibility that an employer could offer one plan with a dual purpose.

Survey of the Law in Other Jurisdictions

Other courts have adopted one of three positions on this issue. Courts in Indiana, North Carolina, and Oklahoma have held that options unvested at the end of the marriage are not marital property. See, e.g., Hann v. Hann, 655 N.E.2d 566 (Ind. App. 1995) (only stock options which were exercisable on the date of filing of dissolution petition should be considered marital property subject to division); Ettinger v. Ettinger, 637 P.2d 63 (Okla. 1981); Hall v. Hall, 363 S.E.2d 189 (N.C. 1987).

In contrast, Maryland, Missouri, and Wisconsin recognize stock options as marital property the moment they are granted, even if they are not exercisable before separation. See, e.g., Green v. Green, 494 A.2d 721, 729 (Md. 1985) (because the plans granted stock options to the appellee while he was married, those options were "acquired" during the marriage, and will be equitably apportioned if and when they are exercised); Smith v. Smith, 682 S.W.2d 834, 837 (Mo. Ct. App. 1984); Chen v. Chen, 416 N.W.2d 661, 663-65 (Wis. Ct. App. 1987).

The third treatment of stock options includes the method adopted by the New York Court of Appeals in DeJesus. These states earmark as marital property some fraction of unvested stock options earned during marriage relative to the total time during which the options were earned. See, e.g., In re Marriage of Hug, 154 Cal. App. 3d 780 (Cal. Ct. App. 1984) (holding that "in marital dissolution actions the trial court has broad discretion to select an equitable method of allocating community and separate property interests in stock options granted prior to the date of separation of the parties, which became exercisable after the date of separation."). In Hug, the court decided that a trial court could allocate stock option interests incidental to the husband's employment by applying a time rule. With regard to stock options, community property was calculated using a fraction in which the numerator was the period in months between commencement of employment and date of separation of the parties. The denominator was the period in months between commencement of employment and date when each option was first exercisable. See also, e.g., In re Marriage of Miller, 915 P.2d 1314, 1318-20 (Colo. 1996); In re Marriage of Frederick, 578 N.E.2d 612 (Ill. App. Ct. 1991); Goodwyne v. Goodwyne, 639 So.2d 1210, 1212-13 (La. Ct. App. 1994); Salstrom v. Salstrom, 404 N.W.2d 848, 850-52 (Minn. Ct. App. 1987); Garcia v. Mayer, 920 P.2d 522, 524-27 (N.M. Ct. App. 1996); In re Marriage of Short, 890 P.2d 12, 15-17 (Wash. 1995); Kapfer v. Kapfer, 419 S.E.2d 464 (W.Va. 1992).

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