MARITAL PROPERTY -- EQUITABLE DISTRIBUTION -- INTEREST IN UNVESTED STOCK
PORTIONS OF UNVESTED STOCK OPTION PLANS PROVIDED BY A SPOUSE'S EMPLOYER
ARE MARITAL PROPERTY FOR PURPOSES OF EQUITABLE DISTRIBUTION IF FOUR FACTORS
[SUMMARY] | [ISSUE & DISPOSITION]
| [AUTHORITIES CITED] | [COMMENTARY]
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
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
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.
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.
Cases Cited by the Court
v. Burns, 84 N.Y.2d 369 (N.Y. 1994)
v. Olivo, 82 N.Y.2d 202 (N.Y. 1993)
O'Brien v. O'Brien, 66 N.Y.2d 576 (N.Y. 1985)
Majauskas v. Majauskas, 61 N.Y.2d 481 (N.Y. 1984)
In re Marriage of Miller, 915 P.2d 1314 (Colo. 1996).
In re Marriage of Frederick, 578 N.E.2d 612 (Ill. App. Ct. 1991).
Salstrom v. Salstrom, 404 N.W.2d 848 (Minn. Ct. App. 1987).
In re Marriage of Nelson, 177 Cal. App. 3d 150 (Cal. Ct. App. 1986)
In re Marriage of Hug, 154 Cal. App. 3d 780 (Cal. Ct. App. 1984)
Other Sources Cited by the Court
In re Marriage of Short, 890 P.2d 12 (Wash. 1995).
Kapfer v. Kapfer, 419 S.E.2d 464 (W.Va. 1992).
Hall v. Hall, 363 S.E.2d 189 (N.C. 1987).
Green v. Green, 494 A.2d 721 (Md. 1985).
Ettinger v. Ettinger, 637 P.2d 63 (Okla. 1981).
Garcia v. Mayer, 920 P.2d 522 (N.M. Ct. App. 1996).
Goodwyne v. Goodwyne, 639 So.2d 1210 (La. Ct. App. 1994).
Hann v. Hann, 655 N.E.2d 566 (Ind. App. 1995).
Chen v. Chen, 416 N.W.2d 661 (Wis. Ct. App. 1987).
Smith v. Smith, 682 S.W.2d 834 (Mo. Ct. App. 1984).
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
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][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.
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.
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).
Regina Cheung, '99
Kevin D. DeBorde, '99
Jeff L. Hogue, '99
Denise A. Johnson, '98
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