A colleague asked today whether post-judgment earnings from accounts established by a broker during his marriage can be considered marital property subject to distribution during a divorce. In the case at issue, the husband “receives thousands and thousands of dollars every year as ‘trailers’ for the accounts he has established during the marriage. They can be compared to ongoing commissions or interest. The effort expended to establish these accounts occurred during the marriage.”
What was not specified is whether a final judgment of divorce has entered, but I make the following assumptions: (1) that no judgment has yet entered; (2) that substantial sums annually will be paid to the husband following entry of divorce; and (3) that the wife wishes to have an equitable distribution of the stream of future income attributable to these "trailers" (a word I assume must be something like a commission.)
There are two possible scenarios here. Obviously, the wife would prefer a cash award, but it may difficult to fix a value for these “trailers.” Whenever the value of an asset cannot be determining with reasonable certainty, a trial court will reject assigning a value. However, what if the husband has been receiving trailers for a number of years? Doesn’t the problem then become more similar to determining the present value of a business based upon an average of the annual receipts?
Another possibility, failing a property distribution approach, one that I would recommend as an alternative theory, is that the future income, the rights to which were accumulated during the marriage, should certainly factor into an alimony approach.
However, let’s analyze this problem using a property distribution approach.
In Byington v Byington, 224 Mich App 103 (1997), a lucrative compensation package earned by the husband during separation and prior to entry of divorce was marital property, but his contribution to the acquisition of the package could be considered as a factor in dividing the marital estate. The general terms of the compensation package, intended as incentive to keep Defendant with his employer, were negotiated prior to the divorce. The agreement provided that, if various contingencies came to pass, most notably the acquisition of the defendant’s employer’s company by another entity, defendant would receive certain bonuses and incentives. In addition, he became eligible for a “phantom stock [option]” plan, which, in general, allowed him to benefit from an increase in the stock price of the company. The defendant accepted the offer and remained with his employer. This new compensation package was more beneficial to him than the earlier one. Ultimately, the compensation he received totaled about $2 million.
The trial court ruled that this $2 million was not part of the marital estate.
The assets here in dispute were not only acquired by defendant well after, almost two years after, this case was started; those assets were earned by defendant without a contribution from plaintiff. An asset earned during a marriage, but received thereafter, is a marital asset. An asset actually generated, not merely received, after a marriage has broken down is not a product of that marriage. That is what happened in this case. [Citations omitted.]
The Court of Appeals disagreed, holding it was error for the trial court to determine that since the parties had separated much earlier, the asset was part of the marital estate since the entitlement to receive it arose prior to termination of the marriage. However, the Byington Court went on to state that the trial court could consider the separation date or action evincing an intent to live separate lives when apportioning the marital assets.
The Court of Appeals remanded to the trial court for reconsideration of the issue of distribution of the $2 million compensation package, stating:
On remand, the trial court should bear in mind the portion of the property division to which the parties have not objected, although the remand is limited to the compensation package. In the context of the entire marital estate, the court must determine the proper division of the portion in dispute—the compensation package—by considering the relevant Sparks factors. That plaintiff may have contributed little or nothing to the compensation package in issue will be a significant factor to consider in applying the Sparks factors. Similarly, the actions of the parties in delaying the entry of the judgment, and the reasons therefore, may also be relevant. The court may again conclude that plaintiff's lack of contribution, coupled with her other substantial assets, significant earning capacity, and desire to have the judgment delayed, justify a division of property that, in effect, awards most or all of defendant's compensation package to defendant. Then again, the court may, in light of the wide range of relevant factors, conclude that to award plaintiff some share of the augmented value of the estate would be equitable under the circumstances.
A case with facts more similar to those in the query today, however, was decided in New Jersey and is instructive. In Pascale v. Pascale, 140 N.J. 583, 660 A.2d 485 (N.J. 07/10/1995), Wife began working for a company in 1987. She was awarded and exercised various stock options prior to the date she filed for divorce on October 28, 1990. Wife argued that the stock options she was granted about ten days after she filed for divorce were not subject to distribution as marital property. New Jersey law fixed the date for determination of identity of marital assets as the date of filing of the complaint for divorce. Painter v. Painter, 65 N.J. 196, 320 A.2d 484 (1974)
Wife’s argument was that the transmittal letter showed that the option for 1,800 shares stated that these were issued in recognition of past performance and that the option for 4,000 shares was awarded in recognition of a job promotion that imposed increased responsibility on her in the future. The trial court rejected her arguments and divided the stock options as marital property stating that "that the case law supports a flexible approach in determining which assets are includable and which assets are not includable for equitable distribution." The trial court’s rationale was that it would be unfair to permit Wife "to retain fruits derived during marriage simply because of a technical determination regarding her choice of a filing date.”
The lower appellate court held that the stock option tied to Wife’s future employment and increased job responsibilities should be excluded from the marital estate, but that the option granted in recognition of past employment performance was properly includable in the marital estate regardless of the date-of-complaint rule.
The New Jersey Supreme Court disagreed with the appellate court, stating
“Property ‘clearly qualifies for distribution’ when it is "attributable to the expenditure of effort by either spouse" during marriage. Painter, supra at 214. On many occasions, this Court has declared that marriage is viewed as ‘a shared enterprise, a joint undertaking, that in many ways -- is akin to a partnership.' Therefore, marital assets acquired in the course of that joint undertaking fairly should be included in the estate subject to equitable distribution. [Citations omitted]. The asset in dispute falls into that category.”
The rationale of the Pascale Court was that whether these stock options were acquired prior to or after the date of filing of the complaint was irrelevant. The real issue was whether certain assets distributed after the date of filing were acquired during the marriage, and consequently were subject to equitable distribution.
“The focus thus becomes whether the nature of the asset is one that is the result of efforts put forth "during the marriage" by the spouses jointly, making it subject to equitable distribution.
Of course, the Pascale Court still had to justify including the 4,000 stock options that were tied to the job advancement. Its logic was eloquent:
Despite the award of the option for 4,000 shares of stock in recognition of [Wife's] promotion, the trial court made a credible finding after listening to many days of testimony that that promotion came about as a result of the excellent service that she had provided to the company during her marriage. Like a spouse who cooks and cleans while one spouse rises to the top of a company, James in his role as husband and father contributed in some way to Wife's success, which increased her worth for that promotion. We credit James for being a supportive spouse as we also acknowledge his supportive role as a secondary caretaker of his children. Wife has not proven that the effort to attain the two stock options awarded on November 7, 1990, was not put forth during her marriage. Like the pension benefits in [an earlier cited case], Wife's stock options are a form of deferred compensation for efforts expended during the marriage. As those efforts were expended during the marriage, equity demands that the options be recognized.