The court is mindful of the following precept:
"Although we recognize the appeal that a bright line rule would
have for practitioners, clients and judges alike, we cannot blind ourselves to the fact
that custody disputes involving minor children often do not lend themselves to easy,
bright line solutions. We reject a rule that would unduly restrict the trial court's
ability to receive information that might aid it in determining where the best interests
of a child lie. Therefore, we decline to adopt the bright line rule requested by the
guardian ad litem, plaintiff and amicus, and, instead, hold that it is within the trial
court's discretion to determine, on a case-by-case basis, whether such dual, conflicting
advocacy of position is in the best interests of the child." Schult v. Schult, 241
Conn. 767, 777, 699 A.2d 134 (1997). Schult involved a dispute concerning the custody
of a minor child. The amicus curiae brief was filed on behalf of the American Academy of
Matrimonial Lawyers. Included in that brief was the contribution of the plaintiff's
attorney in this case.
This quotation concerning the inability to establish a bright line rule
is applicable not only in custody cases but in all family cases, whether dealing with
custody, division of property or determination of alimony. They are all fact specific
determinations. It is inappropriate to establish a bright line rule in such family cases.
This lack of a bright line rule is consistent with the mosaic metaphor of Ehrenkrantz, the
discretion granted to trial judges in deciding family cases, the balancing of the
statutory factors of General Statutes § 46b-81 and § 46b-82 and the concept that
"the purpose of property division is to unscramble the ownership of property, giving
to each spouse what is equitably his." Weiman v. Weiman, 188 Conn. 232, 234, 449
A.2d 151 (1982).
The trial courts and our appellate courts establish bright line rules
with great reluctance. Most rules are applicable "in light of all the
circumstances." State v. Smith, 40 Conn. App. 789, 801, 673 A.2d 1149 (1996).
The latest examples of a reluctance to establish a bright line rule in nonfamily cases
are: State v. Alexander, 197 Conn. 180, 183, 496 A.2d 486 (1985); State v.
Piorkowski, 43 Conn. App. 209, 220, 682 A.2d 582 (1996); Gayle v. Young, 1995 Conn.
Super. LEXIS 1114, Superior Court, judicial district of Fairfield at Bridgeport,
Docket No. 927973 (March 27, 1995, Tierney, J.)(1995 Ct. Sup. 2547-O, 2547-R) appeal
dismissed in part, affirmed in part, per curiam, 41 Conn. App. 913, 676 A.2d 434
(1996), cert. denied, 238 Conn. 906, 679 A.2d 1 (1996).
Many cases require a court to draw such a line. "The great body of
law consists in drawing such lines." Schlesinger v. Wisconsin, 270 U.S. 230, 241,
46 S. Ct. 260, 70 L. Ed. 557 (1926) (Holmes, J., dissenting). Almost 60 years later
the United Supreme Court likened the drawing of a bright line as akin to a "plunge
into the 'Serbonian Bog.'" Air France v. Saks, 470 U.S. 392, 406, 105 S. Ct. 1338,
84 L. Ed. 2d 289 (1985). The first court use of Serbonian Bog was attributed to
Justice Cardozo in an attempt to distinguish between causes that are accidents and
injuries that are accidents. "The attempted distinction between accidental results
and accidental means will plunge this branch of the law into a Serbonian Bog." Landress
v. Phoenix Mutual Life Ins. Co., 291 U.S. 491, 499, 54 S. Ct. 461, 78 L. Ed. 934 (1934).
This poetic phrase has been adopted in Connecticut by Justice Borden on two occasions: (1)
Matarazzo v. Rowe, 225 Conn. 314, 318, 623 A.2d 470 (1993) ("To understand and
address the question of whether federal law so obligates the defendant, however, requires
us to wade into the 'Serbonian bog' of federal and state laws regarding the medicaid
system."); and (2) Ross v. Giardi, 237 Conn. 550,554, 680 A.2d 113 (1996)
("We are required to wade once again into the virtually impenetrable 'Serbonian bog'
of federal and state laws governing the medicaid system."). For additional references
to Serbonian Bog, see John Milton, Paradise Lost, bk. 2, 1.592 (1662) ("A gulf
profound, as that Serbonian bog Betwixt Damiata and Mount Casius old, Where armies whole
have sunk"); see also "Dedication to Hon. William Hughes Mulligan," 65
Fordham L. Rev. 17-18 (1996).
To establish a bright line rule in the area of marital distribution of
employment benefits, where no court has tread, where the landscape varies and the scenery
is in constant change, is to take the step cautioned by Milton, Cardozo, Mulligan and
Borden. This court will not trespass into that area without further guidance.
This court, based upon the view of Rubin, Eslami and Krause feels that
no bright line rule can be established concerning assets that come from trusts, wills or
inheritances. It does appear that those cases involving wills, trusts and inheritances can
be distinguished from those involving employment created resources. Such a distinction was
noted in Krafick v. Krafick, supra, 234 Conn. 297-98 n. 23. It appears to be easier
to create a bright line rule concerning the assets that may come from employment. One of
the considerations is whether the "contingent resource" was granted for past or
present compensation. This court feels that under the circumstances of this case,
employment "contingent resources" are property for marital distribution. This
court will leave for another day whether or not a bright line rule shall be established as
to all "contingent resources" obtained from employment.
This court is mindful that this decision will be read with a great deal
of interest by corporate officers. Attempts may very well be made by those corporate
officers to restructure corporate benefits that would avoid such a bright line rule. Some
of the varieties will be discussed in the section dealing with valuation. The plaintiff
claims that the bright line rule should be: "contingent resources emanating from
employment, whether for past, present or future compensation should be considered property
for marital distribution purposes under Connecticut's statutory equitable distribution
scheme."
"Equitable remedies are not bound by formula but are molded to the
needs of justice."Oneglia v. Oneglia, 14 Conn. App. 267, 540 A.2d 713,
271-72 (1988); Lawler v. Lawler, 16 Conn. App. 193, 204, 547
A.2d 89 (1988).
"Until our legislature amends 46b-81 to authorize contingent
transfers of expected property, we shall not read such an intent into the statute." Rubin
v. Rubin, supra, 204 Conn. 232. Therefore, at this time no bright line rule should be
established. Benson v. Benson, 1997 Conn. Super. LEXIS 1519, Superior Court,
judicial district of Waterbury at Waterbury, Docket No. 128549 (June 2, 1997, Shortall,
J.); In re Marriage of Hug, supra, 201 Cal. Rptr. 686.
The myriad form of property ownership in the modern world would dictate
that virtually no universal principle can be devised to fit every case. Kruger v.
Kruger, 139 N.J. Super. 413, 354 A.2d 340 (App. Div. 1976). "There are few areas
of the law in black and white. The greys are dominant and even among them the shades are
innumerable." Estin v. Estin, 334 U.S. 541, 545, 68 S. Ct. 1213, 92 L. Ed. 1561
(1948).
OTHER JURISDICTIONS CONSIDER WHETHER "CONTINGENT RESOURCES"
WERE ACQUIRED FOR PAST, PRESENT OR FUTURE SERVICES
Connecticut does not presently distinguish between stock options
granted for past, present or future services. The latest case brought to the court's
attention discussing the different treatment of unvested stock options based on the
reasons for the grant is Garcia v. Mayer, 1996 NMCA 61, 122 N.M. 57, 920 P.2d 522 (Ct.
App. 1996). These unvested options, which were granted for past or present services,
were held to be immediately divisible without the use of a coverture factor. Those
unvested stock options granted for future services were only divided according to a
coverture factor in which the denominator was the total number of months from the date of
grant to the date of vesting.
The earliest case regarding allocation of stock options based on past,
present and/or future employment service is In re Marriage of Hug, supra, 201 Cal.
Rptr. 679-81 (1984). Hug is the most widely cited case in the country dealing with
stock options in a dissolution of marriage. "Thus, no single characterization can be
given to employee stock options. Whether they can be characterized as compensation for
future services, for past services, or for both, depends upon the circumstances involved
in the grant of the employee stock option."Id., 681.
This rule is also followed in In re Marriage of Miller, 915 P.2d
1314 (Colo. 1996); Demo v. Demo, 101 Ohio App. 3d 383, 655 N.E.2d 791 (1995); In
re Marriage of Short, 125 Wash. 2d 865, 890 P.2d 12 (1995); and Chen v. Chen, 142
Wis. 2d 7, 416 N.W.2d 661 (Wis. Ct. App. 1987). The common thread among these cases is
that the unvested stock options are presently divisible, even though the contingencies
have not yet expired, when the reward of the option was for employment efforts during the
marriage. Thus, unvested stock option grants awarded during the marriage for employment
labor expended during the marriage for either past or present services are marital assets
for distribution purpose. Examples of a past consideration award of stock options would be
the successful completion of a specific project or the attaining of a goal. In re
Marriage of Short, supra, 890 P.2d 17. These cases state that no coverture factor is
needed, and the stock options are immediately divisible despite the fact that some form of
continued employment is necessary prior to the options becoming vested or exercisable.
Stock options for past compensation can include: the promotion or job
change of a key executive, a bonus for successful completion of a project, specific
language to that effect in the grant documents and limitations contained in the grant
documents awarding options only to employees with certain minimal years of employment.
Stock options for present compensation can include: specific language
to that effect in the grant documents, deferral of compensation for present services,
retention of key executives, management's wish for a direct share in the corporation,
reduction of taxes on a current basis and the date of the option grant contemporaneous
with the hiring of the executive. "Evidence supporting the finding that certain of
the Microsoft stock options were granted to Robert for present services include:
Microsoft's front-loading of the stock options and Robert's acceptance of employment at
Microsoft in lieu of establishing a competing computer technology business." In re
Marriage of Short, supra, 890 P.2d 16.
Stock options for future compensation can include: specific language to
that effect in the grant documents, long term retention of key executives, increasing the
executive's incentives and efforts, providing security for the executive and "golden
handcuffs."
This type of option for future compensation is granted to insure the
employee's continued employment and future productivity. The valued employee is offered an
incentive to remain with the company because if he is no longer with the company the
"golden handcuff" option terminates with no payment to the employee. These
incentive stock options, awarded now, but for labor to be expended in the future, beyond
the date of dissolution are not divisible. Evidence of the future nature of the option is
usually found in the language of the option grant or employment agreement.
The cases cited in this section attempt to distinguish stock options
granted during the marriage which will vest conditioned upon efforts expended after the
dissolution. Some will be for past services, some present and some future. Frequently, the
evidence will show that part of the options were for past and present consideration and
part for future. Then a coverture factor must be developed to divide that type of stock
option. The contractual terms of these options vary so widely, limited only by the
creativity of the negotiation process. No set rule can be created.
"Nevertheless, the gravamen of 'vesting' was not an issue in
determining ownership rights upon marital dissolution. Rather, as I agree, the gravamen
should be whether the options are present, albeit deferred compensation, or future
compensation." Ownership ratios were discussed in this Indiana dissent. This court
rejects the majority holding in the Hann case and feels that the dissent properly reflects
the law of Connecticut. Hann v. Hann, 655 N.E.2d 566, 574 (Ind. Ct. App. 1995)
(Chezem, J., dissenting).
One of the first reported fractions (coverture factor) dividing the
future (nonmarital) and the past and present (marital) is: the numerator is the date of
commencement of employment to the cut off date for the accumulation of marital property
and the denominator is the time between the commencement of employment and the vesting of
the option. In re Marriage of Hug, supra, 201 Cal. Rptr. 676. In some cases that
distinction may not be able to be made, and a coverture factor may not be appropriate. Chen
v. Chen, supra, 416 N.W.2d 661.
After weighing all the cases referred to, the paucity of such cases in
Connecticut, the infrequent use of a coverture factor in past Connecticut trial court
decisions with little expressed rationale and the willingness of our appellate courts to
cite and rely on out of state decisions in this area, this court concludes that a trial
court distributing contingent resources must, prior to distribution, establish whether or
not and to what extent the contingent resources are compensation for past, present or
future services. Past and present service contingent resources can then be directly
divided without the use of a coverture factor. Those attributable to future services can
be distributed with the assistance of a coverture factor constructed by the trial judge
from variables to be discussed later in this opinion.
ALL TYPES OF "CONTINGENT RESOURCES" GRANTED PURSUANT TO
EMPLOYMENT SHOULD NOT BE TREATED ALIKE
This court has been asked to decide a myriad of issues regarding GE
employee benefits. It is clear from reading decisions that each of the benefit issues must
be decided on a case-by-case basis. The determinations are fact intensive and heavily rely
on the language of the various GE documents. None of the GE employee benefits in this case
are unique to the defendant. The benefits are typical of high ranking GE executives.All
the documents are prepared company wide and not for this litigation. The plaintiff called
Norman LaFlamme as her witness. He is the Manager of Executive Compensation for General
Electric Company and as such is familiar with all employee benefits including the three
"contingent resources" and the Long Term Performance Award. Mr. LaFlamme, at the
request of the plaintiff, provided complete GE documents on the employee benefits. A
number of the documents were marked into evidence by stipulation and had not been
previously referred to in testimony until Mr. LaFlamme testified on the 12th day of trial.
The plaintiff reassembled the documents and put them into one black loose leaf notebook
with 14 tabs, each tab for a different benefit or report.
The notebook, Exhibit 95, contained the following GE documents in tabs
in numerical order: (1) GE Pension Plan as amended July 1, 1994 (qualified plan); (2) GE
Supplementary Pension Plan; (3) 1995 Annual Report, General Electric Company; (4) notice
of 1996 Annual Meeting and Proxy Statement, GE, notice dated March 6, 1996; (5) General
Electric Capital Services, Inc. Form 10-K for fiscal year ended December 31, 1995; (6)
General Electric Capital Services, Inc. Form 10-Q for quarterly period ended March 30,
1996; (7) GE Long Term Incentive Plan; (8) GE Stock Options - Performance Unit Plan; (9)
administrative Procedures for the GE Long Term Incentive Plan; (10) GE Stock Option Grant
Certificate; (11) GE Restricted Stock Unit Grant with Dividend Equivalents Highlight
Sheet; (12) GE Restricted Stock Certificates; (13) GE Long Term Incentive Plan report for
Gary Wendt; (14) 1994 Modification of GE Long Term Incentive Plan.
The size of Exhibit 95 is 461 pages, generally single spaced and often
with charts of detailed financial data. No part of Exhibit 95 was highlighted, photocopied
as a separate exhibit or referred to by Mr. LaFlamme in his testimony. It was too late for
the court to impose its own objection since a majority of Exhibit 95 was already
pre-marked as exhibits by the parties themselves. The court's then pretrial procedures did
not provide for judicial supervision of exhibits prior to pre-marking. In later cases,
this court has refused to accept such lengthy exhibits unless: (1) relevant to the issues
to be decided, (2) subject to testimony and explanation by a witness, and (3) counsel
requires the court to read the exhibit in its entirety. Usually upon this court stating
those conditions, the exhibit is redacted and offered in a more manageable form. That
option was not given to counsel in this case. The court was, therefore, faced with a major
dilemma i.e., court rules impose a deadline for the filing of a trial decision and the
court does not have sufficient time within that deadline in which to read the exhibits,
briefs and cases cited. The exhibits were read by the court in their entirety and counsel
granted the court waivers of the decision deadline.
At the commencement of this trial in December 1996 there were four
contingent resources: (1) GE Unvested Stock Option and Appreciation Rights, (2) GE
Restricted Stock Plan, (3) GE Supplemental Pension Plan and Retirement Allowance, and (4)
GE Long Term Performance Award. All of these benefits had been granted to the defendant as
of the date of trial and all had various contingencies that would expire at some date in
the future. The GE Long Term Performance Award contingencies expired on January 1, 1997.
This Award had four contingencies: (1) GE would not have cancelled the entire program; (2)
GE would not have cancelled the defendant's individual participation in the plan; (3) the
defendant would have remained an employee of GE throughout the entire term of the plan
ending on December 31, 1996; and (4) the performance of GE, GESC and the defendant, met or
exceeded certain specific standards contained in the Award. All four contingencies were
satisfied as of December 31, 1996, and thus, the benefit become payable to the defendant
on January 1, 1997. It was paid to the defendant in February, 1997, subject to his
deferral option. This court will, therefore, divide and distribute in its entirety in this
decision, the GE Long Term Performance Award. That leaves three remaining contingent
resources with which to deal.
The plaintiff attempts to draw no distinctions between the unvested
stock option plan and the restricted stock plan stating that just because the same stock,
General Electric Corporation, is involved with both plans, the same conclusion should
automatically be applied in their distribution. Both parties, seeking different results,
request the court to examine: (1) the language of each plan, (2) the contingencies of each
plan, (3) the evidence regarding each plan as to whether it was granted for past, present
and/or future services, (4) the likelihood of the contingencies occurring, and (5) the
general concept that unvested stock options may differ from restricted stock.
The court has examined the documents and the testimony, and concludes
that there is a major difference between these two resources: (1) the unvested stock
options are a contingent right already granted by GE to the defendant giving him a right
to purchase a set number of GE common stock at a predetermined price at a specified future
date; and (2) the restricted stock is GE common stock which has already been issued to the
defendant and which contains a restriction that prevents the stock from being sold,
transferred, conveyed, pledged or hypothecated until the given restrictions lapse at a
specified future date. The restricted stock, unlike the unvested stock options, gives the
defendant a present right to receive all the dividends ("dividend equivalents"),
on the number of shares of GE restricted stock even if the restrictions on the stock
itself have not lapsed. GE retains possession of the restricted stock certificates.
In essence, the right to receive current dividends is the only
substantial difference. The contingencies on both the unvested stock options and the
restricted stock are essentially the same. Therefore, the principal of both contingent
resources can be treated in one fashion and the current income of the contingent resources
can be treated in another fashion.
No Connecticut appellate case discusses restricted stock in a marital
setting. A few trial courts have treated restricted stock: 1. Hayden v. Hayden, 1995
Conn. Super. LEXIS 1967, Superior Court, judicial district of Waterbury at Waterbury,
Docket No. 113097 (June 8, 1995, Dranginis, J.) (1995 Ct. Sup. 7229). Employment issued
stock with restricted sale for two years, in a long term marriage of sixteen years, was
ordered as follows: "The parties shall, after the restriction on the sale of that
stock terminates, sell and divide the proceeds equally and be responsible for any tax due
on their share. The debt to the defendant's mother shall be repaid from the liquidation of
that asset before the proceeds are divided between the parties." The defendant
borrowed this money from his mother to acquire this restricted stock. The opinion gave no
rationale or authority for its order regarding the restricted stock.
2. O'Leary v. O'Leary, 1992 Conn. Super. LEXIS 1019, Superior
Court, judicial district of Fairfield at Bridgeport, Docket No. 270660 (April 10, 1992,
Karazin, J.) (1992 Ct. Sup. 3313). This case involved a nineteen year marriage where the
husband was a high executive with an investment banking firm. He was earning a base salary
and bonus in the last four years of $500,000, $400,000, $315,000 and $475,000. He also had
nonvoting stock in his firm awarded to him. By the date of trial $126,000 of the stock had
vested and $177,000 would vest in two years. The two contingencies of forfeiture, willful
and continued misfeasance, or voluntary termination of employment, were found to be within
his control. The court ordered as to the restricted stock, "In lieu of the wife's
claims to the husband's vested and unvested shares of stock in his employer . . . the
husband will make cash payments set forth below: (a) within ninety days: $60,000, (b) on
or before April 1, 1993: $40,000, (c) on or before April 1, 1994: $40,000." This
money was awarded as property, not periodic alimony. No other rationale for this division
was contained in the decision. No authorities were cited.
3. Fitzgerald v. Fitzgerald, 1996 Conn. Super. LEXIS 2426,
Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. 146541
(September 17, 1996, Novack, J.) (1996 Ct. Sup. 5496-QQ). In this case all real property
and corporate benefits including restricted stock were awarded to the 57 year old
previously married husband and a $425,000 lump sum was awarded to the 51 year old twice
married wife in a nine year childless marriage. The decision did not value the assets,
discuss the rationale for the division or cite any authority. The trial court found
financial manipulation and deception by the wife.
A limited number of out of state cases which have already been cited,
also refer to the treatment of restricted stock. Some of these cases also contain
references to unvested stock options:
1. Mestayer v. Williams, 569 So. 2d 1102 (La. Ct. App. 1990).
Despite testimony from a corporate executive that the restricted stock issued to the
husband was for future services, the court determined from the plan documents that past
services were being rewarded. The trial court held that the restricted shares were both
awarded and issued to the employee in their entirety during the marriage and became
property for distribution purposes at the time of the award rather than when the
restrictions lapsed. It was not error for the trial court to determine all restricted
stock as community marital property, and thus, not to be distributed pursuant to a time
rule.
2. In re Marriage of Miller, 915 P.2d 1314 (Colo. 1996). This
case was previously cited in this decision as to unvested stock options and coverture
factors. The court held that unvested stock options and restricted stock should not be
treated in the same fashion. A coverture factor was held to be appropriate to divide
unvested stock options and not appropriate for restricted stock on the basis that the
restricted stock was found to have been earned when issued because dividends were
currently earned.
The case of Hann v. Hann, 655 N.E.2d 566 (Ind. Ct. App. 1996),
noted the difference between stock options and pension benefits.
There is a significant difference between pension benefits and deferred
compensation. The Incentive Stock Option Plan ('ISOP') offered by Biomet is pure deferred
compensation. They are the golden handcuffs which tie Mr. Hann to the company. They are
more akin to money in the bank than to pension assets. A pension benefit, on the other
hand, is an employer-sponsored plan designed solely to provide for employee retirement
needs. Historically, pensions have not been used as compensation or in lieu of
compensation. Cf. Leisure v. Leisure (1993), Ind., 605 N.E.2d 755 (characterizing
pension benefit as deferred compensation). Unlike ISOP's, most pension plans are subject
to strict federal pension laws which determine their vesting schedules and forfeiture
rules. Moreover, nonqualified but fully vested plan assets (i.e., 'nonqualified deferred
compensation' or '457 plan assets') remain subject to forfeiture and are nevertheless
routinely divided pursuant to qualified domestic relations orders. Internal Revenue Code
§ 457.
On the other hand, in today's corporate climate, many executives
receive significant portions of their earnings through stock options.
Hann v. Hann, supra, 655 N.E.2d 571-72 (Chezem, J., dissenting).
The plaintiff argues also that the mere fact that certain contingencies
can affect full possession and use of the resource does not detract from the fact that
they are still property, e.g., real property subject to a lease depriving the owner of
possession but not the "ownership" of the property; an IRA is still
"owned" despite the fact there are a number of restrictions preventing its full
use. This argument is not persuasive to this court since in those examples, the
contingencies that prevent full use cannot divest the owner of eventual full use and
possession. The contingencies contained in most corporate benefits plans can prevent the
use and possession and actually divest the "owner" of the resource.
The plaintiff argues that the contingencies in all of the contingent
resources are not likely to occur and divest the defendant of his employment benefit. Some
contingencies are largely within the defendant's control: (1) if he will retire, (2) the
date of retirement, (3) if he will resign or change jobs, and (4) the date of that
resignation or job change. One contingency is not within the control of either the
defendant or GE, i.e., the defendant's death. A number of contingencies are largely within
GE's control: (1) termination of the entire plan, program or agreement on a company-wide
basis, and (2) termination of defendant's individual plan. The plaintiff argues that these
last two contingencies, largely in the control of GE, are in the nature of an illusory
promise, not likely to occur and therefore, not enforceable by GE in practical terms.
The contingencies are in the nature of a "condition
precedent," not a pure "condition."
'A condition precedent is a fact or event which the parties intend must
exist or take place before there is a right to performance. . . . A condition is
distinguished from a promise in that it creates no right or duty in and of itself but is
merely a limiting or modifying factor. . . . If the condition is not fulfilled, the right
to enforce the contract does not come into existence. . . . ' Lach v. Cahill, 138 Conn.
418, 421, 85 A.2d 481 (1951); Bauman & Garrity of Lakeville, Inc. v. George E.
Emerson, Inc., 14 Conn. App. 261, 265, 540 A.2d 710 (1988).
Sicaras v. Hartford, 44 Conn. App. 771, 780, 692 A.2d 1290 (1997).
The defendant argues that the condition precedent, GE approval, makes
the defendant's employee benefits illusory because the condition is within the control of
the promisor, GE. The occurrence or failure of the condition, however, is not within the
promisor's complete control. There are restrictions on the promisor's alleged ability to
prevent the condition from occurring. "'If there is a restriction,express or implied,
on the promisor's ability to terminate or to refuse to perform, the promise is not
illusory. The tendency of the law is to avoid the finding that no contract arose due to an
illusory promise when it appears the parties intended a contract.' 2 A. Corbin Contracts
(Rev. Ed. 1995) § 5.28, p. 149." Sicaras v. Hartford, supra, 44 Conn. App. 780.
Sicaras is a pension guideline case.
It should be noted that GE has rarely exercised its option to terminate
an individual plan and even then, usually for cause. No termination of a GE company-wide
plan has occurred. Mr. LaFlamme testified that he is not aware of GE ever cancelling a
stock option under Exhibit 95, Tab 10, Section 4. A similar power is retained by GE
regarding the cancelling of the Restricted Stock Units. Exhibit 95, Tab 11, Section 5. Mr.
LaFlamme could not testify as to any such cancellation ever occurring in 28 years with GE,
the last 9 years as Manager of Executive Compensation. The stock option and restricted
stock program can be terminated on a company-wide basis if GE goes out of business.
Exhibit 95, Tab 8, Section 6.4. The parties orally stipulated that that event is not
likely to occur.
Read into the GE pension agreements and benefits is an implied
obligation of good faith to be exercised by GE. Both the defendant and GE expect the
contingencies not to occur and GE is bound by a duty of good faith to its employees to
perform contracts it enters into with them. Warner v. Konover, 210 Conn. 150, 155, 553
A.2d 1138 (1989); Sicaras v. Hartford, supra, 44 Conn. App. 781.
The above argument does have some validity when it comes to
establishing the value of a contingent resource. For example, the existence of a below
market long term lease on real property will substantially lessen its present market
value. No one would pay full price for real property that would generate an income stream
substantially below market. This also may be relevant concerning the valuation of the
restricted GE stock that pays current dividends. The current dividend on GE stock was 80
cents per share at trial when GE common stock was trading at $100 per share (pre May 12,
1997 two for one stock split). That dividend return is 8/10th of 1% on an annual basis, a
return substantially below market. An investor in GE stock with an 80 cents per share
dividend would be purchasing the stock for capital gains not present income purposes. The
restricted stock can have no capital gains until sale, and thus, until the restrictions
lapse. That fact should substantially affect the current value of the restricted stock
despite the payment of a current dividend.
The evidence further establishes that there is no current market for
either GE unvested stock options or GE restricted stock. There was no testimony by any GE
employees or by financial experts, a number of whom testified, that anyone ever sold or
traded in either GE restricted stock or GE unvested stock options. This court concludes
that neither resource has a current market until the contingencies expire.
This court concludes that all contingent resources cannot be treated
alike. This case involved, at its commencement, four contingent resources. As will be
demonstrated by the distribution of these four resources, each will be treated in a
different manner.
THE GE UNVESTED STOCK OPTION AND APPRECIATION RIGHTS PLAN IS PROPERTY
FOR MARITAL DISTRIBUTION PURPOSES
The four contingencies set forth in the 420,000 shares of GE Unvested
Stock Option plan are either: (1) based on the evidence in this trial,not likely to occur;
(2) largely within the control of the defendant; and/or (3) capable of being valued by
reasonably accurate quantification methods. Furthermore, the court concludes that the
options were granted partially for present, but largely for future services, and
therefore, a coverture factor should be used to distribute the resource. The options do
vest upon the defendant's death, to be exercised by his estate.
These GE unvested stock options are awarded to the defendant by a GE
compensation committee. Mr. LaFlamme is familiar with the method by which the defendant's
pay is determined. The defendant receives a base salary, incentive compensation, life
insurance benefits, automobile allowance and other perks. In addition he receives stock
options, some of which are currently not vested and generally not vested at their
issuance. Although not an accurate value, GE issued documents show what the stock options
could be worth in the future as a graphic emphasis of the "golden handcuff"
incentive approach. Exhibit 63, Tab 4, Page 5. GE does not place a value on the unvested
stock options issued to high executives since they are based on continued employment. Mr.
LaFlamme testified that the purpose of the unvested stock option is to provide "a
very strong incentive to provide GE, continued strong individual performance to benefit GE
overall."
After review of the Compensation Committee report, the CEO of GE
recommends to its Board of Directors a compensation package for high executives at the
defendant's level. There is no contract of employment. There are no guidelines, written or
otherwise. The defendant's pay package is based on the individual performance of the
defendant, the performance of his business, GECS, and future incentives to the defendant
to maintain both at high levels of performance. Mr. LaFlamme noted that the defendant gets
one of the highest stock option packages at GE due to the high level of his performance
and the future anticipation of high level performance of GECS. GE does not place a current
value at the time of grant on the defendant's stock options for either the defendant's
income tax, GE corporate taxes or SEC purposes.
The defendant claims they are not property, are too speculative,
involve a risk of forfeiture not appropriate to be allocated to the plaintiff and are a
mere expectancy. The defendant further categorized this resource as a performance
incentive. Therefore, he claims that they have no current market value. This substantially
reduces his net worth on his financial affidavit. They are not traded on any market. They
only vest upon the date of vesting set forth in the grant, or earlier upon the defendant's
death, retirement or disability.
The plaintiff requests that one-half of the stock options granted
during the marriage, but not yet exercisable, be allocated to her. If, as and when they
become exercisable, the plaintiff should be able to direct the exercise of the options and
receive the net after tax proceeds of the exercise of her options.
The Colorado Supreme Court found that Hewlett-Packard Company (HP)
stock options were partially marital property to the extent that the options were granted
for past or present services, and not marital property to the extent they were granted for
future services. Colorado is an all-property state. The matter was remanded for the trial
court to adopt a formula to evaluate the appropriate portion of the stock options. In
re Marriage of Miller, 915 P.2d 1314, 1320 (Colo. 1996). Unlike GE's plan, HP could
not unilaterally repudiate the options. "In this case, HP's grants of stock options
to the husband were not conditional grants. Although the husband's ability to exercise the
options is contingent on the passage of time and his continued employment, his rights
under the options cannot be unilaterally repudiated by HP. Pursuant to the terms of the
HP's stock plan, HP can modify, extend or renew outstanding options and authorize the
grant of substitute options, but HP cannot alter or impair rights or obligations created
by an option previously granted without the consent of the optionee." Id., 1318.
As to the stock options, the court must follow the three steps of
Krafick: classification, valuation and distribution. This section deals only with
classification. The testimony and documents must be examined and compared with the law in
Connecticut as interpreted by sister states' decisions. To some extent the second step of
valuation is intermixed with classification, because if the resource cannot be reasonably
quantified, it is not property. Thompson v. Thompson, 183 Conn. 96, 100, 438 A.2d 839.
The methods used to evaluate stock options will be discussed in another section. Suffice
it to say, it is not a simple matter, and it may very well be that the stock options
cannot be valued, yet they may be considered property for marital distribution purposes. Puris
v. Puris, 30 Conn. App. 443, 450, 620 A.2d 829.
Valuing many corporate assets can be a difficult task. There is no
Connecticut case that uses any other valuation method other than intrinsic value.
Intrinsic value is a simple matter of subtracting the strike price from its current market
value and multiplying that by the number of shares in each grant. This court has
determined that the valuation of stock options by any one method is not appropriate, and
takes guidance in an evaluation case involving the distribution of stock of a closely held
corporation.
It is generally recognized that closely held corporate stock cannot be
valued reasonably by the application of any inflexible formula. Snyder's Estate v.
United States, 285 F.2d 857, 861 (4th Cir. 1961); O'Malley v. Ames, 197 F.2d 256,
258 (8th Cir. 1952); annot., 22 A.L.R. Fed. 31, 44 et seq. Since valuation of
securities is, in essence, a prophecy as to the future; Revenue Ruling 59-60 3 (26
C.F.R. 2031-2032); it is important that the prognostication be based on an examination of
the appropriate financial tea leaves. While prior earnings records usually are the most
reliable guide as to future expectancy, resort to arbitrary five or ten year averages
without regard to recent trends is not likely to produce a realistic valuation. Id., §
4.02(d). In a closely held corporation, where profits are more likely to be distributed in
the form of salaries and fringe benefits, the amount of surplus available for distribution
in the form of dividends may be of little or no consequence.
Turgeon v. Turgeon, 190 Conn. 269, 276, 460 A.2d 1260 (1983).
The Turgeon court was able to place a value on this business.
This court finds that a majority of the stock options were granted to
the defendant for future employment services, and thus, a coverture factor is appropriate
to determine which portion of the stock options can be distributed between the parties. In
re Marriage of Short, 125 Wash. 2d 865, 873, 890 P.2d 12 (1995). This court will
divide this contingent resource between the parties by the use of a coverture factor. The
factor and the percentage division created thereby will be outlined in the ORDERS section
of this decision.
THE GE SUPPLEMENTARY PENSION PLAN AND RETIREMENT ALLOWANCE ARE PROPERTY
FOR MARITAL DISTRIBUTION PURPOSES
Like the unvested stock options, the four contingencies of the GE
supplementary pension plan and retirement allowance are: (1) not likely to occur, (2)
within defendant's control, and/or (3) capable of being quantified. This court concludes
that this plan was granted solely for future services since its vesting period is the
previous five consecutive years before retirement which can be taken at the earliest at
age 60.
The defendant claims that this nonqualified pension plan is not
property and its current value is zero for the reasons set forth in the prior section
regarding unvested stock options. This substantially reduces the value of the assets on
his financial affidavit.
The latest reference to the GE Qualified Pension Plan is contained in
the defendant's exhibit, the December 31, 1996 financial statement. "The value of the
General Electric Qualified Pension Plan benefit was computed, based upon the payments
estimated by General Electric beginning at age 60 at their present value, using a 6%
discount rate. The Supplemental Pension Plan has been valued at -0- because it is
contingent on future employment." Exhibit 70, note 1. The asset section of the end of
the 1996 financial statement used a value of $846,399 as to the GE Qualified Pension Plan
only. Mr. Smolin, in calculating the present value, used a "present valuation
calculation," not the assumptions of GATT or the Pension Benefit Guarantee
Corporation.
The plaintiff offered evidence to show that if the defendant remains
with GE until age 60, March 13, 2002, and GE does not otherwise cancel or modify the GE
Supplementary Pension Plan, the defendant will receive payments at his retirement,
assuming he retires exactly on his 60th birthday of $60,000 per month. Based on the
defendant's then life expectancy at age 60 discounted to present value, the GE
Supplementary Pension Plan would then be worth $9,000,000. Testimony of Robert Preston.
The plaintiff requests one-half of this plan to be paid to her when the plan is in pay
status. She claims that the defendant has had five consecutive years of employment. He
could retire tomorrow and put the supplementary pension plan immediately into pay status.
She wishes a QDRO issued to protect her one-half interest.
This plan requires further discussion. The supplementary pension plan
is nonqualified and has only been issued to the highest GE executives. This is not an
ERISA qualified plan as is the current GE pension plan. The defendant clearly is vested in
the current GE pension plan as an ERISA qualified plan. The current GE qualified pension
is property for distribution in Connecticut. Krafick v. Krafick, 234 Conn. 783, 798,
663 A.2d 365.
This nonqualified plan, like most nonqualified plans, does not require
GE to have on hand any particular funds, reserves or assets to enable GE to carry out the
terms of the plan. Only the general assets and income of GE, when the plan is put into pay
status, fund this plan. These plans, therefore, are frequently subject to modification by
the employer up until the date of the employee's retirement. At retirement the employer is
contractually unconditionally bound to pay the benefits set forth in the plan. The GE
Supplemental Pension Plan vests when an employee attains 60 years of age, providing that
he has five years qualified service. The plan is unvested prior to that time regardless of
prior GE service. The defendant is 55, has 23 years with GE and still has not vested in
this plan.
The defendant's accountant did prepare an estimated present value of
the vested GE Qualified Pension Plan. The defendant included an "estimated present
value" of $910,000 of that qualified pension plan in his financial affidavit. The
defendant's accountant did a present value calculation as of March 31, 1996, of $876,845.
The parties also stipulated somewhat contrary to those figures that Mr. Smolin said the
qualified pension's present value is $910,000, and the plaintiff's expert, Robert Preston,
will testify to within $10,000-$20,000 of that amount.
Exhibit 63, Tab 17, Page 11 and Exhibit 63, Tab 11, Page 11 also
compiled, by the defendant's accountant, states, "Supplemental Pension at 60 Approx.
$60,000/month not including rights of survivors." He calculated no present value of
that unqualified supplemental pension plan. Defendant's date of birth is March 13, 1942,
and he was 54 at the time this exhibit was prepared. As stated, Robert Preston, the
plaintiff's pension expert, calculated the present value of the GE Supplementary Pension
Plan to be $9,000,000.
The GE Supplementary Pension calculation of benefits was testified to
by Mr. LaFlamme based on Exhibit 95, Tab 2. The first requirement is that the
supplementary pension, issued only to highly ranked executives, is paid to an employee
"who has five or more years of Pension Qualification Service." Therefore, only
five years is necessary to vest. Exhibit 95, Tab 2, Section I. The retirement can be no
sooner than age 60. Exhibit 95, Tab 2, Section I(ii). The defendant will attain age 60 on
March 13, 2002. The employee shall remain an employee until the age the employee selects
for retirement past age 60. Exhibit 95, Tab 2, Section I(ii). The "Average Annual
Compensation means one - third of the Employee's Compensation for the highest 36
consecutive months during the last 120 completed months before his date of retirement or
death, whichever is earlier." Exhibit 95, Tab 2, Section II(f). That sum is times the
years of service multiplied by 1.75%. Exhibit 95, Tab 2, Section II(b). The qualified
pension plan benefits are subtracted from this result.
The evidence has established and the parties have so stipulated that
the opportunity for the defendant to earn more income in the future is greater than for
the plaintiff. The defendant's earnings have increased over the years and no doubt will
increase further.There is no evidence the defendant will leave the employment of GE prior
to age 60. Therefore, the defendant will have completed all "five or more years of
Pension Qualification Service" after the date of the parties' separation, December 1,
1995. His prior service is irrelevant to the "vesting" of this Supplementary
Pension Plan. His Average Annual Compensation will be the average of his last three years
of highest compensation, which no doubt will occur in a future three years. Therefore, the
most significant factor for vesting and payment is the future service of the defendant.
This court concludes that the entire GE Supplemental Pension Plan was issued for future
services.
Under the GE Qualified Retirement Plan based on the requirements of
federal law, the plaintiff is entitled to one half the benefits if the defendant dies.
That sum according to the plan is payable at the defendant's 60th birthday and therefore
must be discounted to his present age of 55. It must be further discounted for one year
because the plaintiff is one year younger than the defendant. This right cannot be taken
away unless: (1) she signs a notarized release to that effect, or (2) the court upon
dissolution issues a Qualified Domestic Relations Order to that effect. In addition if the
parties are married when the defendant retires and goes into pay status, her spousal
survivorship interest is to be paid for her life.
The Supplementary Pension Plan, Exhibit 95, Tab 2, pg 35-36 states that
if the plaintiff is eligible to receive a survivor benefit under the GE Qualified Pension,
"His Supplementary Pension shall be adjusted and paid in the same manner as such
pension payable under the GE Pension Plan is adjusted and paid on account of such survivor
benefit."
In addition, the GE Supplementary Pension Plan is augmented by a
"retirement allowance." This GE program is for high executives whose
"retirement is for the good of the company." Under that plan, if GE determines
that the retirement is for the good of the company, the employee has retired in good
graces and has been employed 20 years, GE will provide a "retirement allowance,"
in effect, an early payment of the GE Supplementary Pension Plan. The parties are equally
at issue as to whether this "retirement allowance" has any value.
Angelo Astone is in charge of "packaging out" executives of
GECS. He is in charge of working out various severance arrangements including recommending
"retirement allowances." There is no written plan or prototype for such a
"retirement allowance" other than Exhibit 96. It has been used, in the past 10
to 12 years, for executives over 50 with 20 years of service. A human resources bulletin
in Exhibit 96 was offered but not testified to by Mr. Astone. If these standards are met,
Mr. Astone makes a recommendation to a committee that a "retirement allowance"
be offered to the soon to depart high level executive. This allowance would bridge the gap
between the current age of the employee and age 60 when the high executive would vest in
the GE Supplementary Pension Plan. The actual retirement benefits would be reduced, since
the employee would not be working for GE for the last few years prior to the 60th birthday
and the last years of earnings considered for calculating the pension benefit would be
lower.
The high ranking officers are all GE Vice Presidents, Senior Vice
Presidents and Executive Vice Presidents, regardless of their designated office in GECS.
There are 20-22 of these high ranking officers in GECS and 120 in all of GE. The defendant
has been such an officer for many years. There are three bands for packaging out. Officer
bands (OBs) and most senior executive bands (SEBs) are negotiated by Mr. Astone's
supervisors. He is responsible for executive bands (EBs) and does an occasional SEB. In
any event the "retirement allowance" includes the regular pension, supplementary
pension and the bridge to age 60. All three bands generally follow the same procedures. If
an executive is fired or has resigned there is no bridge or supplementary pension. The
retirement allowance, once awarded, can be later terminated by GE if it is determined that
the employee "has acted or is acting in any way inimical to the interests of the
Company." Exhibit 96, paragraph 6(a) or can be "reduced, suspended or terminated
by the Board of Directors in its discretion." Exhibit 96, paragraph 7.
Mr. LaFlamme, Manager of Executive Compensation for GE was more
familiar with Exhibit 96's application for all three executive bands. He noted that any
"retirement allowance" is purely discretionary with GE even if a high executive
is over 50, but not yet 60, has 20 years of service with GE and their retirement is for
the good of the company. In any event, the retirement allowance would not exceed whatever
benefits the employee was entitled to under the GE Qualified Pension Plan and
Supplementary Pension Plan. Exhibit 96, paragraph 2(a). Since the retirement allowance
only relates to a few executives, most of whom would never need the benefits of such a
program, there is no "typical" scenario. The retirement allowance, even if not
"typical," guaranteed or widely applied, is still covered by a written procedure
adopted by GE on a company wide basis. "The Chairman of the Board (with power to
redelegate) is authorized to grant an allowance to any employee (including officers) whose
service is terminated after November 21, 1986, subject to the terms and conditions
hereinafter set forth." Exhibit 96, first sentence, first paragraph.
The plaintiff argues that Connecticut has already decided whether
contingent unqualified, unfunded pension plans are property in Dolak v. Sullivan, 145
Conn. 497, 500, 144 A.2d 312 (1958). Dolak was a succession tax case in which the
death of the employee spouse while still employed and covered by a contingent, unfunded,
nonqualified pension plan, triggered the payment of a survivor benefit to his surviving
spouse. The Supreme Court held that this payment constituted a taxable transfer subject to
the succession tax despite the fact that the employer reserved "'the right to
discontinue or modify the plan at its pleasure except that retirement allowances of
employees who have already retired shall not be reduced.'" Id., 501. This case
does not support the plaintiff's position. The basis of the decision was a statute that
requires a succession tax to be paid on such an event and when evaluation of the total
payout is impossible, a statutory compromise is permitted. General Statutes §§ 12-341,
12-355(a), and 45a-151. Thus, by statute, for Connecticut succession tax purposes, this
resource is considered a taxable transfer. That does not make it property under General
Statutes § 46b-81.
The plaintiff further restates the same arguments already previously
not accepted by the court: (1) General Statutes § 52-278a classifying property for the
purpose of attachment as "choses in action" whether such is vested or
contingent; (2) unliquidated workers' compensation is divisible notwithstanding the fact
that the full amount or extent of recovery is unknown at the time of dissolution, Tyc
v. Tyc, 40 Conn. App. 562,672 A.2d 526 (1996); Raccio v. Raccio, 41 Conn. Supp.
115, 556 A.2d 639 (1987); and (3) Krafick v. Krafick dicta citing cases from other
jurisdictions. In addition, the plaintiff cites the following cases from other
jurisdictions holding that similar nonqualified pension plans are property for marital
distribution purposes: Harbour v. Harbour, 227 A.D.2d 882, 643 N.Y.S.2d 969 (App. Div.
1996) (age 55 contingency met by date of trial, thus, plan had vested); Burns v.
Burns, 84 N.Y.2d 369, 376-77, 643 N.E.2d 80, 618 N.Y.S.2d 761 (1994) (defendant only
two years from vesting with no evidence he was planning to leave the job); Grost v.
Grost, 561 S.W.2d 223 (Tex. Ct. App. 1977) (in a Texas community property divorce, 40%
coverture factor for retirement benefits not error where statute did not require 50-50
presumption on division but did presume that all property acquired during the marriage was
community property). These cases are inapposite.
Many states hold that retirement benefits, whether vested or unvested,
accrued partially during the marriage, are subject to being divided at divorce. Most cases
originate from community property states, but are still instructive as to whether or not a
resource is part of the community property. "Under California law, retirement
benefits earned by a spouse during a marriage are community property, subject to equal
division upon the dissolution of that marriage. . . . This is true whether the benefits
are vested or nonvested, matured or immature." (Citations omitted.) In re Marriage
of Gillmore, 29 Cal. 3d 418, 629 P.2d 1, 3, 174 Cal. Rptr. 493 (1981); Van Loan v.
Van Loan, 116 Ariz. 272, 569 P.2d 214 (1977); Cearley v. Cearley, 544 S.W.2d 661
(Tex. 1976); Wilder v. Wilder, 85 Wash. 2d 364, 534 P.2d 1355 (Wash. 1975); Berry
v. Meadows, 103 N.M. 761, 713 P.2d 1017, 1023 (Ct. App. 1986). Most states now
consider potential retirement benefits to be divisible property at divorce, regardless of
whether they are vested or nonvested. J. Thomas Oldham, Divorce, Separation and the
Distribution of Property, § 7.10 (1991).
The only case in Connecticut holding that a nonvested pension is
distributable is Benson v. Benson, 1997 Conn. Super. LEXIS 1519, Superior Court,
judicial district of Waterbury at Waterbury, Docket No. 128549 (June 3, 1997, Shortall,
J.) (1997 Ct. Sup. 6358) (3 Conn. Ops. 243). Citing Krafick and noting the ten year
marriage, Judge Shortall states "Mr. Benson has been contributing to a pension plan
for the 8 1/2 years he has been a police officer. His benefits, however, will not vest for
another year. Vested pension benefits are indisputably 'property' subject to distribution
under § 46b-81 of the General Statutes." Footnote 23 of Krafick v. Krafick,
supra, 234 Conn. at 798 and footnote 20 of Thompson v. Thompson, supra, 183 Conn.
794 were the only citations. There was no reference to any other authority in or out
of Connecticut.
A retirement plan is a contract in Connecticut. The consideration is
the future labor of the employee. A retirement plan amounts to a "contract between
the decedent and the company, the obligations under which were subject to extinguishment,
in whole or in part, upon the happening of a condition subsequent in the form of the
exercise, by the company, of its reserved power of discontinuance or modification, if and
to the extent that such power legally existed." Dolak v. Sullivan, supra, 145
Conn. 503; See also Tilbert v. Eagle Lock Co., 116 Conn. 357, 363, 165 A. 205
(1933). Once the contingencies expired without being exercised the contract
obligations were in full force and effect.
It has been noted that the pension benefit, during the decedent's
employed life, would be worth less, due to the effect of the contingencies upon the
benefit. As to the amount the benefit would decrease would depend on "how likely it
is, in fact, that the company will ever exercise the power, and to what extent the
exercise of it would reduce the benefits to be received. . . ." Dolak v. Sullivan,
supra, 145 Conn. 508.
The concept that a pension benefit would reach its maximum benefit
available under the plan using only non-marital employment has been discussed in a recent
New York case. Evans v. Snyder, 207 N.Y.L.J. 21, April 15, 1992 (N.Y. Sup. Ct. 1st
dept. 1992) "Because defendant's premarital employment entitled him to the maximum
benefit available under the plan, with no contributions having been made during the
marriage, the pension plan is his separate property." Id. This was held to be true
even though the defendant's employment during the course of this ten year plus marriage
would have been sufficient to have vested the defendant's pension. The entire pension was
awarded to the defendant who was president and chief executive officer of a nationally
known publishing company earning in excess of two million dollars annually.
The general reasoning supporting the inclusion of pension plans as
distributable marital property is that some portion of the benefit, eventually obtained
after the divorce, was earned by the labor of the employee spouse during the marriage. The
opposite should then be the logical extension of that rule, i.e., if no benefit accrues to
the employee spouse for labor expended during the marriage, the resulting retirement
benefits should not be divisible. This theory is stated. "A spouse's entitlement to
half of the community interest in a pension plan earned during coverture does not rest
upon whether the employee's interest was vested at the time of the divorce, but whether
the worker's rights in the pension constitute a property interest or right obtained with
community funds or labor." Berry v. Meadows, supra, 713 P.2d 1023-24. If the
defendant's GE supplementary pension offers no benefit to the defendant for his prior
twenty plus years of service, assuming he retires no sooner than five years, at age 60,
this resource should not be divided.
Both the qualified and Supplementary Pension Plan have death benefits
to a named survivor. The qualified plan has already vested and the plaintiff has ERISA
protection. She cannot be deprived of her survivorship share without executing a written
declaration, which she has not done. The court, therefore, will award a share of this
portion to the plaintiff secured by a Qualified Domestic Relations Order. Each party can
then elect whatever survivorship benefits for his or her share free and clear of the
other's claim or consent rights.
The Supplementary Pension also has survivorship benefits since the
defendant is over age 50 and not yet retired. This death benefit to the plaintiff, if and
when it occurs, will be dealt with in the ORDERS portion of this decision.
This court has sufficient authority under the findings and conclusions
of the unvested stock options section of this memorandum of decision to conclude that the
GE supplementary pension plan and retirement allowance is property and is divisible to the
extent that any of the vesting period occurs during the marriage. "An employee does
not earn the right to a full pension until he has completed the prescribed period of
service. . . ." Kern v. City of Long Beach, 29 Cal. 2d 848, 855, 179 P.2d 799, 803
(1947). This issue will be outlined in the ORDERS section of this decision.
THE GE RESTRICTED STOCK IS PROPERTY FOR MARITAL DISTRIBUTION PURPOSES
Like the unvested stock options the four contingencies of the GE
restricted stock are either: (1) not likely to occur, (2) largely within defendant's
control, and/or (3) capable of being quantified. This court concludes that this plan was
granted for past, present and future purposes and, therefore, should be considered for
distribution. The restrictions lapse on the restricted stock upon the defendant's death.
The GE stock along with the right to receive current dividends then becomes an asset of
the defendant's estate. Mr. LaFlamme testified that the Restricted Stock Units were
awarded to the defendant for: (1) his performance, (2) the performance of GECS, (3) to
ensure the performance of the defendant, (4) to ensure the performance of GECS, and (5) to
ensure future service to GECS by the defendant by retaining the defendant with the
"golden handcuffs" of the Restricted Stock Units. Although not an accurate
valuation, GE issues documents showing what the restricted stock could be worth in the
future as a graphic emphasis of the golden handcuff incentive approach. Exhibit 63, Tab 4,
Page 6; Exhibit 63, Tab 8, Page 4.
The defendant claims that the 199,000 shares of GE restricted common
stock are not property, are too speculative, involves a risk of forfeiture not appropriate
to be allocated to the plaintiff and are a mere expectancy. Restricted stock is not traded
in any market. It has no current market value. This substantially reduces the net worth in
the defendant's financial affidavit. The present payment of dividends can be distributed
by the use of periodic alimony. The restrictions on the stock terminate on the dates set
forth in the GE restricted stock plan, at various times beginning June 1998 or earlier
upon the defendant's death.
The plaintiff claims that the entire restricted stock benefits
including dividends and future rights should be considered present property acquired
during the marriage. Both the current income stream generated as dividend equivalents, as
well as the stock itself should be distributed. She suggests two separate methods of
distribution, i.e., either (1) the defendant be ordered to hold one-half of the restricted
stock in trust for her, pay over to her any dividend or dividend equivalent payments
received by him on account of such shares and then to transfer such shares to her
"if, as and when" the restrictions lapse, giving the parties both an opportunity
to share in the appreciation of the value of the stock as well as the risk of forfeiture;
or (2) award the plaintiff an equivalent amount of other assets in value equal to one-half
of the restricted stock and all restricted stock and dividends are then awarded to the
defendant. The plaintiff claims that the 1997 dividend equivalent received by the
defendant is $396,000 annually.
The GE restricted stock is held by GE who maintains the certificates.
The restriction documents and the certificate themselves contain the restrictions. The
defendant's only current benefit is to receive "dividend equivalents" equal to
the current GE dividend rate on each share of restricted stock. The restricted stock is
non-transferable and non-assignable. It is not taxed until the restrictions lapse, and
then at ordinary income tax rates. The defendant must be employed continuously by GE until
the restrictions lapse for the stock to be issued to him.
The 199,000 shares of GE Restricted Stock were granted on three dates.
They lapse at various dates. Exhibit 95, Tab 13, Page 2. The restricted stock is all GE
common stock.
Grant Shares Restrictions Lapse
6/27/8624,000 24,000 at Termination (i.e., age 62
or later) 12/3/2004
7/3/89 35,000 35,000 on 3/13/2007
6/26/7275,000 25,000 on 6/26/1999
50,000 on 3/13/2007
6/23/9565,000 16,250 on 6/23/1998
16,250 on 6/23/2002
32,500 on 3/13/2007
The defendant must be employed by GE on the restriction lapse
date. If not, the remaining restricted stock will cancel. Exhibit 95, Tab 11, Page 1, and
Page 2, Section 4. The restrictions will lapse upon his death, provided he had been
continuously employed to the date of termination. "Notwithstanding the above,
restrictions on all RSUs will lapse immediately if your employment with GE ends as a
result of your death." Exhibit 95, Tab 11, Page 1. "Any RSUs for which the
restrictions do not lapse in accordance with the foregoing terms shall be canceled."
Exhibit 95, Tab 11, Page 1. The defendant's date of birth is March 13, 1942. Three of the
lapse dates are the defendant's 65th birthday. Whether or not he will remain with GE until
his 65th birthday was not subject to any evidence in this case. He is a wealthy man. He
has been CEO for over ten years. At age 60 he will vest in his Supplementary Pension Plan.
He will then have been with GE 27 years, 17 years as CEO. It is not beyond the realm of
possibility that the defendant will not see the vesting of all of the issued Restricted
Units. Rubin v. Rubin, 204 Conn. 224, 235, 527 A.2d 1184.
The "dividend equivalents" are paid at the same dividend rate
GE applies to each issued share of common stock. The money is paid to the defendant
quarterly at the same time GE pays the regular dividend. This is ordinary income to the
defendant. The annual amount of the "dividend equivalents" revealed by the
documents on file are: (1) $285,360.00, representing projected income from RSU dividend
equivalents for calendar year 1995, Exhibit 63, Tab 7, Page 2, Paragraph 2, letter of
September 7, 1995; (2) $358,200.00 shown on defendant's November 24, 1996 financial
affidavit; and (3) $396,000.00 as current income, Exhibit 63, Tab 14, Page 2. This court
will use the most recent sum of 396,000 for the purposes of this decision on the present
income from the restricted stock units' "dividend equivalents." If and when the
restrictions lapse the defendant would be entitled to receive the same amount, not more,
payable as dividends instead of as "dividend equivalents."
The GE Restricted Stock plan is unlike the other forms of restricted
stock - Rule 144 stock and corporation lettered stock. Rule 144 of the Securities and
Exchange Act of 1983 provides a mechanism for certain restricted securities. Under that
rule "restricted" securities are securities performed in unregistered private
placements. A private placement is an investment offered for sale to a small group of
investors exempt from SEC registration. These "restricted" securities have a
limited transferability under Rule 144, first adopted in 1972. Rule 144 permits persons
who hold such securities to publicly sell them without registration and without being
deemed underwriters, if certain conditions are satisfied. The most common restriction is
the prevention of sale for a period of time. Rule 144 was amended by the SEC on February
18, 1997 to permit resale of limited amounts of restricted securities by any person after
a one-year holding period, not the previous two-year holding period. U.S. Securities and
Exchange Commission, Final and Prepared Amendments to Securities Act Rule 144, February
18, 1997; 17 C.F.R. Parts 230 and 239; 15 U.S.C. 77a et. seq.. Rule 144 also
contains a number of other conditions. Rule 144 does not contain any conditions that
require the holder of the restricted stock to remain an employee of the corporation for
some time in the future. The GE Restricted Stock is not 144 restricted stock.
Many corporations issue to "insiders," high ranking corporate
officers, stock which contain conditions on their transferability. The stock certificates
themselves usually contain the word "Restricted" on its face and are often
referred to as "lettered stock" or "legend stock." Lettered stock is
most commonly found in a closed corporation buy/sell agreement among shareholders. The
terms of the restrictions are contained in the agreement itself. The GE Restricted Stock
is not such a "lettered" or "legend" stock. The Colorado Supreme Court
found that Hewlett-Packard Company (HP) restricted stock was entirely marital property
granted for past or present services. Colorado is an all-property state. In re Marriage
of Miller, 915 P.2d 1314,1319-20 (Colo. 1996).
The restricted stock agreement indicates that the restricted stock
shares are subject to forfeiture during the five years after the date of the agreement, HP
cannot unilaterally repudiate the husband's right to retain the stock. The husband
received the shares; he was not granted a conditional right to receive the shares. Because
the husband had already earned the right to receive those shares, they represent a form of
deferred compensation and thus, constitute marital property for purposes of the Act. . . .
That the husband's full enjoyment of the benefit is conditioned on his remaining an
employee affects the present value of the restricted stock shares, not their marital
nature.
(Citation omitted.) Id.
This court will divide this contingent resource among the parties
breaking down this resource into its component parts of principal and income. No coverture
factor needs to be calculated. The division created thereby will be outlined in the ORDERS
section of this decision.
ARE THE "CONTINGENT RESOURCES" IN THIS CASE COMPENSATION FOR
FUTURE SERVICES?
Extensive documentation was furnished to this court concerning the
various GE plans and agreements. Exhibit 95. In addition, the court heard testimony from
an accountant who regularly represents GE employees and who then is paid by GE as an
employment benefit for high ranking executives. The defendant testified.
One of the plans, contingent at the commencement of the trial, has
since vested; the GE Long Term Incentive Performance Award. Its contingencies have all
expired. The defendant has actually received payment although he elected to defer 95% of
the payment over twenty years. This plan was based on a calculation of the results of GECS
compared with GE performance objectives for a five year period ending December 31, 1996.
Those goals could have been characterized as partial compensation for future performance
and, thus, subject to a coverture factor. Since the contingency has expired the entire
Long Term Incentive Performance Award is presently divisible.
The GE Restricted Stock units (RSUs) contain a number of contingencies
in the plan documents which will terminate the plan upon occurrence: (1) the defendant
must be a current continuous employee of GE as of the lapse date on the restrictions; (2)
GE has a right to amend, alter, suspend, discontinue or terminate the defendant's
individual plan; (3) GE has the right to amend, alter, suspend, discontinue or terminate
the plan company wide; (4) in the event the RSUs are assigned, alienated, sold or
transferred, that action would be void and unenforceable. Further, the RSUs contain
additional benefits: (1) they pay a current "dividend equivalent" equal to the
current dividend on GE common stock; (2) upon the death of the defendant while employed by
GE the restrictions automatically lapse and the unrestricted shares become an asset of the
defendant's estate; (3) GE can waive any of the restrictions or amend the restrictions;
(4) if the defendant leaves for the good of the company (not fired for cause or
voluntarily retires) as a high executive, a portion of the RSUs may lapse as part of a
"separation package," an event that has occurred with some frequency in the
past, Exhibit 112; and (5) GE has never altered, suspended, discontinued or terminated
RSUs either company wide or individually except "for cause discharge or voluntary
termination," Exhibit 95, Tab 3, Page 58 (1% without allocation in 1995); Exhibit
112.
The GE Unvested Stock Options contain a number of contingencies in the
plan documents which will terminate the plan upon occurrence: (1) the defendant must be a
current, continuous employee of GE at the date the options vest; (2) GE has the right to
amend, alter, suspend, discontinue or terminate the plan for the defendant individually;
(3) GE has the right to amend, alter, suspend, discontinue or terminate the plan company
wide; (4) in the event the stock options are assigned, alienated, sold or transferred that
action would be void and unenforceable; and (5) the option shall be null and void to the
extent the grant of options or exercise thereof is prohibited under the laws of the
country of residence of the defendant. Further, the unvested stock options contain
additional benefits: (1) upon the death of the defendant while employed by GE the options
vest and the vested stock options become an asset of the defendant's estate; (2) GE can
waive any of the vesting terms or amend the vesting terms; (3) if the defendant leaves for
the good of the company (not fired for cause or voluntarily retires) as a high executive,
a portion of the unvested stock options may vest as part of a "separation
package," an event that has occurred with some frequency in the past, Exhibit 112;
and (4) GE has never amended, altered, suspended, discontinued or terminated any unvested
stock options either company wide or individually except voluntary termination or for
cause discharge, Exhibit 95, Tab 3, Page 58 (1% without any allocation in 1995); Exhibit
112.
After examination of all the witnesses' testimony and the above
documents, this court concludes that the two contingent resources (restricted stock and
unvested stock options) were granted partially for future employment. None can be
categorized solely as "golden handcuffs." Both though refer to an
"incentive to remain with GE indefinitely in the future" or similar language.
All refer to the defendant as a long and valued employee who has performed at an extremely
high level. The GE Stock Option program "is a vital element of the company's drive to
empower and motivate outstanding, long-term contributions by the high performing
executives who will lead GE into the 21st century." Exhibit 95, Tab 4, Notice of 1996
Annual Meeting and Proxy Statement Page 18. "SARs & RSUs provide strong incentive
for continued superior performance because unexercised SARs and RSUs for which the
restrictions have not lapsed are forfeited if the executive officer is terminated by the
company for performance or voluntarily leaves the company before retirement." Exhibit
95, Tab 4, Page 17.
Both of the two contingent resources (unvested stock options and
restricted stock) contain provisions for future performance and future compensation. The
restricted stock pays current "dividend equivalents" and thus, is remuneration,
in part for present service. The unvested stock options also contain elements of
compensation for past and present services. Thus, these two contingent resources are
subject to distribution by the use of coverture factor.
The GE Supplementary Pension Plan contains a number of contingencies in
the plan documents which will terminate the plan upon occurrence: (1) the defendant must
be a current, continuous employee of GE as of the date the Supplementary Pension Plan
vests; (2) GE has a right to terminate, suspend, and to amend the plan and its benefits or
subject it to future rules and regulations that would alter, suspend, discontinue or
terminate the plan or its benefits; (3) in the event the Supplementary Pension Plan is
assigned for any purposes that assignment shall be null and void; (4) if an attempt is
made to alienate, pledge or change said plan, the GE Pension Board, in its discretion, may
suspend or forfeit the interests of such pension; and (5) in the event of the defendant's
misconduct, incapacity or disability the GE Pension Board may make said payments to some
member of the defendant's family whomsoever it may determine is best fitted to receive or
administer such payments. Further, the Supplementary Pension Plan contains additional
benefits: (1) upon the death of the defendant prior to pay status there is a survivorship
benefit; (2) upon the death of the defendant in pay status there is a survivorship
benefit; (3) if the defendant leaves for the good of the company (not fired for cause or
voluntarily retires) as a high executive a portion of the Supplementary Pension Plan may
"vest" as part of a "separation package" called a "retirement
allowance," an event that has occurred with some frequency in the past, Exhibit 112;
and (4) although GE has amended the plan, there was no evidence that GE has ever amended,
altered, suspended, discontinued or terminated the Supplementary Pension Plan in any way
to lessen the benefits to high executives already under said plan other than on an
individual basis "for cause discharge."
In addition the Supplementary Pension Plan has a number of requirements
that must be met: (1) the defendant is not now an "eligible employee" since he
is not yet 60, Exhibit 95, Tab 2, Page 1, Section I; and (2) he has to have completed five
continuous years of employment with GE immediately prior to becoming an "eligible
employee" and these five years are called "Pension Qualification Service,"
all of which can occur post-separation. Exhibit 95, Tab 2, Page 1, Section I. "Mr.
Wendt is not eligible for benefits under the GE Supplementary Pension Plan (nonqualified)
unless he retires directly from the Company at age 60 or later." Exhibit 108, Page 1,
Paragraph 5.
The Supplementary Pension Plan and retirement allowance requires
continuous employment for five years immediately prior to retirement. The defendant's
minimum vested retirement age for the supplementary pension is 60, and he is now 55
(D.O.B. March 13, 1942). The defendant was 53 at the date of separation. Although he has
worked for GE for more than five consecutive years, it is the last five consecutive years
of GE employment that vests the supplemental pension plan. With the projected retirement
of the defendant at age 60, none of those last five years would have accrued
pre-separation. Thus, the Supplementary Pension Plan and retirement allowance are solely
to compensate the defendant for future service. No employment services rendered during the
marriage would affect the date of receipt nor the amount of the Supplementary Pension Plan
if the defendant continued to remain with GE for an additional five years after the
decree. If the defendant went to pay status during those five years, a coverture factor
would have to be applied.
THE USE OF A "COVERTURE FACTOR" IS A PROPER TOOL FOR
DISTRIBUTION OF MARITAL PROPERTY
"There are three stages of analysis regarding the equitable
distribution of each resource: first, whether the resource is property within § 46b-81 to
be equitably distributed (classification); second, what is the appropriate method for
determining the value of the property (valuation); and third, what is the most equitable
distribution of the property between the parties (distribution)." Krafick v.
Krafick, supra, 234 Conn. at 792-93. This court wishes to discuss the use of a tool in
distribution known as the "coverture factor." This factor has never been
formally adopted by nor referred to in any Connecticut appellate decision. A number of
trial courts have used a coverture factor in dividing assets, the most recent of which was
reported in April, 1997. The use of a coverture factor is neither authorized nor
prohibited by Connecticut General Statutes. The plaintiff's pension expert, Robert
Preston, used a coverture factor to allocate the pension. He called it the "fraction
earned during the marriage at age 60." Exhibit 106, Pages 2, 6. The Defendant's
Memorandum of Law: Are Unvested Rights Property, December 16, 1996, refers to coverture
ratios. In his Post Trial Brief, February 24, 1997, at pages 60-68, the defendant
discussed use of a "coverture formula" citing California and New York appellate
court decisions and a Connecticut trial court decision.
In Krafick v. Krafick, supra, 234 Conn. at 803, the use of the
"present division" method of dividing pension benefits between the parties was
recognized. That division and the percentages created thereby are determined on a case by
case basis. Therefore, those percentages do not set forth a bright line formula applicable
to all dissolutions.
The term "coverture" is not found in the current enactment of
the Connecticut General Statutes. The only reference to "coverture" in the
Connecticut Practice Book is contained in a listing of special defenses.
Thus, accord and satisfaction, arbitration and award, coverture,
duress, fraud, illegality not apparent on the face of the pleadings, infancy, that the
defendant was non compos mentis, payment (even though nonpayment is alleged by the
plaintiff), release, the statute limitations and res adjudicata must be specially pleaded.
. . .
Practice Book § 164.
Coverture is defined as "the status and rights of the wife arising
from the marriage relationship." Ballentine's Law Dictionary (3rd Ed. 1969).
"Feme covert" is a common law term for a married woman. Id.; see also Mathewson
v. Mathewson, supra, 79 Conn. 28; Adams v. Kellogg, 1 Kirby (Conn.) 195 (1786).
"Feme sole" is an unmarried woman. Ballentine's Law Dictionary (3rd. Ed. 1969); Mathewson
v. Mathewson, supra, 28. "Coverture" is found in a number of Supreme Court
cases, the latest during the first half of the 20th century, e.g., Castagnoln v.
Fatool, 136 Conn. 462, 464, 72 A.2d 479 (1950); Steinmann v. Steinmann, 121 Conn.
498, 505, 186 A. 501 (1936); Torlonia v. Torlonia, 108 Conn. 292, 296, 142 A. 843
(1928). The phrases "feme covert," "feme sole,"
"coverture" and "baron and feme" were used by the earliest Connecticut
reports in their indices located in the back of Kirby's Reports, Day's Reports and Root's
Reports. The following is a typical example of a more recent reference to
"coverture." "In England the rule is that the domicil of the husband is the
legal domicil of the wife, and there appears to be no exception thereto by which the wife,
during coverture, can acquire a separate domicil for herself. Warrender v. Warrender, 9
Bligh N.S. 89, 5 Eng. Rep. (Reprint) 1227. . . ." Torlonia v. Torlonia, 108
Conn. 292, 296, 142 A. 843 (1928). None of the reported appellate cases in Connecticut
refer to the concept of a "coverture factor."
A number of recent superior court decisions, utilizing California
cases, adopt a coverture factor to divide marital property. These cases are: Masi v.
Masi, 1996 Conn. Super. LEXIS 1057, Superior Court, judicial district of Waterbury at
Waterbury, Docket No. 118171 (April 17 1996,Shortall, J.) (1996 Ct. Sup. 3315, 3318); Mainville
v. Mainville, 1996 Conn. Super. LEXIS 3206, Superior Court, judicial district of New
Haven at Meriden, Docket No. 251375 (December 4, 1996, Dorsey, JTR) (1996 Ct. Sup. 7354,
7357); Sherman v. Sherman, 1993 Conn. Super. LEXIS 2972, Superior Court, judicial
district of New London at New London, Docket No. 526425 (November 17, 1993, Teller, J.)
(1993 Ct. Sup. 9862, 9867); Grich v. Grich, 1996 Conn. Super. LEXIS 3451, Superior
Court, judicial district of Hartford-New Britain at Hartford, Docket No. 525311 (January
2, 1997, Brennan, S.J.R.) (1996 Ct. Sup. 630); Benson v. Benson, 1997 Conn. Super.
LEXIS 1519, Superior Court, judicial district of Waterbury at Waterbury, Docket No.
128549 (June 3, 1997, Shortall, J.) (1997 Ct. Sup. 6358) (3 Conn. Ops. 243).
In the Masi case, Judge Shortall used the present division method of
distributing Mr. Masi's pension. The court concluded that Mrs. Masi was entitled to a
portion, citing only Krafick v. Krafick, supra, 234 Conn. at 803. Judge Shortall
declared that the wife's share of the husband's pension should be capped at its present
value by applying "what has been called a 'coverture factor' to his present projected
pension benefit of $36,000, i.e., by multiplying that amount by a fraction,the numerator
of which is the number of years Mr. Masi participated in this retirement plan during the
parties' marriage, and the denominator of which is the number of years he will have
participated by 2002. The result of that calculation is a yearly benefit of $29,647, the
monthly equivalent of which is $2,471." Masi v. Masi, supra, 1996 Conn. Super.
LEXIS 1057, Superior Court, Docket No. 118171 (1996 Ct. Sup. 3315, 3318). The
application of this "coverture factor" conveyed to the wife 13% of the husband's
current monthly benefit even though his pension was not projected to go into pay status
until 2002. This recitation of the method used to divide the applicable "coverture
factor" is typical of these Connecticut trial court decisions. It is equally typical
that the decision does not discuss other variables that can be inserted into a coverture
factor or out of state cases referring to those variables.
In Mainville, Judge Dorsey applied a present division method to the
"coverture portion" of the husband's pension benefits. Noting the ten years of
marriage, the court awarded the wife a "50 percent interest in this coverture portion
of defendant's monthly pension rights." The husband was then in his late 40's. No
citations or rationale for the use of this factor was set forth. Mainville v.
Mainville, supra, 1996 Conn. Super. LEXIS 3206, Superior Court, Docket No. 251375
(1996 Ct. Sup. 7354, 7357).
In Sherman, Judge Teller referenced the "marital coverture
period" but did not cite any cases. The rationale for the use of a specific coverture
factor of 20/26th was as follows: "This claim derives from the so-called marital
coverture period, as the parties were married during 20 of the husband's 26 years of
military service upon which his pension benefits rest." Sherman v. Sherman, supra,
1993 Conn. Super. LEXIS 2972, Superior Court, Docket No. 526425 (1993 Ct. Sup. 9862,
9866-67). The percentage of the husband's Navy pension plan was transferred to the wife by
Qualified Domestic Relations Order (QDRO).
Judge Brennan's opinion in Grich is the first reported Connecticut
trial decision to discuss out of state authority for the use of a coverture factor in
dividing unvested stock options and vested stock options. He cited In re Marriage of
Hug, 154 Cal. App. 3d 780, 201 Cal. Rptr. 676 (1984). Judge Brennan's decision, filed
January 2, 1997, provided the most detailed analysis of the treatment and distribution of
employment benefits such as stock options yet in any Connecticut trial or appellate court
case. In reviewing case law from various states, the court adopted the time rule method of
distribution in California's In re Marriage of Hug. It was noted that although Connecticut
is not a community property state like California, Hug determined what property in the
marriage was subject to community property division by multiplying a fraction. In Grich
the assets divided were stock options. "The numerator of the fraction was the
difference in months between the beginning employment date and parties separation date;
the denominator was the difference in months between the beginning employment date and
when the option was first exercisable." Grich v. Grich, supra, 1996 Conn. Super.
LEXIS 3451, Superior Court, Docket No. 525311 (1996 Ct. Sup. 630, 642). Judge Brennan
did not discuss other variations of the "coverture factor" which he called a
"time rule."
"While the formula is derived from a community property
jurisdiction, in the interests of equity regarding the facts of this case, it is
considered the proper approach. This would not be the first time a non-community property
state looked to the Hug formula and rationale for guidance in resolving stock option
distributions. See Salstrom[ v. Salstrom], supra[, 404 N.W.2d 848 (Minn Ct.App 1984).]"
Grich v. Grich, supra, 1996 Conn. Super. LEXIS 3451, Superior Court, Docket No.
525311 (1996 Ct. Sup. 630, 642).
A variety of out of state authorities will be examined by this court
concerning the use of a coverture factor in dividing stock options as well as pensions. In
addition, a number of the variables which have been used in other cases will be outlined.
This court finds Judge Shortall's use of a coverture factor persuasive.
Judge Shortall's opinion in Benson dealt with a police pension in a ten
year marriage. Except for some disputed property in which the husband had "a
beneficial interest" the pension was the largest asset. Citing the need for support
in the future for the wife and two minor children, the ten year marriage, the 8 1/2 years
the husband worked during the marriage to accrue the pension benefit and the greater
ability of the husband to acquire property in the future, the trial court divided the
pension by way of a domestic relations order. A specific coverture factor was not used
since the husband's police employment took place entirely during the marriage.
A COVERTURE FACTOR CAN BE USEDTO DIVIDE NUMEROUS "CONTINGENT
RESOURCES"
Employee benefits have a number of common factors: (1) they arise out
of employment, (2) are issued by the employer, (3) are rewards for labor, and (4) are
issued pursuant to a plan or agreement. Vested employee benefits have a number of common
elements: (1) they are put into pay status at sometime in the future, (2) that pay status
is largely determined by the employee who selects a retirement date or chooses to exercise
a vested option, and (3) the benefits are expected to increase the longer the employee
continues to remain with the employer. Unvested employee benefits also have a number of
common contingencies: (1) the employee must remain employed until the contingency expires,
(2) the employer has not sooner cancelled the plan on an individual basis, (3) the
employer has not sooner cancelled the plan on a company wide basis, and (4) the employee
does not sooner leave the employment by quitting, resigning or getting terminated by the
employer.
This concept of division of contingent resources earned during the
marriage is contained in American Law Institute, Principles of the Law of Family
Dissolution: Analysis and Recommendations,(Tentative Draft No. 2, 1996).
Deferred or Contingent Earnings and Wage Substitutes.
(1) Property earned by labor performed during marriage is marital
property whether received before, during, or after the marriage. Property earned by labor
not performed during marriage is the separate property of the laboring spouse even if
received during marriage.
(a) Vested pension rights are marital property to the extent they are
earned during the marriage.
(b) Contingent returns on labor performed during marriage, including
unvested pension rights, choses in action, and compensation contingent on post-marital
events,
are marital property to the extent they are earned during the marriage.
Id., § 4.08
It appears that any unvested employee benefit that contains these types
of contingencies should be able to be divided using a coverture factor. The following
cases hold that the following employee benefits can be so divided: (1) In re Marriage
of Brown, 15 Cal. 3d 838, 544 P.2d 561, 126 Cal. Rptr. 633 (1976) (pension benefits);
(2) In re Marriage of Walker, 216 Cal. App. 3d 644, 265 Cal. Rptr. 32 (1989)
(pension benefits); (3) Garcia v. Mayer, 1996 NMCA61, 122 N.M. 57, 920 P.2d 522 (Ct.
App. 1996) (unvested stock options); (4) In re Marriage of Hug, 154 Cal. App. 3d
780, 201 Cal. Rptr. 676 (1984) (deferred compensation plan); and (5) In re Marriage
of Kilbourne, 232 Cal. App. 3d 1518, 284 Cal. Rptr. 201, 204 n.5 (1991) (husband's
contingent right to receive fees to be divided in accordance with customary community
property rules).
In addition, the court has the power to divide a specific resource into
its component parts, value each part and then distribute each part equitably. Ruggles
v. Ruggles, 116 N.M. 52, 65, 860 P.2d 182, 195-97 (1993). For example, a pension plan
may contain a survivor's benefit provision. Where an employee spouse has a choice of
pension options, he or she should not be permitted by the choice of the option to defeat
or reduce the interest of the non-employee spouse. In re Marriage of Stenquist, 21 Cal.
3d 779, 582 P.2d 96, 100, 148 Cal. Rptr. 9, (1978). On the other hand, ordering an
employee spouse to name his younger non-employee spouse as survivor on the retirement
plan, would reduce the employee spouse's periodic payments and upon his actuarial
anticipated earlier death, gives the non-employee spouse a greater share of the retirement
benefits. Both retirement benefits and survivorship benefits must be separately valued and
separately distributed. Irwin v. Irwin, 121 N.M. 266, 910 P.2d 342, 347 (Ct. App.
1995).
"There is, in sum, no perfect solution to the problem of unvested
pensions. Note, however, that while some courts once treated unvested pensions as separate
property, today nearly all treat them as marital property." ALI, supra, Tentative
Draft No. 2, p. 222. Coverture factors are but one solution to the division of pensions,
stock options, retirement benefits, deferred earnings and other contingent resources.
VARIABLES TO BE CONSIDERED IN "COVERTURE FACTORS"
Only one variable of a "coverture factor" was discussed in
Grich v. Grich. This court has determined that there are at least seven variables that
find support in other jurisdictions for use in the numerator, denominator and multiplier.
It is helpful at this stage to discuss the definition of a stock
option. "[A] stock option is the contractual right to buy or sell stock in the future
at a predetermined price. . . . Options which give the holder the right to buy are known
as 'call' options . . .." Regier v. Rhone-Paulenc Rorer, Inc., 1995 WL 395948
(E.D. Pa. 1995). "In order to exercise a call option, the holder tenders the
price fixed in advance, commonly known as the 'strike price,' and receives the shares of
stock in return." Id., *3. The principle value of the stock option is that the option
holder has no cash at risk in order to obtain a profit in the future. In an employer
issued stock option, there is no loss that can be incurred on a stock option since the
employee has paid nothing for the option. If the stock at its projected sales date is less
than the grant ("strike" or "exercise") price, it is worth zero. It
can never be worth less than zero. If it stays at the grant price it is worth zero and if
the current stock price is higher than the grant price (exercise or strike price) it has
increased in value.
Because the holder of a call option is entitled to buy shares of stock
at a fixed price, the value of a call option will be at least as great as the difference
between the market price and the strike price whenever the market price exceeds the strike
price. . . . If the market price is less than the strike price, exercising the call option
would result in a loss. However, because the holder of a call option has the right to
exercise the option but is not obligated to do so, the holder will simply elect not to
exercise the option whenever the market price is less than the strike price. Thus, the
value of the option can never be less than zero.
Id., *4.
From the foregoing discussion, two important principles follow. First,
when an option is exercised, the grantor of the option is not required to make any cash
payment - the grantor is only required to deliver shares of stock in return for the tender
of the strike price by the holder of the option. And second, although the exact value of a
call option depends on several factors, it will always be a positive amount.
Id.
Employee issued options are generally not traded. The trading publicly
of stock options first occurred in 1973 with the establishment of the Chicago Board of
Trade. A "call" option gives the holder the right to buy stock and a
"put" option gives the holder the right to sell stock. This case deals with call
options. All employee issued options are "call" options. The difference between
the market price and the strike price is called its "intrinsic"value. The value
of a call option will be at least as great as its "intrinsic" value. The holder
of a "call" option has the right to exercise the option but is not obligated to
do so.
The Connecticut Appellate Court has twice considered stock options as
property subject to equitable distribution. These two cases are: Eveland v. Eveland,
1996 Conn. Super. LEXIS 236, Superior Court, judicial district of Stamford-Norwalk at
Stamford, Docket No. 141866 (January 30, 1996, Harrigan, J.) (1996 Ct. Sup. 1030); and Denley
v. Denley, 38 Conn. App. 349, 661 A.2d 628 (1995). Eveland was appealed to the
Appellate Court but was recently settled without an Appellate opinion. In Eveland there
were three types of stock options, not all were vested. The 12,438 unvested options were
awarded to the husband. The wife received half of the 12,558 vested stock options, and she
was given the right to determine when the husband would exercise those options for her. No
coverture factor was discussed.
Denley was a post judgment modification case. In the 1992 decree the
stock options, not yet exercisable, were permitted to be retained by the husband employee.
After the decree he exercised certain of the stock options and the profit on the sale of
those stock options was incorrectly considered by the trial court as income. The sale of
the options was held to be a conversion of an asset into cash and not income. Despite that
error, the decision of the trial court in denying the modification was upheld. Denley did
not discuss coverture factors. It is of no more assistance to this court than the other
reported trial court cases that divided unvested stock options.
The most frequently cited case for using a coverture factor for the
division of marital assets is In re Marriage of Hug. Noncommunity property states
regularly cite In re Marriage of Hug. The formula in Hug is as follows: "Community
property is a product of a fraction in which the numerator is the period in months between
the commencement of the spouse's employment by the employer and the date of separation of
the parties, and the denominator is the period of months between the commencement of
employment and the date when each option is first exercisable, multiplied by the number of
shares which can be exercised on the date the option is first exercisable. The remaining
options are the separate property of the employee."In re Marriage of Hug, supra,
201 Cal. Rptr. 678.
A later California case modifies the In re Marriage of Hug formula and
indicates that there are a variety of dates that can be used. The denominator of the start
of employment in the Hug formula was used but the numerator was changed from the date
options were granted to the date on which options were exercisable. In re Marriage of
Nelson, 177 Cal. App. 3d 150, 222 Cal. Rptr. 790 (1986). Nelson stated the formula as
follows: Community property is determined by a fraction "in which the numerator was
the number of months from the date of grant of each block of options to the date of the
couple's separation, while the denominator was the period from the time of each grant to
its date of exercisability." In re Marriage of Nelson, supra, 222 Cal. Rptr. 793.
An Indiana case cited by the defendant, Hann v. Hann, 655 N.E.2d 566
(Ind. Ct. App. 1995) sets the formula as follows: Stock options granted to an employee
by his or her employer which were not exercisable at time the dissolution petition was
filed or prior to the decree, were not subject to distribution as a divisible marital
asset, where future exercise was wholly contingent on husband's continued employment. Hann
v. Hann is not controlling since Indiana has a statute that holds vested pensions are
property creating in this case on inference that unvested employment benefits including
unvested stock options are not property.
The court in Grich v. Grich, supra, 1996 Conn. Super. LEXIS 3451,
Superior Court, Docket No. 525311 (1996 Ct. Sup. 630), although citing In re Marriage of
Hug, uses a slightly different formula than Hug. Community property equals as the
numerator, the number of months from the start of employment to the separation date and as
the denominator, the months from the start of employment to the date on which options are
exercisable, multiplied by the number of stock options granted after the date of
separation which then becomes property subject to equitable distribution.
It should be noted that a coverture fraction is not limited to
distributing stock options but offers guidance to trial courts in dividing pension
benefits. For example: "The marital interest in each payment will be a fraction of
that payment, the numerator of the fraction being the number of years (or months) of
marriage during which benefits were being accumulated,the denominator being the total
number of years (or months) during which benefits were accumulated prior to or when
paid." In re Marriage of Hunt, 78 Ill. App. 3d 653, 663, 397 N.E.2d 511, 519, 34
Ill. Dec. 55 (1979); Pacheco v. Quintana, 105 N.M. 139, 730 P.2d 1, 6 (Ct. App.
1986).
This court, after examining dozens of coverture factor cases from out
of state sources, determines that the following are the most common denominator variables:
(1) the months from date of option grant to the separation date, (2) the months from date
of option grant to the dissolution date, and (3) the months from date of option to date of
filing of the dissolution action. The following are the most common numerator variables:
(1) the months from the start of employment to the date the options are exercisable, and
(2) the months from the date the options are granted to the date in which options are
exercisable. The final multiplier can be either: (1) the number of shares purchased on the
date at which options are exercisable, or (2) the number of option shares granted after
the date of separation. There are other variables that may be appropriate. The combination
of these seven variables can result in dozens of coverture factors. It is up to the
exercise of judicial discretion based on the facts of the case for the court to apply the
appropriate "coverture factor." The use of a "coverture factor" can be
used to divide stock options (Grich v. Grich), pension plans (Benson v. Benson) and to
determine what percentage of assets were acquired in community property jurisdiction (In
re Marriage of Hug).
We stress that trial courts, in the exercise of their discretion, are
not limited to this formula in seeking to achieve an equitable allocation of separate and
community interests in employee stock options.
In re Marriage of Hug, supra, 201 Cal. Rptr. 678.
Although we approve the use of the time rule fashioned by the trial
court under the facts of this case, we stress that no single rule or formula is applicable
to every dissolution case involving employee stock options.
Id., 685.
The variables may be mixed, matched and combined at the discretion of
the trial judge to meet the particular facts of the case. For example, the following three
California cases contained references to the facts considered applicable in choosing one
coverture factor over another. In re Marriage of Hug, 154 Cal. App. 3d 780, 201 Cal.
Rptr. 676 (1984) (unvested stock options found to be for past and present services and
to a lesser extent future services. The coverture factor used the date employment
commenced); In re Marriage of Nelson, 177 Cal. App. 3d 150, 222 Cal. Rptr. 790 (1986)
(unvested stock option found to be granted more for future employment, the coverture
factor used the date the options were granted rather than the date of employment.
"Hug options appear to have been designed to attract new employees and/or more
generously reward past services."); In re Marriage of Harrison, 179 Cal. App. 3d
1216, 225 Cal. Rptr. 234 (1986) (coverture factor similar to Nelson used, and it was
noted that there was a higher risk of divestment after the date of dissolution).
The trial court must, therefore, take the following steps in dividing
unvested stock options: (1) analyze the facts and the circumstances surrounding the
granting of the options; (2) analyze the facts of the case in regard to the contribution
made by each party to the acquisition, preservation and appreciation of the stock options,
e.g., a long separation of years before the dissolution may be entitled to less than a
separation immediately before the date of dissolution; (3) determine the level of risk of
divestment that is appropriate to be retained by each party; (4) determine whether the
options are for past, present and/or future services; (5) if determined to be for future
services, or partially for future services, consider establishing a coverture factor; (6)
after analysis under step 5, determine the appropriate numerator and denominator; (7)
multiply the coverture factor by the appropriate number of options in each grant; (8) the
resulting sum, are the unvested stock options subject to distribution; (9) determine the
proper distribution method, for example one of the three methods of Krafick; (10) apply
the other statutory standards to determine the percentage or number of stock options that
have already been calculated to be subject to distribution and to be awarded to each
spouse; (11) apply any other appropriate contingencies the court deems applicable, i.e.,
second look, retaining continuing jurisdiction, allocation of earlier death benefits, and
so forth.
In this case there is a major financial impact resulting from the
choice of the variables, i.e., the date of the parties' separation December 1, 1995, or
the date of dissolution, December 3, 1997. During that period of over twenty-four months,
this case was pending. GE stock went from $72 a share to virtually $144 per share.
Therefore, the assets to be distributed substantially increased by tens of millions of
dollars between the date of the separation and the date of dissolution. The plaintiff
argues that she made a substantial contribution to the acquisition, preservation and
appreciation of the assets of the parties, and she did so as a corporate wife. Yet for the
period of time from the separation to the date of decree the parties were living separate
and apart. She made virtually no daily contributions, performed no corporate entertaining
and made no contributions as a corporate wife. Some of her efforts pre-separation may have
had some residual contributions to the parties' assets. The choice of the variables to be
used in the coverture factor will be made later in this decision, but its financial impact
on the parties will be substantial.
VARIABLES USED IN THIS CASE TO ESTABLISH A "COVERTURE FACTOR"
In the Wendt case the date of separation of the parties is December 1,
1995. The date of dissolution is December 3, 1997. The matter of Wendt v. Wendt has been
pending during these twenty-four plus months. The complaint was served in December, 1995
and returned to court. Pleadings were closed and discovery was completed. The trial
commenced on December 7, 1996 and concluded with final argument on February 27, 1997. This
court, in the meantime, was assigned to preside over a high profile criminal trial that
commenced with hearings on motions in February, 1997 and concluded with a July 24, 1997
sentencing. The parties have consented to requests by this court for extensions to file
this decision.
A substantial increase of tens of millions of dollars in the assets to
be divided occurred from the date of the separation to the date of the decree. In those
twenty-four plus months GE common stock went from $72 per share to virtually $144 per
share. The plaintiff argues that she made a substantial contribution to the acquisition,
preservation and appreciation of the assets of the parties. She did so as a corporate
wife. Yet from the December, 1995 separation to the date of the decree, the parties were
living separate and apart. She made no additional nonmonetary contributions to the
husband/wife entity, supervised no corporate entertaining and made no contributions as a
corporate wife.
How much of the increase of GE stock is attributable to a general
market increase and the contribution of others at GE and how much is attributable to the
defendant's efforts? Using the total calendar year of 1996, the Standard and Poor's index
of 500 stocks increased 20%. GE is one of those 500 stocks. GE is a conglomerate involved
in businesses that are included in many sectors. The Dow 30, including GE, increased 28.7%
in all of 1996. Edward C. Johnson III, Chairman and Chief Executive Officer, Fidelity
Investments, Review, January, 1997. Using $72 per share of GE common stock price as of
December, 1995, a 20% increase would bring the price to $86.40 per share and a 28.7%
increase would bring the price to $92.66 per share. Evidence disclosed showed that during
early 1997 GE was trading at $98.87 per share, an increase of 37.3% for the year. It is
clear that GE generally, and GECS under the defendant's leadership, outperformed the
market. Some of the credit must go to the defendant and not just to market conditions.
In an article in the January 13, 1997 issue of the Wall Street Journal,
it was noted that GE, "when it reports record 1996 earnings this week, it is likely
to emerge as the most profitable company in the U.S. . . . Worldwide, only Royal
Dutch/Shell Group of Cos., analysts say, has a chance of reporting higher 1996 earnings
than the Fairfield, Conn. giant, and the Anglo-Dutch oil company's results will depend
heavily on rising crude-oil prices." Exhibit 94, Column 1. Discussing the reason for
that increase, the article stated as to John F. Welch, Chairman of General Electric Co.,
"For years Mr. Welch's exuberant management style has undoubtedly helped drive GE
ahead." Exhibit 94, Column 1. The article focuses on Mr. Welch's efforts and concepts
to continue the growth of GE. The article was based on four new programs, i.e., of quality
control, selling services, acquisition strategies and expansion abroad.
GECS appears prominently in the article. GECS "assets totaled $186
billion at the end of 1995, up 46% in two years; if it were a bank, it would have been the
third-biggest in the U.S." A chart in the article notes nine business segments of GE
in order of revenue: GE Capital, Industries, Materials (GE Plastics), Power Generation,
Aircraft Engines, Appliances, Technicals (medicals, etc.), Broadcasting (NBC), Others.
According to the Wall Street Journal chart, GE Capital's 1995 revenues were $26.49 billion
compared to Appliances' revenues of $5.93 billion. The defendant is quoted in the article
as stating that the quality control program is not as readily applicable to automobile
loans as it is to refrigerators.
The theme of the entire article is the contribution made by John F.
Welch, CEO of GE for fifteen years. "Will the Welch strategies work? Most analysts
think so. 'The turbocharging that GE has done allows it a sustainable long-term growth
rate of 13%' in annual profit." Exhibit 94, Column 7. A former GE employee, now
heading another large corporation, is quoted. "I think Jack's done it for 15 years,
and I think the place is in good shape; so, they are going to be able to keep it
going." It is clear to this court that Mr. Welch has made a substantial contribution
to the Wendts' assets, clearly more than the plaintiff. As CEO of the equally successful
GECS, so did the defendant.
The date of separation in this case appears to be relevant due to the
nonmonetary and corporate wife contributions made by Mrs. Wendt based on the following
factors: (1) the children were grown and no longer living in the marital home; (2) the
parties no longer lived together and have not been living together since December 1, 1995;
(3) since December 1, 1995, the day of separation, the wife has not been included in any
GE activities including all of 1996 and 1997; and (4) the wife is not supportive of the
husband due to the contested dissolution matter pending in the Superior Court.
In other reported cases the date of separation has been used in
applying a coverture factor to divide stock options which were issued to encourage further
employment efforts. In re Marriage of Short, 125 Wash. 2d 865, 872, 890 P.2d 12 (1995).
The California Court of Appeals has upheld the use of a coverture factor where the
numerator is the number of months from the date of the grant of the option to the date of
separation and whose denominator is the number of months from the date of the grant to the
date of vesting not subject to divestment. The options were "golden handcuffs,"
not compensation for past or present service. In re Marriage of Harrison, 179 Cal. App.
3d 1216, 225 Cal. Rptr. 234 (1986).
There were, no doubt, benefits from the plaintiff's corporate wife
contributions made before the separation which ripened postseparation, but there was no
evidence supporting such a finding. A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn.
200, 208-09, 579 A.2d 69 (1990). The wife's nonmonetary contributions to the marriage
and her corporate wife contributions ended on December 1, 1995. The date of separation
will be used as the numerator of any coverture factor.
TAX CONSIDERATIONS REGARDING STOCK OPTIONS ARE RELEVANT IN DIVIDING THE
ASSETS
"The court may consider the tax consequences of its orders in
dissolution actions." Damon v. Damon, 23 Conn. App. 111, 114, 579 A.2d 124 (1990).
"The trial court quite properly considered the tax consequences of its award. . . .
In this connection it could judicially notice pertinent federal statutes . . . and the
regulations issued thereunder. . . . An examination of those materials by the court would
have disclosed the taxability of unallocated alimony and support . . . the exemption
provisions . . . and the tax tables. . . . The application of that information to the
facts of the case involved a mathematical and not an evidential problem." (Citations
omitted.) Powers v. Powers, 186 Conn. 8, 10, 438 A.2d 846 (1982). The court may
not, on its own, solve complex tax problems without expert assistance. "In making its
award the trial court was not called upon to resolve an income tax problem which involved
the application of complex income or accounting principles. We, therefore, leave cases
involving such issues for another day." Id., 10 n. 2.
In the case of nonqualified stock options, it is well established that,
for federal tax purposes, a cash basis taxpayer must recognize income either on the
receipt of the option if it then has a readily ascertainable fair market value, or, if
not, then when the option is exercised, i.e., when the taxpayer gains the benefit of the
bargain purchase. Commissioner v. LoBue, 351 U.S. 243, 76 S. Ct. 800, 100 L. Ed. 1142
(1956); Commissioner v. Smith, 324 U.S. 177, 65 S. Ct. 591, 89 L. Ed. 830 (1945);
Mills v. Commissioner, 399 F.2d 744 (4th Cir. 1968). Options which remain
"unvested" until some time after the grant date escape the characterization of
having a readily ascertainable value for tax purposes, thus allowing the recipient
employee to defer that tax on the portion of his or her compensation represented by the
stock options. Rice v. City of Montgomery, 104 Ohio App. 3d 776, 663 N.E.2d 389, 391
(1995). Since a nonqualified stock option can vary in value during its term, it is
analogous to capital assets where appreciation in value becomes subject to taxation at the
time the asset is liquidated. McMenamy v. Director, Division of Taxation, 3 N.J. Tax
356, 362 (1981), citing Eisner v. Macomber, 252 U.S. 189, 207, 40 S. Ct. 189, 193
64 L. Ed. 521 (1920); MacLaughlin v. Alliance Ins. Co., 286 U.S. 244, 250, 52 S.
Ct. 538, 539, 76 L. Ed. 1083 (1932); Klebanow v. Glaser, 80 N.J. 367, 371, 403 A.2d
897 (1979); and Farber v. Director, Division of Taxation, 2 N.J. Tax 252, 257
(1981).
"An employer is allowed to deduct the value of a nonqualified
stock option as a business expense for the tax year in which the option is included in the
gross income of the employee. Thus, if the option has a readily ascertainable value and is
included in the employee's income when the option is granted, the employer is allowed the
deduction in the year of the grant. If the option does not have a readily ascertainable
value and is not included in the employee's income until the year the option is exercised,
the employer is allowed the deduction in the year of exercise. Further, the deduction
amount is the same as the amount included by the employee in gross income (Code Sec.
83(h))." 1997 U.S. Master Tax Code, (CCH) § 1928.
In this case due to the stock options, certain taxes have not yet been
paid. The stock options were granted by GE to the defendant as remuneration for past,
present and future services. In any event, the corporation takes a deduction of the value
of the option on its tax return in the tax year in which the option is included in the
gross income of the employee. I.R.C. § 83(b). The corporation does not have to expend
money to gain this tax deduction nor to compensate the employee. The employee is able to
cash in those stock options at any time after vesting and would receive a profit in the
event the exercise price is then exceeded by the market price. No income tax was due or
had to be paid by the defendant at the time that the stock options were issued except for
a 1.45% medicare tax.The Social Security tax of 7.65% for employees is a combination of
two tax rates - 6.2% for old age services and disability insurance and 1.45% hospital
insurance (medicare). The 6.2% applies to all wages within the $65,400 wage base
limitation in effect for 1997, and the 1.45% medicare tax applies to "all wages
without limit."
The medicare tax of 1.45% had to be paid by the defendant to the IRS,
and it was due upon the granting of the stock option, whether vested or unvested, whether
profitable to the defendant or not and whether for past, present or future employment
considerations. The employee would have to pay whatever income taxes may be due in the
future only when the options were exercised, sold and converted to cash. The tax rate is
short term capital gains (currently at ordinary income rates). The appropriate tax rate is
the maximum: federal income taxes at 39.6%, Connecticut income taxes at 4.5% less a small
portion of the 4.5% which would be subject to a 39.6% federal tax deduction. To this
42.318% total is added the 1.45% medicare tax due the IRS at the grant. The result would
be 43.768%. The parties both agree as to the tax consequences and suggest using a rounded
off 42.0% bracket since the entire medicare tax at 1.45% has been paid.
The capital gains tax is not relevant as far as the Erskine Road,
Stamford, Connecticut house is concerned. The exhibits indicate a tax basis that exceeds
the current market price of the house and extra lots. There is no evidence that the house
is going to be sold immediately. Although tax considerations may be relevant for division
of appreciated real property with a built in capital gains tax obligation, there was no
evidence that the Stamford property is going to be sold. It is not appropriate for a
financial affidavit to deduct the capital gains taxes in order to obtain a net value of
the house unless the house was to be sold immediately and, thus, would incur a tax
obligation. In that situation it would be appropriate to show such a deduction for
projected capital gains taxes in a financial affidavit.
This rule applies to the division of the other property. If no tax is
due by reason of the property division, and it is not contemplated by the parties that the
property, whether real or personal, tangible or intangible, will be sold in the near
future, no reduction in the value of the property should be considered for future tax
consequences. "[A] trial court is obliged to consider tax consequences only where it
is proven that an immediate and specific liability will arise upon the ordered
division." In re Marriage of Nelson, supra, 222 Cal. Rptr. 794; Weinberg v.
Weinberg, 67 Cal. 2d 557, 566, 432 P.2d 709, 63 Cal. Rptr. 13 (1967). "A trial
court need consider 'only those tax consequences that arise from the distribution itself'
and need not speculate as to 'the possible tax consequences of either parties' future
dealings with the property.'" Salstrom v. Salstrom, supra, 404 N.W.2d at 853; Aaron
v. Aaron, 281 N.W.2d 150, 153 (Minn. 1979); Schanback v. Schanback, 159 A.D.2d 498,
500, 552 N.Y.S.2d 370 (App. Div. 1990), app. denied, 76 N.Y.2d 703, 559 N.E.2d 676
(1990). The tax code may change, the parties' tax bracket may change and new tax
deductions or tax credits may be applicable in the future. All of those considerations
involve a degree of speculation. A good example is the recent IRS amendment virtually
eliminating the first $500,000 of capital gains on a principle residence for joint
taxpayers.
On the vested stock options it is appropriate to deduct on a current
basis taxes that would be due. Employment issued stock options would have no cash value
without being sold. Taxes would be due as soon as the sale took place. Therefore, it is
appropriate to deduct predictable current taxes to obtain a net value of stock options.
There may also be another tax consequence in the distribution of stock
options at dissolution by triggering its taxability by rendering the fair market value of
the "option privilege" readily ascertainable. As already discussed, the GE
unvested options are not actively traded on an established market. "For the purposes
of this section, if an option is not actively traded on an established market, the option
does not have a readily ascertainable fair market value when granted unless the taxpayer
can show that all of the following conditions exist: . . . ." Treas. Reg. §
1.83-7(b)(2) (1978). None of these four Treasury Regulation conditions currently exist
with the GE unvested stock options. The stock options: (1) are not transferable, (2) are
not immediately exercisable in full by the optionee, (3) are currently subject to
conditions and restrictions that have a significant effect upon the fair market values of
the option, and (4) the fair market value of the "option privilege" is not
readily ascertainable in accordance with paragraph (b)(3) of Treas. Reg. § 1.83-7.
This "option privilege," not previously discussed in the
decision, is one of the major property rights of any stock option. "The option
privilege in the case of an option to buy is the opportunity to benefit during the
option's exercise period from any increase in the value of property subject to the option
during such period, without risking capital." Treas. Reg. § 1.83-7(b)(3). This
choice whether to exercise or not resides with the defendant. It is one of the few
conditions affecting the options' nontaxability. In addition, it is a substantial property
right. This property value has also been noted by the IRS. "Therefore, the fair
market value of an option is not merely the difference that may exist at a particular time
between the option's exercise price and the value of the property subject to the option,
but also includes the value of the option privilege for the remainder of the exercise
period." Treas. Reg. § 1-83-7(b)(3). Separate rules are set for use in determining
the "option privilege" component of a stock option. Treas. Reg. §
1-83-7(b)(3)(i)(iii). The court should account for income tax effect on the exercise of
the options and be wary of triggering an income tax obligation earlier under the
"option privilege" IRS rule. In addition to the tax considerations, the court
should also consider the right to select the option exercise date; the "option
privilege" as a separate valuable property right.
METHODS OF EVALUATION OF STOCK OPTIONS AND RESTRICTED STOCK
There were three methods of evaluating the stock options presented at
trial: "intrinsic value," "Black-Scholes method" and variations of the
"Black-Scholes" method. The court received expert testimony on those methods.
Research has revealed a fourth method, called the discount to present value method, and
variations of that method.
"The acceptance or rejection of the opinions of expert witnesses
is a matter peculiarly within the province of the trier of fact and its determinations
will be accorded great deference by this court." (Internal quotation marks omitted.) Bricklin
v. Stengol Corp., 1 Conn. App. 656, 665, 476 A.2d 584 (1984); See also Johnson v.
Healy, 183 Conn. 514, 515-16, 440 A.2d 765 (1981). The trial court is free to accept
or reject, in whole or in part, the testimony of witnesses. Smith v. Smith, 183 Conn.
121, 123, 438 A.2d 842 (1981). In determining values of property, the court is to make
its own conclusion as to value, including providing an appropriate discount rate
established by the trial court. Mechanics Saving Bank v. Allbe Corp., 1993 Conn. Super.
LEXIS 2867, Superior Court, judicial district of Hartford-New Britain at Hartford,
Docket No. 394006 (October 28, 1993, Satter, JTR) (1993 Ct. Sup. 9127, 9129); Ireland
v. Town of Rocky Hill, 1995 Conn. Super. LEXIS 3682, Superior Court, judicial district
of Hartford-New Britain at New Britain, Docket No. 461459 (December 12, 1995, Arena, J.)
(1995 Ct. Sup. 14254, 14261).
The first and fourth methods will first be considered before the
discussion of Black-Scholes. Intrinsic value is obtained by subtracting the exercise price
from current market price of publicly traded stock and multiplying that by the number of
shares of the stock option. Richardson v. Richardson, 280 Ark. 498, 659 S.W.2d 510
(1983); Smith v. Smith, 682 S.W.2d 834, 836-37 (Mo. Ct. App. 1984). This
valuation method does not take into account two factors: (1) risk of investment, and (2)
volatility of the stock price. If a stock option grant was given at a $50 per share rate
on December 1, 1995, and the stock price on October 1, 1997 was $50, that stock would have
zero intrinsic value. Inherent in stock options is the right to be able to acquire that
stock at sometime in the future, presumably when its price had increased. If that same
stock had an ability to grow and it was exercisable on December 1, 1999, no doubt that
stock option would have some market value on October 1, 1997 even though it had no
intrinsic value as of October 1, 1997. Intrinsic value, therefore, is an inadequate method
of evaluating stock options in a marital context.
The fourth method of dividing contingent resources is called the
discount to present value method. This method uses a variety of discounts to obtain
present value starting from the intrinsic value. An example is contained in Evans v.
Snyder, 197 A.D.2d 389, 603 N.Y.S.2d 740 (App. Div. 1993). The defendant, as president
and chief executive officer of Simon and Schuster, received on December 10, 1985 50,000
shares of restricted stock in the parent company, Gulf & Western. This stock was not
transferable for five years and would have to be held for two additional years
thereafter.The defendant's rights to the stock could be terminated by his being fired for
cause or his resigning without cause during that five year period. The trial court found
that this restricted stock was compensation for work to be performed in the future, i.e.,
"golden handcuffs." The parties were married on May 18, 1978 and stipulated that
the marital assets would be valued as of the date of the commencement of the divorce,
February 19, 1987.
The Evans court discussed an alternative method of dividing this
restricted stock. First, the court found that the asset was compensation for future
services. Therefore, a coverture factor was used to determine what portion of the 50,000
shares would be marital property. The restrictions remained in effect for a base period of
five years, 12/10/85 - 12/10/90, 60 months. During that period the parties were married
for 15 of those months, 12/10/85-2/19/87, by reason of their stipulated valuation date.
Thus, the portion of the restricted stock in the marital estate is 15/60th or 25%, 12,500
shares of restricted stock. Next, the intrinsic value was determined as of 12/10/87 for
those shares of publicly traded stock, subtracting the exercise price from the publicly
traded market price as of 2/19/87, multiplied by the number of shares.
Two financial experts testified, and both applied discount factors to
obtain a present value. The defendant's experts applied three discounts: (1) 23% for the
risk of forfeiture, (2) 44% for a lack of marketability, and (3) 44% for the tax due upon
the sale of the underlying stock. This effectively reduced the $3,837,500 intrinsic value
of the 12,500 marital shares of restricted stock to a present value of $1,654,730.
Although the trial court set forth in detail these calculations, the
court decided to award a portion of the restricted shares to the wife in trust for her
benefit. "Rather than attempting to compute and divide the present value of these
restricted shares, we are able, as we did with the 1982-86 stock options, to provide for
an award to the plaintiff of an appropriate portion of the stock at the time a transfer is
possible." Evans v. Snyder, 207 N.Y.L.J. 21, April 15, 1992 (N.Y. Sup. Ct. 1st
dept. 1992).
Connecticut has approved of using the various discounts discussed in
Evans v. Snyder to determine present value in tort cases. See Mather v. Griffin
Hospital, 207 Conn. 125, 145, 147, 540 A.2d 666 (1988); Pisel v. Stamford Hospital,
180 Conn. 314, 344, 430 A.2d 1 (1980); Kiniry v. Danbury Hospital, 183 Conn. 448,
462, 439 A.2d 408 (1981). Present value must be determined in these cases. Chase v.
Fitzgerald, 132 Conn. 461, 470, 45 A.2d 789 (1946); Jackiewicz v. United
Illuminating Co., 106 Conn. 310, 314, 138 A. 151 (1927). Use of various discount
factors to determine present values has been approved in valuing pension benefits. Krafick
v. Krafick, supra, 234 Conn. at 800. "For guidance on establishing the present
value of an employee spouse's interest in a vested defined contribution plan or a
combination plan, see Bloomer v. Bloomer, 84 Wis. 2d 124, 267 N.W.2d 235 (1978)."
Krafick v. Krafick, supra, 234 Conn. at 800, n. 24. Bloomer v. Bloomer sets forth a
calculation similar to Evans v. Snyder. Bloomer v. Bloomer, 84 Wis. 2d 124, 267 N.W.2d
235, 241 (1978) (to determine present value of a retirement benefit three discounts
would have to be considered: (1) interest in the future, (2) mortality - the probability
that the employee would die before qualifying for the benefits and (3) vesting - the
probability that the employee would not work until the required retirement age, thus,
satisfying the qualification for fully vested pension rights.) No evidence as to discount
factors, discount rates or present value was offered in the Wendt testimony.
There are other variations of "discount" methods of valuation
of "contingent resources," i.e., restricted stock or stock options, not
disclosed by evidence or cited authority. This court is aware of two of these
sophisticated methods that may or may not be applicable to the GE restricted stock options
and GE unvested stock options and appreciation rights. Both involve a high degree of risk
and require that the upside appreciation of the underlying stock be relinquished. The two
methods are private purchase and monetizing collar.
Sometimes stock has limitations on its sale. The Securities and
Exchange Commission (SEC) Rule 144 requires that stock with these restrictions not be sold
or transferred for approximately two years. The stockholders themselves can place a
restriction on sale of the stock by agreement. This use of "lettered" stock is
commonly found in small corporations' buy out agreements. Certain investment banks may
arrange a "private purchase"of these shares but at a substantial discount from
their stated price or intrinsic value. This generates immediate cash, does not violate
Rule 144, and, of course, eliminates any downside risk in the underlying stock. The seller
receives much less than 100% value. There are adverse tax consequences.
The second method is called the "monetizing collar" method.
It deals with options only and involves the owner of the option buying a hedge position by
the simultaneous purchase of a put option and the sale of a call option. This establishes
a floor and ceiling for the underlying stock creating a comfort or safety zone. This hedge
strategy is called a "zero-cost collar." Once the collar is in place, some
lenders may be willing to loan money with the options or "zero-cost collar" as
collateral. It generates immediate cash. The seller receives much less than 100% of the
sale and is usually required to relinquish the upside appreciation of the underlying stock
above the strike price for the life of the option. There are regulation limits as to the
amount of the loan, usually 35% without creating a taxable event, but LIBOR rate interest
must be paid. There are other regulating limits relating to future investments with the
loan proceeds.
In any event, the court cannot considered either of these two
strategies in this case. There was no evidence offered and none of these strategies have
been referred to in any reported marital case. These strategies are being discussed to
emphasize these two points: (1) there is no one method of valuation of "contingent
resources" that should be used in marital asset distribution, and (2) a bright line
rule should not be established that all employee generated "contingent
resources" should be considered property for marital distribution purposes. Each
should be evaluated on its own facts, terms and conditions. The resources themselves are
sophisticated, tax driven vehicles and their structure changes daily in the corporate
community.
"There are several sophisticated methods which are used to
determine the exact value of a particular stock option. These methods consider the current
market price, the strike price, the duration of the option, the interest rate and the
volatility of the underlying stock, and, by estimating the probabilities of various
outcomes, establish a value for the stock option." Regier v. Rhone-Paulenc Rorer,
Inc., 1995 WL 395948 *4 (E.D. Pa. 1995); See Gordon Gemill, Options Pricing 3, (McGraw
Hill 1993) p. 14. "Although different models may vary slightly in their valuation of
a given stock option, all such models agree that the value of the stock option is always
positive until the stock option expires." Regier v. Rhone-Paulenc, Inc., 1995 WL
39548 *4; See G. Gemill, supra, p.46. One of these sophisticated methods is the use of
the Black-Scholes model.
The Black-Scholes model is complicated. Powers v Powers, supra, 186
Conn. 10, warns that trial courts should not engage in complicated IRS Code
calculations. The Black-Scholes method is well known. It is found in commercially
available computer software and in a number of publications. Calculators are sold with the
formula already programmed so option traders can punch in the variables. Though well
known, it does not appear easy to use. It still is a complex formula which takes into
consideration: (1) the volatility of stock prices, (2) the record of its dividends, (3)
the exercise price of the stock, (4) the current market value of the stock, and (5)
computes all of those in a lognormal formula. It appears to a layman to be one of the most
complicated formulas ever devised by mankind n3 It is hardly useful for a court to
consider with a simple calculator on the bench. It would require expert computation. The
plaintiff's expert agreed with the following conclusion by Nobel laureate Professor Paul
Samuelson on the Black-Scholes model: it is a "modern option pricing technique with
roots in stochastic calculus and is often considered among the most mathematically complex
of all applied areas of finance." At a recess this court asked the plaintiff's stock
and financial expert to prepare a Black-Scholes calculation. In a fifteen minute trial
recess the expert was not able to complete the necessary calculations. There is no doubt
that this expert would be able to complete the calculations given adequate time since he
did have the appropriate charts, graphs, technical information, variables, givens, formula
and calculation equipment.
n3
-rt
" C =SN(d) - Le N(d-o V t)
Value ofExpected Expected cost of
Call Optionstock price exercising option
The algebra looks complex, but the concept is straightforward.
Most of the hard work comes in determining what 'expected' means.
In the form above, the formula gives the value today of a call option,
represented by the letter C. A call option is the right to buy a stock at a set price
called the strike price (L) before a fixed future date called the maturity (time to
maturity is represented as t). The letter d stands for a combination of the formula's
other variables; it relates movements in the stock price to movements in the option's
value.
The formula assigns a higher value to the option if today's share price
(S) is high, if the share price is very volatile (v-, the price's standard deviation) and
interest rates in general are high (r is the risk-free return available on Treasuries).
Similarly, the longer the time to maturity, the lower the strike price, and the greater
the likelihood that the option will be 'in the money' at maturity (N is the normal
distribution function), the more valuable the option is."
Source: Royal Swedish Academy of Sciences, New York Times,
October 15, 1997, at D4.
For years traders in financial investments had been looking for
formulas that would take the guesswork out of buy/sell decisions. In the area of option
trading, with an uncertain future of this investment vehicle, this need for mathematical
predictability was particularly vexing. In the early 1970's two men, Fischer Black, a
mathematician, and Myron S. Scholes, a professor of finance, developed a mathematical
formula that took into account the variables in common stock options. They later sought
the assistance of Robert C. Merton, an associate of the world renown MIT economist, Paul
Samuelson. Professor Merton developed variations on the original formula then known as the
Black-Scholes model. Eventually, the Black-Scholes model was published in an article in
the Journal of Political Economy in 1973, The Pricing of Options and Corporate Liability,
a document that was referred to in testimony before the court.
Contemporaneous with its publication a new business was created, the
trading of options of publicly traded common stock. At that time Dr. Scholes was teaching
at the University of Chicago Business School. What is now the Chicago Board Options
Exchange, was created in 1973. It was the first exchange in which stock options were
traded, a business largely made possible by the use of the Black-Scholes model and its
variations. The formula has been applied to other option type investments and has spawned
the entire field of derivatives. This had a profound effect on economics in general and in
the growth of financial markets in particular.
On October 14, 1997, Myron S. Scholes and Robert C. Merton were awarded
the 1997 Nobel Memorial Prize in Economic Science together with the $1,000,000 stipend
that goes with the award. Fischer Black died in 1995. The Nobel Prize Committee in
presenting the award wrote: "Such rapid and widespread application of a theoretical
result was new to economics. Nowadays, thousands of traders and investors use the formula
every day." Black-Scholes is used today to evaluate buy/sell opportunities in stock
options, commodity futures, currency futures and derivatives, almost always in developed
trading markets.
The Black-Scholes model makes a number of assumptions that are not
relevant to placing a value on nonvested stock options in a marital setting: (1) the value
of the option has nothing to do with expectancies about the future price of the underlying
stock (a purchaser of an option would not buy that option merely because of a belief that
the price of the stock will rise), (2) there must be a known market for the asset, and (3)
there must be prior history of the trading price for both the underlying stock and the
option being evaluated.
In a marital setting dealing with employer issued unvested stock
options the following comments are appropriate as to those three assumptions: (1) the
value of the option to the employee is primarily that his efforts as a high executive will
increase the price of the underlying stock, or less personally, the longer the employee
remains with the corporation, the higher the value of the underlying stock. Both the
employee and spouse, therefore, value the unvested stock options based on expectations
that the future price of the underlying stock will rise; (2) there is no market for
unvested stock options; and (3) unvested stock options issued to high executives are
almost always nontransferable, and since there is no market for similar unvested stock
options, there can be no history of the trading price of these unvested stock options.
There is, of course, a history of the trading price of the underlying stock.
The most common Black-Scholes formula relates the price of an option to
five inputs: (1) time to expiration, (2) strike price, (3) value of the underlying stock,
(4) implied volatility of the underlying stock, and (5) the risk free interest rate. Some
of the assumptions of the original Black-Scholes formula were: (1) the price of the
underlying stock is lognormally distributed with constant mean and volatility, (2) there
are no transaction costs or taxes, (3) the market trades continuously, i.e., there are no
sudden jumps in prices, and (4) the risk-free rate is constant and the same for all
maturities. In markets where these four assumptions are unreasonable, the Black-Scholes
formula may produce misleading results.
The Black-Scholes model, therefore, is used for the purpose of
determining appropriateness of investments. The value of stock options for gift and income
tax purposes requires the estate planner to use a professional appraiser. The use of the
Black-Scholes model was noted in this area in a recent article in the Connecticut Law
Tribune, "The value obtained through this model and similar models reflects the
'value' of such options to the holder, but still allows for discounts reflecting lack of
marketability, limitations on transferability, and vesting or forfeiture provisions that
may exist in the option agreement." B. Dane Dudley, Turbo-Leveraging Downstream
Giving, Conn. L. Trib. Mag. June 23, 1997, p. 13. There is no known market for unvested
stock options issued by either a publicly traded corporation or a privately held
corporation. The Chicago Board Option Exchange deals in vested stock options that are
issued by public corporations. The Wall Street Journal, other financial publications and
the leading national newspapers publish daily a listing of options in publicly traded
common stocks. Usually a number of issues are listed under each stock issue. In columns
are usually listed the option, then strike price, expiration date, volume of options
traded the previous business day, and the last price traded. There is a separate column
for volume and the last price traded for both the call option and the put option. Exhibit
102. Stock options issued to employees as employment benefits whether vested or unvested
are not traded. The Black-Scholes model is not an appropriate method of evaluating
employment issued unvested stock options in a marital setting.
The Black-Scholes model or other such valuations techniques still are
proper to value vested stock options, when these stock options are publicly traded. There
is a current market for options in General Electric common stock. They have a known market
value in option exchanges. "The time rule may not be the appropriate method of
valuation where a stock option is publicly traded or otherwise capable of valuation."
In re Marriage of Harrison, supra, 225 Cal. Rptr. 240; In re Marriage of Hug,
supra, 201 Cal. Rptr. 686. "Quantifying the value of a stock option at the time
of its grant is a complex task, subject to the vagaries of market forecast and compounded
by the fact that no ready market can exist for nontransferable stock options." Rice
v. City of Montgomery, 104 Ohio App. 3d 776, 663 N.E.2d 389, 392 (1995).
The plaintiff produced the testimony of Scott A. Nammacher, an
Accredited Senior Appraiser of the American Society of Appraisers, and an MBA graduate of
NYU. Mr. Nammacher has determined the value of businesses for years. He is also a Charter
Financial Analyst. He is associated with Empire Valuation Consultants, whose business is
primarily involved in financial security evaluation. He was asked to value the unvested
stock options and restricted stock units in this case. In the first page of his report,
Exhibit 99, he stated that he was requested to determine the "fair market value"
of the two nonvested assets. "Fair market value is defined here as the price at which
the Assets would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell and both having reasonable knowledge of all relevant
facts." He conceded, early on in the voir dire on his credentials, that there is no
known market for the GE unvested stock options and Restricted Stock Units. He also knew of
no publication that dealt with the valuation of these two type of assets.
Mr. Nammacher worked for a number of years in the sales/investment
side. On cross examination he was asked, "Assume the defendant walked into your
office when you were in the sales/investment side of the business and said, 'I would like
to sell my 199,000 RSUs and 420,000 unvested stock options now. When can I expect the sale
to take place and when can I get payment?'" To that question Mr. Nammacher
answered,"Technically, you can't sell them at that point." Further, he noted
that the defendant could not use either as collateral. He concluded by noting that the
restrictions on the GE resources are tied to the defendant's continued employment and are
much more restrictive than 144 stock, a table of value he had consulted during his
evaluation procedures.
There a number of variations of the Black-Scholes model which were
discussed in testimony. The Merton model named after Dr. Robert C. Merton is the most well
known. It involves an extension of the original formula in which the rate of dividends is
assumed to fluctuate and the standard deviation factor changes when the underlying stock
is determined to be very volatile. Other variations have been adopted by Jonathan
Ingerson, Eric Noreen and Mark Wolfson. It is unclear to this court whether the
plaintiff's expert used a pure Black-Scholes model or the Noreen-Wolfson variation. See
Exhibit 97, Page 12 n. 3. The plaintiff's valuation expert also applied the binomial
method to his valuation of the unvested stock options. He concluded that the results
obtained were too high to be reliable. The binomial method was neither explained nor used
further. The plaintiff's valuation expert also applied the Shelton variation of
Black-Scholes. The result was 30% higher that he obtained using the Black-Scholes method.
The Shelton method was neither explained nor used further. Exhibit 101, entitled "A
Comparison of the Black-Scholes and Shelton Models," was offered without supporting
testimony.
The purpose of the Exhibit 101 article was to better understand how
Executive Stock Options should be valued since they are not publicly traded. Although the
Exhibit 101 article offered at trial was not the entire article, the following is a fair
statement of the author's premise: "The Shelton Model has serious theoretical
shortcomings when pricing out of the money warrants. However, the large forecast errors we
have found in the Black-Scholes Model causes us to believe that further research into
alternative pricing models is worthwhile." Exhibit 101, Page 109.
"Unfortunately, one must recognize that both models showed significant errors."
Exhibit 101, Page 115. Exhibit 101's author, Dr. Les Barenbaum of the finance department
at LaSalle University was on the plaintiff's witness list but did not testify.
The plaintiff's expert, Scott A. Nammacher, used two different
appraisal methods to determine a present value of the 199,000 shares of GE Restricted
Stock Units (RSUs) and 420,000 GE unvested stock units. Multiple discounts were used to
evaluate the RSUs starting from $20,447,250, the current market value of GE stock of
$102.75/share, times the 199,000 shares. From this sum, various discounts were taken: (1)
RSU restriction period remaining - 10% to 30% graduated on the 1.6 to 10.3 years remaining
before the restrictions lapse; (2) termination of employment within 5 years -25% to which
the discount factors above were applied; and (3) each of the results were further adjusted
for the probabilities related to each scenario and the tax consequences. The three
probabilities were: (1) death prior to age 65 - 14.4%; (2) termination of employment prior
to lapse of restriction - 8%; and (3) continued service - 77.6%. Applying these discounts
and prohibitions, Mr. Nammacher said that the RSU present value is $15,472,301, and the
after tax value is $8,922,876.
As stated a trial court may in its discretion accept the entire opinion
of the expert, none of the expert's opinion or part of that opinion. In this case the
court does not accept in toto Mr. Nammacher's $15,472,301 present value of the RSUs.
Except for mortality and taxes, none of the discounts were based on known tables. No
actuarial tables or authorities were cited by him in support of his discounts. Although
the findings as to the nature of the restriction are accurate, the use of such a discount
results in a speculative value.
Mr. Nammacher used the Black-Scholes model to value the GE Unvested
Pension Plan. Here, he used a recognized valuation technique and a formula with well known
variations. For the reasons already stated this court does not accept Black-Scholes as a
proper method of evaluating employer issued nonvested stock options. Mr. Nammacher's
present value, using Black-Scholes, of $17,950,000 before taxes is not accepted.
This is the second case in which this court has dealt with the
Black-Scholes model. In the first case this court also rejected the use of Black-Scholes
as a tool in evaluating employee issued unvested stock options. I declined to place an
accurate value on the unvested stock options, although both parties agreed on their
intrinsic value. Yet I found that the lack of value did not prevent their distribution. Chammah
v. Chammah, 1997 Conn. Super. LEXIS 1896, Superior Court, judicial district of
Stamford-Norwalk at Stamford, Docket No. 145944 (July 11, 1997, Tierney, J.) . I did not
rely on Black-Scholes in Chammah. This is so despite the fact that the work of Black,
Scholes and Merton is held in high regard in the financial and economic community.
It appears to this court that neither the intrinsic value, the
Black-Scholes model nor any other variation of Black-Scholes is useful to obtain a value
of employment issued unvested stock options in a marital setting. The present
value/discount method appears to be a viable method of valuing unvested stock options
and/or restricted stocks if there is sufficient supporting data to justify the use of the
various discounts.
LACK OF A MARKET DOES NOT PREVENT VALUATION OF ASSETS IN A DISSOLUTION
The plaintiff in her Claims for Relief asks in simplest terms for a
fifty-fifty division of all the parties' assets. She offered expert testimony to support
this claim. Although a division of property in a dissolution action is designed to
"unscramble the ownership of property," it contains no set formulas. The trial
court's discretion is the rule. Although all the criteria of the statutes must be
considered, no method is set forth on how the court may consider and weigh each one of the
criterion. This lack of precision is found in other areas of Connecticut law.
"Where damages are appropriate but difficult to prove the law
eschews the necessity of mathematical exactitude. Such 'exactitude in the proof of damages
is often impossible, and . . . all that can be required is that the evidence, with such
certainty as the nature of the particular case may permit, lay a foundation which will
enable the trier to make a fair and reasonable estimate.'" Hartford Whalers Hockey
Club v. Uniroyal Goodrich Tire Co., 231 Conn. 276, 285, 649 A.2d 518 (1994); Dooley
v. Leo, 184 Conn. 583, 587, 440 A.2d 236 (1981).
"In determination of the fair market value, the trial court in a
condemnation appeal, hears the matter de novo . . . and makes an independent determination
of value and fair compensation in light of all the circumstances, the evidence, the trial
court's general knowledge and the court's viewing of the premises. . . ." (Citations
omitted; internal quotation marks omitted.) Gasparri v. Department of Transportation,
37 Conn. App. 126, 129-30, 655 A.2d 268 (1995). In determining the fair market value
of a business the trial court is vested with broad discretion. No one appraisal method is
binding on the court and the court has the right to accept so much of the expert testimony
and the recognized appraisal methods which are employed as it finds applicable. Federated
Department Stores, Inc. v. Board of Tax Review, 162 Conn. 77, 86, 291 A.2d 715 (1971).
"Present true and actual value," "market value,"
"actual value," "fair market value," "market price" and
"fair value" are all synonymous terms. Uniroyal, Inc. v. Board of Tax Review,
182 Conn. 619, 623 n. 3, 438 A.2d 782 (1981); Sibley v. Middlefield, 143 Conn. 100,
106, 120 A.2d 77 (1956). "Proper compensation cannot be computed by a
mathematical formula and the law does not furnish an ironclad rule for its
assessment." Shaywitz v. Singing Oaks Day Camp, Inc., 8 Conn. App. 71, 75, 510
A.2d 1013 (1986). "There is no requirement . . . that 'fair market value' must
somehow be related to market sales. When, as here, we deal with machinery which is not
bought and sold in the normal marketplace, a test of fair market value which depends on
operating use of the machinery is appropriate, and the court may properly find that such a
method is the most appropriate system in an individual case. . . ." (Citations
omitted.) Connecticut Coke Co. v. New Haven, 169 Conn. 663, 669, 364 A.2d 178 (1975).
Although the best test of a "fair value" is market sales, the lack of a
buyer/seller market does not prevent the court from determining a value. Sibley v.
Middlefield, supra, 143 Conn. 106. These rules are applicable to valuing corporate
assets in a marital case. Turgeon v. Turgeon, supra, 190 Conn. 274, 276.
Although no specific value of all the assets in this case has been
established, the assets still have to be distributed. "In distributing the marital
assets pursuant to the statutory criteria, the trial court must consider the value of the
assets but need not assign them specific values." Burns v. Burns, 41 Conn. App.
716, 721; Puris v. Puris, supra, 30 Conn. App. at 450. "Moreover, in a
number of cases we have indicated that the existence of an ascertainable present value is
not the key determination of whether the interest should be considered marital property.
Instead, we have stated that, given the broad legislative definition of marital property,
several types of expectancies, or near expectancies, with little or no present value, are
marital property for equitable distribution purposes." Graham v. Graham, 195 W.
Va. 343, 465 S.E.2d 614, 616 (1995); Metzner v. Metzner, 191 W. Va. 378, 446 S.E.2d
165, 174 (1994). Since dissolution distributions are bound by equitable principles and
there is no formula by which a trial judge must conduct the distribution, no specific
value of each of the assets need be established. Burns v. Burns, supra, 41 Conn. App.
at 724; Oneglia v. Oneglia, 14 Conn. App. 267, 271-72, 540 A.2d 713.
BOTH THE OFFSET AND RESERVED JURISDICTION METHODS AREAPPROPRIATE TO
DIVIDE CERTAIN ASSETS IN THIS CASE
The only Connecticut appellate case discussing methods of division of
pension plans discussed "three widely approved methods of valuing and distributing
pension benefits": (1) "present value" or "offset" method
dividing the resource at the time of trial by determining its present value; (2)
"present division" method which establishes at the time of trial a fixed
percentage of the resource to be distributed to each spouse at maturity; and (3)
"reserved jurisdiction" method in which the court reserves jurisdiction to
distribute the resource when it has matured, thereby allowing the court to base its
distribution on the actual figures, not assumptions or variables. Krafick v. Krafick,
supra, 234 Conn. at 800-03. "These methods are not exclusive. A trial court
retains discretion to select any other method to take account of the value of a pension
asset 'that might better address the needs and interests of the parties.'" Id.,
804; In re Marriage of Grubb, 745 P.2d 661, 666 (Colo. 1987). These methods
appear applicable to other types of contingent resources.
The first method, "present value" is not appropriate for this
case. The court has insufficient evidence to determine the exact present value of the
contingent resources. The resources contain contingencies which have not yet occurred. If
the contingencies occur the value of the resource could be substantially reduced or even
eliminated. There was no evidence offered as to (1) the defendant's life expectancy as
established by mortality tables, (2) the proper interest rate for discount, or (3)
evidence of a guaranteed date of retirement. Krafick v. Krafick, supra, 234 Conn. at
800.
Although these contingencies are, in the opinion of this court,
susceptible to reasonably accurate quantification by using generally accepted actuarial
principles, no substantial evidence was offered on this subject from either expert or lay
witnesses. This court further believes, in light of the relevant equitable considerations
under the facts of this case, an "offset" should be considered, i.e., award the
benefits to the employee spouse but offset the nonemployee's equitable share in the
pension benefits with an award of other assets or additional periodic alimony. Krafick
v. Krafick, supra, 234 Conn. at 801. Lawler v. Lawler, 16 Conn. App. 193, 202, 547
A.2d 89; Eveland v. Eveland, supra, 1996 Conn. Super. LEXIS 236, Superior
Court, Docket No. 141866 (1996 Ct. Sup. 1030, 1033). Although the use of "present
value" would effect a "clean break" between the parties, such a goal is
unattainable considering the nature, composition and amount of assets in this case.
The Grich case used the "present division" method. Krafick
v. Krafick, supra, 234 Conn. at 802. It appears that under certain circumstances when
unvested stock options cannot be accurately valued, a court can still consider
distribution under both "present division"or "offset" and
"reserved jurisdiction" methods as long as there is some ball park estimate of
the general valuation of the contingent resource. In this case there is evidence of the
intrinsic value of the stock options, the defendant remaining an employee of GE, the
corporation still retaining the benefit program and the likelihood of GE stock price
increases. From these the court can conclude that these stock options have a positive
value. The court can then determine which party is better able to absorb the risk of the
contingencies occurring, thus, reducing or eliminating the value of the contingent
resource. This risk can be equitably divided between each party, not equally but
equitably. For example, each party would then share in the opportunity for the unvested
stock options to increase in value, or in the risk the stock price will decrease.
It must be noted that an argument can be made that a trial court must:
(1) determine if the resource is a property asset, (2) if property, assign a value to the
resource, and (3) apportion the resource equitably between the parties. Eveland v.
Eveland, supra, 1996 Conn. Super. LEXIS 236, Superior Court, Docket No. 141866 (1996
Ct. Sup. 1030, 1033); Krafick v. Krafick, supra, 234 Conn. at 792. Must a value
always be established by a trial court? Some say Krafick has answered this question in the
affirmative. This court disagrees.
In Krafick the wife of a 33 year marriage sought a 50 percent interest
in the husband's vested teacher's pension which was not yet in pay status, secured by a
Qualified Domestic Relations Order (QDRO). An expert testified that the husband's pension
was worth over $400,000, by far the largest asset before the court. The 1992 decree
awarded the wife $300 per week in alimony to be secured by a QDRO. No percentage interest
in the pension was ordered. In response to a Motion for Clarification, the trial court
stated: (1) it did not intend to order a percentage interest in the pension to the wife,
(2) the pension was an asset, (3) the pension had no liquidated value, (4) the pension was
not amenable to reliable valuation, and thus (5) the pension "was not considered
alongside other assets in distribution of the marital property." Krafick v.
Krafick, supra, 234 Conn. at 791. The Supreme Court found error and ordered a remand
"to assign an appropriate valuation to the pension benefits in light of the
principles discussed in this opinion . . . ." Id., 806.
One of the principles set forth in Krafick by that same decision is the
"reserved jurisdiction" method of distribution. This allows "a court 'to
base its distribution upon actual figures [as to what benefits are being paid] rather than
assumptions as to retirement age and other variables.'" Krafick v. Krafick, supra,
234 Conn. at 803. Furthermore, the actual order of remand did not direct the trial
court to establish an exact value for the pension or any other asset. "The judgment
of the Appellate Court is reversed and the case is remanded to that court with direction
to remand to the trial court for a new hearing and determination regarding the financial
aspects of the judgment of dissolution." Id., 806-07. "In carrying out a
remand of this court, the trial court is limited to the specific direction of the mandate
as interpreted in light of the opinion. . . . It is the duty of the trial court on remand
to comply strictly with the mandate of the appellate court according to its true intent
and meaning." (Citations omitted; internal quotation marks omitted.) West Haven
Sound Development Corp. v. West Haven, 207 Conn. 308, 312,541 A.2d 858 (1988).
Therefore, Krafick's remand does not state that a trial court, under all circumstances,
must place a present value on each asset it is distributing. Puris v. Puris, 30 Conn.
App. 443, 449-50, 620 A.2d 829 (1993).
Furthermore, the court is not required to assign a specific value to an
asset although Krafick v. Krafick indicates that the "valuation" is the second
of the three steps. Because of the intricacies involving these contingent resources, it
appears that it not necessary for this court to assign a specific value, only for it to
make a determination of a general value for the purpose of selecting and implementing a
distribution plan. See Puris v. Puris, supra, 30 Conn. App. 449 (the trial court's
finding of an estimated value of assets is sufficient to support property division); Burns
v. Burns, 41 Conn. App. 716, 721, 677 A.2d 971 (1996) ("In distributing the
marital assets pursuant to the statutory criteria, the court must consider the value of
the assets but need not assign them specific values."); Lawler v. Lawler, supra,
16 Conn. App. at 202 ("The court ordered the liquidation and equal division of
the plaintiff's interest [in Saturn-Kusomer,a business partnership], if any. The actual
amount that might be realized from the plaintiff's interest was unknown to the court, but
the trial court had the discretion pursuant to the dictates of General Statutes § 46b-81
so to divide this asset. Such division of assets, including the liquidation and division
of the marital home, are commonplace in dissolution decrees."); Bartlett v.
Bartlett, 220 Conn. 372, 384, 599 A.2d 14 (can distribute inheritance without a
valuation).
The plaintiff wants the unvested stock options divided between the
parties on an "if, as and when" basis. Her Amended Claims for Relief dated
February 26, 1997, requests "an equitable interest in one-half of all stock option
grants issued during the marriage which are not yet exercisable, valued at this time at
approximately $17,950,000. The plaintiff shall be entitled to the after-tax proceeds of
all such grants awarded to her, if, as and when they are received by the Defendant."
The defendant claims in his financial affidavit that these unvested
stock options have no value due to the contingent and speculative nature of the resources.
In his Claims for Relief, he is claiming the unvested stock options as his sole property.
In lieu of this and other property claims, the defendant in his Claims for Relief offers a
$3,300,000.00 cash lump sum to the plaintiff. The specific assets which this cash will
offset is not clear. The defendant offers an alternative position, in the event that the
court is inclined to divide the stock options; a coverture factor division using the
formula set forth in Evans v. Snyder, 207 N.Y.L.J. 21, April 15, 1992 (N.Y. Sup.
Ct. 1st dept. 1992).
Although Krafick refers to the plaintiff's suggested method as
"reserved jurisdiction" ("if, as and when"), in fact there are many
reported variations of the method. The general disadvantages are: (1) there is no finality
as between the parties at the time of the dissolution, (2) it is anticipated that there
may be further court intervention to conduct the actual division, (3) the results leave
the parties with some uncertainty, and (4) the assumption of the risk of lower stock value
or the occurrence of the contingencies is allocated to both parties, one of whom is not
the primary earner and who may not be able to adequately absorb these risks. It has the
advantage of solving the problem of exact valuation because the value will be a known
quantity at the time the options are exercised. The plaintiff, aware of the pitfalls and
disadvantages of the "if, as and when" method, has opted for this request in her
Amended Claims for Relief.
The following are reported variations of "if, as and when"
distribution orders:
1. In re Marriage of Isaacs, 260 Ill. App. 3d 423, 632 N.E.2d 228,
234, 198 Ill. Dec. 169 (1994). The trial court retained jurisdiction in the decree for
the express purpose of allocating the proceeds from the exercise of the options, if, as
and when they are exercised.
2. In re Marriage of Moody, 119 Ill. App. 3d 1043, 457 N.E.2d 1023,
1026, 75 Ill. Dec. 581 (1983). The trial court reserved jurisdiction at the time of
the decree to later determine the proportion of the profit or proceeds which each spouse
would receive upon the future exercise of the options. In the interim, the husband was
allowed to retain full interest in his employee stock options. 3. In re Marriage of
Frederick, 218 Ill. App. 3d 533, 578 N.E.2d 612, 619, 161 Ill. Dec. 254 (1991). At the
time of the decree the trial court determined the proportion of options for each spouse,
but left it to the employee spouse to determine when the options would be exercised. The
trial court retained jurisdiction to oversee the allocation process.
4. Green v. Green, 64 Md. App. 122, 494 A.2d 721, 729 (1985).
The unvested options were divided at the time of the decree. The employee spouse could not
be compelled to exercise the options, but the court could determine the percentage by
which the profits would be divided between the spouses, if, as and when the options were
exercised.
5. Smith v. Smith, 682 S.W.2d 834, 837 (Mo. Ct. App. 1984). The
unvested stock options were divided fifty-fifty, but upon the husband's exercise after 30
days notice, the wife was to provide the employee husband with the exercise price and a
share of the tax on any option exercised for her benefit. The "trial court retained
jurisdiction to determine questions that may arise concerning the implementation of the
disposal of the stock options."
6. Callahan v. Callahan, 142 N.J. Super. 325, 361 A.2d 561, 564 (Ch.
1976). A constructive trust was imposed on the wife's 25% ownership interest in the
employee husband's stock options. These options were to be exercised by the husband only
at her direction. The wife was to supply the exercise funds and the husband was to pledge
stock on her behalf to finance the purchase. This was due to option plan restrictions and
the possible effect of SEC insider trading rules.
DISTRIBUTION METHODS MAY NOT BE THE SAME FOR PENSIONS AND STOCK OPTIONS
This court has already noted the similarities between stock options and
pensions. They both are: (1) employment benefits, (2) granted pursuant to a written
agreement between the employer and employee, (3) contingent upon a certain term of
service, (4) payable at some date in the future, (5) enforceable by the employee as a
contract right once any contingencies expire, and (6) subject to a future increase in
value. They differ in one major area, the choice granted to the employee by the benefit.
A pension grants only limited options to the employee: (1)
the employee can choose the date of retirement, which in turn can
affect the amount received as pension benefits, and (2) the employee can designate a
survivorship provision, i.e., to a surviving spouse, thus, reducing the current retirement
payment. The stock option on the other hand has more value in the form of choices given to
the employee.The employee has choices regarding: (1) the date of the exercise of the
option, (2) the number of grants to be exercised, and (3) whether to sell the underlying
stock after the option itself is exercised. It is this choice that determines the ultimate
value of the stock option. This choice has been defined by the IRS as a separate property
component of a stock option called "the option privilege." Treas. Reg. §
1-83-7(b)(3). It is the employee who chooses when to exercise an option on stock that may
in the future increase after its exercise and sale date or may decrease, thus, reducing
the value of the option to zero. "Stock options are not like pensions in any
significant sense. . . . [A] stock option is the right to buy a specific stock within a
designated time period at a designated price if the option holder so chooses." Hann
v. Hann, supra, 655 N.E.2d 570. "Stock options are like investments only in the
limited sense that the employee must decide when the spread between the option price and
the market price is greatest to optimize the income realized." Rice v. City of
Montgomery, supra, 663 N.E.2d 394.
Taking this choice component (option privilege) of a stock option away
from an employee is taking away a valuable property right. It may also have adverse tax
consequences and render the stock option immediately taxable upon its marital division, if
it can be determined that the stock option would then have a "readily ascertainable
fair market value." Treas. Reg. § 1.83-7(b)(2) and Treas. Reg. § 1.83-7(b)(3).
Granting to the nonemployee spouse the right to exercise the option, if and when the
nonemployee spouse chooses, takes two valuable rights from the employee: (1) the right to
receive a portion of the options, and (2) the right to determine when and in what manner
the option will be exercised.
This choice factor (option privilege) in stock options must be kept in
mind when a trial court in Connecticut engages in the "distribution" of stock
options. Krafick, supra, 234 Conn. at 793. Careful consideration should be given to
the following methods, all of which preserve the employee's property right to chose in
regard to the option: (1) reserved jurisdiction, see McDermott v. McDermott, 150 Vt.
258, 259-60, 552 A.2d 786 (1988); (2) if, as and when, see In re Marriage of Moody,
119 Ill. App. 3d 1043, 457 N.E.2d 1023, 75 Ill. Dec. 581 (1983); and (3) constructive
trust, see Callahan v. Callahan, 142 N.J. Super. 325, 361 A.2d 561 (Ch. 1976); Eveland
v. Eveland, supra, 1996 Conn. Super. LEXIS 236, Superior Court, Docket No. 141866
(1996 Ct. Sup. 1030, 1033).
THE DATE OF THE DISSOLUTION IS THE DATE OF THE VALUATION OF THE ASSETS
"In distributing the marital assets pursuant to the statutory
criteria, the trial court must consider the value of the assets, but need not assign them
specific values." Burns v. Burns, supra, 41 Conn. App. 721; Puris v. Puris,
supra, 30 Conn. App. 450.
It is black letter law that the date of dissolution is the date of the
valuation of the assets, not the date of any subsequent hearing, the last day of trial or
the date of the financial affidavit. Sunbury v. Sunbury, 216 Conn. 673, 676, 583 A.2d
636 (1990); Roach v. Roach, 20 Conn. App. 500, 507, 568 A.2d 1037 (1990); Tobey
v. Tobey, 165 Conn. 742, 748-49, 345 A.2d 21 (1974). "The trial court did err,
however, in its division of the parties' assets due to its valuation of those assets as of
the date of the parties' separation." Zern v. Zern, 15 Conn. App. 292, 296, 544
A.2d 244 (1988).
"The division of property and the entry of orders of alimony in
dissolution proceedings are governed by General Statutes §§ 46b-81(a) and 46b-82.
Section 46b-81(a) provides in part: 'At the time of entering a decree . . . dissolving a
marriage'. . . . The only temporal reference in the enabling legislation refers us to the
time of the decree as controlling the entry of financial orders. It is neither
unreasonable nor illogical, therefore, to conclude that the same date is to be used in
determining the value of the marital assets assigned by the trial court to the parties.
'In the absence of any exceptional intervening circumstances occurring in the meantime,
[the] date of the granting of the divorce would be the proper time as of which to
determine the value of the estate of the parties upon which to base the division of
property.'" Sunbury v. Sunbury, supra, 216 Conn. 676.
In Cuneo v. Cuneo, the first day of trial was October 9, 1984 when the
parties filed current financial affidavits. The trial was postponed for over six months
pending completion of a visitation study by the Family Relations Office. At the resumed
trial on August 1, 1985, the trial court did not accept a new financial affidavit from one
of the parties. The Appellate Court noted "the broader principle that the final
awards in a marital dissolution case should be based on the parties' current financial
circumstances to the extent reasonably possible. Practice Book 463." The trial court
erred, and a remand was ordered limited to the issue of the valuation and distribution of
assets including the marital home, the only area of change demonstrated by the 1984 and
1985 financial affidavits. Cuneo v. Cuneo, 12 Conn. App. 702, 709, 533 A.2d 1226
(1982).
This proposition is found throughout trial court and appellate court
cases. This proposition is clearly Connecticut law. This proposition cannot be changed by
this decision. This court finds it difficult to implement that rule in this case.
"We recognize that in the ordinary marital dissolution case there
may be some time lag between the presentation of the evidence and the decision of the
trial court . . . ." Cuneo v. Cuneo, supra, 12 Conn. App. 709. In a Wisconsin
case where the rule on date of valuation is the same as Connecticut's, it was held not to
be error to value stock options at a date other than the date of the decree in a 25 year
marriage. A value of the stock options were offered to the court on August 9, 1990, the
last date of trial, when only the fund's balance as of December 31, 1989 was available.
When the trial recommenced on January 7, 1991, the fund's value for December 31, 1990 was
available and they showed an increase in the fund. The decree, issued on May 9, 1991, used
the December 31, 1989 values in dividing the stock options, some of which were unvested at
that date. No error was found for the court using values that were 16 months old. Wikel
v. Wikel, 168 Wis. 2d 278, 483 N.W.2d 292, 295 (Ct. App. 1992).
In this case, the reason that the difference between the date of
separation and the date of dissolution is so significant is that the majority of the
assets are tied to the value of a publicly traded stock, General Electric Corporation. At
the time of the separation of the parties, the stock was worth $72 per share. The parties
owned substantial other assets, including real property, stocks, mutual funds and other
financial holdings, some of which also contained GE stock as subinvestments. It is
impossible to determine from examining the financial affidavits and the exhibits on file,
how many shares of GE stock the Wendt family owns either as of the date of their
separation on December 1, 1995, the last date of trial, February 27, 1997 or the date of
this decision. A substantial portion of those assets are contained within mutual fund
investments that itself fluctuates as to the number of shares of GE stock owned at any
given point in time. Suffice it to say the amount of shares of GE stock is substantial.
The increase in the value of GE stock traded on the New York Exchange affects the value of
the Wendt assets on a daily basis.
Though there were disputes concerning whether or not unvested GE stock
options and restricted GE stock were included as assets, the almost doubling in value of
GE stock during this litigation will have a greater impact on the parties' finances than
the judicial resolution of those other legal issues. Under the facts of this case it
appears that Mr. and Mrs. Wendt, together, owned, controlled or have invested in their
name, directly or indirectly for their benefit, at least 500,000 shares of General
Electric Corporation common stock. As of December 1, 1995 that would mean a total
investment at the then current value of $72 per share of $36,000,000. At the date of trial
the New York Stock Exchange price of General Electric was $102.00. Assuming no increase in
the number of shares since December 1, 1995, the holdings of GE stock by the Wendt family
would then have been worth $51,000,000.
The parties entered into a stipulation post trial that the court would
take judicial notice that on May 12, 1997 GE common stock split two for one. Flynn v.
Flynn, 1995 Conn. Super. LEXIS 2099, Superior Court, Docket No. 136550 (1995 Ct. Sup.
7666, 7669 n. 1). The stipulation further stated that GE stock was traded at $65.00 per
share as of June 30, 1997 and has been traded as high as $73.00 per share since July 1,
1997. The court was permitted to take continuing judicial notice of the current publicly
traded and reported stock market price for GE common stock. The court, therefore, noted
that GE reached a high of $72 share on August 1, 1997 in its split capacity. That was the
equivalent of $144 per share. Using the same number of 500,000 shares as of December 1,
1995 or now 1,000,000 shares of stock, each at the rate of $72 per share, the result is a
total value of $72,000,000. The Wendt family holdings since the date of the separation of
December 1, 1995 in GE stock,directly or directly owned by the Wendts or for their
benefit, has doubled since the date of the separation. In the twenty month period from
December 1, 1995 to August 1, 1997 the average increase was $180,000 per month. If the
price of GE changed by $2 per share on any given day, and it did many times, the
fluctuation in value of the assets would vary by $1,000,000. A financial affidavit filed
in court on one day could be inaccurate by a million dollars. Sizeable differences in the
valuation of assets have supported an appellate remand to the trial court for a new trial
on the finances. Cuneo v. Cuneo, supra, 12 Conn. App. 709 ($40,000 to $60,000
difference in valuation was sizeable); Kinderman v. Kinderman, 19 Conn. App. 534, 538,
562 A.2d 1151 (1989) ($132,000 difference in valuation was sizeable). The court cannot
believe that the theory of Sunbury v. Sunbury and other such cases contemplated such high
assets with such high degree of fluctuation.
While it is black letter law that assets in a dissolution must be
valued as of the date of the decree, there is an equal but older rule that there must be
finality to judgments. McCleskey v. Zant, 499 U.S. 467, 111 S. Ct. 1454, 113 L. Ed. 2d
517 (1991); Anastasiou v. Anastasiou, 1991 Conn. Super. LEXIS 1239, Superior
Court, judicial district of Fairfield at Bridgeport, Docket No. 264843 (May 7, 1991,
Bassick, J.) (6 C.S.C.R. 585) (1991 Ct. Sup. 4253); Chomko v. Patmon, 20 Conn. App.
159, 161-62, 565 A.2d 250 (1989); Ames v. Sears, Roebuck & Co., 206 Conn. 16,
20, 536 A.2d 563 (1988).
Sunbury was cognizant of this fact in restating the rule "In the
absence of any exceptional intervening circumstances occurring in the meantime." Sunbury
v. Sunbury, supra, 216 Conn. 676. This is an invitation to reopen the evidence prior
to the entry of judgment to consider these "exceptional intervening
circumstances." The change of assets of $1,000,000 would surely amount to
"exceptional intervening circumstances." The opening of the evidence in Wendt v.
Wendt would then be continual. There would be no finality to the proceedings. This problem
was discussed in a large asset stock option case.
Most applications of the Marital Property Act to the evidence presented
at trial preclude an immediate decision by the court at the close of the evidence. We will
not, nor should we, encourage hasty decision making in such cases. On the other hand,
unreasonable delays between the close of the evidence and the rendering of the judgment
may in some cases cause distortion in the valuation of certain highly volatile marital
property, resulting in prejudice to one of the parties. Although we need not decide here
whether the four month delay caused prejudice to the appellant since this case will be
remanded for a redetermination of the monetary award, we point out that equity requires
that reasonable efforts be equity requires that reasonable efforts be made to ensure that
valuations of marital property approximate the date of a judgment of divorce which
includes a monetary award.
Green v. Green, 64 Md. App. 122, 494 A.2d 721, 730-31 (Md. Ct. Spec.
App. 1985).
"We recognize that in the ordinary marital dissolution case
there may be some time lag between the presentation of evidence and the decision of the
trial court." Cuneo v. Cuneo, supra, 12 Conn. App. 709.
This court believes that it has four choices in such a situation:
1. The court could set aside the law of Sunbury v. Sunbury and declare
that it is the value of the assets at the time of the last day of trial which determines
the value of the property. If the parties believe that an "exceptional intervening
circumstance" has occurred in the interim, under the theory of Sunbury v. Sunbury
they could move to reopen the judgment to offer additional evidence. After trial and
before a decision is rendered, the court, in its discretion, can permit additional
evidence. Elliott v. South Isle Food Corp., 6 Conn. App. 373, 379-80, 506 A.2d 147
(1986).
2. The court could assume that the assets as of February 27, 1997, the
last day of trial, were the exact assets that existed at the time of the decree of
December 3, 1997 and divide the assets in that fashion. This will, of course, put blinders
on the court. The court will have to pretend that it is unaware of the substantial and
significant change in the assets of the parties. This would be inequitable to all the
parties in this case.
3. The court could decide the case the very day the evidence concludes.
This is feasible in most cases. It is impossible in a high asset or legally complicated
trial. Cuneo v. Cuneo, supra, 12 Conn. App. 709; General Statutes § 51-183b.
4. The court could fashion a form of relief that would minimize the
requirement of a new hearing and yet put the court in the position of bringing finality to
this case without permitting the entire case to be reopened. A careful division of the
assets would have to be accomplished along with the issuance of Yontef orders. This choice
strikes a balance between the rule of valuation and rule of finality. Bryant v. Bryant,
228 Conn. 630, 636-37, n. 5, 637 A.2d 1111 (1994).
Maryland has passed a practice rule that grants a 90 day safe harbor
from the last day of testimony. "In an action for divorce, annulment or alimony in
which the testimony has been concluded for more than 90 days without entry of a final
decree, a final decree may not be entered until supported by additional testimony
justifying the conclusion that there has been no substantial change since the prior
testimony was concluded." Maryland Rule § 74(c); Dobbyn v. Dobbyn, 57 Md. App.
662, 471 A.2d 1068 (1984).
This court is mindful that it would be virtually impossible for the
court to rely on the accuracy of a financial affidavit in such a high asset case, when the
assets change without control of the parties, during the middle of a trial. Even during a
day of trial, evidence would start at 10 o'clock, the stock market closes at 3 o'clock and
the evidence concludes at 5 o'clock. The parties would have no way of determining the
value of the stock assets at the close of the market, Court issued computers with modems
and a dedicated phone line notwithstanding. With high asset, high volatility cases another
solution must be found to resolve these matters.
To the maximum extent possible, the court will enter the following
orders concerning each and every asset that will be divided and/or distributed, including
stock, pension plans, stock options, contingent resources and other personal property,
real property, cash and other investments: The real and personal property will be awarded
outright, thereby preserving the date of decree value. The stock, cash and mutual funds
will be equally divided as of their date of decree value. This equitably distributes all
income, capital gains and increase in value. The contingent resources will be divided in
an equitable manner not requiring future evaluation or hearings. The date of separation
will be used in coverture factors. Therefore, this court will avoid a rehearing concerning
what the valuation of the assets was on December 3, 1997, which the court cannot possibly
determine with the information on hand. The parties will still have the right to seek an
articulation or to move to open the judgment to consider "exceptional intervening
circumstances" that may have arisen in the meantime from the date of the trial to the
date of the decision.
The court will also enter Yontef v. Yontef type orders permitting the
parties' post judgment to file a Motion for Articulation and/or Correction citing the
"exceptional intervening circumstances" under Sunbury v. Sunbury, supra, 216
Conn. 676. The judgment will be as of December 3, 1997, and any further articulation
will not affect the integrity of these orders and leave the parties to their due process
and appellate rights as referred to.
This articulation was a proper method of clarifying its oral decision.
An articulation is appropriate where the trial court's decision contains some ambiguity or
deficiency reasonably susceptible of clarification. State v. Wilson, 199 Conn. 417,
435, 513 A.2d 620 (1986); Rostain v. Rostain, 213 Conn. 686, 694-95, 569 A.2d 1126
(1990). Carothers v. Capozziello, 215 Conn. 82, 114, 574 A.2d1268 (1990).
Proper utilization of the motion for articulation serves to dispel any . . . ambiguity by
clarifying the factual and legal basis upon which the trial court rendered its decision. .
. . Barnes v. Barnes, 190 Conn. 491, 494, 460 A.2d 1302 (1983). An articulation,
however, is not an opportunity for a trial court to substitute a new decision [or] to
change the reasoning or basis of a prior decision. Koper v. Koper, 17 Conn. App. 480,
484, 553 A.2d 1162 (1989); see Eichman v. J & J Building Co., 216 Conn. 443,
458, 582 A.2d 182 (1990).
(Internal quotation marks omitted.) Walshon v. Walshon, 42 Conn.
App. 651, 655-56, 681 A.2d 376 (1996).
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