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Employment Stock Bonuses Awarded After the Date of Classification
© 2004 National Legal Research Group, Inc.
NORTH CAROLINA: Ubertaccio v. Ubertaccio, ____ N.C. App. ____, 588 S.E.2d 905 (2003).
Under an employment agreement signed during the marriage as consideration for past services, the wife was eligible for awards of stock. But no awards were made until after the date of classification. A three-judge panel wrote three different opinions, ultimately affirming the trial court's finding that the stock was completely subject to division upon divorce.
In late 1999, prior to the date of the parties' January 2000 separation, the wife executed an employment agreement with a corporation that was a spinoff corporation from the one for which she had been employed for 20 years. By that agreement, she was eligible to receive as compensation, in the year 2000, 10,000 shares of stock in the spinoff company. In May and July 2000, she received distribution of the shares of stock. Subsequently, another corporation purchased the one for whom she worked, and she received 4,298 shares of stock in that corporation in exchange therefor. She incurred a tax liability for that year on the gain realized by the conversion. The spinoff corporation withheld a number of shares to meet that tax liability and issued a stock certificate to the wife for the balance. Shortly thereafter, she sold the stock and received proceeds of over $86,000. The trial court found the entire proceeds from the sale of stock to be divisible and, in the alternative, marital property. The trial court awarded the husband an unequal distribution of 55% and required the wife to pay the husband 55% of the proceeds from the stock sale. The wife appealed.
A three-judge panel of the court of appeals affirmed by a 2-1 margin, with each judge writing a distinct opinion. The wife first argued that the lower court had erred in classifying the stock sale proceeds as divisible and, in the alternative, marital property. In considering stock rights in light of the statutory definitions of marital, divisible, and separate property, see N.C. Gen. Stat. 50-20(b), the lead opinion noted that they are treated similar to retirement benefits in that they are a salary substitute or a deferred compensation and, if received during the marriage and before the date of separation and acquired as a result of the efforts of either spouse during the marriage and before the date of separation, they are marital property even if they cannot be exercised until a date after the parties' divorce. Stock rights are divisible if acquired as a result of a spouse's efforts during the marriage but not received until after the date of separation and before the date of distribution. Such rights are neither marital nor divisible if received during the marriage and before the date of distribution but not in consideration for services rendered during the marriage and before the date of separation.
The wife's argument that the stock rights were neither granted, vested, nor matured as of the date of separation was rejected by the first opinion. Pursuant to her employment agreement, she was required to successfully complete her evaluation period before she received the stock in May and July 2000. Both of these dates were after the date of separation. Although these shares of stock did not vest until after the date of separation, her employment agreement, which was executed during the marriage and before the separation date, created her right to those shares. Her entitlement to the shares of stock therefore arose during the marriage.
Finally, the contention raised, that the right to receive the stock was "conditioned" and therefore that such stock rights could not be classified as marital, was also denied. The wife's execution of a covenant not to compete, which the plan administrator had the discretion to require, did not take place until after she had received over 8,000 shares. The equitable distribution statute, after all, includes in the definition of marital property vested as well as nonvested stock options. In addition, the assertion that the "conditional" stock options were not earned until after the date of separation, since the wife was required by the employment agreement to be an employee in good standing at the end of her six-month evaluation period, was held to be no basis for challenging the classification of the shares as divisible. Continued employment is a normal and expected condition in deferred compensation plans and in stock plans that vest in the future.
The wife also argued that the trial court erred in failing to hold that the stock rights were consideration only for her 29 days of service before the date of separation with the company from which she actually received the stock options. But the wife had worked for 20 years with her original employer, and it was reasonable to infer that her employment with the new company resulted from that service. She was married, living with the husband, and had been employed by the original corporation at the time she accepted the offer of employment with the spinoff company. It was proper to award the husband a share of the proceeds from the sale of all of the shares of stock, with valuation as of the date of distribution, as the wife had accrued her interest in the stock during the entire course of the marriage.
The second opinion in the case was the most specific in terms of facts. Quoting the employment agreement, the opinion found that the wife actually participated in a "phantom stock program." The trial court found that the wife's rights under that program were acquired upon execution of the agreement, this opinion found, as consideration for prior services. Because no transcript was provided on appeal, the second opinion refused to review the correctness of this factual finding, and it voted to affirm the decision below.
A third opinion argued that the wife acquired only bare eligibility for an award of stock as a result of the employment agreement. The award itself was made, this opinion argued, after the date of separation, which is the date of classification under North Carolina law. Because the award itself was compensation for future services, this opinion found that the stock was entirely separate property.
Editor's Note: The trial court's finding that the stock was consideration for services rendered before the signing of the employment agreement seems reasonable and may be immune from further attack due to failure to provide a transcript.
But it seems odd that the stock was not also consideration for services rendered from the time the employment agreement was signed until the date on which the award was made, as the agreement gave the wife only bare eligibility for an award. The first opinion's treatment of continued employment as a mere incidental condition is questionable, for employees are entitled to be compensated for their services. Thus, as near as can be determined from the facts provided, the stock was most likely consideration for efforts from the date of employment until the date when the actual award was made. Most, but not all, of this period occurred before the date of classification, so the stock was mostly (but not entirely) subject to division.
A similar result was reached with regard to true stock options in In re Marriage of Hug, 154 Cal. App. 3d, 201 Cal. Rptr. 676 (1984), and Salstrom v. Salstrom, 404 N.W.2d 848 (Minn. Ct. App. 1987), both finding that the options were consideration for service from the start of employment to the date of vesting. Like Ubertaccio, both Hug and Salstrom involved benefits associated with a change of employment by the owning spouse.
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