Opinion ID: 2679799
Heading Depth: 2
Heading Rank: 3

Heading: the court of appeals erred when it affirmed

Text: THE DISTRICT COURT‘S DETERMINATION OF MS. ZORIC‘S SHARE OF MR. JOHNSON‘S RETIREMENT BENEFIT ¶ 22 Mr. Johnson alleges that the court of appeals erred in applying the marital foundation approach rather than the bright line or other context-specific approach to determine what portion of his pension should be awarded to Ms. Zoric. Mr. Johnson also argues that the court of appeals erred in applying an abuse of discretion rather than a correctness standard of review, but contends that under either standard, the district court‘s pension award determination should be reversed A. The District Court’s Determination of Equitable Distribution of Marital Property Is Reviewed for an Abuse of Discretion ¶ 23 An appellate court‘s review of a district court‘s determination of which pay grade to apply to determine a former spouse‘s marital portion of an employee spouse‘s retirement benefit is subject to an abuse of discretion standard. ―A [district] court has considerable discretion considering property [division] in a divorce proceeding, thus its actions enjoy a presumption of validity. We will disturb the [district] court‘s division only if there is a misunderstanding or misapplication of the law . . . indicating an abuse of discretion.‖43 As explained below, the district erroneously believed it was bound by the marital foundation approach, and in so doing, misunderstood and misapplied the law.44 Thus, the district court abused its discretion and we reverse the court of appeals and remand to the district court for further proceedings consistent with this opinion. 43 Oliekan v. Oliekan, 2006 UT App 405, ¶ 16, 147 P.3d 464 (second alternation in original) (internal quotation marks omitted); see also Featherstone v. Schaerrer, 2001 UT 86, ¶ 41, 34 P.3d 194 (explaining that applying an incorrect legal standard is an abuse of discretion). 44 See infra Part III.B. 13 JOHNSON v. JOHNSON Opinion of the Court B. The Court of Appeals Erred when It Affirmed the District Court’s Award Granting Ms. Zoric Her Marital Fraction of Mr. Johnson’s Actual Retirement Benefits ¶ 24 The district court in this case was faced with the issue of how to determine the appropriate portion of Mr. Johnson‘s pension benefits to award Ms. Zoric. Specifically, the parties disagreed as to whether the district court should include postdivorce increases to Mr. Johnson‘s pension benefits when calculating Ms. Zoric‘s pension benefit award. The district court, relying on our precedent in Woodward v. Woodward,45 held that Ms. Zoric was entitled to an award that included the postdivorce increases in Mr. Johnson‘s pension benefits. A divided panel of the court of appeals affirmed that decision. As discussed below, the district court‘s reliance solely on Woodward was misplaced. As such, the district court applied the wrong legal standard, and in so doing, abused its discretion.46 On this issue, we reverse the court of appeals and remand to the district court. ¶ 25 On certiorari, Mr. Johnson argues that Ms. Zoric‘s share of his retirement benefit should be based on his pay grade at the time of the parties‘ divorce or the present-day salary for his pay grade at the time of divorce, rather than his pay grade and salary at the time of his retirement. We begin by noting that a former spouse is entitled to an equitable distribution of an employee spouse‘s retirement or pension benefits that ―accrue[] in whole or in part during the marriage.‖47 ¶ 26 We have established that a nonemployee spouse is entitled to receive ―a portion of the retirement benefits represented by the number of years of the marriage divided by the number of years of the [employee spouse‘s] employment.‖48 This has become known as the ―time rule‖ formula. A number of jurisdictions have adopted this time rule formula to determine the ―marital fraction,‖ which determines the martial interest in 45 656 P.2d 431 (Utah 1982). 46 See Featherstone, 2001 UT 86, ¶ 41 (explaining that applying an incorrect legal standard is an abuse of discretion). 47 Woodward, 656 P.2d at 433. 48 Id. at 433–34. 14 Cite as: 2014 UT 21 Opinion of the Court pension benefits.49 The marital fraction is calculated by dividing the number of years (or months) that the employee spouse has earned toward the pension during the marriage by the number of years (or months) of total service toward the pension.50 The marital fraction is then multiplied by the employee spouse‘s monthly benefit that is subject to equitable distribution.51 Each spouse is then awarded one-half of the marital interest in the pension that is subject to equitable distribution.52 Mathematically, the formula is: years of service during marriage x monthly benefit x 1/2 years of total service When a court invokes this formula, there are two unknowns at the time of divorce: the years of total service and the amount of the monthly benefit. Once the employee spouse retires, the years of total service factor is known and can be plugged into the equation to determine the marital fraction. In the present case, the parties were married for ten years, during which time Mr. Johnson accrued ten years of qualifying service. Mr. Johnson retired after twenty-four years of qualifying service. Using the time rule formula above, the parties were married for 41.6 percent of the time Mr. Johnson was employed by the Air Force, and Ms. Zoric‘s half of that portion is 20.8 percent. The parties agree on this calculation.53 ¶ 27 The remaining unknown factor at the time of divorce, and what the parties dispute in this case, is the amount of the 49 See, e.g., In re Marriage of Hunt, 909 P.2d 525, 532 (Colo. 1995); Stouffer v. Stouffer, 867 P.2d 226, 231 (Haw. Ct. App. 1994); Warner v. Warner, 651 So. 2d 1339, 1340 (La. 1995); Lynch v. Lynch, 665 S.W.2d 20, 23–24 (Mo. Ct. App. 1983); Rolfe v. Rolfe (In re Marriage of Rolfe), 766 P.2d 223, 226 (Mont. 1988); Gemma v. Gemma, 778 P.2d 429, 431 (Nev. 1989); Berry v. Meadows, 713 P.2d 1017, 1023 (N.M. Ct. App. 1986); Welder v. Welder, 520 N.W.2d 813, 817 (N.D. 1994). 50 In re Marriage of Hunt, 909 P.2d at 531. 51 Id. 52 Id. 53 Johnson v. Johnson, 2012 UT App 22, ¶¶ 11–15, 270 P.3d 556. 15 JOHNSON v. JOHNSON Opinion of the Court monthly benefit that is to be multiplied by the marital fraction. Though our decision in Woodward established the time rule formula as the appropriate method for calculating the marital fraction, we were not presented with the question of how to properly determine the amount of the employee spouse‘s monthly benefit subject to equitable distribution. That question is squarely presented here. Thus, we must determine whether postdivorce increases in pension benefits that are predicated on increases in the employee spouse‘s rank and pay grade following the parties‘ divorce are properly part of the monthly benefit subject to equitable distribution. The district court had several alternatives from which to choose. ¶ 28 At one end of the spectrum is the bright line approach— the approach advocated by Mr. Johnson. The bright line approach ―likens post-divorce pension enhancements to post-divorce earnings and characterizes all such increases as the separate property of the employee spouse.‖54 Under this approach, ―pension benefits accruing as compensation for services rendered after a divorce are not part of the [marital] estate . . . subject to division on divorce.‖55 This approach treats any subsequent advancement (and the resulting pay increase) as the separate property of the employee spouse because any such advances or increases result solely from the labors of the employee spouse.56 A court applying this approach uses the employee spouse‘s pay grade at the time of the parties‘ divorce, instead of the pay grade at the time of retirement to calculate the monthly pension benefits.57 The bright line approach comports with the longestablished notion that property acquired after the marriage is generally considered separate property and is, therefore, not 54In re Marriage of Hunt, 909 P.2d at 532. 55 Berry v. Berry, 647 S.W.2d 945, 947 (Tex. 1983) (internal quotation marks omitted). 56 Koelsch v. Koelsch, 713 P.2d 1234, 1238–40 (Ariz. 1986); Berry, 647 S.W.2d at 947. 57 Shill v. Shill, 765 P.2d 140, 143–46 (Idaho 1988) (applying the bright line approach where a large increase in pension benefits was due solely to the employee spouse‘s additional years of work after the divorce, and any cost of living increases gained in four years of marriage would be negligible, based on the average salary of the employee spouse). 16 Cite as: 2014 UT 21 Opinion of the Court subject to distribution along with the martial estate.58 This approach is also aligned with our precedent that marital property should be valued at the time of the divorce decree, absent compelling circumstances.59 ¶ 29 At the other end of the spectrum is the marital foundation approach, which acknowledges that postdivorce earnings are separate property, but treats all postdivorce increases in pension benefits as marital property.60 The marital foundation approach is easy to apply, as a district court need only apply the time rule formula to the employee spouse‘s monthly pension benefit at retirement, with no need to ―parse out the ‗marital‘ portion of the post-dissolution enhancement from the ‗separate‘ portion . . . attributable solely to the efforts of the employee spouse.‖61 Furthermore, the marital foundation approach seeks to offset the ―risk of forfeiture, delay in receipt, and lack of control over the timing of the receipt of benefits‖ suffered by the nonemployee spouse by permitting the nonemployee spouse to share in postdivorce enhancements to benefits.62 58 See Koelsch, 713 P.2d at 1239 (―Finally, it is established law that while the fruits of labor expended during marriage are community property, earnings after dissolution are separate property.‖ (citation omitted)); In re Marriage of Heupel, 936 P.2d 561, 572 (Colo. 1997) (―[P]roperty acquired by a spouse after a decree of legal separation is excepted from the definition of marital property. . . .‖ (internal quotation marks omitted)). 59 Goggin v. Goggin, 2013 UT 16, ¶ 49, 299 P.3d 1079. 60See In re Marriage of Hunt, 909 P.2d at 534 (―Typically, there is a commingling of effort undertaken during the marriage and after the marriage which together enhance the value of the future benefit. The employee spouse‘s ability to enhance the future benefit after the marriage frequently builds on foundation work and efforts undertaken during the marriage.‖). 61 Id. at 535. 62Id. at 537. Counsel for Mr. Johnson stated that the marital foundation approach is the majority approach. However, a review of the jurisdictions that have adopted the marital foundation approach reveals that most jurisdictions will apply the marital foundation approach when appropriate, but they 17 JOHNSON v. JOHNSON Opinion of the Court ¶ 30 The bright line and marital foundation approaches can be thought of as anchoring each end of a spectrum of approaches available to district courts. Judge Davis, in dissenting from the result adopted by the court of appeals, advocated an approach between these two extremes.63 Judge Davis disagreed with both the bright line approach and the marital foundation approach as generally consider it only one of a handful of options available when crafting an equitable remedy. See, e.g. McCarthy v. McCarthy, 704 P.2d 1352, 1354 (Ariz. Ct. App. 1985) (―[I]t was not error for the trial court here to adopt a different but fair method based on the evidence of the value of the community interest in the pension plan and dividing that amount in half.‖); Askins v. Askins, 704 S.W.2d 632, 634 (Ark. 1986) (―The statute gives the [trial court] broad discretion. It is not the intent of the statute or this opinion to tie the [trial court] to any specific formula for dividing prospective retirement benefits.‖); In re Marriage of Adams, 134 Cal. Rptr. 298, 302 (Cal. Ct. App. 1976) (―As a general rule, in selecting a method to effect distribution of the community interest in retirement rights the court acts in the exercise of judicial discretion and its determination respecting such will not be interfered with on appeal unless an abuse of discretion is shown. The criterion governing judicial action is reasonableness under the circumstances. The method adopted may vary with the facts in each case.‖ (internal quotation marks omitted)); Ranfone v. Ranfone, 928 A.2d 575, 581 (Conn. App. Ct. 2007) (―[I]t is within the trial court‘s discretion . . . to choose, on a case-by-case basis, . . . [any] valuation method that it deems appropriate in accordance with [the] law that might better address the needs and interests of the parties. . . . The touchtone of valuation, as well as the ultimate distribution of pension benefits, is the court‘s power to act equitably.‖ (first, second, and sixth alterations in original) (internal quotation marks omitted)); Cohen v. Cohen, 937 S.W.2d 823, 831–32 (Tenn. 1996) (―The choice of valuation method remains within the sound discretion of the trial court to determine after consideration of all relevant factors and circumstances. While the parties are entitled to an equitable division of their marital property, that division need not be mathematically precise.‖). 63 Johnson, 2012 UT App 22, ¶¶ 37–38 (Davis, J. concurring in part and dissenting in part). 18 Cite as: 2014 UT 21 Opinion of the Court used in the context of this case.64 Judge Davis would have awarded Ms. Zoric 20.8 percent of the monthly benefit Mr. Johnson would have received had he remained at the E-5 pay grade he attained during the parties‘ marriage.65 This would have included normal cost of living increases, but not the increases attributable to Mr. Johnson‘s promotion to the E-7 pay grade he attained prior to retirement.66 Judge Davis reasoned that ―there is no evidence of any specific contribution made by [Ms.] Zoric to [Mr.] Johnson‘s earning capacity apart from the fact that she was married to him while he was employed at the E-5 rank.‖67 Accordingly, Judge Davis found no reason to award Ms. Zoric the benefit of ―all future improvements in [Mr. Johnson‘s] financial situation merely by virtue of their having been married for some period of time.‖68 ¶ 31 Like Judge Davis, we believe that a context-specific approach leads to the most equitable distribution of pension benefits. District courts are charged with making an equitable distribution of marital property, including pension benefits. 69 In making such distribution, the presumptive value of marital property is determined at the time of the divorce, absent compelling circumstances.70 District courts should also consider a variety of factors when making equitable distributions, including whether the property was acquired during the marriage, the source of the property, and the parties‘ respective financial conditions.71 ―The appropriate distribution of property var[ies] 64 Id. ¶ 37. 65 Id. ¶ 38. 66 Id. ¶ 37. 67 Id. ¶ 37 n.2. 68 Id. 69 See UTAH CODE § 30-3-5(1) (allowing district courts to issue ―equitable orders relating to . . . property‖ in divorce decrees); Woodward, 656 P.2d at 433 (holding that pension benefits accrued during the marriage are marital property subject to equitable distribution). 70 Goggin, 2013 UT 16, ¶ 49. 71 Id. ¶ 47. 19 JOHNSON v. JOHNSON Opinion of the Court from case to case, [but] [t]he overriding consideration is that the ultimate division be equitable—that the property be fairly divided between the parties, given their contribution during the marriage and their circumstances at the time of the divorce.‖72 Thus, our precedent has endorsed a context-specific approach that recognizes the various ways marital property can be acquired and then distributed equitably. ¶ 32 When determining the most equitable distribution of the employee spouse‘s pension benefits, a district court should consider the pension benefits much like it does other marital property. That is, the district court should consider the extent to which the property was acquired during the marriage and the ultimate source of the property.73 In the context of pension benefits, this will require the district court to consider how the trajectory of the employee spouse‘s career intersected with the marriage and the extent to which the marriage contributed to the employee spouse‘s pay grade at retirement. For example, if the parties were married only briefly early in the employee spouse‘s career, it is highly unlikely that the nonemployee spouse contributed significantly to the employee spouse‘s ultimate pay grade at retirement. In such a scenario, there would be no reason to award the nonemployee spouse the benefit of all of the employee spouse‘s subsequent pay raises, whether they result from promotions, renegotiations of union contracts, or job changes. ¶ 33 On the other hand, if the parties are married for a significant portion of the employee spouse‘s career, it is much more likely that the nonemployee spouse‘s contributions impacted the trajectory of the employee spouse‘s career in a way the court should credit. This would be especially true in circumstances in which the parties were married while the employee spouse underwent specialized training or schooling that would further his or her career. To the extent such training or education led to increases in rank or pay grade, the court could see fit to award the nonemployee spouse credit for the resulting 72Id. ¶ 48 (first and third alterations in original) (internal quotation marks omitted). 73 Id. ¶ 47. 20 Cite as: 2014 UT 21 Opinion of the Court increase in pension benefits.74 Even in this circumstance, however, it does not stand to reason that the nonemployee spouse would then be entitled to all subsequent increases. The district court should, in its discretion, determine what contribution the nonemployee spouse made to the subsequent increases, if any, and award credit only for those fairly attributable to that contribution. ¶ 34 Therefore, the district court is not bound by a specific prescribed approach in determining the most equitable distribution of pension benefits following the dissolution of a marriage, but should evaluate all relevant factors and circumstances in making such a determination. ¶ 35 Based on our review of the record in this case, we find that it is insufficient to determine the extent to which Mr. Johnson‘s career trajectory was impacted by his marriage to Ms. Zoric.75 There is no question that Ms. Zoric‘s efforts during the marriage helped Mr. Johnson attain the E-5 rank that he held as the time of the parties‘ divorce. And had Mr. Johnson remained at this rank and merely received his anticipated cost of living increases, Ms. Zoric would have been entitled to share in his monthly pension benefits as they were awarded. But, Mr. Johnson did not remain at the E-5 rank. Mr. Johnson was promoted from Staff Sergeant to Master Sergeant following his divorce from Ms. Zoric, and consequently, his rank and pay were elevated to E-7. The record is unclear as to the extent 74 Utah‘s property distribution statute directs courts to engage in just such an analysis in the context of alimony. UTAH CODE § 30-3-5(8)(a)(vii) (―The court shall consider . . . whether the recipient spouse directly contributed to any increase in the payor spouse‘s skill by paying for education received by the payor spouse or enabling the payor spouse to attend school during the marriage.‖ (emphasis added)). Because pension benefits are often predicated on the employee spouse‘s salary at retirement, the court should consider the extent to which efforts of the nonemployee spouse contributed to that salary. 75 Presumably because neither the district court nor the parties were aware of any need to characterize Mr. Johnson‘s career trajectory in this manner, there is nothing in the record that sheds any light on the nature of Mr. Johnson‘s postdivorce promotion. 21 JOHNSON v. JOHNSON Opinion of the Court Mr. Johnson‘s postdivorce promotion and career trajectory can be fairly attributed to Ms. Zoric‘s efforts during the marriage. As such, we remand to the district court for further fact-finding with the understanding that the district court is not limited to the marital foundation approach when determining the amount of monthly benefits to insert in to the time rule formula. Rather, the district court is authorized to use any approach it deems necessary to come to the most equitable outcome.