Opinion ID: 1873943
Heading Depth: 1
Heading Rank: 5

Heading: Dividing the Pension in the Present Case

Text: In the present case, the trial court was confronted with the problem of dividing the community portion of an employee spouse's fully matured defined benefits pension. This task was complicated by the fact that the pension had been overlooked and omitted from a previous partition of community assets. The community was terminated in 1975 by judgment of separation of bed and board retroactive to the date on which the petition for same was filed. La.Civil Code art. 159. But because of the omission, the former spouses continued to be owners in indivision of the community pension asset. The present partition action was brought in 1988 after the former husband retired and began to draw matured pension benefits. The trial court in effect classified and divided the pension by using a fixed percentage method, considering itself bound to award the wife one half of a fixed fraction of all past and future retirement payments according to the formula set forth in Sims v. Sims, 358 So.2d 919 (La. 1978). Under that formula the community portion of the pension right is deemed to be the same fraction that results when the length of the employee spouse's creditable employment during the community is divided by the length of his total creditable employment. We see no abuse of discretion or reversible error in the trial court's use of a fixed percentage approach, although, as we will explain, some adjustment of the formula may be necessary in order to prevent inequity in the present case. The trial court correctly rejected the husband's proposed method of division, under which the court would have been required to award him the entire pension and grant the wife a lump sum of $15,219 plus legal interest from the date of the termination of the community in lieu of her interest in retirement payments. According to the husband's actuary witness, this amount was equivalent to one-half the paidup deferred annuity contract payable at age 65 that the husband could have obtained had he terminated employment on the date of the termination of the community in 1975. If the husband had left employment then, he would have been entitled to a deferred pension of $952 per month payable in the future when he became 65 years old. According to the actuary, the $952 per month pension payable at age 65 would have had a lump sum equivalent of $30,438 in 1975, if the husband had terminated employment and if the company had chosen to pay a lump sum. The husband's proposal, which was later adopted by the court of appeal, was legally incorrect and inequitable. The wife owns a present undivided one-half interest in the pension right insofar as it is ascribable to the community. The pension right fully matured in 1988 prior to the commencement or trial of this partition suit. To relegate the wife to a one-half interest in the value that the pension may have had in 1975 long before its maturity would fail to recognize her legal status as the co-owner of an interest in the present fully matured pension. La.Civ.Code arts. 2336, 2369, 2369.1; 2369.1 comment (c). The husband's proposal also conflicts with the procedural requirement that in the partition of community property the court shall value the assets as of the time of trial on the merits. La.R.S. 9:2801(4)(a). Moreover, the effects of the husband's proposal would be profoundly inequitable. If the wife's interest in the pension were valuated as of 1975, instead of after its maturity and at the time of the partition trial, she would be deprived of the substantial appreciation in value of her interest that occurred after 1975. As of that date the pension right was not fully developed and was subject to several contingencies that might have prevented its maturation, e.g., the employee spouse's mortality and termination of his employment. Consequently, the value of the unmatured pension right in 1975, which reflected a heavy discount because of these contingencies, was significantly less than the value of the pension right in 1988, which had survived all contingencies to become fully matured. Thus, the husband's proposal would have deprived the wife of the equal share of the pension ascribable to the community to which she was due, and, by the same token, would have created a windfall for the husband by allowing him to retain the fully matured pension right attributable to the community while paying the wife substantially less than one-half of its actual matured value. For all these reasons, the trial court concluded that the fixed percentage method was preferable to the husband's inequitable and legally incorrect approach. In the absence of an acceptable alternate proposal with supporting evidence, we find no abuse or error in the trial court's selection of the fixed percentage method as a basic approach to partition. We disagree, however, with the trial court's conclusion that a partitioning court is bound to use the fixed percentage method in every case analogous to Sims. In Sims this court required the trial court to apply a fixed percentage formula to determine the wife's interest in any retirement payments if and when they became due in the future. In doing so, however, we did not say that the fixed percentage method is the only technique that may be applied to divide pension benefits. The Sims court added, perhaps unnecessarily, that [T]he community interest in the retirement plan has no immediate redeemable cash value. Until the employee is separated from the service, dies, retires or becomes disabled, no value can be fixed upon his right to receive an annuity or upon lump-sum payments or other benefits to be paid on his account. Sims v. Sims, supra at 923. In retrospect, the statement was unfortunate. If it was intended to signify that the employer could not be required to pay benefits until due under its contractual obligation, the statement was correct but ambiguous. But if it was meant to indicate that a pension right could not be valuated for purposes of voluntary or judicial partition prior to maturity the statement must be acknowledged as error. Neither the Civil Code nor La.R.S. 9:2801 contains anything that requires courts to follow the fixed percentage method to the exclusion of others. In fact, La.R.S. 9:2801, which was enacted subsequent to Sims affords the partitioning tribunal a great deal of flexibility and clearly implies that the goals of equality and equity require that no one method should be used to the exclusion of other apportionment techniques. Moreover, our study of legal developments both here and in other jurisdictions convinces us that because of the great variations in pension plans and communal situations no one method can accomplish justice in every case. It is essential, therefore, that courts be able to take advantage of reasonable alternatives and adjustments in order to accomplish an equal distribution in an equitable manner in all situations. McDermott v. McDermott, 150 Vt. 258, 552 A.2d 786 (1988); In re Marriage of Rogers, 45 Or.App. 885, 890, 609 P.2d 877, 882, mod. 47 Or.App. 963, 615 P.2d 412, mod. 50 Or.App. 511, 623 P.2d 1108 (1988); Gregory, The Law of Equitable Distribution § 5.05[1], supra; see generally, Thiede, The Community Property Interest of the Non-Employee Spouse in Private Employee Retirement Benefits 9 U.S.F.L.Rev. 635 (1975); Comment, Retirement Equity Inaction: Division of Pension Benefits upon Divorce in Louisiana, 48 La. L.Rev. 675 (1988); Comment, Distribution of Pension Benefits in Marital Dissolutions: Determining the Time and Valuation of the Community Interest, 24 Santa Clara L.Rev. 999 (1984) [hereinafter Distribution of Pensions]. Regrettably, the ambiguous or mistaken statement in Sims may have prevented the trial court in the present case from making a needed adjustment to the community fraction. There are some cases in which a mechanical application of the community fraction in calculating the community's portion of the pension benefits will not lead automatically to a correct or equitable result. In such cases, an application of the rule may be inappropriate or require some modification in order to be equitable. The trial court felt intuitively that a rigid enforcement of the community fraction would be unfair in the present case but nevertheless decided that no alternative was permitted by the Sims opinion. The community fraction does not take into consideration that most pension plans do not accrue at a fixed rate throughout a career. Consequently, the fraction may not always accurately reflect the relative community and separate components when there have been post-divorce increases to the pension benefits retirement due to high separate earnings in the employee spouse's late employment years. Fondi v. Fondi, supra; Gemma v. Gemma, supra; Distribution of Pensions, supra at 1009. It is assumed, however, that, in most cases, any underrepresentation of the employee spouse's post-divorce input toward pension benefits will be offset by another factor. In theory an employee's acquisition of a pension right in the early years of employment during marriage, even though based on a smaller salary, may be actually worth more than his enhancement of that right during the post-divorce years, due to the longer period of accumulated interest and investment income prior to the commencement of benefit payments. Fondi v. Fondi, supra; Gemma v. Gemma, supra; Judd v. Judd, 68 Cal.App.3d 515, 137 Cal. Rptr. 318 (1977); In re Marriage of Anderson, 64 Cal.App.3d 36, 134 Cal.Rptr. 252 (1976); Distribution of Pensions, supra at 1010. Another rationale is that the services rendered by the nonemployee spouse to the community during the early, low paid years of the employee spouse's employment provide the foundation for the post-divorce escalation of pension benefits and thereby usually justify applying the community fraction to the entire pension benefit including any increases after divorce. H. Ross, M. Projector & L. Jacoby, Handling Retirement Plans in Marriage Dissolution, app. A2 at 19 (1977). In other words, a brick at the bottom of a wall may be more important to its stability than quite a few near the top. Nevertheless, there will be unusual cases in which a substantial part of the increased retirement benefits earned by the employee spouse after divorce will not result from a foundation provided by prior community earnings. Fondi v. Fondi, supra; Gemma v. Gemma, supra. In such cases, the partitioning court should select a more equitable method or modify the community or marital fraction rule to attribute that part of the post-divorce increase to the employee spouse separately. Although the emerging jurisprudential precepts are not yet well defined, some factors may be identified as helpful guidelines in determining when such a modification is required. Distribution of Pensions, supra at 1010. In general, the partitioning court should inquire as to whether a substantial post-community increase is due to personal effort or achievement after the termination of the community that has little or no relationship with the prior community. The community should not be given credit when a substantial post-community increase to a retirement fund is due to a singular personal factor such as individual effort, education or achievement resulting in a merit raise or an extraordinary promotion or series of promotions. For example, such an increase in benefits might occur where the employee spouse attains a significantly higher-paying position while remaining within the coverage of the same pension plan, either through earning a post-community degree, or transfer within the company to an unrelated area of service. Fondi v. Fondi, supra; Gemma v. Gemma, supra. Such increases are not acquired during the existence of the legal regime through the effort, skill, or industry of either spouse are not fairly ascribable to the community and should not be considered community property. La.Civ.Code arts. 2338. On the other hand, when such an increase results from nonpersonal elements such as longevity raises, cost-of-living raises, forfeitures by terminated employees, and investment returns, the community should participate in that gain. See La.Civ. Code arts. 2340; Distribution of Pensions, supra at 1015. Drawing the line in this manner is consistent with the codal scheme for classification of property as community or separate, is fair, and is consistent with the reasonable expectations of the parties. The employee spouse should expect to profit individually from his extraordinary personal industry after divorce, and the nonemployee spouse is entitled to expect to share in the benefits earned by his or her investment in the community. Id. When an employee spouse believes that the income he or she will receive on retirement contains a substantial increment ascribable to his or her personal effort or achievement after termination of the community, that spouse may request the court to adjust the community fraction to credit his or her separate property with that increment. Should the trial court agree that the pension was increased due to the employee spouse's personal effort or achievement, benefits may then be reallocated using the highest income the employee spouse would have received under the normal course of events, including ordinary promotions and cost increases and gains due to non-personal factors. Because the employee spouse is generally in a position of superior knowledge and is attempting to prove the unusual or unlikely case, the burden of going forward with evidence and of persuasion on this issue properly should be assigned to the employee spouse. McCormick on Evidence § 337 (E. Cleary 3d ed. 1984). Thus, for the courts the process may be viewed as a winnowing of increments of post-community increases in the employee spouse's earnings for the purpose of determining whether the increases are due purely to personal merit. First, the increment must represent a fairly substantial increase in the employee spouse's post-community earnings. Second, the increment must not be due to a non-personal factor, such as cost-of-living raises, etc. Third, the increment must be attributable to the employee spouse's meritorious individual efforts or achievements. Moreover, since the employee spouse has the burden of production of the evidence and persuasion, cases of doubt should be resolved in favor of the community and against the employee's spouse's separate estate or subsequent marital community. In the present case, the evidence suggests that the employee spouse's skill and industry were a major factor in causing his earnings to increase markedly following the termination of the community. His annual earnings increased from about $47,000 in 1975 at the end of the community to an average of almost $86,000 in his last three years of employment in 1985-88. During this period he was promoted from territorial manager of his employer's southern region to divisional manager of sales nationwide. According to the husband's expert actuary witness, his raises in pay outstripped the increase in cost of living and were attributable to promotions and sales and production bonuses. The actuary testified that an application of the community fraction rule in this case might be inappropriate because it could lead to an unmerited enhancement of the community's interest in the retirement benefits. The court appointed expert in the valuation of pension plans, on the other hand, testified that any distortion caused by use of the community fraction rule would be offset by countervailing factors. For lack of incisive interrogation, however, each expert's testimony in this regard was conclusory rather than explicative. From the record presented for our review, we cannot determine which of the husband's post-community increases in compensation, if any, was due purely to his personal effort or skill and unrelated to the prior community earnings. Evidently, the trial court and the parties were under the impression that the opinion of this court in Sims v. Sims inflexibly required the application of the fixed percentage method along with the community fraction rule as its integral part in the present case without any adjustment or modification. Consequently, although the trial court and counsel expressed some concern about a possible inequitable distortion that might result from use of the formula, they did not pursue the potential inequity as a genuinely material issue. Accordingly, we are unable to determine justly whether the partition effected by the trial court divided the community interest in the pension equally and in an equitable manner between the former spouses. Moreover, it would not be just or equitable for us to resolve the issue here by merely applying the burden of proof rule newly announced in the present case, without allowing the parties to litigate the issue. Very few other courts or writers have dealt with the problem, and the parties before us reasonably could have concluded that the Sims decision prevented the trial court from adopting any modification to remedy inequity produced by application of the community fraction. For the foregoing reasons, the judgment of the court of appeal is reversed and vacated to the extent that it partitioned the community pension right. To the extent that the court of appeal judgment affirmed the trial court's decision to overrule the exceptions of res judicata and prescription, however, it is affirmed. The case is remanded to the trial court with a direction to render a new partition judgment after conducting further proceedings to determine whether the community fraction rule underlying the fixed percentage method applied herein should be modified to reflect that some of the post-community increases in earnings by the employee spouse should be attributed solely to his personal effort or skill and not related to the prior community earnings. COURT OF APPEAL JUDGMENT AFFIRMED IN PART, REVERSED IN PART; CASE REMANDED TO TRIAL COURT TO CONDUCT FURTHER PROCEEDINGS TO DETERMINE WHETHER THE METHOD OF DIVIDING COMMUNITY PROPERTY SHOULD BE MODIFIED AND TO RENDER JUDGMENT ACCORDINGLY.