Opinion ID: 2461632
Heading Depth: 1
Heading Rank: 4

Heading: Valuation Method

Text: ¶ 18 At the time of dissolution, all property is brought before the court for a just and equitable distribution. RCW 26.09.080. With its equitable authority invoked, the court retains jurisdiction over all issues related to the decree of dissolution to ensure justice is administered properly. See Yount v. Indianola Beach Estates, Inc., 63 Wash.2d 519, 524-25, 387 P.2d 975 (1964). The court's continuing equitable jurisdiction includes the ability to grant whatever relief the facts warrant. Ronken v. Bd. of County Comm'rs, 89 Wash.2d 304, 313, 572 P.2d 1 (1977) (quoting Kreger v. Hall, 70 Wash.2d 1002, 1008, 425 P.2d 638 (1967)). ¶ 19 Langham illustrates how this plays out in the case of converted community assets. There the court entered a decree of dissolution dividing several thousand stock options between the husband and wife. Langham, 153 Wash.2d at 556, 106 P.3d 212. Years later, the husband cashed in the wife's share of the options on the mistaken belief they were his. Id. at 558, 106 P.3d 212. Immediately after the husband exercised the options, the stock plummeted, resulting in a substantial loss. Id. The wife moved to enforce the decree, seeking damages for the wrongful exercise of her share of the options. Id. at 558-59, 106 P.3d 212. In assessing damages against the husband, the court analogized to a conversion cause of action and measured damages based on the value of the stock at the time the options were exercised or converted. Id. at 558, 560, 106 P.3d 212. On review, we approved of the trial court's use of a tort law conversion measure of damages as a framework for granting equitable relief to the aggrieved wife. Id. at 560, 106 P.3d 212. We held that, at a minimum, the wife was entitled to recover the value of the stock at the time her options were converted. Id. at 569, 106 P.3d 212. But we left open the issue of damages when a converted asset increases in value, saying we would address that question another day. Id. ¶ 20 Daniel argues this is that other day, but he misconstrues the import of our Langham decision. The trial court here granted relief on a similar theory as the trial court in Langham: Using the framework of conversion and tort damages, the court sought to place Teresa in as good a position as she would have been had Daniel not fraudulently converted her share of the stock options. VRP (June 4, 2007) at 27-29. In this regard, the court found support in the well-established theory of tort damages that seeks to make the tort victim whole. See, e.g., De-Nike v. Mowery, 69 Wash.2d 357, 358, 418 P.2d 1010, 422 P.2d 328 (1966) (The purpose of awarding nonpunitive, pecuniary compensation to the injured party is to repair his injury, or to make him whole again as nearly as that may be done by an award of money.). The trial court explained that nothing in Langham foreclosed providing such relief to Teresa, but rather Langham supported a measure of damages that would make Teresa whole. VRP (June 4, 2007) at 27. ¶ 21 Daniel argues that the trial court erred as a matter of law by measuring damages in light of the projected value of the stock options on the latest date they could be exercised. In Daniel's view, there is only one answer to the question left open in Langham: Damages for conversion of stock options must be based on the highest value of the stock between the time the tort victim has notice of the conversion and a reasonable time thereafter, but under no circumstances can the reasonable time extend beyond the date of judgment. Teresa argues that the trial court's method for measuring damages was permissible and that we should defer to the court's choice of this particular method of valuing her loss. ¶ 22 We reject Daniel's proposal for a single, categorical rule for measuring the value of stock options when the stock price increases after conversion. In the first place, Langham itself does not suggest that such a rule exists. We noted in Langham that the parties had briefed the issue of measuring damages in conversion actions when the property fluctuates [or increases] in value, as stock does. 153 Wash.2d at 569, 106 P.3d 212. But we decided to leave that question for another day, as the stock in Langham declined rather than increased in value immediately after the options were converted. Id. Daniel's argument assumes that only one measure of damages can be correct when the asset increases in value. But we do not read Langham as foreshadowing the adoption of a single, categorical rule. ¶ 23 Moreover, the valuation of stock options does not lend itself to one universal approach. Determining the value of stock options is a complicated endeavor. See, e.g., Everett v. Everett, 195 Mich.App. 50, 53, 489 N.W.2d 111 (1992) (Other jurisdictions have examined the issue regarding how to calculate the value of stock options, a formidable task given the numerous possible contingencies and restrictions involving stock options.). As a result, methods for valuing stock options and assets of fluctuating value vary widely, both in the context of dissolution actions and the context of tort actions. ¶ 24 In dissolution proceedings, courts have used three main approaches to valuing stock options: present value, retained jurisdiction, and deferred distribution. Tracy A. Thomas, The New Marital Property of Employee Stock Options, 35 FAM. L.Q. 497, 518-21 (2001). The present-value approach requires the court to measure the present value of a stock option and award the aggrieved party a lump-sum cash award at the time of dissolution. Id. at 519. Experts have developed a variety of models for calculating the stock options' present value under this approach. The most widely known model, the Black-Scholes formula, is a complex method that reflects the interrelationship between market value and exercisability by taking into account eleven different variables. Id. at 518-19. [4] Two other models, the Shelton model and the Kassouf model, rely on regression analysis of historical relationships among economic variables to estimate statistically the expected value of the option. Id. at 519 n. 116. ¶ 25 Some courts are reluctant to wade into the economic morass of ascertaining a present value for stock options, and instead defer any valuation until the options are exercised at some point in the future. Under the retained-jurisdiction approach, for example, the court does not grant a lump-sum cash award at dissolution, but instead retains jurisdiction over the property distribution until the holder cashes in the options, at which point the court enforces an equitable distribution of the proceeds. Id. at 521. Similarly, under the deferred-distribution approach, the court allocates rights in the stock options at the time of dissolution but refrains from making any award until the holder exercises the options at a later date. Id. Because the spouse who is the employee typically retains the stock options, under both the deferred-and retained-jurisdiction approaches courts have developed a variety of methods for securing the nonemployee spouse's interests pending the exercise of the stock options. Id. ¶ 26 In the context of a tort action for conversion, the approaches to valuing and measuring damages are equally varied. See generally C.B. Higgins, Annotation, Measure of Damages for Conversion of Corporate Stock or Certificate, 31 A.L.R.3d 1286, cmt. n. (1970). Some courts measure damages by the highest value of the stock between the time of conversion and a reasonable time after the victim receives notice of the conversion. Id. § 5[c] at 1317. New York courts have developed a similar rule that measures damages using the highest value of the stock between the time the victim learns of the conversion and a reasonable time thereafter. Id. § 5[d] at 1322-23. The New York rule excludes the time between the act of conversion and the victim's notice of the conversion on the theory that, if the victim had wanted to sell the stock during that interval, he would have learned of the conversion. In re Salmon Weed & Co., 53 F.2d 335, 341 (2d Cir.1931). While the New York rule has garnered some acceptance, it is still only one of at least seven accepted measures of damages for the conversion of stock. Royce de R. Barondes, An Alternative Paradigm for Valuing Breach of Registration Rights and Loss of Liquidity, 39 U. RICH. L. REV. 627, 636-39 (2005). The general acceptance of so many different approaches for valuing stock options and other assets of fluctuating value weighs against our adopting a single, universal approach for all cases. Cf. Scully v. U.S. WATS, Inc., 238 F.3d 497, 512 (3d Cir.2001) ([G]iven the myriad factors that might arise in each case, we doubt that any single universal damage theory could properly value stock options in all situations.)., ¶ 27 One additional consideration cautions against adopting Daniel's categorical rule for valuation. Daniel advocates for our adoption of the New York rule, which measures damages by the highest value of the stock between the time the victim has notice of the conversion and a reasonable time thereafter. The rationale behind the reasonable time thereafter is to grant the conversion victim an interval of time in which she could theoretically reenter the market to purchase the stock that was converted and thus be returned to her preconversion position. Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136, 140 (2d Cir.1983). This rationale makes sense when dealing with assets that are readily replaceable on the market. But employment stock options, like those Daniel received from PACCAR, have no market and are irreplaceable. Thomas, supra, at 517 (explaining employment stock options do[] not have an ascertainable market value because [they are] unassignable); Scully, 238 F.3d at 508 (noting unlike other stock options, employee stock options are not publicly traded). Once converted, Teresa's stock options were gone forever, and Teresa could not even in theory have reentered the market to replace them. Adoption of the New York rule in the context of employee stock options would therefore make little sense because the rule's policy underpinnings are simply not present. [5] ¶ 28 Upholding the trial court's measure of damages in this case is consistent with the significant deference we accord trial courts in dissolution proceedings. In the context of valuing pensions, for example, we have developed a `Iumpsum' approach and a `pay as it comes' approach, In re Marriage of Wright, 147 Wash.2d 184, 190, 52 P.3d 512 (2002), which mirror approaches some courts use for valuing stock options. We have deferred to the equitable discretion of trial courts to use one approach over the other and have recognized that [f]lexibility [is] especially important in allocating the community interest in a retirement plan. Id. at 196, 52 P.3d 512; see also Wilder v. Wilder, 85 Wash.2d 364, 369, 534 P.2d 1355 (1975) (There can be no set rule for determining every [pension] case and as in all other cases of property distribution, the trial court must exercise a wise and sound discretion.). We are likewise hesitant to second-guess a trial court's equitable distribution of other assets that pose difficult valuation problems. See, e.g., In re Marriage of Hall, 103 Wash.2d 236, 242-43, 692 P.2d 175 (1984) (explaining that several accounting or appraisal methods may be used to value goodwill and that selection of any one method for all cases would unnecessarily limit the court in making a fair and just distribution). A similar notion of deference is evident from our reluctance to revisit a trial court's distribution of property when the court mischaracterizes assets as separate or community property but otherwise makes a just and equitable distribution. See Worthington v. Worthington, 73 Wash.2d 759, 768, 440 P.2d 478 (1968); In re Marriage of Zier, 136 Wash.App. 40, 46, 147 P.3d 624 (2006); see also In re Marriage of Pilant, 42 Wash.App. 173, 181, 709 P.2d 1241 (1985) (holding that erroneous valuation of pension was not reversible error where distribution was otherwise just and equitable). ¶ 29 The trial court granted to Teresa relief based on what it considered to be just and equitable under the circumstances of the case. Consistent with well-established tort law principles, the court sought to make Teresa whole by returning her to her preconversion position. The court did so by measuring Teresa's losses by the present value of her converted stock options, using a lump-sum or present-value approach to valuation. Because there are several possible methods for valuing converted stock options, we cannot conclude that the trial court erred as a matter of law by employing a tort measure of damages. We decline Daniel's invitation to adopt a single approach, particularly one that seems out of place in the context of employee stock options. [6] ¶ 30 As an alternative, Daniel argues that the court's calculation of damages was unduly speculative. The trial court based its calculation of damages on the Nelson declaration, which Teresa filed in support of her CR 60(b) motion. Daniel did not timely provide any expert testimony to contradict or otherwise challenge Nelson's calculation of damages. [7] Nor did Daniel provide any expert testimony regarding the calculation of damages when he filed his motion for reconsideration. It was not until the court called for further information on the correct present-value calculation that Daniel submitted an expert opinion challenging Nelson's calculations. The court properly struck that testimony as untimely. ¶ 31 Our reluctance to second-guess the trial court's equitable authority is even more pronounced when we are asked to dictate not only a method of valuation, but also the calculation of damages under that method. As the Court of Appeals correctly observed, the calculation of damages is a question of fact, Farmer, 152 Wash.App. 1054, 2009 WL 3584260, at  (citing Womack, 133 Wash.App. at 263, 135 P.3d 542), and Daniel has not established that the amount of damages awarded by the trial court is unsupported by the evidence. Rather, he merely reiterates the same argument he made to the trial court that the damages are speculative. We fail to see how the trial court speculated when it based its damages award on the evidence presented. [8] ¶ 32 Daniel's real concern, therefore, does not seem to focus on the court's supposed speculation, but rather on expert Nelson's allegedly speculative calculations. Unlike the dissent, we decline to critique Nelson's calculations on review. As noted above, experts have developed a variety of highly complex models for valuing stock options. This is an evolving science that is properly addressed through expert testimony. To the extent parties desire to scrutinize and critique different valuation models through dueling expert testimony, we think the trial court provides the appropriate forum. In this case, the trial court weighed the Nelson declaration against Daniel's own assertions and found that the Nelson declaration provided the more credible and accurate calculation. We hold that, on this record, the trial court properly exercised its discretion in calculating damages. [9]