Court Opinion

ID: 4685774
Source: CourtListenerOpinion
Date Created: 2021-05-11 18:05:22.774691+00
Date Added: 2024-06-11T08:04:30.292847
License: Public Domain

Filed 5/11/21
                          CERTIFIED FOR PUBLICATION

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                             SIXTH APPELLATE DISTRICT

 In re the Marriage of NICOLAS and LISA            H045089
 KELPE.                                           (Santa Clara County
                                                   Super. Ct. No. 2012-1-FL-161459)

 LISA KELPE,

          Appellant,

          v.

 NICOLAS CHARLES KELPE,

          Respondent.

        In this dissolution proceeding, we address the characterization of a lump-sum cash
payment respondent received from a retirement plan upon leaving his employment with
an accounting firm after a marital dissolution. As we will explain, we conclude the
payment was not an enhanced community benefit derived from the retirement benefits
respondent accrued during the marriage. Rather, the payment was an additional benefit
respondent acquired when he became a partner in the firm, which occurred after the
parties’ date of separation. We will therefore affirm the trial court’s order characterizing
the payment as respondent’s separate property.
                                   I. BACKGROUND
        Lisa and Nicolas Kelpe married in 1997 and separated in 2010. The marriage was
dissolved in 2013. Respondent was employed as a senior manager with Ernst & Young
LLP throughout the marriage before separation. As a non-partner employee, he accrued
benefits under a qualified defined benefit retirement plan and a 401(k) plan. In mid-
2012, Ernst & Young offered him an equity partnership in the firm. As a condition of
becoming a partner, respondent made a $150,000 capital contribution to the partnership
from his post-separation property. He executed the partnership agreement and became an
equity partner effective January 1, 2012. As a partner-owner of the firm, respondent
received profit distributions instead of a salary.
       The partnership agreement offered two deferred compensation retirement plans
that were not available to respondent when he was a non-partner employee: the HR-10
Plan and the Top-Hat Plan. Benefits payable under the Top-Hat Plan are based on a
formula that factors the average of the three highest fiscal years of partnership earnings
and the partner’s total years of service. To vest in the Top-Hat Plan, the partner must be
at least 58 years old and meet the “Rule of 75” (minimum age of 50 plus total years of
service equals 75) or the “Rule of 65” (minimum age of 50 plus service years as a
principal/partner equals 65). Partners who separate from the firm before vesting in the
Top-Hat Plan are eligible for a lump sum buyout of their interest in the plan, provided
they have either 20 years of total service, or 10 years of service as a partner.
       Respondent suffered a heart attack in 2014. In October 2015, Ernst & Young
requested that he withdraw as a partner, and he resigned from the firm effective
December 2015, before vesting in the Top-Hat Plan. Based on 20 years of service with
the firm, 13 of which were during the marriage, respondent received under the Top-Hat
Plan a single lump-sum payment reflecting “the actuarial equivalent present value of
monthly payments that would otherwise be expected to be paid upon retirement, reduced
by the monthly accrued benefit to which [he] is entitled under [the defined benefit
retirement plan] and Ernst & Young’s H.R. 10 Plan.” The benefit was calculated at
$928,243.
       The trial court ruled that the lump-sum payment was respondent’s separate
property. Relying on In re Marriage of Brown (1976) 15 Cal.3d 838 (Brown) and In re
Marriage of Frahm (1996) 45 Cal.App.4th 536 (Frahm), the trial court rejected the
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argument that respondent’s right to receive the benefit accrued during the marriage by
virtue of the years of service needed to qualify for the payout, even though he was not a
partner and therefore not eligible for the benefit during the marriage. The trial court
rejected the notion that respondent’s partnership rights accrued during the marriage
because of an expectation of advancing to partnership during that time. The court also
found respondent was not equitably estopped from claiming the Top-Hat payout as
separate property despite a letter from his attorney to the parties’ joint expert expressing
willingness to treat the asset as having a community component in order to reduce his tax
liability and potentially his spousal support obligation.
                                     II. DISCUSSION
       Appellant argues that the Top Hat payout is community property under the time
rule applied in In re Marriage of Gowan (1997) 54 Cal.App.4th 80 (Gowan), and that the
trial court should not have relied on Frahm to conclude otherwise. We review de novo
this predominantly legal question of property characterization. (In re Marriage of
Lehman (1998) 18 Cal.4th 169 (Lehman).)
   A. CONTROLLING AUTHORITIES
       Addressing the division of nonvested pension rights in a marital dissolution, the
California Supreme in Brown explained that pension benefits are a form of deferred
compensation for services rendered, and an employee’s right to receive such benefits “is
a contractual right, derived from the terms of the employment contract.” (Brown, supra,
15 Cal.3d at pp. 841, 845.) Whether or not vested, pension rights represent a property
interest, and are acquired by the employee when he or she “enters upon the performance
of [the] employment contract.” (Id. at pp. 842, 845.) To the extent pension benefits
derive from employment during marriage before separation, they are a community asset
subject to division in a dissolution proceeding. (Ibid.)
       In Lehman, the Supreme Court addressed the characterization of a post-dissolution
early retirement incentive which enhanced a defined benefit retirement plan under which
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the employee spouse had accrued benefits both during and after marriage. (Lehman,
supra, 18 Cal.4th at pp. 174–175.) Several years after the marriage dissolved, the
employee spouse accepted an early retirement incentive which added three putative years
of service under the plan and waived an early-retirement penalty. (Id. at p. 175.) The
Lehman court rejected the employee spouse’s argument that the community did not have
an interest in the “retirement benefit[] as enhanced through a postseparation ‘contract’
between the employee spouse and the employer independent of any right to [the]
retirement benefit[] that accrued, in some part, during marriage before separation.” It
likened the enhancement to consideration given for immediate retirement. (Id. at p. 185.)
The Lehman court explained that the actual amount realized from a community
retirement asset may be affected by post-separation events or conditions, including
changes in the retirement-benefit formula as well as the basis on which the formula
operates, such as the employee’s age, years of service, and final salary. (Id. at p. 178.)
The retirement incentive in Lehman was not a severance payment or tantamount to one,
but “derivative of the right to retirement benefits that accrued, in some part, during
marriage before separation.” (Id. at pp. 185–186.) It was no different than a benefit
enhanced through additional years of service, an increase in earnings, or an increase in
age. (Id. at p. 185.) “By its very terms, it results from ‘improvements to the retirement
benefit formula’ under [the employer’s] existing defined benefit retirement plan, not from
a new plan altogether.” (Id. at p. 186.)
       The Lehman court found no abuse of discretion in the trial court’s application of
the time rule to apportion the pension benefits between the community and the employee
spouse’s separate property interests. (Lehman, supra, 18 Cal.4th at p. 187.) Use of the
time rule, which calculates the relative interest of the community as the ratio of the
employee spouse’s length of service during marriage before separation to the employee
spouse’s total length of service, is not unreasonable where the “ ‘amount of the retirement
benefits is substantially related to the number of years of service.’ ” (Ibid.)
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       In Frahm, decided two years before Lehman, an interlocutory dissolution
judgment awarded the nonemployee spouse half of the community’s interest in the
employee spouse’s retirement benefit accrued during marriage. (Frahm, supra,
45 Cal.App.4th at pp. 537–538.) After several years of continued service, the employee
spouse accepted a voluntary severance cash incentive and retired early. (Id. at p. 538)
The appellate court rejected a “past services or future compensation test” other courts had
used to determine the character of the cash benefit because that test was inconsistent with
the principles set forth in Brown, which we have already discussed. (Id. at p. 543.) The
Brown court made clear that “[a]n employment benefit … is community property to the
extent a right to it accrues during marriage.” (Id. at p. 544.) The severance payment in
Frahm was not a right that accrued during marriage; it was not “ancillary to … those
employment rights which were earned during marriage” but was additional to those
rights. (Ibid.) The Frahm court noted that although the amount of the payment was
“somewhat dependent on the length of employment, the right to receive it was not,” and
for that reason the relationship between the incentive payment and the employee’s years
of service was irrelevant. (Id. at pp. 544–545, & fn. 2.) The non-employee “received her
community property interest in the employment benefits which accrued during and
derived from the time of marriage.” (Id. at p. 545.) The Supreme Court approved of the
analysis in Frahm because it “cleave[d] closely to Brown.” (Lehman, supra, 18 Cal.4th
at p. 183.)
       The marriage in Gowan was dissolved after the employee spouse left a company
where he had worked for several years. (Gowan, supra, 54 Cal.App.4th at p. 84.) The
dissolution judgment characterized the employee spouse’s retirement benefits as
community property, and the trial court retained jurisdiction “over the subject matter.”
(Ibid.) The employee spouse rejoined the company several years after the marriage
ended and worked for an additional five years before retiring. (Ibid.) The Gowan court
rejected the employee spouse’s arguments that both the dissolution judgment and the
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parties’ underlying stipulation limited the trial court’s retained jurisdiction to the
retirement benefits as they existed at the time of dissolution. (Id. at pp. 86–88.) The
appellate court rejected the employee spouse’s factual argument against applying the time
rule to the combined pension—that the reinstated service credits were specially
negotiated as part of his second employment contract and unrelated to his earlier
service—finding substantial evidence that the employee spouse’s pension was based on
both periods of credited service. (Id. at p. 89.) The Gowan court also rejected the
argument that the time rule did not apply where there is a break in service. “The rationale
for the time rule applies wherever the total number of years served by the employee
spouse (continuous or otherwise) is a substantial factor in computing the retirement
benefits.” (Id. at p. 90.)
   B. THE TOP-HAT PLAN PAYMENT IS RESPONDENT’S SEPARATE PROPERTY
       This appeal is governed by the seminal rule in Brown that an employee’s right to
receive retirement benefits “is a contractual right, derived from the terms of the
employment contract” and the employee spouse acquires the right when embarking upon
the contract. (Brown, supra, 15 Cal.3d at p. 845.) The rule was applied in Lehman to
recognize the community interest in an early retirement incentive “result[ing] from
‘improvements to the retirement benefit formula’ under [the employer’s] existing defined
benefit retirement plan.” (Lehman, supra, 18 Cal.4th at p. 186.) And it was applied by
the Frahm court to characterize as the employee spouse’s separate property a severance
payment unrelated to the retirement benefits acquired and accrued during marriage.
(Frahm, supra, 45 Cal.App.4th at p. 544.) It is undisputed that respondent acquired a
property interest in the Top-Hat Plan as part of and upon the commencement of his
partnership agreement in 2012, after he and appellant had separated. Respondent was not
eligible for the Top-Hat Plan until his post-separation entry into the partnership, so there
is no way the community could have acquired or accrued an interest in the plan. As a
distinct and separate benefit available only to partners, the Top-Hat Plan was in addition
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to and not derivative of the retirement benefits available to respondent while a non-
partner employee. The Top-Hat Plan may have “enhanced” respondent’s overall
retirement portfolio, but it was a stand-alone contractual benefit.
       We reject the argument that respondent’s right to receive the Top-Hat partnership
benefit accrued during the marriage because he “needed to count the 13 years of
community service to qualify for any benefits under the plan.” The trial court correctly
concluded that even where a benefit is dependent in part on total years of service accrued
during marriage, if the contractual right to the benefit is not acquired until after
separation, the benefit is separate property. (See Frahm, supra, 45 Cal.App.4th at
pp. 544–545.) Appellant argues that Frahm is distinguishable because that case involved
a cash incentive payment offered by the employer in order to reduce its workforce in
response to changing business conditions. But the Supreme Court has made clear that an
employer’s motive for offering a severance incentive is not relevant to the asset’s
characterization as community versus separate property (Lehman, supra, 18 Cal.4th at
p. 180), even when a severance payment is characterized as a beneficent act on the part of
the employer. (Id. at p. 182, fn. 6.) What is crucial according to Frahm is that the right
to the payment accrued by contract at the time the incentive was offered, and not during
the time when the employee spouse acquired and accrued retirement benefits.
       The time rule appellant relies on is not used “ ‘[to] determine the character of [a]
benefit’ ” as community or separate property. (Lehman, supra, 18 Cal.4th at pp. 182–
183.) The Supreme Court has made clear that the time rule is employed to apportion
retirement benefits between the community and the employee spouse when the benefits
are earned both during and after marriage. (Id. at p. 187; accord Gowan, supra,
54 Cal.App.4th at p. 88.) The time rule does not apply here because the Top-Hat benefit
is entirely respondent’s separate property, having accrued in 2012 after the parties had
separated.

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       Gowan is not dispositive of this appeal. That case addressed a single pension plan
with service credits drawn from two employment periods. (Gowan, supra,
54 Cal.App.4th at p. 89.) In contrast, the Top-Hat Plan did not reinstate service credits in
a unitary pension. It involved a separate retirement benefit accrued by respondent under
his post-separation partnership agreement. Appellant’s other authorities are also
distinguishable. In re Marriage of Gram (1994) 25 Cal.App.4th 859, 866–867, and In re
Marriage of Davis (2004) 120 Cal.App.4th 1007, 1015–1017, involved enhancements to
existing retirement plans. The Supreme Court emphasized in Lehman that the
determinative factor in Gram was that the employee spouse accrued the right to the
benefits during marriage. (Lehman, supra, 18 Cal.4th at p. 183.) And In re Marriage of
Worth (1987) 195 Cal.App.3d 768 did not involve a retirement benefit, but addressed a
former spouse’s entitlement to the proceeds from a copyright infringement lawsuit based
on books written and published by the other spouse during the marriage, whose royalties
were community property. (Id. at pp. 771–773.)
                                   III. DISPOSITION
       The May 2, 2017 order characterizing the Top-Hat Plan payment as respondent’s
separate property is affirmed. Respondent shall recover his costs on appeal.

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                               ____________________________________
                               Grover, J.

WE CONCUR:

____________________________
Elia, Acting P. J.

____________________________
Danner, J.

H045089 - Kelpe v Kelpe

                                 9
Trial Court:                           Santa Clara County Superior Court
                                       Superior Court Case No. 2012-1-FL-161459

Trial Judge:                           Hon. Cynthia C. Lie

Counsel for Plaintiff/Appellant Lisa   Rebekah A. Frye
Kelpe:                                  Law Offices of Rebekah A. Frye

                                       Gregory R. Ellis
                                        Law Offices of Gregory R. Ellis
Counsel for Defendant/Respondent:      Robert A. Roth
                                       Kelly Ann Woodruff
                                        California Appellate Law Group

H045089 - Kelpe v. Kelpe