Court Opinion

ID: 9534839
Source: CourtListenerOpinion
Date Created: 2023-08-07 04:43:05.87681+00
Date Added: 2024-06-11T13:32:46.536418
License: Public Domain

CHEZEM, Judge,
dissenting.
I respectfully dissent. The issue before us today is whether accrued but unmatured stock options are marital property for purposes of a divorcee settlement. Because this is a case of first impression in Indiana, I urge the Majority to consider the following: Sandra takes issue with the trial court's failure to include 12,500 of the 1990 stock options, 8,750 of the 1992 stock options, and 25,000 of the 1998 stock options in the marital pot. For several reasons, I do not agree that as a matter of law we should perpetuate the fiction that the options are not the property of both parties to the marriage. First, it is not disputed that Sandra participated in the marriage in such a way so as to make it possible in part for her husband to be placed in a situation wherein he could be compensated as an executive. I agree with our supreme court in that in many marriages the joint effort of both spouses are invested so that one of them may earn assets for the marriage as a whole. In re the Marriage of Adams (1989), Ind., 535 N.E.2d 124, 126, reh. denied (the asset earned was a pension asset). The stock options themselves, though unmatured, are a benefit earned by both parties in this marriage.
Second, the majority, in essence, treats the stock options identical to pension benefits. There is a significant difference between pension benefits and deferred compensation. The Incentive Stock Option Plan ("ISOP") offered by Biomet is pure deferred compensation. They are the golden handcuffs which tie Mr. Hann to the company. They are more akin to money in the bank than to pension assets. A pension benefit, on the other hand, is an employer-sponsored plan designed solely to provide for employee retirement needs. Historically, pensions have not been used as compensation or in lieu of compensation. Cf. Leisure v. Leisure (1993), Ind., 605 N.E.2d 755 (characterizing pension benefits as deferred compensation). Unlike ISOP's, most pension plans are subject to *572strict federal pension laws which determine their vesting schedules and forfeiture rules. Moreover, nonqualified but fully vested plan assets (Le., "nonqualified deferred compensation" or "457 plan assets") remain subject to forfeiture and are nevertheless routinely divided pursuant to qualified domestic relations orders. Internal Revenue Code § 457.
On the other hand, in today's corporate climate, many executives receive significant portions of their earnings through stock options. The options themselves, though may be "unvested" or unexercised, are the present compensation the executive receives in exchange for services. This is a typical executive compensation package. Had Mr. Hann not been eligible to participate in Biomet's ISOP, Sandra would have shared in his presumably higher income as each year passed. Rather, both she and Mr. Hann agreed to forego some annual income and be paid in stock options instead. In essence, Mr. Hann bargained marital income as consideration for the options, thus depriving the family of the present use of those funds. See Gnerlich v. Gnerlich (1989), Ind.App., 538 N.E.2d 285, 286, trans. denied. Although the plan document for the ISOP does not contain a provision which makes stock options consideration in exchange for a lesser salary, the reality of this type of plan is that the options are indeed a form of consideration in exchange for a lesser salary on the part of the plan participants.
Third, the general test in determining whether a pension asset is marital property is: (1) whether there is a present right to withdrawal, and (2) whether the asset would be forfeited upon the employee's termination from employment. ILC. 31-1-11.5-2(d). It should first be noted that this part of the statute applies specifically to pension benefits, which are not the same as ISOP benefits. But analogously, there is certainly a present right to own the stock options granted to Mr. Hann. This is similar to a right to withdrawal in a pension plan.
However, with an ISOP, the benefit is bifurcated. The option itself is an independent benefit which belongs to the plan participant. This benefit should be considered marital property. The underlying stock is not owned by the participant until the option is exercised. This does not mean that ownership ratios on the overlying option to purchase cannot be assigned in a divorcee property settlement. Mr. Hann, in receiving the option, received a tangible benefit. He was given a reason to remain with Biomet, a reason to forego a possible higher salary, and the security of knowing that his income was invested in a company whose outcome over which, as an executive, Mr. Hann had some degree of control.
There is also great doubt about whether Mr. Hanu's benefits under the ISOP would be forfeited upon his termination. The plan document in effect for all three options gives great deference to the committee: "§ 6(e) Time of Exercise. The Committee may, in its discretion, provide that an option granted under the Plan may not be exercised in whole or in part until the expiration of such period or periods of time as may be specified by the Committee." In other words, the committee has the ability to accelerate the options at any time, including prior to or at the same time as a termination. The 1998 Plan Document clarifies this discretionary power in the committee, adding,
[PJrovided, however, that any such limitation on the exercise of an option contained in an option agreement may be rescinded, modified, or waived by the Committee, in its sole discretion, at any time and from time to time after the date of grant of such option so as to accelerate the time in which the option may be exercised.
Additionally, all three of the Plan Documents contain § 6(F), the section dealing with expiration of the options upon termination of employment. That section purports to cause immediate exercise of unmatured but accrued options upon the termination of the employee-participant. However, that section is subordinate to section 6(e) because it is "subject to the provisions of paragraph 6(d) and paragraph 6(e)." The committee has the authority and discretion to trigger an immediate acceleration of the maturation schedule for accrued but unmatured options at any time. Clearly, there is no guarantee of forfeiture upon an employee's termination.
*573Once again, reality in the world of the ISOP is that unless the plan participant was terminated as a result of poor performance or misconduct, there most likely would not be a forfeiture of options. In fact, this provision is designed to protect plan participants in the event of a hostile takeover of the corporation. It allows for immediate acceleration of the options maturation schedule.
Fourth, stock options are "property" within the meaning of I.C. 31-1-11.5-2(d). That statute defines "property" as "all of the assets of either party or both parties." Id. The statute went on to specifically enumerate pensions. Some general rules of statutory construction are helpful. Where the term "including" is used in a statute, it implies that the list or items enumerated are nonexclusive and are merely examples. Caylor-Nickel v. Dept. of State Rev. (1991), Ind.App., 569 N.E.2d 765, 771-772, judgment aff'd by Indiana Dept. State Rev. v. Caylor-Nickel, P.C. (1992), Ind., 587 N.E.2d 1311. In Gnerlich, 538 N.E.2d 285, we held that disability payments were "property" subject to distribution upon dissolution. We examined the nature of different types of "property" in relation to I.C. 81-1-11.5-2(d) and held:
The value of William's disability pension is readily ascertainable and susceptible to division. Its nature is no more contingent or speculative than an ordinary retirement (longevity) pension-exeept for one contingency. The benefits depend on William's continued disability. However, because Faye was awarded a percentage of each payment, her interest expires with William's. This contingency does not make William's disability pension speculative or conjectural such that it may not be characterized as a marital asset under the rationale of the McNevin [v. McNevin (1983), Ind.App., 447 N.E.2d 611] supra and Murphy [v. Murphy (1987), Ind.App., 510 N.E.2d 285] supra, decisions.
Id. at 288 (distinguished from worker's compensation benefits in Leisure, 605 N.E.2d 755). Stock options, like disability payments, are marital property governed by the statute.
Assigning an ownership ratio to the options owned on the date the petition of dissolution is filed (or the date of the final dissolution hearing) may practically be accomplished similar to how pension assets are divided. The parties can certainly negotiate the terms of the agreement. For example, Sandra might agree to take a lump sum in lieu of her assigned ownership ratio. Valuation is not necessary because until the options mature their value is only the inherent value of the option itself. Or, the parties may wish to wait until the options have matured to divide their proceeds. In such case, Sandra would be entitled to her percentage of the options as they mature. They would be valued on their respective dates of maturity. Both parties, then, incur the risk of loss.
The plan participant would not be forced to exercise options not attributable to the spouse's portion. For example, Mr. Hann could exercise only the options attributable to Sandra's ratio amount upon the options' respective maturities. He would therefore not be forced to make an undesirable economic decision for himself in the event the stocks were not performing well at their respective dates of maturity. Nevertheless, the method of the property settlement would be determined in advance by the divorce decree.
Finally, it is useful to look to other jurisdictions and their treatment of accrued but unmatured stock options for purposes of dividing marital property. Many jurisdictions treat accrued but unmatured stock options as marital property subject to division upon dissolution. See, e.g., In re Marriage of Hug (1984), 154 Cal.App.3d 780, 201 Cal.Rptr. 676; Green v. Green (1985), 64 Md.App. 122, 494 A.2d 721; Smith v. Smith (1984), Mo.App., 682 S.W.2d 834; Callahan v. Callahan (1976), 142 N.J.Super. 325, 861 A.2d 561; In re Marriage of Moody (1983), 119 Ill.App.3d 1043, 75 Ill.Dec. 581, 457 N.E.2d 1028; In re Marriage of Isaacs (1994), 260 Ill.App.3d 423, 198 Ill.Dec. 169, 682 N.E.2d 228, appeal denied; Chen v. Chen (1987), 142 Wis.2d 7, 416 N.W.2d 661, review denied.
In a case decided by the Washington Court of Appeals, the trial court allocated unma-tured stock options. The court held that the accrued but unmatured stock options were to be considered marital property for division, if and when exercised. In re Short (1993), 71 *574Wash.App. 426, 859 P.2d 636 (affirmed in part and reversed in part, In re Short (1995), Wa.S.Ct., 125 Wa.2d 865, 890 P.2d 12). The court reasoned that an option to purchase was a bilateral contract. The employer was legally bound to honor the option agreement (absent termination). The employee's right of election was viewed as presumptively acquired for the marriage community. The separation and divorce of the parties had no bearing on the employer's legal obligation to honor the agreement.
The Washington Supreme Court thereafter modified the holding of the appeals court in Short when it delineated between stock options granted for present employment services and options granted for future employment services. In re Short, 125 Wa.2d 865, 890 P.2d 12. Nevertheless, the gravamen of "vesting" was not an issue in determining ownership rights upon marital dissolution. Rather, as I agree, the gravamen should be whether the options are present, albeit deferred compensation, or future compensation.
The appeals court in Short also noted that the tax laws are not "the tail that wags the dog." In other words, because tax laws allow for future recognition of current earnings, it does not follow that the stock options are not marital property for purposes of division pursuant to a dissolution. I would add that the income, when recognized for tax purposes, is ordinary income, just as if Mr. Hann would have been paid salary in lieu of his options. If the gain from options were anything other than compensation, it would seem to merit capital gain treatment under the tax laws.
It is for these reasons that I would reverse the trial court's grant of summary judgment and remand to the trial court for an assignment of ownership ratios on the stock options.