November 22, 2011

Brett Turner, Senior Attorney, National Legal Research Group

A recent Virginia Supreme Court decision clarifies the law on classification of stock options.  In Schuman v. Schuman, Record No. 100967, 2011 WL 5325292 (Va. Nov. 4, 2011), the wife received stock options during the marriage.  The options did not vest until after the marriage was over.  The trial court held that the stock options were entirely the wife's separate property.  The court of appeals affirmed, holding that the options had not been acquired during the marriage, because they did not vest until after the marriage was over.  Schuman v. Schuman, Nos. 0631‑09‑4, 1259‑09‑4, and 1260‑09‑4, 2010 WL 1539955 (Va. Ct. App. Apr. 20, 2010) (unpublished).  The court's holding was consistent with prior authority, holding that stock options are acquired on the date of vesting.  Shiembob v. Shiembob, 55 Va. App. 234, 685 S.E.2d 192 (2009); Ranney v. Ranney, 45 Va. App. 17, 608 S.E.2d 485 (2005).

On further appeal, the Virginia Supreme Court reversed.  Virginia's equitable distribution statute provides that deferred compensation benefits, "whether vested or nonvested," can constitute marital property.  Va. Code Ann. § 20-107.3(G)(1).  If the court of appeals' position were correct, unvested options could never be marital property, because they would never vest until after the divorce.  "The inclusion of the phrase 'whether vested or nonvested' clearly indicates that the date of vesting is not, by itself, dispositive of whether the deferred compensation is marital or separate property."  Schuman, 2011 WL 5325292, at *2.

What, then, is the correct way to determine when stock options are acquired?  Section 20-107.3(G)(1) applies the same rules to both retirement benefits and deferred compensation benefits, such as stock options.  "[T]he legislature clearly intended for the delineated plans of compensation to be treated uniformly. Therefore, it is axiomatic that the marital share of deferred compensation should be calculated in the same manner as the marital share of pensions or other retirement benefits."  Id. at *3.

Virginia law is clear that retirement benefits are acquired when they are earned, not when they vest.  E.g., Dietz v. Dietz, 17 Va. App. 203, 436 S.E.2d 463 (1993).  Schuman applied the same rule to stock options.   "'[S]tock options, like retirement benefits, are acquired when they are earned, and not at the time of receipt, vesting or exercise.'"  Schuman, 2011 WL 5325292, at *2 (quoting 2 Brett R. Turner, Equitable Distribution of Property § 6:49, at 292 (3d ed. 2005)).  The marital interest is therefore a fraction, equal to the total time married during the earning period, divided by the total earning period.^[1]

The court did not determine the date of earning on the facts of Schuman, instead leaving that issue for the trial court on remand.  But Schuman adopted the general majority rule, so there is ample relevant authority from other states.

August 16, 2011

Brett Turner, Senior Attorney, National Legal Research Group

The divorce court orders, or the parties agree, that marital real estate be sold for a stated listing price.  The real estate market then crashes, and the stated listing price is much too high.  What options are available when the property fails to sell?

This fact pattern has arisen with some frequency in recent years, due to the subprime mortgage crisis, and the applicable general principles are starting to become settled.  To begin with, an order or agreement that sets a listing price is materially different from an order or agreement that sets a sale price.  A listing price is not an inflexible price at which a property absolutely must be sold but, rather, an initial asking price.  "[T]he initial asking price was exactly thatCa starting point, not a nonnegotiable or guaranteed sale price."  Townsend v. Townsend, 724 N.Y.S.2d 545, 546 (App. Div. 2001).  When no offer is received at the initial listing price, the normal practice when selling real estate is to reduce the listing price as needed until one or more offers are received. 

Thus, an order establishing the listing price does not prevent the court from reducing that price if the property fails to sell.  Likewise, an agreement on the listing price is not an agreement upon the sale price, and does not prevent the court from ordering sale at a reduced price if no offers materialize after the property has been offered at the listing price for a reasonable period of time.

Reduction in the listing price is generally preferred over other remedies.  In Brown v. Brown, 709 S.E.2d 679 (S.C. Ct. App. 2011), the property failed to sell at the agreed-upon initial listing price of $274,000.  The court then entered a money judgment against the wife for the husband's share of the property.  The order was reversed on appeal as an improper substantive modification of a final property division order.  In the alternative, the trial court also "set the home's [new] initial listing price at $255,550, and required the listing price to be reduced by five percent every sixty‑day period the home remained unsold."  Id. at 682.  This order was expressly affirmed as a reasonable exercise of the court's power to set a new listing price when the property fails to sell.  "Contrary to the wife's argument, establishing the terms of the sale is well within the family court's statutory authority."  Id. at 684.

Another example is Ryan v. Ryan, 946 N.E.2d 1191 (Ind. Ct. App. 2011).  There, after the property did not sell at the agreed-upon initial listing price, the trial court held that it was powerless to take action.  The appellate court reversed and ordered a reduction in the listing price.  "The Settlement Agreement and Private Agreement do not contain any terms or provisions which address circumstances such as those presented when the dollar amounts set forth in the agreements make it impossible, as a practical matter, to implement the intended sale of the properties due to a sustained decline in residential housing prices."  Id. at 1196.  The case was remanded with instructions to hold a hearing and then to "issue an order providing additional terms to the extent the Settlement Agreement and Private Agreement are silent, i.e., what steps would be taken to accomplish the intended sale of the properties under the circumstances."  Id. at 1200.  Such an order would probably have to include an appropriate reduction in the listing price.

May 10, 2011

Brett Turner, Senior Attorney, National Legal Research Group

A perennially recurring issue in divorce cases is dissipation of marital property.  Dissipation occurs when marital property is spent or otherwise lost, in anticipation of divorce, for a nonmarital purpose.

A nonmarital purpose is normally a purpose which benefits only one of the parties.  Expenditures within the accustomed marital standard of living are generally not dissipation, however, even if only one spouse benefits, as all married persons normally spend some marital property for their own sole benefit.  For example, each spouse will use marital funds to purchase clothing which only he or she wears.  A nonmarital purpose must therefore both (1) lie outside the normal marital standard of living, and (2) benefit only the spending spouse.  See generally 1 Brett R. Turner, Equitable Distribution of Property ' 6:107 (3d ed. 2005 & Supp. 2010).