The Lawletter Vol 37 No 12
When settling a divorce case, a spouse will sometimes desire ownership of a large asset such as a home or business. It may be uncertain, however, whether the spouse can afford to purchase the other party's interest. In that situation, one useful device for making the division work is to give the spouse an option to buy the asset.
An option gives the spouse a period of time to arrange financing or another source of funding for making the purchase. If the option is not exercised, the asset can be sold on the open market. Some cases even give both parties sequential options to purchase, with the asset not sold unless neither option is exercised. See generally 3 Brett R. Turner, Equitable Distribution of Property § 9:15 (3d ed. 2005).
In setting up an option, however, it is important to avoid undue delay of the divorce case. In Cox v. Floreske, 288 P.3d 1289 (Alaska 2012), the parties had been married for 28 years. They had a large marital estate, worth approximately $3 million, but it was highly illiquid, consisting mainly of businesses and real estate that could not easily be sold. Moreover, only the husband had the skill and ability to operate most of the businesses.
While both parties wanted ownership of the real estate, it was obviously necessary to divide the real estate between them. To maximize each party's ability to obtain the real estate that he or she wanted, however, the trial court created an unusual option scheme. Each party was awarded an option to purchase any marital real estate that the other sold on the open market, by matching the purchase price within 15 days of when an offer to buy was tendered.
Some time after the divorce, the wife realized that the option did not have a termination date. On the face of the divorce decree, the option could be invoked years or even decades after the divorce. She then moved to set aside the option provision, relying mainly upon Alaska Rule of Civil Procedure 60, which allows the court to reopen a judgment when "it is no longer equitable that the judgment should have prospective application." Alaska R. Civ. P. 60(b)(5). The trial court clarified that the option did not survive the death of the parties, but otherwise reaffirmed that the option lasted for the owning spouse's lifetime.
On appeal, the Alaska Supreme Court reversed. "The opportunity to buy property should the ex-spouse desire to sell it must be weighed against the strong policy we have expressed 'to disentangle fully interspousal affairs upon dissolution.'" 288 P.3d at 1294 (quoting Musgrove v. Musgrove, 821 P.2d 1366, 1370 n.7 (Alaska 1991)). An indefinite option could potentially burden the courts with substantial future marital litigation. Moreover, since most of the real estate was awarded to the wife, the effect of the option was to give the husband "some degree of continuing control over [the wife] for so long as she owns her properties." Id. at 1293. "[N]ot only is this a potential source of friction, it is inconsistent with the superior court's goal to disentangle the parties." Id.at 1293-94. The trial court therefore erred by failing to reopen the decree and vacate the option.
It is important to remember that the option was vacated only prospectively. The parties operated under the option successfully for more than a year, and the court did not invalidate any past transactions. The problem was therefore not that the option was granted but, rather, that it lasted too long, resulting in undue entanglement of the parties' financial affairs and an undue risk of future litigation. Options are a useful device, but they should last for no longer than is absolutely necessary to ensure an equitable division of the marital estate.