Couple Still Fighting Over House Ten Years After Divorce

This small building stands next to the church ...

People getting a divorce generally do not make good business partners.  One Oklahoma couple learned this the hard way.  After trying to maximize the return on their marital residence, they ended up back in court ten years later.

The Original Plan
When the couple divorced in 1995, they entered into a settlement agreement which placed the marital residence  in a Trust “established for the purpose of holding title to and selling same.”  Their stated goal was to get the highest and best price for the house.  The trust provided that wife would continue to live in the house.  Neither the trust nor the settlement agreement were incorporated into the decree dissolving the marriage.

The Plot Thickens

Ten years pass without an offer on the house.  The wife still lives there, and is renting rooms to tenants.  Husband files suit asking the court to remove wife as trustee, and appoint a receiver for the house.  After a contested hearing, the trial court first took control of the trust and ordered the parties to cooperate in selling the house.  After 10 months passed without a sale, or even a listing agreement, the trial court appointed a receiver to take control of the property.  Wife appealed, and the Oklahoma Court of Civil Appeals affirmed the appointment of a receiver.

The Lesson Learned
Despite the best laid plans of the couple, they failed to maximize their investment in the marital residence.  The take-away from this couple’s misfortune – do your best to sever all financial ties to your former spouse in the divorce documents.  Lingering financial connections leave opportunity for continuing discord, and abuse of fiduciary relations.

by David Tracy


Dividing Stock Options In A Divorce – Part III

In Part I of this topic, I discussed how stock options are characterized as marital or separate property.  Part II of this topic addressed the valuation and distribution of stock options in divorce actions.  This last in the series, Part III, discusses the information needed to divide stock options in divorce.

Each case involving stock options is fact specific.  The employee spouse who holds the options must share information with the non-employee spouse.  The parties should exchange the following general information to properly characterize, value and divide stock options.

•    The employer stock option plan
•    Any Summary Plan Description
•    All documents actually granting an option to the employee
•    All documents describing why the employer grants the options
•    Any benefit statements describing outstanding options
•    Any reference in the Employee Manual to any stock option program
•    Any documents amending an option plan or an option grant

This is a good starting point for locating the information you need.  Request more information if you are not sure of the following:

•    The number of shares granted to the employee for each option
•    The purpose of the grant
•    The grant date
•    The vesting date
•    Any preconditions before vesting occurs
•    The date of exercise of any grants
•    The expiration date
•    The strike price (the price at which the employee may buy the shares)
•    The tax treatment of any award (ordinary income or capital gains), and how the tax will be paid
•    Any amendments to the option plan, or any options granted
•    Whether the options are transferable (not likely, but you might get lucky)

by David A. Tracy

“For Better Or Worse” Includes Accepting the Baggage of Your Spouse’s Obligations to a Prior Family

Suppose you married someone who owes child support from a prior marriage. The support checks to the prior family go out each month, drawn on an account containing funds earned during your marriage.  Then the second relationship sours.  Can you recover an equitable share of marital funds used by your spouse to pay a pre-existing support obligation?  The Oklahoma Court of Civil Appeals says you cannot.

The Husband in Pounders v Pounders used marital monies to pay child support and other expenses for the children of his previous marriage. Wife knew of the payments and wrote the checks for some of them.  In the subsequent divorce action, Wife asked the court to compensate her for the joint funds used to pay Husband’s support obligation to his prior family. The trial judge awarded Wife more than $20,000 in “restitutionary alimony.”   Husband appealed.

Wife argued to the lower court that his use of marital money to pay a separate obligation unjustly enriched Husband.  She asked the court to apply the logic used in cases by Oklahoma women who helped their husbands through medical school, only to find themselves in divorce court shortly after graduation.  The Oklahoma Court of Civil Appeals held the cases involving professional degrees are limited to their facts.  Ms. Pounders knew her husband had ongoing obligations to his prior family when she married him. She knew the obligations would be part of her marriage to him.  Her consent during marriage prevents her from recovering when the marriage ends.

The Pounders case addresses only court-ordered obligations.  It does not address premarital debt such as student loans or credit card debt one spouse may bring into the marriage. Whether the holding of this case would extend from court-ordered obligations to general debt, or obligations not disclosed before marriage, must be decided in a future case.

by David Tracy

Dividing Stock Options In A Divorce – Part II

In Part I of this topic, I discussed the characterization of stock options as marital or separate property.  After determining the marital and separate property component of each stock option, the next step is to value and divide the option. The following Part II of this topic addresses the valuation and distribution of stock options in divorce actions.

The primary method of dividing stock options in divorce is to defer distribution until the employee exercises the option.  The proceeds, net of taxes to the employee, are divided according to a set percentage established in the decree.  The stock price on the date of exercise sets the value of the option.  This is called the deferred distribution, or “as, if and when” approach to valuation and division.

A second approach is to establish a present value for the options and award them all to the employee spouse.  The other spouse receives different assets of comparable value.  This is called the “immediate offset” approach.  The problem with this approach is the number of assumptions one must make to assign a present value to a contingent asset.

One present value option simply compares the strike price and the market value of the stock on the date of valuation.  The difference between strike price and market value is called the “intrinsic value.”  Using intrinsic value deprives the non-employee spouse of the right to benefit from the anticipated rise in stock price before the employee exercises the option.  The employee spouse receives no discount for lack of transferability of the option, the risk that the option will never be exercised, or that the price of the stock might go down.

The Statement of Financial Accounting Standards adopts the Black-Sholes Option Pricing Model to value stock options.  This is a complicated formula requiring expert analysis and testimony.  Accountants use this method to estimate stock option values on company financial statements.  The SEC and IRS also make limited use of the Black-Sholes method for disclosure statements, and gift and estate tax valuations.  The formula requires use of assumptions and hypotheticals, however, and has been rejected by some courts as too speculative.

In an ideal world, employees would be allowed to divide stock options in divorce like retirement accounts.  A spouse could receive options on a certain number of shares as an alternate participant in the plan.  If the conditions for vesting and exercise are met by the employee, the alternate participant could directly exercise the option.  In the real world, stock option plans rarely, if ever, allow direct assignment of a stock option to a spouse.  I have never seen it.  Employers naturally want discounted stock to remain with the employee, even if the assignment remains in the family unit.  Stock options carry tax consequences that could be manipulated in divorce situations.  This detracts from the original purpose the employer intends in granting the option.

Part III of this topic will discuss the information the parties should exchange in a divorce to develop a plan to characterize, value and divide stock options.

by David A. Tracy

Dividing Stock Options In A Divorce – Part 1

An employee stock option gives an employee the right to buy a specified number of shares of stock in the employer-corporation at a specified price (strike price) at a specified future time.  The goal is to give the employee an incentive for the stock price to go up, making the stock option more valuable.  Companies generally grant stock options to reward years of service, or to induce an employee to remain with the company.  Options change in value with the stock price.  They are not generally assignable.  For all of these reasons, stock options are difficult to characterize, value and divide as spouses go their separate ways.

In this first of a two-part discussion of stock options, I explore the issue of characterization of stock options as marital or separate property.

Characterization – Marital property in Oklahoma is property acquired by the parties during marriage through joint industry.  Spouses contribute to joint industry in various ways, including maintaining the marital home, caring for children, sacrificing a career to further the career of a spouse, as well as earning income through employment.  Stock options granted during marriage are considered marital property in Oklahoma.  See Duty v. Duty.  Stock options granted after a decree of divorce are the separate property of the employee spouse in Oklahoma.  See Ettinger v. Ettinger.

It is possible that stock options granted during marriage are partly marital and partly separate property.  There are several relevant dates to consider in analyzing stock options.

  • Grant date – the date an employer awards a stock option to an employee
  • Vesting date – the date an employee can exercise a stock option
  • Expiration date – the date a vested stock option expires if not exercised by the employee

A divorce can occur at any point along this time line and affect the characterization of the stock option as partly marital and partly separate property.  Consider options granted during marriage, but which vest after joint industry ends. What if the options are granted before marriage and vest during marriage?

Stock options granted but not yet vested are contingent assets.  Their value will be realized in the future.  Taking a cue from how courts treat retirement accounts in divorce, these contingent assets are still considered marital property, even though they require continued employment, or expire on the occurrence or non-occurrence of some future event.

The reason a company grants a stock option can also affect its characterization in divorce.  One must always determine why a company grants a stock option.  Is it a reward for past service?  Is it an incentive to remain with the company?  Is it a bonus or a form of deferred compensation? Each case is fact specific.

Parties and courts must fashion a time rule in each case to equitably allocate the marital or separate property components of each stock option award.  The time rule is a ratio, or fraction,  based on the number of months between various dates such as the date of marriage, date of employment, date the option is granted, date joint industry terminates, vesting date, and exercise date.  It is interesting to note that in the Duty case, the Oklahoma Court of Civil Appeals affirmed an award to the wife of one-third of husband’s stock options.  Neither the trial court or appellate court explained how it arrived at the one-third figure, except to note that the husband had to continue to work after the marriage to make the options vest.

In part two of this topic, I will explore the valuation and division of stock options in an Oklahoma divorce.

by David Tracy

Value of “Goodwill” Excluded in Law Practice Divorce Valuation

How do you value a small business when one of the partners is getting a divorce?  A shareholder agreement carried the day to reduce the value of a law practice in a court opinion released this week.  The Oklahoma Court of Civil Appeals in Kingery v. Kingery excluded goodwill as an asset to be divided, even though the husband had paid for goodwill when buying into the business.

The husband, attorney K, bought an interest in the WAK&H law firm.  The seller, founding member attorney W, included $200,000 in “practice acquisition” in the sale value.  During the divorce proceedings, the valuation experts hired by both husband and wife considered the “practice acquisition” to represent goodwill value of an existing business.  Husband’s expert witness valued attorney K’s interest in the law firm at either $96,818 or $133,486, depending on whether good will value was included.  Wife’s expert witness agreed with the higher number.  That is the value the trial court adopted.

The Court of Civil Appeals disagreed.  Husband and his partners had a Shareholders’ Agreement.  That agreement included a formula for valuing shares of the corporation.  That formula did not include goodwill value. Husband could only sell his shares to the corporation.  The court assigned a lower value to husband’s interest in the law firm, $98,818, based on the valuation formula of the Shareholders’ Agreement.

The valuation adopted by the appellate court appears to be an adjusted book value.  This type of valuation considers hard assets, such as furnishings, fixtures, and equipment, cash on hand and accounts receivable.  The court noted that husband could only recoup or realize his share of the law firm’s goodwill by continuing to render professional services.  The personal nature of goodwill, coupled with the Shareholders’ Agreement, caused the court on appeal to decide against including goodwill value as part of this marital estate.

The court did not assign a value to more than 400 open contingent fee cases in valuing husband’s law firm.  This is consistent with existing case law.

The appellate court did affirm that salary and bonus paid immediately after the couple separated should be included in the marital estate.  The income represented payment for services rendered while the couple was still a couple.  The appellate court did send this issue back to the trial court to consider further the issue of taxes due on the bonus, and whether the bonus payment should affect the value placed on the business.  In other words, did the salary and bonus payments get counted twice, and does it matter?