Equitable Distribution of Restricted Stock in a Divorce

M.G. v. S.M., 457 N.J. Super. 286 (App. Div. 2018).  As Judge Mawla stated in his opinion in this case today, “[i]ncreasingly, executive compensation has been achieved through means other than salary and retirement assets.”  Today’s opinion relates to one of those means: the award of stock options.  The specific issue was how such options are to be treated for purposes of equitable distribution when the options do not vest until a date after the divorce complaint, and where “post-complaint efforts were required in order for the stock to vest.”

Plaintiff had a job as “a principal consultant for a large multi-national corporation.”  Every August, beginning in 2003, he would receive a stock award from his employer.  The stock would not vest immediately, however, but only in annual tranches, so that stock was vesting on a rolling basis eight years after an award was made.  According to literature from the employer, vesting was dependent on the employee’s performance going forward.  The stock plan represented “a reward program …  because it provides an ownership stake in the company’s success for employees who contribute over the long term.”  Defendant did not challenge any of those facts.  Plaintiff’s testimony about the stock program was consistent with the idea that vesting depended on his future performance.

Plaintiff filed for divorce on July 28, 2014.  At that point, plaintiff had been given eight stock awards, of which only three had fully vested.  The others were to vest after the date of the complaint, beginning on August 31, 2014.

Defendant sought equitable distribution of all the stock awards.  Plaintiff conceded that defendant was entitled to equitable distribution of stock awards that had fully vested as of the date of his complaint.  After a trial, the Family Part ruled that all the stock awards were subject to equitable distribution.  The judge stated that the August 2014 award and all the preceding awards were the result of plaintiff’s efforts expended during the marriage and were equitably distributable under Pascale v. Pascale, 140 N.J. 583 (1995).

Plaintiff appealed, and the Appellate Division reversed and remanded on this issue.  Judge Mawla expounded in detail on the standard of review, which is normally very deferential to the Family Part, based on its expertise and its opportunity to observe witnesses.  Here, however, the Family Part misperceived the facts, its ruling went against its own findings that plaintiff’s testimony was credible and defendant’s was not, and Pascale, which involved different facts, did not apply.

As summarized above, it was factually incorrect for the Family Part to have found that the 2014 stock award (or any of the others) were premised on plaintiff’s efforts during the marriage.  In fact, vesting of what the employer described as a “reward program” depended on plaintiff’s maintaining “sustained individual excellence” in the future, after the date of the divorce complaint.  The Family Part’s contrary finding contravened its conclusion that plaintiff’s testimony was credible.  And Judge Mawla found Pascale inapplicable because, unlike in that case, “the analytical framework is not when the stock was received, but rather, the efforts required for it to vest.”

Plaintiff offered several different bases for what Judge Mawla called “the mechanics of distribution.”  The panel rejected two of those alternatives: a “coverture fraction analysis” and consideration of “the momentum of the marriage.”  But Judge Mawla found persuasive, with some modifications, a decision from the Supreme Judicial Court of Massachusetts, Baccanti v. Morton, 752 N.E.2d 718 (Mass. 2001).   After discussing and quoting that case at length, Judge Mawla adopted the following test:

“(1) Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution; (2) Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it tio is subject to equitable distribution; and (3) Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, in whole or in part, is for future performance.  The party seeking to exclude such assets from equitable distribution on such ground bears the burden to prove the stock award was made for services performed outside the marriage.”

Judge Mawla strongly indicated that, on the record here, plaintiff should prevail.  But since “there was little guidance for the trial judge” prior to today’s opinion, the panel remanded the case for further proceedings.