Brebaugh v. Deane, 1 CA-CV 04-0237.

• Court: Supreme Court of Arizona
• Citation: 211 Ariz. 95,118 P.3d 43
• Docket Number: No. 1 CA-CV 04-0237.,1 CA-CV 04-0237.
• Parties: In re the Marriage of: William J. BREBAUGH, Petitioner-Appellant, v. Nancy L. (Brebaugh) DEANE, Respondent-Appellee.
• Decision Date: 23 August 2005

118 P.3d 43 211 Ariz. 95 In re the Marriage of: William J. BREBAUGH, Petitioner-Appellant,
v.
Nancy L. (Brebaugh) DEANE, Respondent-Appellee. No. 1 CA-CV 04-0237. Court of Appeals of Arizona, Division 1, Department B. August 23, 2005.

Page 44

Raymond, Greer & Sassman, P.C., Phoenix, By Leonard D. Greer, J. Douglas McVay, Phoenix, for Petitioner-Appellant.

Page 45

Fromm Smith & Gadow, P.C., Phoenix, By Stephen R. Smith, Sandra J. Fromm, for Respondent-Appellee.

OPINION

PORTLEY, J.

¶ 1 We examine whether stock options that had not vested before the petition for dissolution was served can be divided as community property. Because we find that the trial court needs to determine whether the unvested stock options were compensation for past performance, incentives for future performance or some combination of both, we reverse that portion of the decree of dissolution and remand the matter to the trial court.¹

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 William J. Brebaugh ("Husband") and Nancy L. Deane ("Wife") were divorced after thirty years of marriage. Husband is the vice president of enrollment at Apollo Group, Inc./University of Phoenix ("Apollo"). Wife teaches art in the Scottsdale School District. The parties were unable to resolve whether Husband's unvested stock options were community property. After their trial, the court determined the unvested stock options were community property and awarded Wife one-half of those options. Husband appealed and we have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") section 12-2101(B) (2003).

DISCUSSION

¶ 3 Husband received blocks of stock options from his employer during the marriage. The parties agreed that stock options that had vested prior to the date the petition was served were community property. They also agreed that stock options he received after service were his separate property. They could not agree, however, whether the options he received during the marriage but could not be exercised until after service of the petition were community or separate property.

¶ 4 The trial court, after consideration of testimony, memoranda and proposed findings of fact and conclusions of law, noted that the issue was how any community interest in the unvested options should be determined. After noting that Arizona has not examined the issue, the trial court examined the "time rule" outlined in In re Marriage of Hug, 154 Cal.App.3d 780, 201 Cal.Rptr. 676 (1984), and rejected Husband's claim that the unvested options were intended as incentive for his future employment. It determined that Husband had failed to demonstrate by clear and convincing evidence that the options that had not vested before service of process were his sole and separate property.

¶ 5 On appeal, Husband contends that we should allocate the community and separate property interests in unvested stock options using a formula that favors the future efforts of the employee-spouse. See generally In re Marriage of Nelson, 177 Cal.App.3d 150, 222 Cal.Rptr. 790 (1986). Wife contends that there was insufficient evidence to suggest that the options were granted for Husband's future efforts. She argues that the options were compensation for work during the marriage and, therefore, are entirely community property. In the alternative, she contends that a time rule that emphasizes the employee's past efforts is the appropriate formula in this case. See generally Hug, 154 Cal.App.3d 780, 201 Cal.Rptr. 676. Because the issue is a question of law, we review it de novo. Brink Elec. Constr. Co. v. Ariz. Dep't of Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App.1995).

¶ 6 Stock options are a form of compensation. See In re Marriage of Robinson and Thiel, 201 Ariz. 328, 332, ¶ 9, 35 P.3d 89, 93 (App.2001). "Property acquired by either spouse during marriage is presumed

Page 46

to be community property, and the spouse seeking to overcome the presumption has the burden of establishing a separate character of the property by clear and convincing evidence." Thomas v. Thomas, 142 Ariz. 386, 392, 690 P.2d 105, 111 (App.1984). Property acquired after service of a petition for dissolution is considered separate property if the parties get divorced. See A.R.S. § 25-211 (2000).

¶ 7 In Arizona, the community has an interest in the property earned during the marriage. See Van Loan v. Van Loan, 116 Ariz. 272, 274, 569 P.2d 214, 216 (1977) (holding that to the extent a spouse acquires unvested pension benefits from community efforts, that property right is divisible upon dissolution). However, compensation for a spouse's post-dissolution efforts is sole and separate property. See A.R.S. § 25-213(B) (Supp.2004); In re Marriage of Kosko, 125 Ariz. 517, 518, 611 P.2d 104, 105 ("any portion of a recovery which represents compensation for post-dissolution earnings of the ... spouse is the separate property of that spouse"). As such, we hold that unvested stock options are analogous to pension plans.

¶ 8 Arizona courts have held that "pension rights, whether vested or non-vested, are community property insofar as the rights were acquired during marriage." Johnson v. Johnson, 131 Ariz. 38, 41, 638 P.2d 705, 708 (1981) (footnotes omitted); accord Van Loan, 116 Ariz. at 274, 569 P.2d at 216. Other jurisdictions also consider unvested stock options analogous to unvested pension benefits in determining the community interest. See, e.g., Garcia v. Mayer, 122 N.M. 57, 920 P.2d 522, 525, ¶¶ 14-15 (Ct.App.1996); Hug, 201 Cal.Rptr. at 681, 684-85; MacAleer v. MacAleer, 725 A.2d 829, 833, ¶ 9 (Pa.Super.Ct.1999). Thus, if the stock options are intended as compensation for Husband's efforts during marriage, they are community property. If, however, the options are, in part, intended to induce future employment, then, to that extent, they are Husband's separate property.

¶ 9 Most jurisdictions have applied a time rule for determining the community's interest in unvested stock options. See, e.g., Baccanti v. Morton, 787, 752 N.E.2d 718, 727-28 (2001) (citing cases); Garcia, 920 P.2d at 525, ¶ 16 (citing cases). In determining whether the community has an interest in the unvested stock options granted during the marriage, the court must determine the extent to which the stock options were compensation for a spouse's effort during the marriage. In making that determination, the court must consider the employer's purpose for awarding the stock options.

¶ 10 As the trial court recognized, the purpose of stock options varies widely. A company may award stock options as compensation for past services or performance, as incentive to remain with the company, or to garner favorable tax consequences. Therefore, we agree that "[t]rial courts should be vested with broad discretion to fashion approaches which will achieve the most equitable results under the facts of each case." Hug, 201 Cal.Rptr. at 685.

¶ 11 Here, the trial court concluded that Husband's stock options compensated him for work performed during the marriage and rejected his claim that the options were solely intended to encourage him to remain with Apollo. It concluded, based on the date the options were granted, that all options granted during the marriage, whether vested or not at the time of service, were community property. The stock option agreements do not, however, appear to support that conclusion.

¶ 12 The stock option agreements provide that the options were intended to encourage key employees to remain and to enhance Apollo's ability to attract new employees "by providing an opportunity to have a proprietary interest in the success of [Apollo,]" and as an incentive to "focus on [its] long-term...