In the Matter of The Marriage of Daniel J. Farmer v. Farmer

Decision Date08 September 2011
Docket NumberNo. 83960–3.,83960–3.
PartiesIn the Matter of the Marriage of Daniel J. FARMER, Petitionerv.Teresa W. FARMER, Respondent.
CourtWashington Supreme Court

OPINION TEXT STARTS HERE

Catherine Wright Smith, Valerie A. Villacin, Smith Goodfriend PS, Seattle, WA, Douglas Allen Saar, Law Office of Skinner & Saar PS, Oak Harbor, WA, for Petitioner.Kenneth Allen Manni, Attorney at Law, Oak Harbor, WA, Gregory Mann Miller, Carney Badley Spellman PS, Seattle, WA, for Respondent.STEPHENS, J.

[172 Wash.2d 618] ¶ 1 This case involves a trial court's method of valuing stock options in a dissolution proceeding. After separating, Daniel and Teresa Farmer entered into a stipulated agreement dividing their community assets, including several thousand stock options Daniel 1 had received from his employer during the marriage. Under the terms of the agreement, Teresa could decide when to exercise her share of the stock options. Before entry of the decree of dissolution, however, Daniel fraudulently exercised all of the options. The trial court was unaware of this when it awarded Teresa half of the community stock options in the final decree. When the facts came to light, Teresa moved for relief from the dissolution decree under CR 60(b), asking the court to invoke its equitable authority to award her damages for her loss. The court assessed damages based on the present value of the stock options as calculated by Teresa's expert witness. The Court of Appeals affirmed, deferring to the trial court's equitable discretion to make Teresa whole. We affirm the Court of Appeals and hold that the trial court did not abuse its discretion in calculating damages to Teresa.

FACTS AND PROCEDURAL HISTORY

¶ 2 Daniel and Teresa were married in August 1987 and accumulated significant community assets before separating in early 2004. During the course of the marriage, Daniel was employed at PACCAR. Beginning in April 1999, Daniel received PACCAR stock options on an annual basis, each with a set price and a ten-year expiration period. By the time of the parties' separation in 2004, Daniel had received approximately 15,000 stock options. The options had expiration dates between April 27, 2009 and January 15, 2013.2

¶ 3 After initiating the dissolution action and engaging in over two years of discovery, Daniel and Teresa filed a stipulated agreement with the court under CR 2A (CR 2A Agreement) resolving the parenting plan, child support, and the division of community assets. The agreement contained a specific provision equally dividing the community stock options Daniel had received from PACCAR. Because the options were nontransferable, they had to remain in Daniel's possession, but the agreement granted each party the right to choose when to exercise his or her share of the options.

¶ 4 In August 2006, approximately one month after filing the CR 2A Agreement with the court, Daniel unilaterally exercised all of the community stock options, including Teresa's share. He immediately sold the stock, netting $444,664.63 after taxes and other expenses. Shortly after cashing in the options, Daniel e-mailed Teresa and attempted to persuade her to exercise her half of the stock options, which, unknown to her, no longer existed. He followed up with a similar e-mail a few weeks later. Teresa refused to authorize any exercise of her options.

¶ 5 In late September, Daniel moved for the court to enforce the parties' CR 2A Agreement and enter the final decree dissolving the marriage. Daniel did not disclose that he had unilaterally exercised all the stock options. Meanwhile, in response to a subpoena for Daniel's bank account records, Teresa discovered that approximately $491,000 had been deposited into Daniel's account in August. The day before the court's scheduled hearing to finalize the dissolution, Teresa asked the court to continue entry of the final decree so she could investigate the source of the $491,000 in Daniel's account. Opposing any delay, Daniel, through counsel, falsely advised the court that the $491,000 represented proceeds from Daniel's exercise of his share of the PACCAR stock options. The court denied Teresa's motion to continue, but ordered Daniel to produce all documents regarding the August exercise of the stock options. Daniel did not comply.

¶ 6 The court entered the decree of dissolution on October 13, 2006, dissolving the marriage and dividing the parties' community and separate property. The decree adopted the provision from the CR 2A Agreement that equally divided the PACCAR community stock options. Neither Teresa nor the court was aware the options had already been exercised and no longer existed.

¶ 7 Approximately two weeks later, Daniel, through new counsel, filed an affidavit admitting for the first time that he had cashed in all of the community stock options. Daniel moved to amend the decree to reflect that the options no longer existed. His motion proposed two alternative modifications to the decree as a way of preserving Teresa's interests. First, he offered to immediately distribute to Teresa approximately $170,000, an amount reflecting her share of the proceeds from the August sale of the PACCAR stock. Second, he proposed depositing approximately $190,000 into a trust account as a way of replicating Teresa's interest in the stock options. Under Daniel's proposal, Teresa could periodically choose to “exercise” the options as if they still existed, and proceeds from the trust account would be distributed to her according to the value of the PACCAR stock at the time of her “exercise.”

¶ 8 With the revelation that Daniel had exercised her share of the options, Teresa moved for production of all documents related to the August sale. The court granted her motion, but Daniel again refused to comply. After being held in contempt, Daniel eventually produced the requested documents, which confirmed that he had exercised all of the community stock options back in August. In March 2007, Teresa moved for relief from the decree under CR 60(b) and requested that the court “re-open the decree and award [her] additional property, assets, or such relief as the court deems just and equitable to compensate” for her loss. Clerk's Papers (CP) at 147.

¶ 9 In support of her CR 60(b) motion, Teresa submitted a declaration from certified public accountant Ronald Nelson, who calculated Teresa's losses from the wrongful exercise of her stock options to be $617,553. Nelson arrived at this figure by analyzing the performance of PACCAR stock over the previous 10 years, which yielded an annual rate of return of 20.235 percent. Nelson explained in his declaration that [i]f Ms. Farmer had held her options until the day before expiration, and the rate of return remained consistent, Ms. Farmer would have realized $617,553 on future exercises (dating from April 26, 2009 to January 14, 2013) using an estimated federal tax rate of 35% plus Medicare tax of 1.45%.” 3 CP at 137.

¶ 10 Daniel filed his own declaration claiming Teresa's proposed valuation was “inappropriate and unreasonable.” CP at 130. He did not, however, offer any competing analysis of the value of the stock options. Instead, Daniel renewed his motion for modification of the decree to allow him to establish a trust account that would provide periodic distributions to Teresa. The court denied Daniel's motion and granted Teresa's request for relief from the decree under CR 60(b) on the basis of fraud, surprise, and newly discovered evidence. The court assessed Teresa's damages according to the valuation of the stock options as set forth in the Nelson declaration.

[172 Wash.2d 622] ¶ 11 Daniel moved for reconsideration. While he did not dispute the trial court's conclusion that his conduct constituted a fraudulent conversion of the stock options, he argued that the court made a legal error by basing the value of Teresa's losses on the projected price of the stock the day before each option expired several years in the future. Daniel cited for the first time In re Marriage of Langham, 153 Wash.2d 553, 106 P.3d 212 (2005), and Brougham v. Swarva, 34 Wash.App. 68, 661 P.2d 138 (1983), arguing that these cases require damages for the conversion of stock and other property of fluctuating value to be based on the highest value of the asset at the time of conversion or a reasonable time thereafter. Under Daniel's proposed measure of damages, Teresa's losses would have been approximately $173,000. Daniel also argued that the court erred by failing to discount Teresa's losses to present value.

¶ 12 The court denied Daniel's motion for reconsideration and rejected his proposed valuation of the stock options, explaining that this measure of damages would fail to make Teresa whole and would reward Daniel's fraudulent conduct:

[T]he Court is a court of equity. And Mr. Farmer exercised the stock options in August fraudulently. He knew he didn't have the authority to do so. And he continued to hide his actions and lie to this Court and try to finesse Mrs. Farmer into agreeing that they should be sold so that he wouldn't have to disclose what he had done.

...

The judgment represents her loss.... She had the ability to exercise these stock options at some point in the future—[n]ot just today—but at some point in the future. And the only information that I have is what the value of those would be in the future is the expert opinion that was provided to me.

Now, I thought very long and hard because of the cases that you provided to this Court. And ... I keep coming up against the block of why if—if we provide that the damages will be on the date the ... stock options were exercised, then we are rewarding Mr. Farmer's wrongdoing. We are letting him have his way for something he knew was wrong, but he didn't have the authority to do.

...

It's not a windfall. It's the amount that she had the ability to exercise of her own free will. He took her own free will...

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