Macilwaine v. Macilwaine (In re Macilwaine)

• Citation: 26 Cal.App.5th 514,237 Cal.Rptr.3d 156
• Decision Date: 22 August 2018
• Docket Number: A147847
• Court: California Court of Appeals
• Parties: IN RE the MARRIAGE OF John and Patricia MACILWAINE. John Macilwaine, Respondent, v. Patricia Macilwaine, Appellant.

26 Cal.App.5th 514

237 Cal.Rptr.3d 156

IN RE the MARRIAGE OF John and Patricia MACILWAINE.John Macilwaine, Respondent,

v.Patricia Macilwaine, Appellant.

A147847

Court of Appeal, First District, Division 2, California.

Filed August 22, 2018

Garrett C. Dailey, Oakland, for Appellant

Stephen Temko, Dennis Temko, San Diego, Scott J. Lantry, William F. Whiting, Walnut Creek, for Respondent.

KLINE, P.J.

In this appeal, Patricia Macilwaine contends that the trial court erred in granting John Macilwaine's request to modify an existing child support order pursuant to Family Code section 4057, subdivision (a)(3) ’s extraordinarily high earner provision.¹ Among the issues presented is how and when stock options factor into a supporting parent's gross income, a key factor in calculating child support under the statewide uniform guideline. Although stock options plainly constitute income for purposes of support, we must decide when employer-granted stock options must be recognized as "income," as that term is used in section 4058, subdivision (a)(1). The answer has significant implications for this case, as most of John's² compensation was provided in the form of stock options, and more generally, given the ubiquity of stock options as employment compensation in our state. We conclude that subdivision (a)(1) of section 4058 must be construed to include all compensation that has been conferred upon and is available to the employee. At that point, the available compensation from stock options (the market price less the "strike price") should be included in gross income, regardless of whether the parent elects to exercise the option and sell shares of stock.

In the second part of our opinion, we hold that the court applied the incorrect legal standards in determining the "needs of the children," as that phrase is used in subdivision (a)(3) of section 4057, and failed to provide the explanatory findings required by section 4056, subdivision (a).

FACTUAL AND PROCEDURAL BACKGROUND

The parties married in 1996. They had four children together, born between 1997 and 2008. In 1997, the parties agreed that Patricia, who was previously a practicing pediatric nurse, should put her career on hold to stay home and raise their children. The family resided in Danville.

John and Patricia separated in 2010. In June 2012, John became chief technology officer for the LendingClub Corporation. His compensation consists of a base salary; an annual performance bonus targeted around half of his base pay; and stock option grants. When John took the position with LendingClub, it was a private (nonpublicly traded) startup company. John characterized his move to the LendingClub "as risky ... at that time due to its size and the uncertainty of the market."

A judgment of dissolution incorporating the parties’ "Marital Settlement Agreement" (MSA) was entered on December 27, 2012. At that time, the children ranged in age from four to 15. Pursuant to the judgment, as of January 1, 2013, John was to pay a base amount of monthly spousal support, plus 12.5 percent of John's earnings over his annual base salary, up to a maximum of $1.2 million. In child support, he was to pay $5,200 per month in base child support and 14 percent of his earnings over his annual base salary as "bonus" support. The judgment also provides that the costs of certain "add-ons" for the children, including "necessary" education expenses, uncovered medical expenses, and "agreed upon" extracurricular activities would be split equally by the parties. The parties’ assets were divided and sale of the marital residence was deferred.

John's stock options started to vest in July 2013. When an option vested, John obtained the right to purchase shares at the designated "strike price." LendingClub had its initial public offering in late December 2014.

The evidence showed that John's income, as reported on his tax return, more than tripled from 2012 (when it was less than $800,000) to 2014 (when it was almost $2.6 million). As a result, in 2014, John paid approximately $32,000 per month in child support. Just before trial, John disclosed that the proceeds of options he exercised and sold in the first nine and one-half months of 2015 approached $1 million.

John's Request for Order Capping Child Support

In August 2014, John filed a "Request for Order" (RFO) seeking to cap the judgment's bonus child support provision due to his extraordinary earnings. Specifically, he sought to cap his total earnings, for purposes of calculating child support, at $1.2 million per year (thus, limiting the base for purposes of calculating "bonus" support to no more than $900,000 per year). He argued that in light of the considerable spousal support Patricia was receiving and her substantial assets, the requested cap (limiting monthly support to $15,700) was more than adequate to cover the children's needs.³ He asserted that this was in the children's best interests, in particular because they can attend public schools (or, in one child's case, obtain grant or scholarship monies to cover private school tuition). He also contended that the children "have not experienced a reduced standard of living" because they continue to live in the family residence.

Patricia opposed, arguing that the court could not consider the RFO because there had been no material change in circumstances; although John's income had increased, he anticipated this would occur once his stock options vested. Patricia also asserted that John was not an "extraordinarily high earner" and had not met his burden to show that the amount of support provided by guideline would exceed the children's needs (as he provided no evidence of those needs) or be in their best interests. Patricia's evidence in support of her opposition included an "Income and Expense Report" showing her monthly household costs of $28,917 (well in excess of the $15,700 cap proposed by John); this figure mainly consisted of expenditures for the children, but included a $4,642 proposed cost for a graduate nursing program for Patricia.⁴

The Parties’ Trial Briefs

In his trial brief, John amended his request to cap his income, for purposes of child support, to a higher amount of $1,877,829 per year, which would cap monthly child support at about $23,600. He argued that because Patricia's household expenses had not exceeded $23,600 (once proposed costs such as the cost of a graduate nursing program were omitted from her income and expense report), that amount would meet the children's needs while in her care.

He based this argument on Patricia's expected testimony (based upon deposition testimony) "that, at this level of expenditure, the children's needs are satisfied while they are in her care." Patricia's admission would be corroborated by an analysis by John's expert, James Sheehy, of Patricia's actual household expenditures, which would show that, at the present level of spending, the children enjoy a comparable, comfortable, upper-middle class standard of living in both homes.

Patricia reiterated her objection that there was no material change in circumstances meriting consideration of John's RFO. She argued John is not an extraordinarily high earner and that his stock options, once vested, constitute "income" for purposes of child support. She asserted that the court must: calculate the presumptively correct child support under the guideline; identify the point (if any) at which guideline support exceeds the cost of the children's needs; determine the needs of the children based upon more than just the parties’ past expenditures; and, if capping support, explain why this is in the children's best interests.

The Hearing on John's RFO

The hearing spanned four days in October and November 2015.

When and Whether Stock Options Constitute "Income" for Child Support

John presented evidence that stock options are not taxable until exercised, and that, once his options were vested, he was not free to sell them without management preapproval. As a named executive officer of LendingClub who frequently possessed "material nonpublic information," John was subject to certain insider trading rules. He also testified that his sales of stock were a matter of public record, and the perception that John was dumping stock could negatively impact the company's share value. Significant reductions in his equity holdings could also be viewed as diminishing his incentive to perform. Thus, LendingClub required John and other named executive officers who wished to sell their options to implement advance sales plans, called 10b5-1 plans, which were subject to review and approval by LendingClub's securities team.⁵

Pursuant to these plans, a designated number of vested options would be sold at future, predetermined dates, provided the market price had reached minimum values, also predesignated by the employee (here, John) in his or her proposed plan. Once approved and active, a plan could not be amended other than for extraordinary, extenuating circumstances. And once an active plan's price limit was met or exceeded, the designated number of shares would be exercised and sold, regardless of whether a lockout or blackout period was otherwise in place.

At the time of trial, 450,000 shares—or about 30 percent of the 1.4 million options⁶ granted to John—were designated for sale in John's two active 10b5-1 plans. One of those plans was based upon a trading price of at least $20 per share, and provided for the sale of up to 320,000 shares; the other based upon a $1 price and called for the sale of up to 150,000 shares. At the time, LendingClub shares were trading at between $14 and $15 per share. Thus, the $1 plan resulted in the exercise and sale of shares, while the $20 plan did not.

While the LendingClub had no "bright line limit" on the number of shares an employee could sell during a given timeframe, Jason Altieri (the company's compliance officer, who was responsible for implementing the company's insider trading policy)...