Marriage of Miller, In re, 94SC473

• Decision Date: 29 April 1996
• Docket Number: No. 94SC473,94SC473
• Citation: 915 P.2d 1314
• Parties: In re MARRIAGE OF Kathleen A. MILLER, Petitioner, and Bradley W. Miller, Respondent.
• Court: Colorado Supreme Court

Page 1314

915 P.2d 1314

In re MARRIAGE OF Kathleen A. MILLER, Petitioner and Bradley W. Miller, Respondent.

No. 94SC473.

Supreme Court of Colorado En Banc.

April 29, 1996.

Wallace & Kling, P.C., Nancy L. Wallace, Fort Collins, for Petitioner.

Moore, Smith & Williams, P.C., Michael D. Liggett, Fort Collins, for Respondent.

Justice KIRSHBAUM delivered the Opinion of the Court.

In In re Marriage of Miller, 888 P.2d 317 (Colo.App.1994), the Colorado Court of Appeals affirmed the trial court's conclusion that certain employee stock options and shares of restricted stock owned by respondent Bradley W. Miller (the husband) constituted in part marital property for purposes of property division in a dissolution of marriage proceeding. The trial court determined that the employee stock options and restricted stock shares constituted marital property "based upon the ratio of the period that the parties were married during these respective options and grant in proportion to the entire length of the option or grant." Having granted the request of petitioner Kathleen A. Miller (the wife) for certiorari review of the court of appeals' decision, we affirm in part, reverse in part, and remand the case to the court of appeals with directions.

I

The parties were married on June 10, 1983. On November 17, 1988, November 16, 1990, and November 21, 1991, the husband received nonstatutory stock options from his employer, Hewlett-Packard Company (HP), pursuant to a corporate incentive compensation plan. Each option is subject to the terms and conditions set forth in a stock option agreement. Each agreement provides that on the first, second, third, and fourth anniversaries of the agreement the option is exercisable as to one-quarter, one-half, three-quarters, and all of the option stock, respectively. Each agreement further provides that all rights to exercise the option will terminate upon the termination of the husband's employment "for any reason other than retirement because of age or permanent and total disability," or after ten years, whichever occurs first. Each agreement also describes circumstances in which the death of the employee might result in the termination of the option. William Brunelli, a personnel manager of HP, testified that these stock options are commonly granted each year to the company's high level and top performing employees.

On July 17, 1991, HP granted the husband 2,500 shares of restricted stock. The restricted stock agreement provides that the stock shares will vest and the restriction period will expire five years from the date of the agreement and that during the restriction period the husband cannot transfer or pledge his interest in the stock shares, but retains all other rights associated with ownership of the stock shares, including the rights to vote the stock and to receive cash dividends. The agreement also contains provisions affecting the husband's right to retain all or portions of the restricted stock shares in the event of the termination of the husband's employment prior to the expiration of the restriction period, the husband's retirement, the husband's total and permanent disability, or the husband's death. Brunelli testified that HP rarely grants restricted stock shares to its employees and that such grants are usually awarded as bonuses for completion of some project and as incentives to employees to remain with the company.

The decree of dissolution in this case was entered on November 16, 1992. After conducting a hearing, the trial court entered its permanent orders on May 14, 1993. The trial court found that the stock options had been granted to the husband for services and as an incentive to remain an employee and that the restricted stock shares had been granted to him as a bonus for his activities in closing down a division of HP and as an incentive to encourage the husband to remain an HP employee. Upon these findings and in reliance on In re Marriage of Frederick, 218 Ill.App.3d 533, 161 Ill.Dec. 254, 578 N.E.2d 612 (1991), the trial court held that portions of the stock options and portions of the restricted stock shares constituted marital property. After determining that the marital property should be divided equally, the trial court concluded that the wife was entitled to receive a portion of the net value of the stock options and restricted stock shares "based upon the ratio of the period that the parties were married during these respective options and grant in proportion to the entire length of the options or grant." The trial court then awarded fifty percent of fifty percent of the value of the 1990 option, fifty percent of twenty-five percent of the value of 1991 option, and fifty percent of twenty-six percent of the value of the restricted stock shares. ¹ Because of the difficulty in determining the present values of the stock options and the restricted stock shares, the trial court retained jurisdiction to distribute the property when the options were exercised and when the restriction period relating to the stock shares expired. The court of appeals affirmed the trial court's rulings.

II

The wife argues that all of the options and all of the restricted stock shares constitute marital property. Alternatively, she asserts that the marital fraction adopted by the trial court is erroneous. We conclude that the trial court properly determined that only portions of the stock options constitute marital property. However, we further conclude that the formula adopted by the trial court in determining the marital fraction of those options is inappropriate under the circumstances of this case. We agree with the wife's argument that all of the restricted stock shares constitute marital property.

A

In a dissolution proceeding, a trial court is required to "divide the marital property" between spouses. § 14-10-113(1), 6B C.R.S. (1987). Marital property is defined as "all property acquired by either spouse subsequent to the marriage" and prior to a decree of legal separation. § 14-10-113(2)(c), 6B C.R.S. (1987). ² The General Assembly has not defined the meaning of the term "property" for purposes of the Uniform Dissolution of Marriage Act, §§ 14-10-101 to -133, 6B C.R.S. (1987 & 1995 Supp.) (the Act). Furthermore, the General Assembly did not indicate at what point property is acquired for purposes of the Act.

While this court has not previously considered whether or to what extent stock options and restricted stock shares constitute marital property for purposes of the Act, we have addressed similar issues with respect to retirement plans. In In re Marriage of Grubb, 745 P.2d 661 (Colo.1987), we held that future benefits available to an employee-spouse pursuant to a vested employer-supported pension plan constituted marital property for purposes of the Act even though receipt of the benefits was contingent on the employee-spouse's continued employment and survival until the commencement of retirement. We determined that the benefits were a form of deferred compensation and overruled prior decisions holding that rights to such benefits must have a present cash surrender or loan value to constitute marital property. Id. at 664. We concluded that the right of the employee-spouse in Grubb vested, and thus became enforceable, when the minimum terms of employment necessary for the employee to be entitled to receive the pension benefits had been fulfilled. Id. at 665. We held that the employee-spouse's right to receive pension benefits constituted marital property for purposes of the Act even though receipt of the benefits was contingent on continued employment and survival until retirement. Id. We noted that such contingency should be considered by the trial court in determining the present value of the property, id., and suggested that trial courts could retain jurisdiction of the case and order distribution of those assets at a later time to avoid valuation problems. Id. at 666.

In In re Marriage of Gallo, 752 P.2d 47 (Colo.1988), we held that vested but unmatured military retirement benefits that had accrued during a marriage constituted marital property for purposes of the Act. In In re Marriage of Hunt, 909 P.2d 525 (Colo.1995), we held that post-dissolution increases in benefits established under a noncontributory defined benefit military pension plan, even though nonvested and unmatured, constituted marital property for purposes of the Act and approved the use of a time-rule formula for evaluation of such property. We recently reaffirmed the basic principles announced in Grubb, Gallo, and Hunt in In re Marriage of Kelm, 912 P.2d 545 (Colo.1996). Those principles instruct our analysis of the questions raised concerning the status of the husband's stock options and restricted stock shares for purposes of the Act's provisions concerning marital property.

B

An employee stock option is a contractual right to purchase stock during a specified period at a predetermined price. 2A Research Institute of America, Benefits Coordinator p 31,101 (1995) (2A Benefits Coordinator). While there is no requirement that the option period be limited to a certain duration for nonstatutory stock options, the option period is typically ten years. Id. p 31,154. In addition, while nonstatutory employee stock options may be immediately exercisable upon being granted, for tax planning purposes of both the employer and the employee such options more typically are exercisable only after a waiting period or in incremental portions. Id. p 31,157.

An optionee's right to exercise an employer-granted stock option is typically related in some manner to the optionee's employment status. Neal A. Mancoff & David M. Weiner, Nonqualified Deferred Compensation Arrangements § 4:47 (1991). By relating an optionee's rights to exercise stock options to the optionee's employment status, an employer is able to use stock options as an incentive to employees to continue employment with the employer. An...