Wooters v. Wooters

• Decision Date: 18 August 2009
• Docket Number: No. 08-P-824.,08-P-824.
• Citation: 911 N.E.2d 234,74 Mass. App. Ct. 839
• Parties: Thomas A. WOOTERS v. Janet S. WOOTERS.
• Court: Appeals Court of Massachusetts

911 N.E.2d 234

74 Mass. App. Ct. 839

Thomas A. WOOTERS v. Janet S. WOOTERS.

No. 08-P-824.

Appeals Court of Massachusetts, Middlesex.

Argued January 9, 2009.

Decided August 18, 2009.

Norman I. Jacobs, Boston (Mary M. Ferriter, Fitchburg, with him) for the husband.

Alexander Furey, Boston, for the wife.

Present: CYPHER, BROWN, & KATZMANN, JJ.

KATZMANN, J.

Can the exercise of stock options be considered as part of gross annual income under a divorce judgment? We consider this question in the context of an appeal from a contempt order. We conclude that the answer is in the affirmative, but that, in the circumstances here, a contempt judgment was not appropriate.

Background. We recite the facts from the judge's findings and the uncontradicted evidence before her, reserving recitation of certain facts as they become relevant in regard to the issues raised.

Thomas Wooters (husband) and Janet Wooters (wife) were

divorced on June 2, 1994.¹ Paragraph one (1) of the divorce judgment provided, in relevant part:

"Alimony, Support and Maintenance: Until the earlier to occur of the death of either party, the [husband] shall pay to the [wife] an amount as alimony for her support and maintenance, which amount shall be equal to one-third (33 1/3%) of the [husband's] gross annual employment income. Such income amount shall be computed without any deduction for capital contributions, retirement contributions, medical insurance premiums, tax liability of any kind, any amount not distributed in cash, life insurance premiums or any other amount of income withheld prior to distribution." (Emphasis supplied.)

At the time of the divorce in 1994, the husband was a partner in the law firm Peabody & Arnold, where he had a sevenyear average of earning about $220,000 per year. In 2003, the husband accepted a position as executive vice president and general counsel for LoJack Corporation (LoJack). The husband's compensation package included a base salary, annual bonus, shares of nonqualified stock options, and various other benefits.

In 2006, the husband exercised some of his stock options.² The husband's 2006 W-2 form listed his gross pay from LoJack as $1,171,208.38, which included the compensation from the exercised stock options. In June of 2007, the wife became aware that in January, 2006, the husband had exercised certain of his options. She demanded that the husband pay to her one-third of the pretax income realized from the exercise of the options. The husband responded that the divorce judgment did not encompass the income derived from the exercise of the options. On July 12, 2007, the wife filed a complaint for contempt, alleging that the husband had failed to pay the wife alimony as directed by the divorce judgment. Following the September 19, 2007, hearing, a Probate and Family Court judge found the husband guilty of contempt and ordered him to pay alimony in accordance with the divorce judgment. The husband now appeals from the judgment finding him in contempt and ordering him to pay the alimony arrearage.

Discussion. The judge determined that the husband's exercised stock options fell within the definition of "gross annual employment income" as provided in the divorce judgment and held the husband in contempt for failure to pay proper alimony. On appeal, the husband challenges the judge's order, claiming that (1) the employee stock options should not be considered part of his "gross annual employment income"; (2) the finding of contempt was improper; and (3) the judge erred in denying him an evidentiary hearing.

a. Employee stock options. A determination whether stock options and similar incentives are to be included in the annual income of a spouse who is obliged to pay alimony is complex. See, e.g., Seither v. Seither, 779 So.2d 331, 332-333 (Fla.Dist.Ct.App.1999). See also Kindregan and Kindregan, Unexercised Stock Options and Marital Dissolution, 34 Suffolk U.L.Rev. 227, 236-237 (2001). The Massachusetts courts have not addressed this precise issue in a published opinion; however, quite a few out-of-State decisions have dealt with it and inform our analysis.

Generally, employment stock options are issued as part of one's compensation; they allow "a corporate employee to buy shares of corporate stock at a fixed price or within a fixed period." Black's Law Dictionary 1459 (8th ed.2004). "In their simplest form, stock options are another way for employers to compensate their employees. An option gives the employee the right to purchase the employer's stock at a predetermined price during a prescribed time period." Baccanti v. Morton, 434 Mass. 787, 795, 752 N.E.2d 718 (2001). The challenge posed by stock options in divorce proceedings is that they have a dual nature: On the one hand, they could be characterized as "an asset in that they represent a right to purchase an ownership share in the underlying corporation's stock.... On the other hand, they have characteristics of income in that the whole purpose behind options is to allow the owner to capture the appreciation in value of the stock prior to its actual purchase." Seither v. Seither, 779 So.2d at 332-333. See In re Marriage of Robinson & Thiel, 201 Ariz. 328, 332, 35 P.3d 89 (Ct.App. 2001). Courts outside Massachusetts³ have held that exercised stock options are to be considered part of one's income. See id. at 330, 35 P.3d 89 (vested employee stock options constituted income for purposes of calculating child support); Hiett v. Hiett, 86 Ark.App. 31, 36, 158 S.W.3d 720 (2004) (it was not error for trial court to base alimony award on percentage of net income including stock options that may be exercised by husband in future, given that all sources of income must be considered in determining alimony); In re Marriage of Kerr, 77 Cal.App.4th 87, 92, 91 Cal.Rptr.2d 374 (1999) (future grant of stock options is part of husband's over-all compensation package and is properly considered in setting both alimony and child support); Seither v. Seither, 779 So.2d at 333 (stock options determined to be income for purposes of child support); Geoghegan v. Geoghegan, 969 So.2d 482, 485-486 (Fla. Dist.Ct.App.2007) (certain stock options should have been included in income for purposes of alimony); In re Marriage of Colangelo, 355 Ill.App.3d 383, 392, 290 Ill. Dec. 986, 822 N.E.2d 571 (2005) (stock option distributions were "income" for purposes of child support); Matter of Dolan & Dolan, 147 N.H. 218, 221, 786 A.2d 820 (2001) (exercised stock options must be included as income for purposes of calculating child support); Murray v. Murray, 128 Ohio App.3d 662, 666-670, 716 N.E.2d 288 (1999) (stock options were to be included within definition of "income" in determining child support).

The fact that some of the cases involve child support rather than alimony and some deal with situations where stock options were also addressed in connection with property division between the parties is of no material consequence to our inquiry here. Regardless of the context, those cases primarily focus on the broad definition of "income" to ascertain whether stock options should be included in the definition. Analogously, in the present case, we are dealing with the definition of "gross annual employment income," which is a broad and flexible term. See Murray v. Murray, 128 Ohio App.3d at 667, 716 N.E.2d 288. As such, the term can plausibly encompass the income obtained from the exercise of stock options, as long as the definition is not limited by the parties. In fact, here, the judge properly observed that there was ample opportunity for the parties to restrict the definition of "gross annual employment income," and if the parties wished to do so, they should have done that at the time of divorce.

In addition to the supporting case law, common sense dictates that the income realized from the exercise of stock options should be treated as gross employment income: It is commonly defined as part of one's compensation package, and it is listed on W-2 forms and is taxable along with the other income.⁴ Stock options are each customarily calculated with at least some reference to the others. We also note that this determination accords with policy considerations as well—if the exercised stock options were not deemed income for alimony purposes, a...