The issue of the division of deferred compensation in divorce – more particularly, unvested deferred compensation, is often one that is hotly disputed.  This is in part because there is not a lot of case law on the issue.  The case law is clear that deferred compensation (eg. stock options, restricted stock, RSUs, REUs, etc.) granted during the marriage, or even shortly after the date of complaint but for efforts that occurred during the marriage are subject to equitable distribution.  The fights arose regarding whether (1) the deferred compensation should be treated as either income and/or an asset; and (2) if an asset, should they be divided 50-50 or in some other percentage.  In fact, I blogged about this in a piece entitled Deferred Compensation – Income, Asset or Both, back in 2013.  at the time, I said:

If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult.  I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests.  More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse.  Many believe this to be the fairer way of equitably dividing deferred compensation.

There hasn’t been much case law on this issue since that time, though a case that I will discuss later, suggests that the language of the documents granting the deferred compensation is key,  That said, late in 2018, we got some more guidance from the Appellate Division.  Specifically, in the reported (precedential) opinion in the case of M.G. v. S.M. decided on December 26, 2018, Judge Mawla gave new guidance with regard to the distribution of deferred compensation, again pointing to the importance of the plan documents.

In M.G., the plaintiff worked as a  principal consultant for a large multi-national corporation. Beginning in August 2003, and every August thereafter until 2010, plaintiff received a stock award from his employer. Plaintiff received 490 shares in 2003 and those years began to vest at a rate of 174 shares per year commencing in 2011. A similar vesting schedule was applied to the other grants.  Note that in my experience, this is an unusual vesting schedule.  That is, it is unusual, in my experience, for their to be  a 7 year gap before deferred compensation vests.  Typically, I have seen deferred compensation serially vest, over three or five years, starting with the year following the grant.  What that means is that if 600 shares of restricted stock were granted in 2018, then they would vest 200 shares each in 2019, 2020 and 2021.  Other times, you see shares cliff vest in 3 or 5 years.  What that means is that if 600 shares were granted in 2018 that vest in 3 years, all 600 shares would vest in 2021.  This is important because the argument you most often heard from the titled spouse is that the because the shares will vest post divorce allegedly based upon post divorce efforts, that they should be distributed in a less than 50-50 percentage.

Back to M.G.  At the date of complaint, only 3 of 8 awards were fully vested.  At trial, plaintiff offered into evidence plan documents that stated:

Stock-based compensation is a key component of our reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term. To preserve this core element of our culture, in July 2003, [we] decided to grant employees stock awards, which represent the future right to receive shares of . . . stock when a vesting requirement is satisfied.

. . . .

At [our company] we believe that employees who become shareholders maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.

. . . .

Each eligible employee’s annual stock award grant is based on his or her impact, level, and country.

In my experience, the plan language for most plans is much more generic than this.  However, in this case, the plan language supported the husband’s position that his continued employment was required for him to receive the value of the options.  Judge Mawla noted:

Plaintiff’s unrefuted testimony was clear that post-complaint efforts were necessary to cause the stock, which had not vested as of the date of complaint, to become payable. The plan documents and literature adduced in evidence at trial, and attached to plaintiff’s post-judgment motion, stated vesting would occur dependent upon plaintiff’s post-complaint performance. We reject defendant’s argument that “performance” in this case required plaintiff merely to continue living and go to work. Nothing in the record supports this assertion. Indeed, all of the objective evidence in the record demonstrates much more was required of plaintiff as a high-level corporate employee in a highly competitive industry.

As we noted, plaintiff’s employer described the stock plan as a “reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term.” Company literature explained the stock grants were to “maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.” This language does not suggest the stock would vest through mere continued employment without consideration of plaintiff’s level of proficiency. Nor does this language suggest the stock awards were for work already performed.

As a result, Judge Mawla held that the trial judge misapplied his discretion because in the absence of any evidence or testimony to the contrary, he concluded the stock was earned for work performed during the marriage.  Judge Mawla rejected both the use of a coverture fraction or applying the concept of “marital momentum” to address the equitable distribution of the unvested stock awards noting, “In instances where an asset has been granted after the date of complaint, these principles are of little help because they presume a marital component attributable to the asset in question.” (emphasis added).

In determining how to divide such assets, Judge Mawla modified a mechanism found in a case out of Massachusetts.  Specifically, the court adopted the following rubric:

(1) Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution;

(2) Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it too is subject to equitable distribution; and

(3) Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, either in whole or in part, is for future performance. The party seeking to exclude such assets from equitable distribution on such grounds bears the burden to prove the stock award was made for services performed outside of the marriage. That party must adduce objective evidence to prove the employer intended the stock to vest for future services and not as a form of deferred compensation attributable to the award date. Such objective evidence should include, but is not limited to, the following: testimony from the employed spouse; testimony of the employer’s representative; the stock plan; any employer correspondence to the employed spouse regarding the award; and the employed spouse’s stock plan statements from commencement of the award and nearest the date of complaint, along with the vesting schedule.

In this case, the court noted that the unvested stock was either in whole or in part unattributed to the marriage based upon the plan documents and testimony at trial.

But before people go too wild about this decision, and simply say that all non-vested deferred compensation is the property of the titled spouse, they should really go back to square one and look at the grant documents, because many, if not most, are not like those in M.G.  In fact, in an reported case last year entitled K.C. v. D.C., a review of the plan documents lead to an entirely different result.

Rejecting the husband’s argument about his post-complaint efforts being necessary to receive the deferred compensation, the court held that the RSUs awarded were “subject to equitable distribution and shall be equally divided,” observing defendant provided no evidence to support his theory that the award was for future performance.  Like in M.G., the generic purpose of the plan was:

to aid the Company . . . in recruiting, retaining and rewarding key employees . . . of outstanding ability and to motivate such employees . . . to exert their best efforts . . . by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such key employees . . . will have in the welfare of the Company as a result of their proprietary interest in the Company.

Different from M.G., however, is the fact that the employee would still get the deferred compensation if they died, became disabled, or were terminated through no fault of their own.  Put another way, no post-complaint efforts were specifically required.  Accordingly, the Court held:

Aside from the generalized aspiration that “key employees” who are granted RSUs will have an enhanced interest in the welfare of Accenture, there is no requirement that the employee meet any performance goals before a batch of RSUs will vest pursuant to the schedule. The only condition for vesting is “continued employment.” Moreover, in the event the employee is no longer employed due to death or disability, all of the RSUs granted, whether vested or not, are transferred to the employee or his estate. Obviously, the transfer of RSUs following death or disability would not be based on future performance.

In sum, all the documentary evidence in the record1 states that such promotional grants are awarded based on performance ratings at the time of the award, in recognition of employees’ efforts, and no document provided to the court states defendant must meet any given performance goal to trigger the vesting of RSUs that are part of the grant. Contrary to defendant’s argument, the record was clear, and fully supported the trial court’s determination that the RSUs were subject to equitable distribution.

So what is the takeaway here.  You need more than just a party’s self serving testimony.  You need the plan documents and the documents seemingly must really require post-divorce exemplary efforts more than just staying employed, in order to exempt the deferred compensation granted but not vested during the marriage.  M.G. does not address the necessary corollary which would be that if the deferred compensation is exempted from equitable distribution, should it not then be considered as income available to pay alimony when it vests?  Seems so but we shall see.


Eric S. Solotoff, Partner, Fox Rothschild LLPEric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

 

 

 

Let’s be honest – articles about Tom Cruise’s lifestyle are never dull, especially those pertaining to his religious beliefs.  His divorce last year from Katie Holmes was, and continues to be, consistent tabloid fodder, especially with his ongoing defamation lawsuit against one such magazine for claiming that he “abandoned” their daughter, Suri.  While some of us may wonder at what point Tom became more known for his off-screen behavior than for his movies (for my money I’m taking the Oprah couch-jumping incident of 2005), the impact of religion in the now-settled divorce matter is somewhat coming to light.tom

News reports are spilling the details of  his deposition testimony stemming from the defamation lawsuit.  Apparently Tom acknowledged under oath that one of the assertions made by Katie in filing for divorce was to “protect” Suri from Scientology.  While I cannot say what their settlement agreement says about Suri and her religious upbringing, I can talk about the law in New Jersey on this issue.  We have blogged on this issue in the past, but “Maverick” inspired me to write about it again.  In New Jersey, the law generally provides that religious education/upbringing is a matter of joint legal custody (major decisions).  However, the so-called “Parent of Primary Residence” (most commonly defined as the parent with more than 50% of the overnights) has the final say in the event of a dispute.  By contrast, the “Parent of Alternate Residence” is allowed to expose (not educate) the child to another religion.

Assuming that the parties do not agree in their settlement agreement as to the child’s religious upbringing, the PPR could have final say in the event of a dispute  Thus, she could determine that the child should no longer be raised in the PAR’s religion.  By contrast, the PAR could expose a child to his religion in what is ultimately a non-educational manner.  I once represented a client who raised her son Catholic, but dad was bringing him to “classes” at his mosque.  When mom objected, the court determined that the “classes” involved an educational component, rather than just game playing for the kids while the adults attended services.  As a result, dad was prohibited from taking the son to such classes.

What is the takeaway here?  As seen by Eliana Baer’s most recent posts, religion can play a major part in a divorce matter.  It can be especially sensitive when it involves the children.  Each case will ultimately rest on its own facts to determine whether the decisions are being made in the best interests of the child.

 

 

Early in case where children are involved, we discuss the different types of custody.  There is residential custody – i.e. who the children live with and the resulting parenting time for the other parent. Then there is legal custody which is decision making regarding issues of the health, education, religion and general welfare of the kids.  in 99% of the cases, the parties will share joint legal custody – it is usually a no brainer.  in fact, In the New Jersey Supreme Court’s seminal decision of Beck v. Beck, 86 N.J. 480, 497-501 (1981), the Court stated as follows with regard to whether joint custody should be awarded:

At a minimum both parents must be ‘fit’ that is, physically and psychologically capable of fulfilling the role of parent.

That said, the minimum requirement of joint legal custody is the ability to communicate and cooperate on some basic level as it relates to the best interests of the children.  The Court in Beck further noted:

The judge must look for the parents’ ability to cooperate and if the potential exists, encourage its activation by instructing the parents on what is expected of them. . . [W]hen the actions of [an uncooperative] parent deprive the child of the kind of relationship with the other parent that is deemed to be in the child’s best interests, removing the child from the custody of the uncooperative parent may well be appropriate as a remedy of last resort.

Again, in Beck, the Supreme Court of New Jersey has written:

The most troublesome aspect of a joint custody decree is the additional requirement that the parents exhibit the potential for cooperation in matters of child rearing. This feature does not translate into a requirement that the parents have an amicable relationship. Although such a positive relationship is preferable, a successful joint custody arrangement requires only that the parents be able to exclude their personal conflicts from their roles as parents and that the children be spared whatever resentments and rancor the parents may harbor. Beck v. Beck, 480, 498 (1981).

Continue Reading HOW CAN THERE BE JOINT LEGAL CUSTODY IF THE PARTIES CANNOT COOPERATE AND REFUSE TO COMMUNICATE?

Last week we blogged about a recent unreported Appellate Division case where I was the attorney for the winning party at trial and on appeal.  To view the prior post, click here – to view the Appellate Division opinion, click here.  In last week’s post, I blogged about the importance of credibility.  There were other interesting parts of the decision.

In this case, the parties agreed that they would have joint legal custody but that the wife would have the children about 60% of the overnights.  The husband, however, in what we deemed a game of semantics, would not agree that the wife was the Parent of Primary Residence (PPR), though by definition, since she had the children more than 50% of the time, she was the PPR.  There is case law that says that the PPR has final say if parents deadlock on major decisions for the children.  Despite this being the law, this was an unresolved issue at trial.  The trial court essentially acknowledged the law.  The husband appealed claiming that the custody agreement was modified.

The Appellate Division held:

Defendant initially argues that the trial court erred in "setting aside material portions of the Consent Judgment to elevate plaintiff’s decision-making authority" respecting the parties’ two children. We disagree.
This was a bitterly contested divorce as evidenced by the extent of the record and the expense of the litigation. The court recognized that the parties "dispute[d] how to make decisions related to their children" and "recognized the parent of primary residence to be the parent in the better position to make those decisions." The court held that as "primary caretaker," plaintiff "shall decide in the best interest of the children their medical needs and treatment, schooling, expenses, and even religious instruction" because it was not in the children’s interest to "be in the middle of parental conflict" when decisions concerning their welfare needed to be made. The court left intact the parties’ agreement to "confer on all important matters concerning the children’s health, education and general well being" and to use a mediator to resolve disputes that might arise concerning the children. The court concluded that "[t]he parties shall be bound by the terms of their consent judgment fixing custody and parenting time subject to the plaintiff’s authority as parent of primary residence." With respect to extraordinary medical treatment, the parties were to consult each other in advance, except in cases of emergency, and "[n]either party shall unreasonably withhold consent."

We agree that the trial court’s modification of the parties’ consent judgment is in the children’s best interest, considering the hostility between the parties. Kinsella v. Kinsella, 150 N.J. 276, 317 (1997). Should the parties come to a resolution of their hostilities and be able to deal reasonably with each other regarding the children, they may seek to amend the judgment in respect of the custody provisions pursuant to N.J.S.A. 2A:34-23. In the meantime, irrespective of the parties’ agreement, the court properly exercised its "supervisory jurisdiction as parens patriae," in the children’s best interests. Sheehan v. Sheehan, 38 N.J. Super. 120, 125 (App. Div. 1955).

 

To the extent that parenting agreements are unclear, or there is a dispute as to what joint legal custody means, this case provides some guidance.

In this day and age, marriages involving people of different religious in no longer uncommon.  In some of these families, the parties choose one religion to raise the children in.  Sometimes even, one parent converts to the other’s religion.  In other cases, the parties and the children observe both religions.

The question is what happens when the parties divorce?  What happens if one parent converts to another religion post-divorce and wants the children to similarly convert.  Though it seems as though this would be a complicated issue, in reality, the answer to the question is relatively easy. 

Specifically, under NJ law, the primary caretaker has the right to determine the religious upbringing of the children in their custody and courts will not interfere in that parent’s decision regarding religious training for the children.  The policy behind this judicial reluctance to interfere with the religious training of children is that it is in the best interests of the children that the custodial parent be allowed to determine their religious upbringing. 

This principle was confirmed by the Appellate Division in a case where the parties were Protestant and raising the children in that religion before the divorce.  After the divorce, the mother converted herself and the children to Orthodox Judaism.  The mother, however, was not allowed to use the religion to interfere with the father’s time with the children.  Moreover, the father could expose the children to his religion when they were with him but was not allowed to educate them in his religion.

Simply put, the custodial parent can determine the children’s religion – the non-custodial parent can expose, but not formally educate the children in that parent’s religion. 

The Court’s have been clear that this has nothing to do with the preference of one religion over another. Rather, it is consistent with the law in general that gives custodial parents final say in decisions regarding children, even where there is joint legal custody, because that parent is presumed to know more about and be more in tune with what is in the children’s best interests.  This principle has been applied to disputes ranging from religion to those involving elective medical procedures such as a nose job. 

While this issue does not come before the Court all that often, as noted above, the law is well settled in this area and pretty straight forward.

A lot of times clients come in saying that they want full or sole custody of the children.  This inevitably leads to a discussion regarding the distinctions between legal and residential custody.

Legal custody is essentially involves decisions regarding children’s health, education, religion and general welfare.  With sole legal custody, one parent can make all of the decisions regarding these matters, though they have to consult the other parent in most cases.  With joint legal custody, the parents must consult and attempt to agree. 

Residential custody is where the child lives.  Some catch phrases often used are Parent of Primary Residence (or PPR) and Parent of Alternate Residence (or PAR).  Surprisingly enough, the official definitions for these terms come from the Child Support Guidelines.  Simply put, the PPR is the parent with whom the children reside more than 50% of the time. 

Now, with regard to the question as to whether it is worth fighting about the issue of sole vs. joint legal custody.  In practice, I have found that even in all but the worst of situations, must custody experts recommend and most judges order joint legal custody.  This is even though there is case law that says that joint legal custody may not be appropriate if the parties evidence no ability to communicate.  Of course, if it is the custodial parent that wont cooperate, it seems unfair to reward that parent with sole custody. 

In addition, there is a presumption in the case law that the custodial parent gets the final say in the event of a deadlock between the parents, even when there is joint legal custody.  This has come up time and again in reported decisions, including in cases regarding religious upbringing and of all things, a nose job. 

So, if the experts and courts are usually going to recommend joint legal custody, a litigant must investigate whether it is really worth it to fight for sole custody  Similarly, if the PPR has the legal presumption anyway, one must really consider whether it is worth the fight. 

This is not to say that it is not worth fighting about custody.  The real fight in most cases, if there is a bona fide dispute,  is and should be who is the PPR and how much parenting time the other parent enjoys.