When do stock options become marital property subject to equitable distribution in a Virginia divorce case?

When do stock options become marital property subject to equitable distribution in a Virginia divorce case?

According the Supreme Court of Virginia in the case of Schuman v. Schuman, 282 Va. 443, 717 S.E.2d 410 (2011) stock options become marital property when they are earned during the marriage and before the date of last separation, regardless of whether the options are vested or nonvested.  Although Schuman does not directly concern bankruptcy, it does concern how intangible property rights, options in stock arising from employment, are treated as deferred compensation under Virginia’s equitable distribution statute, §20-107.3, and how a spouse who is not on the legal title to such property, nevertheless gains an interest through marriage and divorce in Virginia.  In a bankruptcy case, normally title to property controls, and the spouse who is not a title owner of such options would not have an interest in them that could be considered property of the bankruptcy estate under 11 U.S.C. §541 by virtue of the marriage, unless that spouse acquires or becomes entitle to acquire those rights in the marital property before filing bankruptcy, or as a result of a property settlement agreement, or interlocutory or final divorce decree within 180 days after filing bankruptcy under 11 U.S.C. §541(a)(5)(B).

In the Schuman case, the parties were married for only about four years and had entered into a premarital agreement or antenuptial agreement prior to their marriage, as permitted under the Virginia Premarital Agreement Act, Sections 20-147 to 20-155 of the Code of Virginia.  The Wife worked as a Vice President and then a President for SAIC, a large government contractor in Virginia.  As part of her employment package, she received what were called “stock options”, but what were in fact vesting stock, according to footnote 2 of the Supreme Court’s opinion.  A stock option is a right to buy a particular stock at a particular price, known as the strike price, on a predetermined date in the future when the option can be exercised.  The option purchaser pays a premium for the right to purchase under those conditions, but is not obligated to buy the stock.  If the stock option is exercised, then the option holder would ordinarily have to pay the price to buy the stock.  The option itself, the right to buy the stock at the strike price, may become a valuable property right if the strike price is lower than the current trading value or price of the stock, because the purchaser could buy the stock and sell it at its higher fair market value for a profit.  The value of the option increases or decreases disproportionately greater than the differences in the value of the underlying stock.  With a true option, the option itself can be sold without ever buying the stock.  By giving the controlling officers options in the company’s stock, a company can create a strong incentive for the controlling officers to increase the values of the shares of stock.

In Schuman, the option was not a true option because the stock would simply become part of the highly compensated employee’s portfolio when vested, provided the employee continued to work for the company.  It was actually a grant of stock subject to a vesting schedule, what the Supreme Court of Virginia referred to as “vesting stock”.  Unlike a true stock option, such vesting stock does not have a strike price, and would not be exercised by anyone; it simply transfer’s from the company’s books to the employee’s book of stock.

The Schuman case was twice appealed, first from the Virginia Circuit Court where the divorce case was tried, to the Virginia Court of Appeals, and then from the Virginia Court of Appeals to the Supreme Court of Virginia.  At the trial court level, the judge who heard the equitable distribution portion of the divorce case decided that the entirety of the stock award were separate funds, because the wife purchased them with her separate property.  The Court of Appeals decided the stock awards were separate property for a different reason, because the vesting date was after the date of last separation of the parties, a critically important date under Virginia equitable distribution statute, particularly with respect to a married person’s interest in his or her spouse’s retirement plan, pension plan or deferred compensation plan.  The Supreme Court of Virginia reversed the Court of Appeals and remanded the case to the Court of Appeals for a further remand to the trial court for the appropriate factual determinations consistent with the appellate court’s legal decision.

In arriving at its decision, the Supreme Court of Virginia noted that the Court of Appeals had previously correctly decided, in Dietz v. Dietz 436 S.E.2d 463 (Va. App. 1993), that deferred compensation in the form of stock options were considered deferred compensation subject to equitable distribution under Virginia Code Section 20-107.3(G), which allows the divorce court judge to direct payment of a certain percentage, up to 50%, of the marital share of a pension, profit-sharing or deferred compensation plan, or retirement benefits, vested or nonvested, of an employee spouse to the nonemployee spouse. Citing Black’s Law Dictionary, the court found “deferred compensation” to be “[p]ayment for work performed, to be paid in the future or when some future event occurs.”  While the Virginia Court of Appeals implicitly held that the option was earned on the date of vesting, the Supreme Court of Virginia held that the marital share of a deferred compensation, whether vested or nonvested, should be calculated the same way as the marital share of a pension, profit-sharing or retirement plan, as illustrated in the case of Mann v. Mann, 22 Va. App. 459, 464-65, 470 S.E.2d 605, 607-08 (Va. Ct. Appeals, 1996).  Consequently, the case was remanded for further remand to the trial judge for new findings and a new decision.

You should consult with your Virginia divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., concerning how to calculate the marital share of stock options in your Virginia divorce case.

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