Fisher v. Fisher

769 A.2d 1165, 564 Pa. 586, 26 Employee Benefits Cas. (BNA) 1014, 2001 Pa. LEXIS 840

• Court: Supreme Court of Pennsylvania
• Decided: April 25, 2001
• Docket: 170 and 171 M.D. Appeal Dkts. 1998
• Status: Published

Opinions

OPINION OF THE COURT

FLAHERTY, Chief Justice.

The sole issue in this equitable distribution case is to determine the proper disposition of employee stock options which had been granted to one spouse during coverture but had not vested¹ and could not have been exercised during the marriage.

The Fishers married in 1984, separated in 1993, and divorced in 1994. During the marriage, Mr. Fisher worked as an executive officer for the Harley Davidson Corporation in Allentown, Pennsylvania. One of the perquisites of the position was the periodic award of stock options. Mr. Fisher routinely exercised the options when they vested. At the time the parties separated in 1993, Mr. Fisher had redeemed all the options which had vested, but during the period of the separation and before the divorce, he received more options and some of the options he had received prior to the separation vested. It is only the options received prior to the parties’ separation that are at issue in this case.²

After Mr. Fisher filed a complaint in divorce, the parties requested that the court bifurcate the divorce from the equitable distribution of marital property and appoint a master to address the property issues.

The divorce master, following conferences and hearings, made a report and recommendation to the trial court regarding marital property issues. The master placed the value of Mr. Fisher’s stock options at $71,000; he recommended that Mr. Fisher retain the options and that Mrs. Fisher be compensated for her interest in the options via the immediate offset method. Both parties excepted to the values assigned to Mr. Fisher’s Harley Davidson stock options and to the master’s recommended disposition.

The trial court found that the value of the options was too speculative to merit inclusion in the marital assets subject to distribution, citing Powell v. Powell, 395 Pa.Super. 345, 577 A.2d 576 (1990) and McGinley v. McGinley, 388 Pa.Super. 500, 565 A.2d 1220 (1989). The court noted that possibilities such as Mr. Fisher’s death or the termination of his employment with Harley Davidson would terminate the options as well; these possibilities make unvested options mere expectancies with no ascertainable value. The court also noted that the value of the unvested options ascribed by the master rested on the assumption that Mr. Fisher would have the means and inclination, on the date of vesting, to exercise the options. Again, this assumption, though reasonably likely, is not a foregone conclusion. Rejecting the master’s recommended value of $71,000 because it was based on such assumptions, the trial court instead assigned a value, for equitable distribution purposes, of zero.

Superior Court affirmed, reasoning that “stock options ‘themselves have no ascertainable value,’ ” citing Marchlen v. Twp. of Mt. Lebanon, 707 A.2d 631 (Pa.Cmwlth.1998).³ The court therefore held that the trial court did not abuse its discretion in determining that the options should be valued at zero for purposes of equitable distribution of marital property.

Mrs. Fisher, appellant, urges this court to reverse Superior Court and to hold that the unvested stock options constitute marital property and are subject to distribution. A key element of her argument is that every sister jurisdiction which has considered the question treats unvested pensions the same as unvested stock options. Since Pennsylvania law includes unvested pensions as marital property, we should hold that unvested stock options are likewise marital property. She cites as examples Pascale v. Pascale, 140 N.J. 583, 660 A.2d 485 (1995); Green v. Green, 64 Md.App. 122, 494 A.2d 721 (1985); and In re Hug, 154 Cal.App.3d 780, 201 Cal.Rptr. 676 (1984). She asks us to order immediate distribution and suggests that the value recommended by the master should be used. Her brief states that “ [immediate offset would enable the case to be closed without further court supervision----” She (and many courts) consider both unvested stock options and unvested pension benefits to be forms of compensation earned during the marriage.

Appellee husband, conversely, takes the position that because the stock options are mere expectancies, Superior Court was correct in excluding them from the marital estate subject to distribution. He argues (1) that unvested stock options have no present value and may not be bought or sold and thus do not meet the statutory definition of “marital property” set forth in 23 Pa.C.S. § 3501(a) or “property” as defined by the law of Pennsylvania; (2) that, unlike pension benefits, “stock options are usually awarded to the employee by the employer as an inducement to remain in the corporation’s employ”; (3) that, unlike pension benefits, “the employee expends no funds to secure [the stock options.]”; and (4) the better analysis would be to treat unvested options the same way as an expectancy under a will. He states: “While such a circumstance may give rise to an expectation on the putative legatee’s part, there is no assurance that the said putative legatee will, in fact, inherit anything, due to the vagaries of chance, such as the testator changing his will prior to death.” He argues that stock options, similarly, are expectancies “in that they may be terminated prior to vestiture by any number of circumstances, including the corporate employer’s bankruptcy, or termination of employment by the option holder.”

Thus we must decide, first, if the unvested stock options are marital property, and second, if they are, how they should be distributed.

We agree that stock options are a form of deferred compensation which has been earned by the employee. Appellee’s argument is that options are awarded to induce the employee to remain in his present employment and that he expended no money to acquire the options. The same, however, can be said of most pension benefits, though pension benefits, like stock options, have a cost to the employer which is paid as a salary substitute, for employees’ compensation would arguably be higher were it not for employment benefits such as these. And, of course, all compensation and benefits are intended, in part, to induce employees to remain with the employer. Moreover, appellant argues persuasively that unvested stock options are analytically identical to unvested pensions and both should be considered marital property. She points out that an unvested pension’s value is speculative because the pension beneficiary may, in some circumstances, receive absolutely no payments due to a variety of reasons, and these reasons are materially identical to those already discussed which make the value of unvested stock options so questionable and speculative. She bolsters this argument with the assertion that every sister jurisdiction which has considered the question has reached the same conclusion. We have independently researched the decisions of our sister states which have decided the issue, and appellant appears to be correct in stating that they are unanimous, or nearly so, in treating unvested stock options identically with unvested pensions. Such uniformity in approach is persuasive, and we use the same approach. It seems the most logical means of dealing with expectancies not susceptible to precise present evaluation. We therefore conclude that the Fishers’ stock options earned during their marriage prior to separation must be considered to be marital assets.

The best means of distributing the stock options presents more difficulty.

We agree with the trial court and Superior Court that it is impossible to ascribe a meaningful value to the unvested stock options, primarily because it is absolutely impossible to predict with reliability what any stock will be worth on any future date. Ascription of a value to a stock option before it vests is impermissibly speculative. On the other hand, to omit the asset from equitable distribution, as Superior Court did, is clearly inequitable. When there is a reasonable possibility that the asset will be of value in the future, then the spouses should share that worth in proportions deemed to be equitable in view of the factors set forth in 23 Pa.C.S. § 3502(a), pertaining to division of marital property. Lack of certitude does not justify excluding Mrs. Fisher from enjoyment of expected benefits: this would provide a totally unjustified windfall to Mr. Fisher if and when a profit is realized.

Recognizing that the stock options at issue in this case are expectancies, as opposed to assets which have a readily ascertainable present value, we must decide the proper disposition of the options.

Several alternative approaches to assets of this type are presented.

One is the “deferred distribution” approach. It would exclude the options from the present distribution but hold the case open as long as necessary to ascertain the values of options on the future dates when they may be exercised and then distribute those values in an equitable way. There are sound reasons to avoid this approach due to its drawback of necessitating ongoing future proceedings and preventing finality and certainty in the litigation.

A second approach would be to establish a present value for the options and to distribute that value in accordance with each party’s marital proportion determined appropriate to effectuate economic justice between the parties. This is the “immediate offset” method, the method recommended by the master. Unlike the “deferred distribution” method, the second approach has the commendable quality of finality because it makes a final disposition at the time of distribution, and need not take account of future fluctuations in stock prices or other contingencies which may affect the value on the dates when the stock options may be exercised. On the other hand, the immediate offset method requires that the value of the asset be known. We have determined supra that no value for unvested stock options can be established without unjustifiable assumptions which render the value impermissibly speculative. This approach, therefore, is not viable in this case.

A third approach would be to distribute the options themselves according to the parties’ marital proportions: the value of the options would then be immaterial, for regardless of how little or how much the options are worth, the parties would share their value in the proper proportions and, significantly, there would be no need for the court to participate in future transactions involving the options. This approach appears to avoid the drawbacks of both deferred distribution and immediate offset. Unfortunately, again, this approach cannot be used in this case. The immediate distribution of the Fishers’ stock options appears to be impossible. Mr. Fisher’s options are nontransferable. They must be exercised while he is still in the employ of Harley Davidson. They will not survive his death. The options are indivisible.

It appears, therefore, that deferred distribution is unavoidable in this case, despite the sacrifice of finality. It will be necessary, in the order of distribution, to require Mr. Fisher to provide notice and render an accounting when he exercises any of the options and to report the profits,⁴ if any, realized upon exercise.

The possibility has been raised that a vindictive option-holder might decline to exercise options when they vest, despite the possibility of realizing a profit, merely to spite his former spouse and to avoid sharing any profit with her. A possibility has also been raised that a recklessly speculative option-holder might decline to exercise options when they vest, despite the possibility of realizing a profit, due to a peculiarly optimistic hope that their market value will continue to rise until they expire so the options might produce an even greater profit. On the basis of these theoretical possibilities, it has been urged that Mr. Fisher be required to exercise the options when they vest, or at the earliest date when they will yield a profit. We decline to order such a disposition.

Unreasonable or spiteful spouses are not altogether unknown to trial courts charged with adjudicating the multifarious issues arising under the divorce code. The court of common pleas will have jurisdiction over the equitable distribution of the Fishers’ marital assets until all of the assets have been distributed; we have already determined that the stock options or their value cannot be distributed at the present time. Mrs. Fisher will be able, so long as options acquired during her marriage may yet be exercised, to petition the court if she has evidence that Mr. Fisher has violated 23 Pa.C.S. § 3102(a)(6) (policy of effectuating economic justice between parties who are divorced) or otherwise deprived her, under principles of equity, of assets she is entitled to receive. The theoretical possibility of such vicissitudes does not justify the court to enjoin the option-holder to any specific future limitations on his rights, granted by Harley Davidson Corporation, with regard to exercise of the stock options.⁵

On the basis of these considerations, the order of Superior Court is vacated and the case is remanded for further proceedings consistent with this opinion.

Justice NEWMAN files a concurring opinion. Justice NIGRO files a concurring and dissenting opinion. Justice SAYLOR files a concurring and dissenting opinion.

1 . Both parties use the term "vesting” to refer to the time when all conditions attached to the stock options have been satisfied and die options may be exercised. In this opinion, the term is used in the same sense.

2 . "[T]he Divorce Code excludes property acquired after the date of separation from consideration as marital property.” Berrington v. Berrington, 534 Pa. 393, 399, 633 A.2d 589, 592 (1993); 23 Pa.C.S. § 3501(a)(4).

3 . Since the Superior Court decision in this case citing Marchlen, this court reversed Marchlen on other grounds. See 560 Pa. 453, 746 A.2d 566 (2000).

4 . Profit is defined as the market value of the stock purchased, less the purchase price and any applicable financing costs.

5 . The question has been raised of what should be done if Mr. Fisher allows options to expire without being exercised though he could have realized a profit on them. This, too, is a speculative possibility not presented by the facts of record. Should such a contingency arise, we are confident that the trial court is competent to render an equitable decision based on the evidence presented to the court.