Officially released October 1, 2019
In Short: Be very careful drafting inclusions and exclusions from income for alimony formulas. This case provides a detailed analysis of the specific language of the settlement agreement and what constitutes “stock” and “performance based” awards in that context.
The Background Facts: The parties were divorced via separation agreement in 2010. The separation agreement provided, in relevant part, that Husband shall pay alimony equal to 30% of his gross income, minus 20% of Wife’s gross income, with a minimum earning capacity for each party.
Per the separation agreement, gross income was to include “gross income from their base pay and any performance based bonuses received. Income shall not include moving expenses, any car allowance, sign on stock options or stock which may be awarded to either party…. The parties shall exchange income tax returns each year … for the purpose of establishing the actual gross income for the previous calendar year, which the parties understand will include any additional bonus income which was received by either party in the previous calendar year.”
At the time of dissolution, Husband was self-employed as a consultant working for multiple companies, one of which hired him in 2011 as an employee. That employment included a package of short-term and long-term incentives, including restricted stock units (RSUs) and performance stock units (PSUs). Husband was terminated in 2015 and received a severance payment.
Two post-judgment trial court decisions had previously been issued, not subject of this appeal. In 2015 the trial court found that short-term incentive payments constituted “performance based bonuses” within the meaning of alimony, rejecting the argument that only compensation based solely on individual performance should be included. In 2016 the trial court held that “sign-on” applied only to stock options and that “stock which may be awarded to either party” was excluded from the definition of gross income regardless of when awarded.
The subject of this appeal: In response to Wife’s motion that was subject of this appeal, the trial court began by stating that prior decisions would be considered the law of the case. As with the prior decisions, the trial court found the language of the separation agreement to be clear and unambiguous. The trial court concluded that RSUs and PSUs were “performance based bonuses” under the alimony inclusion language and were not “stock” under the alimony exclusion language. The trial court concluded that severance payment must be included in the calculation. The trial court did not hold Husband in contempt but issued remedial orders.
Husband appealed, claiming that the trial court erred in interpreting the separation agreement by concluding that (1) RSUs and PSUs were properly included in the alimony calculation, and (2) a severance payment was properly included in the alimony calculations.
The standard of review regarding the clear and unambiguous[1] agreement was plenary and as to factual findings as to the nature of the payments was subject to the clearly erroneous standard.
The Appellate Court held, contrary to the trial court’s conclusion, that RSUs are stock within the meaning of the alimony exclusion, as the RSUs were awarded and actually received in stock. The PSUs, however, were designed to be distributed in cash based on a formula referencing stock values and no stock was actually received. Therefore, PSUs did not fall into the definition of stock under the alimony exclusion. The Appellate Court further found no error in the trial court’s conclusion that the PSUs were performance based, under the alimony inclusion, as a form of incentive and compensation package intended to attract and retain employees.
The Appellate Court held that the trial court erred in interpreting gross income to include severance payment. Such payments were received in exchange for a release from claims that may arise out of the termination. Thus, it was neither base pay nor performance based under the separation agreement.
The Judgment was reversed only as to the orders to include RSUs and severance payments in the definition of gross income under the separation agreement.
[1] It was so clear and unambiguous that non-compliance with it was not deemed willful and it was subject of three trial court decisions and an appeal.
