In a New Jersey Divorce, What Happens With My Stock Options From My Employer?
As I have discussed in numerous blogs, marital assets are subject to equitable distribution. The court will look to see what assets were acquired during the marriage, in addition to assets acquired before the marriage yet significantly enhanced in value during the marriage. However, clients still frequently ask me what are considered assets anyways? When you typically think of an “asset”, tangible physical property comes to mind. Yet, what about things such as ownership interests in companies? Do they count as assets subject to equitable distribution as well? The New Jersey divorce case of Callahan v. Callahan addressed that issue in 1976 and it has been the law of our state throughout my career as a New Jersey divorce attorney. Let’s explore.
In Callahan, the parties divorce on November 13, 1975. The final judgment of divorced was initially entered in favor of the defendant husband on the legal grounds of cruelty. However, once the plaintiff petitioned the court, the judgment was amended to provide for a dual judgment of divorce. Additionally, the plaintiff wife asked the court to distribute property that her ex-husband owned that was not brought to the court’s attention when equitable distribution was first decided.
The defendant was an executive at an international corporation and had stock options in the company. At the time the parties divorced, the defendant owned the following options, which he acquired all throughout his marriage to the plaintiff: 1,500 shares at $23 a share, expiring February 1975; 500 shares at $34 a share, expiring May 1979; 500 shares at $29 a share, expiring February 1981; and 1,500 shares at $32 a share, expiring February 1981. The defendant first exercised his option on February 21, 1975 when the price was 33 ¾. He exercised the option is full with a $34,500 loan from Chase bank.
Upon hearing that the plaintiff wanted his stock options to be considered marital property for purposes of equitable distribution, the defendant stated to the court that they were not in fact property subject to distribution. The defendant claimed that owning stock options in a company was equivalent to owning the right to acquire an asset in the future. This point was significant to his argument because he stated that the options were not in fact assets and therefore not property. Furthermore, the defendant argued that pursuant to the company’s policy the options were not transferable other than by will.
When the issue was brought before the court, the court looked to Blitt v. Blitt, 139 N.J. Super. 213 (Ch. Div. 1976) for guidance. The court reasoned that the assets in Blitt were very similar to the ones at issue. Both of them constituted a form of compensation earned by the spouse during the marriage. Additionally, in both situations the assets were tied to respective plans that placed restrictions on the enjoyment of the assets. The defendant in the case argued that his stock options were different than other assets because it would be an expenditure to him to exercise the option. Yet, the court disagreed and held that the fact that an expenditure was required wasn’t crucial to the decision. Therefore, the court decided that the options were indeed subject to equitable distribution.
Once the court determined that the stock options were distributable, it faced an even greater challenge; how to distribute them. The court decided to bring up the idea of a constructive trust; a devise commonly used in wills and trusts law. It quoted a Supreme Court of New Jersey case stating when a constructive trust could be utilized— “there may be a constructive trust where the retention of the property or the beneficial interest would constitute an unconscionable advantage by the holder of the legal title, even though its acquisition was not wrongful. Where the property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest, equity holds him accountable as trustee.”
After deciding to implement the constructive trust, the court granted the plaintiff a 25% ownership of each remaining option with the defendant to act as the trustee. By appointing the defendant as trustee of the constructive trust, the court would avoid fraudulent activity on the part of the defendant toward the plaintiff.
On many cases that I have handled as a New Jersey divorce attorney, I have worked with my client’s family and wills and trusts lawyer, accountants and Wall Street experts and insiders to better understand your unique situation.
If you or a loved one are considering a divorce in New Jersey with assets such as the stock options described above, I invite you to reach out to my office to discuss the situation in detail.