Stock options not factored into husband’s alimony obligations
Didn’t count as shareable ‘bonus’ under separation agreement
By: Eric T. Berkman September 23, 2022
The Appeals Court has found that a former husband’s stock options did not constitute “bonus” income payable to his ex-wife as alimony under the couple’s separation agreement.
The agreement, merged into the divorce judgment, obligated defendant Andrew Jones to pay plaintiff Lisa Jones 31 percent — 15 percent as alimony and 16 percent as child support — of the gross amount of “any manner of bonus” he might receive from his employer.
The Appeals Court noted that the case illustrates the complexity of executive compensation schemes and the importance of precision in drafting separation agreements.
Though the separation agreement did not explicitly define what counted as a bonus, the husband took a hard line during negotiations against including interest in stock options earned post-separation. He also apparently insisted he would only pay alimony and support on cash bonuses.
After the divorce, the husband received $1 million largely attributable to the exercise of stock options. The wife unsuccessfully sought a declaration in Probate & Family Court that it should be treated as a bonus and argued on appeal that the trial judge erred, given that the employer had initially described the payment as a bonus before revising the corporate resolution approving the payments.
The Appeals Court disagreed.
“[I]t is the intent of the parties to the divorce, not the intent of the company — or even the labels attached to various forms of compensation by the company — that ultimately governs,” Judge Mary T. Sullivan wrote for the panel. “In this case, after a careful and thorough review, the [trial] judge found that by referring to ‘any manner of bonus’ the parties did not include stock or stock options in the definition of ‘bonus.’ That finding was fully supported by the evidence and did not constitute an error of law as to the definition of ‘bonus.’”
The court nonetheless remanded the case to consider income from the exercise of stock options in determining the husband’s total income for purposes of child support.
The 28-page decision is Jones v. Jones (and a consolidated case), Lawyers Weekly No. 11-091-22.
‘Thoughtful analysis’
Gayle Stone-Turesky of New Bedford, who represented the husband on appeal, said the decision highlights the importance of clear drafting.
“You need to do that in whatever you do, but it’s particularly important in areas like executive compensation, which can mean so many different things to so many people,” she said.
The wife’s appellate counsel, Richard M. Novitch of Boston, who was not involved in drafting the underlying agreement or any of the litigation at the Probate Court, said the case highlights the “endless and ever-changing permutations” of executive compensation.
“In Jones, language that appeared open-ended — ‘any manner of bonus’ — was actually purposefully restrictive.”
— Ana E. Schwarz, Needham
“What might be called a stock option today might be called something different two years from now,” Novitch said. “Trying to draft an agreement is like trying to follow the bouncing ball. You never know what the terminology will be year by year.”
Needham family lawyer Ana E. Schwarz said the case reiterates that when an ambiguity arises in a separation agreement, the Appeals Court will consider extrinsic evidence to determine the intent of the parties.
“In Jones, language that appeared open-ended — ‘any manner of bonus’ — was actually purposefully restrictive,” Schwarz said. “As attorneys, when drafting, we have to take into consideration the interplay between the interpretation of language in the context of underlying legal standards, the facts of a specific case, and the public policy behind Massachusetts laws.”
Jason V. Owens of Hingham said the decision demonstrates how, after the Supreme Judicial Court’s recent seismic Cavanagh v. Cavanagh decision, parties may define what constitutes income for alimony purposes, but they do not have the freedom to define income for support purposes, even when the parties’ combined income exceeds the presumptive $400,000 limit of the child support guidelines.
In Cavanagh, in addition to requiring the separate consideration of alimony and child support in every case, the SJC voided a provision in a divorce agreement stating that income from a husband’s second job would not be factored into his support obligations. Similarly, in Jones, the Appeals Court found that while a husband’s stock options did not count as a bonus for alimony purposes, they should still be factored into his total income for purposes of child support.
“Prior to Cavanagh, the Appeals Court would have accepted the judge’s decision not to order child support on the father’s stock options as a reasonable exercise of the judge’s discretion not to order child support on income over $400,000,” Owens said. “Post-Cavanagh, new and arguably duplicative steps are required at every point in the process, from negotiating an agreement to entering judgment to appeals.”
‘Any manner of bonus’
When the parties divorced in 2006, the judgment incorporated their separation agreement, which provided that Andrew would pay $900 a week in alimony and $334 in child support.
The agreement also called for Andrew to pay additional child support and alimony equivalent to 31 percent of the gross amount of “any manner of bonus” paid by his employer, with 15 percent designated as alimony and 16 percent designated as child support.
During a lengthy negotiation over the terms of the separation agreement, Andrew apparently objected to including in the bonus provision any interest in stock options granted after separation. He further rejected proposals from Lisa that she receive a percentage of any future “income allotment” as child support and that she receive a percentage of “any manner of bonus, incentive payment or other type of lump sum payment” by his employer.
Andrew apparently reasoned that options granted or exercised post-separation were earned by him alone and were not attributable to the marriage.
The final language in the separation agreement did not specifically explain what the term “bonus” did or did not include.
A year after the divorce, Andrew took a job with Integrity Interactive Corp., accepting $200,000 in annual salary, a bonus of up to 40 percent of his salary, and incentive stock options.
The options were subject to an accelerated vesting schedule should Integrity be sold or merged. Andrew was required to exercise those options within three months of termination of his employment.
In 2010, Integrity’s CEO increased Andrew’s compensation to make up for a perceived inadequacy in his initial grant of stock options.
Integrity was in the process of being sold, preventing the grant of additional stock options, so the CEO proposed “additional compensation” in the form of a severance package, given that Jones would lose his job after the sale.
The package included a $1 million “one-time severance payment,” minus all proceeds Andrew would receive from the exercise of his stock options, in order to “true up” any deficiency in the original grant.
When the sale went through, Andrew received $1 million in income: $628,423 from the exercise of his options and $371,457 in “severance.”
Jones v. Jones (and a consolidated case)
THE ISSUE: Did a former husband’s stock options constitute “bonus” income payable to his ex-wife as alimony under the couple’s separation agreement?
DECISION: No (Appeals Court)
LAWYERS: Gayle Stone-Turesky of Wilkinson & Finkbeiner, New Bedford; Judith McKinnon of the Law Office of Roseanne Klovee, Stoneham; Svana M. Calabro of Sugarman, Rogers, Barshak & Cohen, Boston (husband)
Richard M. Novitch, Dea Ilia Coka and Gary O. Todd, of Todd & Weld, Boston (wife)
Another employee received cash only in an arrangement described as a “bonus,” and the initial resolution authorizing Andrew’s payments described his package as a “bonus” as well.
The CEO, however, requested that the resolution be revised to label Andrew’s payment as “additional compensation” and later testified that that was necessary for tax and governance reasons.
In August 2011, Lisa filed a declaratory action seeking a determination that the $1 million was indeed a bonus under the separation agreement.
After extensive litigation, the case went to trial in May 2017.
In May 2019, Probate & Family Court Judge George F. Phelan issued findings that the bonus provision did not apply to stock or stock options. He also retroactively terminated Andrew’s alimony obligation while prospectively increasing his child support obligation.
Lisa appealed.
Parties’ intent
The Appeals Court noted that the case illustrates the complexity of executive compensation schemes and the importance of precision in drafting separation agreements.
However, Sullivan wrote, “in a divorce proceeding, our statutory guidepost is G.L.c. 208 [the divorce statute], and it is that statute and the intent of the parties to the separation agreement that matters.”
Here, Sullivan continued, evidence presented at trial — particularly evidence that Andrew rejected any proposals to include stock options or preferred shares in the purview of the bonus provision — demonstrated that Andrew did not intend for stock options to be construed as a bonus in the separation agreement.
“[The trial judge] also found that the husband did not manipulate the terms of his separation from Integrity for purposes of alimony avoidance,” Sullivan observed. “The judge’s factual findings were supported by the evidence, and he did not err in his ultimate construction of the separation agreement.”
Still, the court found that income from stock options should be considered as part of Andrew’s income for child support purposes.
“Accordingly, it is necessary to remand this matter to permit the judge to explicitly consider all the husband’s income in awarding child support, and to reconsider whether that award of child support should apply retroactively or prospectively,” Sullivan wrote.
