Kentucky Case Law Roundup

United We Stand, Divided are our Marital Accounts

Cobane v. Cobane, Nos. 15-CI-00270 & 2016-CA-001869-MR (Ky. App. 2018)
Employee Incentive Programs & Post-Decree 'Vesting'

Dated March 23, 2018
Affirming in Part, Reversing in Part, and Remanding

Kentucky sure has been busy with vesting over the past few months. Although some of these recent cases do not directly intersect with retirement plans, they all relate to the larger question of what, when, and how various ‘assets’ develop into marital property interests, subject to equitable division in divorce. The topical overlap is made clear by the citations iterated within and amongst the cases themselves. See for yourself--

Enter: Grasch v. Grasch, No. 2016-SC-000591-DG (Ky. 2017), see my previous blog post, “Contingency Fee Contracts May be Considered Marital Property.” See also, my post on Duffy v. Duffy, Nos. 2016-CA-000983-MR & 2016-CA-000995-MR (Ky. App. 2018), “Unvested Restricted Stock Units (RSUs): Asset or Income Column, the Court Must Choose.”

More recently, we have Normandin v. Normandin, Nos. 13-CI-00741 & 2016-CA-000392-MR (Ky. App. 2018), my summary of which is further below, regarding unvested restricted stock options.

This case, Cobane, involves a unique fringe employee incentive program: Husband, in-effect, vested on a multi-year schedule, in a series of employer “loans” (to the tune of about a million bucks), toward which he made “payments” showing up as income on his paychecks, but which actually represented forgiven amounts on said loans. There were a total of 5 such loans, maturing over a period of 9 years, to be forgiven at various intervals. Were Husband to separate from employment at any point during that time, he would be required to pay back any loans not yet forgiven. At the time of trial, Husband testified the outstanding loan balance was a little less than $500,000.00.

Husband argued the outstanding balance was nonmarital as it represented unearned income, vesting post-decree. Husband relied upon Holman v. Holman, 84 SD.W.3d 903 (Ky. 2002), for the position that benefits that replace future income are nonmarital. Wife countered that at least a portion of the outstanding balance was marital, to the extent of coverture. In other words, if the loans -treated collectively- were forgiven over 9 years, or 108 months, and 70 of those months overlapped with marriage, then 65% of the loan balance was forgiven during the marriage, resulting in marital property, and 35% would be forgiven post-decree, resulting in Husband’s separate property. The trial court agreed with Wife, and entered an order requiring Husband to make direct, incremental payments to Wife, as the loans were incrementally forgiven. Husband appealed.

The Court of Appeals reviewed Wife’s arguments, including her reliance on Dotson v. Dotson, Nos. 2013-CA-001598-MR, 2013-CA-001658-MR, 12-CI-502147 (Ky. App. 2017), a recent case dealing with restricted performance units, a form of deferred compensation realized through a vesting schedule. The Dotson Court found the unvested units to be marital, to the extent they represented work performed during the course of the marriage, defeating the argument that the spousal interest was too speculative to be determined a property interest. (You will note Dotson is also discussed in this post’s ‘vesting companion case’ Normandin.)

The Court disagreed that Husband’s benefit was analogous to that in Dotson, although the Court’s stated distinction was hard for me to detect. In fact, as the Court explained its reasoning, it seemed to me to support the Dotson comparison. However, I also agree with the Court’s subsequent reference to McGinnis v. McGinnis, 920 S.W.2d 68 (Ky. App. 1995), in that the operative factor in determining whether benefits are marital is not whether the benefits vest pre-decree. Instead, as the Court noted, the question is whether the right to participate in the plan was earned during the marriage. (You will note this concept of ‘right to participate,’ and the McGinnis case, are also discussed in this post’s ‘vesting companion case’ Normandin.)

This is where I can pick back up and follow the Court’s reasoning, though it is still a very thin line for me: unlike the restricted units in Dotson, Husband’s right to the loan proceeds did not accrue until the loans were forgiven. The critical determinative fact seems to be that the loan forgiveness (infer ‘right to participate’ in the loan forgiveness program?) arises post-decree; thus, the outstanding balance as of that date must be nonmarital. Or at least so says the Court of Appeals in this case.

As discussed in my blog post below, where Normandin is a vesting cluster (due to the Court of Appeals’ mixed messages with regard to restricted options and units, at least in my humble opinion, through the cases discussed), Cobane -to me- stands for an important proposition: ‘Vesting cases’ will continue to turn on subtle facts (and unfortunately may look much like a coin toss), especially the more unique, creative, and sophisticated employee incentive programs become.

Kreimborg v. Kreimborg, Nos. 14-CI-501728 & 2017-CA-000244 (Ky. App. 2018)
Pre-Marital versus Marital Growth on Accounts

Dated: May 25, 2018
Reversing and Remanding

What does “marital portion” mean in Kentucky?

In many settlement agreements, it means just what it meant to the Kreimborgs:
“The parties shall equally divide the marital portion of all retirement accounts effective August 31st, 2015. The ‘marital portion’ is that portion accumulated from the date of the parties’ marriage until August 31st, 2015.”

Not much help? Yeah, not to the Kreimborgs either.

Husband’s 401(k) had a value at marriage of about $35,000.00. By August, 2015, the value was upwards of $79,000.00 (and spread between multiple accounts). The increase in value was clearly about $44,000.00. What was not so clear, however, was whether the retirement account increases were entirely or partially Husband's, based on the premarital balance, or whether, pursuant to the parties’ agreement, Wife was entitled to half of the increase in value during the marriage.

After a procedural game of ping-pong, the trial court ultimately determined that by way of KRS 403.190(2), Wife was only entitled to a proportion of the increase in value, not half of it, as she argued would have been required by the agreement.

The relevant portion of KRS 403.190(2)(e) reads:
“For the purpose of this chapter, ‘marital property’ means all property acquired by either spouse subsequent to the marriage except . . . [t]he increase in value of property acquired before the marriage to the extent that such increase did not result from the efforts of the parties during marriage.”

Great! Now the Kreimborgs can get some rest. But wait! Not so fast.

The Court of Appeals remembered a little something called KRS 403.180, which governs the enforceability of written separation agreements. Under KRS 403.180, property disposition provisions contained in agreements, such as the Kreimborgs’, are binding upon the court unless they are unconscionable.

The Court of Appeals aptly noted that not only are property settlements binding under KRS 403.180, but they also trump other law, including KRS 403.190. Remember: parties are generally free to contract around the law regarding marital property dispositions. See Gentry v. Gentry, 798 S.W.2d 928, 934 (Ky. 1990).

So, the agreement wins! But can the Kreimborgs sleep yet? Not yet, the Court has yet to tell them what the agreement -and marital portion- actually means… oh yes, that again.

The Court deconstructed the agreement and the meaning of “marital portion” within:
“Paragraph (6) of the Agreed Order contains only two lines, the first of which reads, ‘[t]he parties shall equally divide the marital portion of all retirement accounts effective August 31st, 2015.’ This line explicitly includes all retirement accounts. It does not exclude premarital retirement accounts. It also requires the ‘marital portion’ to be equally divided. This is particularly significant because the second line of the paragraph defines ‘marital portion’ as ‘that portion accumulated from the date of the parties’ marriage until August 31st, 2015.’ The provision’s reference to the ‘portion accumulated’ is not inherently limited but refers to the overall increase in value of any retirement account. Accumulation may occur as a result of ‘continuous or repeated additions, ... profit accruing on sale of principal assets, or increase derived from their investment[.]’ Accumulations, BLACK’S LAW DICTIONARY (6th ed. 1990).

More importantly, the second line of the Agreed Order provision defining ‘marital portion’ to mean ‘accumulation’ effectively supersedes the definition of ‘marital property’ in KRS 403.190(2), which excludes ‘[t]he increase in value of property acquired before the marriage.’ Paragraph (6) of the Agreed Order contains no such exclusion.”

With that, the Court found that Wife was entitled to half of the disputed accumulations during the marriage, versus a much more limited proportion, as Husband had hoped. So, at least Ms. Kreimborg can get some sleep now.

A settlement agreement is a powerful drug. It can’t be said enough, be precise with settlement agreement language. Take the time to say exactly what is intended. Then you will be able to sleep at night too.

Normandin v. Normandin, Nos. 13-CI-00741 & 2016-CA-000392-MR (Ky. App. 2018)
Restricted Stock Options (and Inconsistencies)

Dated: June 1, 2018
Affirming

More recently, we have Cobane v. Cobane, Nos. 15-CI-00270 & 2016-CA-001869-MR (Ky. App. 2018), my summary of which is above, regarding employee incentive programs and post-decree ‘vesting.’

In this case, Normandin, Husband’s Restricted Stock Units (RSUs) were earned at his employer’s discretion, based on his prior year’s performance, and were subject to certain restrictions, including a three-year vesting schedule. As you might have already guessed, that schedule is the crux here. For added impact: Husband’s RSUs were valued at $220,000.00, and vested only 18 days after the conclusion of trial.

After spending much alone-time with this Opinion (yes, I know how to have fun!), I have decided it may be of less value, at second blush, than it might otherwise seem based on its conclusion that Husband’s unvested RSUs were not marital property.

For starters, the Court misattributed a quote to the McGinnis Court, specifically that "if a benefit is a mere expectancy, it is non-marital." In fact, McGinnis flatly rejected this concept in favor of the reasoning behind Poe v. Poe, 711 S.W. 849 (Ky. App. 1986):
“[A]lthough traditionally it was considered that a spouse's interest in a nonvested pension plan was a mere expectancy which could not be divided as marital property unless there was some present right to either immediate or future payment, such reasoning is inadequate where an employee has ‘a vested interest to participate in’ the employer's pension plan. Instead, the employee's spouse in such a situation shares in the entitlement even though the pension plan's proceeds might never be enjoyed due to the employee's premature death or other such circumstances.” McGinnis v. McGinnis, 920 S.W.2d 68, 70 (Ky. App. 1995). (Emphasis added.)

McGinnis keenly observed the critical distinction realized by the Poe Court in reconciling prior case law deeming unvested benefits a mere expectancy: vesting in one's pension benefit versus vesting in one's right to participate in the pension plan itself. Poe determined the 'right to participate in the plan' was key to resolving any marital property interest in the pension benefit, notwithstanding whether a participant also had a vested 'right to payment' of the pension benefit. Poe and McGinnis were the primary Court of Appeals cases Wife relied upon in support of her argument that Husband’s unvested RSUs should be considered marital property. Thus, it is of no small significance that -as part of its basis for ruling against Wife- the Normandin Court miscited and/or misunderstood McGinnis' reliance on Poe.

Beyond that, the Court posited a statement, wholly unsupported by state law, and which I am unable to reconcile with federal law: “[P]ensions are a less speculative benefit mechanism, and the employee has a right to the benefit before it is fully vested.” Unless we are talking about a contributory pension (where the employee makes their own plan contributions, which amounts would be vested), employees do not have any right to their unvested pensions. See 26 USC §411. Rather, employees have the right to participate in the plan, by virtue of their continued employment, in hopes of ultimately becoming partially or fully vested. See Poe v. Poe, 711 S.W. 849, 855 (Ky. App. 1986). This is a huge distinction, and pivotal to the rationale relied upon by the Poe Court in overturning years of case law otherwise determining unvested property rights to be mere expectancies too speculative to be considered divisible marital property.

I am also of the opinion that the Court did not convey the full extent to which Penner v. Penner, 2011-CA-002238-MR, 07-CI-504079 (Ky. App. 2013), is relevant to the instant case (Penner is another case cited by Wife in support of her argument). This Court simply discounts Penner as a case about “double-dipping,” stating, “The Penner court did not direct the trial court on how to resolve the duplicative use of RSUs in its calculations. Therefore, Penner is not instructive on whether the court should have classified the RSUs at issue as marital property.” I agree that Penner is about “double-dipping,” but I disagree that the Penner court did not direct the trial court on how to resolve its duplicative ruling. I quote directly from Penner: “Therefore, we vacate … and remand for instructions that the trial court equally divide the stock upon vesting and not include the stock as income to either party, treat the stock as income to Tom upon vesting instead of marital property, or divide the stock upon vesting and attribute half as income to Lane and half as income to Tom.” Albeit, Tom didn’t argue that the unvested RSUs should not be considered marital property, but at the same time, this sounds like an absolute direction to the trial court from the Court of Appeals.

The Court instead found its footing on two other Court of Appeals cases. The first, Scharber v. Sharber, 35 S.W.3d 841 (Ky. App. 2001), wherein the Court of Appeals found that an offer of a bonus not made to the employee/Husband until after the date of divorce could not be considered a marital interest, but rather an expectancy. I will note here, that prior cases involving stock options have reviewed Scharber, and have observed distinction when the grants existed during the marriage. For instance, in Murray v. Murray, Nos. 01-CI-00799, 2009-CA-002385-MR (Ky. App. 2011), an unpublished case, the Court analogized stock option grants to pension rights, and held that Scharber was not applicable, citing Scharber itself for the proposition that, “[t]his bonus is unlike a [unvested] pension in that no interest, even a speculative one, existed prior to the offer of the bonus.”

At this point, I might spend more time discussing Gallagher v. Gallagher, No. 2012-CA-000671-MR (Ky. App. 2013), the notably unpublished case this Court ultimately hung its hat on. However, instead, I shift my focus to Duffy v. Duffy, Nos. 2016-CA-000983-MR & 2016-CA-000995-MR (Ky. App. 2018), a recently published Court of Appeals case (which I’ve blogged about). In Duffy, among other things, the Court visited relevant case law regarding Restricted Performance Units, “RPUs” (for purposes herein, RPUs and RSUs are nearly identical insofar as a marital property analysis is concerned), and marital property rights, including Gallagher, and determined that: “[i]n reviewing the case law on the issue, culminating with Dotson, we are of the opinion that the trial court correctly held that RPUs were marital property.” Dotson, the cited case, extensively reviewed Gallagher as well, and declined to agree with Gallagher’s characterization of RSUs as entirely speculative. Duffy instead sided on the sound reasoning of both Poe and McGinnis. Remember, Poe and McGinnis were both cited by Wife in this case, as discussed above, and both were dealt away in a problematic manner by this Court, as also explained above.

The real rub here is that Duffy (heard by a different bench) was published after the briefs in Normandin were filed, even though the Duffy Opinion was ultimately issued before Normandin. Thinking about that, I looked on the Court of Appeals and Kentucky Supreme Court websites just today, and it appears Wife still has few days left to seek review by Supreme Court (notably, Wife motioned the Court for a rehearing, but her motion was recently denied). But I also wonder, based on the revelations in Duffy, and for the many other reasons I’ve noted above, how much precedential value Normandin will have.

There are slight distinctions between Gallagher, Duffy, and Normandin that might be finessed in presenting your own cases in settlement or trial. Unless or until there is a cogent answer, and in order to best advise your clients regarding potential outcomes when dealing with restricted stock options or performance units, you must review each of the above cases, and note the subtle differences in each of the incentive program offerings.

8/27/2018: Important Update
A Motion for Discretionary Review is now pending at the Supreme Court of Kentucky (motion filed 8/24/2018). You can bet your bottom restricted unvested dollar I will be watching this closely.
12/26/2020: Important Update
The Supreme Court of Kentucky rendered its Opinion on 12/17/2020. You can now bet your bottom restricted unvested dollar I will be blogging about it as soon as I stop hyperventilating from the excitement. In short, as I predicted (or rather, pontificated) above, the Supreme Court found that the trial court improperly classified the RSUs as entirely nonmarital property. The High Court held that appropriate classification of RSUs required the trial court to apply a rebuttable presumption: that RSUs are earned over the period between grant and vesting, and the proportion of RSUs acquired for purposes of marital classification is the proportion of time between grant and decree of separation.

Barr v. Barr, Nos. 13-CI-500764 & 2016-CA-000132-MR (Ky. App. 2018)
Marital Interests and Survivorship Benefits for Federal Employees

Dated: June 8, 2018
Affirming in Part, Reversing in Part, and Remanding

A good primer to start the engines, courtesy of the Barr Court:
“In a dissolution proceeding involving contested property distribution issues, the family court is required to follow three steps. It must “categorize each piece of contested property as either marital or nonmarital. Next, the court must assign each party's nonmarital property to that party. Finally, the court must equitably divide the parties’ marital property in just proportions.” Smith v. Smith, 235 S.W.3d 1, 5 (Ky.App. 2006) (footnotes omitted).”

Husband participated in a Thrift Savings Plan, TSP, essentially a 401(k) for federal government employees. Husband presented evidence of investment growth on his pre-marital portion by way of uncontroverted, expert testimony on that issue. The growth was significant, due in part to the long-term marriage (18 years): approximately $120,000.00. The trial court ignored the testimony and restored to Husband only his initial pre-marital balance of about $94,000.00, without any crediting for the subsequent investment growth. The Court of Appeals remanded to the trial court, finding Husband was due the increase in value on his pre-marital portion.

Not so easy for Husband was proving his marital interest in several IRAs. The trial court found Husband did not meet his evidentiary burden to trace/establish nonmarital contributions. See Sexton v. Sexton, 125 S.W.3d 258, 266 (Ky. 2004). That isn’t so interesting, it happens all the time. (In fact, for a recent case, check out Duff v. Duff, Nos. 14-CI-503285 & 2016-CA-001759-ME.(Ky. App. 2018)). However, what is interesting is that in this case the Court cited to Maclean v. Middleton, 419 S.W.3d 755 (Ky. App. 2014), observing, “[w]here the party claiming the non-marital interest is a skilled business person with extensive record keeping experience, the courts may be justified in requiring documentation to trace non-marital assets into marital property.” Oh wait, did I mention Husband was an attorney, and had been for 49 years?! You can probably guess the ending here. The Court of Appeals affirmed the trial court.

The final issue raised by Husband concerned the trial court’s award to Wife of survivor benefits related to his federal pension. Note: the Barr case does not explain under what circumstances and to what extent Kentucky law may require or permit surviving spouse protection, as part and parcel of the marital pension benefit, and/or as part of an equitable and fair division of the marital property interest, itself. Here, Husband simply took issue with the trial court’s order that Wife be awarded full survivor benefits, and argued that instead, she should only have been awarded such protection to the extent of her assigned interest in the pension, or 42%. As is a commonly voiced concern, in my experience, Husband wished to reserve his right to provide for a future spouse (and widow) the remaining interest, or 13% (the maximum survivor benefit under CSRS is 55%).

What is interesting, at least to me, is that the Court treated the trial court’s award of a survivor annuity -meant to protect a marital property interest- as a spousal support issue, citing to an out-of-state case, Caldwell v. Caldwell, 103 Md. App. 452, 653 A.2d 994 (1995). This is a first in Kentucky, to my knowledge. However, taking a look at Caldwell, and related cases, I am not so sure this is as sweeping a potential precedent as it appears at first blush. I think the support approach in Barr likely only applies in the limited scenario when a court awards what is called ‘excess survivorship.’ Meaning, an amount above-and-beyond the amount necessary to protect the marital property interest. In this case, it is certainly arguable that 13% of the survivor annuity was Husband’s separate property. The survivor ‘tail,’ 13%, is likely all that the Barr Court had been attempting to fashion as ‘support’. The Opinion is not overly articulate on this point, and ends with “[u]nder the facts, the family court did not abuse its discretion.”

Of note, there are several Ohio cases, and other out-of-state cases, touching the issue of excess survivorship. Some treat the tail as a marital gift, some as a distributive property award, and some -as here- as spousal support. Some courts attempt to ‘equalize’ the tail with other marital property, in cases where survivorship has already been elected during the marriage, and such election is irrevocable.

Under similar circumstances, there is at least one Kentucky case, of which I am aware (and blogged about at the time, wow, almost 5 years ago!) , where such survivorship is treated as a vested property interest when elected during the marriage: “[T]he parties had made a joint decision during the marriage to economically protect Carla should Tom predecease her.” See Gogan v. Gogan, Nos. 10-CI-01600, 2012-CA-001634-MR, (Ky. App. 2013). Interestingly, in Gogan, an unpublished case, the Court declined Husband’s invitation to view the survivorship benefit granted to Wife as an inappropriate and indirect form of permanent maintenance, and instead sided with Wife that the court properly awarded the survivor benefit as marital property.

There are obviously many ways to approach survivorship, but the most important thing is to address it when negotiating settlement, or at trial. Especially if you represent the non-participant spouse. Particularly with federal civil service plans, under certain circumstances, you only get one bite at the apple, and if survivorship isn’t awarded in the original property settlement agreement, it can’t be awarded later. This can have a devasting, long-lasting effect.

A pension is generally regarded as a lifetime future stream of income. If both spouses don’t walk away with such, then the marital benefit has not been fully distributed. Put another way, the non-participant spouse has an incomplete ownership interest in the marital property. That to me, is common sense. My two cents, anyway. (See what I did there?)

Saunders v. Saunders, 2016-CA-000765-MR & 2016-CA-001057-MR, (Ky. App. 2018)
For Your Enjoyment

Dated: July 27, 2018
Affirming

I just share one quote from this case, that I love, and I am sure you will find use for in your future brief writing:
"It is axiomatic that a party may not “feed one can of worms to the trial judge and another to the appellate court.” Kennedy v. Commonwealth, 544 S.W.2d 219, 222 (Ky. 1976), overruled on other grounds by Wilburn v. Commonwealth, 312 S.W.3d 321, 327 (Ky. 2010) (citations omitted))."

Yeah, I know. You are welcome!

For More Kentucky Case Law Updates, check out my last installment, here.

Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

2018Eileen ZellAugust 23, 2018KY, Kentucky, Appeals, Marital Property, Family Law, IRA, Tracing, Equitable Division, Coverture, Expert, ERISA, Vesting, Retirement, FERS, Pension, Avoiding Pitfalls, Survivorship, Divorce, QDRO, Stocks, Restricted Stock, Employee Incentive Programs, Poe