STATE OF MINNESOTA
IN COURT OF APPEALS
Kim Susan Hislop, petitioner,
John Thompson Hislop II,
Filed August 18, 1998
Hennepin County District Court
File No. DC200572
Alan C. Eidsness, Kristi L. Skordahl, Henson & Efron, P.A., 1200 Title Insurance Building, 400 Second Avenue South, Minneapolis, MN 55401 (for appellant/ respondent John Thompson Hislop II)
Considered and decided by Amundson, Presiding Judge, Willis, Judge, and Holtan, Judge.*
In consolidated appeals from a dissolution proceeding, wife challenges the district court's determination that certain stock options are partially nonmarital property, while husband appeals the court's denial of his motion to terminate spousal maintenance and its award to wife of interest earned on the portion of proceeds from the exercise of her stock options that husband withheld for the payment of taxes. We affirm.
John Thompson Hislop II (husband) and Kim Susan Hislop (wife) were married in 1972. They have two daughters, the younger of whom will reach majority in November 1998. Wife filed for dissolution of the marriage in 1994 and obtained custody of both girls.
In 1993, husband became Vice President and Chief Financial Officer of Telex Corporation, where his compensation included options to purchase 12,000 shares of Telex stock. The options were granted to husband at the time of his employment, but they were exercisable in increments of 3,000 shares each in May 1994, 1995, 1996, and 1997. The right to exercise any remaining options would be lost if husband left his employment at Telex.
Wife, who attended college for two years, remained a homemaker throughout most of the parties' marriage and testified that husband actively discouraged her from pursuing a career of her own. At the time of the dissolution, she had become interested in physical training and had obtained three part-time jobs in the field. But in a 1997 affidavit, wife said she had suffered a back injury that precluded further work in physical training.
During the dissolution proceedings, the parties agreed on the record that wife should receive permanent maintenance, but they disputed the amount. In December 1994, the court dissolved the marriage pursuant to a partial judgment and decree that reserved the issues of the amount of permanent maintenance and the distribution of husband's Telex stock options. In an order dated June 1, 1995, the court set maintenance at $6,000 per month and concluded that the stock options were partially marital and partially nonmarital; the court equally divided the marital portion, resulting in wife receiving rights to exercise through husband the options to 4,215 of the 12,000 shares. The order provided that wife was responsible for payment of taxes "at the time" she exercised the options. The court directed the parties to draft an amended judgment, but because they could not agree on language, no judgment was entered until the court granted husband's summary judgment motion in December 1997.
In May 1997, Telex merged with another company and recapitalized, which required wife to exercise most of her stock options. Wife received $1,035,292 in net proceeds from sale of the stock she acquired by exercise of the options; husband withheld an additional $933,481.20 to pay the taxes due on the sale. Husband paid the taxes in December 1997 and April 1998; in the meantime, he invested the money withheld and kept for himself the interest earned, which exceeded $50,000.
After Telex's recapitalization was announced, husband moved to terminate the maintenance award on the ground that wife's receipt of cash from the sale of her stock constituted a change in circumstances. Husband also moved for summary judgment as to the other reserved issues. Wife moved for an award of the interest earned on the sale proceeds, for reopening of the property division to grant her a larger percentage of the stock options, and for an increased maintenance award.
In December 1997, the district court issued an amended judgment and decree that did not change the level of maintenance or the allocation of stock options in the June 1995 order. In an accompanying order, the court found that it "properly applied the law" in allocating the stock options and denied husband's motion to terminate maintenance, concluding that
[t]he fact that [wife] now has received assets which she can invest is insufficient by itself to warrant a modification. At the time spousal maintenance was established, it was assumed that [wife] would receive substantial assets.The court also granted wife's motion for an award of the interest earned on the withheld sale proceeds.
Husband appealed the denial of his motion to terminate maintenance and the award of the interest on the withheld sale proceeds. Wife appealed the denial of her motion to reallocate the stock options. This court consolidated the appeals, and we affirm the district court in all respects.
I. Allocation of Stock Options
Wife argues that all of husband's stock options are marital property. Whether property is marital or nonmarital is a question of law, but this court defers to the district court's findings as to the underlying facts. Campion v. Campion, 385 N.W.2d 1, 4 (Minn. App. 1986).
Compensation for services that a party performs after the dissolution of a marriage is nonmarital property. See Ward v. Ward, 453 N.W.2d 729, 732 (Minn. App. 1990) (concluding that personal injury settlements that compensate for future economic loss occurring after dissolution are nonmarital property), review denied (Minn. June 6, 1990). The only published Minnesota case that addresses whether stock options that have been granted but are not exercisable at the time of the dissolution are marital property is Salstrom v. Salstrom, 404 N.W.2d 848 (Minn. App. 1987). This court concluded that the options in that case had both marital and nonmarital aspects and that the appropriate "starting point" for their allocation should be a "time rule" in which the marital interest is expressed as a fraction: the numerator is the number of years or months of marriage after the options are granted and the denominator is the total number of years or months between the date that the options are granted and the date when they may be exercised. Id. at 851-52. The court emphasized that "the time rule is not inflexible and can be modified depending upon the particular facts of the case, including the different purposes to be served by the stock options." Id. at 852.
Wife contends that the primary consideration in allocating stock options under Salstrom is the reason that the stock options were granted and that where options are granted primarily for the purpose of inducing a married executive to join a company, the options are entirely marital property. But the only evidence that wife offers regarding the purpose of the options here is language in Telex's stock option documents, which states that the purpose of the options is to enable the company to "obtain and retain the services" of key executives. Husband testified that he sought to leave his previous employer because he wished to avoid relocating to Israel, that he first approached Telex for employment, and that the stock options were included in Telex's initial offer, which husband accepted without further negotiation. The record therefore shows that while Telex may grant options in part as a means to attract executive talent, the options are also intended to enable Telex to retain those executives for a certain period of continuous service.
The time rule appears designed precisely for situations where stock options compensate in part for joining a company but also are intended to reward an executive for remaining at that company for a stated period. For example, husband's option to buy 3,000 shares of stock in 1997 could be exercised only if husband retained his employment at Telex for four years. Husband and wife were married for 42% of that four-year period, and wife therefore contributed to 42% of the effort by which husband earned the right to exercise that option. See Hug v. Hug, 201 Cal. Rptr. 676, 684 (Cal. Ct. App. 1984) ("the community's share of * * * benefits is to reflect the extent of the community effort in earning the contractual right to receive those benefits"). Under the time rule, therefore, 42% of the stock option exercisable in 1997 is marital property.
We conclude that the district court did not clearly err in implicitly finding that the purpose of the stock options was best reflected by application of the time rule. Moreover, we see nothing in the record to support a conclusion that the stock options were intended solely or primarily to attract, rather than to retain, husband's services. Cf. Salstrom, 404 N.W.2d at 850 (noting that timing of exercise suggested options were granted largely as inducement to join company). We therefore determine that any error in the district court's failure to make explicit findings as to the purpose of the options is harmless. See Minn. R. Civ. P. 61 (providing that harmless error is to be ignored).
II. Award of Interest on Withheld Sale Proceeds
The June 1995 order granted wife the right to exercise the stock options awarded her "through" husband and provided:
At the time [wife] exercises her options, she should do so in compliance with the tax and security laws. Specifically, [wife] should pay the purchase price plus the tax cost to exercise those options based upon [husband's] tax bracket at the time that [wife] exercises her interests in the options allocated to her.Husband's counsel claimed at oral argument that the court's order required husband to withhold income for taxes and forward the net proceeds to wife, but he could direct the court to no provision of the order to that effect.
By the terms of the June 1995 order, the stock options allocated to wife are wife's property. Any proceeds from exercise of the options, therefore, are also her property. Husband argues that because the court's order provides that wife should pay taxes "at the time" she exercises her options, she should not be entitled to interest earned between exercise of the options and payment of taxes. But husband has no ownership interest in the stock options to give him a claim to interest income resulting from their exercise. Even accepting husband's doubtful premise that wife was not entitled to possession of the gross sale proceeds because the order requires wife to pay taxes "immediately" upon exercise of her stock options, the share of the proceeds that husband withheld properly belonged to the federal and state tax authorities, not to him. Because husband has no claim to the proceeds from the sale of wife's stock under the court's order or any other law, we affirm the district court's allocation of the interest on those proceeds to wife.
III. Motion to Terminate Maintenance
[T]he decision not to modify maintenance is in the sound discretion of the trial court, and will not be reversed except upon a clear showing of an abuse of discretion. In order for this court to find the trial court abused its discretion, there must have been a clearly erroneous conclusion that is against both logic and the facts on record.Cisek v. Cisek, 409 N.W.2d 233, 235 (Minn. App. 1987) (citations omitted), review denied (Minn. Sept. 18, 1987). A district court's discretion to modify a maintenance award should be exercised "cautiously and only upon clear proof of facts showing that * * * modification [is] equitable." James v. James, 397 N.W.2d 587, 590 (Minn. App. 1986).
A maintenance order may be modified upon a showing of
(1) substantially increased * * * earnings of a party [or] (2) substantially * * * decreased need of a party * * * , any of which makes the terms [of the order] unreasonable and unfair[.]Minn. Stat. § 518.64, subd. 2(a) (1996). The moving party has the burden of demonstrating "both a substantial change in earnings and unfairness of the existing obligation as a result of the change." Savoren v. Savoren, 386 N.W.2d 288, 291 (Minn. App. 1986). Thus, "a favorable change in an ex-spouse's income, absent a showing that the second threshold * * * (unreasonableness and unfairness) has been met, does not by itself constitute sufficient grounds" to modify maintenance. Cisek, 409 N.W.2d at 236.
Although a maintenance recipient is not required to invade the principal of her assets to pay her living expenses, income earned from the assets is considered in determining the propriety of a maintenance award. See, e.g., Kruschel v. Kruschel, 419 N.W.2d 119, 122 (Minn. App. 1988). Considering that investment of the proceeds from the exercise of the stock options awarded to wife at an interest rate of 5% would increase wife's income by more than $50,000 per year, we agree with husband that wife has experienced a substantial increase in income within the meaning of the statute. Cf. Peaslee v. Peaslee, 400 N.W.2d 447, 449 (Minn. App. 1987) (concluding that $1,100 decrease in obligor's monthly income was "significant" but not "substantial" in view of obligor's net monthly income of $4,500 after maintenance and $900,000 in assets). But we interpret the district court's finding to be that the change did not render the existing arrangement unreasonable and unfair, and we conclude that the court did not abuse its discretion in so finding.
"The terms 'unreasonable and unfair' * * * are strong terms which place upon the claimant a burden of proof more than cursory." Giencke v. Haglund, 364 N.W.2d 433, 436 (Minn. App. 1985) (citation omitted). Husband is correct that "maintenance depends on a showing of need." Lyon v. Lyon, 439 N.W.2d 18, 22 (Minn. 1989). But the court found that wife's "reasonable" expenses in view of the "affluent" standard of living during the marriage were $82,980 per year after taxes. While husband's expert testified that wife should be able to earn at least 8.5% interest on her investment, wife's expert gave that rate as a maximum and testified that such a return would require wife to place her fixed asset base in high-risk investments. This court generally defers to a district court's evaluation of the credibility of witnesses. General v. General, 409 N.W.2d 511, 513 (Minn. App. 1987). Wife's affidavits indicate that she is keeping the assets in a secure but low-interest money market account while attempting to teach herself enough about finances to avoid being entirely at the mercy of a financial planner; there is no evidence that wife is acting in bad faith so as to require this court to impute a higher rate of return. Cf. Hecker v. Hecker, 568 N.W.2d 705, 710 (Minn. 1997) (imputing employment income to recipient wife where referee found that wife failed to make good-faith effort to achieve self-sufficiency as required by stipulation).
Moreover, although an award of maintenance may not be based solely on the obligor's ability to pay, the fact that an obligor's income increases concomitantly with a recipient's is relevant to the question of whether a change in circumstances renders a maintenance award unreasonable and unfair. See, e.g., Halvorson v. Halvorson, 402 N.W.2d 168, 172 (Minn. App. 1987). It is undisputed that husband also has exercised a substantial portion of his stock options and has profitably invested the proceeds. Also relevant to the question of reasonableness is the fact that an increase in the recipient's income was contemplated at the time of the dissolution. See, e.g., Tuthill v. Tuthill, 399 N.W.2d 230, 232 (Minn. App. 1987) (affirming conclusion that wife's employment did not render award unreasonable where small amount of maintenance indicated that it was presumed that wife would have additional income). Here, both parties knew at the time of the dissolution that the stock options were valuable, although their exact value was not known, and their exercise was foreseeable. Cf. James, 397 N.W.2d at 590 (noting that wife's employment was "foreseeable" in view of small size of maintenance award).
when a stipulation fixing the respective rights and obligations of the parties is central to the award, the [court] * * * should view it as an important element because it represents the parties' voluntary acquiescence in an equitable settlement. * * * [T]rial courts [should] * * * only reluctantly alter the terms of a stipulation governing maintenance.Claybaugh v. Claybaugh, 312 N.W.2d 447, 449 (Minn. 1981). A stipulation is relevant to "the identification of the baseline circumstances against which claims of substantial change are evaluated." Hecker, 568 N.W.2d at 709.
[A] negotiated stipulation with both parties represented by attorneys carries great weight. By definition, a negotiated stipulation is indicative of the intentions and expectations of the parties and incorporates their respective assessment of their own present and future needs.Cisek, 409 N.W.2d at 237.
Husband's claim that there was no stipulation in this case is disingenuous; the parties agreed on the record that wife was entitled to a permanent award of maintenance, that agreement was noted in the 1994 partial judgment, and the only dispute at the evidentiary hearing was about the amount. At the time of the stipulation it was clear that the stock options were valuable, and the parties' "assessment of their own present and future needs" included a permanent maintenance award despite the existence of the stock options. See Cisek, 409 N.W.2d at 237; see also Peaslee, 400 N.W.2d at 449 (concluding that where parties stipulated to awarding wife permanent maintenance in addition to $400,000 in assets, wife's inheritance of $79,000 did not warrant modification). Because (1) the parties stipulated to a permanent award of maintenance despite the foreseeability of wife's exercise of the stock options, (2) husband enjoyed a similar increase in income, and (3) there is conflicting evidence about whether wife would be able to meet her reasonable needs without invading the principal of her assets, we conclude that the district court did not abuse its discretion in determining that the change in wife's income did not render the maintenance award unreasonable and unfair.
* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.