On appeal from the Superior Court of New Jersey, Chancery Division, Family Part,Morris County, Docket No. FM-14-154-97.
Before Judges Stern, Lefelt and Payne.
The opinion of the court was delivered by: Stern, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued telephonically March 4, 2004
Plaintiff, former wife, appeals from an order of August 12, 2002, providing that stock options and proceeds from stock option sales by defendant, former husband, are"not includable as part of defendants' gross earned income," and"not includable for purposes of computing defendant's child support" obligation under the parties' property settlement agreement ("PSA").Defendant cross-appeals from paragraphs of a second order, also entered on August 12, 2002, holding him"in violation of litigant's rights for refusing to comply with paragraph 2.3" of the PSA, ordering him to comply with that paragraph and declining to modify the agreement. Paragraph 2.3 required defendant to contribute 11.6% of his"gross income" above $180,000 as additional child support.
On the wife's appeal, we conclude that the exercise and sale of stock options acquired after the parties' divorce cannot be deemed part of"gross income" for purposes of the child support provisions of the PSA in this case. We emphasize, however, that our decision is based on the particular PSA in question.
The PSA in this case treated existing stock options acquired during the course of the marriage as assets, and provided that the parties each retained their respective stocks and existing stock options. Pascale v. Pascale, 140 N.J. 583, 607-11 (1995), which in the absence of an agreement to the contrary, treats stock options earned during the marriage as assets subject to equitable distribution, does not govern this case.
Absent a PSA dictating otherwise, the law generally holds that income is generated by the exercise of an option earned and acquired post-divorce if exercised at a price below fair market value or if sold at a profit. It does not support the contention that stock options should be treated as income upon mere vesting. Although in the year 2000 defendant sold stock acquired by the exercise of options, we agree with the motion judge that the sale did not generate"income" for purposes of the additional child support provisions of the parties' PSA. We also reject the husband's cross-appeal seeking a reduction of his additional child support obligations.
The parties were married in 1985 and divorced in 1997. They have a son born in 1992 and a daughter born in 1995. Plaintiff's income for 1996, the year before the counseled PSA was negotiated, was approximately $141,000, and defendant's was about $245,000. However, the parties agreed to use an average of their respective incomes over the prior three-year period for purposes of calculating child support. Both parties' incomes reflected commissions as well as base salaries.
The parties entered into the PSA on October 14, 1997. It provided for joint legal custody of the children and gave plaintiff"primary physical and residential custody." Neither party received alimony and support from the other independent of the husband's child support obligation.
The PSA noted that plaintiff, who worked for IBM, had purchased IBM shares during the marriage through an employee stock purchase plan, and that defendant had a vested right to exercise an option on shares of Platinum Technology, one of his employers during the marriage. The PSA further recited that plaintiff was"entitled to retain all the IBM stock" and that defendant was"entitled to retain his options."
The PSA obligated defendant to pay $2,500 per month in child support, based on the parties' expectation that their annual incomes for 1997 would be $180,000 for defendant and $130,000 for plaintiff. In addition, defendant would pay additional child support equal to"11.6% of his gross income over $180,000.00 per year." Specifically, the PSA provided:
2.2 The Husband agrees to pay the Wife the sum of $2,500.00 per month commencing on November 1, 1997, one-half on or before the first and one-half on or before the fifteenth of each month for child support for the unemancipated children, Torey and Samantha. The Husband represents that his 1997 income through October 15, 1997 is $126,667.00 and that he expects his gross income in 1997 to be approximately $180,000.00. The Wife represents that her 1997 income through October 15, 1997 is $98,743.00 and that she expects her gross income in 1997 to be approximately $130,000.00. The parties acknowledge that the support is based on the Husband's annual income of $180,000.00 and the Wife's annual income of $130,000.00. The Husband shall make the child support payments through the Morris County Probation Department on or before the first of each month.
2.3 In addition to the child support in paragraph 2.2, the Husband shall pay the Wife child support of 11.6% of his gross income over $180,000.00 per year. For example, in the event that Husband's earned gross income from all sources in January, 1998 is $10,000, he shall pay $2,500 per month child support for February, 1998. In the month his gross exceeds $180,000.00, he shall pay the base support set forth in paragraph 2.2 plus 11.6 cents for each $1.00 ($11.60 per $100.00) his gross income exceeds $180,000.00. Thereafter, he shall pay one-half of the base support on or before the first and one-half on or before the fifteenth of the month and extra support on a monthly basis when he receives his check. In the event that the Husband has to pay back his employer for a commission he received from which he paid the Wife the 11.6% as required in this paragraph, the Wife shall repay or credit the Husband the amount she received from the overpayment when he has to pay his employer. The Husband shall provide the Wife with a copy of all commission statements and any other information verifying such charge backs. The Husband shall provide the Wife with a copy of his paystubs monthly and commission statements quarterly within five days of receipt of same.
Under paragraph 2.7 of the PSA, certain specified expenses for the children ("the shared expenses") were to be treated separately from the child support and the additional child support (62.3% to be paid by defendant and 37.7% by plaintiff). It based the parties'"proportionate share" of those expenses on their"gross earned income," which it defined as"all gross wages, commissions, salaries, bonuses and income from businesses." The respective shares were to be"recalculate[d]" annually based on the mutual disclosure of"W-2 forms, verification of all commissions earned during the year and records of all gross business income for the prior year." If the parties disputed the amount of either party's"gross earned income," they were to"agree on and cooperate with accountants to calculate the figures."
The October 15, 1997 judgment of divorce incorporated the PSA upon noting that each party"testified that they entered into the agreement knowingly and voluntarily" and sought"to be bound by the terms thereof."
In June 1998, plaintiff remarried. In October 1998, defendant remarried, and the following year he and his new wife had twins. It is undisputed that in 1998, defendant's gross earned income was $87,378, and in 1999 it was $124,315. In September 1999, defendant began working at Interwoven, Inc., for a base salary of $70,000 (which was subsequently increased ...