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Cobane v. Cobane

Court of Appeals of Kentucky

March 23, 2018



          BRIEF AND ORAL ARGUMENT FOR APPELLANT: Anita M. Britton Lexington, Kentucky

          BRIEF AND ORAL ARGUMENT FOR APPELLEE: Martha A. Rosenberg Lexington, Kentucky



          MAZE, JUDGE.

         Marc Irwin Cobane (Marc) appeals from findings of fact, conclusions of law, and a decree of the Jessamine Family Court dissolving his marriage to Laurie Lynn Cobane (Laurie). Marc argues that the trial court erred in its classification of his non-marital interests in certain property, its valuation of his interest in a family business, and in its division of marital property. We conclude that the trial court erred by classifying as marital the encumbered balance in Marc's Employee Transition Program account. Likewise, the trial court erred by including those funds in its calculation of the marital estate and equalization payment due to Laurie. However, the trial court did not clearly err in classifying and valuing Marc's other interests, and the court did not abuse its discretion in its division of marital property with respect to those assets. Hence, we affirm in part, reverse in part, and remand for entry of a new judgment.

         I. Facts and Procedural History

         Marc and Laurie were married on July 17, 2006, and separated in March of 2015. There was one minor child born of the marriage. Laurie filed a petition for dissolution of the marriage on April 30, 2015. On September 2, 2016, the trial court entered findings of fact, conclusions of law, and a decree of dissolution of the marriage. Marc filed a motion to alter, amend or vacate with respect to several contested issues. The trial court denied the motion on November 3, 2016. This appeal followed. Additional facts will be set forth below as necessary.

         II. Standard of Review

         Marc raises five issues relating to the trial court's classification, valuation, and division of marital property. Classifying property as marital or non-marital "involves an application of the statutory framework for equitable distribution of property upon divorce and therefore constitutes a question of law . . . ." Holman v. Holman, 84 S.W.3d 903, 905 (Ky. 2002). Accordingly, we review trial court rulings regarding the classification of marital property de novo. Young v. Young, 314 S.W.3d 306, 308 (Ky. App. 2010). Once classified, the division of marital property is within the sound discretion of the trial court. McGregor v. McGregor, 334 S.W.3d 113, 119 (Ky. App. 2011). "We review a trial court's determinations of value and division of marital assets for abuse of discretion." Young, 314 S.W.3d at 308 (citing Armstrong v. Armstrong, 34 S.W.3d 83, 87 (Ky. App. 2000)).

         III. Classification of ETP Account

         Marc first argues that the trial court improperly classified as marital the encumbered funds in his employee incentive program. Throughout the marriage, Marc worked as a financial advisor. While Marc was initially with Fifth Third Bank, he began working for UBS Financial Services, Inc. (UBS) in late 2010.

         Since most of Marc's income comes from commissions and the industry requires a period of time for a financial advisor to build up a client list, UBS placed Marc in its Employee Transition Program (ETP). In pertinent part, the ETP consists of five forgivable promissory notes totaling $967, 243.00. The loans mature over a period of nine years and are forgiven at intervals during that period. When a portion of the ETP debt is forgiven, Marc's paycheck shows the forgiven amount as income to him. But if Marc leaves his job prior to the end of the nine-year period, he will be required to pay back any loans that have not been forgiven. Marc testified that the outstanding loan balance on the ETP was $426, 627.49 as of the date of the hearing in this action.

         Marc argues that the outstanding portion of the ETP debt is unearned income which vests only after the entry of the decree. Consequently, he maintains that portion of the ETP is entirely non-marital. However, Laurie argues that the ETP payments were a bonus which UBS paid to Marc as an incentive to work there. Laurie agrees that the ETP payments are not fully vested until Marc completes the full nine-year period. But she contends that the entire amount should be treated as marital to the extent that it vested during the marriage.

         The trial court agreed with Laurie, finding that 65% of the remaining encumbered ETP funds are marital, and 35% are Marc's non-marital funds, as they will not be forgiven until after the entry of the decree.[1] In accord with this finding, the trial court evenly divided the remaining payments. Marc would receive 15% of the marital interest, which when added to his non-marital interest, would result in 50% of the payments. The trial court directed Marc to forward 50% of any net ETP forgiveness (less payment of required taxes) within five business days after each loan forgiveness becomes effective. In a post-judgment order, the court recognized that Marc is liable for interest on the outstanding balances. Consequently, the court directed that any such interest be deducted from the divisible portion of the ETP accounts as it is forgiven.

         On appeal, Marc correctly notes that benefits which replace future earnings are non-marital property. Holman, 84 S.W.3d at 910. Since the ETP funds are not taxable as income until the loans are forgiven, Marc argues that the remaining sums of the ETP constitute future income. As a result, he maintains that those amounts must be considered as non-marital assets.

         In response, Laurie cites to the recent case of Dotson v. Dotson, 523 S.W.3d 441 (Ky. App. 2017), which holds that unvested incentive benefits may be regarded as a form of deferred compensation earned during the marriage, even if the right to receive that benefit may never be exercised. Id. at 445. In Dotson, the spouse participated in an incentive program through her employer, under which she was paid annually. The award was paid in the form of Restricted Performance Unit (RPU) stocks. The RPU stocks were not immediately available to the employee, but vested over a period of five years. The RPU stocks would be forfeited if the employee did not remain with the employer for the full five-year period. However, the employee had the right to enforce the plan if it was not administered according to the company's agreement. Id. at 445. The trial court found, and a panel of this Court agreed, that the spouse's interest in the unvested RPU stocks were more than merely speculative. Rather, the Court found that they represented payment for work performed during the course of the marriage. As a result, the Court held that the stock options were subject to division as marital property even though the right to exercise those options may never vest. Id. at 444-45.

         The ETP funds are a unique asset which defy simple classification. However, we agree with Marc that the ETP funds are not comparable to the RPU stocks in Dotson. Although Marc had immediate access to the funds in the ETP accounts, they were fully encumbered by the outstanding balance of the loans. Marc's manager, Matt Fresca, testified that the proceeds of the loans were not considered the employee's money until forgiven. In addition, Marc was required to make payments on any withdrawals from the accounts prior to forgiveness of the loan. Furthermore, Marc paid monthly interest on the balance of the loans, but the funds were not taxable as income until the year the underlying loans were forgiven.

         The ETP funds are similar to the RPU stocks in Dotson to the extent that both were provided as incentives to reward the employee's long-term commitment to the employer. In the case of an employee benefit, the operative factor in determining whether benefits are marital or non-marital property is not whether vesting has occurred. McGinnis v. McGinnis, 920 S.W.2d 68, 70 (Ky. App. 1995). Rather, the test is whether the spouse's right to participate in the plan was earned during the marriage. Id. If the benefits are a mere expectancy, then the asset is non-marital; but, if the employee's right to future participation in the plan accrued during the marriage, then it is a marital asset even though the employee's right to receive those benefits does not arise until after the marriage. Id. at 71.

         But unlike the RPU stocks in Dotson, Marc's unrestricted right to the ETP funds does not accrue until the loans are forgiven. Any value of the ETP funds, marital or otherwise, is offset by the outstanding balance of the loans against them. Marc cannot seek to require UBS to forgive a portion of the promissory note until he works for UBS for the specified intervals of time. Prior to those points in time, the ETP funds are merely loan proceeds and subject to repayment.

         Thus, Marc's right to forgiveness of the ETP loans does not arise until after the entry of the decree of dissolution. In this respect, the funds are more akin to unearned future income than an unvested benefit. Consequently, we must conclude that the trial court ...

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