The Appeals Court’s recent Ludwig v. Lamee-Ludwig approaches the intersection of unvested stock options and double counting, colloquially known as “double dipping”, in divorce litigation. Relying on the Supreme Judicial Court’s (SJC) Bacanti v. Morton, they got it right. But, was the SJC precedent correctly decided? It is worth revisiting.
In Baccanti, the SJC addressed the question of unvested stock options at divorce, concluding that options granted during marriage but to be vested thereafter “may” be treated as marital property by the trial court. As we have discussed here before, “may” is plainly a word that grants discretion, meaning that the grantee is permitted, but not compelled, to do something. Think: “Do it if you think it appropriate, but don’t, if not.”
By contrast, and while there is some case law to the contrary, common usage of “shall” imposes an obligation – and if it does not, there are a whole lot of temporary orders, separation agreements and judgments out there that don’t say what they mean, or mean what they say! Think: “Do it.”
This common-sense distinction is highlighted when the words “may” and “shall” inhabit the same sentence. M.G.L., ch. 208, §34, upon which the Baccanti ruling relied, reads:
“…the court may assign to either husband or wife all or any part of the estate of the other, including but not limited to, all vested and non-vested benefits…and which shall include, but not be limited to, retirement benefits, … pension, profit-sharing, annuity, deferred compensation and insurance.” (As quoted by the SJC; bold italics ours.)
Thus, as we read it, §34 requires (“Do it”) the trial court to include the enumerated, but unlimited, forms of compensation or other benefits within the marital estate, but it permits (“Do it if/how you think it appropriate”) the trial judge to assign them between the parties as she sees fit. Why would the statute drafters have used two different modal verbs in the same sentence, if they were not to connote different meanings?
Yet, the Baccanti court equated the two by concluding that the trial court may include unvested options in the marital estate. May = shall. Think: judicial amendment.
None of this made much practical difference in 2001, as Baccanti took hold in asset divisions. After all, the SJC’s “time rule” sensibly divided granted but not yet vested options in a way that distinguished between those that were tightly related to the marital enterprise during which both parties contributed, from those for which the connection to mutual marital efforts was diluted by the passage of post-divorce time. Who cared if the time formula technically excluded some options from the estate, or if it simply assigned them disproportionately between the spouses because of the declining nexus with marital efforts?
Now, it matters, the intangible becoming material, with unvested options ripening into disposable cash.
The central holding of Ludwig is that the income generated by the post-divorce exercise of stock options granted during marriage, but excluded from marital property at divorce by application of Baccanti, may be tapped for payment of alimony (and, perforce, child support) because it does not constitute a double counting, let alone one that may be reversibly inequitable. (The law does not bar double dipping per se, but only if it is deemed inequitable.) The SJC obliquely suggests that alimony exposure for income arising from later vested options that were deemed to be marital property at divorce, presents a more compelling case of double counting.
The Baccanti holding made Ludwig an easy case for the Appeals Court to decide. But, had the higher court stuck to statutory interpretation in 2001, rather than effective revision, the current case might, and we think should, have been more challenging.
[The Appeals Court easily dispatched the argument that inclusion of the unvested option-derived income was precluded by M.G.L., ch. 208, §53(b)(1), by holding the legislature to its precise words. Those drafters exempted certain income derived from assets assigned under §34, for income calculation purposes, listing interest, dividends and capital gains only, without any indication these were mere examples; and income produced by options is none of the above. We infer (but do not know) that the drafters just did not consider the particular wrinkle.]