Opinion
A144601
03-07-2018
In re the Marriage of NINA FRANK and LEE THOMAS KRANEFUSS. NINA FRANK, Appellant, v. LEE THOMAS KRANEFUSS, Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Marin County Super. Ct. No. FL1005175)
Nina Frank (Wife) appeals an order of the family court allocating payments Husband received from his employer between community and separate property. We shall affirm the order.
I. BACKGROUND
A. Husband's Employment
Lee Kranefuss ("Husband" or "Lee") began working as Director of Strategic Planning for Barclays Global Investors (BGI) in 1997. Beginning in 1999, he developed a financial product called "iShares," an exchange-traded fund (ETF), which allowed mutual fund investors to trade shares directly on stock exchanges. He proposed the idea to Barclays, which committed $150 million to the project over three to four years. Husband described himself as "the founder, entrepreneur, idea guy and the corporate manager." In 2000, he became BGI's chief operating officer of iShares in the United States. Under Husband's leadership, iShares in the United States was successful, and developed assets of more than $500 billion. In 2003, Husband was asked to take responsibility for all iShares programs around the world, including Asia, Canada, Brazil, and Europe.
In 2005, Husband's role expanded again, and he was put in charge of additional business units, while continuing to oversee iShares. He was responsible for funds totaling $1.6 trillion. His workload increased and he travelled extensively. He worked between 50 and 80 hours a week.
Husband was rewarded "handsomely" for his work. Between 2003 and 2010, his annual compensation averaged approximately $18.5 million.
During 2008, friction developed between Husband and his supervisor. In August of that year, Husband's supervisor told him BGI had decided to sell iShares; Husband also learned he would not remain in a senior management role.
In June 2009, Barclays announced it would sell BGI (including iShares) to another company, BlackRock. At the time, BGI was concerned that Husband might convince other managers to band together and block the sale. Over the next several months, Husband negotiated the terms of his exit with BGI.
Such an event had happened with another company in the past: When Lehman Brothers had tried to sell Neuberger Berman, a mutual fund company it owned, Neuberger Berman's management banded together and threatened to leave the company—effectively destroying its value—unless they received more favorable terms in the sale.
B. The Transition Agreement
On September 2, 2009, Husband entered into a "Transition Agreement" (the Agreement) with BGI. Husband's full-time active employment with BGI would terminate on September 2, 2009, and he would become a part-time employee of BGI, working not more than 20 hours per month, and retaining his titles as Managing Director of BGI and non-executive Chairman of iShares and his role as a member of the BGI Executive Committee. He would resign his positions as officer or director of BGI, its parents, or its subsidiaries upon request.
The Agreement defined the "Transition Period" as the period between the effective date of the Agreement and Husband's departure date, which was anticipated to be April 30, 2010. During the Transition Period and for 12 months thereafter, Husband was barred from soliciting any employee of BGI or its affiliates to cease employment there; during the Transition Period and thereafter, he was also barred from using any confidential information to solicit business from customers of BGI or its affiliates. Husband also agreed not to work for a competitor or act as a sole proprietor of a competing business during the Transition Period.
Under the Agreement, Husband agreed to an Initial Release generally releasing all known and unknown claims against BGI or its affiliates as of the Effective Date, and also agreed to execute a Final Release of Claims. The Agreement contained an integration clause providing that it would constitute the entire agreement between the parties and would supersede any previous agreements.
The Agreement contemplated a number of payments to Husband. Among them, during the Transition Period, he would be paid a base salary of $20,833 per month. He would also receive a lump sum of $7,500,000 on the effective date of the Agreement "in consideration of the covenants and commitments hereunder" and his execution of the Initial Release; a second lump sum payment of $7,500,000 "in lieu of any wages [other than base salary] for services provided during the Transition Period and in consideration of the covenants and commitments hereunder" unless a "Cause Event" occurred; an installment of $4,000,000 of his "2008 plan cycle award under the BGI Long Term Incentive Plan (the 'LTIP')" in February 2010 unless a Cause Event occurred; and "a payment under Barclays' Long Term Cash Plan (the 'LTCP') in the amount of $2,100,000 in March 2010" unless a Cause Event occurred. He would continue to participate in BGI's Deferral Bonus Plan (DBP), and BGI would release his awards unless a Cause Event occurred; and his stock options under the Equity Ownership Plan (EOP) would continue to vest.
A "Cause Event" was defined to mean Husband's failure to perform his duties under the Agreement, engaging in gross misconduct injurious to BGI, conviction of a felony, a breach of his covenants and commitments (including the non-solicitation agreement and non-competition agreement), or his failure to resign his positions with BGI and its affiliates upon request.
Although the Agreement stated that this payment was $2.1 million, the parties later agreed that Husband was paid $4.2 million.
The LTIP, LTCP, and DBP (referred to as the "British schemes") were described as "expectations," and were contingent on the discretion of management. Husband's expert on executive compensation opined that if Husband had not entered into the Agreement, he would not have been entitled to, and likely would not have received, those payments.
Exhibit F to the Agreement was a "Non-Solicitation and Confidentiality Agreement," which Husband had signed in November 2000. It prohibited Husband, during his employment with BGI and for one year afterward, from soliciting any employee to accept employment elsewhere, inducing any clients to take their business elsewhere, or competing with BGI. In the event of breach of the non-solicitation or non-competition agreement, Husband would not be entitled to severance pay and he would forfeit his unvested or vested but unexercised stock options.
Wife understood that BGI was letting Husband go and that the purpose of the Agreement was to give him money to leave Barclays. An attorney who represented BGI in preparing the Agreement testified that Husband's employment was going to be terminated and that the Agreement was a severance agreement. The attorney who represented Husband in the negotiation testified that through the Agreement, BGI "pa[id] him for a departure." Husband's expert on employment law and employee mobility testified that Husband had to "abide by the restrictive covenants in return for the payments."
The final day of the Transition Period was April 30, 2010. One day before that, on April 29, 2010, Husband and Wife separated. This dissolution action ensued.
C. The Trial Court's Ruling
The trial court held a trial of the bifurcated issues of "(1) the character (separate or community) of the proceeds of the September 2009 Transition Agreement and (2) whether or not [Lee] is entitled to any reimbursement from the community for his post-separation performance of any of the terms of the Transition Agreement, and if so the amount of reimbursement [Lee] is entitled to from the community."
The trial court found that it was "critical to Barclays, to BGI and to BGI's purchaser (Blackrock) that Lee not be able to depart and take employees, customers, and his expertise to another firm, or even to allow the perception that this might happen.[] It was critical to Lee to leave BGI on the best financial and relationship terms possible. The result was the Transition Agreement which is the subject of this bifurcated trial." According to the court, "BGI wanted something from Lee—that is, for Lee not to lead an employee uprising which might torpedo the Blackrock deal, and for Lee to step back from the ETF world. Lee wanted something from BGI—a financial settlement on the best possible terms. The TA resulted." Furthermore, "[o]ther than BGI's agreement to pay $500,000 on account of Lee's attorney's fees, every single cash payment under the [Agreement] is in consideration of Lee's honoring the conditions and commitments of the [Agreement], including the covenant not to compete. . . . [¶] With these principles in mind, it is evident that the [Agreement] is a severance agreement, even though it calls for rather lavish interim compensation[] during the months leading to Lee's final exit."
The court concluded that, although the Agreement was signed during the marriage, each payment was not necessarily a community asset. The disputed payments "were in consideration of Lee's continued employment at BGI[], his agreement not to interfere with the Blackrock sale,[] and his covenant not to compete. Lee was able to negotiate an agreement whereby, in addition to salary, unvested payments under the British schemes and unvested and/or unexercised stock options were protected, and Lee was paid $15,000,000 to boot. Lee's participation in the British schemes and the stock options were incidents (albeit unvested) of Lee's employment during marriage. He may not have gotten that money if he had not entered into the TA." The court concluded that portions of Husband's performance of the Agreement occurred before the parties separated, but nevertheless, "a significant portion of the [Agreement] relates to Lee's severance from BGI. The language of the [Agreement] seems to indicate that it includes both a severance agreement and a covenant not to compete."
The court concluded that both Husband and Barclay's had reasons for entering into the Agreement: Many of Husband's employment-related benefits were not legally protected and would be granted only at BGI's discretion. Barclay's, in its turn, needed additional liquidity in order to purchase Lehman Brothers, and to achieve that, decided to sell its most valuable asset, BGI. Because of Husband's prominence in iShares and the larger world of ETF's and the financial world, "BGI was legitimately worried that Lee would lead a management/employee revolt and undermine the sale, either causing it to abort entirely or at least to sabotage the sales price. Simply stated, unless Lee was neutralized the deal was in jeopardy, and it was worth a great deal of money to BGI to enlist his cooperation." The payments under the Agreement were made "in part because of Lee's service to BGI during marriage and in part because of his promise not to compete with BGI/Blackrock and a desire by the parties to negotiate compensation for Lee's future lost salary and benefits."
The court determined that the fairest result would be reached by application of the "time rule." The court reasoned: "All of the disputed sums were paid in consideration of all the covenants in the [Agreement.] The benefits under the British 'schemes' and the stock options were attributes of Lee's community efforts during marriage but they were not vested and they were in jeopardy because of Lee's termination of employment. His promise not to compete with BGI/Blackrock and not to obtain employment with their chief competitors for at least a year after his termination date was, under the plain language of the [Agreement], consideration for his receiving his employment-related benefits. The two payments of $7,500,000 were clearly payment for all of Lee's covenants under the contract, including his work (or, perhaps more accurately, his refraining from work) before separation and his inactivity for at least a year after separation." The period of the Agreement was 605 days—from September 2, 2009 through April 30, 2011. The court calculated that the parties were married and living together for 239 of those days and separated for 366; thus, Husband owned 60 percent of the disputed payments as his separate property and the community owned 40 percent.
Under the "time rule," "the community is allocated a fraction of the benefits, the numerator representing length of service during marriage but before separation, and the denominator representing the total length of service by the employee spouse. That ratio is then multiplied by the total benefit received to determine the community interest." (In re Marriage of Steinberger (2001) 91 Cal.App.4th 1449, 1460 (Steinberger).)
The court also stated that, if it were to determine that all the monies were community property, subject to equitable reimbursement under Marriage of Quay (1993) 18 Cal.App.4th 961, based on Husband's performance of his covenant not to compete, "the result would not differ materially, because the court found the testimony of Lee's compensation experts to be more credible than Nina's."
II. DISCUSSION
The issue before us is whether the trial court properly treated the Agreement as a severance agreement and divided its proceeds in accordance with the time it concluded the Agreement was in effect—that is from September 2, 2009 to April 30, 2011.
"As a general rule, factual findings that underpin the characterization determination are reviewed for substantial evidence. 'Appellate review of a trial court's finding that a particular item is separate or community property is limited to a determination of whether any substantial evidence supports the finding.' [Citation.]" De novo review is appropriate if "resolution of 'the issue of the characterization to be given (as separate or community property) . . . requires a critical consideration, in a factual context, of legal principles and their underlying values . . .' " (In re Marriage of Rossin (2009) 172 Cal.App.4th 725, 734.) The issue before us hinges on the trial court's factual findings regarding the purpose of the Agreement, and we shall review those findings for substantial evidence. "Once the court determines the assets and liabilities of the community estate, it must value them and make an equal division of the estate. [Citations.] Issues concerning the valuation and apportionment of community property are reviewed for abuse of discretion. [Citations.]" (In re Marriage of Finby (2013) 222 Cal.App.4th 977, 984.)
" 'In general, all property that a spouse acquires during marriage before separation is community property.' [Citation.] Cases have recognized that Family Code section 760 creates ' "a general presumption that property acquired during marriage by either spouse other than by gift or inheritance is community property unless traceable to a separate property source." ' [Citation.] However, '[t]he earnings and accumulations of a spouse . . . while living separate and apart from the other spouse, are the separate property of the spouse.' [Citation.]" (In re Marriage of Finby, supra, 222 Cal.App.4th at pp. 983-984.)
At trial, Wife took the position that the payments made under the Agreement were almost entirely community property. She argued in her trial brief: "The Transition Agreement covered Lee's employment from September 2, 2009, through April 30, 2010. Nina recognizes that the parties separated on April 29, 2010. Accordingly, one day of the period covered by the Transition Agreement would be attributable to Lee's post-separation efforts. As the Transition Agreement was in effect from September 2, 2009 through April 30, 2010[], Nina concedes that 1/241 of the payments received by Lee for his services under the Transition Agreement would be Lee's separate property."
The trial court did not accept this characterization, instead concluding the Agreement was in effect through April 30, 2011, and dividing the payments accordingly. On appeal, Wife does not dispute that the Agreement was in effect through April 30, 2011, a full year later than she urged in the trial court. She argues, however, that the payments made under the Agreement should be attributed not only to Husband's efforts during the 605 days the Agreement was in effect, but to all his efforts from the time Lee launched iShares onward—that is, from March 2000 until April 2011, or 4,048 days. Because the parties were married 3,681 of those days, she argues that 90.93 percent of the payments under the Agreement belong to the community. According to Wife, the court should have given the community credit for "the marital years predating the [Agreement], during which the community spent time and effort building Lee's reputation and achieving his unparalleled success." She argues: "The magnitude of the threat Lee posed to the iShares sale—and the $34 million he was able to obtain under the [Agreement]—were the result of Lee's almost decade-long development and leadership of iShares and development of his expertise and reputation. All of this occurred before the Transition Period and during marriage—and were community efforts. The benefits under the [Agreement] derived from those efforts, and the trial court was required to take them into account in its time rule fraction."
It does not appear that Wife made this precise argument below. Husband argues she has forfeited it. However, in her objections to the trial court's tentative decision, Wife raised the issues of whether, in applying the time rule, the court should take into account whether Husband developed his experience, reputation, and expertise during the marriage. We shall consider Wife's contention on the merits.
In effect, Wife argues that—at least with respect to the Agreement—Husband's professional reputation is a community asset. Case law, however, is to the contrary. The court in In re Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090, 1100-1102, concluded that a motion picture director's earning capacity and reputation—or his "elite professional standing"—was not a property interest. Unlike, for instance, the owner of a medical or law practice, such a person could not transfer this standing: "That standing is his, and his alone, and he cannot bestow it on someone else." (Id. at pp. 1100-1101.) The reputation that Wife contends is the source of the disputed payments, similarly, is Husband's alone.
Indeed, carrying Wife's argument to its logical conclusion, all of Husband's future earnings in the field of ETF's could be considered community property, since they might all derive from the expertise and reputation he gained during marriage.
In her reply brief, Wife tells us she is not seeking a community share of Husband's professional reputation or standing, but rather the community's fair share of the benefit derived from his efforts during marriage. (See In re Marriage of Harrison (1986) 179 Cal.App.3d 1216, 1226 [" '. . .[E]ach spouse's time, skill, and labor are community assets, and whatever each spouse earns from them during marriage is community property' "], italics added.) She relies on Pereira v. Pereira (1909) 156 Cal. 1, 7-8, in which our high court apportioned a portion of the increase in the husband's business to the community based on his efforts during marriage. But here, on the other hand, Husband's efforts on BGI's behalf during marriage had already been compensated.
The trial court found the Agreement was a severance agreement, and there is substantial evidence to support this finding. That is, there is evidence that the purpose of the Agreement was not to reward Husband for his past service, but to persuade him to leave the company in a manner that would not undermine Barclay's sale of BGI and its iShares business. The court in Steinberger similarly considered the characterization of the proceeds of a severance agreement. There, a wife was about to be terminated from her job for cause, as a result of which she would receive no severance pay. (Steinberger, supra, 91 Cal.App.4th at p. 1457.) After the husband and wife separated, the wife reached an agreement with her employer under which she would be paid her salary for a year and continue to vest in the stock option plan for the same period, in consideration for which she released her claims against her employer and agreed not to accept employment with two competitors for three years. (Id. at pp. 1454-1455.) The trial court awarded all the severance pay to the wife as her separate property, concluding that the agreement constituted a "new deal, in which she was able to retain her severance pay and to acquire further stock options, in exchange for her relinquishment of her right to work following severance for the two competitors most likely to give her a job." (Id. at pp. 1457-1458.) The appellate court upheld this finding, concluding the evidence was sufficient to sustain the finding that the severance pay was a right acquired at the time the wife's employment was terminated, and not before. (Id. at p. 1458; see also In re Marriage of Flockhart (1981) 119 Cal.App.3d 240, 243 [layoff benefit treated as separate property because it was intended to replace future income, rather than compensate for services previously rendered].)
The court in Steinberger distinguished In re Marriage of Lehman (1998) 18 Cal.4th 169, upon which Wife relies. (Steinberger, supra, 91 Cal.App.4th at pp. 1461-1462.) In Lehman, after the parties separated, a husband was offered enhanced retirement benefits, in the form of three additional years of putative service, to encourage him to take early retirement. (Lehman, 18 Cal.4th at p. 175.) The high court rejected the husband's assertion that the enhanced benefits amounted to a severance payment, and, as such, were his separate property; rather, both in name and in nature, they were an increase in his retirement benefits. (Id. at p. 186.) The court also rejected the suggestion that it should add the putative three years' credit to the denominator of the time-rule fraction, noting, "[s]uch years are fictive—they have no independent existence, but are merely a means by which the employer effects the enhancement." (Id. at p. 188.) The court in Steinberger noted, "Because Mr. Lehman was not rendering services to his former employer during those three years, the court considered the enhancement merely a part of the existing retirement benefits which were contracted for during marriage. The putative years of service were not added to either the numerator or the denominator of the time rule fraction. [Citation.]" (Steinberger, 91 Cal.App.4th at p. 1461.) The Steinberger court concluded the trial court was not bound to apply Lehman, because it found that the wife in Steinberger received the benefits based not on her prior service with her employer, but because she entered a new deal with her employer for benefits she had not previously accrued. (Id. at p. 1462.)
Similarly here, the evidence is sufficient to support a finding that Husband's right to the payments under the Agreement was acquired at the time it was negotiated, and not before. For that reason, Wife's contention that Husband's efforts during the nine-year period preceding the Effective Date placed him in a position to command the payments required by the Agreement is not persuasive. That contention confuses the distinction between the character of those payments and their amount. Unlike pension benefits, which arise out of an employment agreement and are a form of deferred compensation for services rendered, we are dealing here with severance payments to which Husband had no absolute contractual right prior to entering into the Agreement. Just as in In re Marriage of Lawson (1989) 208 Cal.App.3d 446, "the pay here was wholly conditional on the employee signing the release and agreeing to leave when [employer] determined the time was right." (Id. at p. 453.) Such payments are properly treated as the separate property of the spouse who receives them, even if their amount depends in part on the length of the spouse's prior service. (Id. at p. 454 [employment separation allowance treated as separate property, even though one of the bases for determining the amount of the allowance was husband's years of service]; see also In re Marriage of Frahm (1996) 45 Cal.App.4th 536, 544-545 [although the amount of severance payment was somewhat dependent on length of employment, ex-spouse's right to receive it was not]; cf. In re Marriage of Gowan (1997) 54 Cal.App.4th 80, 88-91 [trial court acted within its discretion in utilizing time rule to separate combined pension plan payments, so as to divide community property portion based on former husband's employment prior to dissolution, from separate property portion based on employment which occurred after he was rehired by same employer following judgement]; In re Marriage of Hug (1984) 154 Cal.App.3d 780, 789 [stock options that represented "deferred compensation for present services" were earned during spouse's first two years of employment].)
Where property contains both separate and community interests, "the court has very broad discretion to fashion an apportionment of interests that is equitable under the circumstances of the case. [Citation.]" (In re Marriage of Gowan, supra, 54 Cal.App.4th at p. 88; see also Steinberger, supra, 91 Cal.App.4th at p. 1459.) We review the court's utilization of the time rule for abuse of discretion. (Id. at p. 1459.) We see no abuse of discretion here. It certainly appears to be the case that Husband's ability to negotiate the Agreement derived in large part from the professional standing he acquired during the marriage. But there is no doubt that the community was well compensated for his efforts during the course of the marriage and that Wife shared in that compensation. On this record, the trial court could reasonably conclude the payments under the Agreement were made in consideration of Husband's prospective promises to refrain from competing and from undermining the sale of BGI and iShares, either before or after his termination, rather than for his past efforts, and the court could reasonably use the time rule to allocate those payments based on the time the Agreement was in effect.
We note here that Wife does not ask us simply to reverse the trial court's order, but rather to modify it in one of two ways and to affirm it as modified: She first suggests that we, like the trial court, treat all the payments due under the Agreement as a single undifferentiated sum—a method she describes as "unremarkable"—and apply her proposed time rule fraction (i.e., 3681/4048) to the entire amount. As an alternative, she asks us to apply a different time rule fraction—based on different beginning and ending dates—to the various payments due under the Agreement. She provides detailed proposed calculations for the two $7,500,000 lump sums, the $4,000,000 Long Term Incentive Plan, the $4,200,000 Long Term Cash Plan, the 2007 and 2008 Deferral Bonus Plans, and the stock options. It does not appear, however, that she proposed these or similar calculations to the trial court, and she has accordingly forfeited the issue. (In re Marriage of Campi (2013) 212 Cal.App.4th 1565, 1572-1573.) In any case, although she proposes this approach as a fallback, Wife does not argue that it constitutes error or an abuse of discretion to treat the payments under the Agreement as a single undifferentiated sum; her challenge was only to application of the time rule commencing on the effective date of the Agreement.
III. DISPOSITION
The order is affirmed.
/s/_________
Schulman, J. We concur: /s/_________
Ruvolo, P.J. /s/_________
Reardon, J.
Judge of the Superior Court of California, County of San Francisco, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. --------