Property Classification of Unvested Stock Options in Tennessee Divorce: Malone v. Malone

Facts: During the parties’ marriage, Husband accumulated 20,200 shares of vested and unvested stock options. At the divorce trial, Husband argued the options were of no value since the grant price was currently below the sale price. The trial court agreed and awarded Wife no interest in the stock options. Otherwise, the trial court awarded 60% of the approximately $7.3 million marital estate to Husband and 40% to Wife. Wife appealed.

On Appeal: The Court of Appeals reversed the trial court.

Tennessee Code Ann. § 36-4-121 governs the classification of property as marital or separate. “Marital property” means:

all real and personal property, both tangible and intangible, acquired by either or both spouses during the course of the marriage up to the date of the final divorce hearing and owned by either or both spouses as of the date of filing of a complaint for divorce . . . [including] income from, and any increase in value during the marriage of, property determined to be separate property . . . if each party substantially contributed to its preservation and appreciation, and the value of vested and unvested pension, vested and unvested stock option rights, retirement or other fringe benefit rights relating to employment that accrued during the period of the marriage.

While he first clause refers to income from and appreciation on separate property that accrues during the marriage where “each party substantially contributed to [the separate property’s] preservation and appreciation,” the second clause refers to “the value of vested and unvested pension, vested and unvested stock option rights, retirement or other fringe benefit rights relating to employment that accrued during the period of the marriage.” If the property at issue is deemed to fit within this second clause, then it is marital property without regard to “substantial contributions” by either spouse.

The Court ruled as follows:

At the time of trial, Husband’s stock options were at an option price below the market price. However, there is adequate time prior to the expiration of the option period for them to recover their value and become a valuable marital asset. In Cohen v. Cohen, 937 S.W.2d 823, 827 (Tenn. 1996), the Tennessee Supreme Court held that vested and unvested retirement benefits accruing during the marriage constitute marital property pursuant to Tennessee Code Ann. § 36-4-121(b)(1)(B). To determine that because the stock options have no value now and to assume therefore they will have no future value is speculative and denies Wife the right to share in any future gains from an employment benefit which accrued during the marriage. Wife is entitled to the same percentage, i.e., forty percent, of the gains realized from any future exercise of those options. Husband has the obligation to notify the trial court if he exercises or does not exercise the stock options and must provide proof of value. The trial court will retain jurisdiction to oversee payment, if any.

It is also worth noting that Wife argued the trial court erred in failing to include Husband’s expenditure of $130,945.32 for his attorney and expert fees as part of the marital estate and for failing to divide those funds on the same basis as was the remainder of the marital estate. The Court agreed and modified the trial court’s division of property to award Wife 40% of the $130,945.32 spent by Husband on the litigation.

Malone v. Malone (Tennessee Court of Appeals, Eastern Section, July 26, 2011).

Information provided by K.O. Herston: Knoxville, Tennessee Matrimonial, Divorce and Family Law Attorney.

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K.O. Herston is a family-law attorney in Knoxville, Tennessee whose practice is devoted exclusively to family law, including divorce, child custody, child support, alimony, prenuptial agreements, and other aspects of family law.

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