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Friday, September 30, 2005
Harrington v. Pulte Home Corporation: Division One Holds That an Arbitration Clause in a Contract of Adhesion May Be Enforced
Plaintiffs, a group of homeowners seeking to proceed as a class, sued Pulte Homes and various other defendants alleging that they failed to disclose that the homes they purchased were in close proximity to an area used for pilot training and jet engine testing. Defendants moved to compel plaintiffs to pursue their claims via arbitration pursuant to an arbitration clause set forth in the home purchase contracts. Plaintiffs did not dispute that, if enforceable, the arbitration clause would apply to the claims asserted against all of the defendants, nor did they dispute that styling their action as a class action precluded proceeding in arbitration. Instead, they argued that the arbitration clause was unenforceable either under the “reasonable expectations” doctrine set forth in Darner Motor Sales, Inc. v. Universal Underwriters Insurance Company, 40 Ariz. 383 682 P.2d 388 (1984), and its progeny, or under the unconscionability doctrine. In particular, they argued that the form adhesion contracts resulted in an unknowing waiver of the right to trial by jury (without disclosing that in the contract) and forced plaintiffs to pursue arbitration that involved cost-prohibitive expenses required by the American Arbitration Association. The trial court (Gottsfield, J.) accepted plaintiffs’ arguments, and denied the motion to compel arbitration.
As a preliminary matter, the Court of Appeals explained that although generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements consistent with the Federal Arbitration Act, that Act precludes states from invalidating arbitration clauses under state laws applicable only to arbitration provisions. The Court then rejected the trial court’s finding that the arbitration clause violated the doctrine of reasonable expectations. That doctrine requires a showing that the party seeking to enforce the agreement had reason to believe that the signing party would not accept the term in issue. The seven factors relevant to this inquiry, which the Court reviewed, do not suggest that the arbitration clause violated the doctrine. The Court further explained that the right to a jury trial can be waived even if it is not done knowingly, intelligently, and voluntarily, and rejected the argument that Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 840 P.2d 1013 (1992), created a new rule applicable to all standardized contracts with arbitration clauses. The Court also found the costs were not so prohibitive to run afoul of the reasonable expectations doctrine.
As for the distinct ground of “unconscionability,” that inquiry concerns the actual terms of the contract and examines the relative fairness of the obligations assumed to determine whether they are so one-sided as to oppress or unfairly surprise an innocent party. The Court found that the plaintiffs failed to meet their burden of demonstrating that arbitration would be so expensive as to be unconscionable. Judge Barker authored the decision, Judges Portley and Ehrlich concurred
Plaintiffs, a group of homeowners seeking to proceed as a class, sued Pulte Homes and various other defendants alleging that they failed to disclose that the homes they purchased were in close proximity to an area used for pilot training and jet engine testing. Defendants moved to compel plaintiffs to pursue their claims via arbitration pursuant to an arbitration clause set forth in the home purchase contracts. Plaintiffs did not dispute that, if enforceable, the arbitration clause would apply to the claims asserted against all of the defendants, nor did they dispute that styling their action as a class action precluded proceeding in arbitration. Instead, they argued that the arbitration clause was unenforceable either under the “reasonable expectations” doctrine set forth in Darner Motor Sales, Inc. v. Universal Underwriters Insurance Company, 40 Ariz. 383 682 P.2d 388 (1984), and its progeny, or under the unconscionability doctrine. In particular, they argued that the form adhesion contracts resulted in an unknowing waiver of the right to trial by jury (without disclosing that in the contract) and forced plaintiffs to pursue arbitration that involved cost-prohibitive expenses required by the American Arbitration Association. The trial court (Gottsfield, J.) accepted plaintiffs’ arguments, and denied the motion to compel arbitration.
As a preliminary matter, the Court of Appeals explained that although generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements consistent with the Federal Arbitration Act, that Act precludes states from invalidating arbitration clauses under state laws applicable only to arbitration provisions. The Court then rejected the trial court’s finding that the arbitration clause violated the doctrine of reasonable expectations. That doctrine requires a showing that the party seeking to enforce the agreement had reason to believe that the signing party would not accept the term in issue. The seven factors relevant to this inquiry, which the Court reviewed, do not suggest that the arbitration clause violated the doctrine. The Court further explained that the right to a jury trial can be waived even if it is not done knowingly, intelligently, and voluntarily, and rejected the argument that Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 840 P.2d 1013 (1992), created a new rule applicable to all standardized contracts with arbitration clauses. The Court also found the costs were not so prohibitive to run afoul of the reasonable expectations doctrine.
As for the distinct ground of “unconscionability,” that inquiry concerns the actual terms of the contract and examines the relative fairness of the obligations assumed to determine whether they are so one-sided as to oppress or unfairly surprise an innocent party. The Court found that the plaintiffs failed to meet their burden of demonstrating that arbitration would be so expensive as to be unconscionable. Judge Barker authored the decision, Judges Portley and Ehrlich concurred
Posted by azapp @ Fri, Sep 30, 2005
Tuesday, September 27, 2005
Bennett v. Brownlow: Supreme Court Decides Sua Sponte That Plaintiff Lacks Standing to Assert Constitutional Claim
Tammie Bennett filed an action against Yavapai County challenging a county ordinance that required all major events on the Courthouse Plaza to be sponsored by a non-profit organization. Two non-profits, VFD and FOP, submitted applications for use of the Plaza on the same dates. The permit was awarded to VFD, which had a history of hosting an event on the specified dates. Bennett, an independent event coordinator for the FOP event, alleged that the County violated the First Amendment by limiting event sponsors to non-profit organizations. FOP did not join Bennett’s suit. The trial court granted summary judgment in favor of the County, the court of appeals reversed and remanded on the merits, and this appeal followed.
Justice Jones, writing for a unanimous bench, noted that although there is no “case or controversy” provision in the Arizona Constitution, Arizona courts have long required persons seeking redress in Arizona courts to establish standing to sue. The court found sua sponte that Bennett had failed to show a particularized injury to herself and therefore did not have standing to sue. Bennett was not a sponsor and the decision to award the permit to one non-profit sponsor instead of another did not violate Bennett’s First Amendment rights. The court vacated the court of appeals’ decision and remanded to the trial court with instructions to dismiss the complaint.
Justice Jones (retired) authored the opinion; Justices McGregor, Berch, Ryan and Hurwitz joined.
Tammie Bennett filed an action against Yavapai County challenging a county ordinance that required all major events on the Courthouse Plaza to be sponsored by a non-profit organization. Two non-profits, VFD and FOP, submitted applications for use of the Plaza on the same dates. The permit was awarded to VFD, which had a history of hosting an event on the specified dates. Bennett, an independent event coordinator for the FOP event, alleged that the County violated the First Amendment by limiting event sponsors to non-profit organizations. FOP did not join Bennett’s suit. The trial court granted summary judgment in favor of the County, the court of appeals reversed and remanded on the merits, and this appeal followed.
Justice Jones, writing for a unanimous bench, noted that although there is no “case or controversy” provision in the Arizona Constitution, Arizona courts have long required persons seeking redress in Arizona courts to establish standing to sue. The court found sua sponte that Bennett had failed to show a particularized injury to herself and therefore did not have standing to sue. Bennett was not a sponsor and the decision to award the permit to one non-profit sponsor instead of another did not violate Bennett’s First Amendment rights. The court vacated the court of appeals’ decision and remanded to the trial court with instructions to dismiss the complaint.
Justice Jones (retired) authored the opinion; Justices McGregor, Berch, Ryan and Hurwitz joined.
Posted by azapp @ Tue, Sep 27, 2005
Pima County v. Pima County Law Enforcement Merit System Council: Supreme Court Holds That Pima County Law Enforcement Merit System Council Rule XIII-4(I) Giving the Council Broad Discretion to Revoke or Modify the Employer’s Disciplinary Action Is Consistent With the “Recognized Merit System Principles of Public Employment” Under A.R.S. § 38-1003
Deputy Sheriff Joseph Harvey appealed the decision to terminate his employment to the Pima County Law Enforcement Merit System Council, which reversed the termination decision. The Court of Appeals then reversed the Council’s decision, finding that the standard it applied in reviewing the employer’s decision, set forth in Pima County Law Enforcement Merit System Council Rule XIII-4(I), failed to give appropriate deference to the employer’s decision, and thus was not a “recognized merit system” principle of public employment in violation of A.R.S. § 38-1003. The Supreme Court disagreed, explaining that nothing in A.R.S. § 38-1003 “requires a council to adopt any particular standard.” Moreover, although other case law has articulated some “recognized merit system principles of public employment” (a term not defined in the statute), no existing authorities indicate whether procedural matters such as burdens of proof or standards of review constitute recognized merit system principles. Deferring to the Council’s interpretation of its rule as requiring the employer to prove the charges warranting discipline by a “preponderance of the evidence,” the Supreme Court found Rule XIII-4(I) consistent with merit system principles of public employment. As for the Council’s power to revoke or modify a disciplinary action if “the disciplinary action imposed was, in the sole discretion of the Council, too severe a penalty for the conduct proven,” that too comports with “recognized merit system principles of public employment.” The Court explained that nothing in A.R.S. § 38-1003 obligates merit system councils to employ any particular standard of review or to defer to the employer’s choice of discipline. Thus, while other merit systems do require more deference, that is not a statutory requirement. The reported cases modifying disciplinary action in the absence of arbitrary and capricious action by the employer have involved rules or statutes that expressly required deference to the employer’s decisions or application of the “arbitrary or capricious” standard. This difference in the underlying rules, the Court explained, explains the difference between the outcome in this case and the contemporaneously issued decision in Maricopa County Sheriff’s Office v. Maricopa County Employee Merit System Commission. The Court reinstated the Council’s decision.
Vice Chief Justice Berch authored the unanimous decision.
Deputy Sheriff Joseph Harvey appealed the decision to terminate his employment to the Pima County Law Enforcement Merit System Council, which reversed the termination decision. The Court of Appeals then reversed the Council’s decision, finding that the standard it applied in reviewing the employer’s decision, set forth in Pima County Law Enforcement Merit System Council Rule XIII-4(I), failed to give appropriate deference to the employer’s decision, and thus was not a “recognized merit system” principle of public employment in violation of A.R.S. § 38-1003. The Supreme Court disagreed, explaining that nothing in A.R.S. § 38-1003 “requires a council to adopt any particular standard.” Moreover, although other case law has articulated some “recognized merit system principles of public employment” (a term not defined in the statute), no existing authorities indicate whether procedural matters such as burdens of proof or standards of review constitute recognized merit system principles. Deferring to the Council’s interpretation of its rule as requiring the employer to prove the charges warranting discipline by a “preponderance of the evidence,” the Supreme Court found Rule XIII-4(I) consistent with merit system principles of public employment. As for the Council’s power to revoke or modify a disciplinary action if “the disciplinary action imposed was, in the sole discretion of the Council, too severe a penalty for the conduct proven,” that too comports with “recognized merit system principles of public employment.” The Court explained that nothing in A.R.S. § 38-1003 obligates merit system councils to employ any particular standard of review or to defer to the employer’s choice of discipline. Thus, while other merit systems do require more deference, that is not a statutory requirement. The reported cases modifying disciplinary action in the absence of arbitrary and capricious action by the employer have involved rules or statutes that expressly required deference to the employer’s decisions or application of the “arbitrary or capricious” standard. This difference in the underlying rules, the Court explained, explains the difference between the outcome in this case and the contemporaneously issued decision in Maricopa County Sheriff’s Office v. Maricopa County Employee Merit System Commission. The Court reinstated the Council’s decision.
Vice Chief Justice Berch authored the unanimous decision.
Posted by azapp @ Tue, Sep 27, 2005
Thursday, September 22, 2005
Joffe v. Acacia Mortgage Corporation: Division One Holds that Federal Telephone Consumer Protection Act Applies to Text Messages Sent to Cellular Telephones
Rodney Joffe received two text messages from Acacia Mortgage Company on his cellular telephone handset advertising the availability of mortgage services. He sued Acacia under the federal Telephone Consumer Protection Act, 47 U.S.C. 227, which prohibits the use of an automatic dialing system to make “any call” to a number assigned to a cellular telephone service. Acacia unsuccessfully moved for summary judgment, arguing that the law did not apply to the text messages that Acacia sent. The court subsequently entered partial summary judgment for Joffe on liability only, and Acacia appealed. On appeal, Acacia argued that the statute did not apply to the sending of text messages, and that if it did, it violated the First Amendment. The Court of Appeals rejected these arguments. The Court held that the Act’s use of the term “call” applied to any attempt to communicate by telephone, even one involving the transmission of text only, disagreeing with Acacia’s assertion that the Act applied only to traditional telephone calls involve the transmission of voice and intercommunication between the parties. The Court also held that the text messages did not constitute email messages, rather than calls, because they were intentionally configured to terminate at a cellular telephone handset. The Court rejected Acacia’s First Amendment argument, holding that the law as interpreted imposed a permissible narrowly-tailored, content-neutral restriction on the use of certain equipment to make telemarketing “calls.”
The decision was authored by Judge Norris and joined by Judges Lankford and Gemmill.
Rodney Joffe received two text messages from Acacia Mortgage Company on his cellular telephone handset advertising the availability of mortgage services. He sued Acacia under the federal Telephone Consumer Protection Act, 47 U.S.C. 227, which prohibits the use of an automatic dialing system to make “any call” to a number assigned to a cellular telephone service. Acacia unsuccessfully moved for summary judgment, arguing that the law did not apply to the text messages that Acacia sent. The court subsequently entered partial summary judgment for Joffe on liability only, and Acacia appealed. On appeal, Acacia argued that the statute did not apply to the sending of text messages, and that if it did, it violated the First Amendment. The Court of Appeals rejected these arguments. The Court held that the Act’s use of the term “call” applied to any attempt to communicate by telephone, even one involving the transmission of text only, disagreeing with Acacia’s assertion that the Act applied only to traditional telephone calls involve the transmission of voice and intercommunication between the parties. The Court also held that the text messages did not constitute email messages, rather than calls, because they were intentionally configured to terminate at a cellular telephone handset. The Court rejected Acacia’s First Amendment argument, holding that the law as interpreted imposed a permissible narrowly-tailored, content-neutral restriction on the use of certain equipment to make telemarketing “calls.”
The decision was authored by Judge Norris and joined by Judges Lankford and Gemmill.
Posted by azapp @ Thu, Sep 22, 2005
Arizona Republic article by Paul Davenport of the Associated Press reports:
"State Court says 1991 law applies to cell phone spam."
An Arizona appellate court ruled Tuesday that a 1991 federal law's ban against using autodialers to call cell phones applies to sending e-mail text messages with unsolicited advertisements - a technology not in vogue when the law was enacted.
"State Court says 1991 law applies to cell phone spam."
An Arizona appellate court ruled Tuesday that a 1991 federal law's ban against using autodialers to call cell phones applies to sending e-mail text messages with unsolicited advertisements - a technology not in vogue when the law was enacted.
Posted by azapp @ Thu, Sep 22, 2005
Sept. 22, 2005 Arizona Republic Article: High Court Ruling Reinstates Fired Sheriffs Deputy
TUCSON - A Pima County sheriff's deputy who was fired in 2001 will get his job back along with about $90,000 in back pay.
TUCSON - A Pima County sheriff's deputy who was fired in 2001 will get his job back along with about $90,000 in back pay.
Posted by azapp @ Thu, Sep 22, 2005
Monday, September 19, 2005
Phelps Dodge Corp. v. Arizona Department of Water Resources: Division One Holds that Department of Water Resources has Authority to Issue Permits for Instream Water Rights
The United States Forest Service applied to the Arizona Department of Water Rights (the “Department”) for a permit to appropriate the waters of Cherry Creek, in the Tonto National Forest. Phelps Dodge Corporation and others opposed the application. The Department referred the protests to the Office of Administrative Hearings, where an Administrative Law Judge (“ALJ”) ruled in favor of the Department. The Department Director adopted the ALJ’s findings. Phelps Dodge unsuccessfully appealed the decision to the Superior Court, then filed an appeal in Division One. Phelps Dodge’s argument was that the Department had no authority to issue permits for instream water rights. Because Arizona has a “prior appropriation” system of water rights, Phelps Dodge argued, a physical diversion is an essential element of an appropriation, and an instream water right by definition does not involve any physical diversion of water. The Court of Appeals disagreed. The Court focused on the statute governing the Department’s authority to approve applications for the “beneficial use” of water, A.R.S. § 45-152. Nothing in the statute, the Court noted, affirmatively required a physical diversion to effect a “beneficial use.” Nor did the common-law backdrop of water use rights support Phelps Dodge’s argument, the Court reasoned, because historically the essential question was the appropriator’s intent to use the water, and physical diversion was significant only insofar as it provided tangible evidence of that intent. Finally, the Court examined Phelps Dodge’s argument that a physical diversion was essential to ensure that other parties receive notice of a beneficial use. The Court disagreed, noting that there were other methods of providing such notice, and that the caselaw had found such methods to be adequate. Phelps Dodge also argued that the Department erred in using a 1991 Guide as a basis for its decision because the Guide had not been codified as a regulation. The Court first stated that it would not reach the issue, because Phelps Dodge had failed to address the pertinent portion of the Superior Court’s ruling on appeal. The Court went on to address the argument in a footnote, finding that the Department properly treated the Guide as a “substantive policy statement.”
The opinion was authored by Judge Kessler and joined by Judges Winthrop and Hall
PRACTICE NOTE: The Court made plain its view that Phelps Dodge had waived its challenge to the Department’s reliance on the Guide when, although Phelps Dodge apparently pressed the argument in its briefs, it declined to address specifically the Superior Court’s conclusion that the Department had not actually relied on the Guide “as a rule” and had not applied it against Phelps Dodge.
The United States Forest Service applied to the Arizona Department of Water Rights (the “Department”) for a permit to appropriate the waters of Cherry Creek, in the Tonto National Forest. Phelps Dodge Corporation and others opposed the application. The Department referred the protests to the Office of Administrative Hearings, where an Administrative Law Judge (“ALJ”) ruled in favor of the Department. The Department Director adopted the ALJ’s findings. Phelps Dodge unsuccessfully appealed the decision to the Superior Court, then filed an appeal in Division One. Phelps Dodge’s argument was that the Department had no authority to issue permits for instream water rights. Because Arizona has a “prior appropriation” system of water rights, Phelps Dodge argued, a physical diversion is an essential element of an appropriation, and an instream water right by definition does not involve any physical diversion of water. The Court of Appeals disagreed. The Court focused on the statute governing the Department’s authority to approve applications for the “beneficial use” of water, A.R.S. § 45-152. Nothing in the statute, the Court noted, affirmatively required a physical diversion to effect a “beneficial use.” Nor did the common-law backdrop of water use rights support Phelps Dodge’s argument, the Court reasoned, because historically the essential question was the appropriator’s intent to use the water, and physical diversion was significant only insofar as it provided tangible evidence of that intent. Finally, the Court examined Phelps Dodge’s argument that a physical diversion was essential to ensure that other parties receive notice of a beneficial use. The Court disagreed, noting that there were other methods of providing such notice, and that the caselaw had found such methods to be adequate. Phelps Dodge also argued that the Department erred in using a 1991 Guide as a basis for its decision because the Guide had not been codified as a regulation. The Court first stated that it would not reach the issue, because Phelps Dodge had failed to address the pertinent portion of the Superior Court’s ruling on appeal. The Court went on to address the argument in a footnote, finding that the Department properly treated the Guide as a “substantive policy statement.”
The opinion was authored by Judge Kessler and joined by Judges Winthrop and Hall
PRACTICE NOTE: The Court made plain its view that Phelps Dodge had waived its challenge to the Department’s reliance on the Guide when, although Phelps Dodge apparently pressed the argument in its briefs, it declined to address specifically the Superior Court’s conclusion that the Department had not actually relied on the Guide “as a rule” and had not applied it against Phelps Dodge.
Posted by azapp @ Mon, Sep 19, 2005
Division Two Reverses Pinal County Employee Merit System Commission’s Decision to Reinstate Terminated Detention Officer Who Assaulted a Fully Restrained Inmate
The Pinal County Sheriff’s Department (“PCSD”) terminated a detention officer who assaulted a restrained inmate after the inmate referred to the officer’s wife as a “f____ b____.” The officer appealed the termination decision to the Pinal County Employee Merit System Commission, which overturned PCSD’s termination decision. The Superior Court affirmed the Commission’s decision, but Division Two reversed. The Court explained that in light of the undisputed evidence that the officer had committed the charged acts, the Commission should have upheld the dismissal because it was “within the range of permissible disciplinary acts” and was not “so disproportionate . . . as to be shocking to a sense of fairness.” Moreover, the Court explained that it could not find County’s position that termination was necessary to “deter such behavior” unreasonable, and there was no evidence that similarly situated officers had received different treatment.
Chief Judge Pelander authored the decision in which Judges Florez and Espinosa joined.
The Pinal County Sheriff’s Department (“PCSD”) terminated a detention officer who assaulted a restrained inmate after the inmate referred to the officer’s wife as a “f____ b____.” The officer appealed the termination decision to the Pinal County Employee Merit System Commission, which overturned PCSD’s termination decision. The Superior Court affirmed the Commission’s decision, but Division Two reversed. The Court explained that in light of the undisputed evidence that the officer had committed the charged acts, the Commission should have upheld the dismissal because it was “within the range of permissible disciplinary acts” and was not “so disproportionate . . . as to be shocking to a sense of fairness.” Moreover, the Court explained that it could not find County’s position that termination was necessary to “deter such behavior” unreasonable, and there was no evidence that similarly situated officers had received different treatment.
Chief Judge Pelander authored the decision in which Judges Florez and Espinosa joined.
Posted by azapp @ Mon, Sep 19, 2005
Haines v. Goldfield Property Owners Association: Division One Remands for Determination of Whether Excess Assessments Held by Association Were Held in Trust and Could Therefore Be Distributed to Members
The board of directors of Goldfield Property Owners Association, an Arizona non-profit corporation, approved a resolution allowing for a pro rata disbursement of excess assessment funds to the current Association members. The Hainses attached the resolution, seeking a declaratory judgment against the Association, arguing that Arizona statutes forbid distributions by non-profit corporations. A.R.S. §§ 10-3140(22), -11301 and -11302. The superior court granted summary judgment in the Association’s favor, upholding the Association’s actions. This appeal followed.
The court of appeals noted that the parties disputed whether the Association’s payments were impermissible corporate distributions or lawful repayments of funds held in trust by the Association on behalf of its members. Due to the conflicting evidence, the court remanded for a determination of whether the funds were held in trust. The court noted that if the trier of fact determines that a trust does not exist, the funds could not be distributed to the members under A.R.S. § 10-11301.
Judge Lankford authored the opinion; Judges Snow and Orozco joined.
The board of directors of Goldfield Property Owners Association, an Arizona non-profit corporation, approved a resolution allowing for a pro rata disbursement of excess assessment funds to the current Association members. The Hainses attached the resolution, seeking a declaratory judgment against the Association, arguing that Arizona statutes forbid distributions by non-profit corporations. A.R.S. §§ 10-3140(22), -11301 and -11302. The superior court granted summary judgment in the Association’s favor, upholding the Association’s actions. This appeal followed.
The court of appeals noted that the parties disputed whether the Association’s payments were impermissible corporate distributions or lawful repayments of funds held in trust by the Association on behalf of its members. Due to the conflicting evidence, the court remanded for a determination of whether the funds were held in trust. The court noted that if the trier of fact determines that a trust does not exist, the funds could not be distributed to the members under A.R.S. § 10-11301.
Judge Lankford authored the opinion; Judges Snow and Orozco joined.
Posted by azapp @ Mon, Sep 19, 2005
Wednesday, September 7, 2005
Brebaugh v. Deane, Division One Panel Remands to Trial Court to Determine Whether Unvested Stock Options Were Community Property
After thirty years of marriage, William Brebaugh and Nancy Deane divorced. Though the parties agreed that stock options vesting prior to the date that the petition for dissolution was served were community property and stock options received after the petition service date were Mr. Brebaugh's separate property, they could not agree on the characterization of the options received during marriage but exercised after the petition service date. Ms. Deane argued that either the unvested options were entirely community property or should be allocated based on a formula that gives more weight to the employee's entire tenure with an employer during marriage (thus reflecting that the options were compensation for past service and giving the community a larger share of the options). The trial court determined that the options were compensation for work performed during the marriage and were not intended as an incentive for future employment. Thus, it concluded that all options granted prior to the petition service date were community property.
A unanimous panel of the Court of Appeals reversed and remanded. The Court disagreed with the bright line rule that all stock options received prior to the petition service date are community property. Instead, the Court articulated two rules that apply depending on whether the stock options were primarily intended to compensate for past service or, instead, to reward and encourage future efforts. Under the Hug formula, the employees' entire tenure weighs in the allocation of the property, with a greater share of the property allocated to the community. Under the Nelson formula, only the period of time between the granting of the option and the petition service date weigh into the allocation of the property, with a greater share of the property allocated to the separate property. The Court disagreed with the trial court that Mr. Brebaugh's stock options were for past compensation and remanded to the trial court to reconsider whether the employer's intent in granting the option, the expressly stated purpose of the option, and the adequacy of other compensation indicate that the options were for past service or future efforts, and accordingly, to apply either the Hug or the Nelson formula in allocating the options between community and separate property.
Presiding Judge Portley authored the opinion in which Hall and Weisberg concurred.
After thirty years of marriage, William Brebaugh and Nancy Deane divorced. Though the parties agreed that stock options vesting prior to the date that the petition for dissolution was served were community property and stock options received after the petition service date were Mr. Brebaugh's separate property, they could not agree on the characterization of the options received during marriage but exercised after the petition service date. Ms. Deane argued that either the unvested options were entirely community property or should be allocated based on a formula that gives more weight to the employee's entire tenure with an employer during marriage (thus reflecting that the options were compensation for past service and giving the community a larger share of the options). The trial court determined that the options were compensation for work performed during the marriage and were not intended as an incentive for future employment. Thus, it concluded that all options granted prior to the petition service date were community property.
A unanimous panel of the Court of Appeals reversed and remanded. The Court disagreed with the bright line rule that all stock options received prior to the petition service date are community property. Instead, the Court articulated two rules that apply depending on whether the stock options were primarily intended to compensate for past service or, instead, to reward and encourage future efforts. Under the Hug formula, the employees' entire tenure weighs in the allocation of the property, with a greater share of the property allocated to the community. Under the Nelson formula, only the period of time between the granting of the option and the petition service date weigh into the allocation of the property, with a greater share of the property allocated to the separate property. The Court disagreed with the trial court that Mr. Brebaugh's stock options were for past compensation and remanded to the trial court to reconsider whether the employer's intent in granting the option, the expressly stated purpose of the option, and the adequacy of other compensation indicate that the options were for past service or future efforts, and accordingly, to apply either the Hug or the Nelson formula in allocating the options between community and separate property.
Presiding Judge Portley authored the opinion in which Hall and Weisberg concurred.
Posted by azapp @ Wed, Sep 7, 2005
