This seems reasonable to me. But perhaps that's because it's almost definitionally reasonable, as what the Court of Appeal does is to remand to the trial court to do what seems right. Though I still think that's the correct call.
It's a thorny question with reasonable positions on both sides. A couple gets married and then divorced. Prior to the marriage Husband served in the Air Force for four years, and during the marriage served as a firefighter. For military folks, CalPERS (the state retirement system) lets you "buy in" extra years of service, so during the marriage, the couple used community property to start "buying in" (through installments) an extra four years of service. That's a good deal, because you "buy in" at a rate corresponding to your current pay but get benefits when you retire at your future (presumably higher) rate of pay. Makes financial sense.
The problem comes -- as many do -- once you get divorced. Husband says the extra years are his separate property because they came from his pre-marriage years of service in the military. He admits that he needs to reimburse his ex-wife for the community money spent buying in (plus interest), but that's it. The trial court agrees. But Wife says, no, it's community property, because those extra years were bought during the marriage and you can't transform community property to separate property just by paying back the money.
To its credit, the Court of Appeal realizes that this isn't an easy issue, so it invites the American Academy of Matrimonial Lawyers to file an amicus brief. Nicely done. I don't know that I would have thought of that, and I like it.
That doesn't necessarily mean you'll get a uniform answer, of course. Because, like I said, this is a tough issue. And indeed that's the case. The AAML can't agree on the answer, so it files a brief that articulates both sides. One part says "Yes, it's separate property," and makes the relevant arguments, and the other part says "No, it's community community property," and makes those arguments. The upside being that you have all the arguments laid out on an issue that affects lots of people -- not just the parties here -- and the downside being that only one of these parts is correct.
The Court of Appeal ultimately holds that the trial court was wrong in characterizing the property as separate, and I tend to agree. So it remands. At the same time, the Court of Appeal realizes that the allocation of this property might well be complicated, and so allows the trial court to exercise discretion. That seems entirely right to me as well.
It's not like the husband doesn't have a good argument. He does. His basic take is that (1) he earned the military credits before the marriage, and (2) sure, he "cashed in" those credits during the marriage, but that's essentially circumstance -- he could easily have "cashed in" those credits after separation and obtained the same benefit, so it's not right to call the property entirely community property. There's some power to that argument. Even in an area as necessarily artificial and form-bound as this one.
The Court of Appeal responds that the property was necessarily transformed; that once you've rung the bell and transformed your separate property into community property, you can't unring it. And that's true. But it doesn't necessarily respond to his point that he didn't really "ring" the bell because his pre-marriage service was always his separate property, even after he activated it with community funds. All that that requires, he says, is reimbursing the community.
The Court of Appeal has an answer to that, and it's one that's pretty persuasive (as well as backed by precedent). Justice Sepulveda says that the military credits weren't really "vested" -- thus remaining the owner's separate property forever -- because those credits could have gone away after the marriage. Maybe Husband would be fired as a firefighter. Maybe CalPERS would change the retirement plan and no longer allow buy-ins. Lots of things could happen. As a result, Husband didn't have a vested contractual right to his purported separate property, so he indeed transformed it during the marriage -- he exercised a "contingent" benefit and thereby made it vested during the marriage, and ergo, it's community property.
There's a lot to that analysis. It makes a ton of sense. It supports the Court of Appeal's holding. And it's especially persuasive in the economic climate in which we live. Goverment employees are being laid off. Retirement plans -- especially state pensions -- are being limited. So, yeah, Husband's benefit was indeed contingent. So once it became vested during the marriage, yep, community property.
But notwithstanding the power of this doctrinal argument, the proto-economist in me slightly rebels at this conclusion. It might be overly facile.
Husband essentially had an option: a financial benefit that he was contractually permitted to exercise. That option was his separate property prior to the marriage, and it had a certain value -- a value associated with the expected return of an investment that would "buy" years of credit and obtain a future pension return.
That value would not be exactly equivalent in an actuarial sense to the expected return, for precisely the reasons the Court of Appeal articulated. Husband might be fired. CalPERS might change the plan. But despite these potential events, this separate property still had value. An arms-length buyer would be willing to pay value for these contingent benefits. Value that would have gone exclusively to Husband.
In that regard, the buy-in rights were no different than any other financial derivative. Perhaps someone has an option to purchase 100 shares of IBM at $100 until Date X, and acquired this option prior to marriage. That option has value. Sure, IBM might never reach $100. It might even go bankrupt. Or Date X might pass. Or the universe might explode. Things can happen. But that option nonetheless has value.
Now, with a regular option like this, we give the Husband as his "separate" property the value of the option prior to marriage, and any appreciation in the option during the marriage we split as community property. An approach that makes sense.
But here, the value of Husband's CalPERS option doesn't really appreciate much during the marriage. Sure, he exercises the option -- he actually transforms it into a purchase, and thereby obtains contractual rights -- rights that have some value (e.g., avoids the possibility that CalPERS will change the plan, since it now can't do so, at least as to him). So a willing buyer would now be willing to pay slightly more for these benefits, as they're now more certain. But that benefit -- that "appreciation" -- is pretty marginal. And certainly does not equate to the entire value of the option itself, which is what gets split once you call the option itself (the four years of service) community property. Which is what the Court of Appeal essentially does.
Husband could have exercised the option the day after his separation. If he'd have done so, he'd have obtained the same benefit at retirement and wouldn't have had to split it with his wife. Moreover, he was entitled to this option because of activities he performed prior to the marriage. So you can see the good argument that this separate property didn't really appreciate during the marriage -- at least much -- and thus that it largely belongs to Husband (subject, of course, to a return to the community of any property spent on the actual exercise of the option).
Go back to the IBM option. Imagine that Husband owns this option when IBM is at $110. He then gets married, IBM's stock price never changes during the marriage, he exercises his option by buying 100 shares of IBM stock (which are worth $110 each) at his option price of $100 -- thereby obtaining a $1000 return -- and then separates. Surely we don't split the $1000 benefit in this example, right? Even if community funds were used to purchase the underlying 100 shares. Sure, the community gets reimbursed, but the "option benefit" -- the difference between $100/share and $110/share -- predated the marriage, so is entirely Husband's. Notwithstanding the fact that IBM stock might have gone down below $100/share, making the option worthless.
That's the best argument, in my view, for Husband's position. Not that Husband, or the AAML, or the Court of Appeal, puts it that way. But that's the argument.
I think it's a sufficiently strong argument such that the trial court should have discretion to take that into account when it decides how to apportion the property. And I see nothing in the Court of Appeal's opinion that would prevent such an approach. Even though I'm sure the Court of Appeal isn't exactly thinking about the issue this way. Yes, there's a benefit to exercising an option. Yes, that turns a contingent event into a certain event. But the value of that benefit is not equivalent to the value of the underlying transaction. You have to subtract the value of the preexisting option.
So that's a slightly different approach to this opinion. One that I also think has merit. And which parties, and courts, might want to consider.
Because it might make sense economically as well as be equitable. At least if you're an economist, and maybe even if you're not.
