De Felipe v. El-Youssef Asset Division Ruling Challenge
On October 14th the Massachusetts Appeals Court issued a slip opinion that addresses questions about the division of equity compensation in Massachusetts divorce cases. This summary focuses on just one of the questions presented in the case.
In De Felipe v. El-Youssef, Massachusetts Appeals Court Docket No. 24-P-792 the court was presented with a challenge to an asset division ruling that followed a multi-day trial. The question before the Appeals Court, among others, was: Did the trial judge err in not applying a modified time rule formula to the division of the husband’s non-voting common shares (NVCs) and investor entity units (IEUs)?
The parties were married for approximately 14 years by the time the husband filed for divorce in 2020. The husband worked as a research analyst and portfolio manager at Fidelity and the wife was a dentist.
Shortly after filing for divorce, the husband purchased 20,000 NVCs from Fidelity. He purchased another 20,000 shares in 2022. After trial, the judge equally divided the 2020 NVCs and awarded the husband 100% of the 2022 NVCs. The husband argued on appeal that the judge should have used the modified time rule formula set out in Baccanti v. Morton for the division of these assets. The husband’s accountant testified at trial that the unvested portion of the NVCs were not subject to the division analysis he performed.
The appeals court, in affirming the trial court decision, rejected this argument stating that the husband’s Baccanti analysis was flawed because it did not consider the different consequences of vesting stock options and vesting NVCs. The court explained the rationale behind the modified time rule formula: that certain equity compensation is only awarded based on the future (non-marital) labor of the employee. So, the further away in time you are from the marriage when the asset vests, the smaller the percentage that should go to the former spouse.
In this case, the court found that the NVCs were unlike stock options in that they represent the actual present-day purchase of equity in Fidelity. There is no delay in this asset between its purchase and the time that the employee receives an income stream from it (as opposed to stock unit grants, which provide no present value until vesting). For this reason, the appeals court upheld the trial judge’s decision to award the wife 50% of the 2020 NVCs (and IEUs) but none of the 2022 units. The court found that the trial judge appropriately balanced the equities and acted prudently under her broad discretion.