“Bonus Income” Defined

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In many cases there will be language in the court order providing that one party will pay X% of any bonus income as additional child support or as additional spousal support.  With time we are beginning to appreciate that the customary language is beginning to become problematic.  An unpublished opinion out of Ventura County demonstrates how, and tries to implement a fix.

Sylvia and Eddie married in August 1985 and separated in November 1994.  They have two children: one born in October 1991 and the other in May 1994.  A judgment of dissolution was entered in December 1996.  The judgment ordered the parties to comply with a Marital Settlement Agreement (MSA).  The MSA required Eddie to pay monthly support of $366 for the elder child and $524 for the younger child.  The MSA further required him to pay to appellant “as additional child support the sum of 8 percent of any gross bonus he receives.”  The term “bonus” was defined “as the gross amount of incentive based compensation, other than nominal gifts.”

In August, 2012 Sylvia filed a motion requesting that Eddie pay her additional support from the stock options that he received, arguing that those options fit the definition of bonus income.  Eddie argues that the options were not bonus income.  More specifically he argued that the stock options were not “incentive based” compensation and therefore did not qualify as a bonus within the meaning of the MSA.

A slew of witnesses marched through court explaining the option.   The trial court concluded that the MSA was ambiguous as to whether respondent’s stock options qualified as bonus compensation.  The trial court therefore considered extrinsic evidence in ascertaining the intent of the parties when they signed the MSA.  The court accepted the testimony of Eddie’s witnesses and  found “that the parties did not intend to include stock options as a form of bonus.”  The court denied Sylvia’s request to pay to her, as additional child support, eight per cent of respondent’s stock option gains.

First the Court of Appeals approved the trial’s court’s weighing of extrinsic evidence because the MSA was ambiguous.  Second the appellate court agreed with the trial court that Eddie’s stock options did not come within the MSA’s definition of bonus income.

The bonus provision is included in paragraph 5 of the MSA.  Paragraph 5.a. provides, “The parties have agreed to a formula to allocate the bonuses they have received or will receive during calendar years 1995 and 1996.”  The paragraph lists the bonuses received by respondent: “[Respondent] received a $15,000 bonus in 1995 and a $40,000 bonus in 1996.”  The paragraph then sets forth the formula for allocating these bonuses between the parties.

Paragraph 5 does not mention stock options.  But respondent testified that in April 1996 Power-One had issued stock options to him.  If the parties had intended these stock options to constitute a bonus within the meaning of paragraph 5, they would have said so.  Paragraph 5 specified respondent’s bonus compensation in 1996.  It follows that the bonus provision does not encompass respondent’s stock options.  This construction of the MSA reasonably harmonizes the first sentence of paragraph 5, which refers to “performance bonuses,” with the second sentence, which refers to “incentive-based compensation.”  “Courts must interpret [contracts] to try to give effect to every clause and harmonize the various parts with each other.  [Citation.]”  (Friedman Professional Management Co., Inc. v. Norcal Mut. Ins. Co. (2004) 120 Cal.App.4th 17, 33-34.)

The bottom line for Sylvia is that if she wanted to receive additional support from Eddie for his stock options, she should have included the words “stock options” in the definition of bonus income in the MSA.  This case is another example of how trial court pressure to get cases settled can backfire when the Court of Appeals says efficiency and compromise are unacceptable.

Please Click Here To Read The Original Schnopp opinion.

Please be sure to visit www.hardinglaw.com, the website for the law firm of Harding & Associates, for more information on California family law.

#Harding&AssociatesFamilyLaw #californiafamilylaw #divorce #family law #superlawyers #americanacademyofmatrimoniallawyers #Pleasantondivorce #AlamedaCountyDivorce #ContraCostaCountyDivorce #lawyers

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