Ross v. Ross

GARRITY, Judge. This appeal by Jay S. Ross is from an order of the Circuit Court for Montgomery County (McKenna, J.) which granted Inas M. Ross’ Motion to Reconsider and resolved issues concerning marital property, the monetary award, expert witness fees, and litigation expenses. The order, in effect, overruled a prior order entered by a retiring judge of the same court. The appellant presents the following issues for our review: 1.

Whether the court erred when it signed a Judgment of Absolute Divorce which in effect overruled the prior divorce decree entered in the same case by another judge from the same court; 2. Whether the court erred in classifying a pre-emptive right, or right of first refusal, to purchase stock as marital property; ¹⁷⁹ 3. Whether the court erred in valuing the stock of a closely held corporation at fair market value in light of a restrictive shareholders’ agreement; 4. Whether the court abused its discretion when it established a payment schedule, with interest, for the monetary award rather than making an award on an “if, as, and when” basis; 5.

Whether the court erred when, having concluded that certain marital property had been dissipated, it included that property in computing the monetary award; and 6. Whether the award of attorney fees and expenses should be vacated if the monetary award is vacated. Facts Jay and Inas Ross were married on July 23, 1963. Their union yielded three children, one of whom was a minor at the time of the lower court proceedings.

During the course of the marriage, Mrs. Ross bore the responsibility for the housework and child care and held either full or part-time jobs for the greater part of the marriage. At the time of trial, Mrs. Ross was employed by the City of Takoma Park as a clerk, earning $24,000 a year. Throughout most of the marriage, Mr. Ross worked for Pioneer Technologies Group, Inc., a closely held Maryland corporation that is controlled by a small group of individuals, the Washington Shareholders, and a parent corporation, Prioneer-Standard Electronics, Inc. At the time of the trial, Mr. Ross held the positions of Vice President and General Manager, and earned about $178,600 a year. In addition to his base salary, he received an annual performance bonus, as well as a sum pursuant to an agreement with the company solely for the purchase of shares of stock belonging to former shareholders.

During the marriage, he purchased a total of 7,130 shares, 6,594 shares acquired prior to the parties’ separation and 536 shares subsequent thereto. At issue, however, will be the classification of certain shareholder rights not exercised during marriage. ¹⁸⁰ I. After Mrs. Ross filed a Complaint for Absolute Divorce, the case was referred to a domestic relations master for a hearing on the issues of marital property, attorney’s fees, and expert witness fees. Judge Calvin R. Sanders held a hearing on Mr. Ross’ exceptions to the report and recommendations of the master during which the exceptions were sustained in part. Judge Sanders retired shortly thereafter and Mrs. Ross’ request for the court to reconsider its ruling was referred to Judge James J. McKenna, who granted the motion and entered a decree consistent with the master’s recommendations.

Appellant contends that Judge McKenna erred when he signed the six month old proposed master’s report without a hearing on the motion and without an explanation of his ruling. Relying on Driver v. Parke-Davis & Co., 29 Md.App. 354 , 348 A.2d 38 (1975), and dicta in Insurance Co. v. Thrall, 181 Md. 19 , 27 A.2d 353 (1942), appellant argues that these cases stand for the proposition that the trial judge is in a position of greater responsibility than a judge ruling on pretrial matters and, therefore, is entitled to reject a prior decision made by a pretrial judge, in this case, the master. Appellant then argues that a judge who is considering a post judgment motion is without authority to modify a prior ruling of the trial judge. We disagree.

Md.Rule 2-536 provides, in essence, that in the event of a judge’s termination of office, any other judge of that court may perform the act or duty of the previous judge. Under Md.Rule 2-535, in the exercise of power incident to all courts of record, the succeeding judge, Judge McKenna, was vested with the authority to revise the judgment pursuant to the timely filed motion.

II

Appellant argues that the court erred in classifying his pre-emptive right to purchase Pioneer stock as an option to purchase, and therefore subject to equitable distribution as ¹⁸¹ marital property. Appellant contends that as a shareholder of Pioneer Standard he is bound by a stock purchase agreement which restricts the right of any shareholder to sell, transfer, or otherwise dispose of shares in Pioneer. The agreement at hand details the terms by which a shareholder’s stock is disposed of in the event of death, retirement, or termination of employment, or in the event that a shareholder wishes to sell his stock. The agreement confers upon the remaining shareholders the right to acquire the shares owned by the deceased, retiring, or terminating shareholder at the book value of such shares determined as of the date of the corporation’s fiscal year end for the year immediately preceding the death, retirement, or termination.

If two or more shareholders desire to purchase stock offered for sale, the right to purchase is directly proportional to the capital stock the shareholder owns as it bears to the total shares issued and outstanding. If the shareholders fail to purchase any portion or all of the stock, then the corporation is bound, in certain instances, to purchase the stock. 1 The primary difference between purchasing the stock under the various circumstances lies in the amount and manner of payment. The master determined that Mr. Ross’ ownership interest was an option to purchase and constituted marital property. He then ordered that 40 percent of the profit Mr. Ross derived therefrom be awarded to Mrs. Ross on an “if, as and when” basis.

After considering Mr. Ross’ exceptions to the master’s report, Judge Sanders ruled that the possible right to purchase another’s shares did not constitute an option and did not have a present value. In his written opinion and order Judge Sanders wrote, “[i]t is speculative as to whether or not any such shares will ever be offered for sale, and if so offered, whether or not its then value will ¹⁸² exceed the book value.” On reconsideration, however, Judge McKenna agreed with the master. Maryland has yet to consider whether a pre-emptive right to purchase stock which is acquired during marriage but not exercised prior to the termination of the marriage is marital property subject to equitable distribution. Preliminary to our determination of whether this pre-emptive right is marital property, we must determine if it is property within the meaning of the Marital Property Act, and, if so, whether it was acquired during the marriage.

Green v. Green, 64 Md.App. 122, 133 , 494 A.2d 721 (1985). Section 8-201(e) of the Md.Fam.Law Code Ann. (1984) defines marital property as “property, however titled, acquired by 1 or both parties during the marriage.” 2 Property has been further defined as a term of wide and comprehensive signification embracing “everything which has exchangeable value or goes to make up a man’s wealth — every interest or estate which the law regards of sufficient value for judicial recognition.” In Bouse v. Hutzler, 180 Md. 682, 686 [ 26 A.2d 767 ] (1942), we said that the word “property,” when used without expression or implied qualifications, “may reasonably be construed to involve obligations, rights and other intangibles as well as physical things.” “Goodwill,” for example, has been characterized as a legally protected valuable property right, (citations omitted). Archer v. Archer, 303 Md. 347, 356 , 493 A.2d 1074 (1985). A pre-emptive right is an exclusive right to have the first opportunity to purchase upon specified terms, but only if the owner chooses to sell.

VI American Law of Property ¹⁸³ § 26.64 (A.J. Casner ed. 1952). A pre-emption differs from a traditional option in that: An option creates in the optionee a power to compel the owner of property to sell it at a stipulated price whether or not he be willing to part with ownership. A preemption does not give to the pre-emptioner the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the person entitled to the pre-emption, at the stipulated price. Upon receiving such an offer, the pre-emptioner may elect whether he will buy.

If he decides not to buy, then the owner of the property may sell to anyone. Id. at 507. See also, Dennis Rourke Corp. v. Ferrero Construction, 64 Md.App. 694, 703 , 498 A.2d 689 (1985). In seeking to uphold the lower court, appellee relies upon Green, supra, wherein we noted that restricted stock option plans, like pension plans, are a form of employee compensation, “providing to the employee the right to accept within a prescribed time period and under certain conditions the corporate employer’s irrevocable offer to sell its stock at the price quoted.

If the employer attempts to withdraw the offer, the employee has a ‘chose in action’ in contract against the employer.” Unlike a stock option or a pension plan, a pre-emption is a mere possibility or expectancy, contingent upon specified but uncertain triggering events. In the instant case, the pre-emption does not reach the level of a property right because fellow holders cannot compel an unwilling owner to divest, unless upon termination of employment, retirement, or death. The pre-emption is inchoate and the interest to which it relates is speculative and remote, the execution of which may depend upon future proportional rights. Furthermore, valuing the pre-emption is complicated by a provision in the Washington shareholder’s agreement establishing as the pre-emptioner’s purchase price the book value of the stock for the fiscal year immediately preceding the ¹⁸⁴ event triggering the pre-emption.

In its simplest form, book value is calculated by subtracting liabilities from assets. Valuation and Distribution of Marital Property, § 22.08[2] (McCahey ed. 1991). [M]ore common than a pure book value assessment is a valuation based on various adjustments to the book value. Asset values may be adjusted to reflect inflation and appreciation in value; accounts receivable may be adjusted if they could only be sold at a substantial discount; and unrecorded obligations may necessitate adjustments to liabilities. Accordingly, the straight book value may be reduced based upon involvement in litigation.

Risks to the continued success of the business have also been cited as justifying an adjustment to book value. Id. Because of the inability to compel an owner to sell, and given the speculative nature of the pre-emption that a court must value marital property as of the divorce, 3 Dobbyn v. Dobbyn, 57 Md.App. 662 , 471 A.2d 1068 (1984), and that the purchase price of stock which may be acquired via a preemptive right cannot be established in advance of the purchase, we conclude that the mere pre-emptive right at issue cannot properly be termed marital property. Because the court apparently considered the unexercised pre-emptive rights in fashioning a monetary award, we shall vacate the award and remand that matter for reconsideration.

III

We now consider the effect of a restrictive transfer agreement on the value of stock in a closely held corporation. Appellant argues that the court, on reconsideration, erred in valuing the stock at fair market value when the shareholder’s agreement established book value as the purchase price to be paid in the event that the corporation and other shareholders exercised their pre-emptive rights. ¹⁸⁵ Of the other jurisdictions considering this issue, a majority have concluded that the price established by a buy-out or restrictive transfer agreement does not control the determination of value when the other spouse did not consent or was not otherwise bound by its terms. Argyle v. Argyle, 688 P.2d 468 (Utah, 1984); Arneson v. Arneson, 120 Wis.2d 236 , 355 N.W.2d 16 (1984); Beavers v. Beavers, 675 S.W.2d 296 (Tex.App.1984); Lyon v. Lyon, 439 N.W.2d 18 (Minn. 1989); Pelton v. Pelton, 167 Mich.App. 22 , 421 N.W.2d 560 (1988) ; Ullom v. Ullom, 384 Pa.Super. 514 , 559 A.2d 555 (1989) ; In Re Marriage of Moffatt, 279 N.W.2d 15 (Iowa 1978); see also Effect of Restrictive Agreement on Valuation, 6 Equitable Distribution Journal 49 (1989). Courts have rejected buy-out provisions on the basis that they do not necessarily represent the inherent worth of the stock to the parties.

A growing number of jurisdictions, however, have determined that while a restrictive stock transfer agreement is not binding on the court, it is a factor to be considered. Bosserman v. Bosserman, 9 Va.App. 1 , 384 S.E.2d 104 (1989); In Re Marriage of Micalizio, 199 Cal. App.3d 662 , 245 Cal.Rptr. 673 (1988); review denied May 25, 1988; Stearns v. Stearns, 4 Conn.App. 323 , 494 A.2d 595 (1985); Rogers v. Rogers, 296 N.W.2d 849 (Minn.1980); Amodio v. Amodio, 70 N.Y.2d 5 , 516 N.Y.S.2d 923 , 509 N.E.2d 936 (1987); In the Matter of the Marriage of Belt, 65 Or.App. 606 (1983); Buckl v. Buckl, 373 Pa.Super. 521 , 542 A.2d 65 (1988); Suther v. Suther, 28 Wash.App. 838 , 627 P.2d 110 , rev. denied, 95 Wash.2d 1029 (1981); see generally I.R.S.Rev.Rul. 59-60, 1959 — 1 C.B. 237 (restrictive agreement is factor to consider). A third position has been adopted in some jurisdictions.

These states hold that the terms of the restrictive agreement