Opinions, July 28, 2015: There is No Bright Line Rule for Bonuses.

UPDATED: The Supreme Court reversed this opinion on May 12, 2017.

The Fourteenth Court of Appeals has released its published opinion in Loya v. Loya, No. 14-14-00208-CV (Tex.App.–Houston [14th Dist.] Jul. 28, 2015) with Justice Frost dissenting. This is an important decision regarding discretionary bonuses paid post-divorce which I imagine will be appealed. The take away: “[A] bonus paid post-divorce, but alleged to be based in part on work performed during the marriage, could be subject to proof that some portion of this bonus is community property.”

After 28 years of marriage, Leticia Loya filed for divorce in 2008 from Miguel Loya.  During and after the marriage, Miguel was an employee of Vitol, Inc. where he was eligible for, but not entitled to, a discretionary bonus:

You will continue to be considered for an annual bonus based on various performance parameters considered by [Vitol]. Bonuses are completely at the discretion of [Vitol] and, if paid, are typically paid in March/April each year.

Miguel regularly received bonuses. His bonus paid in 2010 was awarded to him shortly before the divorce which was placed into a bank account that was awarded to Leticia in the MSA. Based on this fact, Miguel argued Leticia was aware that Vitol would potentially pay him a bonus in 2011. (As the dissent points out, the parties were married for 28 years and Leticia should have known the regularity with which Miguel received annual bonuses)

Leticia presented the MSA to the trial court and requested it be entered. The trial court announced the parties’ divorce on the record, set an entry date, and ordered the parties to draft their final documents. Shortly after that, Leticia moved to set aside the MSA because the parties “did not reach an agreement as to the division of… the community’s interest in Miguel Angel Loya’s bonus to be paid in 2011, nearly half of which pertains to [Miguel]’s services through June 13, 2010.”

The MSA, which also served as an immediate partition, included the following provision: “All future earnings from each party are partitioned to the person providing the services giving rise to the earnings.”

On June 22, 2010, the trial court denied Leticia’s motion to set aside the MSA and signed the parties’ final decree of divorce which incorporated an AID setting out the terms of the MSA (though the AID was not signed by either party). The decree and the AID both provided that any community assets of the parties not divided by the parties’ agreements would be subject to future division. Leticia did not appeal from the decree.

On March 15, 2011, Miguel received his bonus for $4.5 million ($2.85 m net after taxes and retirement). In June 2012, Leticia filed an original petition for post-divorce division of property seeking to divide the 2011 bonus.

Miguel moved for partial MSJ on the grounds that: 1) the bonus was not community property; 2) if the bonus was subject to division, it was partitioned to Miguel under the MSA; and 3) Leticia’s claim was barred by res judicata because the trial court considered the division of the bonus through Leticia’s motion to set aside the MSA.

Leticia’s response alleged there were fact issues on whether: 1) the bonus was community property and subject to division, 2) the bonus was awarded to Miguel in the divorce, and 3) Leticia’s suit was barred by res judicata.

On January 6, 2014, the trial court signed a take-nothing judgment on Leticia’s petition.

On appeal, Leticia asserted four issues: 1) Miguel failed to conclusively prove that the bonus was his separate property; 2) alternatively, there is a fact issue concerning the characterization of the bonus; 3) the bonus was not partitioned in the decree of divorce; and 4) res judicata does not apply because the decree did not award the bonus to anyone. The Court of Appeals held that because the bonus was not considered, disposed of, or partitioned in the decree, Leticia raised a fact issue concerning characterization of the bonus and reversed the summary judgment, remanding the case to the trial court for further proceedings.

The COA first discussed the third and fourth issues, Leticia’s res judicata and partition challenges.

Res judicata, the court noted, does not apply to post-divorce partitions where the decree has not disposed of an asset. In such cases, partition is appropriate. “The MSA, the divorce decree, and the AID do not mention the 2011 bonus,” the COA stated.  Miguel argued the trial court “considered” the bonus, barring Leticia from re-litigating the issue, because Leticia’s motion to set aside the MSA was based in part on the failure of the parties to divide the bonus. The Court of Appeals disagreed, noting Leticia did not seek to divide the property in her motion; rather, she sought to set aside the MSA based on lack of mutual assent.  As such, the COA concluded Miguel’s 2011 bonus was not considered, divided or partitioned in the MSA, the AID, or the decree.

Turning to characterization, the COA looked to its prior opinion in Sprague v. Sprague, 363 S.W.23d 788, 801-802 (Tex.App.–Houston [14th Dist] 2012, pet. denied) which considered whether bonuses awarded during a marriage for work performed at least partially before the marriage could be established as a spouse’s separate property. In that case, evidence of the characterization of the bonuses was improperly excluded from the fact-finder because the spouse was entitled to present evidence that portions of the bonuses were awarded based on work performed before the marriage. “In other words, there is no bright line rule for bonuses: a bonus paid during marriage may be based in part on work performed prior to the marriage, which would make that portion of the bonus a spouse’s separate property.” Extending the logic of Sprague, the COA said a bonus paid post-divorce but alleged to be partially based on work performed during the marriage, could be subject to proof that some portion of the bonus is community property.

Miguel’s summary judgment evidence established the bonus was paid to him in March 2011, but Leticia submitted an affidavit stating the bonus was based in part on services  performed during the marriage and before divorce. And, the court noted, Miguel did not establish that the 2011 bonus was not earned, at least in part, based on services he provided during the parties’ marriage. Thus, the court concluded, Leticia raised a genuine issue of material fact concerning whether some of the 2011 bonus was community property.

Before wrapping up the opinion, the majority addressed an argument of the dissent which “appears to urge that ‘future earnings’  are measured solely by the ex-spouse’s receipt of the ‘earning.'” The majority stated this ignored the language of the MSA at issue which partitioned future earnings to the “person providing the services giving rise to the earnings.” Based on this language, the Court of Appeals held that the MSA at issue indicated that the character of the bonus would be based on whether the work was performed during the marriage or not.

The dissent, addressing the exact same provision, reached the opposite conclusion. The dissent argued that the MSA’s provision (“All future earnings from each party are partitioned to the person providing the services giving rise to the earnings.”) was unambiguous, looking to the Texas Family Code definition of “earnings” which includes payment to or due to an individual, regardless of source and how denominated, plus “wages, salary, compensation received as an independent contractor, overtime pay, severance pay, commission, bonus, and interest income.” Tex. Fam. Code 101.011. The parties, the dissent argues, allocated all future earnings and income to Miguel as part of their settlement embodied in the MSA concerning the division of the community estate, which clearly includes the 2011 bonus.

The dissent disagrees with the majority’s reliance on Sprague, finding that even if a portion of the bonus could be characterized as community property, the parties partitioned the community property to Miguel by agreement when they allocated all future earnings to Miguel, relying upon the dictionary definition of “future.” The majority held that a bonus based on work performed during the marriage might be proportionately characterized as community property, but the dissent argued that none of the bonus came into existence until after the divorce and, under the parties’ agreement, the entire bonus fell under the provision partitioning future earnings to Miguel.

In a footnote, the dissent notes at length that Leticia should have known that Miguel would receive a bonus after the divorce, a fact the majority noted as well. What both opinions appear to be hinting at is that the 2011 bonus should have been explicitly part of the settlement reached at mediation.

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