Benefit Rights and Community Property: Is Marriage of Brown Still Good Law?

• Jurisdiction: California,United States
• Author: James M. Crawford, Jr.
• Publication year: 2021
• Citation: Vol. 43 No. 3

Benefit Rights and Community Property: Is Marriage of Brown Still Good Law?

James M. Crawford, Jr.

Introduction

For over 40 years, the leading case on dividing retirement and other forms of deferred compensation in divorce has been In re Marriage of Brown, 15 Cal. 3d 838 (1976). The purpose of this article is to explore whether In re Marriage of Green, 56 Cal. 4th 1130 (2013) has altered Brown's basic principles. Examining Green in light of the subsequent case of Cal Fire Local 2881 v. California Public Employees' Retirement System, 6 Cal.5th 965 (2019), I argue that Brown remains the controlling authority in this area, and that the difficulty encountered by the Green court in stating and applying its principles was due to a failure to distinguish between benefit rights that are earned as deferred compensation for services and those acquired by purchasing service credit, both in terms of when the rights accrue as "property," and in determining the extent to which that property is community property.

This distinction is critical to resolving any benefit case involving the purchase or award of credit for service during which no benefit rights are accrued, including, for example, service for a prior employer (e.g., the military service at issue in Green), pre-plan service for the same employer, and even deemed or "fictive" service. This issue can arise in retirement plans—both private and governmental—which are allowed by the Internal Revenue Code to utilize a limited amount of such service in determining the amount of benefits to be paid.¹ The issue can also arise in other types of benefit plans that are not subject to the qualified plan rules, such as severance benefit or stock option plans.

Brown

The topic in Brown was the question of when an unvested or otherwise contingent² right to retirement benefits becomes "property." The result was a game changer. Overruling more than thirty-five years of jurisprudence under French v. French,³ Brown finally recognized that, because retirement rights are a form of deferred compensation for services rendered, they are earned as "property" at the time the service on which they are based is performed, even when the rights are accrued subject to a contingency, such as vesting.⁴ By virtue of this holding, two fundamental principles became firmly established.

First, as a form of deferred compensation, retirement rights are community property to the extent they are earned or accrued during marriage and before separation. As a consequence, the character of such rights is always determined by the marital status of the employee spouse at the time of the service from which they are derived was rendered—what the high court later described in In re Marriage of Lehman⁵ as "a single concrete fact."⁶ Accordingly, if the rights are accrued subject to a contingency such as vesting, then any post-accrual service that may be required to remove that contingency (such as vesting service) will not change their character. As Lehman explained:

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As stated, various events and conditions after separation and even after dissolution may affect the amount of ...benefits that an employee spouse receives. But not their character. Once he or she has accrued a right to . benefits, at least in part, during marriage before separation, the . benefits themselves are stamped a community asset from then on.⁷

The second basic principle established in Brown is that when married spouses accrue unvested or otherwise contingent rights as community property, the risk that those rights will fail to vest or otherwise become non-contingent is shared equally between them, as co-owners.⁸ Where employee benefits are concerned "[w]hat the nonemployee spouse possesses, in short, is the right to share in the [benefit attributable to the community's service] as it is ultimately determined. "⁹ Consequently, the employee spouse does not have to answer to the non-employee spouse if, as a result of post-separation events, the community's rights should fail to vest or mature as was hoped;¹⁰ but the employee spouse also cannot acquire a separate interest in those rights by providing the post-separation employment necessary to vest or mature them.

Brown's message is very simple. An employment benefit, whether or not vested, is community property to the extent a right to it accrues during marriage.¹¹

An important corollary to these basic principles is that the character of any period of service during which the right to a benefit was not accrued in any part (sometimes referred to herein as "non-accruing service") has no relevance to the characterization of that benefit even if that non-accruing service is used to calculate the amount of the benefit that is to be paid. For example, there was no community interest for severance benefits the amount of which was partly based upon service during marriage, where the plan under which the benefits were accrued was not established until after separation.¹² Similarly, the non-accruing "fictive" service credited for purposes of calculating husband's benefit under a post-separation amendment to his plan did not give him a separate interest in the resulting additional benefits.^{13 14} Hence, whether actually performed (as in Frahm) or totally fictive (as in Lehman), non-accruing service may affect the value of benefit rights accrued but not their character.

Over the years, Brown has mostly been followed, but due to a misapplication of its simple message, not always.

Brown's rule for determining the character of benefit rights accrued as deferred compensation is a bright line test. Such rights are community property to the extent they were earned in community employment. For this reason, when applied to stock options and other types of benefit plans in which the rights all accrue on a single date rather than over time as service is provided (such as the usual case for the award of stock options and severance benefit plans), Brown dictates that the employee's marital status on the date the rights are accrued determines their character, regardless of whether the benefits are intended to reward past service, incentivize future service, or some combination thereof. When confronted with this type of benefit in the past, some courts have decided that equity requires the benefits to be characterized based on the employer's perceived purpose in providing them, making the determinative factor why the rights were accrued, rather than when.¹⁵,¹⁶

Despite these aberrations, or perhaps in response thereto, in Lehman the high court decided to clarify what Brown requires. It explained that because the character of benefit rights is determined solely by the extent to which they are contractually earned or accrued during marriage and before separation, the employer's motive in providing them has no part to play in determining the extent to which they are property of the community:

[T]he Frahm court recognized that the issue of characterization of property, including the right to retirement benefits and retirement benefits themselves, as the community property of the employee spouse and the nonemployee spouse or the separate property of the employee spouse alone, does not turn on the motive of the employer. In any context, motive is, at best, hard to discern. In this context, it is also "irrelevant." That is because the employer acts for its own business reasons, and not for reasons bearing on the characterization of property for employee spouses and nonemployee spouses.¹⁷
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[Frahm's reasoning is sound] because it cleaves closely to Brown.... As we held in Brown, what is determinative is the single concrete fact of time. To the extent-and only to the extent-that

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an employee spouse accrues a right to property during marriage before separation, the property in question is a community asset.¹⁸

Lehman also removed the confusion that was evident in such cases as Hug and Nelson¹⁹ over how characterization (in which courts have no discretion), relates to apportionment (where discretion is allowed).

Characterization and Apportionment

As Lehman explained it, "characterization" is the process of determining whether a right to benefits was accrued to any extent during marriage, in which case the rights are a community "asset." Since this is a "single concrete fact," courts do not have discretion to characterize such rights in any other way. However, when a community asset is only partly accrued during marital service, it must then be subject to an "apportionment" in order to determine the portion that was accrued during marriage and before separation, which makes it community property to that extent.²⁰ Unlike characterization, apportionment requires a determination made in the sound discretion of the court of the relative contributions made by the community and separate estates to the accrual of the benefit rights.²¹

Since both concepts are grounded in the Brownian maxim that "'[a]n employment benefit ...is community property to the extent a right to it accrues during marriage' before separation",²² apportionment and characterization are in many respects two sides of the same coin.²³ But not in all. For whenever the benefit rights in issue are accrued only during community employment (as they were in the Hug and Nelson cases, for example), the asset is community property in its entirety, and therefore cannot be apportioned without impermissibly invading the community interest. By the same token, apportionment is also unavailable whenever the benefit rights in issue are all accrued by the separate estate before marriage or after separation, which was the situation encountered in Frahm. Per Lehman:

In Frahm, the non-employee spouse had argued that because the benefits in question were based on husband's total service, much of which was performed during the marriage, they should be apportioned under "time rule" even though the right to receive them did not accrue to any extent until after the parties separated. Frahm

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