O.C. Ruling Keeps Ex-Spouses From Sharing Buyout Pay

George Frahm had worked 30 years for GTE California, but when the company offered an early buyout to employees, Frahm jumped at a lump-sum retirement package that included an $83,143 incentive.

The incentive payment also proved enticing to Janice, his former wife.

She argued that she deserved part of the windfall because it was based on the years he worked at the company, many of them during their 12-year marriage.

The law, which has expanded in favor of nonworking spouses, appeared to be on Janice Frahm’s side. But last week, the state Court of Appeal in Santa Ana ruled that she had no right to the additional money because it came after the divorce and was essentially a gift from the company.

“The legal concept is not new, but it’s new to these kinds of severance plans,” said family law expert Steve Griggs of Newport Beach.

The unanimous decision by the three-judge panel comes at a time when thousands of divorced people are being bought out of their jobs with so-called golden handshakes by corporations bent on downsizing.

“These deals are prevalent throughout all industries,” said Nancy Bennett Bunn, attorney for Janice Frahm. “The workplace isn’t what it used to be.”

Bunn believes the opinion conflicts with a 1994 appellate case in San Diego, and she plans to appeal to the state Supreme Court. George Frahm’s lawyer, Jeri R. McKeand, doesn’t see a conflict but concedes that “the law in this area isn’t settled.”

Indeed, the decision is important, family law experts say, more for the large number of divorced people it can affect than for what it says. The case governs those in similar situations in Orange County and can be used as persuasive reasoning in other appellate court districts.

The court in the Frahm case understood the ramifications and the need for guidance.

“Increasingly, employers are offering significant financial incentives to employees to voluntarily separate themselves from the workplace,” wrote Court of Appeal Justice Sheila Sonenshine, an authority on family law matters.

Many workers are divorced or in the process of divorce, she wrote, and courts are being asked to decide if an enhanced severance payment is a working spouse’s separate property or the couple’s community property. If it’s community property, the other spouse is entitled to up to half the money.

GTE and other companies with pension plans must follow such cases closely because they could be on the hook if they fail to pay the right amount in retirement benefits to former spouses.

Southern California Edison, for instance, is scurrying to make sure it allocates pension and severance benefits properly as it prepares to shell out $65 million to reduce its work force by 1,750 employees. Under the company’s voluntary severance plan, 3,500 of Edison’s 16,000 workers are eligible for the buyout and have until June 14 to apply.

“The Frahm case is giving us cause to consider the impact on how we interpret these orders,” said William Harn, an Edison benefit plan lawyer. “It will affect what we have to consider as divisible and how we distribute the money.”

Since 1984, a state law has required that a divorced person seeking retirement benefits obtain a court order on how the benefits should be split with an ex-spouse. Then the company’s pension plan manager has to determine if that order complies with federal laws.

Because the Frahms were divorced in March 1977, well before the state law was enacted, no court order--called a qualified domestic relations order--was ever prepared. When George Frahm decided to take the GTE buyout, though, the company’s pension plan required that his lawyer, McKeand, draft an order.

Janice Frahm’s lawyer, Bunn, figuring this area of law was murky, urged her client to challenge the order.

“I said whatever I get was going to the boys,” said Janice Frahm, who said she raised two young sons on her own.

The trial court ruled for George Frahm, deciding that the incentive was essentially “present compensation for loss of future earnings.” The appellate court agreed, but on different grounds.

“An employment benefit, whether or not vested, is community property to the extent a right to it accrues during marriage,” Justice Sonenshine wrote. “Such is not the case here.”

While Janice Frahm was entitled to a portion of her former husband’s other retirement benefits derived from his employment, the judge said, she wasn’t entitled to any part of the incentive payment. That severance payment resulted “solely from GTE’s beneficence,” the judge said, and the right to receive it arose after the divorce.

“Courts have tried to find community property wherever they can, and the law has been expanding on behalf of the nonworking spouse,” said family law specialist Thomas A. Bernauer of Newport Beach. “So it’s interesting that they found for the working spouse in this matter.”

The issue cuts both ways in a typical family law practice, where lawyers find themselves representing both working and nonworking spouses.

“When this decision came down, my client lost,” Bunn said, “but five other clients who are taking a Southern California Edison buyout went out celebrating.”

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Who Gets What

In states such as California, so-called “community property” assets are divided roughly 50-50 between spouses. Separate property assets may not be divided. Guidelines on what is community or separate property:

COMMUNITY PROPERTY

* Money & possessions: All income and items purchased after the marriage and before legal separation, even if one spouse earns more than the other

* Home equity: If home purchased after marriage

* Settlements: Damages portion of legal settlement received by either spouse during the marriage

* Investment appreciation: Even if investment purchased before marriage

* Pension plans, 401(k) plans: Pension amounts accumulated during marriage; 401(k) contributions, company matching and account appreciation during marriage

* Social Security benefits: If married at least 10 years

SEPARATE PROPERTY

* Money and possessions: Anything earned or purchased before marriage or after legal separation

* Home equity: Homes purchased and paid for completely before marriage

* Inheritances: All inherited assets, regardless of date received

* Income from separate properties: Rental property income if rental acquired before marriage

* Settlements: Pain and suffering portion of a legal settlement

Source: Victoria Felton-Collins, author of “Money and Divorce,” published by Nolo Press, Berkeley