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Robert Wainwright v. Karen Wainwright (1/13/95), 888 P 2d 762
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Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
ROBERT BRUCE WAINWRIGHT, )
) Supreme Court Nos. S-5560/5570
Appellant and )
Cross-Appellee, ) Superior Court No.
) 3AN-91-216 CI
v. )
)
KAREN YVETTE WAINWRIGHT, ) O P I N I O N
)
Appellee and ) [No. 4160 - January 13, 1995]
Cross-Appellant. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Joan M. Woodward,
Judge.
Appearances: William T. Ford,
Anchorage, for Appellant and Cross-Appellee.
Sharon L. Gleason, R. Scott Taylor, Rice,
Volland and Gleason, P.C., Anchorage, for
Appellee and Cross-Appellant.
Before: Moore, Chief Justice,
Rabinowitz, Matthews, Compton, Justices, and
Bryner, Justice, pro tem.*
MATTHEWS, Justice.
I. FACTS AND PROCEEDINGS
After a marriage of some twenty-two years, Robert and
Karen Wainwright were granted a divorce on November 4, 1992,
following a contested trial in the superior court. Each appeals
from various aspects of the court's order dividing their
property. The main dispute involves the court's decision to
retain jurisdiction until December of 1999 when Robert's pension
is scheduled to vest.1
Robert is a physician employed by the United States
Public Health Service. At the time of the trial he was earning
approximately $95,000 annually and was fifty-two years old.
Karen is a nurse employed at the Alaska Native Medical Center.
At the time of the trial she was earning approximately $54,000
per year and was fifty-one years old.
The court valued the marital estate at approximately
$377,000 (including $10,488 for the family home) and ordered a
property division under which Karen is to receive 55%, and Robert
45%, of the net value of the estate. Approximately 90% of the
parties' net assets are highly liquid, consisting of mutual
funds, bonds, money market accounts and cash. Not included in
the total asset calculation are the parties' nonvested federal
pensions. Robert's pension vests in December 1999 and Karen's
pension vested in December 1992, two months after trial.
Robert asked the court to treat his pension as though
it were vested, to value it and determine its marital component
based on that assumption, and to make a compensatory award of
other property to Karen representing her share of the pension.
The trial court refused to treat Robert's pension as vested,
ruling that "under the doctrine of Laing v. Laing, 741 P.2d 649,
valuation of said retirement is too speculative." Instead, the
court entered an order setting out a procedure to be followed in
1999 if and when vesting occurs.
The order provides that Karen is to receive 50% of the
marital portion of Robert's pension.2 It specifies that thirty
days prior to vesting Robert must elect whether to pay Karen her
share in a lump sum or an "allotment."3 The marital portion of
the pension will be determined by a so-called coverture fraction
of 75/240. Seventy-five is the number of months of Robert's
qualified employment during the marriage. Two hundred and forty
will be the total number of months of qualified employment at the
time of vesting. Robert's pay for the purpose of calculating the
marital property portion of the pension is not to be his actual
pay at vesting, but his salary at separation, "plus all annual
percentage increases for cost of living."4 The order requires
use of IRS life expectancy tables and states that the "discount
rate shall be the percentage rate that the Internal Revenue
Service uses in November, 1999, for its annuity valuation
calculations."5
II. DISCUSSION
A. Dividing Robert's Nonvested Pension
As noted, the main dispute in this case is whether the
trial court should have retained jurisdiction until Robert's
pension vests or divided Robert's nonvested pension for immediate
allocation between the parties. In Laing v. Laing, 741 P.2d 649,
658 (Alaska 1987), we held that a nonvested pension should not be
divided as part of a divorce property division. Rather, the
trial court should retain jurisdiction until the pension vests
and, at that point, equitably divide that portion of the pension
which is marital in character. Id. at 657-58. We acknowledged
in Laing that this result conflicts with the goal that a divorce
property division should provide a prompt and final resolution of
a couple's financial affairs, but found it necessary to "accept a
degree of continued financial entanglement"in order to avoid
unfairness. Id.
Robert argues that the jurisdiction-retaining device
adopted in Laing was intended to benefit the spouse who is in the
process of earning the pension (the employee spouse), and to
protect that spouse from the risk that the pension may never
vest. He contends that where, as here, the employee spouse is
willing to assume the risk of nonvesting, the general rule that
financial matters should be settled at the conclusion of a
divorce trial should control.
In response, Karen first argues that the vesting
contingency is not waivable by the employee spouse, citing Root
v. Root, 851 P.2d 67 (Alaska 1993). Further, she argues that
considerable uncertainty will be eliminated by deferring
valuation until the time of vesting.
In Root, the husband's military pension was to vest two
years after the divorce trial. Id. at 68 n.2. The trial court
awarded the husband all of his nonvested pension, but did not
value it. Id. at 68. The trial court purported to offset this
award by granting the wife the estimated value of the family home
and a savings account. Id. On appeal by the wife, we stated
that "[u]nder Laing, the trial court clearly erred in awarding
[the husband] his nonvested retirement benefits at the time of
divorce." Root, 851 P.2d at 69. Noting that the husband's
retirement benefits would vest before the family home could be
sold, we stated that "once [the husband's] pension vested, the
court could then have determined the present value of the vested
pension and awarded [the wife] a lump sum (possibly out of [the
husband's] share of the house equity when sold) as her share of
the pension." Id. We went on to observe that the husband had
failed to present evidence indicating the current value of his
pension benefits and that the wife had also failed to present
evidence as to the current value of her vested pension. Id.
Root does not stand for the proposition that an
employee spouse who owns a nonvested pension may not waive the
fact that it is nonvested for purposes of calculating a division
of the marital estate. It does not appear from the Root opinion
that the husband offered in the trial court to waive the risk of
nonvesting. Despite the reference to Laing, the real error in
Root was the trial court's failure to value the husband's
pension. Without such a valuation, there was no way to determine
whether the property division was equitable. This inability
would exist regardless of whether the property division was
deferred until the husband's pension vested or was accomplished
at the time of the trial.
Robert's argument that the deferral-until-vesting
remedy of Laing was imposed so that the employee spouse would not
bear the risk of nonvesting is correct. We stated in Laing that
"[s]ince the nonemployee spouse receives his or her share in a
lump sum at the time of the divorce, . . . [attaching a present
value to a nonvested pension] unfairly places all risk of
possible forfeiture on the employee spouse." 741 P.2d at 657.
Since the Laing method was imposed for the benefit of the
employee spouse, it follows that the employee spouse may waive
the method and choose to accept "all risk of possible
forfeiture." Id.6 When the employee spouse accepts the total
risk of forfeiture, prompt and final settlement of the marital
estate, the policy sacrificed in Laing, can be achieved.7
Karen's second argument, that retaining jurisdiction
until 1999 would eliminate uncertainty and the necessity for "a
battle of valuation experts,"is largely incorrect. The major
dispute between Robert's expert, Sherwin, and Karen's expert,
Schilling, related to the applicable discount rate.8 The dispute
between Schilling and Sherwin as to what discount rate to employ
was present just as strongly in their calculations assuming a
1999 valuation as in their time of trial calculations.9
We conclude, therefore, that the court erred in
refusing to value Robert's pension as though it had vested at the
time of trial. Robert, in a knowing waiver, decided to accept
the entire risk of his pension not vesting. Treating his pension
as vested would achieve the goal of settling the marital estate
promptly without continuing entanglements. Deferral would not
eliminate the need to choose between conflicting methods offered
by expert witnesses.
B. Computing the Current Value of Robert's Nonvested
Pension
On cross-appeal, Karen challenged that aspect of the
trial court's order which set the salary base upon which Karen's
share of the pension will be calculated as Robert's salary at the
time of separation plus annual cost-of-living increases until the
time of vesting. Karen contends that there are two problems with
this. First, it does not account for post-vesting cost-of-living
increases (either to retirement payments if Robert retires at
vesting or to salary should Robert not retire at vesting).
Second, it does not account for salary increases to Robert for
promotions Robert might receive between the time of trial and the
time of vesting.
Although Karen's cross-appeal relates to the court's
order concerning the means of distribution of Robert's pension in
1999 and is thus moot in light of our decision in this case, it
does raise one point which also applies to a distribution made as
of the time of trial. Karen contends that both Robert's salary
and his retirement pay are essentially inflation proof and the
court erred in failing to take this into account.10 The fact that
Robert's salary and retirement pay are protected from inflation
is unrefuted on the record before us. In these circumstances the
court should reduce Robert's anticipated pension benefits to
present value by adjusting Robert's future pension benefits
upwards for expected inflation and then discounting them by the
market interest rate.11 The court incorrectly used a calculation
which froze Robert's benefits, yet discounted them at market
rates. In doing this the court denied Karen the benefit of
inflation's impact on Robert's remuneration, while saddling her
with the detriment of inflation's effect on the discount rate.
This is clearly inequitable. See Jones & Laughlin Steel Corp. v.
Pfeifer, 462 U.S. 523, 540-41 (1983) (inequitable "to deny the
plaintiff the benefit of the impact of inflation on . . . future
earnings, while giving the defendant the benefit of inflation's
impact on the interest rate that is used to discount those
earnings to present value").
III. CONCLUSION
For the above reasons the judgment is reversed in so
far as it relates to the division of the parties' property. This
case is remanded for further proceedings in which the court shall
treat Robert's pension as vested, value the pensions of both
parties, determine and divide the marital component of both
pensions, and enter an appropriate offsetting award from other
marital property.
REVERSED in part and REMANDED.
_______________________________
* Sitting by assignment made pursuant to article IV,
section 16 of the Alaska Constitution.
1 We find no clear error concerning the other issues and
determine them summarily. See, e.g., Brosnan v. Brosnan, 817
P.2d 478, 480 (Alaska 1991) (trial court factual determination
will be overturned only if clearly erroneous). Specifically, the
court did not abuse its discretion in concluding that the
Colorado property was marital rather than separate property.
Robert admitted at trial that he used marital funds to pay
property taxes on the property, and expended some $2600 of
marital funds in order to foreclose and thus reacquire the
property. See Zimin v. Zimin, 837 P.2d 118, 122 n.6 (Alaska
1992) (separate property may be transmuted when marital funds are
used, in part, to acquire it); Miles v. Miles, 816 P.2d 129, 132-
33 (Alaska 1991) (de minimis payments on separate property do not
transmute it to marital property). The court did not err in
distributing $7839 of art work to Karen and $2944 to Robert.
Robert, of course, is under a duty to transfer art work in his
possession which has been allotted by the court to Karen. Karen
asks for no relief concerning her claim that Robert should not
have been allowed to peremptorily challenge the settlement
conference judge and we thus make no ruling concerning this
claim. The trial court's award of $2500 in fees to Karen --
approximately 12% of Karen's total litigation expenses -- was not
an abuse of discretion since the property division was weighted
in her favor and she is employed at a well-paying job. See,
e.g., Mann v. Mann, 778 P.2d 590, 592 (Alaska 1989) (parties in
comparable economic situations should bear own costs).
2 Robert is also to receive a share of the marital
portion of Karen's pension.
3 This is a reference to installment payments made at the
direction of employees of the Public Health Service which are
deducted by the Public Health Service from employees' salaries or
pension payments.
4 Robert's annual pension payments will actually be
calculated by multiplying his base pay times 2.5 for every year
of qualified employment with a maximum of 30 years. Thus if
Robert retires after 20 years he will receive 50% of his base
pay, if he retires after 30 or more years he will receive 75% of
his base pay. 42 U.S.C. 212 (1991).
5 Under current law this rate is 120% of the federal
midterm rate (I.R.C. 7520(a)(2)); the federal midterm rate is
the average market yield on United States securities with
remaining periods to maturity of three to nine years. I.R.C.
1274(d). Currently the federal midterm rate is 6.83% for an
annuity payable monthly.
6 A trial court would not abuse its discretion in opting
for the Laing method despite the employee spouse's willingness to
waive if exceptional circumstances convince the court that
reliance on the Laing method is necessary to achieve an equitable
distribution of assets. For example, exceptional circumstances
could exist where the non-employee spouse would otherwise have to
take an unsecured money judgment against the employee spouse with
a substantial risk of non-collection, and the pension is close to
vesting.
7 We stated in Laing that retaining jurisdiction "more
evenly allocates the risk of forfeiture between the parties,
although it also runs counter to our expressed preference for
finalizing a couple's financial affairs as soon as possible."
741 P.2d at 657.
8 Schilling contended that the market discount rate had
to be adjusted to reflect the fact that Robert's retirement pay
will be indexed to inflation and Robert's pay while employed will
increase annually "more or less in line with inflation." Because
the value of Robert's pay and benefits would thus not be reduced
by inflation, Schilling testified that the component of market
interest which exists because of inflation must be factored out
of the applicable discount rate. By contrast, Sherwin used a 7%
discount, a rate which was not adjusted to reflect what interest
would be absent the effects of inflation.
9 The only uncertainty which would be eliminated by
deferral is that actual inflation, and Robert's actual cost of
living increases, between 1992 and 1999 will be known. However,
given the fact that in 1999 predictions as to future inflation,
and inflation driven benefit increases, will have to be made
which are of the same character as those which were deferred in
1992, this is not a persuasive reason for deferral. It leads
logically to deferral until each benefit is actually received.
Neither the parties nor the court view that as desirable in this
case.
10 The court took into account increases before 1999 but
not thereafter.
11 If the court finds this method of calculating present
value too cumbersome, it may employ the following alternate
method. The court may discount Robert's anticipated pension
benefits by a "real"interest rate -- an interest rate in which
inflation is deducted from the market interest rate -- without
adjusting Robert's expected benefits upward for inflation. This
allows the court to calculate present value through the use of a
present value table without elaborate computation. See
California Jury Instructions, App. B, 8th ed. 1994. In theory
this alternative method is not as accurate as the method of first
adjusting upward for inflation and then discounting by the market
interest rate. However, since the alternate method is simpler
and will normally yield an acceptable approximation of present
value, using it is not error. See Jones & Laughlin Steel Corp.
v. Pfeifer, 462 U.S. 523, 548-49 (1983); O'Shea v. Riverway
Towing Co., 677 F.2d 1194, 1199-1200 (7th Cir. 1982).
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