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Full Opinion
In re the MARRIAGE OF Marietta and Jack R. LEHMAN.
Marietta LEHMAN, Respondent,
v.
Jack R. LEHMAN, Appellant.
Supreme Court of California.
*826 Harry L. Styron, Walnut Creek, for Appellant.
Bernard N. Wolf, San Francisco, Whiting & Rubenstein, Whiting, Rubenstein, Fallon & Ross, Walnut Creek, and R. Ann Fallon, Richmond, for Respondent.
Barbara DiFranza, Salinas, and Soma F. Baldwin, Santa Maria, as Amici Curiae on behalf of Respondent.
MOSK, Justice.
We granted review in this cause in order to address an important question relating to the characterization of retirement benefits as community or separate property under a socalled "defined benefit retirement plan," which specifies payments in advance in accordance with a formula that comprises factors such as final compensation, age, length of service, and a per-service-year multiplier: Does a nonemployee spouse who owns a community property interest in an employee spouse's retirement benefits under such a plan own a community property interest in the retirement benefits as enhanced? As we shall explain, we conclude that the answer is: Yes.
I
Jack R. Lehman (Husband) was born on September 3, 1940, and Marietta Lehman (Wife) was born on November 13, 1941. On June 15, 1959, he was hired by the Pacific Gas and Electric Company (PG & E). On June 11, 1960, the couple married. On May 1, 1962, he began to participate in PG & E's defined benefit retirement plan, and thereby began to accrue a right to retirement benefits thereunder. On October 29, 1977, the *827 couple separated. On December 19, 1978, they obtained an interlocutory judgment of dissolution of marriage from the superior court, which retained jurisdiction for purposes including the division of the community property interest in his retirement benefits at the time of retirement. On February 23, 1979, they obtained a final judgment of dissolution.
In March 1993, in order to avoid discharging certain employees, PG & E offered an enhanced retirement program, called the "Voluntary Retirement Incentive" (VRI). It described the VRI program as a "management tool" to "reduc[e] costs" by "bring[ing] our workforce in line with the needs of our changing business" through enhancement of retirement benefits by means of "two special improvements to the retirement benefit formula," namely, the crediting of three putative years of service and the waiving of the normal actuarial reduction of 18 percent for early retirement, which is designed to account for more projected payments. It stated that the "decision to participate ... is completely voluntary." For eligibility, it required, among other things, that the employee in question had attained the age of 50, and had accumulated 15 years of service, as of December 31, 1992. Husband met the conditions. He elected to retire early at about 54 1/3 years of age under the VRI program effective January 1, 1995, with enhanced retirement benefits in the amount of $3,059.30 per month based on final compensation of $5,360.43 per month, length of service of 35.67 years, including 3 putative years, and a per-service-year multiplier of 1.6 percent. (Without the three-year putative service credit, he would have received enhanced retirement benefits in the amount of $2,802 per month; without the waiver of the normal 18 percent early retirement actuarial reduction, he would have received enhanced retirement benefits in the amount of $2,508.63 per month.) Had he waited to retire early at 55 years of age, without the 3-year putative service credit and without the Waiver of the normal 18 percent early retirement actuarial reduction, he would have received retirement benefits in the amount of $2,350.39 per month based on (presumed) final compensation of $5,360.43 per month, length of service of 33.42 years, and a per-service-year multiplier of 1.6 percent. Had he waited to retire at 65 years of age, without the 3-year putative service credit and also without any early retirement actuarial reduction (inasmuch as retirement at that age is not early), he would have received retirement benefits in the amount of $3,724.00 per month based on (presumed) final compensation of $5,360.43 per month, length of service of 43.42 years, and a per-service-year multiplier of 1.6 percent. By electing to retire early at about 54 1/3 years of age under the VRI program instead of waiting to retire early at 55 years of age, he received enhanced retirement benefits in an amount of $708.91 per month.
After Husband retired, Wife made various motions in the superior court, seeking various orders together with a determination as to characterization that she owned a community property interest in his retirement benefits as enhanced. In response, Husband admitted that she owned such an interest in his retirement benefits, but denied that she owned one in them as enhanced. What was in contest was solely characterization, i.e., whether the enhancement was a community asset in any part, and not apportionment, i.e., to what extent the enhancement, if a community asset at least in some part, belonged to the community and separate estates. Generally following In re Marriage of Gram (1994) 25 Cal.App.4th 859, 30 Cal. Rptr.2d 792 (hereafter sometimes Gram,) which had recently been decided, the superior court issued orders favorable to Wife, including the determination that, by owning a community property interest in Husband's retirement benefits, she owned a community property interest in his retirement benefits as enhanced. As to apportionment, it applied the so-called "time rule." (See, e.g., In re Marriage of Judd (1977) 68 Cal.App.3d 515, 522, 137 Cal.Rptr. 318; In re Marriage of Adams (1976) 64 Cal.App.3d 181, 186, 134 Cal.Rptr. 298.) Under that method, the community property interest in retirement benefits is the percentage representing the fraction whose numerator is the employee spouse's length of service during marriage before separation, here 17.39 years, and whose denominator is the employee spouse's *828 length of service in total, here 32.67 years; the separate property interest is the percentage representing the remainder of 100 percent minus the community property interest percentage. The superior court determined that the community property interest in Husband's retirement benefits as enhanced was 53.23 percent and that the separate property interest therein was 46.77 percent. It proceeded to award Wife, as her share, one-half of the community property interest, here 26.62 percent which yielded her an amount of about $814.39 per month, including about $188.71 per month attributable to the enhancement. It declined to follow Gram to the extent that Gram suggested that it had to add any putative years credited to the employee spouse's service to the denominator of the time-rule fraction.
On Husband's appeal, the Court of Appeal affirmed. Husband claimed that the superior court erred in its determination as to characterization that, by owning a community property interest in his retirement benefits, Wife owned a community property interest in his retirement benefits as enhanced. Reviewing the ultimate question, as it appears, independently, the Court of Appeal concluded that the superior court was correct in its characterization. In this regard, it agreed with Gram. At the same time, it disagreed with the then recent decision in In re Marriage of Frahm (1996) 45 Cal.App.4th 536, 53 Cal.Rptr.2d 31 (hereafter sometimes Frahm,) which it read to be in conflict. Neither Husband nor Wife claimed that the superior court erred in its determination as to apportionment of Husband's retirement benefits as enhanced between community and separate property interests through its application of the time rule. Hence, the Court of Appeal did not address the point.
On Husband's petition, we granted review. We now affirm.
II
The question before us is one of characterization of retirement benefits as community or separate property under a defined benefit retirement plan, specifically, whether a nonemployee spouse who owns a community property interest in an employee spouse's retirement benefits under such a plan owns a community property interest in the latter's retirement benefits as enhanced.
A
Generally, all property acquired by a spouse during marriage before separation is community property. (See Fam.Code, §§ 760, 771.)
Under the leading case of In re Marriage of Broum (1976) 15 Cal.3d 838, 126 Cal.Rptr. 633, 544 P.2d 561 (hereafter sometimes Brown), and its progeny, such property may include the right to retirement benefits accrued by the employee spouse as deferred compensation for services rendered. (Id. at pp. 841-842,126 Cal.Rptr. 633, 544 P.2d 561.) This is the case whether or not the right to retirement benefits is `Vested" in the sense of "surviv[ing] ... discharge or voluntary termination," and whether or not it is "matured" in the sense of amounting to an "unconditional" entitlement "to immediate payment." (Id. at p. 842, 126 Cal.Rptr. 633, 544 P.2d 561.) What is determinative is not any "abstract terminology'' of this sort (id. at p. 851, 126 Cal.Rptr. 633, 544 P.2d 561), but rather a single concrete fact time. The right to retirement benefits "represent[s] a property interest; to the extent that such [a] right[] derive[s] from employment" during marriage before separation, it "comprise[s] a community asset...." (Id. at p. 842, 126 Cal.Rptr. 633, 544 P.2d 561.) "Throughout our decisions we have always recognized that the community owns all [such] rights attributable to employment during marriage" before separation. (Id. at p. 844, 126 Cal.Rptr. 633, 544 P.2d 561.)
The right to retirement benefits is a right to "draw[] from [a] stream of income that... begins to flow" on retirement, as that stream is then defined. (In re Marriage of Cornejo (1996) 13 Cal.4th 381, 383, 53 Cal. Rptr.2d 81, 916 P.2d 476; see In re Marriage of Gillmore (1981) 29 Cal.3d 418, 428, 174 Cal.Rptr. 493, 629 P.2d 1; In re Marriage of Brown, supra, 15 Cal.3d at p. 848, 126 Cal. *829 Rptr. 633, 544 P.2d 561.)[1]
The stream's volume at retirement may depend on various events or conditions after separation and even after dissolution. (See In re Marriage of Gillmore, supra, 29 Cal.3d at p. 428,174 Cal.Rptr. 493, 629 P.2d 1; In re Marriage of Brown, supra, 15 Cal.3d at p. 848, 126 Cal.Rptr. 633, 544 P.2d 561.) Such events and conditions include both changes in the retirement-benefit formula (see In re Marriage of Brown, supra, 15 Cal.3d at p. 849, fn. 11, 126 Cal.Rptr. 633, 544 P.2d 561; In re Marriage of Gowan (1997) 54 Cal. App.4th 80, 86, 62 Cal.Rptr.2d 453; In re Marriage of Bergman (1985) 168 Cal.App.3d 742, 767-768, 214 Cal.Rptr. 661), and also changes in the basis on which the retirement-benefit formula operates (see In re Marriage of Judd, supra, 68 Cal.App.3d at p. 523, 137 Cal.Rptr. 318; In re Marriage of Adams, supra, 64 Cal.App.3d at p. 186,134 Cal.Rptr. 298). Changes in the retirement-benefit formula may be frequent. (See, e.g., University of San Francisco Faculty Assn. v. University of San Francisco (1983) 142 Cal.App.3d 942, 950, fn. 2, 191 Cal.Rptr. 346 [changes in the retirement-benefit formula are provided for annually in a collective bargaining agreement].) Changes in the basis on which the retirement-benefit formula operates are virtually constant. (See, e.g., In re Marriage of Adams, supra, 64 Cal.App.3d at p. 186, 134 Cal.Rptr. 298 [changes in the basis on which the retirement-benefit formula operates are effected continuously through "additional years of service," "increase in earnings," and "increase in age"].)
Thus, the stream's volume at retirement may turn out to be even less than feared, as when the right to retirement benefits fails to vest or mature (In re Marriage of Brown, supra, 15 Cal.3d at p. 848, 1226 Cal.Rptr. 633, 544 P.2d 561), or when the employment itself ceases because the employer ceases to do business. By contrast, it may turn out to be even more than hoped for, as when the employer increases the per-service-year multiplier of the retirement-benefit formula (see In re Marriage of Bergman, supra, 168 Cal. App.3d at pp. 767-768, 214 Cal.Rptr. 661 [referring to "future liberalized pension rules or conditions"]; see also In re Marriage of Gowan, supra, 54 Cal.App.4th at p. 86, 62 Cal.Rptr.2d 453 [recognizing the possibility of such liberalization]), or when the employee spouse lives to a greater than expected age, or serves more than expected years, or attains a higher than expected final compensation (In re Marriage of Gillmore, supra, 29 Cal.3d at p. 428, fn. 9, 174 Cal. Rptr. 493, 629 P.2d 1).
That the nonemployee spouse might happen to enjoy an increase, or suffer a decrease, in retirement benefits because of postseparation or even postdissolution events or conditions is justified by the nature of the right to retirement benefits as a right to draw from a stream of income that begins to flow, and is defined, on retirement (see In re Marriage of Cornejo, supra, 13 Cal.4th at p. 383, 53 Cal.Rptr.2d 81, 916 P.2d 476; In re Marriage of Gillmore, supra, 29 Cal.3d at p. 428, 174 Cal.Rptr. 493, 629 P.2d 1; In re Marriage of Brown, supra, 15 Cal.3d at p. 848, 126 Cal.Rptr. 633, 544 P.2d 561), with the nonemployee spouse, at one and the same time, holding the chance of more (see In re Marriage of Anderson (1976) 64 Cal.App.3d 36, 39, 134 Cal.Rptr. 252; In re Marriage of Adams, supra, 64 Cal.App.3d at p. 186, 134 Cal.Rptr. 298), and bearing the risk of less (In re Marriage of Brown, supra, 15 Cal.3d *830 at p. 848, 126 Cal.Rptr. 633, 544 P.2d 561), equally with the employee spouse. Because the nonemployee spouse is compelled to share the bad with the employee spouse (see ibid.), he or she must be allowed to share the good as well.
Hence, if the right to retirement benefits accrues, in some part, during marriage before separation, it is a community asset and is therefore owned by the community in which the nonemployee spouse as well as the employee spouse owns an interest. (In re Marriage of Brown, supra, 15 Cal.3d at pp. 841-842, 126 Cal.Rptr. 633, 544 P.2d 561.)
The employee spouse is "free[] to change or terminate ... employment, to agree to a modification of the terms of ... employment (including retirement benefits), or to elect between alternative retirement programs" in a word, he or she is "free[]" to "define ... the nature of the retirement benefits owned by the community." (In re Marriage of Brown, supra, 15 Cal.3d at pp. 849-850, 126 Cal.Rptr. 633, 544 P.2d 561.)
But regardless how the employee spouse might choose to exercise such freedom, the "nonemployee spouse owns an interest" in what he or she chooses by owning an interest in the community. (In re Marriage of Gillmore, supra, 29 Cal.3d at p. 425, 174 Cal.Rptr. 493, 629 P.2d 1.)
It follows that a nonemployee spouse who owns a community property interest in an employee spouse's retirement benefits owns a community property interest in the hitter's retirement benefits as enhanced. That is because, practically by definition, the right to retirement benefits that accrues, at least in part, during marriage before separation underlies any right to an enhancement. (See Reddall, The Characterization and Apportionment of Early Retirement Enhancements in Pre-Judgment Cases Again (Summer 1994) 17 Fam.L.News 22, 22-23 (hereafter Reddall).)[2]
The fact that a nonemployee spouse who owns a community property interest in an employee spouse's retirement benefits owns a community property interest in the latter's retirement benefits as enhanced does not mean that the enhancement is a community asset in its entirety. But the question what extent such an enhancement belongs to the community and separate estates is one of apportionment and not characterization.
B
At the outset, both the Gram court and the 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. (See, e.g., Buss v. Superior Court (1997) 16 Cal.4th 35, 52, fn. 14, 65 Cal.Rptr.2d 366, 939 P.2d 766.) In this context, it is also "irrelevant." (In re Marriage of Frahm, supra, 45 Cal.App.4th at p. 543, 53 Cal.Rptr.2d 31; see In re Marriage of Gram, supra, 25 Cal.App.4th at p. 862, 30 Cal.Rptr.2d 792.) 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. (In re Marriage of Frahm, supra, 45 Cal.App.4th at p. 543, 53 Cal.Rptr.2d 31; In re Marriage of Gram, supra, 25 Cal.App.4th at p. 862, 30 Cal.Rptr.2d 792.)
Beyond that point, however, the Gram court and the Frahm court diverged in their analytical approaches to resolve the issue of characterization.
*831 In Gram, a nonemployee spouse owned a community property interest in an employee spouse's retirement benefits under a defined benefit retirement plan because the latter had accrued a right thereto during marriage before separation. (See In re Marriage of Gram, supra, 25 Cal.App.4th at p. 861, 30 Cal.Rptr.2d 792.) Years after dissolution, in an attempt to avoid discharging certain employees, the employer offered incentives for early retirement, including an "Enhanced Early Retirement Option" which was similar to PG & E's VRI program. (See id. at pp. 861, 866, 30 Cal.Rptr.2d 792.) As the record therein reflects, the "Enhanced Early Retirement Option" involved, among other things, the crediting of five putative years of service and five putative years of age. (See also id, at p. 861, 30 Cal.Rptr.2d 792.) The employee spouse elected to retire early under the "Enhanced Early Retirement Option." (Id. at p. 862, 30 Cal.Rptr.2d 792.) By doing so, he received enhanced retirement benefits each month. (Ibid.) He did not receive any other benefits, such as a severance payment. The superior court characterized the enhancement as his separate property. (Ibid.)
The Gram court disagreed. After invoking a test derived from a series of decisions in the area of severance payments,[3] which looks to whether the benefit in question constitutes deferred compensation for services during marriage before separation or present compensation for loss of earnings thereafter, and after considering what it deemed to be "relevant factors" identified in those decisions (In re Marriage of Gram, supra, 25 Cal.App.4th at pp. 862-866, 30 Cal.Rptr.2d 792), it held that the nonemployee spouse owned a community property interest in the employee spouse's retirement benefits as enhanced (id, at pp. 866-867, 30 Cal.Rptr.2d 792): The "enhanced retirement benefit should have been included in the computation of the nonemployee spouse's "community interest in the retirement payment" because "it was a part of, and intended to be, the realization of the employee spouse's "retirement expectation and thus a form of deferred compensation for services rendered" (ibid,).
In Frahm too, a nonemployee spouse owned a community property interest in an employee spouse's retirement benefits under a defined benefit retirement plan because the latter had accrued a right thereto during marriage before separation. (See In re Marriage of Frahm, supra, 45 Cal.App.4th at pp. 537-538, 541-542, 545, 53 Cal.Rptr.2d 31.) Years after dissolution, in an attempt to avoid discharging certain employees, the employer offered incentives for early retirement, including a "Voluntary Separation Incentive Program" which was different from PG & E's VRI program. (See id, at pp. 541-542, 53 Cal.Rptr.2d 31.) As the record therein reflects, the "Voluntary Separation Incentive Program" involved both a severance payment and also retirement benefits, which were available together either in a lump sum or by monthly installments. (See ibid.) The employee spouse elected to separate himself under the "Voluntary Separation Incentive Program." (Id, at p. 542, 53 Cal. Rptr.2d 31.) By doing so, he received, in a lump sum as he had chosen, both a severance payment and also retirement benefits. (Id. at pp. 537-538, 542, 544, 53 Cal.Rptr.2d 31.)[4] As the record therein reflects, the employee spouse admitted that his retirement benefits were a community asset. (See also id. at pp. 537-538, 53 Cal.Rptr.2d 31.) The superior court characterized the severance *832 payment as his separate property. (Id. at pp. 538, 542, 53 Cal.Rptr.2d 31.)
The Frahm court agreed. After reviewing Gram itself and the "severance payment" decisions on which it relied, it stated that it found little "guidance" therein. (In re Marriage of Frahm, supra, 45 Cal App.4th at p. 543, 53 Cal.Rptr.2d 31.)[5] "The cases said `they were following one bright-line rule or another, but in fact they've simply looked at the menu of factors that point toward separate or community property, selected one or two, and then molded them into a result. The factor that carries the day in one case may not be determinative in the next.... About the only "bright line" in these cases is the differentiation between compensation for past services and compensation for future lost wages.'" (Ibid, quoting Comment, 1994 Cal.Fam.L.Rep. 6298.) "Applying the reasoning of these cases to our facts works as well as trying to fit a square peg into a round hole.... [T]he results are inconsistent." (In re Marriage of Frahm, supra, 45 Cal.App.4th at p. 543, 53 Cal.Rptr.2d 31.) At bottom, the "past services or future compensation test is inapt for determining the character of the benefit...." (Ibid.) The Frahm court then turned back to Brown, from Which it distilled a "simple" "message": "An employment benefit... is community property to the extent a right to it accrues during marriage'' before separation. (In re Marriage of Frahm, supra, 45 Cal.App.4th at p. 544, 53 Cal.Rptr.2d 31.) It held that the nonemployee spouse did not own a community property interest in the employee spouse's severance payment because the latter had not accrued a right thereto during marriage before separation. (Id. at pp. 544-545, 53 Cal.Rptr.2d 31.)[6] It recognized that the amount of the severance payment that the employee spouse received was based, in part, on his years of service. (45 Cal.App.4th at 544-545, 53 Cal.Rptr.2d 31.) But it declared this fact "irrelevant" because his right to receive the severance payment was not based thereon. (Id. at p. 545 & fn. 2, 53 Cal.Rptr.2d 31.) "The time rule determines the amount of the community share. It does not determine the character of the benefit; Stated another way, a court first looks to see if the right to the payment accrued during marriage. If so, the time rule determines the extent of the community interest in the payment. But if the right to the payment did not derive from employment, it is separate property." (Id. at p. 545, fn. 2, 53 Cal.Rptr.2d 31.)
On their respective facts, Gram and Frahm are each correct in its result as to characterization. Gram concludes that a nonemployee spouse who owns a community property interest in an employee spouse's retirement benefits owns a community property interest in the latter's retirement benefits as enhanced. For its part, Frahm concludes that a nonemployee spouse does not own a community property interest in an employee spouse's severance payment when the latter accrues a right thereto solely after separation.
Apart from their results, however, Frahm is sounder in its reasoning as to characterization because it Cleaves closely to Brown, and Gram is weaker because it wanders away in the direction of ad hoc decisionmaking. As we held in Brown, what is determinative is the single concrete fact of time. To the extent and only to the extent that an employee spouse accrues a right to property during marriage before separation, the property in question is a community asset.
To recall what we made plain in Brown: The right to retirement benefits "represent[s] a property interest; to the extent that such [a] right[] derive[s] from employment" during marriage before separation, it "comprise[s] a community asset...." (In re Marriage of Additional Information