At the point the literal construction of a contract leads to an absurd result, the actual words should yield to logic and the mutual understanding of the parties. The First Department held otherwise in its March 19, 2015 decision in Buckingham v. Buckingham when depriving the former wife of a 20% share of the stock in a publicly-held company the husband sold for $7,279,117.62.
In this case, under a prenuptial agreement signed eight days before the parties’ marriage, the wife was to receive a percentage of the post-marital appreciation from the proceeds of the sale of that company, Mobile Streams PLC (“MS”).
The husband is the founder and CEO of that company and, at the time of the prenuptial agreement, had a majority interest. MS retails Mobile Content including Apps, Games, eBooks, Music and Videos globally through mobile carrier partners and its Appitalism.com applications storefront.
The agreement stated:
Simon owns approximately 55.83% of the issued and outstanding shares of [Mobile Streams] [ MS’]. If MS or any of its subsidiaries or related companies are sold, and the sale takes place after the occurrence of an Operative Event, and proceeds of sale are not otherwise invested or reinvested in another business enterprise, but rather Simon retains the proceeds for himself and provided the parties are married for five (5) years or more, Simon, will place the following percentages of the net proceeds less the value of the MS shares on the date of marriage, in an account established in Nisha’s sole name which shall be deemed Nisha’s Separate Property:
(i) if the parties are married for 5 or more years – 20%; or
(ii) if the parties are married for 10 or more years – 25%; or
(iii) if the parties are married 15 or more years – 30%; or
(iv) if the parties are married for 20 or more years – 40%; or
(v) if the parties are married for 25 or more years – 50%.
During the marriage, the parties modified certain terms of the prenuptial agreement, including the foregoing provision, and reflected the husband’s transfer of his shares into a revocable trust. The husband was both the Grantor and Trustee. The wife was the Successor Trustee. Upon the husband’s death, the Trust would terminate and all of the principal and accrued and accumulated income was to be paid to the wife. In pertinent part, the parties’ modification agreement:
- reduced the minimum vesting period from five to three years;
- deleted the reference to an Operative event;
- deleted the reference to the husband being the one who retained the proceeds;
- deleted the reference to the husband being the one whose reinvestment of the proceeds would avoid the payment; and
- gave the wife a share in the entire proceeds, not just the post-marital appreciation.
The modification agreement provided:
After the parties have been married for a period of three (3) years, if MS or any of its subsidiaries or related companies are sold, and the proceeds of sale are not otherwise invested or reinvested in another business enterprise, the following percentage of the proceeds (after payment of any taxes and transactional costs due upon such sale,) shall be paid to Nisha in accordance with the length of the marriage and shall constitute her separate property:
three or more years — twenty (20%) percent; or
eight or more years – twenty-five (25%) percent; or . . . .
After three, but less than eight years of marriage, the parties were divorced on November 14, 2011.
Between May 15, 2013 and October 17, 2013, the husband sold approximately 7,875,000 MS shares for $7,279,117.62. By virtue of the sale, the husband’s ownership interest in Mobile Streams was reduced from 55.83% to 28.34%.
The wife demanded her 20% share of the net proceeds. The husband’s initial response was that the agreement allowed him to reinvest the proceeds from the sale of his MS shares “within a reasonable time period” and that this was an “an ongoing process.” He did not then take the position that the wife’s entitlement only arose if the entire company were sold.
The wife then made her post-judgment motion for distribution of 20% of the net proceeds the husband received from the sales of his MS shares. In opposition, the husband took the position that the wife’s entitlement to the 20% was intended to be limited to the event that “MS or any of its subsidiaries or related companies are sold,” which did not encompass his sale of MS shares. The husband further argued that he had already invested some of the proceeds of the sale in JP Morgan Chase investment and brokerage accounts, and planned to use more of it to purchase an apartment in Beijing for $2.33 million. He argued that both of those investments satisfied the provision that the wife’s entitlement only arose if the husband failed to invest the net proceeds of the sale — i.e., that it was not necessary that he reinvest in another business enterprise, as the wife had argued. The husband also asserted that the wife’s entitlement to share in the net proceeds of any sale of MS was extinguished upon the divorce.
Supreme Court New York County Justice Lori S. Sattler denied the by-then ex-wife’s post-judgment motion for distribution of 20% of the net proceeds. Justice Sattler held that the wife failed to demonstrate the occurrence of a condition precedent to her participation in the husband’s profit, namely, a sale of the company or a subsidiary of it. Justice Sattler also rejected the husband’s contention that the wife’s right to participate in the proceeds was extinguished upon the parties’ divorce. The court declined to address the husband’s contention that investing the proceeds in a brokerage account satisfied the reinvestment requirement.
The First Department affirmed the dismissal of the wife’s claim on the ground that the plain and unambiguous language of the parties’ agreement made it clear that a distribution to the wife was not required unless MS or one of its subsidiaries or related companies was sold. The opinion stated:
[T]he plain and unambiguous language of the parties’ modification agreement makes clear that defendant shall make a distribution to the wife only if, among other things, MS or one of its subsidiaries or related companies is sold. The wife does not claim, and there is no evidence, that this condition precedent was met. Accordingly, the wife is not entitled to a distribution. . . . Contrary to the wife’s contention, she was not entitled, under the terms of the modification agreement, to a distribution merely because the husband sold outstanding stock of MS.
In a concurring opinion, Justice David B. Saxe acknowledged that “[a] written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” However, he also noted:
It is not uncommon for clauses of marital agreements to sometimes fail to achieve their intended purpose. This appeal provides us with the opportunity to examine one such clause. My colleagues point to one phrase in the contractual provision at issue that they term “plain and unambiguous,” which they rely on as controlling the outcome of this appeal. While I agree that the wife failed to establish that she was entitled to any payment under the parties’ agreement, I write separately because I believe that the contractual provision as written does not comport with either party’s understanding of it, and, in fact, under other scenarios, could cause unintended mischief.
Here, Justice Saxe recognized that despite the clarity of the words “if MS or any of its subsidiaries or related companies are sold,” the wife had a reasonable expectation that she would be entitled to a share of the proceeds from a sale of the husband’s shares, rather than from a sale of the company itself. Indeed, Justice Saxe felt that the wife’s understanding comported with the focus of the modification agreement provision as a whole, which began by discussing the husband’s transfer of his MS shares to a trust. Logically, the only reason to segue in one contract provision from the information about the husband’s MS shares directly into a discussion of the wife’s entitlement to a percentage of the sale proceeds is that the sale contemplated by the provision is a sale of the husband’s shares.
For Justice Saxe, the provision made more sense if it read as if the words “Simon’s shares in” appeared between the word “if” and the words “MS or any of its subsidiaries,” so that it would read “if Simon’s shares in MS or any of its subsidiaries or related companies are sold, and the proceeds of sale are not otherwise invested or reinvested in another business enterprise, the following percentage of the proceeds . . . shall be paid to” the wife.
Nevertheless, the wife could not prevail here because that is not what the paragraph’s language actually provided.
A court may not, in the guise of interpreting a contract, add or excise terms or distort the meaning of those used.
Jusrtice Saxe recognized that the husband, too, seemed to have made an assumption about the same provision that was not warranted by the provision’s wording. While he correctly contended that the language of the agreement only entitled the wife to claim a payment in the event of a sale of the company, he also seemed to presume that her entitlement was limited to her percentage of his receipts from the sale of his shares in the event of a sale of the company. This presumption, like the wife’s, was logical; after all, why would the husband provide for the wife to be entitled to a percentage of the proceeds of sale of the entire company, when he would receive only a share proportionate to his ownership interest? Yet, nowhere did the provision state that the wife’s percentage share was to be based on what the husband earned from the sale of his shares in the context of the sale of the company. Rather, it merely said that “if MS or any of its subsidiaries or related companies are sold, and the proceeds of sale are not otherwise invested or reinvested in another business enterprise,” the wife shall be paid her percentage of the net proceeds — not the husband’s share of the proceeds.
Justice Saxe thought it counterintuitive that the husband would agree to the wife being entitled to a share of the proceeds of a sale of the company, rather than a share of the proceeds of a sale of the husband’s shares in the company. Nevertheless, that is what the paragraph actually says.
Justice Saxe concluded his opinion by noting that the wife wanted the modification agreement to say that she was entitled to a percentage of the proceeds paid to the husband for his shares in the company; the husband wanted it to say that the wife was entitled to a percentage of the proceeds from the sale of his shares only if he received those proceeds in the context of a sale of the company as a whole (or a subsidiary). The agreement actually said neither of those things. But, since the modification agreement was not ambiguous, it had to be enforced according to its terms. Therefore, despite the incongruity, Justice Saxe agreed that the contract, as written, did not entitle the wife to a distribution.
Comment: As the clause is flawed, the result must be absurd.
A publicly-traded company is “sold” presumably through the sale of its shares by its shareholders. The shareholders receive the consideration. The sale of the assets of a company (whether those assets are the shares of a subsidiary, its tangible assets, its goodwill, or otherwise), is not a sale of the company. The company receives the consideration.
Here, however, the same sentence applied to both events, the sale of the company (when the shareholders would get the proceeds) and the sale of its assets (when the company would get the proceeds): “if MS or any of its subsidiaries or related companies are sold, and the proceeds of sale are not otherwise invested or reinvested in another business enterprise, the following percentage of the proceeds . . . shall be paid to [the wife] in accordance with the length of the marriage and shall constitute her separate property.”
As Justice Saxe noted, the literal wording provides the wife with a share of the entire sales proceeds, not just a share of the husband’s interest. Thus, if a subsidiary were sold, the husband would receive nothing; it would be the company itself that received the proceeds. However, the agreement did not state the husband would pay the wife a sum equal to a share of the proceeds received by the company. The agreement also did not state that the husband would pay the wife a sum equal to a share of the husband’s proportionate share interest in the proceeds received by the company.
When applied to the sale by MS of one of its subsidiaries, it makes sense that the payment to the wife would be avoided if the proceeds of the sale that were received by MS were not reinvested in another enterprise of MS.
To suggest, as the husband argued, that the husband could avoid a payment by placing the proceeds he received from the sale of his stock, whether in a bank account, or an apartment for that matter, also reveals that the husband’s agreement was illusory. Perhaps absent the single circumstance of the husband hiding his $7,279,117.62 under his mattress, every investment of the proceeds could be deemed an investment by the husband in a business enterprise. Certainly, any purchase of stock in another company(ies), regardless of the percentage of ownership of the company acquired, would be an investment by the husband in another business enterprise.
Moreover, the modification agreement does not say that it will be the husband who makes the payment to the wife. Does the agreement purport to bind the company itself to make a payment if its assets are sold, or the revocable trust to make the payment if its shares in the “company” is sold?
Could the husband frustrate the wife’s entitlement merely by giving the stock away; or by selling stock before the company is sold?
Although not the basis of the decision, it was held that the parties’ divorce did not terminate the rights and obligations under this provision. When do those rights and obligations end? If the agreement is understood to apply to the sale of the company or its subsidiaries, and not the husband’s shares in the company, does not the husband’s obligation (or the company’s) survive the husband’s sale or other transfer of his entire stock ownership? Does it not survive his death? Is it not perpetual?
What was the import of the elimination in the modification agreement of the original requirement that the wife would get her share only after the occurrence of an “Operative Event,” presumably the commencement of a matrimonial action, the physical separation of the parties, or the like. The obvious effect was to enable the wife to receive her share of proceeds while the marriage was intact and, by denominating her share as her “separate property,” to provide that she would retain those proceeds even in the event of a divorce.
However, if the true intent of the modification agreement was to give the wife a share of proceeds from the sale of the husband’s stock, whenever sold, whether tied to a sale of the company or not, there were other devices that could have accomplished this. An immediate transfer to the wife or into a trust could have been made, with the husband retaining the right to vote the shares and invest the proceeds.
It is certainly extraordinary for the provision’s promise to extend beyond divorce. Rarely do post-divorce risk and rewards affect the rights of a former spouse.
So, is the import of this decision that while the wife lost for now, does she still have an absolute right to 20% or 11.167% (20% of the husband’s original 55.83% interest) or 5.668% (20% of the husband’s remaining 28.34% interest) of the proceeds of the sale of the company or its subsidiaries or affiliates? Does that right last forever? Is it the husband’s obligation to make the payment? Does the obligation survive his death? Does it survive the wife’s death?
When a marital agreement attempts to embrace complex business concepts, it is time to bring in counsel familiar with both areas. Here, estate planning counsel should have been brought in as well. At then end of the day, this is another example of the failure to think through the literal meaning of what was written; the repeated asking of “what if”; the giving of examples in the agreement itself.
The point remains the provision is so flawed that its literal terms cannot be applied in any reasonable fashion. As a result, either the provision should lapse, with the husband’s stock being the subject of a new judicial equitable distribution determination (if not waived by the failure to raise this at the time of the divorce), or the court should simply impose a logical result consistent with the reasonable understandings of the parties.