Best to be up front: Costly mistake for non-disclosure of stock options

To disclose or not to disclose? That is the question.

It was the inquiry In re Marriage of Hyman, 2023 IL App (2d) 220041, where a husband failed to disclose the receipt of stock options during the divorce. On a post-decree petition filed by his wife, he was ordered to pay her $130,196, the net value of her 50% share.

The Hymans were married for about 13 years until their marriage was dissolved on Dec. 31, 2015. During the marriage, the husband was self-employed by Strong Suit, a company that ceased operations in 2010. In May 2015, during divorce proceedings, he said he had not established any new entities or businesses beyond those already disclosed, which included Strong Suit. However, in spring 2015, he reactivated Strong Suit. In June 2015, he entered into a consulting agreement with Cubed. For this, the husband received stock options issued by Cubed that had a nominal value of $3,650. At the time of the divorce, only 160 of the options had vested.

During the divorce, the husband failed to tell his wife about the consulting work for Cubed. She did not ask about it and he provided no documents about Cubed or the stock options. Nonetheless, in the settlement agreement executed on Dec. 31, 2015, he said he had fully disclosed all of his assets and income. The settlement agreement provided that if additional marital assets were discovered later, the asset shall be evenly divided using the greater of the value of the asset at the time the property is discovered or the value of the asset on the date of divorce.

In May 2021, the husband received $739,865 in exchange for his Cubed stock options. The wife filed a petition for equal allocation of an undisclosed marital asset, alleging her husband had failed to disclose his interest in Cubed.

The trial court ruled in the wife’s favor and the Illinois 2nd District Appellate Court affirmed. The appellate court held that all 500 stock options awarded during the marriage were marital property and subject to equal division. The wife’s 50% share was calculated to be $246,597. After taxes and expenses, the husband was required to pay her $130,196.

On appeal, the husband argued the court erred in finding the Cubed stock options were not disclosed within the meaning of the settlement agreement. This was fallacious given that the stock options were held in the husband’s name, not in the name of Strong Suit.

The husband also argued the settlement agreement’s undisclosed-asset provision could not be invoked due to his wife’s failure to pursue discovery and press him for answers to her supplemental document requests. While a party may be held responsible for its own decisions to discontinue discovery and settle a case, the court found the husband took every opportunity to deprive his wife of information. In the settlement agreement he represented that he had fully disclosed all his assets, but made no mention of the stock options either at the prove-up hearing or in the agreement. In the court’s view, the husband had multiple opportunities to inform his wife about the options. But the husband failed to do so and was barred from complaining that his wife did not dig deeply enough after he failed to disclose the options when he should have.?

Hyman is a significant case, procedurally and practically. The options had a nominal value at the time of the divorce and were not fully vested. Had the husband disclosed them he could have likely negotiated a lower amount to pay his wife based on the length of the vesting schedule, the time between the option grant and the time was exercisable, and because two-thirds of the options were liking for his future efforts.

Procedurally, Hyman shows the difference between a section 2-1401 petition based on newly discovered evidence and a motion to enforce a settlement agreement. With 2-1401, a petitioner must show that the new evidence was not known at the time of the proceeding and could not have been discovered with the exercise of reasonable diligence. However, in Hyman, due diligence was not required because the wife’s petition was not brought pursuant to section 2-1401 and she did not seek to reopen the judgment. Instead, she petitioned the court to enforce the marital settlement agreement and allocate her 50% of the undisclosed asset. This, in effect, lowered the burden of proof to obviate the need to prove due diligence. Practitioners should keep these standards in mind when deciding the type of post-decree motion to file if undisclosed assets are discovered later.

2023 Law Bulletin Media