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A week later, in another email Michael confirmed to Bernice that, notwithstanding their “discussions . . . about me someday getting an ownership stake [in IBG],” he had “no idea if it will ever happen, or how it will be structured, or the value.” He added that IBG’s grant of an ownership interest “may never happen. It will certainly not happen anytime soon.” In another e-mail, Michael added that any stake in IBG awarded to him “would be defined, probably, as stocks,” and that he did not anticipate “a big cash payment.” Michael also asked Bernice to identify what she considered to be her fair percentage share of any “potential income/assets I make if I ever accept a buyout[.]”  Bernice refused to commit to any specific percentage.

Again by email, Michael stated that although there had been no discussions of a sale of IBG since 2006, he viewed Bernice’s claim to his assets to date back to the time of their daughter’s birth in 2003. He reiterated his view that IBG would not be sold “soon,” but again asked her to quantify her claim to “a future ownership stake” in the company. She did not do so. A month later, Michael urged Bernicee not to delay the settlement of their dispute “based on something that may never happen.” He reassured her that if he were awarded “ownership in IBG” in the future, “we are going to need to revisit” the issue. Michael reiterated that he had no contract with IBG; he represented that there was “absolutely nothing at all stating that I am going to ever get any part of” the company. He suggested that the parties discuss the issue later, in the event that he acquired an interest in IBG.

In April 2012, Michael and Bernice signed a property settlement agreement (“PSA”) evenly dividing their identified assets (whether acquired before or during their marriage) and resoling alimony, child support, and visitation. The PSA provided that neither party owned “any businesses or any interests whatsoever in any businesses which are subject to equitable distribution” and that the agreement had no binding effect on undisclosed assets. The PSA did not address Michael’s deferred compensation which the parties anticipated.

In June 2012 the Superior Court of New Jersey entered a final judgment of divorce which incorporated the PSA. Unbeknownst to Michael at the time, just 3 months later IBG’s owners entered into an agreement to sell their company. Shortly before the closing, IBG’s owners signed a document acknowledging that Michael would receive “a one-time bonus in the amount of $2,250,000.00” contingent on the sale going through. One of the owners testified that the bonus was in consideration for Michael’s contributions to IBG over 13 years. The same owner also testified that Michael was not informed about the sale of IBG until after the closing.

Michael deposited $200,000 of his one-time bonus into a joint bank account maintained with Bernice during their marriage. Th is the first time Bernice learned that Michael had received a bonus from IBG. Michael apparently did not realize he was depositing the funds into a joint account. Without any notice to Michael, Bernice withdrew the entire $200,000 prompting Michael to return to Court demanding that Bernice be held in contempt. For her part, Bernice contended that Michael engaged in fraud by deliberately withholding disclosure that the company was up for sale and that he would be receiving a substantial payout. …

The trial court was confronted with determining what portion of Michael’s bonus that Bernice was entitled to. Should the bonus be apportioned based on the entire length of their relationship, including 8 years of cohabitation? Or should Bernice’s portion be limited to the 14-month period of their marriage?

The trial court ruled in Michael’s favor, finding that Bernice was not entitled to equitable distribution of any portion of the closing bonus earned by Michael during the 8 years of their cohabitation, because of New Jersey’s equitable distribution statute (N.J.S.A. 2A:34-23(h)) limits equitable distribution to “marital assets.” In accordance with this ruling, the trial court allocated the $2,250,000 closing bonus. It concluded that in the course of his employment, Michael earned the closing bonus at a rate of $14,423 per month. Multiplying that amount by 14 months of their marriage, the court ruled that Michael earned deferred compensation in the amount of $201,923. The trial court then determined that Michael’s net income from the allocated portion of his bonus, after the deduction of taxes, was $100,961. It subjected that amount to equitable distribution under N.J.S.A. 2A:34-23.1, awarding thirty percent of that amount, or $30,288, to Bernice and ordering her to return the balance of $169,712 to Michael.

Bernice appealed, and the the Appellate Division affirmed. In a further appeal, the New Jersey Supreme Court reversed. While our state’s Supreme Court agreed with the trial and appellate court’s finding that New Jersey’s equitable distribution scheme only allows for a claim to “marital assets” “acquired during the marriage or civil union, N.J.S.A. 2A:34-23(h), the Court resorted to the remedy of a constructive trust to level the playing field for Bernice.

The Supreme Court noted that application of the equitable distribution scheme resulted in Bernice receiving less than 2 percent of Michael’s bonus. The Court determined that restricting Bernice to such a nominal share of Michael’s closing business would result in unjustly enriching Michael, especially considering the overwhelming and undisputed evidence that on many occasions Michael had represented to Bernice that he would fairly compensate her in recognition of her sacrificing her career to advance his, and that he would share the proceeds of a future sale from IBG. With the substantial bonus materializing only 3 months after the parties’ divorce was finalized, it was too late to divide Michael’s bonus with their other assets.

Constructive Trust to the Rescue

To remedy this unfair result, the Supreme Court held that a percentage of the portion of Michael’s closing bonus earned during their 8-year period of cohabitation should be deemed to be held by in constructive trust by Michael for Bernice.

A constructive trust has been described as ““the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.” Carr v. Carr, 120 N.J. 336, 351 (1990).

The Court further explained that equitable remedies such as constructive trusts “are not based on the actual intent of the parties, but ‘are arbitrarily imposed by the court to prevent an unjust enrichment.’” Id. at 352 (internal citation omitted). Generally,  “all that is required to impose a constructive trust is a finding that there was some wrongful act, usually, though not limited to, fraud, mistake, undue influence, or breach of a confidential relationship, which has resulted in a transfer of property.” D’Ippolito v. Castoro, 51 N.J. 584, 589 (1968).

The Court cited no wrongful act by Michael, however. Despite this, the Court nevertheless imposed a constructive trust.  The Supreme Court returned the case to the trial court to determine the appropriate amount to award Bernice.