In Re Marriage of Karafotas ( 2010 )

JUSTICE LAVIN

delivered the opinion of the court:

In this case, we consider the effect of a marital settlement agreement (the Agreement) upon the windfall profits earned from the post-divorce sale of stock from a seat on the Chicago Mercantile Exchange (CME) after its very successful initial public offering (IPO). The trial court ruled that a “sale” of the seat had not occurred, since the trading rights still existed after the husband sold 10,800 shares of stock for a total profit of nearly $2.2 million. We reverse the judgment of the trial court and enter judgment on behalf of Pamela Karafotas, who was contractually given the right to 50% of the profits from any sale of the seat owned by her former husband, Phillip Karafotas.

BACKGROUND

Phillip and Pamela were married on August 1, 1987. On April 13, 2000, Phillip and Pamela were divorced, and a judgment for dissolution of marriage (Judgment) was entered into by the circuit court of Cook County. The Judgment incorporated the Agreement entered into by Phillip and Pamela on January 10, 2000.

At the time of the Judgment, the CME was an Illinois not-for-profit membership organization structured as a privately held non-stock entity (Old CME). Phillip was a member, or seat holder, of the Old CME. Phillip actually owned an International Monetary Market Exchange membership (IMM Membership) and a separate CME membership. Each of these memberships included trading and ownership rights.

The Agreement included two provisions addressing Phillip’s two seats. First, article II, “Maintenance,” provided that Phillip was to pay Pamela 45% of the combined gross rental income derived by Phillip from his IMM Membership and CME Membership until either 72 months elapsed from the date of the dissolution of their marriage or until either party died. Phillip satisfied the article II requirements by paying Pamela the required amount for the first 72 months following the dissolution of their marriage.

The next provision, article III, “Disposition of Assets,” provided:

“E) Phillips’s [sic] Chicago Mercantile Seats: Except as set forth herein Phillip shall retain his two seats (CME and IMM) on the Chicago Mercantile Exchange as his sole property free and clear of any interest therein by Pamela. Phillip agree[s] that in the event he dies before Pamela then upon his death, the asset known as the IMM International Monetary Market Exchange Membership, division of the CME (hereafter referred to as the IMM membership!)], will be transferred to Pamela. *** In the event th[at] Pamela dies before Phillip, Pamela’[s] estate shall have no claim to the IMM membership and it shall remain the sole property of Phillip. If

Phillip sells the IMM membership during his lifetime, Phillip agrees that he will transfer to Pamela one-half of the net sales proceeds of after taxes and customary sales expenses within thirty days of the receipt of the proceeds.

Pamela and Phillip wish to treat the property transfers herein as an economic severance. Upon completion of the property transfers, or entry of a Judgment of Dissolution of Marriage, each parties’ assets, income from the assets and income shall he treated as that person’s separate non-marital property.”

The Agreement concluded:

“Mutual Waiver-. Except as to the provisions contained in this Agreement, each of the parties does forever waive, release, relinquishes [sic] and quit claim to the other all rights of homestead, maintenance and all other property rights and claims, including claims of tortious acts, which he or she now has or may hereafter have, *** in or to, or against the property of the other party, or his or her estate, whether now owned or hereafter acquired by such party.”

CME Demutualization and Merger Process

The transformation of the CME from a privately held entity to a for-profit public holdings company, or the demutualization and merger process, involved a series of rather complex transactions, which we will attempt to summarize in layman’s language below.

Old CME initially merged into CME Transitory Company (CME Transitory), a Delaware nonstock company formed as a transitional entity during the demutualization process. Old CME’s membership interests, including Phillip’s IMM Membership and CME Membership, were converted into equivalent interests in CME Transitory.

CME Transitory then merged with and into Chicago Mercantile Exchange, Inc. (Delaware CME), a Delaware corporation. As a consequence, the IMM Membership and CME Membership interests in CME Transitory were converted into one share of IMM Class common stock and one share of CME Class common stock in Delaware CME. CME explained in its 2000 annual report:

“CME completed its historic Demutualization on November 13, 2000, becoming the first U.S. financial exchange to demutualize by converting its membership interests into shares of common stock that can trade separately from exchange trading privileges and membership rights.

Our members — now our shareholders — benefitted because their equity ownership was unbundled from their trading privileges and other rights. When the initial transfer restrictions are completely lifted, CME shareholders will be able to buy or sell equity (Class A shares) while still retaining the Class B shares that confer CME trading rights — or vice versa. Holders of Class B shares are able to sell, lease, transfer or bequeath their trading and membership rights on the exchange, just as they did before demutualization with memberships or ‘seats.’ ”

Delaware CME’s equity interests were then recapitalized. Applicable to this case, each share of IMM class common stock in which Phillip had an interest was converted into 10,800 shares of Class A common stock and one share of Class B-2 common stock of Delaware CME. Each share of CME Class common stock was converted into 16,200 shares of Class A common stock and one share of Class B-l common stock of Delaware CME. In essence, Phillip received a total of 27,000 shares of Class A common stock of Delaware CME, 40% (10,800 shares) of which derived from the conversion of his IMM Membership. Phillip also received one share of IMM Class B-2 common stock of Delaware CME, containing both equity and IMM trading rights.

Finally, Delaware CME merged into and became a wholly owned subsidiary of a newly formed holding company, Chicago Mercantile Exchange Holdings, Inc. (CME Holdings). Delaware CME shareholders became shareholders of CME Holdings. Phillip’s 27,000 shares of Class A Delaware CME stock were converted into 27,000 shares of Class A CME Holdings stock, and Phillip received an additional 2,998 Class A shares in CME Holdings, 40% (1,199) of which derived from his IMM Membership in Old CME. CME Holdings explained in a February 24, 2003, memorandum to Class B shareholders, “As a consequence of the Demutualization and the Merger, therefore, each Old CME Membership interest is now represented by CME Holdings Class A and Class B common shares and a New Membership Interest.”

By the completion of the demutualization and merger process in December 2001, Phillip owned: 11,999 shares of Class A common stock in CME Holdings, 40% of which derived from his IMM Membership; one share of Class B-2 common stock in CME Holdings; and a new membership interest combining the nonequity portion of the Class B stock he had in Delaware CME with a Class B-2 share in CME Holdings, which could only be traded together.

Phillip Sold Stock

Between June 2004 and March 2006, Phillip sold 28,000 shares of his CME Holdings Class A common stock and received $5,459,280 in total proceeds. Forty percent of these shares were derived from the sale of stock converted from his IMM Membership in Old CME, amounting to $2,183,712. Accounting for the paid income taxes on the gains from the sale at the maximum long-term capital gain rate of 15%, the resulting net-after-tax proceeds amounted to $1,856,155, of which one-half would equal $928,077.50.¹ Phillip did not relinquish, exchange, convert, or sell his Class B-2 share of his new membership interest in CME Holdings.

Pamela Petitioned the Circuit Court, Then Filed This Appeal

Pamela petitioned the court to enforce her right under the Judgment to receive one-half of the proceeds from any sale of Phillip’s IMM Membership interest, claiming that the Class A stock Phillip sold represented a part of his original IMM Membership interest, to which she was entitled under the Agreement. Phillip countered that since he still retained the IMM Membership through his Class B-2 share, there was no “sale” of that membership within the meaning of the Agreement.

On October 15, 2008, Pamela filed a motion for summary judgment. In her motion, she asked the court to rule, as a matter of law, that she was entitled to 50% of the net proceeds from the sale of stock which represented Phillip’s IMM Membership in Old CME. On June 29, 2009, the court entered two orders denying Pamela’s motion for summary judgment. The court found that there was no genuine issue of material fact and that Pamela was not entitled to judgment as a matter of law. The court ruled as a matter of law that no sale had occurred regarding Phillip’s IMM Membership for purposes of the Agreement. On September 8, 2009, the court entered a final order denying Pamela’s petition to enforce judgment.

On September 21, 2009, Pamela filed a timely notice of appeal. Pamela contends on appeal that her motion for summary judgment should have been granted because 40% of the Class A stock which Phillip sold derived from the exchange/conversion of his IMM Membership into stock in CME Holdings. While Pamela acknowledges that Phillip did not sell his entire IMM Membership and that Phillip still retains trading rights under an IMM Membership with the same membership number (No. 602), Pamela argues that it is undeniable that Phillip’s original IMM Membership was exchanged for stock, and the Class A stock which Phillip sold represented a substantial portion of the original IMM Membership in question. Pamela requests that this court reverse the circuit court’s order denying her petition to enforce judgment and find that Pamela is entitled to summary judgment in the amount of $928,077.50. Phillip responds on appeal that the Agreement is unambiguous and that because he still owns IMM Membership No. 602 and its trading rights, Pamela has no right to share in the proceeds from the stock sale and no current rights to the trading rights of that membership.

ANALYSIS

The central issue on appeal is whether, pursuant to the Agreement, Pamela was entitled to 50% of the net sale proceeds of Phillip’s Class A common stock in CME Holdings where that stock derived from Phillip’s IMM Membership. We review the circuit court’s denial of Pamela’s motion for summary judgment de novo. Adams v. Northern Illinois Co., 211 Ill. 2d 32, 43 (2004). Similarly, the interpretation of a marital settlement agreement comprises a question of law which we review de novo. Blum v. Koster, 235 Ill. 2d 21, 33 (2009).

The parties agree that the material facts surrounding the Agreement are not in dispute. Instead, they simply disagree with the single issue of whether their intent is being frustrated by Phillip’s refusal to pay his ex-wife 50% of the after-tax and expenses portion of his sale of the stock. Accordingly, our analysis focuses on the meaning of the language used in the Agreement itself by applying ordinary rules of contract interpretation. See In re Marriage of Velasquez, 295 Ill. App. 3d 350, 356 (1998).

The primary objective in interpreting a contract is to give effect to the intent of the parties at the time they entered into the agreement. In re Marriage of Schurtz, 382 Ill. App. 3d 1123, 1125 (2008). A court must first look to the language of the contract alone, “as the language, given its plain and ordinary meaning, is the best indication of the parties’ intent.” Gallagher v. Lenart, 226 Ill. 2d 208, 233 (2007). “Where the language of the agreement is clear and its meaning is unambiguous, courts must give effect to that language.” Schurtz, 382 Ill. App. 3d at 1125. A contract is not ambiguous simply because the parties disagree as to the meaning of a term or provision. See Rich v. Principal Life Insurance Co., 226 Ill. 2d 359, 372 (2007). “[A] contract should be given a fair and reasonable interpretation based on the consideration of all its language and provisions.” Velasquez, 295 Ill. App. 3d at 356. The intent of the parties is not to be determined from detached portions of a contract or from any clause standing by itself. Gallagher, 226 Ill. 2d at 233.

Pamela contends that the clear intent of the parties was that she would receive 50% of the value of the IMM Membership if Phillip sold it during her lifetime or 100% of its value if he predeceased her. The circuit court essentially ruled that a “sale” of the IMM Membership did not occur because the Class B-2 common share, which confers the trading rights to the owner, is still owned by Phillip. Pamela argues that the trial court’s interpretation of the Agreement is unduly strict and arbitrary, in light of the fact that Phillip sold all 1,800 shares of the Class A stock (earning over $2 million in the process) which he received as a result of his ownership of the IMM seat when the CME had its IPO. We agree.

Turning to the merits of the case sub judice, it is clear to us from our reading of the terms of the Agreement that there was a definable sale of a substantial portion of the IMM Membership. To us, any other interpretation would be the product of a rather strained and arbitrary point of view, because not only was there “a” sale, there were numerous “sales” of the shares of the Class A stock, which were sold on the public market through the New York Stock Exchange, which resulted in more than $2 million to Phillip.

The fact that the Class B-2 share of stock, which confers the trading rights of the IMM Membership, is still registered to Phillip in no way changes the undeniable reality that he deprived his ex-wife of her rightful share by refusing to pay her part of the windfall that he acquired by ownership of the seat. Further, the fact that Phillip owned this seat prior to his marriage is also largely irrelevant, because Phillip chose to utilize this arguably nonmarital asset as both a vehicle to fund his maintenance obligation (for 72 months), but also to confer a contingent benefit upon his ex-wife should one of two events (sale or his predeceasing his ex-wife) occur.

Phillip essentially argues that only he should be the beneficiary of the transformation of the IMM Membership from a unitary entity into a hybrid entity. This transformation, however, was accomplished by the CME itself and its action is the only agency which allowed Phillip to earn the profits in question. Phillip goes to great lengths to argue that his ex-wife knew that she would never be entitled to stock and that any talk of stock was “off the table,” but the Agreement is wholly silent on this issue. If Phillip’s argument and deposition testimony were completely accurate, it would seem that it would have been reflected to some extent in the Agreement itself.

As of the time of the Agreement, the CME’s IPO was not an accomplished fact, but both parties were aware that it was a distinct possibility, not that either could have accurately predicted the hybrid approach referred to above or the enormous windfall that would be conferred upon the timely sale of the Class A stock. If Phillip’s argument were correct, a single sentence in the Agreement to the effect that nothing in the language in the Agreement should be construed to mean that Pamela would ever be entitled to proceeds from stock sales would have been an easy and enforceable way to communicate any such intent. Phillip is the party who utilized this nonmarital asset as a vehicle for providing agreed maintenance for six years. He could have avoided any potential ambiguity that might occur because of the incipient IPO by not tying his maintenance obligation to this asset.

The continued existence of IMM Membership No. 602 does not operate to negate the possible sale of the equity within the seat, because it is clear that the overall value of the seat has been diluted by millions of dollars. Allowing Phillip to sell the stock portion of the currently constituted seat while blithely maintaining that no sale had occurred since the Class B-2 share is still vested in his name strikes us as sophistry. Only an unrealistic and hypertechnical construction of the meaning of “sale” would allow Phillip to prevail under these facts. In fact, it is nigh impossible to reconstruct the intent of the parties into a form that would support Phillip’s argument. In order to say that Phillip’s argument supports the parties’ intent at the time of the contract, one would have to accept that: (1) the parties knew that demutualization was going to occur; (2) the demutualization would effectively mutate the unitary seat into a hybrid vehicle that would allow sale of substantial equity in the seat through publicly traded stock; (3) Pamela would maintain rights in the Class B-2 share and the trading rights, but not in any publicly traded stock; and (4) only Phillip would be entitled to enjoy the potential windfall from the sale of the Class A stock. The language of the Agreement leads us to the conclusion that the parties did not want to limit or expand their respective rights in any way as a result of the then-upcoming demutualization and merger of the CME and its potential effect on the IMM Membership.

On the other hand, the plain language of the agreement inexorably lends itself to the conclusion that Pamela is entitled to 50% of the proceeds of the sale of the stock that Phillip obtained as a result of the transfiguration of the IMM Membership after the very successful IPO. The language of the Agreement makes it clear that Pamela has several ways to benefit from the IMM Membership. First, she obtained 72 months of monthly maintenance tied to the lease value of the trading rights to the seat. Second, she would get a 100% right to the seat if Phillip predeceased her, and third, she would get 50% of the value from any sale of the seat that occurred during her lifetime. Under the plain and ordinary meaning of the word “sale,” it is obvious that Phillip sold a substantial portion of the seat, even if he scrupulously maintained the seat’s trading rights and membership number.

Accordingly, we conclude that, pursuant to the Agreement, Phillip is required to pay Pamela 50% of the net-after-tax proceeds he received from the sale of the Class A stock he acquired in exchange for his IMM Membership, amounting to $928,077.50. Because there are no genuine issues of material fact, Pamela is entitled to judgment in her favor as a matter of law.

CONCLUSION

For the foregoing reasons, we reverse the judgment of the circuit court denying Pamela’s motion for summary judgment and her petition to enforce judgment. Pursuant to Supreme Court Rule 366, we grant Pamela’s motion for summary judgment as a matter of law and award her $928,077.50 pursuant to her petition to enforce judgment. 155 Ill. 2d R. 366.

Reversed.

HOWSE, J., concurs.

1 These computations are set forth by Pamela in her brief on appeal and match those she has asserted throughout the legal process. Phillip has never contested these amounts and does not do so now.