Case of the Month Archive

Father who was sole shareholder of law firm with substantial reserves could not defer salary to suspend or reduce child support obligation. . .

In a partially published opinion, the First District held substantial evidence supports the trial court's imputation of income in excess of father's actual salary, in denying father's request to modify child support, where father was the sole shareholder of his law firm with the unilateral ability to set his own income and, although father's salary for the year in question was significantly less than previous years, father's net worth was $4 million and his law firm's reserves were ten times the amount of child support due for the year.

In November 2019, Scott and Kikianne Cole entered into a stipulation and order providing that Scott would pay $7,537 per month in child support for their two children. Scott paid child support for the first three months of 2020 but stopped making payments beginning in April. In May 2020, Scott filed a request to modify his child support obligations, alleging that he had to stop taking a salary from his law firm due to the COVID-19 pandemic. Scott further alleged that his law firm had to lay off three employees and cut its expenses by 25% and that he and his current spouse lived off their savings. As such, Scott requested the trial court to suspend child support payments or set payments to zero. Kikianne opposed Scott's modification request, arguing that Scott had access to funds in the amount of $20 million that he was not reporting.

Previous years' income. . .
The trial court held a long cause hearing over the course of two days in March 2021 and April 2021. The evidence showed that Scott received a salary of $11 million in 2017, $578,767 in 2018, and $1.4 million in 2019. Although Scott's reported salary on his 2020 tax return was $100,000, Scott's law firm had $1.4 million in reserves for operating and capital expenses. Moreover, Scott had total assets worth $6.4 million and a net worth of $4 million.

At the conclusion of the hearing, the trial court issued a proposed decision in Kikianne's favor, to which Scott objected. The trial court then issued a final written statement of decision in which it found Scott's testimony regarding his personal finances "'largely unbelievable.'" The trial court (Contra Costa County's Reyes) denied Scott's modification request and ordered Scott to pay $90,444 in total child support for the calendar year 2020. The trial court also ordered Scott to pay Kikianne's attorney fees pursuant to Fam C §271 [attorney's fees as sanctions for conduct that frustrates settlement] in the amount of $123,909. Scott appealed, but the First District affirmed.

The panel began its analysis by observing several principles relating to the need for adequate child support, including (1) a parent should support his or her child according to the parent's circumstances and station in life; (2) a parent should pay child support according to the parent's ability; (3) the interests of children are the state's top priority; (4) because children share in the standard of living of both parents, child support may appropriately improve the custodial household's standard of living; (5) the mandatory statewide uniform child support guideline seeks to encourage settlement between parents and minimize litigation costs; and (6) child support orders must ensure children actually receive fair, timely, and sufficient support.

Courts may deviate from the child support guidelines in special circumstances. . .
The justices next noted that although the child support amount established by the guideline is presumptively correct, Fam C §4057 authorizes courts to deviate from that amount when "'the formula would be unjust or inappropriate due to special circumstances in the particular case.'" For example, per Fam C §4058(b)(1), when calculating child support, courts may consider the earning capacity of a parent in lieu of the parent's actual income. Generally, courts will not modify child support unless there has been a material change of circumstances following a previous determination. Also, a parent seeking a reduction in child support carries the burden of proving changed circumstances. Whether circumstances have changed sufficiently to modify child support is determined on a case-by-case basis, but the most important consideration is how the purported change impacts a party's financial status.

Trial court properly imputed father's earning capacity in lieu of actual income. . .
With these principles and rules in mind, the justices noted several reasons supporting the trial court's conclusion that Scott failed to prove a material change of circumstances for the purposes of suspending or reducing his child support obligation. First, as the only shareholder of his law firm, Scott has unilateral ability to set his income. As Scott himself testified, he determines his salary "'based on the needs of the business and based on personal needs.'" Scott added that "'if the income is needed on the personal side' and 'the business can afford it' then he 'can make adjustments.'" Second, Scott reported substantial income from 2017 through 2019. Scott also stated his net worth was over $4 million and that his law firm held $1.4 million in reserves that were not required for its day-to-day operations. As the justices observed, the law firm reserves amounted to ten times the amount of child support that was due for 2020. As a result, the justices found that the trial court reasonably inferred that Scott's law firm had sufficient funds to pay him a salary to cover his 2020 child support obligations. The justices further found that their conclusion was supported by In re Marriage of Berger (2009) 170 Cal.App.4th 1070, 88 Cal.Rptr.3d 766, 2009 FA 1376 [special circumstances existed to allow trial court to deviate from child support guideline where father was simply choosing to invest his salary into his startup company instead of taking sufficient income from which to pay child support]. The justices noted the similarities between Scott's situation and the situation in Berger, including that both obligors were wealthy business owners who had the unilateral ability to set their own income and that both lived a relatively affluent lifestyle.

Scott next argued that the trial court erred by failing to consider Fam C §4057.5 [a new spouse's income may not be considered when modifying child support]. The justices disagreed, first noting that Scott failed to raise this issue in his initial modification request or in his trial brief. Instead, Scott raised this issue for the first time in his closing brief after the long cause hearing, at which time he argued that half of his accounts should be excluded when determining his income available for child support purposes. The justices further noted that the trial court properly found that Scott failed to offer any detailed evidence of his current spouse's income or assets. In so holding, the justices emphasized that Scott held the burden of proving his circumstances had materially changed.

In the unpublished portion of the opinion, the justices concluded that the trial court properly determined that the requested attorney fees pursuant to Fam C §271 were reasonable. In so finding, the justices disagreed with Scott that Kikianne had disclaimed reliance on Fam C §271. On the contrary, Kikianne's trial and closing briefs explicitly requested attorney fees under several statutes, including Fam C §271. The justices further concluded that Scott was not deprived of notice and an opportunity to be heard on the matter, since each party requested attorney fees from the other, on the same statutory grounds, and neither party objected when the trial court stated at the long cause hearing that such attorney fees were at issue. Finally, although Kikianne's request for attorney fees lacked certain billing details, such as billing hours and billing rate, she did elaborate on her request in other ways, noting that she spent 14 hours preparing for and attending her deposition, responded to Scott's motion to quash trial subpoenas, filed motions to join Scott's law firm in the action, and engaged in "'many other legal maneuvers…due to Scott's overly litigious nature.'" Moreover, Kikianne's counsel submitted a declaration stating Kikianne had incurred $125,456 in attorney fees for defending against Scott's request to modification. As such, the justices upheld the trial court's attorney fee award.

For the foregoing reasons, the First District affirmed the trial court's judgment