Case of the Month Archive

Changed financial situations constitute changed circumstances . . .

In reversal, Sixth District holds that trial court erred by attributing income to equity in father’s home when it calculated guideline child support

Before 1995, Thomas and Hilary Williams supported themselves and their two children, Kirstie and Logan, with earned income. In 1995, Thomas sold his company, Combinet, to Cisco Systems in exchange for shares of Cisco stock worth between $65 million and $85 million. After that, neither Thomas nor Hilary held jobs. They bought and remodeled a 5,400-square-foot house in Monte Sereno, and an 11,000-square-foot house on 17-Mile Drive in Pebble Beach.

Hilary subsequently filed for divorce. At a mediated settlement conference in June 2003, the couple agreed that Hilary would receive the Monte Sereno house free and clear of any mortgage, and Thomas would get the Pebble Beach house and pay its mortgage. The parties also agreed to attribute monthly income of $20,833 to Thomas and $2,800 to Hilary; they stipulated that, per a DissoMaster™ calculation, Thomas would pay $3,411 a month in child support. On September 11, 2003, the trial court issued a judgment on reserved issues that included the parties’ agreement regarding child support.

On April 5, 2004, Thomas filed a motion to modify child support, claiming that Hilary’s financial situation had been considerably enhanced by the proceeds she received from selling the Monte Sereno house. In opposition, Hilary sought increased child support, contending that the original order was below the guideline because it did not take into account Thomas’s investment income. She also argued that the kids were entitled to share in their father’s “extraordinarily high standard of living,” which she was unable to provide. Hilary included a supporting declaration from her accounting expert, Charles Helfrick, who, among other things, calculated that Thomas’s net worth was $19 million, while Hilary’s was $4 million. Thomas shot back a declaration from his own accountant, Richard Wilkolaski, who claimed that Helfrick’s calculations had not followed accepted accounting procedures and were “nonsensical.” Thomas also asserted that Hilary “had failed to maximize her income” by refusing to raise the rent on property she owned in Philadelphia and by loaning $800,000 to a friend at 4.25% interest.

At a hearing on August 31, 2004, Thomas testified that he owned a brokerage account worth $5.3 million (managed for growth), a house in Hillsborough (then vacant and held as an investment) into which he’d put about $1.3 million, and the house in Pebble Beach, worth $10 or $11 million, with a mortgage of $4.5 million; he claimed monthly expenses of $54,863. Thomas estimated that Hilary had received $5 million from the sale of the Monte Sereno house. Hilary testified that she had to sell that house to free up assets to support herself and the kids, and said that she’d bought a 2,323-square-foot house in Los Gatos. She described the lifestyle the family had enjoyed in the Monte Sereno house, which had five bedrooms, six and a half bathrooms, and a separate wing in which the children lived. The family spent weekends at the “large palatial estate” in Pebble Beach, where the kids had “extremely large bedrooms” in the house. Hilary contrasted that with the Los Gatos house, where the children “share ‘cramped quarters’ that include ‘tiny’ bedrooms and a bath.” Hilary told the court that she had set aside $1.2 million for remodeling the Los Gatos house to add larger bedrooms and a bath for each child. She believed that the kids took “a ‘huge hit’ ” in their standard of living because of the divorce. Hilary also acknowledged loaning $800,00 to a friend and purchasing property in Philadelphia that generated $1,200 a month in rent.

When Helfrick testified, he described for the court three possible methods for calculating child support, the third of which was to measure Thomas’s income by attributing a 3% rate of return on his investments, including the equity in the Pebble Beach estate and the Hillsborough house. He subtracted $1.8 million from the equity in both the Pebble Beach property and the Los Gatos house as a reasonable amount of home equity for the parties to shield from income attribution. Helfrick admitted that this was the first time he’d advocated attributing income to home equity, but he believed that it was appropriate in this case because of “ ‘the magnitude of equity,’ ” almost $6 million, that Thomas was sheltering in the Pebble Beach estate. Wilkolaski, on the other hand, asked the court to calculate child support by using Thomas’s actual income from his brokerage account, $803 a month, and attributing an additional $1,200 a month in rental income to Hilary.

In its tentative decision, the trial court found that Hilary’s net worth was about $5.4 million (or $4.2 million if the home remodeling was treated as a liability), that Thomas’s net worth was between $15 million and $19 million, and that, per the parties’ stipulation, Thomas had attributed income of $20,833 a month. Finding guidance in Helfrick’s third method for calculating support, the court attributed a 3% rate of return to between $14.6 million and $14.8 million of Thomas’s investments available as income, and to $3.8 million of Hilary’s net worth available for investment; those attributions yielded monthly income of $31,057 for Thomas, and $9,576 for Hilary. After calculating guideline support, the court ordered Thomas to pay $7,177 a month in child support, plus 75% of the add-ons, including private-school tuition; uninsured medical, dental, and therapeutic expenses; and agreed-upon costs of extracurricular activities. After receiving objections to the tentative decision, the court entered findings and order after hearing that included the child-support amount ordered in the tentative decision.

Thomas appealed, and the Sixth District reversed and remanded.

There’ve been some changes . . .
Thomas first contended that the trial court should not have modified the child-support order because Hilary had failed to show a change of circumstances. The panel noted that the lower court had found that because the parties had stipulated to the original order, which was at or below the guideline, Hilary did not need to show changed circumstances; alternatively, the court held that there were sufficient changed circumstances in the financial conditions of the parties to justify a modification. The justices agreed that per Fam C §4065(d), a stipulated below-guideline order may be brought up to guideline without proof of changed circumstances, but they noted that per Fam C §4065(a), parents who stipulate to such an order must also state that they have been fully informed of their rights regarding child support, that they stipulated to the order without coercion or duress, and that the order meets the needs of the children and is in their best interests. In addition, the trial court has a sua sponte obligation to state on the record or in writing the guideline amount, the reasons for deviating from it, and the reasons that the amount ordered is in the kids’ best interests. In this case, the justices found, Thomas and Hilary had failed to make the requisite declaration, and the trial court failed to make the necessary findings. Thus, assuming that the original order was at the guideline, the panel concluded that a change of circumstances had to be shown before the trial court could increase that order. Agreeing with the lower court, the justices found that the changes in the parties’ financial situations satisfied the “necessary predicate for modification.”

Doubting Thomas . . .
Thomas next argued that the trial court erred by attributing income to his investment assets and to the equity in his Hillsborough property; as he saw it, Hilary had failed to show that the kids needed attributed income from those assets to meet their reasonable needs. He urged the court to find that his child-support obligation should have been based on the actual income he received from investments, $803 a month, plus his stipulated imputed income of $250,000 a year. The justices noted that in Mejia v. Reed (2003) 31 Cal.4th 657, 3 Cal.Rptr.3d 390, 74 P.3d 166, 2003 CFLR 9410, FIRST ALERT #F-2003-1108, the Supremes reasoned that a court may consider the income from invested assets as part of a determination of earning capacity in making its child-support calculation, or it may consider such assets as a special circumstance that justifies deviating from the guideline. Moreover, the panel continued, in In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 111 Cal.Rptr.2d 755, 2001 CFLR 8849, FIRST ALERT #F-2001-1017, the Sixth District held that it was error not to include the gross proceeds from the exercise of stock options in the payor’s income. The justices there reasoned that by failing to consider that income, the trial court had permitted the payor to evade his child-support obligation, and it may have made an order so low that it was not in the kids’ best interests. Also, this panel pointed out, in In re Marriage of Destein (2001) 91 Cal.App.4th 1385, 111 Cal.Rptr.2d 487, 2001 CFLR 8825, FIRST ALERT #F-2001-1015, the First District held that the trial court was permitted to attribute a 6% rate of return on the equity in property that the payor held as a long-term investment, where doing so was necessary to address the disparity in the parties’ living standards. Moreover, in In re Marriage of Dacumos (1999) 76 Cal.App.4th 150, 90 Cal.Rptr.2d 159, 2000 CFLR 8385, FIRST ALERT #F-99-926, the Third District held that attributing income to underutilized income-producing assets was permitted, and In re Marriage of Pearlstein (2006) 137 Cal.App.4th 1361, 40 Cal.Rptr.3d 910, 2006 CFLR 10257, FIRST ALERT #F-2006-1236, the First District held that it was permissible to attribute a reasonable rate of return on non-income-producing assets. In light of those authorities, the justices here found that the trial court had not erred by imputing a reasonable rate of return on Thomas’s income-producing and non-income-producing assets.

Poor little rich kids . . .
Thomas did not argue that the 3% rate of return imposed by the lower court was unreasonable. His contention was that the trial court may impute income on assets only to the extent that it is necessary to meet the reasonable needs of the children. The panel reminded him, however, that when the parents are wealthy, those needs are measured by a higher standard of living, not just by the funds needed to pay for life’s necessities. Here, Thomas’s wealth was unquestioned, and he had failed to prove that the increased amount of support that the trial court ordered was not in his kids’ best interests. Accordingly, the justices found that the trial court correctly attributed a 3% rate of return to Thomas’s investment assets, including the Hillsborough house that he held for investment purposes.

His home is his castle . . .
The justices next considered whether the trial court erred by attributing income to the equity in the Pebble Beach mansion. Thomas asserted that such an attribution was permitted only where appropriate due to special circumstances. The panel noted that in In re Marriage of Henry (2005) 126 Cal.App.4th 111, 23 Cal.Rptr.3d 707, 2005 CFLR 9885, FIRST ALERT #F-2005-1180, the Fourth District held that an increase in the equity in a parent’s residence does not constitute income or earning capacity for purposes of calculating child support. However, Hilary asked the justices to find Henry distinguishable because there, a rate of return was not applied to the home equity of the mother, and that equity wasn’t part of an “overall investment portfolio that ‘vastly minimized her income.’ ” Here, Hilary argued, income should be imputed to Thomas’s home equity because “Thomas ‘purposefully holds much of his wealth in his two residences.’ ” The panel pointed out that Hilary hadn’t cited any other decision that contained a “bright line rule” making it appropriate to consider home equity in calculating child support. Still, the justices found the reasoning in In re Marriage of de Guigne (2002) 97 Cal.App.4th 1353, 119 Cal.Rptr.2d 430, 2002 CFLR 9015, FIRST ALERT #F-2002-1046 “particularly instructive” regarding the part that wealth tied up in the payor’s residence should play when calculating child support. In that case, the panel explained, the payor had inherited a $20-million estate that included a mansion in which the family lived “ ‘an opulent lifestyle’ ” before the disso. The payor asked the trial court to order guideline support based on his annual income from trusts and securities; however, the court ordered triple that amount, reasoning that the children were entitled to enjoy an approximation of the same lifestyle postdisso that they’d had predisso, and that the disparity between their pre- and postdisso circumstances constituted a special circumstance that justified deviating from the guideline. In affirming that order, the First District reasoned that it was in the children’s best interests to consider the wealth invested in the payor’s home, and that the payor could easily afford the higher order if he sold a portion of the estate, which sat on some of the most desirable land in the Bay Area. Applying some of that reasoning here, the panel found that Hilary had failed to show that there were special circumstances in this case that made it appropriate to consider the equity in the Pebble Beach estate. Moreover, they could find no case that specifically permitted them to do so. Accordingly, the justices held that the trial court had erred by including a 3% rate of return on that equity in making its child-support calculation, and they reversed that part of the judgment. The panel remanded for further hearing at which the lower court would make a new calculation and Hilary would be free to show that special circumstances exist that make deviating from the guideline appropriate. In light of their reversal, the justices declined to consider Thomas’s alleged calculation errors.