Case of the Month Archive

Justices stop short of bright-line rule for all annuities . . .

In affirmance, Second District holds that monthly annuity payments to Dad under undifferentiated personal injury settlement are not income for purposes of calculating child support

Martha and Jeffrey Rothrock were married in September 1983. On August 1, 1990, Jeffrey began receiving monthly annuity payments of $1,700 from a personal injury structured settlement. The couple separated in August 1992, and Jeffrey filed for divorce. He and Martha subsequently executed an MSA, which provided, among other things, that the monthly annuity payments would be Jeffrey’s separate property. Jeffrey also agreed to pay monthly support of $300 for the oldest child, $400 for the middle one, and $500 for the youngest, until each turned 19, or 18 if not a full-time student living with a parent. The support payments were to be made by assignment from the annuity. Jeffrey and Martha agreed to a 50-50 split of the kids’ unreimbursed medical, dental, and orthodontia bills. The MSA was incorporated into the disso judgment issued by the trial court in August 1993.

In November 2004, the court ordered Jeffrey to pay support of $1,100 a month ($550 each) for the remaining minor children, Ryan and Jeffrey Jr. By the following January, the court found that Jeffrey had fallen behind in his payments to the tune of $2,762. In June 2005, Jeffrey filed an OSC, seeking a child-support modification, reimbursement of uninsured medical expenses, and attorneys’ fees. He claimed that he was currently unemployed, that Ryan had reached majority, and that Martha was earning $2,400 a month. In response, Martha pointed out that Jeffrey was behind in his support payments, and contended that cosmetic health expenses, such as orthodontia, were not covered by the MSA. Moreover, she argued that Jeffrey’s personal injury settlement was a community asset that should be divided, and she had “ ‘inadvertently agreed to receive child support by assignment’ ” of that settlement. At the initial OSC hearing, the court noted that a recently decided case, In re Marriage of Heiner (2006) 136 Cal.App.4th 1514, 39 Cal.Rptr.3d 730, 2006 CFLR 10235, 2006 FA 1232 [lump-sum personal injury settlement not income for child-support purposes], “ ‘might have some impact on the issue of the personal injury annuity,’ ” and told the parties that it would hear argument on that issue at trial, which it scheduled for May 17, 2006.

Two days before trial, Jeffrey filed supplemental points and authorities, claiming that, per Heiner , his annuity payments should not be considered income in calculating child support. He advised the court that he had impaired brain function and suffered from back and leg pain that required medication and physical therapy; he contended that it would be unfair to require him to pay child support from funds he needed for medical treatment. When trial began on May 17, Martha appeared in pro per, having fired her attorney. The court told her and Jeffrey that it had reviewed the files at some length and asked them if they were ready to proceed; both said they were. Before permitting Jeffrey’s attorney to make an offer of proof, the court found that attempting to allocate the personal injury settlement funds would be “ ‘pure speculation’ ”; that, per Heiner , unallocated and undifferentiated settlement funds are not income for child-support purposes; and that the parties’ MSA and disso judgment required Martha and Jeffrey to share unreimbursed medical, dental, and orthodontia costs equally. The court terminated support for Ryan as of June 30, 2005, found that Jeffrey’s overpayment of support for Ryan was roughly equal to the amount of unpaid support arrearages, and concluded that Martha owed Jeffrey $1,693 as her half of the unreimbursed medical expenses. Taking into account Jeffrey’s $1,300 a month in unemployment benefits, his 20% timeshare, and Martha’s monthly income of $2,800, the court ordered Jeffrey to pay child support of $153 a month, starting June 1, 2006. The court entered its findings and order on June 5, 2006.

Shortly thereafter, Martha, no longer in pro per, filed motions to vacate the judgment and for a new trial, claiming procedural irregularities in Jeffrey’s supplemental memorandum. Jeffrey countered that her motions were frivolous, and he sought sanctions; she shot back a claim that his opposition was frivolous, and she too sought sanctions. The trial court denied Martha’s motions.

Martha appealed, but the Second District affirmed.

What they mean by income. . .
Martha argued that the trial court should have found that the annuity payments were income for child-support purposes. The justices acknowledged that annuities are included in the definition of income in Fam C §4058(a)(1). However, per In re Marriage of Scheppers (2001) 86 Cal.App.4th 646, 103 Cal.Rptr.2d 529, 2001 CFLR 8669, 2001 FA 984, income must also meet the common-law definition of income, which is “ ‘the gain or recurrent benefit that is derived from labor, business, or property . . . or from any other investment of capital.’ ” Moreover, the panel continued, since §4058(a)(1) is based on the definition of gross income in the Internal Revenue Code (at 26 USC 61), federal statutes dealing with income are persuasive. Per 26 USC 104(a)(2), personal injury damages (other than punitive ones) received by the injured party as either lump-sum or periodic payments are not considered income for federal tax purposes. The justices also noted that the settlement agreement in Jeffrey’s personal injury case specified that the payments constitute damages within the meaning of 26 USC 104(a)(2).

Same forest, different trees. . .
The panel recognized that the Heiner court distinguished cases in which personal injury damages had been paid in the form of an annuity or a structured settlement from those involving a lump-sum settlement. The justices declined to treat the two differently, however. They noted that the Heiner court had not considered how the common-law definition of income might affect its reasoning regarding the distinction between lump-sum settlements and periodic payments. Moreover, this panel went on, 26 USC 104(a)(2) makes no distinction between the two types of recovery. In addition, in Rev Rul 79-220, 1979-2 CB 74, the IRS stated that the statute’s exclusion from income applied to personal injury damages received as monthly payments, as long as the payments were not from a lump-sum recovery that the recipient subsequently invested in an annuity to be paid out monthly, and the recipient did not have access to the lump-sum amount that someone else purchased to generate the payments. Here, Jeffrey had access only to the amounts he received every month; he did not have access to the sum that had been invested in the annuity that yielded the payments. And the fact that the payments were funded from an annuity, the panel thought, did not change their essential character as damages due to personal injury that were intended to compensate Jeffrey for his loss of capital and personal rights. The justices cautioned that they weren’t saying that an annuity could never be income for child-support purposes; where part of an annuity is designated as reimbursement for lost past or future wages, the result would be different. However, on these facts, the panel concluded, damages received from an undifferentiated settlement and paid out monthly from an annuity are not includible in income for child-support purposes.

Martha got her due. . .
The panel turned next to the contention that Martha had been denied her due-process rights because Jeffrey had filed his supplemental trial memorandum late and failed to provide an official citation to Heiner. The justices noted that as a pro per litigant, Martha was not entitled to any special consideration. She knew that the filing was late and allegedly deficient when she appeared at trial, they pointed out, yet she failed to object to its consideration, or to move for a continuance. Although she’d been warned that the Heiner case was significant, she failed to ask for additional time to brief the Heiner issue. When Martha was asked whether she was ready to proceed to trial, she said, “ ‘Yes.’ ” All of that convinced the panel that her due-process rights had not been violated, and that she’d had plenty of notice and an opportunity to be heard.

Short shrifts. . .
The justices quickly brushed aside Martha’s assertion that the trial court should not have reduced child support because Jeffrey had the capacity to make more money than he was then earning. The lower court, the panel found, had not been presented with sufficient evidence on which to impute income to Jeffrey; thus, it had not erred in making the reduction. The justices were equally unpersuaded that the court erred by ordering Martha to pay her share of the kids’ unreimbursed medical expenses; there was no evidence to support her contention that Jeffrey’s statement of expenses was untimely or that the MSA set any time limit on reimbursement. In conclusion, the panel found nothing to indicate that the trial court had mischaracterized the annuity or abused its discretion by denying Martha’s motion for sanctions under Fam C §271 [fees as sanctions] or CCP §128.5 [sanctions for bad-faith actions or frivolous, delaying tactics].