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Child and Spousal Support - California Court of Appeal - Riddle v Ri

California

,

United States of America

Issue

In the context of spousal support and child support orders, how do courts assess a spouse’s income when the income is based on commission and fluctuates significantly from year to year?

Conclusion

In cases where a party has fluctuating income, the time samples used to calculate the party's monthly net disposable income must be fair and representative. (Riddle v. Riddle)

Cal. Fam. Code § 4060 creates a presumption that the most recent 12 month period of earnings will be an appropriate time sample for calculating monthly net disposable income for the purposes of child and spousal support in most cases. (Cal. Fam. Code § 4060, Riddle v. Riddle)

In order for a trial court to exclude a party's variable or additional pay from the party's net monthly income for the purposes of determining support, the court must determine that the monthly net income amount does not accurately reflect the party's prospective earnings. (Cal. Fam. Code § 4060, County of Placer v. Andrade)

Courts have the discretion to adjust the monthly net income amount if it does not accurately reflect the party's prospective earnings at the time the order is made. (County of Placer v. Andrade, Cal. Fam. Code § 4060)

Additionally, courts have the discretion to adjust a support order to accommodate the fluctuating income of either party. (Cal. Fam. Code § 4064, Riddle v. Riddle, Pletcher v. Pletcher (In re Pletcher))

In Marriage of Ostler & Smith, In re (Ostler & Smith), the California Court of Appeal for the First District held that an order for additional child and spousal support, based on a percentage of the husband's future bonuses, was within the trial court's discretion. The Court noted that trial courts have broad discretion in weighing and balancing the various factors in each particular marriage before making a suitable support award. The Court also explained that the trial court had clear statutory discretion to consider the future bonuses of a parent in determining the parent's income to fix child support and to take into consideration the children's right to enjoy their father's higher standard of living. (Marriage of Ostler & Smith, In re)

In Pletcher v. Pletcher (In re Pletcher), the California Court of Appeal for the Fourth District held that the trial court erred when it based the husband's income for the purpose of determining a spousal support award off of his income from the last year where undisputed evidence showed that the husband's income varied wildly from year to year. The Court suggested two possible approaches the trial court could take to calculate the husband's income on remand. First, the court could expand its data set to include additional years that captured the volatile nature of the husband's income. Alternatively, the court could employ a Smith/Ostler percentage, as established in Ostler & Smith, to the support award. (Pletcher v. Pletcher (In re Pletcher))

Law

California courts have the discretion to adjust a child support order to accommodate the fluctuating income of either parent. This discretion is codified at Cal. Fam. Code § 4064:

The court may adjust the child support order as appropriate to accommodate seasonal or fluctuating income of either parent.

Cal. Fam. Code § 4060 sets out how a court shall calculate a parent's monthly net disposable income for child support orders. However, this section also gives courts discretion to adjust the net monthly income amount appropriately if the calculation does not accurately reflect the prospective earnings of the parties:

The monthly net disposable income shall be computed by dividing the annual net disposable income by 12. If the monthly net disposable income figure does not accurately reflect the actual or prospective earnings of the parties at the time the determination of support is made, the court may adjust the amount appropriately.

Cal. Fam. Code § 4058 defines annual gross income for the purposes of calculating child support. Commissions are included in the annual gross income calculation for each parent per subdivision (a)(1). Subdivision (b) grants the court discretion to consider the earning capacity of a parent in lieu of the parent's income as is consistent with the best interest of the child or children:

(a) The annual gross income of each parent means income from whatever source derived, except as specified in subdivision (c) and includes, but is not limited to, the following:

(1) Income such as commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, social security benefits, and spousal support actually received from a person not a party to the proceeding to establish a child support order under this article.

(2) Income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business.

(3) In the discretion of the court, employee benefits or self-employment benefits, taking into consideration the benefit to the employee, any corresponding reduction in living expenses, and other relevant facts.

(b) The court may, in its discretion, consider the earning capacity of a parent in lieu of the parent's income, consistent with the best interests of the children, taking into consideration the overall welfare and developmental needs of the children, and the time that parent spends with the children.

(c) Annual gross income does not include any income derived from child support payments actually received, and income derived from any public assistance program, eligibility for which is based on a determination of need. Child support received by a party for children from another relationship shall not be included as part of that party's gross or net income.

Cal. Fam. Code § 4320 sets forth the factors a court shall consider when ordering spousal support. One of the factors is he ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living:

In ordering spousal support under this part, the court shall consider all of the following circumstances:

(a) The extent to which the earning capacity of each party is sufficient to maintain the standard of living established during the marriage, taking into account all of the following:

(1) The marketable skills of the supported party; the job market for those skills; the time and expenses required for the supported party to acquire the appropriate education or training to develop those skills; and the possible need for retraining or education to acquire other, more marketable skills or employment.

(2) The extent to which the supported party's present or future earning capacity is impaired by periods of unemployment that were incurred during the marriage to permit the supported party to devote time to domestic duties.

(b) The extent to which the supported party contributed to the attainment of an education, training, a career position, or a license by the supporting party.

(c) The ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living.

(d) The needs of each party based on the standard of living established during the marriage.

(e) The obligations and assets, including the separate property, of each party.

(f) The duration of the marriage.

(g) The ability of the supported party to engage in gainful employment without unduly interfering with the interests of dependent children in the custody of the party.

(h) The age and health of the parties.

(i) All documented evidence of any history of domestic violence, as defined in Section 6211, between the parties or perpetrated by either party against either party's child, including, but not limited to, consideration of:

(1) A plea of nolo contendere.

(2) Emotional distress resulting from domestic violence perpetrated against the supported party by the supporting party.

(3) Any history of violence against the supporting party by the supported party.

(4) Issuance of a protective order after a hearing pursuant to Section 6340.

(5) A finding by a court during the pendency of a divorce, separation, or child custody proceeding, or other proceeding under Division 10 (commencing with Section 6200), that the spouse has committed domestic violence.

(j) The immediate and specific tax consequences to each party.

(k) The balance of the hardships to each party.

(l) The goal that the supported party shall be self-supporting within a reasonable period of time. Except in the case of a marriage of long duration as described in Section 4336, a "reasonable period of time" for purposes of this section generally shall be one-half the length of the marriage. However, nothing in this section is intended to limit the court's discretion to order support for a greater or lesser length of time, based on any of the other factors listed in this section, Section 4336, and the circumstances of the parties.

(m) The criminal conviction of an abusive spouse shall be considered in making a reduction or elimination of a spousal support award in accordance with Section 4324.5 or 4325.

(n) Any other factors the court determines are just and equitable.

In Riddle v. Riddle, 23 Cal.Rptr.3d 273, 125 Cal.App.4th 1075 (Cal. App. 2005) ("Riddle"), the husband appealed the trial court's child support and spousal support orders based on the trial court's calculation of his monthly net disposable income. The husband was employed as a commissioned financial advisor for a major investment firm. The commission-based nature of the husband's employment caused his monthly income to fluctuate. The trial court based the husband's monthly net disposable income off of two months of earnings. The California Court of Appeal for the Fourth District found that the time sample the trial court used to calculate the husband's monthly net disposable income was an abuse of discretion (at 1083):

So what was implicit in Rosen as regards a goodwill calculation we will now make explicit as regards to support orders: It is a manifest abuse of discretion to take so small a sliver of time to figure income that the determination essentially becomes arbitrary. And under the facts of this case, no other word but "arbitrary" properly describes the trial court's selection of the last two months to determine Husband's income. A mere two months is an embarrassingly short period on which to predict the annual income of a commissioned salesperson who works in the financial markets. And it is particularly too short under the record before us, where Husband's income for the previous 14 months, previous calendar year, and immediately preceding 12 months were all (a) pretty consistent in themselves ($7,591.12, $6,611.05, and $8,394, and if you used W-2 medicare wages, $5,429) but (b) wildly inconsistent with the two month period January-February 2003 ($21,950).

The Court held that in cases where a party has fluctuating income, the time samples used to calculate the party's monthly net disposable income must be fair and representative. The Court further noted that while there are exceptions, Cal. Fam. Code § 4060 creates a presumption that the most recent 12 month period of earnings will be an appropriate time sample for calculating monthly net disposable income for child and spousal support in most cases (at 1083):

We also recognize, of course, that, as in Rosen, longer time samples are appropriate for measuring "average annual income" for purposes of goodwill valuations. However, as regard support, we may say that statutes appear to create a presumption that the most recent 12 months is certainly an appropriate period in most cases.

In In re Marriage of Rosen, 130 Cal.Rptr.2d 1, 105 Cal.App.4th 808 (Cal. App. 2002) ("Rosen"), the California Court of Appeal for the Fourth District held that the trial court's finding that the payor's law practice had a goodwill value of $42,500 was erroneous and instead, the Court assigned the law practice a goodwill value of zero. The Court held that the trial court improperly assigned an inflated goodwill value when it relied on the payor's net income for 1995 alone to calculate excess earnings. Instead, the trial court should have used an average of his net earnings to calculate excess earnings because his net income was highly volatile, varied greatly from year to year, and his 1995 earnings did not reasonably illustrate his current rate of earnings (at 820-821):

The expert's own report shows Bruce to have had net income in 1992 of

[130 Cal.Rptr.2d 8]

$72,667, in 1993 of $101,067, and in 1994 of $71,362. Bruce's net income for 1995 alone is neither an average nor "reasonably illustrative" of his earnings. A reasonable trier of fact could not help but conclude the expert chose to use Bruce's net income from 1995—one of Bruce's highest earning years—solely to inflate the value of goodwill.

[...]

Pat argues that under In re Marriage of Garrity and Bishton, supra, 181 Cal. App.3d 675, 226 Cal.Rptr. 485, the trial court was not bound to use any particular time period over which to average income for calculating goodwill.The problem is that Bruce's net income for 1995 alone is not illustrative of Bruce's rate of earnings in light of the fluctuations in Bruce's income. Pat's expert admitted that had he averaged Bruce's income over any period of years he considered, goodwill value would be nominal or nothing.

In Marriage of Ostler & Smith, In re, 272 Cal.Rptr. 560, 223 Cal.App.3d 33 (Cal. App. 1990) ("Ostler & Smith"), the California Court of Appeal for the First District held that an order for additional child and spousal support, based on a percentage of the husband's future bonuses, was within the trial court's discretion. The Court noted that the trial court was not limited to ordering spousal support that met the standard of living acquired during the marriage, but rather that the standard of living acquired during the marriage was one factor the court should consider in determining the spousal support amount. The Court noted that trial courts have broad discretion in weighing and balancing the various factors in each particular marriage before making a suitable support award and the trial court did not abuse its discretion in fashioning the spousal support award to include the award of a percentage of the husband's bonus and the step-down of support in three years (at 48-50):

[223 Cal.App.3d 48] Clyde's argument that spousal support cannot exceed the amount necessary to maintain the standard of living acquired during the marriage is similarly infirm. The standard of living is only one circumstance to be considered. (In re Marriage of Watt, supra, 214 Cal.App.3d at pp.

Page 569

351-352, 262 Cal.Rptr. 783.) 11 But even if it were the limiting factor in setting the amount of support, we would find it difficult to apply in this case. The trial court used an average of the family's expenses over the seven years before the parties' separation on January 1, 1986 (1979-1985), to arrive at an average figure of $6,000 per month for the family of six. This is a distorted figure because it gives little or no weight to the upward mobility of the family. In 1985, the year before the separation, Clyde's fixed salary was $140,004, and the bonus earned the previous year, but not paid until 1985, was $75,000, for a total income in 1985 of $215,004, or $17,917 per month gross plus dividends. At the time of the hearing in 1988, Clyde's total gross income for the year was $300,000 in salary and bonus plus $18,500 in dividends, for a total of $26,542 per month. To leave the custodial parent and the two minor children at a significantly lower plateau of living while the noncustodial parent enjoys a significantly increased income is unjust. (§ 4801, former subd. (a)(8) [now subd. (a)(10)].) The trial court was well aware of this inequity when it stated, "I can't ignore the bonus income as you [Clyde] suggest ... and that's being chintzy. I'll have to consider it."

Rather than looking only to need and standard of living, the trial court here considered all the circumstances and appropriately gave great weight to the factors set out in subdivision (a) of section 4801. We do not have to dwell long on the extent to which Vicki contributed to Clyde's attainment of an education and highly successful career position. She undertook all the domestic duties and, more importantly, was the prime caretaker for the four children of the marriage for 21 years while Clyde devoted time and effort to his career. As a result, he now has substantially enhanced earning capacity and a secure financial future, which admittedly benefits not only him but also the other family members.

[...]

Although patterns in marital breakups emerge, each couple has such a diverse mix of circumstances that trial courts must have broad discretion in weighing and balancing the various factors in each particular marriage before making a suitable support award. A trial court will not be reversed absent an abuse of that discretion. An abuse "occurs when, after calm and careful reflection upon the entire matter, it can be fairly said that no judge would reasonably make the same order under the same circumstances." (In re Marriage of Lopez (1974) 38 Cal.App.3d 93, 114, 113 Cal.Rptr. 58; In re Marriage of Bukaty, supra, 180 Cal.App.3d at p. 147, 225 Cal.Rptr. 492.) Because trial courts have such broad discretion, appellate courts must act with cautious judicial restraint in reviewing these orders. (In re Marriage of Aufmuth, supra, 89 Cal.App.3d at p. 458, 152 Cal.Rptr. 668.) Here, the record reflects that the court weighed and considered each circumstance required under section 4801, subdivision (a), and the record supports the

Page 571

trial court's exercise of discretion. The court's balancing of factors is particularly evident when we consider the award of a percentage of the bonus and the step-down of support in three years. We find no abuse of discretion in the award of spousal support.

The Court noted that in regard to the child support order, the trial court had clear statutory discretion to consider the future bonuses of a parent in determining the parent's income for the purposes of fixing child support and to take into consideration the children's right to enjoy their father's higher standard of living. The amount of child support rests in the sound discretion of the trial court, and the Court found no abuse of discretion in the trial court's award of child support (at 52, 54):

The Agnos Act provides in part that when a court is called upon to determine minimum child support and monthly child support payments, it must first compute the annual gross income of each parent. "... The annual gross income means income from whatever source derived ... and includes ... [p] (1) ... commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits [and the like]." (§ 4721, subd. (a)(1), emphasis added.) Thus the trial court has a clear statutory direction to consider the future bonuses of a parent in determining income for purposes of fixing child support.

[...]

Neither party asked for specific findings on the amount needed for child support. (See Code Civ.Proc., § 634.) Nor did they avail themselves of section 4700, subdivision (a)(1), which provides in part that "[a]t the request of either party, the court shall make appropriate findings with respect to the circumstances on which the order for the support of a minor child is based...." Thus, in the absence of specific figures, we assume the trial court determined the reasonable needs of the two minor children, taking into consideration their right to share in their father's higher standard of living. The principles set forth by the Legislature in the Agnos Act make it very clear that the child is entitled to share his or her parents' standard of living. (§§ 4720, subd. (e), 4724, subds. (a), (b); In re Marriage of Hubner, supra, 205 Cal.App.3d at pp. 667-668, 252 Cal.Rptr. 428; In re Marriage of Catalano (1988) 204 Cal.App.3d 543, 552, 251 Cal.Rptr. 370; White v. Marciano (1987) 190 Cal.App.3d 1026, 1032, 235 Cal.Rptr. 779.) The trial court followed this mandate.

Clyde's arguments that the court failed to assure that the children were the actual beneficiaries of the support and that the court should be required to make a finding that the large amount of support was in the children's best interests are intertwined. Both arguments assume that Vicki is irresponsible about teaching the children values and that she cannot be trusted to manage the child support for the benefit of the children. We find nothing in the record to support those assumptions. It is also apparent that if Clyde had been willing to consider his bonuses in determining the amount of support, he may very well have had a greater say in the purposes for which the child support is to be spent.

The amount of child support rests in the sound discretion of the trial court, and an appellate court will not interfere with the trial court order unless as a matter of law an abuse of discretion is shown. (In re Marriage of Aylesworth (1980) 106 Cal.App.3d 869, 876, 165 Cal.Rptr. 389.) Here, we find no such abuse in the award of child support.

In Pletcher v. Pletcher (In re Pletcher), 68 Cal.App.5th 906, 283 Cal.Rptr.3d 728 (Cal. App. 2021), the California Court of Appeal for the Fourth District held that the trial court erred when it based the husband's income for the purposes of determining a spousal support award off of his income from the last year where undisputed evidence showed that the husband's income varied wildly from year to year. The Court cited Riddle, supra, and noted that the time period on which income is calculated must be long enough to be representative, as distinct from extraordinary. The Court applied the reasoning from Rosen, supra, and held that picking one year's net income, which happened to be the husband's highest-grossing year on record, was not a reasonable basis for determining value where the husband's income varied greatly from year to year (at 732-733):

The inquiry into a party's ability to pay is prospective in nature. Although the evidence is necessarily historical, the court is attempting to forecast what the party will be able to pay as the litigation progresses. In most cases, this is not particularly challenging. A review of the payor's income over a 12-month period is normally adequate, as most people's income does not fluctuate dramatically from year to year. (In re Marriage of Riddle, supra, 125 Cal.App.4th at p. 1083, 23 Cal.Rptr.3d 273 ["as regard [to] support, we may say that statutes appear to create a presumption that the most recent 12 months is certainly an appropriate period in most cases"].)

Mitchell, however, is not most people. The evidence was clear and undisputed that Mitchell's income varied wildly from year to year. Between 2014 and 2019 he made, on the low end, $490,000 in a year, and on the high end, $1,590,000. Moreover, the evidence was clear as to why this was the case; for his profit-based clients, he had to beat his previous high watermark in order to make any money.

For this reason, it was error to conclude that having earned $1,590,000 in 2019, Mitchell would continue making that amount throughout the remainder of the litigation (which, if the temporary spousal support hearing is any indication, could go on for many years). As another panel of this court once cautioned, " ‘The theory is that the court is trying to predict likely income for the immediate future, as distinct from extraordinarily high or low income in the past. ’ [Citation.] We must be

[283 Cal.Rptr.3d 733]

wary of ‘the logical fallacy of extrapolation, in which some series of events in the past is necessarily assumed to continue in exactly the same way into the future.’ " (In re Marriage of Mosley (2008) 165 Cal.App.4th 1375, 1386, 82 Cal.Rptr.3d 497.) The court ran afoul of these principles.

The court made essentially the same error that was reversed in In re Marriage of Riddle, supra, 125 Cal.App.4th 1075, 23 Cal.Rptr.3d 273. That case likewise involved an order of pendente lite spousal support from a husband whose income fluctuated due to monthly sales commissions. (Id. at pp. 1077-1078, 23 Cal.Rptr.3d 273.) The trial court had utilized a sample size of just two months in calculating support payments. (Id. at p. 1078, 23 Cal.Rptr.3d 273.) Had the trial court used a full 12 months, the income would have been approximately 38 percent of the trial court's two-month calculation. (Id. at p. 1079, 23 Cal.Rptr.3d 273.) The court held this was error. It reasoned that "the time period on which income is calculated must be long enough to be representative, as distinct from extraordinary. " (Id. at p. 1082, 23 Cal.Rptr.3d 273.) The Riddle court held that a 12-month period is "an appropriate period in most cases" (id. at p. 1083, 23 Cal.Rptr.3d 273), but acknowledged that "[a] longer period could"—and we say should —" be conceivably used ... if it were more representative of a party's income" (id. at p. 1084, 23 Cal.Rptr.3d 273). Here, due to the significant fluctuation in Mitch's income from year to year, we encounter a case that required a longer time period to generate a representative sample.

Riddle relied heavily on the case In re Marriage of Rosen (2002) 105 Cal.App.4th 808, 130 Cal.Rptr.2d 1 (Rosen), a case where, like the present case, one year's worth of income did not provide a representative sample. The issue in Rosen was slightly different than the issue here, though the rationale is equally applicable. There, in dividing the community property, the court was required to calculate the value of the goodwill in husband's law practice. (Id. at p. 814, 130 Cal.Rptr.2d 1.) His income fluctuated, and over the previous three years his income had been as low as roughly $71,000 per year, and as high as roughly $139,000. (Id. at pp. 819-820, 130 Cal.Rptr.2d 1.) In calculating the goodwill of the business, the court relied on wife's expert's testimony, who utilized the highest income figure. The Court of Appeal reversed, concluding the court had failed to calculate the average income: "A reasonable trier of fact could not help but conclude the expert chose to use [husband's] net income from 1995—one of [husband's] highest earning years—solely to inflate the value of goodwill." (Id. at p. 820, 130 Cal.Rptr.2d 1.) "Picking one year's net income, where income rises or falls from year to year, is not a reasonable basis for determining value." (Id. at p. 821, 130 Cal.Rptr.2d 1, italics added.)

Likewise, here, Mitchell's income fluctuates, and the court abused its discretion in calculating his average income based on a single year of income, which happened to be his highest grossing year on record.

The Court suggested two possible approaches the trial court could take to calculate the husband's income on remand. First, the trial court could expand its dataset to include additional years that captured the volatile nature of the husband's income. Alternatively, the court could employ a Smith/Ostler percentage, as established in Ostler & Smith, supra, to the support award. A Smith/Ostler percentage is a percentage that is assessed for any discretionary bonus actually received. Employing a Smith/Ostler percentage would allow the court to establish a base level of spousal support in reliance on the $240,000 the husband reliably earned each year, plus add a percentage of the husband's annual bonus up to the amount necessary to maintain the marital standard of living (at 733-734):

For purposes of guiding the parties and the court on remand, we suggest two possible approaches the court might take.

First, it could expand its data set to include additional years that capture the volatility in Mitchell's income. We are sympathetic to the fact that the court here was confronted with expert testimony on opposite extremes. On the one hand, Mitchell's expert based his recommendation on income data going all the way back to 2008. The court reasonably concluded that incorporating the years of the great recession artificially depressed Mitchell's income. On the other hand, Jill's expert

[283 Cal.Rptr.3d 734]

swung to the opposite extreme; he incorporated only one year of data, which artificially exaggerated Mitchell's income. The underlying premises of both expert opinions were unreliable. In such circumstances, the court's equitable duty is to issue a support award based on its own determination of what constitutes a representative time period for calculating income, to the extent the underlying evidence permits it. (See In re Marriage of White (1987) 192 Cal.App.3d 1022, 1026, 237 Cal.Rptr. 764 [noting that "spousal support is a consideration of equity"]; Darsie v. Darsie (1942) 49 Cal.App.2d 491, 494, 122 P.2d 64 ["A divorce action is in the nature of an action in equity"].) Under the specific circumstances of this case, for example, incorporating five years of income data would have been one option within the court's discretion.

The second option is to employ a tool well suited for this scenario: a Smith/Ostler component to the support award. (See In re Marriage of Ostler & Smith, supra, 223 Cal.App.3d 33, 272 Cal.Rptr. 560.) "An Ostler & Smith percentage is assessed ... for ‘any discretionary bonus actually received.’ [Citation.] It was originally justified on the ground that future bonuses are not guaranteed, and it would be unfair to require the obligor to file motions for modification every time a bonus is reduced." (In re Marriage of Samson (2011) 197 Cal.App.4th 23, 27, 127 Cal.Rptr.3d 857.) That would allow the court to establish a base level of spousal support in reliance on the $240,000 Mitchell reliably earned each year, plus add a percentage of Mitch's annual bonus up to the amount necessary to maintain the marital standard of living. This approach would obviate much of the need for the court to forecast Mitchell's income, relying instead on the amount actually earned.3

Accordingly, we will remand for the court to recalculate temporary spousal support.4

In In re Marriage of Hall, 96 Cal.Rptr.2d 772, 81 Cal.App.4th 313 (Cal. App. 2000), the California Court of Appeal for the Fourth District reversed and remanded a trial court's child support order which required the father to pay the mother $836 a month plus eight percent of his e

Alexsei publishing date:
2022-01-06 20:22:09.985754
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