Recent Posts in Imputed Income and Earning Capacity Category

Kevin Q. v. Lauren W., G043576 

The Fourth Appellate District has taken the next predictable step for litigants who hope to force the other side to contribute to exorbitant attorney fees incurred in certain high conflict family law cases. In so doing the law as it relates to the "relative circumstances" of the parties has been expanded to require that trial courts treat recurrent monetary infusions made by family members as "income" for purposes of interpreting the larger picture as it relates to attorney fee requests.  Previously that argument only existed within the realm of support obligations.

This is the first case that deals with what happens to attorney fees claims, in a situation family lawyers know is common where grandparents may be effectively encouraging (and often funding) a rancorous custody battle between their child and a now estranged former partner. Often in family court litigation there are not merely two individuals at war - their relatives have also been sucked into the trance. Many wealthier Americans are able to fund their child's litigation attorneys, or pay that child's household bills so that their need to find work is reduced. The parents of these children may feel forced to underwrite this status quo, effectively spending the family inheritance now. This may be the real subtext to the case.

Kevin Q. is a natural evolution of a doctrine which was recently stated in Marriage of Alter (2009) 171 Cal.App.4th 718. In Alter the trial court found gifts from the former husband's mother to be disguised as loans and imputed income to him for these gifts in deciding his ability to pay child and spousal support.

In Kevin Q. and Lauren W., published on May 13, 2011, the two parties incurred over $400,000 in lawyer's fees combined fighting over the paternity of a boy born outside of marriage. That these are warring high-conflict parents is made clear from the fact that this is their second published appeal (see Kevin Q. v. Lauren W. (2009) 175 Cal.App.4th 1119). Mother won the first appeal; Kevin prevailed here. Both sets of litigants have had the same attorneys throughout the proceedings. Kevin Q. is himself an attorney who practices family law in Orange County. As it turned out in the earlier case, Kevin is not the child's biological father but he alleged he was the child's psychological parent - the appellate ruling was that Kevin was not the boy's "legal" father. Unfortunately for the child, it sounds as though the man declared to be the legal father went "walkabout." I cannot tell whether Kevin continued to maintain any relationship with the child after he lost his paternity claim ('once a psychological parent, always a psychological parent?'). Perhaps the parties or their attorneys will weigh in this Blog so I can have the facts corrected.

The first decision is dated June 19, 2009. In December, 2009, Lauren moved the court to order that Kevin pay her outstanding attorney fees, including those from the earlier appeal. Kevin had contributed a total of $20,000 up to that point. Her attorney was Debra Opri of Opri & Associates; Kevin was represented by Marjorie G. Fuller and Marc S. Tovstein. Hence, all the litigation after the first decision appears to be over recovering attorney fees relating to it (but this is unclear). Fees upon fees?

In this round Attorney Opri filed a declaration stating that there was $55,754 due from the earlier work and that another $178,581 and costs of $6,589 was incurred thereafter. Hence, Lauren's total unpaid fees amounted to $227,746. Opri's hourly billing rate was $575 and her law clerk's was $225/hour. Of these fees, Attorney Opri had only received the $20,000 from Kevin plus $28,280, which included a payment of $15,600 from Lauren's father. Lauren urged that Opri had been effectively working for free. She owes her father "tens of thousands" and he was tapped out.

Kevin responded that Lauren's fees were unreasonable. She'd incurred $311,242 in fees for the entire case while his fees totaled $141,384. He complained that $4,200 in charges were for driving time for her attorney to travel from Beverly Hills to Orange County.

The matter was submitted for decision to the trial court, with the issue being identified as whether "attorney fees should be paid to [Lauren], based on need and ability to pay, as set forth in ... [Family Code] sections 2030, 2032, 7605, and 7640." Lauren urged that because the underlying dispute concerned paternity, Family Code section 7605 and section 7640 governed and that these statutes required a different analysis than under sections 2030 and 2032.

The court made the following findings: Kevin's average monthly income was $12,803. He had borrowed $50,000 from his relatives for attorney fees, which he was paying back at the rate of $150/month. He had monthly expenses of $13,320 leaving a deficit of $517.

Lauren had zero income from employment and had not worked since 2006, although she had a master's degree in psychology and is a certified chemical dependency counselor. She received $8,700 per month from "others." Her monthly expenses were $9,197, leaving a shortfall of $497.

Loans vs. Gifts From Family Members

    "(a) At a hearing on any order to show cause or notice of motion brought pursuant to this code, absent a stipulation of the parties or a finding of good cause pursuant to subdivision (b), the court shall receive any live, competent testimony that is relevant and within the scope of the hearing and the court may ask questions of the parties.

    (b) In appropriate cases, a court may make a finding of good cause to refuse to receive live testimony and shall state its reasons for the finding on the record or in writing. The Judicial Council shall, by January 1, 2012, adopt a statewide rule of court regarding the factors a court shall consider in making a finding of good cause.

    (c) A party seeking to present live testimony from witnesses other than the parties shall, prior to the hearing, file and serve a witness list with a brief description of the anticipated testimony.

If the witness list is not served prior to the hearing, the court may, on request, grant a brief continuance and may make appropriate temporary orders pending the continued hearing."

Family Code section 217 will cause a sea-change in day to day family court proceedings across our state, unless family court judicial officers ignore it to the limited extent possible by court rules.  It will likely have immense financial and resource consequences upon not only the courts but upon parties to family court proceedings.  It will force the state government in coming years to study whole new paradigms for resolving divorce and domestic partnership dissolution outside the adversary template, including those currently practiced in New Zealand and southern Australia. 

It will also pressure parties to consider mediation, and collaborative processes which occur outside congested courthouses, much more carefully.  The costs of adversary litigation are about to sky-rocket, making mediation even more appealing from a financial perspective (I have written extensively about the emotional and psychological benefits here an elsewhere).  There simply is no governmental money available to absorb the coming Elkins Onslaught. For more information about an alternative method for resolving family disputes, please visit us at www.DesertFamilyMediationServices.com.
  
At the same time, at least in the short run taken together with some of the other revisions that become effective next month, it may encourage more people to litigate more stubbornly and so make mediation seem less attractive than it did before the changes (just the reverse will be true).  Some folks will mistakenly assume that this invites the use of court hearings as a live-testimony forum for sharing unresolved complaints relating to their marriage or domestic partnership dissolution with the other party in open court.  Instead, judges will sustain objections to such irrelevant material and parties who seek to use Family Court as a platform to air relationship grievances will find themselves alienating the trier of fact in ways that will have adverse consequences to them beyond just the time and expense of the exercise. 

The purpose of today's Blog is to introduce you to section 217 and the new changes.  I will follow up with more articles in coming weeks.  Without a doubt the new rules will make all the information I provide on my websites more relevant and timely for my readers. 

Q.  My wife and I were married for 14 years.  We have two children, aged 11 and 13.  We are both in our early 40's.  My wife has a college degree, but quit working shortly before our first child was born.  I am a doctor, and she was a nurse at the local hospital before she quit.  Our divorce is not final.  I think she should be able to support herself once she gets some updated training, although I don't object to supporting our children.  She says she won't work until until our youngest child finishes high school.  What should I ask the judge to do and what should I expect to limit my spousal support exposure?

By the way, this is exactly why you should want mediation rather than a court judgment.  IMHO.  Mediation takes the future into consideration, and creates a safe container for the parties to talk about it!

Thurman Arnold
http://www.DesertDivorceandFamilyLawyer.com

Q.  I remarried in August, 2009, and my new wife is a doctor.  She has one child from her prior marriage and I have two.  I am still paying my former wife alimony and child support even though the kids we have together live at our home 40% of the time.  I have been hit hard by the economy and we largely depend upon my wife's medical income to make ends meet.  Now my ex is threatening to take me back to court to increase my support based upon my new wife's income, while my own income is down from when the court last decided it.  My new wife is upset at the idea that my ex can learn anything about the medical practice or income.  What should I do?

A.  If there has been a material decrease in your income since the time of your last order, you may safely file a support modification motion to lower your child support and to lower or possibly terminate your spousal support.  Whether that is advisable based upon your numbers has nothing to do with your new mate's income, and should not cause you to hesitate - but again, it does depend on the actual respective numbers between you and Wife 1, which you did not provide me.  You also need not worry about W1 filing a motion to increase (you can't stop her, but she will not win based on W2's earnings).  Maybe you should give her this link so she will think twice.

California law is quite clear that new mate income cannot generally be considered against you in ordering or modifying child or spousal support.  The controlling California Family statute is section 4057.5.

In the normal situation, Family Code section 4057.5 leaves the Court no discretion to consider your new wife's earnings, period.  You do not need to report those earnings on your FL-150 (Income and Expense Declaration). This is a statement of California legislative policy effective in 1993 when this section was added to the Family Code.  This is true for both spousal and child support.

However, section 4057.5 does contain an exception for the "extraordinary case" which the statute makes clear is intended to address situations where "where excluding that income would lead to extreme and severe hardship to any child subject to the child support award" or where "a parent ... voluntarily or intentionally quits work or reduces income, or who intentionally remains unemployed or underemployed and relies on a subsequent spouse's income."  Even if the court were to find a severe hardship on the children of marriage number one, it would be required not to impose a severe hardship on your wife's child by reallocating her income to you for purposes of supporting your two children. 

In practice, so far, Courts almost never find facts sufficient overcome this clear statutory prohibition.  So far there is no published California appellate decision defining these extraordinary circumstances.  No doubt one day someone will so abuse this protection and hide behind it that we will get a reported decision that fleshs out how bad someone needs to behave before the protection is lost.  But "extraordinary" means really extraordinary.  In the average case, your new Wife has nothing to be concerned about. 

With regard to attorneys fee awards, however, there is authority for an argument that new mate income may be considered in granting or denying an attorney fee request, but the odds are against a judge doing that.

Incidentally, this section also applies to income from nonmarital partners as well as new spouses.  In one reported case (IRMO Loh), a trial court was reversed for inceasing dad's child support obligation after the mother produced photos of the father's "lifetyle" to show imputed nontaxable income in the form of his new girlfriend's contributions to him, since she paid for all his toys. 

The new mate question is a subset of the "imputed income" situations where a father or mother may quit work or reduce hours because they are relying on their new mate to contribute the difference.  That is not likely going to be an extraordinary case, but  W1 can separately seek to impute income to you on the basis that you have a higher earning capacity than you are exercising.  Earning capacity and imputed income is a blog for another day.  Also, I will mention here that another argument exists in favor of W1 that has nothing to do with the right to obtain the records or income of W2:  Equalizing the lifestyle's of the two households where yours is rich and grandiose and W1 is impoverished (an extreme example) pursuant to FC section 4057(b)(4).

The tax returns are privileged as they relate to your new wife's medical practice.  For instance, if she is a medical corporation (which I recommend be set up), she will almost never be forced to divulge those records.  Even as to your joint returns, you may be entitled to redact the information concerning your new spouse or have the Court review them in camera (meaning they are not turned over to the other side).  Your former mate is entitled to see your side of the tax returns, however, and they are not insulated from scrutiny simply because you filed joint with the Doctor Wife.  If you don't file jointly, your former wife will almost certainly never get her hands on your new wife's Married Filing Separately (MFS) returns.  Structuring things this way may or may not be advisable and you should consult a tax accountant.

An interesting twist here is that because you marry a higher, wealthy earner, your taxes actually increase because under federal IRS (and the California FTB), you are responsible for one-half of your new mate's income - and this is true even if you don't file jointly.  One case (County of Tulare vs. Campbell) has held that this additional tax you become liable for can form the basis for a reduction in your support because you have less net income available for support after the tax hit is deducted.  Hence, based on these tax consequences you may have an additional argument for decreased support - although a Court may try to deny you some discretionary offset to even the score since this feels a bit unfair to the spouse who is  primarily supporting the children and so lessen the downward modification.

The take-away:  So long as you are not playing games, have not intentionally reduced your income by relying upon your new mate's income, and there is no really extraordinary difference in the two households, your new wife's income is just not relevant and so it is protected.

Q.  How is temporary spousal support calculated in California?

A.  In order to be entitled to spousal support, parties must be married or be registered domestic partners.  Spousal support (which is not usually referred to as "alimony" in California) is available in dissolution proceedings, actions for legal separation, and in connection with domestic violence applications. 

Spousal support orders may be temporary, or they be what is called permanent.  Different rules apply to how temporary support is figured than to permanent or long-term support.  I address permanent spousal separately.

Temporary spousal support is designed to preserve the status quo pending a final judgment.  Family Code section 3600 provides that during the pendency for dissolution of marriage or legal separation or in any proceeding where there is at issue the support of a minor child, the court may order the husband or wife to pay any amount that is necessary for the support of the husband and wife (subject to limitations contained in FC section 4320 and FC section 4325).  Again, parties dissolving domestic partnerships may also be awarded support.

Temporary spousal support has nothing to do with the length of the marriage.  Courts look at what the spending pattern was pre-separation and issues a spousal support award based upon need.  If there isn't enough money on the basis of need, then an amount is ordered based upon the higher earner's ability to pay.  A party seeking spousal support isn't deprived on the right to receive support even if they have income - the question is the relative income circumstances of the two parties.

Most California counties have formulas that determine temporary spousal support, but the two most important are Santa Clara and Alameda counties.  Essentially the spousal support formula for Santa Clara County - which is the dominant one - is as follows:  From any amount which is not allocated to child support, take 40% from the net income of the payor spouse, less 50% from the net income of the recipient spouse.  The resulting number is the temporary spousal support.  You do not need to have children to be entitled to receive spousal support.

As a practical matter, courts typically use one of two computer programs that generate these numbers:  Either the Dissomaster or Xspouse.  The Indio courts use Xspouse and the Santa Clara guidelines.

Into one of these programs are inputted the respective gross incomes of the parties.  If there are children of the parties, the custodial timeshare in percentages is inputted (because only a party who has physical custody for more than 50% of the year can claim the tax benefits of HH/MLA or head of household status, the programs require one to be considered to have 51% even in true joint custody arrangements). 

Only certain expenses matter for purposes of temporary support in California.  What doesn't matter at all is most personal expenses (like mortgage payments, utilities, debt).  This effectively ignores the entire debt structure of the parties at time of separation.  Health insurance, union dues, and mandatory contributions to retirement (i.e., typically not IRA contributions), and obligations existing to other minor children living in one party's home, or as to which an actual court order requires they make support payments, are also entered.  The support program 'tax effects' these numbers and figures out the net incomes of the parties.  It renders a number that tells the Court how much the higher earning spouse must pay for purposes of a court order.

Since the court determines the support obligation some weeks after a request for support is made (by way of Motion for Order to Show Cause application), it typically makes the support order retroactive to the date of the filing for the request.  Most courts order support payable one-half on the first and fifteenth of the month.  For this reason, if you file for support on the 5th day of the month, the court will not make support retroactive to the 1st but will start of the obligation on the 15th day of the month.

This might sound like temporary spousal support is easy to fix and who needs a lawyer?  This is not at all the case.  The final support numbers depend upon how much income the Court is attributing to each party.  Each is required to submit before the hearing an FL-150 Income and Expense Declaration.

For instance:  A husband's (and wife's) income numbers are usually but not always based upon historical earnings, and the California judicial council form (FL-150) requires both to set forth there total gross for the past 12 months and also the past month.  The legal assumption is that historical earnings are a reliable guide to future earnings, but this may not be at all true.  Especially in today's economy, historical earnings may not be indicative of what the income stream will be going forward.  This information needs to be credibly presented to the Court.

In cases where one party is a self-employed spouse, their net pre-tax earnings must be determined after deducting business expenses.  This is a common and complex area of dispute, because what is deductible for purposes of Schedule C accompanying a tax return according to the federal government is in no way binding upon California courts for purposes of figuring support.  If somebody works from home and charges part of the mortgage expense as a business deduction, that expense may be added back into the income stream as being available for support.

Another support battleground often involves imputed income.  What if one party refuses to work, or insists on working at a lower paying job?  Perhaps a support recipient believes they will get more money from their spouse if they have no job but if they tried to get one, they could?  What if one party claims that they aren't working and that no jobs are available?  Imputing income cuts both ways, and is extremely sophisticated. I will address another blog to it.

Incidentally, while only temporary alimony is calculated in this way, child support is always figured in this manner regardless whether there is a spousal support obligation.