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Bar Journal - Fall 2004

Post-Divorce Assets and the Determination of Child Support

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The New Hampshire Supreme Court decided two cases last year that, at first glance, seem to be at odds with each other in how a parent's assets impact the calculation of child support. In the Matter of Plaisted and Plaisted,1 held that "considerable cash resources" could not be taken into account in re-calculating a parent's child support payment after the parent became unemployed. Yet earlier in the term in The Matter of Feddersen and Cannon,2 the Court affirmed placing some of the residue of a previous year's income into a trust to assure future child support payments. This article addresses how and to what extent a parent's assets may affect the computation of that parent's contribution to child support.

THE STATUTE AND GUIDELINES

The United States Congress, in 1984, mandated that each state develop child support guidelines, and in 1988 required that the result of the guidelines be rebuttably presumed correct in any child support adjudication.3 Traditionally, child support had been a matter of discretion for the courts, who were guided by statutory factors lacking hard numbers. The Federal regulations require that state guidelines be based on specific descriptive and numeric criteria. They require that the guidelines establish a support amount that is presumed correct: a written judicial finding that application of the guidelines would be unjust or inappropriate is necessary to rebut the presumption.4 The rationale behind the guidelines is to insure adequate money is available for support of the children and to provide uniformity among support orders.5

The New Hampshire child support guidelines formula is based on the Income Shares Model, used by the majority of states, which allocates child support obligations between the parents based on each parent's proportionate share of income.6 One parent's (the "obligor's") portion is payable as child support and the other parent's (the "obligee's") portion is retained and presumed spent on the child. The total support obligation is a percentage (based on the number of children) of both parents' Adjusted Gross Income after taxes and withholding are deducted. Gross Income, reported to the court by each parent in a sworn financial affidavit, is "all income from any source, whether earned or unearned, including but not limited to, wages, salary, commissions, tips, annuities, social security benefits, trust income, lottery or gambling winnings, interest, dividends, investment income, net rental income, self-employment income, alimony, business profits, pensions, bonuses, and payments from other government programs"7 Public assistance benefits are not counted as income, but workers' and unemployment compensation are.8 There are various adjustments (deductions) to Gross Income to produce "Adjusted Gross Income,"9 and a further set of standard deductions produces "Net Income."10 The total child support obligation is divided between the parents in proportion to their respective Net Incomes.11

The guidelines provide a rebuttable presumption that the amount of the award is correct.12 The court has the discretion to raise or lower that figure if it finds there are special circumstances making the guidelines amount "unjust or inappropriate in a particular case."13 Particular factors permitting adjustment are listed in the statute,14 all of which involve income or expense, not assets. However, the list is not exclusive. It is prefaced by the phrase "including but not limited to," and ends with a section stating that the court may consider "all relevant circumstances" to "avoid an unreasonably low or confiscatory support order."15

THE PLAISTED CASE

Although the "not limited to" phrase in the statute suggests broad discretion, in Plaisted the Court limited that discretion with respect to a parent's assets. Prior to Plaisted the only plain statement concerning assets and child support was in Wheaton-Dunberger v. Dunberger: "All of the defendant's assets could have been properly considered in setting the amount of the child support award."16 However, the statement was dicta: the issue in Wheaton-Dunberger was an order to pay a portion of the annual income produced by invested assets. Inclusion of such income is mandated by statute.17

In Plaisted,18 the Supreme Court, in a 3-2 decision, took a more narrow view than the dicta in Dunberger, holding that a parent's assets as such may not be considered in applying the support guidelines. The Plaisteds were divorced in March 1998 and the father was initially ordered to pay $270 per week in child support for their two children who were in the mother's custody. Three years later, Mr. Plaisted filed a petition to modify the child support award downward after receiving notice from his employer that he was about to be "downsized". His gross income would be significantly reduced.19

The Superior Court ordered a temporary reduction to $110 per week retroactive to August 2001, the date when his salary ended and when he began receiving unemployment benefits. In April 2002, the court held a final hearing on the motion when Plaisted testified that he was still looking for work; he also testified that he had managed to accumulate $50,000 in savings since the divorce in 1998. The court's final order raised the obligation up to $180 per week. In explaining its upward deviation from child support guidelines, the court stated that its decision was based on Plaisted's "present financial circumstances including his considerable cash resources."20 Plaisted appealed arguing that the trial court erred in its child support award because its decision was based upon assets rather than income.

The Supreme Court, pursuant to well-established canons of statutory interpretation, would not consider what the legislature might have said, would not add words that the legislature did not include, and would only interpret statutes in the context of the overall statutory scheme.21 The Court concluded that if the legislature had intended the courts to consider a parent's assets as falling within "but not limited to", they would have written that in the statute as they did with alimony.22

Additionally, the Supreme Court reasoned that if assets were considered in calculating child support, a court would have to consider the assets of the obligee parent. Carrying this to its logical conclusion, the possible liquidation of assets would then have an impact on the parents' property settlement. Under the circumstances, the majority felt that considering assets would be "creating new legislation," which they declined to do.23

The dissent preferred the "plain reading" of the child support guidelines statute, interpreting the "but not limited to" phrase to mean that other circumstances, not enumerated or described, may be considered. According to the dissent, establishing a bright line rule that the court can never consider a parent's assets when calculating child support is inconsistent with the legislature's goal to "minimize the economic consequences of divorce on the children."24 Though the dissenters found no cases where a parent's assets, per se, have been included in calculating child support, they did point to de Guigne,25 a California decision where the imputed income from the liquidation of a parent's assets was considered in child support calculations.

The de Guigne family's annual expenses were in excess of $450,000, yet the only income was an average of $250,000 from the father's investments; he was regularly liquidating assets to maintain their lifestyle. Under California's guidelines,26 the father's child support obligation, based on his investment income, was less than $5,000. The court modified that upward to $15,000. The California child support statute, similar to New Hampshire's, emphasizes the interests of children as the state's top priority. Each parent should pay for the support of the children according to his or her ability and any deviation from the child support formula is only appropriate in special circumstances of a particular case.27 Noting that the statute "does not catalogue all of the special circumstances in which a formula amount would not be appropriate," the California court used its broad discretion and imputed income from the regular liquidation of de Guigne's assets in calculating his child support obligation.28 Unmentioned in either Plaisted opinion, however, is the fact that the assets and pattern of liquidation in de Guigne pre-existed the divorce while Plaisted's disputed savings were accumulated after divorce while he was paying child support.

Having limited their disagreement to the text of the statute, none of the justices took up the rather obvious point that the first use of savings is to continue to meet needs and obligations during periods of interrupted income. The justices also neglected to discuss the practical difficulties, costs, and time lags involved in attempting to adjust to employment and income fluctuations solely through motions to modify. If parents become unemployed and continue to pay support as previously ordered until an order reduces it to the statutory minimum, they will in fact be paying out of savings.

THE FEDDERSEN CASE

The Plaisted opinion also makes no reference to the Court's earlier decision in the Matter of Feddersen and Cannon29 upholding an order requiring a party to put proceeds of a post-divorce legal settlement into a trust to secure future child support payments. Feddersen and Cannon divorced in 1995. Cannon filed a motion to modify Feddersen's $3,000 per month child support order in 1998. This was finally ruled on in 2002 and raised to $7,000. The primary change in circumstances was the 2001 settlement of a patent suit in favor of Feddersen's wholly-owned corporation for $3,400,000 (after attorney fees). Feddersen claimed to believe the money was entirely his own, ignoring corporate formalities, but had failed to disclose it on his financial affidavit. The Master considered the settlement non-repetitive income (correctly according to the Supreme Court) and included the $3,400,000 for child support purposes. Although "settlements" are not specifically named, the statutory definition of gross income does include such non-recurring items as lottery or gambling winnings.30 It does not appear that Feddersen pursued any argument that the profits recovered on his company's claim were attributable to several different years. The settlement was included as income for the year in which it was awarded. Although such a large, non-recurring item distorts a party's income, the Supreme Court has firmly forbidden any system of averaging.31

With averaging forbidden, the Master was faced with an extreme case: it was nearly certain that Feddersen would never approach his 2001 income levels again. Where the guidelines would produce support payments beyond common sense, the trial court can use its statutory discretion to deviate from the guidelines, either upward or downward, to account for a parent's significantly high income.32 In Feddersen, following the uniform child support guidelines would have calculated Feddersen's total support obligation at approximately $40,000 per month, an amount that was clearly inappropriate.33 The Master, using his statutory discretion, significantly reduced Feddersen's total support obligation to $7,000 per month. He observed that "even in California, $ 40,000 a month for child support might seem a bit over the top."34

The Master evidently thought there was reason to be concerned about payment. Feddersen had suggested that nearly all the settlement proceeds had been invested in new business or would go for taxes. The Master ordered Feddersen to place $200,000 in trust to protect the child from any future vagaries in his income.35 The Supreme Court approved, concluding that a trial court may, in its discretion, require security for payment of child support and may require the obligor to place money in a trust empowering the trustee to make support payments on his behalf.36 Significantly, the Court held there is no need to find any particular risk of non-payment before ordering such security.37

Unless Feddersen's income following the final modification order happened to rise dramatically, he would in fact have to spend down "savings" from a previous year's income. Thus, under certain circumstances an asset (retained earnings from previous income) may be treated as present income and used in calculating child support.

SIMPLE EXPLANATIONS AND DEEPER ISSUES

A formal distinction between the cases is easy. Plaisted's savings were assets accumulated out of the residue of the income already taken into account when his original support obligation was calculated. Feddersen's gains had not yet been taken into account as income; that was the basis of the modification. The trust arrangement was not a way of transferring assets, merely a device to secure the payment of support. Neither case was like de Guigne. De Guigne's assets were in no sense gross income, but their liquidation had been, well before the divorce, a regular source of the family's support.

It is tempting to see a sort of unstated equity behind the formal distinctions. Unlike Feddersen and de Guigne, Plaisted gave no indication of trying to evade responsibility and his assets were not at the extremes. Although the trial judge referred to Plaisted's $50,000 as "considerable", the reality was that in New Hampshire in 2002, at the depth of a serious recession, $50,000 in savings was not going to last long for someone who was unemployed, no longer on unemployment benefits, and had no job prospects. One can speculate what the majority's position would have been if Plaisted had, after the divorce and division of property, acquired a yacht, a 2nd home, an expensive sports car, fine art decorations in the home, etc., or if he really did have considerable savings, $500,000 or even $5,000,000. Would the court then have imputed an income based on the regular liquidation of those assets? Of course, if these assets were acquired with enhanced income there would normally have been a motion to modify along the way, but that just sets up the paradox: such a high-income parent could still become unemployed. Under the holding in Plaisted, no amount of accumulated wealth will prevent a parent's child support obligation from being reduced if current income drops without that party's fault.

A more fundamental problem is common to both Feddersen and Plaisted: how to fit a statutory scheme focused entirely on income calculated as of a particular moment in time to a reality where (1) income sometimes fluctuates severely and rapidly, and (2) the prudent way to prepare for downward fluctuation is to accumulate savings- assets which can be used to pay one's continuing obligations. The Feddersen Court approved downward adjustments from the guidelines to account for upward spikes in income, but the Plaisted majority forbade consideration of savings, effectively requiring reduction to the statutory minimum whenever there is a downward spike. This asymmetrical bias toward lower support appears to be based purely on an assumption that there is a bright distinction between assets and income and that the statute incorporates such a distinction.

The distinction is not sound. Assets are just the accumulated surplus of intake over expenditure. Income can only be defined with reference to time- either particular increments between particular dates or a rate allocated across a period. Annualization of income is a convention, as is the choice of the beginning point of a year. Income can also be expressed in monthly, bi-weekly, or weekly terms. The smaller the unit one considers, the more accurate the figure at any given moment. Yet the statute is silent on the time element. There is nothing in it to forbid averaging. Indeed, the common use of an annual income figure to determine a monthly payment is in fact a form of averaging (across months) no more or less sound in principle than averaging across years. Yet the Court has long barred averaging across years: "Our case law is clear that trial courts should not employ income-averaging over a number of years to determine child support obligations."38 "We read this statute to provide that child support is determined on the basis of present income. "39 While this seems to call for a yearly or monthly figure as of the time of the hearing, the Court has left some room to maneuver in arriving at that figure. "Present income" is not an average, but its determination can involve consideration of income in years prior to the hearing. In Feddersen the Court determined that "present income" in 2002 was evidenced by figures from 2001, including a huge non-recurring item.40 The Court cited In the Matter of Crowe & Crowe, 148 N.H. 218, 222 (2002)41 in which several years' tax returns and business records were evaluated to determine present income. Neither Crowe nor Feddersen had been forthright with the trial court, creating uncertainty about their actual earnings and opening the door to a procedure that had the practical effects of averaging. Such a procedure would presumably not be proper in a case with clear, complete, and accurate evidence of present income.

CONCLUSION

In Feddersen, a parent who created doubt about present income opened the door to a finding that was sustained even though it appeared to reach assets rather than income. Absent such doubt, the Court indicated in Plaisted that the exclusive way to deal with income volatility is to wait until changes of income occur and then move to modify. As a practical matter, this will involve time lags placing a premium on quick action and early success in securing temporary modifications pending final hearing. Some de facto averaging and expenditure of savings is implicit in those time lags. Yet, according to the Plaisted Court, such practical effects are acceptable. It is the explicit reference to assets, rather than income, in support calculations that is now clear error.

ENDNOTES

  1. 149 N.H. 522 (2003).
  2. 149 N.H. 194 (2003).
  3. 42 U.S.C. 667(b) (1988).
  4. 45 C.F.R. 302.56(c) (1991).
  5. Williams, Development of Guidelines for Child Support Orders: Advisory Panel Recommendation and Final Report (U.S. Dep't of Health and Human Services, Office of Child Support Enforcement, 1987).
  6. Douglas, New Hampshire Practice, Family Law 16.02, at 594 (3d ed. 2002).
  7. N.H. Rev. Stat. Ann. 458-C:2, IV.
  8. Id.
  9. N.H. Rev. Stat. Ann. 458-C:2, I.
  10. N.H. Rev. Stat. Ann. 458-C:2, VI.
  11. N.H. Rev. Stat. Ann. 458-C:3.
  12. N.H. Rev. Stat. Ann. 458-C:4, II.
  13. Id.
  14. N.H. Rev. Stat. Ann. 458-C:5, I, (a) - (h).
  15. N.H. Rev. Stat. Ann. 458-C:5, I, (i).
  16. 137 N.H. 504, 510 (1993).
  17. N.H. Rev. Stat. Ann. 458-C:2, IV.
  18. In the Matter of Linda A. Plaisted and Grahame J. Plaisted, 149 N.H. 522 (2003).
  19. Plaisted, 149 N.H at 523.
  20. Plaisted, 149 N.H at 523.
  21. Id. at 524 (citing Appeal of Brady, 145 N.H. 308, 310 (2000)).
  22. Plaisted, 149 N.H. at 525.
  23. Plaisted, 149 N.H. at 527.
  24. Id. at 528 (citing In the Matter of Dolan & Dolan, 147 N.H. 218, 222 (2001)).
  25. In re Marriage of de Guigne, 97 Cal. App. 4th 1353, 1358 (Cal. Ct. App. 2002).
  26. Cal. Fam. Code 4050 et seq.
  27. de Guigne at 1360.
  28. Id.
  29. In the Matter of Feddersen and Cannon, 149 N.H. 194 (2003).
  30. RSA 458-C:2, IV.
  31. Hillebrand v. Hillebrand, 130 N.H.520, 526 (1998); Rattee v. Rattee, 146 N.H. 44, 46 (2001).
  32. Dunberger, 137 N.H. 508; N.H. Rev. Stat. Ann. 458-C:5, I(b).
  33. Giles v. Giles, 136 N.H. 540, 544, 618 A.2d 286 (1992).
  34. Feddersen, 149 N.H. 196.
  35. Feddersen, 149 N.H 196.
  36. N.H. Rev. Stat. Ann. 458:21; see also Dubois v. Dubois, 121 N.H. 664, 667-68 (1981); Leary v. Leary, 137 N.H. 161, 165(1993); Buckner v. Buckner, 120 N.H. 402(1980).
  37. Feddersen, 149 N.H. at 201.
  38. Rattee, 146 N.H. at 46.
  39. Hillebrand, 130 N.H. at 526.
  40. Feddersen, 149 N.H. at 197(citing In the Matter of Crowe & Crowe, 148 N.H. 218, 222 (2002)).
  41. In the Matter of Crowe & Crowe, 148 N.H. 218, 222 (2002)

Author

David C. Cox, Class of 2005, Franklin Pierce Law Center, Concord, New Hampshire.

 

 

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