Spousal Support – The Devil is in The Details

This month’s blog highlights two old, but good cases. The first, In re Marriage of Romero (2002) 99 Cal.App.4th 1436, deals with a question I get asked every so often “Will my new spouse’s income be factored into my spousal support payment to my previous spouse?” The second, In re Marriage of Kerr (1999) 77 Cal.App.4th 87, follows with an interesting conversation I recently had with a peer about framing an award of permanent spousal support as a percentage of future income. Specifically, future income derived from stock options. Both deal with spousal support; but, different, and interesting, issues impacting calculation of spousal support.

In Romero, husband and wife (hereinafter “Wife 1”) were married for 28 years. Upon dissolution of their marriage, husband was ordered to pay wife $1,200 a month. Husband remarried and enjoyed a higher standard of living with his new wife (hereinafter “Wife 2.”) Wife 1 was not as fortunate and experienced financial difficulty. Husband was later diagnosed with Parkinson’s disease and, as a result, took early retirement and suffered a pay cut from $5,000 to $3,000 a month. Husband then filed a motion to modify the support order. The trial court denied his motion to modify basing its opinion on “current total family circumstances” in determining husband’s income available for support. (Romero, supra, at p.1439.) Husband timely appealed. California Family Code section 4323(b) is clear and states that “[t]he income of a supporting spouse’s subsequent spouse or nonmarital partner shall not be considered when determining or modifying spousal support.” The issue before the appellate court, however, was whether the “court may account for the indirect effects of this additional income [from Wife 2] on other considerations, including the husband’s ability to pay and his standard of living.” (Id. at p.1440.)

What the trial court did in Romero is look at Husband’s monthly expenses, note the fact that these expenses exceeded his income, and keep the spousal support order in place based on his ability to pay these expenses. Specifically, “[b]ased on the husband and [“Wife 2’s”] shared expenses, the court found that there was no material change of circumstances justifying the requested modification.” (Romero, supra, at pp. 1440-1441.) The appellate court held that this was in error and the court must consider only husband’s part of the shared expenses. How is this done? The appellate court reasoned “in order to comply with the statutory prohibition against considering new mate income, the trial court, in determining husband’s ability to pay spousal support, must also eliminate from consideration all additional expenses resulting from the remarriage.” (Id. at p.1445.) Based on the particular facts of this case, the appellate court held that “the court must determine what expenses are reasonable based only on husband’s net monthly income.” (Ibid.)

The trial court was then in error and abused its discretion when it ordered husband to continue to pay $1,200 a month in spousal support despite a material change in circumstances in husband’s reduction in salary due to his disability. Specifically, when “the court indirectly considered husband’s new wife’s income as it related to husband’s ability to pay and standard of living” this was not correct. (Romero, supra, at p. 1446.) Therefore, the case was reversed and remanded for a new hearing.

In In re Marriage of Kerr (1999) 77 Cal.App.4th 87 husband and wife were married for 20 years and shared joint legal custody of their two children, with both children primarily residing with wife. Husband worked as vice-president of Qualcomm with an annual salary of $110,427 at the date of separation. During the marriage, husband received yearly stock options from Qualcomm, producing substantial additional income, which the parties used to enhance their standard of living. (Id. at p.91.) On a hearing to determine permanent spousal support and child support, the trial court ordered husband to pay $2,000 per month in spousal support and $2,806 per month in child support. Additionally, the trial court held that the ongoing monthly support amount “does not adequately meet the parties’ former standard of living.”(Ibid.) As to the Qualcomm stock options, the court found the future grant of both incentive stock options (ISOs) and nonqualified stock options (NQSOs) was part of husband’s overall compensation package from employment and must be considered in setting both spousal support and child support. The trial court then ordered husband to transfer to wife “40 percent of the beneficial ownership in any future Qualcomm stock options he exercised until April 1, 2003, when the 40 percent award would be reduced to 25 percent, and would continue until further court order.” (Kerr, supra, at p.92.) The court ordered 40 percent as spousal support and child support until both children were no longer minors, then she would receive 25 percent. Husband timely appealed.

On appeal, husband objected to the court’s award of a percentage, initially 40 percent and later 25 percent, because he argued it was not based on wife’s or the children’s needs. (Kerr, supra, at p. 92.) The appellate court noted that the trial court considered the parties’ unique circumstances and weighed the various factors of California Family Code section 4320. Namely, it was a lengthy marriage, wife devoted herself to domestic duties and did not work, and wife needed substantial financial assistance to maintain the marital standard of living, which included current expenses as well as the cost of reinvestment. The trial court noted “the parties’ standard of living based on the use of their options had permitted them to improve that standard, to save money and invest wisely, and thereby increase their wealth…[t]he court’s order for additional support allows them to maintain the marital standard of living.” (Id. at p. 94.) The trial court also considered wife’s impaired earning ability caused by her twenty-year absence from the work force and, the appellate court held, “properly intended to address the disparity in the parties’ present financial positions.” (Id. at p.94.) Husband argued that by giving wife a percentage of his stock options, she would receive a portion of his separate property if he exercises a stock option, however, the appellate court did not agree and held that any income husband “receives upon exercising an option is properly considered for purposes of setting support.” (Ibid.) The appellate court also found that there was ample evidence of wife’s needs and earnings in that her income and expense declaration showed she only had monthly interest income of $1,883 per month and expenses of $6,500. These figures show that she could not, without additional support, maintain the marital standard of living.

However, the appellate court reversed the trial court. It reasoned that “the court was not presented with the typical range of stock activity that would generate some additional income.” Rather, due to the enormous increase in value of Qualcomm stock and husband’s stock options, the court’s percentage support order far exceeded the parties’ standard of living, even considering their investment and reinvestment history. (Kerr, supra, at p.95.)Therefore, the case was remanded to the trial court to “determine the amount of additional support that is ‘just and equitable’…using the parties’ marital standard of living as a point of reference against which the other statutory factors must be weighed.” The trial court was further instructed that once it conducted this analysis, “a percentage support award based on [husband’s] exercised option income would be permissible as long as the court sets a maximum amount proportionate to its findings of the marital standard of living.”(Id. at p. 95.) The take away is a “maximum amount” based on specific findings and not a straight percentage without a ceiling.

Regarding child support, the trial court ordered $2,806 per month and awarded 15% of husband’s option income. For essentially the same reasons as their opinion on spousal support, the appellate court stated “the percentage of option income represents an extremely high dollar amount, given the enormous increase in Qualcomm stock value.” (Kerr, supra, at p.97.) The appellate court then held “[a]pplying the guideline formula under these circumstances is inappropriate without a finding that the amount ordered would not exceed the children’s need.” Thus, the trial court was reversed again with orders that it must determine the children’s needs in light of both parent’s abilities and standards of living. (id. at p.97.) Again, the appellate court reiterated the take away “a percentage award based on the realized income from the exercise of stock options would be permissible, as long as the court sets a maximum amount that would not exceed the children’s needs.”

The common theme across both cases is that parsing through income and expenses, as tedious as it seems, is crucial to assisting the trial court in making the right ruling on setting, and modifying, support orders.

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