In a recent unpublished (non-precedential) Appellate Division decision, K.W. v. S.W., the Court addressed income, expenses and bad faith within the context of a child support calculation and ongoing custody issue post-divorce judgment. The issues before the Court, in boiled down to their root, were: (1) what to do when a party manipulates their income in a self-employed situation; (2) when to impute a party income, even if the parties stipulated as to an imputation previously; and (3) when to award a party counsel fees when the trial court determined that there was bad faith and gamesmanship. These issues arise often in the context of divorce litigation and the context of the in this case is important to recognize the greater picture:
The parties were divorced in 2013 after a 9 year marriage. They had 2 children together, born in 2002 and 2004 respectively. The parties signed their Marital Settlement Agreement (“MSA”) and were divorced on March 19, 2013. Within the MSA, the parties agreed that they would each have joint legal and physical custody of the children, with the specific final residential custody arrangement reserved pending evaluations. The MSA designated the Defendant as the parent of primary residence and the Plaintiff as the parent of alternate residence. The parties were exercising parenting time equally during the summer (50/50) and during the school year Defendant was exercising 1 extra overnight per month than Plaintiff.
From a financial standpoint, in relevant part, Plaintiff agreed to pay $33,600 per year in alimony for a limited duration of 3.5 years. He also agreed to pay $73 per week in child support, which was to be recalculated at the conclusion of the alimony term. In the MSA, the parties stipulated that the above referenced figures were based upon Plaintiff’s gross income from salary and investments of $185,000 and Defendant’s imputed income as a pharmacist of $125,000.
During the post-judgment litigation the parties retained multiple custody related experts over a 4 year span and argued vociferously as Plaintiff demanded a true shared (50/50) parenting time schedule year round. As time passed by, Plaintiff would vacillate back and forth between wanting this true, shared parenting time schedule and being amenable to the schedule outlined above. Overarching this custody battle was the fact that alimony ended and child support needed to be recalculated. On the eve of a plenary hearing (akin to a trial), after 5 years of post-judgment litigation, Plaintiff withdrew his request for equal parenting time and to be designate the parent of primary residence. The plenary hearing shifted completely and solely to child support and child related expense issues.
At trial, Plaintiff testified and evidenced that his income was $163,000 from his construction business and $12,000 from unearned income. Plaintiff took over the family construction business from his father in 2016. Prior to 2016, Plaintiff’s father controlled the business finances, but since taking over, Plaintiff had full control of the wages and salaries of all employees, including himself. To evidence this, Defendant pointed out that Plaintiff’s girlfriend, who was an employee at the construction company, had received numerous raises since 2016 based upon Plaintiff’s approval. Plaintiff further testified that he had purchased a vehicle for the parties older child and paid for the child’s auto insurance, which he wanted Defendant to contribute towards.
On the other hand, Defendant worked part-time as a pharmacist during the marriage and did not have a doctorate in pharmacy, which was more and more becoming an essential degree in the industry. Defendant testified that she struggled to find employment and evidenced 65 job applications where she applied to work in the field and was rejected from all such jobs.
TRIAL COURT DECISION
At the conclusion of the plenary hearing, the trial court issued a written decision that spans over 60 pages addressing all of the outstanding issues. The trial court utilized an average income for Defendant for the years 2017-2019 ($71,000). As to Plaintiff, the trial court found Plaintiff’s testimony “to be lacking in credibility, disingenuous, and intentionally misleading” especially regarding compensation and bonuses. The trial court was perplexed, to say the least, that Plaintiff’s income remained stagnant for many years despite other employee raises. The trial court also was deeply concerned about artificially low bonuses provided to Plaintiff which the court believed were intentional to obtain advantage over Defendant. The trial court ordered above the guidelines child support of $251 per week plus required Plaintiff to pay 100% of summer programs, camps, vehicle, auto insurance and maintenance. After reviewing the long, protracted lead up to the plenary hearing, as well as the lack of Plaintiff’s credibility, the trial court awarded Defendant counsel fees in the amount of over $102,000.
APPELLATE DIVISION DECISION
- Self-Employed Income
The Appellate Division rejected Plaintiff’s argument that the trial court misapplied the law and abused discretion when calculating child support by including hypothetical gifts and bonuses to artificially increase his earned income. The Appellate Division cited Appendix IX-B in stating that income and expenses from self-employment or the operation of a business should be carefully reviewed to determine gross income that is available to the parent to pay a child support obligation. In most cases, this amount will differ from the determination of business income for tax purposes. Here, the Appellate Division pointed out that the trial court correctly analyzed the issue by indicating that additional imputation may also be justified when examining income reported by self-employed obligors, who control the means and methods of their earnings. Elrom v. Elrom, 439 N.J. Super 424 (App. Div. 2015).
- Imputing Income to Defendant
The Appellate Division equally rejected Plaintiff’s claim that the trial court erred by failing to impute income to Defendant because there was an income imputed to her in the original MSA. As noted by the Appellate Division, the trial court has the discretion to impute income, but only after first finding that a party is voluntarily unemployed or underemployed. Caplan v. Caplan, 182 N.J. 250, 268 (2005). There is no bright line rule that governs the imputation of income, see Caplan, but that there must be a finding of voluntariness before considering imputation of income. Dorfman v. Dorfman, 315 N.J. Super. 511, 516 (App. Div. 1998). Here, the trial court determined Defendant was involuntarily underemployed.
- Supplemental Child Support
The Appellate Division additionally set aside Plaintiff’s position that the trial court erroneously awarded supplemental child support to be paid by Plaintiff and improperly allocated 100% of those costs to Plaintiff. The Appellate Division noted that child support is necessary to ensure parents provide for the “basic needs” of their children. Pascale v. Pascale, 140 N.J. 583, 590 (1995). “The purpose of child support is to benefit children, not to protect or support either parent.” J.S. v. L.S., 389 N.J. Super. 200, 205 (App. Div. 2006). “In accordance with Rule 5:6A, these guidelines must be used as a rebuttable presumption to establish . . . all child support orders. The guidelines must be applied in all actions . . . .” Current N.J. Court Rules, Appendix IX-A to R. 5:6A, ¶ 2. “A rebuttable presumption means that an award based on the guidelines is assumed to be the correct amount of child support unless a party proves to the court that circumstances exist that make a guidelines-based award inappropriate in a specific case.” Ibid.
The Appellate Division has also directed that while the parties’ respective income percentages are to be considered for calculating child support under the guidelines, those percentages cannot be used to determine the supplemental child support component. The Court elaborated:
Because the income and assets of each party are only two of the many statutory factors the trial court must consider in determining a fair and just child support award, the allocation equation utilized under the guidelines-based award has little or no application to the amount of additional support determined through analyzing the N.J.S.A. 2A:34-23 factors. [Caplan, 182 N.J. at 271.]
The Appellate Division affirmed the trial court determination that the parties’ combined income levels exceed the maximum child support guidelines, and the trial court supplemented the support amount by applying the statutory factors in N.J.S.A. 2A:34-23(a). Once again, the Appellate Division noted that the trial court adhered to the proper procedure, and engaged in a detailed analysis of the statutory factors.
- Counsel Fees
Lastly, the Appellate Division addressed and rejected Plaintiff’s arguments that the trila court did not comply with Rule 1:7-4 by not providing factual findings to justify the counsel fee awarded to Defendant. Rule 4:42-9(a)(1) provides that “[i]n a family action, a fee allowance . . . may be made pursuant to [Rule] 5:3-5(c).” Rule 5:3-5(c) sets forth nine factors for the court to consider in determining a fee allowance:
- (1) the financial circumstances of the parties;
- (2) the ability of the parties to pay their own fees or to contribute to the fees of the other party;
- (3) the reasonableness and good faith of the positions advanced by the parties both during and prior to trial;
- (4) the extent of the fees incurred by both parties;
- (5) any fees previously awarded;
- (6) the amount of fees previously paid to counsel by each party;
- (7) the results obtained;
- (8) the degree to which fees were incurred to enforce existing orders or to compel discovery; and
- (9) any other factor bearing on the fairness of an award.
The Appellate Division declined to disturb the counsel fee award as a fee award should only be modified by the Appellate Division on the “rarest occasion” and only because of “clear abuse of discretion”. Strahan v. Strahan, 402 N.J. Super 298, 317 (App. Div. 2008). The Appellate Division affirmed the trial court’s citation of Plaintiff’s pattern of “bad faith” litigation surrounding the 50/50 parenting time issue and that the trial court determined that Plaintiff’s conduct was “disingenuous [and] calculated to mislead the court and prolong the litigation.” Contrary to Plaintiff’s argument, the Appellate Division indicated that the trial court considered the lengthy, post-judgment aspect of the case, the manner in which the custody and parenting time issues were resolved, Plaintiff’s pursuit of an increase in parenting time by less than a dozen nights each year, and the parties’ abilities to pay their counsel fees.
The overall takeaways from this case should be that it generally does not pay to manipulate your income in a self-employment setting in an effort to intentionally show a low income level. While there are certainly legitimate business reasons why someone would not increase salary over a number of years, when there is a pattern of providing other employees with raises while artificially keeping your income low, it will likely backfire. Additionally, there is an interesting discussion in this case about the trial court not imputing the Defendant income despite a prior imputation in the parties’ Marital Settlement Agreement. The exact language utilized in the MSA is very important and could be the deciding or determining factor as to whether an imputation is utilized in any future review. Lastly, with an extraordinary counsel fee awarded in this case, it is extremely important to not just litigate for the sake of argument. By withdrawing his request for equal parenting time (especially considering how close to 50/50 he was already getting) at the 11th hour after almost 5 years of post-judgment litigation, it left a very sour taste in the trial court’s mouth. Whether it was done intentionally or not, the trial court believed that Plaintiff was merely litigating to delay a resolution and determined that there was a pattern of bad faith. When you combine this with the trial court’s belief that Plaintiff was intentionally deflating his income, it led to the significant counsel fee award.
Adam Wiseberg is an associate within the Firm’s family law practice. He can be reached at (973) 548-3363 or at email@example.com.