The ability to pay support and fees in family law cases is broadly defined

In the half-century that the no-fault divorce law has been on the books, litigants who are likely to be ordered to pay child support, spousal support or attorneys' fees have resorted to a variety of strategies to limit their exposure. In general, those strategies involve minimizing income and maximizing deductions.

As a threshold matter, such litigants may attempt to avoid the provisions of Family Code section 4058 that defines income broadly for purposes of determining child support. That section provides in pertinent part as follows:

(a) The annual gross income of each parent from whatever source derived ... 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, worker's compensation benefits, unemployment insurance benefits, disability insurance benefits, Social Security benefits . ...

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

(3) In the discretion of the Court, employee benefits from self-employment, 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 the parent in lieu of the parent's income . ...

In order to determine a parent's annual net disposable income, various expenses may be deducted, including federal and state income taxes, FICA, mandatory union dues and retirement benefits, health insurance premiums, and necessary job-related expenses. Family Code section 4059.

The same standards apply to an award of spousal support. Family Code section 4320 mandates consideration of the supporting party's earning capacity, earned and unearned income, assets and standard of living. Along the same lines, attorneys' fees are routinely awarded based on one party's need and the other party's ability to pay. Family Code sections 2030-2032.

Attempts to shelter and benefit from substantial assets that produce no income have been unavailing. See, e.g., Marriage of deGuigne (2002) 7 Cal.App.4th 1353). Marriage of Usher (2016) 6 Cal.App.5th 347, summarized the prevailing view that the inclusion of "the broader concepts of station in life, ability to pay, and standard of living" in Section 4053 signaled that the Legislature did not intend the courts to consider only actual income.

Many dozens of appellate cases have rejected the various ways in which litigants have attempted to lower the income available for support. See Marriage of C (Denise and Kevin) (1997) 57 Cal.App.4th 1100 (no deduction of expenses for food, automobile, clothing and "educational seminars"); County of Stanislaus v. Gibbs (1997) 59 Cal.App.4th 1417 (no deduction for "high consumer debt"); Marriage of Butler and Gill (197) 59 Cal.App.4th 462 (no hardship deduction for payor's support of his mother).

Notably, when actual income is artificially low, the appellate courts have based support orders and attorneys' fee awards on the payor's earning capacity. See, e.g., Marriage of Hinman (Hinman II) (1997) 55 Cal.App.4th 988; Marriage of Padilla (1995) 38 Cal.App.4th 1212.

Decades of precedent are apparently insufficient to stifle the creativity of payors who are determined to avoid their financial responsibilities. The most recent iterations of this phenomenon are elaborated in Marriage of Hearn (2023 DJDAR 8290) (Aug. 10, 2023) and Marriage of Cole (2023 DJDAR 8283) (Aug. 11, 2023), in which the payors (both lawyers) attempted unsuccessfully to bamboozle the trial courts.

In Hearn, Rocky was ordered to contribute $25,000 to over $100,000 in attorneys' fees that his former wife, Jennie, had incurred in responding to Rocky's two appeals from prior orders. Rocky appealed once again on the ground that he did not have the ability to pay. The appellate court noted that Rocky was a member in good standing of the State Bar, and that he had an average monthly income of approximately $13,000 in 2020, even though he was currently unemployed.

Rocky argued that even if his prospective monthly income in 2021 was the same as his average monthly income in 2020, his monthly "disposable income" would only be about $825. In order to reach this conclusion, Rocky disregarded the formula for calculating disposable income in Family Code section 4059, and deducted his monthly living expenses from his gross to support an argument the appellate court deemed "meritless."

In Cole, Scott claimed that he had paid no salary to himself since February, 2020, in an effort to keep his business going. He represented that his law firm was able to collect only a fraction of the settlements and judgments that was owed, that it had laid off three of its employees and slashed its expenses by at least 25% in order to survive. He further represented that he and his current spouse were living off their savings, carrying two mortgages, and trying to avoid foreclosure.

Although Scott's compensation from his wholly-owned law firm averaged over $4 million per year in 2017, 2018 and 2019, he reported salary income of only $100,000 on his 2020 tax return. At the same time, his law firm maintained $1.4 million in reserves for law firm operating capital expenses. The court concluded that Scott's law firm had sufficient funds in its reserve accounts to pay Scott a salary commensurate with his professional experience, or at least a salary that would have covered his 2020 child support obligations, while leaving adequate reserves for the law firm's operational expenses.

Despite reducing his salary to $100,000 in 2020, the court noted pointedly that Scott relied on other resources to pay the cost of an affluent lifestyle that far exceeded his reduced income. Specifically, Scott and his current spouse received over $977,000 in distributions, and also paid at least $387,245 in credit card charges from one of his personal Morgan Stanley accounts.

The appellate court approved the trial court's finding that "Scott had significant net worth, assets, income and earning capacity available to pay" his 2020 child support obligations and concluded that "Scott evidently chose to substantially reduce his salary while continuing to support his lifestyle using other available assets, instead of drawing a salary that would cover his child support obligations and using those other assets to keep his business going."

The lesson of these cases: Payors who manipulate their incomes or expenses in an effort to eliminate or reduce their financial obligations are unlikely to overcome judicial skepticism in the trial courts or on appeal.