April 1, 2008
CHERYL L. FRUSTIERI, PLAINTIFF-APPELLANT,
LYLE K. RAWLINGS, DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Chancery Division, Family Part, Hunterdon County, FD-10-64-99.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 7, 2008
Before Judges Parrillo, S.L. Reisner and Gilroy.
Plaintiff Cheryl Frustieri appeals from a January 19, 2007 order of the Family Part and a March 2, 2007 order denying her motion for reconsideration. We remand this matter to the trial court for further proceedings.
Between October 1987 and May 1998, plaintiff and defendant Lyle K. Rawlings lived together and had two children, Christopher, born January 29, 1988, and Dakota, born October 19, 1994. The parties separated in May 1998. On November 20, 1998, they reached a custody agreement, and the Family Part issued a consent order requiring defendant to pay plaintiff $900 per month in child support for the two children. In December 2000, the parties agreed to reduce the defendant's child support obligation to $650 per month. In the fall of 2006, the parties' oldest son, Christopher, began attending Rutgers University as a full-time student and, therefore, no longer resided with either party during the school year.
On October 25, 2006, defendant filed a motion to increase his parenting time, and to modify child support based on a change in circumstances due to Christopher's attending college. Defendant also alleged that he was paying a disproportionate share of the college expenses.
In connection with the motion, the parties produced the following evidence of their finances. Plaintiff, a registered nurse, works for a pharmaceutical company. In 2006, she received a salary of $69,720 and a $4809 bonus, for a total earned income of $74,529.
Defendant is the president and owner of a subchapter C corporation (C Corp), Advanced Solar Products (ASP), a high growth engineering and construction firm that specializes in the solar energy field. He is also president and one of three trustees of Fully Independent Residential Solar Technology, Inc. (FIRST), a 501(c) non-profit corporation. Defendant has a joint venture in Reaction Sciences, Inc., a research and development startup.
The parties disagreed about defendant's income. The trial court used defendant's September 21, 2006 sworn case information statement (CIS) to determine that defendant's income was approximately $90,000 per year. Defendant earned $99,000 from ASP, according to his pre-amended 2006 W-2 wage and tax statement, with $90,000 as salary and $9,000 as bonus.
As a FIRST employee from the beginning of 1998 through August 2003, defendant received wages from FIRST. However, according to defendant, due to FIRST's "lack of sufficient revenue," defendant had to return those funds by loaning the company $292,900. In his CIS, defendant did not list this $292,900 loan to FIRST even though it is listed in FIRST's 2004 form 990 income tax return, and the same form lists a $10,700 "compensation" to defendant as its president.
In addition to receiving a salary from ASP, defendant rents and resides in an experimental solar home owned by FIRST. He pays only $250 per month, because the house is environmentally friendly and lacks certain amenities.*fn1 On his CIS, defendant did not list income from Reaction Sciences, Inc., a research and development startup, that receives support from ASP.
In the trial court, plaintiff alleged that defendant's CIS understated his 2006 income. Plaintiff cited defendant's year-to-date pay stub as of September 29, 2006, indicating that defendant had earned $91,500 with a calculated year-end total projection of $114,000. In a certification, defendant attested that the September 29 pay stub contained an error and that his 2006 income was $99,000, consisting of $90,000 in wages and a bonus of $9000. In addition, defendant's CIS listed "a one-time bonus of $33,184 in August 2005 to compensate for salary which was foregone in 2003 and 2004." Thus, in 2005 defendant earned $132,184, as reported on his form 1040, but this included a "one-time bonus of $33,184."*fn2
In addition to questioning defendant's reported income, plaintiff raised an issue as to defendant's ownership interest in ASP. Plaintiff alleged that defendant owned 100% of ASP. Defendant, however, contended that he owned a 2/3 interest and that Edward Seliga owned a 1/3 interest in ASP based on a "verbal agreement of ownership" from 2001, in consideration for Seliga's work in building ASP's business and other projects that Seliga brought to ASP. According to defendant, although stock had not been transferred, it will be transferred for $1 based on the 2001 verbal agreement. According to defendant, he and Seliga, as partners, determined his salary. On the other hand, plaintiff contended that defendant was the controlling shareholder with sole decision-making power to alter his compensation at his own discretion.
Defendant did not produce ASP's corporate income tax returns, although he provided some of his personal tax returns. In his reply certification, defendant provided his federal 1040 income tax forms for 2003 reporting $93,960, 2004 reporting $72,751, and 2005 reporting $132,184. He did not include his 2004 Schedule E form to explain a $64,181 loss listed on line 17 of his 2004 form 1040 as "rental real estate, royalties, partnerships, S corporations, trusts, etc." Defendant's amended 2006 form W-2 wage and tax statement indicated that defendant earned $97,612.32 in 2006, while his CIS and September 15, 2006 paystub indicated $90,000 in wages plus $9000 in bonuses. Defendant did not provide any form 1120 corporate tax returns from ASP in 2004 to explain the $64,181 loss on his 2004 individual income tax return, nor in 2005 to clarify a $4121 loss. He did provide a 2003 Schedule E form from the Sunspace Builders and Developers, Inc., a S-Corp, to explain a $7268 pass-through loss, that was listed on line 17 of his 2003 federal 1040 income tax forms. In his CIS, defendant did not claim any credit for the 2004 loss of $64,181 and asserted that his losses, including the 2003 loss, were therefore irrelevant for determining child support.
Plaintiff also asked the trial court to impute 4% interest on defendant's business checking account that held $165,000. Defendant kept those funds in the account as retained income of the business. The court rejected plaintiff's contention that defendant should be required to place the money in a higher-earning investment, reasoning "[t]hat's assuming you are going to put all that money into a CD . . . [and] [t]hat's an absurd assumption."
In an order dated January 19, 2007, the trial judge determined child support, based on the Child Support Guidelines, to be $107 per week for Dakota; required the parties to pay for Christopher's college education in proportion to their respective incomes with plaintiff paying 45% and defendant paying 55%; required the parties to pay unreimbursed medical expenses in excess of $250 per child in proportion to their incomes: 45% - 55%; required the parties to pay Christopher's auto insurance in proportion to their incomes: 45% - 55%; denied plaintiff's request for a $20,000 retainer for attorney fees; denied plaintiff's request for discovery of defendant's corporate records; denied plaintiff's request to compel defendant to obtain life insurance; and denied both parties' requests for counsel fees and costs.
In the Final Memorandum of Decision on Motion, dated January 19, 2007, the judge addressed Dakota's child support:
The defendant states that his 2006 salary was $90,000 plus a $9,000 bonus. The Court will generally base a party's income on recent pay stubs or tax returns. The defendant's statements regarding his 2006 salary are more up-to-date than his 2005 tax return. Thus, the Court will take the defendant' certified statements as information regarding his current income. Thus, child support was calculated based on $99,000 income for the defendant in 2006. The Court is satisfied with the defendant's explanation of the reduced rent he pays for his residence, i.e. that because of its environmentally friendly built, the house lacks certain amenities. The Court will, thus, not count the reduced rent as in-kind-income for purposes of child support. There are no specific allegations regarding improperly deducted items and it appears that the defendant's other businesses (ASP and Reaction Sciences) are not producing income to him at this time. Even the plaintiff simply states that ASP is involved in a high growth industry. There are no specific statements that would lead the Court to believe that the defendant is not being truthful about his total income.
Thus, the Court will calculate child support based on the information provided by the parties. The child support calculation is further based on the plaintiff's annual income of $74,529 ($69,720 in income based on her most recent pay stubs plus $4,809 for a bonus based on performance in 2005 but paid in 2006). The calculation is further based on overnights in accordance with the current arrangements, i.e. 130 overnights with the defendant (2 overnights one week, three overnights the next week). The number of overnights has also resulted in the use of the shared parenting worksheet. Based on these figures, the defendant's child support obligation for Dakota is $107 per week.
The judge then addressed Christopher's child support and college expenses, stating:
The Child Support Guidelines do not apply to Christopher who is over the age of eighteen and is attending college away from home. At this time, the parties present no clear picture of how much time Christopher will spend at home, or at whose home he will spend his time away from school. The Court cannot make a determination at this point. However, in general the Court finds it appropriate that the parent with whom Christopher regularly spends his time away from school, be granted child support in the amount of $30 per week, which is roughly one-third of the award for one child under the Guidelines.
The parties appear in agreement that each party shall contribute to Christopher's college education. There is also no dispute as to Christopher's aptitude for college or as to other factors cited by the Newburgh Court. Based on their respective incomes, both parents appear to have the ability to support Christopher financially in his college education. The plaintiff requests that the defendant be liable for 64% of all expenses while the defendant proposes a 50/50 split of expenses. Neither party states a compelling reason why the split should occur according to their proposed percentages. Given the income split between the parties shown by the Child Support Calculations, the plaintiff's income is approximately 45% and the defendant's 55%.
The Court finds it reasonable and appropriate that the parties share all expenses related to Christopher's college education, such as room and board, tuition, books and supplies, fees and reasonable transportation costs. The Court also agrees with the plaintiff in that Christopher also needs a spending allowance of $50 per week for miscellaneous expenses.
Next, the judge reviewed the parties' requests for counsel fees and stated, "Given the mixed outcome of the motion and cross motion as well as the lack of bad faith on part of either party, the Court will deny both parties' requests for counsel fees and costs."
In the January 19, 2007 hearing, the trial judge denied plaintiff's request for discovery of corporate records during the following colloquy:
[Plaintiff's counsel:] [T]his [defendant] is a self-employed individual. . . . [Larbig v. Larbig, 384 N.J. Super. 17 (App. Div. 2006)] talks about being [a] self-employed obligor who is in a better position to present an unrealistic picture of his income. . . . [T]he child support guidelines go through a whole analysis at looking at the reasonableness of business expenses.
[Court:] I think I'm fated to disagree with you at this particular juncture . . . .
[Court:] Because your argument seems to be that [there is] almost a per se [rule] that there needs to be discovery every time there's a self-employed person and the Court is not convinced of that. That's the problem with your argument.
[Court:] What you are asking the Court to do is in every situation where there's a self-employed[,] [a]ny time the other side wants to[,] it can obtain all sorts of discovery because inherently the thing can be manipulated. That's not the law.
[Plaintiff's counsel:] Judge, doesn't it send a red flag to you that in 2005 he has [a $]32,000 [bonus], and when we're before the Court he says its nine [for 2006].
[Court:] That's what happens in businesses.
[Court:] Some years are good and some years aren't good.
[Plaintiff's counsel:] Judge, don't I get a right to get the underlying documents to see if that's really appropriate or whether he is manipulating?
[Court:] I've got to see more than that. Otherwise, again I think you are under the problem the Court just described. Every self-employment becomes a vehicle for discovery every year and a half and I'm not going there.
[Plaintiff's counsel:] But this has never been discovered. This isn't every year and a half. Are you saying, Judge, that we get no discovery?
[Court:] We're fated to disagree . . .
[Plaintiff's counsel:] And is it Your Honor's decision that we don't get discovery?
[Court:] That's correct.
On January 25, 2007, the trial court issued an amended order directing that the party with whom Christopher spends most of his time when home from college should receive $30 per week in child support for Christopher. On February 7, 2007, plaintiff filed a motion for reconsideration of the January 19, 2007 order. On March 2, 2007, the court denied the motion.
On this appeal, plaintiff raises the following points for our consideration:
POINT I: THE DE NOVO STANDARD OF REVIEW APPLIES.
POINT II: THE TRIAL COURT INCORRECTLY APPLIED THE LEPIS MODIFICATION PROCEDURE.
A. The Trial Court Failed To Make Any Findings Of Changed Circumstance.
B. The Trial Court Erred By Denying Cheryl Frustieri The Right To Take Financial Discovery.
C. The Trial Court Erred By Refusing To Hold A Plenary Hearing.
POINT III: THE TRIAL COURT INCORRECTLY APPLIED THE CHILD SUPPORT GUIDELINES FOR DAKOTA.
A. The Trial Court Erred By Failing To Examine Defendant's Income At The Business-Level.
B. The Trial Court Erred By Refusing To Include Loan Proceeds From Defendant's Business As Part Of Defendant's Personal Income.
C. The Trial Court Erred In Refusing To Impute A Reasonable Rate Of Return On Defendant's $167,000 Liquid Assets.
D. Trial Court Erred In Refusing To Adjust The Child Support Upward Based On The Age Of Dakota.
E. Trial Court Erred In Including Dakota's Share Of Health Insurance Premiums In The Overall Child Support Award.
F. Trial Court Erred In The Use Of The Shared Parenting Worksheet.
POINT IV: THE TRIAL COURT ERRED AS TO CHILD SUPPORT FOR CHRISTOPHER AND THE ALLOCATION OF CHRISTOPHER'S COLLEGE EXPENSES.
POINT V: THIS COURT SHOULD REVERSE THE TRIAL COURT'S REFUSAL TO AWARD COUNSEL FEES.
POINT VI: THIS CASE SHOULD BE REMANDED BACK TO A NEW TRIAL JUDGE.
Preliminarily, we note that legal arguments are improperly scattered throughout plaintiff's statement of facts and procedural history, contrary to Rule 2:6-2(a)(4) and (5). We will consider only those legal arguments that are properly included in the argument section of the brief.
We begin with the issue of discovery. Plaintiff contends that she was entitled to discovery of the tax returns of defendant's corporations. In Lepis v. Lepis, 83 N.J. 139 (1980), the Court addressed the issue of financial discovery in a case in which one party was seeking a modification of a support order based on changed circumstances:
Only after the movant has made this prima facie showing should the respondent's ability to pay become a factor for the court to consider. Therefore, once a prima facie case is established, tax returns or other financial information should be ordered. We recognize that individuals have a legitimate interest in the confidentiality of their income tax returns. However, without access to such reliable indicia of the supporting spouse's financial ability, the movant may be unable to prove that modification is warranted. Similarly, without knowledge of the financial status of both parties, the court will be unable to make an informed determination as to "what, in light of all the [circumstances] is equitable and fair." Courts have recognized that discovery and inspection of income tax returns should only be permitted for good cause. [Id. at 157-58 (citation omitted).]
The proceedings thereafter may or may not include an evidentiary hearing:
Once the above steps have been completed, the court must decide whether to hold a hearing. Although equity demands that spouses be afforded an opportunity to seek modification, the opportunity need not include a hearing when the material facts are not in genuine dispute. We therefore hold that a party must clearly demonstrate the existence of a genuine issue as to a material fact before a hearing is necessary. Without such a standard, courts would be obligated to hold hearings on every modification application. The application of the equitable principles we have outlined does not require elaborate procedures in every case. Courts should be free to exercise their discretion to prevent unnecessary duplication of proofs and arguments. The volume of postjudgment litigation provides additional, practical support for this approach.
In determining whether a material fact is in dispute, a court should rely on the supporting documents and affidavits of the parties. Conclusory allegations would, of course, be disregarded. Only statements to which a party could testify should be considered. Thus, if the sole dispute centered around the supporting spouse's earnings, the disclosure of income tax returns might render a hearing unnecessary. [Id. at 159 (emphasis added)(citations omitted).]
In support of her claim for discovery of corporate tax returns, plaintiff relies on Appendix IX-B, which provides instructions for using the Child Support Guidelines. Child Support Guidelines, Pressler, Current N.J. Court Rules, Appendix IX-B to R. 5:6A (2008). The instructions indicate:
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. [Id. Instructions for Lines 1 through 5, Income from self-employment or operation of a business, par. b, at 2309.]
Subparagraph c of the same section also lists a series of expenses which the Internal Revenue Service allows for tax purposes, but which the Guidelines do not permit the self-employed parent to exclude from the business's income as ordinary and necessary expenses. These include certain types of depreciation, home offices, entertainment, excessive voluntary contributions to pension plans, and "any other business expenses that the court finds to be inappropriate for determining gross income for child support purposes." Id. at c(11). The instructions are consistent with our observation in Larbig v. Larbig, 384 N.J. Super. 17, 23 (App. Div. 2006), that "it is the self-employed obligor who is in a better position to present an unrealistic picture of his or her actual income than a W-2 earner."
The parties, however, dispute whether defendant is self-employed. In the trial court, plaintiff contended that defendant owned Advanced Solar Products, Inc. (ASP) and thus was essentially self-employed. Defendant contended that he was merely a corporate employee; he asserted that he was only a two-thirds owner and that one-third of the corporation was owned by his partner Edward Seliga, although no stock had yet been transferred to Seliga. Allegedly, Seliga would be entitled to the stock for nominal consideration of one dollar based on his work for the corporation and his having brought in valued clients. However, even if that were so, defendant still admittedly controlled this two-person corporation and was in a position to manipulate its finances and his own. Thus, we conclude that the considerations underlying self-employed litigants apply here.
Plaintiff also contended that ASP had retained excessive amounts of earnings which could otherwise have been disbursed to defendant as income, thus enabling him to pay more child support. We find no merit in this contention. In a certification, defendant provided a cogent explanation for the need to have the corporation retain income, and his reply to the motion included a certification from Thomas Ruddy, ASP's corporate accountant, attesting to the legitimate need to retain earnings.
Plaintiff also submitted a copy of Ruddy's certification to the court with her motion for reconsideration. Yet, she did not submit any contrary certification from an accountant or other corporate financial expert contradicting Ruddy's certification that retaining earnings is a legitimate financial step for a corporation to take and specifically a legitimate action for ASP to take. Therefore, the undisputed evidence before the court established that there was nothing nefarious in defendant causing ASP to retain earnings and therefore no reason to grant plaintiff's application for further discovery on that basis. See Forrestall v. Forrestall, 389 N.J. Super. 1, 6-7 (App. Div. 2006)(The children of divorced parents are not entitled to child support based on funds that would not have been available to support the family if it had remained intact.).*fn3
However, this does not end the inquiry. While we do not agree with plaintiff that the retained earnings issue justified further discovery, or that she was automatically entitled to an evidentiary hearing to determine defendant's income, we do agree that discovery of the corporation's tax returns was necessary to determine defendant's income for child support purposes. In seeking to reduce his child support obligation, and in asking the court to require plaintiff to pay for a portion of their son's college expenses based on the couple's relative incomes, defendant was putting his own income in issue. See Newburgh v. Arrigo, 88 N.J. 529, 545 (1982)(In evaluating a claim for contribution to college expenses, the court must consider the parents' financial resources and ability to pay.).
While defendant did make a prima facie case of changed circumstances in showing that Christopher was in college, therefore presumably warranting a downward modification of support for him, plaintiff had a right to take discovery as to defendant's income before the court set her obligation to pay for a portion of the college tuition. Her right to discovery is consistent with Appendix IX-B which cautions that "income and expenses from self-employment or the operation of a business should be carefully reviewed." Pressler, supra, Appendix IX-B to R. 5:6A at 2309. This review cannot realistically occur without discovery. Moreover, in 1998, when the parties settled the issue of child support, defendant was not working for ASP and hence plaintiff never had an opportunity to take discovery as to the corporation or its earnings. Discovery of ASP's corporate tax returns might also shed light on the corporate ownership, and hence the issue of self-employment, to the extent that the returns indicate who owned the corporation. Moreover, because there are financial relationships between FIRST, ASP and Reaction Sciences, plaintiff is entitled to discover the tax returns of each company.
Because this matter must be remanded, we address several additional issues for the guidance of the trial court and the parties. We find no merit in plaintiff's contention that the child support amount for the younger child, Dakota, should have been adjusted upward to account for his age. The Guidelines slightly overstate child support amounts for younger children, taking into account the higher costs that will be incurred when they are older. See Child Support Guidelines, Pressler, Current N.J. Court Rules, Appendix IX-A to R. 5:6A, par. 17 at 2300. Therefore, if child support is set for the first time when a child is over the age of twelve, a 14.6% adjustment is warranted. Ibid. However, in this case, defendant had been paying child support for Dakota since the child was very young, and had been paying at a level considerably above the Guidelines amount. Therefore, plaintiff had already received more than the benefit of the overpayment built into the Guidelines.
We also find no merit in plaintiff's contention that the judge misapplied the child support guidelines in calculating support for Dakota. Dakota spends 130 overnights with defendant, who, in turn is entitled to credit for the expenses associated with that parenting time. There is no evidence that defendant received credit for housing expenses beyond the modest expenses he incurs. He was also entitled to credit for the food, transportation and other variable expenses incident to shared parenting.
However, the trial court did not render a proper or enforceable decision on the issue of support for Christopher. The court concluded:
At this time, the parties present no clear picture of how much time Christopher will spend at home, or at whose home he will spend his time away from school. The Court cannot make a determination at this point. However, in general the Court finds it appropriate that the parent with whom Christopher regularly spends his time away from school be granted child support in the amount of $30 per week.
Rather than making findings as to where Christopher spent his time while away from college, the court simply ordered that whichever parent he lived with was entitled to $30 per week from the other parent. Particularly given the enmity between the parties, such an order is effectively unenforceable and will foster further litigation. If the parties did not provide sufficient evidence on the issue of Christopher's residence, the court should either have required that they submit additional certifications or should have taken testimony on that limited issue.
In summary, we conclude that before the court decided the issues of child support and contribution to Christopher's college expenses, plaintiff should have been allowed discovery of the tax returns of defendant's corporations. Therefore, we remand this matter to the trial court to enter an order setting a schedule for this discovery. Given the mistrust between the parties, and defendant's sworn allegations that plaintiff had tried to ruin his businesses, such discovery should be taken by plaintiff's counsel and not disclosed to plaintiff without a further court order. Following that discovery, and the resolution of any further issues such discovery may engender, the court shall reconsider the issue of child support for both children as well as Christopher's college expenses, and shall frame a specific order with respect to each party's support obligation for each child.*fn4