On appeal from the Superior Court of New Jersey, Chancery Division - Family Part, Somerset County, Docket No. FM-18-670-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Lisa, R. B. Coleman and Baxter.
Plaintiff Carole Ray appeals from three post-judgment matrimonial orders in which the judge determined that defendant David Ray had demonstrated a permanent, involuntary change in his financial circumstances that: 1) entitled him to a fifty percent reduction in his alimony and child support payments; 2) entitled him to a suspension of his obligation to maintain life insurance policies to secure those payments; and 3) excused him from reimbursing plaintiff for the sums of money she expended in paying the premiums on those life insurance policies.
We reject plaintiff's argument that the reduction in defendant's child support and alimony obligations was unwarranted. We are satisfied that defendant demonstrated, through sufficient, credible evidence, that the computer consulting firm he owned had suffered a dramatic downturn, which was not merely temporary, and that his decision to accept employment with a former client, at a vastly reduced income, represented a sensible response to the abrupt and permanent decrease in his income.
However, we agree with plaintiff that once the judge found a change of circumstances that warranted such a reduction, the methods the judge used to set the new child support and alimony payments were flawed.
We thus vacate those orders and remand for a redetermination in accordance with the discussion below.
We also agree with plaintiff's contention that even if the judge was entitled to suspend defendant's obligation to pay the life insurance premiums, she mistakenly exercised her discretion when she declined to order defendant to reimburse plaintiff for the premiums she had paid to prevent the policies from lapsing. Finally, we agree with plaintiff's argument that the judge erred when she denied plaintiff's request for counsel fees incurred as a result of an enforcement motion that plaintiff filed in March 2007. In all other respects, we affirm the denial of plaintiff's request for counsel fees.
We thus affirm in part, reverse in part and remand.
The parties were married in November 1986 and were granted a dual judgment of divorce (JOD) in January 2004, which incorporated a property settlement agreement (PSA) of the same date. Four children were born of the marriage, two sons and two daughters, between November 1991 and January 2001.*fn1
During and after the marriage, plaintiff worked part-time as a preschool teacher in a school owned and operated by her parents. At the time of the divorce, she was earning $3,600 per year. The PSA reflected the parties' expectation that by 2014, plaintiff would have earned a Master's degree in education, and would be earning approximately $50,000 per year in a full-time teaching position.
Pursuant to the terms of the PSA, the parties had joint legal custody of the children, with plaintiff being the parent of primary residence. The PSA obligated defendant to pay child support of $3,334 per month ($40,000 per year), and required him to maintain a $400,000 life insurance policy to secure his child support obligation.
The PSA also specified that for a six-year period beginning December 15, 2003, defendant would pay rehabilitative and permanent alimony of $8,334 per month ($100,000 per year). After six years, and for the next five years, defendant would pay the reduced amount of $6,667 per month ($80,000 per year) as permanent and rehabilitative alimony. Finally, beginning December 16, 2004, defendant's alimony obligation, which by then no longer included rehabilitative alimony, dropped to $5,000 per month. In addition, defendant was obligated by the PSA to maintain a $700,000 life insurance policy to secure his alimony obligation for the first eleven years of the agreement, which rose to $800,000 per year thereafter.
Section 2.10 of the PSA provided that child support and alimony would be reviewed at the request of either party upon the happening of certain specified circumstances, including an increase or decrease in income. Significantly, section 3.1 of the PSA specified that defendant's gross annual income at the time the PSA was executed was $289,000:
The parties have compromised and agree that Husband's income is currently $289,000 gross per annum and he is the owner of 50% of the stock and is a manager of both DR Solutions, Inc. and Phase II, Inc., computer consulting businesses.
After applying all the credits and debits and dividing the retirement and savings accounts, defendant owed plaintiff $105,549, which he was entitled to pay in cash, or by transferring a portion of his retirement accounts to plaintiff by rollover, or by preparation of a Qualified Domestic Relations Order. This $105,549 payment compensated plaintiff for her surrender of her interest in two businesses defendant owned, DR Solutions and Phase II. Her share of those two businesses was valued at $178,000. The foregoing provisions were the result of protracted mediation sessions over the course of several months, during which each party produced numerous expert reports on the value of, and income generated by, defendant's two businesses. Defendant did not comply with his equitable distribution obligations under the JOD, which forced plaintiff to file numerous enforcement motions. She did not receive her equitable distribution of the retirement funds until March 2004, and of defendant's two businesses until May 2005.
Less than thirty days after the parties' PSA was executed and their JOD was granted, defendant notified plaintiff that his business, Phase II, was in far worse financial condition than he had thought, that its value was significantly less than the parties had agreed to in their PSA, and that his income had been substantially reduced. He sought a return to mediation to renegotiate the parties' equitable distribution and support agreement. Because defendant had not fulfilled his equitable distribution obligations under the PSA, plaintiff declined to return to mediation.
On June 10, 2004, defendant filed a motion seeking to compel plaintiff to participate in mediation to address his proposal for a reduction of his alimony and child support obligations in light of his claim of changed financial circumstances. The judge denied defendant's request to return to mediation on those issues, but, in August 2004, plaintiff changed her mind and agreed to participate.
On October 4, 2004, after the mediation was unsuccessful, defendant filed a motion alleging that he had sustained "significant, permanent changed financial circumstances," which entitled him to an adjustment of his alimony and child support obligations. He also sought to reduce his life insurance obligation in accordance with the anticipated reduction in alimony and child support.
On November 15, 2004, the judge denied defendant's request to modify alimony and child support, finding that defendant failed to show a permanent and substantial change, and that his "rapid downturn in business" so soon after the divorce was "suspicious." The judge likewise denied defendant's request to adjust his life insurance obligations.
Less than four months later, on March 1, 2005, defendant renewed his motion for a reduction in child support and alimony. This time, however, the motion was assigned to a different judge, who, in a March 11, 2005 decision, concluded that defendant had presented prima facie evidence of changed circumstances that warranted a plenary hearing to determine whether defendant had, as he claimed, suffered a substantial and permanent change in circumstances that entitled him to a reduction of his alimony, child support and life insurance obligations. The judge held that if any modification were to be granted, it would be retroactive to the date defendant filed his motion.
The plenary hearing was conducted over a three-day period in May 2005. Defendant testified that his company, DR Solutions, was in the business of obtaining contracts from large corporations to establish and maintain their computer networks. DR Solutions earned a profit by supplying computer specialists to those companies and paying such consultants less than the amount that DR Solutions billed the client corporation.
In 1997, defendant joined forces with his longtime friend and colleague, Raoul Alonso, who also owned a computer consulting company. The two men formed Phase II, in which each was half owner. Although Alonso and defendant began working together on Phase II in 1997, each partner maintained his own company until January 2002, when they "collapsed" their individual businesses into Phase II.
Phase II's revenue peaked in 2001, and then began to decline. The company earned gross receipts of $392,874 in 1999; $1,801,766 in 2000; $3,134,683 in 2001; $2,870,297 in 2002; $2,131,805 in 2003; and $1,055,926 in 2004. As to the distribution of profits between the two partners, defendant explained that he and Alonso equally split the profits derived from the work performed by the firm's employees; however, if either he or Alonso personally generated more revenue than the other, the one who generated such excess "would get that money." When asked whether it was "fair to say... that... you get to eat what you kill," defendant answered "absolutely." As an example, defendant explained that in 2004, although the total compensation for the two was $306,000, all but $72,083 went to Alonso because Alonso had sourced more of the profit than defendant had.
During his testimony, Alonso introduced "equitable compensation calculation" charts that he claimed were prepared by defendant and himself at the end of each year. The charts were used to determine how much money should be paid as a year-end bonus to the partner who had generated the most income, to ensure that his income was commensurate with the revenue he generated.
Defendant testified that in January 2004, after the Phase II corporate books for 2003 were closed, defendant and Alonso met with their accountant, Michael Hausman, as they did every year. According to defendant, it was only at this point that he learned that although Phase II "showed a profit on the books," the company was "actually losing $30,000 a month." Hausman's testimony corroborated defendant's description of that meeting. According to Hausman, he advised defendant and Alonso that "the business was getting so bad that there had to be some changes made. Otherwise they weren't going to be able to stay in existence."
Hausman pointed to the significant decline in the firm's gross revenues in the one year between 2003 and 2004. In 2003, the firm enjoyed gross receipts of $2,131,000, but by 2004, the firm's revenues had dropped by fifty percent down to a level of $1,055,926.
According to Hausman, this steep drop in revenues occurred because "the bottom fell out of the industry." Hausman described similar problems experienced by several of his other clients who were also in the computer consulting industry. According to Hausman, the downturn was caused by "outsourc[ing] outside the country." Hausman explained that in his meeting with Alonso and defendant "[t]hey were giving me their insight from their end and I was giving them the information that I had from other businesses I deal with about what was going on with the economy." He recommended that they prepare "some schedules... where they could see the difference in the number of people that they were hiring, the number of placements, what was changing in the industry."
In response to Hausman's warning that Phase II would be forced to go out of business unless some radical changes were made, Phase II adopted cost-saving measures, including reducing the partners' salaries, stopping all voluntary contributions to their pension funds, leasing less expensive cars, laying off sales personnel, reducing the office manager's salary by fifty percent, cutting travel and entertainment expenses and canceling their life insurance polices.
Defendant's testimony also described a significant drop-off in the number of employees that Phase II had "on billing" each month. He testified that throughout 2001, Phase II had been able to maintain between eleven and eighteen people on billing each month, and in 2002, between thirteen and seventeen. In 2003, although the company had fourteen people on billing each month in the first half of the year, by the fourth quarter, the number had dropped to only seven per month. The same trend continued in 2004, because, during the first half of the year, six or ...