February 20, 2022
I am prefacing this post with the disclaimer that divorce cases with these issues are complex. One can expect rounds of discovery including depositions and the need to retain forensic accountants. Why, you ask? Seems simple enough, right? Wrong. This is where you need to make certain that the family law attorney you hire is not only experienced with forensic accountants and has a working relationship with a good one; but also will not gouge you with attorney's fees and costs in this complex analysis.
Let us examine a fact pattern where this becomes an issue to understand its importance. We look at the 2020 case of In re Marriage of Deluca (2020) 45 Cal.App.5th 184. In this case, the trial court includes Mr. Deluca's, we will call him H, amount of monthly loan principal payments he is required to make on his income producing properties as income available for spousal support. The Court of Appeal reversed the spousal support award and directed the trial court to reconsider the amount of support "after determining the extent to which [H's] loan principal payments reasonably and legitimately reduce his income for purposes of support." (id. at p. 187.) The parties in this case were married for 15 years and had two children. Before and during marriage, H owned and operated an insurance agency as well as owning and managing several income-producing rental properties.
The trial court found that H had monthly self-employment income of $7281. However, H's expert found that his average monthly income was $25,332 before principal payments on the loans against his commercial and residential properties. (Deluca, supra, at p. 192.) This is where the fight in this case lies. Would you rather have spousal support based on income of $25,332 per month for H or based on income after principal payments on the loans against his commercial and residential properties? I am sure you can guess the numbers H wanted to use and the numbers wife, who we will call W, wanted to use. H's expert argued that the principal payments should be excluded from his income available for support because "if those payments were not made, the properties would go into foreclosure and [H] would lose the income they generated." (Deluca, supra, 45 Cal.App. 5th at p. 192.) The trial court concluded that H's expert's reasoning was "flawed" and, further, "[p]ayments made solely to benefit the separate property of [H] cannot operate to reduce his income available for support. If that were the case, then any party could divert income to the benefit of their separate property at the exclusion of being considered income available for support." (id. at p. 193.) The trial court then combined H's self-employment income and separate property rental income available for support for a total of $25,332. (Ibid.) What the trial court did was "impute" the amount of his monthly loan payments to him as "phantom income" and awarded W monthly spousal support of $7500. H and W in this case appealed.
Looking at cases from other jurisdictions, the Court of Appeal formulated a rule that we must follow when faced with the issue of whether principal payments on loans against
income producing properties or business debt in general should be deducted from a party's income available for spousal or child support. (Deluca, supra, 45 Cal.App.5th at p. 199.) The rule is:
Although such principal payments may increase an obligor spouse's net worth, a trial court retains discretion to deduct a payment from income available for support if it finds, based on substantial evidence, that the payment reasonably and legitimately reduces the spouse's net income available for support, considering the totality of the relevant circumstances, including the extent to which the payment constitutes an ordinary and necessary business expense and whether disallowing the deduction would work a substantial hardship on the payor spouse. payments on business debt from a party's income available for support under appropriate circumstances, such as where the court reasonably finds the principal payments are excessive, the property encumbered by the loan in question was acquired for the purpose of lowering income available for support, or the payments are unnecessary for the operation of the business at a reasonable level." (Deluca, supra, 45 Cal.App.5th at p. 199.) So, these are the ways discovery should be crafted and depositions structured if you want to argue for allowing the deduction as well as what you need to keep in mind if you want to disallow it. What will happen to Mr. Deluca? Will the case just settle out? Who knows, but the intake for this type of case and the attorney and forensic accountant time is great at best and one should be prepared accordingly.
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