1. Child Support, Custody, and Visitation_support_changing jobs--earning capacity
rule_bad faith required
The trial court abused its discretion by using the earning capacity rule to calculate child
support where there was no showing that plaintiff had reduced his income in bad faith. The law
requires both voluntary underemployment or unemployment and bad faith. The court found in
this case that the reduction in income which came from leaving one job (YMCA aquatics
director) while looking for another (full time teaching) was not in bad faith.
2. Child Support, Custody, and Visitation_support_changing investment strategy--
earning capacity rule_bad faith required
The trial court abused its discretion when calculating child support by imputing income
from investments where the court found that plaintiff had changed his investment strategy from
income to growth, but made no findings as to motive.
Law Office of Heather A. Shade, by Heather A. Shade; and Gum
& Hillier, P.A., by Howard L. Gum, for plaintiff appellant.
Robert E. Riddle, P.A., by Diane K. McDonald, for defendant
appellee.
McCULLOUGH, Judge.
Plaintiff Matthew H. Cook and defendant Maria Elianne Cook
were married on 11 January 1999. Soon after, their child, John
Aaron Cook, was born on 9 May 1999. Plaintiff and defendant
separated on 27 October 1999 and were subsequently divorced.
Defendant was granted primary custody of the child.
On 1 February 2001, a child support order was entered
mandating that plaintiff pay child support to defendant in the
amount of $516.00 per month. In addition, plaintiff wasmaintaining health insurance for the child, costing an additional
$232.00 a month.
The February 2001 order noted that plaintiff was employed and
earned $24,500.00 per year at his position at the local YMCA. He
also earned $11,400.00 per year from interest and dividend income
from money he had inherited from his father and subsequently
invested. The trial court included this amount in calculating
plaintiff's child support obligation in accordance with the North
Carolina Child Support Guidelines, rather than deviating from them
as requested by defendant. Defendant was not employed at the time,
as she was a student at the University of North Carolina at
Asheville. There were no day-care expenses for the child at that
time.
On 9 August 2001, defendant filed a motion in the cause
seeking modification of the previous child support order pursuant
to N.C. Gen. Stat. § 50-13.4 (2001). According to her motion, she
had procured employment as a realtor, anticipating approximately
$20,000.00 in earnings her first year, and she now had day-care
expenses. Also in her motion, it was noted that plaintiff had
ceased paying for health insurance.
The matter was heard on 14 December 2001. The parties
stipulated that a substantial change in circumstances had occurred
based upon the facts of defendant's employment and day-care costs.
Defendant had become a realtor for Coldwell Banker, and she had
secured a place for the child at a day-care facility beginning on2 January 2002 at a cost of $441.00 per month. Thus, all that
remained was recalculation of plaintiff's child support obligation.
While circumstances for defendant had changed, so had those
surrounding plaintiff. Since the first order for child support,
his income had decreased. In May of 2001, he became certified as
a teacher. As a result of this, coupled with other problems at the
YMCA, plaintiff resigned his position with the YMCA. Plaintiff did
not have employment secured and searched for full-time teaching
employment. What he found was part-time and substitute teaching
positions. His testimony at the hearing revealed that he had
earned the following in those capacities during the months before
the hearing: $57.00 in September; $1,054.50 in October; and
$1,665.00 in November.
Further, plaintiff's interest and dividend income had also
changed. First, plaintiff's investment portfolio had declined in
overall value since the previous hearing by 11.5%. Second, his
portfolio had been restructured by him to achieve long-term growth.
As a result, his interest and dividend income was now, according to
the trial court, $7,200.00 ($600.00 a month).
In his order of 29 April 2002, the Honorable Gary S. Cash
found that plaintiff had voluntarily reduced his income by
resigning his position at the YMCA, yet this was not done in bad
faith. Nevertheless, Judge Cash imputed to plaintiff income in the
amount of $24,500.00 (former YMCA wage), as “he has the ability to
earn said amount as wages.” Judge Cash also found that plaintiff's income from interest
and dividends had been reduced due, at least in part, to
intentional actions on his part. As a result, his income had
dropped from $11,400.00 to $7,200.00 annually. The order did not
make a finding as to whether these actions were done in bad faith.
Rather than use the present income figure, $7,200.00, Judge Cash
fashioned a formula of his own to determine what value he would
impute. As mentioned above, the value of the account had dropped
by 11.5% since the previous hearing. This was due to market
conditions and not to any action by plaintiff. Yet the
restructuring was because of plaintiff's action, according to Judge
Cash. Thus, he imputed the interest and dividend income figure
from the previous hearing minus 11.5% (11.5% of $11,400.00 equals
$1,311.00), arriving at the new figure of $10,089.00 ($11,400.00
minus $1,311.00).
Accordingly, Judge Cash added the two income amounts
($24,500.00 + $10,089.00) to arrive at plaintiff's gross income,
$34,589.00, “for the purpose of establishing child support . . ..”
Plaintiff was ordered to pay $637.14 on child support per month.
Plaintiff appeals.
On appeal, plaintiff contends that the trial court erred in
calculating child support by (I) imputing employment income to
plaintiff when he did not reduce his income in bad faith or to
avoid or minimize child support; and (II) imputing investment
income to plaintiff rather than using the actual investment income
at the time of the hearing.
Mason v. Erwin, 157 N.C. App. 284, 289, 579 S.E.2d 120, 123 (2003).
The trial court made the following finding of fact as to
plaintiff's employment income:
6. That at the time of the previous Order,
the Plaintiff was employed at the YMCA as
an aquatics director; that his salary was
$24,500.00 per year; that on May 3, 2001,
the Plaintiff wrote a letter to his
superior at the YMCA in which he
voluntarily terminated his employment,
effective June 1, 2001; that the
Plaintiff had no other anticipated
employment, but hoped to obtain full-time
employment as a teacher, for which he is
certified. That the Plaintiff knew by
terminating his employment his income
would be substantially reduced and that
his child would no longer have health
insurance coverage; that this decision by
Plaintiff to voluntarily reduce his
employment was not made in bad faith, but
was a deliberate deduction of and
depression of Plaintiff's wage income;that this Court therefore should impute
to Plaintiff income from wages of
$24,500.00; that he has the ability to
earn said amount as wages.
(Emphasis added.)
The trial court has not made sufficient findings to justify
applying the earning capacity rule in this case. It made the
finding that plaintiff deliberately reduced his income, but did not
do so in bad faith, and then applied the earning capacity rule. It
appears that the trial court believed that it could impute earnings
to plaintiff merely because he voluntarily reduced his income.
This is not the law, as it requires both.
This Court has visited this issue several times in the past,
and has always required bad faith with voluntary depression of
income:
It is clear . . . that “[b]efore the
earnings capacity rule is imposed, it must be
shown that [the party's] actions which reduced
his income were not taken in good faith.”
Askew [v. Askew], 119 N.C. App. [242] at 245,
458 S.E.2d [217] at 219 [(1995)]. See also
Schroader v. Schroader, 120 N.C. App. 790,
794, 463 S.E.2d 790, 792-93 (1995); Kennedy v.
Kennedy, 107 N.C. App. 695, 701, 421 S.E.2d
795, 798 (1992); Fischell [v. Fischell], 90
N.C. App. [254] at 256, 368 S.E.2d [11] at 13
[(1988)]; O'Neal v. Wynn, 64 N.C. App. 149,
153, 306 S.E.2d 822, 824 (1983), aff'd, 310
N.C. 621, 313 S.E.2d 159 (1984).
Ellis, 126 N.C. App. at 364, 485 S.E.2d at 83.
Plaintiff's voluntary depression of income must have been made
with an intent to avoid his child support obligation. The only
finding by the trial court on this point was that it was not madein bad faith. This should have ended the discussion and the
earning capacity rule should not have been applied.
Defendant contends that the recent case of King v. King, 153
N.C. App. 181, 568 S.E.2d 864 (2002) has somehow changed the law in
this area, and is controlling. We disagree for a myriad of
reasons. In that case, the movant asked for a reduction in her
child support obligation due to a change in circumstances, namely
that her income had substantially decreased. The evidence showed
that this was because she had essentially stopped working and did
not give the trial court a satisfactory explanation for her
actions. Id. at 185-86, 568 S.E.2d at 866. Defendant stresses the
following quote from King: “A party's capacity to earn income may
become the basis of a child support award if it is found that the
party voluntarily depressed her income.” Id. at 185, 568 S.E.2d at
866. Yet, defendant ignores the following qualification: “Before
the earning capacity rule may be applied, there must, however, also
be a showing, reflected by the trial court's findings, 'that the
actions which reduced a party's income were not taken in good
faith.'” Id. (quoting Sharpe v. Nobles, 127 N.C. App. 705, 708,
493 S.E.2d 288, 290 (1997)). The Court in King made special note
that, “as Defendant did not carry her burden of showing good faith
. . . the trial court, in the absence of any evidence regarding
intent, properly found that '[D]efendant's actions which reduced
her income were not taken in good faith.'” Id. at 186, 568 S.E.2d
at 866-67. King is clearly controlling. Unfortunately fordefendant, it is a mere restatement of the existing law which
requires that voluntary reductions be made in bad faith.
Bad faith is a general term given to situations which trigger
the earning capacity rule. An intentional reduction in income is
not punishable by the earning capacity rule unless it is proven to
have been made to avoid a child support obligation. Therefore,
plaintiff's assignment of error is sustained.
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