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Caldwell v. State, Dept. of Revenue, Child Support Enforcement Div. (01/21/2005) sp-5861
Caldwell v. State, Dept. of Revenue, Child Support Enforcement Div. (01/21/2005) sp-5861
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
KENNETH A. CALDWELL, )
) Supreme Court No. S-11149
Appellant, )
) Superior Court No.
v. ) 3AN-97-7007 CI
)
STATE OF ALASKA, ) O P I N I O N
DEPARTMENT OF REVENUE, )
CHILD SUPPORT ENFORCEMENT ) [No. 5861 - January 21, 2005]
DIVISION, and JAKKI THORNTON, )
)
Appellees. )
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Morgan Christen, Judge.
Appearances: Sarah J. Tugman, Anchorage, for
Appellant. D. Kevin Williams, Assistant
Attorney General, Anchorage, and Gregg D.
Renkes, Attorney General, Juneau, for
Appellee State of Alaska.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
BRYNER, Chief Justice.
I. INTRODUCTION
In December 2000, a year and a half after Kenneth
Caldwell and Jakki Thornton divorced, Caldwell and other owners
of Audio-Video, Inc., sold the company to a competitor; as part
of the sale, Caldwell gave up his job at Audio-Video and agreed
not to compete with the buyer for five years. Caldwell was paid
his share of the sale proceeds, more than $500,000, in 2000 and
2001. More than a year later, however, in a proceeding filed to
establish Caldwells future child support obligation, the superior
court ruled that the sale proceeds should be counted as annual
income spread evenly over the five-year period of Caldwells
agreement not to compete. Caldwell appeals this decision. We
reverse, concluding that the sale proceeds were returned capital
with one-time capital gains and, absent a finding of exceptional
circumstances, could not properly be treated as five years of
income for the purpose of determining Caldwells duty to pay
support.
II. FACTS AND PROCEEDINGS
Kenneth Caldwell and Jakki Thornton divorced in May
1999. Thornton was awarded primary custody of the parties two
children. Caldwell was ordered to pay monthly child support
based on his annual earnings at Audio-Video, Inc. a closely held
company in which Caldwells father had given him stock comprising
a minority interest and where Caldwell had worked since he was
twenty years old. As part of the property distribution, Caldwell
was also awarded his Audio-Video stock, which the court treated
as being his separate property.
In December 2000 Caldwell sold his stock in Audio-
Video. The sale was part of a larger transaction in which the
companys majority shareholders apparently decided to sell out to
a larger competitor. As part of the sale, Caldwell gave up his
job and, together with Audio-Videos other shareholders, promised
not to compete with the new buyer for five years after the sale.
Caldwell received most of his part of the sale proceeds when the
sale closed in December 2000 and was paid the rest in 2001 sums
totaling about $553,210. After selling his shares and receiving
these funds, Caldwell did not attempt to find a new job, relying
on the proceeds to pay his child support and usual expenses.
Thornton moved to Mississippi in the summer of 2001.
Caldwell requested a modification of the child custody
arrangements and the superior court awarded him interim custody
pending a child custody investigation. The custody award
terminated his support payments and ordered Thornton to begin
paying monthly support to Caldwell. Thornton failed to pay
support while the children lived with Caldwell but resumed
primary custody in July 2002 as recommended by the custody
investigator. Her duty to pay monthly support then ceased, but
she did not immediately move to renew Caldwells child support
payments.
Several months later, Thornton asked Alaskas Child
Support Enforcement Division for help in obtaining support. In
March 2003 CSED filed a motion asking the superior court to issue
a child support order. Noting that Caldwell appeared to be
voluntarily unemployed, CSED sought an order directing him to
make monthly payments of $1,537 an amount calculated by imputing
future earnings to Caldwell equaling CSEDs estimate of his income
during his last full year of actual work.1
Caldwell opposed CSEDs motion, objecting that CSEDs
imputed income figure neglected to offset Thorntons unpaid
support and was excessive in any event because it improperly
included capital gains from his Audio-Video stock sale. Caldwell
also denied CSEDs claim that he was voluntarily and unreasonably
unemployed, and he accused CSED of unfairly assuming that he
could still earn as much as he did before losing his job at Audio-
Video. He pointed out that he had sold his stock and lost his
job as a result of a corporate buy-out of a company in which he
was a minority shareholder. He further emphasized that he was
subject, for several more years, to a non-compete agreement which
does not allow him to work in Alaska in the only field in which
he has training and experience. Moreover, according to Caldwell,
he had used the buy-out proceeds to pay child support at a much
higher rate than he would have been required to pay based on his
actual income during that time; he had purchased private medical
insurance for his children; and he had paid all their expenses
when they lived in his custody and had received no support
payments from Thornton. In summary, Caldwell insisted that he
probably at best could expect to find a minimum wage job. If he
did, his income would . . . result in a child support obligation
of less than $400.00 a month. Calling CSEDs proposed support
payment egregiously unfair, Caldwell asked the court to set his
child support payments at $400.
CSED shifted grounds in replying to Caldwells
opposition. Abandoning its initial approach of imputing income
to Caldwell because he was voluntarily unemployed, the agency
proposed a revised theory of calculating his payment one that
increased its original request for support by characterizing the
buyout proceeds as income replacing the five years of earnings
that Caldwell gave up by signing the agreement not to compete:
The stock sale is income that falls
under [Alaska Civil Rule 90.3 Commentary III
A. (3), (4), (5), (7), and (8)]. Because Mr.
Caldwell has received money for agreeing not
to work, and in fact is not working and
instead spending this money, it is
appropriate to divide the $553,210.00
received by five years (representing the
duration of the non compete clause), and add
in the anticipated permanent fund dividends
over five years to calculate a gross annual
income of $112,182.76. After allowing for
deductions, Mr. Caldwell should pay $1,789.00
per month[.] (Internal references omitted.)
The superior court accepted this theory and issued a
written order adopting the view that, for purposes of calculating
Caldwells child support payments, the sale proceeds equated to
five years of future income:
CSEDs revised calculation does not impute
income based upon the theory that Mr.
Caldwell is voluntarily under employed. It
is premised upon Mr. Caldwells argument that
the non-compete makes it impossible for him
to work in his chosen field, and that the buy-
out is therefore compensation for not
working. Though Mr. Caldwell argues that the
non-compete makes it impossible for him to
achieve income comparable to the levels he
earned before the company was sold, this
argument reinforces the conclusion that the
buy-out should be considered as compensation
for not working for a period of five years
and treated as income for purposes of
calculating child support.
CSED amortized the entire buy-out over 5
years, and concluded that Mr. Caldwell could
be fairly assessed with $112,182 in annual
income. Mr. Caldwell correctly argues that
this sum is significantly more than his
annual income during the years when he was
working in the company. However, a review of
CSEDs attached calculation shows that the
income cap was applied and Mr. Caldwells
adjusted income for child support purposes
was $79,524.
Using CSEDs revised calculation, the court ordered
Caldwell to pay monthly support of $1,708 as of July 2002, the
month when the children left Alaska and reunited with Thornton in
Mississippi.
Caldwell moved for reconsideration. His motion
challenged the courts characterization of the sale proceeds as
payment for five years of not working, renewed his original
arguments, and supplied additional documentation to support his
position. The superior court denied Caldwells motion and
confirmed its earlier ruling, explaining its decision concerning
the sale proceeds as follows:
Mr. Caldwells implied argument is that a
one-time sale of a capital asset cannot be
considered to be a regular source of income.
However, in this case the sale of stock was
coupled with Mr. Caldwells agreement not to
compete in the same field for a period of
five years. In fact, Mr. Caldwell
represented that he was unable to work much
after the sale due to this agreement and the
limitation of other employment outside the
audio-video industry suited to his education
and training. . . . This appears to be the
basis for Mr. Caldwells assertion . . . that
his net annual income was approximately
$13,300 subsequent to the sale. . . .
However, the inescapable conclusion is that
Mr. Caldwell treated the net proceeds
received from the stock sale as a substitute
source of income for the ensuing five-year
period during which he would not be working
in the audio-visual field. These proceeds
constituted his primary source of income for
the duration of the non-compete period.
(Internal references omitted.)
Caldwell then filed this appeal.
III. DISCUSSION
A. Standard of Review
We will reverse a superior courts child support order
only for abuse of discretion or if the court applied an incorrect
legal standard.2 Whether the trial court used the correct method
of calculating child support is a matter of law, therefore we
give no deference to the trial courts decision.3 We review a
superior courts findings of facts used to determine child support
under the clearly erroneous standard.4
B. Stock Sale Proceeds
On appeal, Caldwell argues that the superior court
erred in basing his future child support payments on an old, one-
time only, receipt of proceeds from the sale of personal
property. He insists that the proceeds were payment for an asset
he sold, and also contends that the evidence fails to support the
courts conclusion that the proceeds amounted to compensation for
him not to work. We agree. The sale proceeds amounted to one-
time capital gains, plus a return on capital.5
In treating the stock sale proceeds as a five-year
stream of income, CSED and the superior court relied on the
Commentary to Civil Rule 90.3.6 But the commentary provides
scant support for CSEDs proposal.
Rule 90.3(a)(1) requires child support to be based on
the non-custodial parents adjusted annual income and looks to the
parents total income from all sources as the proper starting
point for calculating adjusted annual income. These provisions
are addressed in Part III.A. of the Commentary to Rule 90.3,
which generally advises that the rules key phrase parents total
income from all sources should be interpreted broadly to include
benefits which would have been available for support if the
family had remained intact. The commentary goes on to list
twenty-nine examples of items to be included as income. As one
of these examples, the commentary specifically advises courts to
include capital gains in real and personal property transactions
to the extent that they represent a regular source of income.7
Here, the superior court expressly acknowledged this provision
but did not find it to be controlling and chose to give greater
weight to other listed examples.
Specifically, the court cited Civil Rule 90.3
Commentary III. A. (3), (4), (5), (7), and (8), which lists items
of income including severance pay,8 royalties,9 bonuses and
profit sharing,10 income derived from self-employment and from
businesses or partnerships,11 and social security.12 But as
Caldwell correctly points out, none of these examples neatly
describes his situation, a one-time sale of corporate stock.
The court also placed weight on the commentarys general
admonition that courts should interpret Rule 90.3(a) broadly to
include benefits which would have been available for support if
the family had remained intact.13 Yet invoking this broad
interpretive principle here appears problematic for several
reasons.
Because Caldwells Audio-Video stock was apparently
acquired by him from his parents and awarded to him in the
divorce as non-marital property, it does not seem self-evident
that Thornton would have been entitled to count on the stock or
its sale revenues as a source of support if the family had
remained intact. More important, even assuming that the revenues
could properly be counted as income available to the intact
family, they would amount to income only to the extent that they
represented capital gains.14 And because they reflected a one-
time sale and were non-recurring, the proceeds could at most
qualify as income accruing only in the two years when proceeds
were actually paid; absent an express finding of exceptional
circumstances under Rule 90.3(c), CSEDs proposal to spread two
years of payments over a span of five years would directly
conflict with the policies underlying Rule 90.3s cap on annual
income. In reaching the contrary conclusion and treating
the sale proceeds as a five-year income stream, the superior
court found it determinative that Caldwell agreed to a five-year
non-compete agreement that left him unable to work much after the
sale. But these findings are as problematic as reliance on the
commentary to Rule 90.3. They hinge on the assumptions that
Caldwell voluntarily chose to sell his business to a competitor,
that he separately opted to sign a five-year agreement not to
compete, and that the entire payment amount was attributable to
the agreement not to compete. As it currently stands, the record
does not fairly support these assumptions. Caldwell has
consistently asserted that he owned a minority interest in Audio-
Video; CSED has not refuted, or even contested, this assertion.
As a minority shareholder, Caldwell potentially had no power to
prevent the majority shareholders from selling the company.15
Moreover, the covenant not to compete appears to have been an
ordinary and integral condition of the contract for the companys
sale, a provision that all shareholders were required to accept.
We see no realistic basis, then, for viewing the sale proceeds as
merely reflecting a payment for Caldwells willingness to sign the
agreement not to compete.
The superior court appears to have faulted Caldwell to
a certain extent for neglecting to fully explain the
circumstances surrounding the sale and for failing to prove the
exact value attributable to his promise not to compete. But CSED
first raised its proposal to characterize the sale proceeds as a
five-year revenue stream at a late stage in the case: when the
agency filed its reply memorandum to Caldwells memorandum
opposing its original theory. CSED thus left Caldwell no
opportunity to respond to its revised theory before the court
issued its ruling. Caldwells only recourse, then, was to seek
reconsideration of a decision that had already been made.
Moreover, as the proponent of the new theory, CSED had the
primary burden of justifying this unusual method of calculation.
Although Caldwells superior knowledge of the sales financial
details might have given the court good reason to consider
shifting part of the burden to him, the court never expressly did
so; thus, when Caldwell moved for reconsideration, he lacked any
clear notice of what the court expected him to show. Given this
unusual procedural backdrop, we think it unfair to fault Caldwell
for failing to make a more detailed showing.
While CSED attempts to support its view by
distinguishing authorities cited by Caldwell, it cites no
persuasive authority bolstering its own proposal to treat sale
proceeds actually paid in 2000 and 2001 as a continuous five-year
income stream. Moreover, even if we accepted the premise that
CSEDs proposed approach might be appropriate in certain unusual
settings, the existing record indicates that this approach
presents an unrealistic picture of the transaction disputed here.
On the one hand, even assuming that Caldwell actually
wanted to sell the business, had a say in the matter, and
actively negotiated the covenant not to compete as a way to avoid
five years work, we see no evidence to justify valuing his
promise not to compete as being worth more than he would have
earned had he remained employed at Audio-Video earnings that
would evidently lead to an adjusted income falling well below one
attributed to him under CSEDs five-year income-stream method.
Caldwells post-sale willingness to remain unemployed does not
point to a different conclusion. To the contrary, uncontroverted
evidence offered by Caldwell seems to show that he maintained a
modest lifestyle after the sale, spending only limited amounts of
the proceeds for his ordinary living expenses a pattern strongly
supporting Caldwells position that the proceeds were not merely a
substitute for five years of lost earnings. Even viewing the
record in the light least favorable to Caldwell, then, it does
not realistically support valuing the proceeds as exceeding
Caldwells prior earnings.16
On the other hand, if we assume that Caldwell had no
voice in bringing about the sale, that he involuntarily lost his
job and his ability to obtain similar work, and that he has
accurately described the limited extent of his current earning
capacity issues that were left unresolved below then his
willingness to remain unemployed and use sale proceeds for
support would at most demonstrate little more than a voluntar[y]
and unreasonabl[e]17 choice to forgo a limited regular income an
income worth only a fraction of the one that he formerly earned.18
Viewed in the light most favorable to Caldwell, then, the record
would support treating only a minor part of the proceeds as
continuing income.
Accordingly, although we recognize that these differing
views of the record could easily support different child support
calculations, we hold that no tenable view of the record could
justify dividing the entire amount of the proceeds into five
equal annual income payments accruing under Rule 90.3(a).19
We emphasize that this holding does not necessarily
mean that the sale proceeds could have no further bearing on the
appropriate level of Caldwells child support payments.
The continued availability of these funds could
conceivably be treated as an exceptional factor warranting some
increase in Caldwells support obligation.20 But reliance on the
proceeds availability as an exceptional factor warranting further
adjustment could only be justified if the superior court
considered the totality of the circumstances, including the
childrens need for support and Thorntons income, and only if it
then made express findings conforming to the requirements of Rule
90.3(c) a matter that the superior court has not yet considered.21
IV. CONCLUSION
We therefore REVERSE the child support order and REMAND
for further proceedings to establish Caldwells support obligation
in a manner consistent with this opinion.
_______________________________
1 Caldwells gross wages from his work at Audio-Video
during the last year he worked there, 2000, were approximately
$63,000.
2 Beaudoin v. Beaudoin, 24 P.3d 523, 526 (Alaska 2001).
3 Turinsky v. Long, 910 P.2d 590, 593 n.10 (Alaska 1996).
4 Routh v. Andreassen, 19 P.3d 593, 595 (Alaska 2001).
5 The record indicates that Caldwells basis on the stocks
was approximately $90,000.
6 Although the commentary to Rule 90.3 has not been
officially adopted, we have previously noted that it can provide
useful guidance in applying the rule. See Eagley v. Eagley, 849
P.2d 777, 779 (Alaska 1993).
7 Alaska R. Civ. P. 90.3 Commentary Part III.A.(16)
(emphasis added).
8 Id. at (3).
9 Id. at (4).
10 Id. at (5).
11 Id. at (7).
12 Id. at (8).
13 Alaska R. Civ. P. 90.3 Commentary Part III.A.
14 See, e.g., Robinson v. Robinson, 961 P.2d 1000, 1003 &
n.3 (Alaska 1998) (allowing non-custodial spouses sale of land to
be treated as income, but only to extent that the proceeds
represented capital gains or payments of interest).
15 Cf. Alaska Plastics, Inc. v. Coppock, 621 P.2d 270, 273-
74 (Alaska 1980) (noting that majority shareholders who control
[and] operate policy are in a unique position to squeeze out a
minority shareholder).
16 Cf. Ogard v. Ogard, 808 P.2d 815, 819-20 (Alaska 1991)
(suggesting that special circumstances to justify imputing income
under Rule 90.3(c) might arise if non-custodial parent liquidated
income-producing assets and reinvested them to avoid producing
income in order to lower child support payments).
17 Alaska R. Civ. P. 90.3 Commentary Part III.C.
18 See Johansen v. State, 491 P.2d 759, 769 (Alaska 1971)
(citing Houger v. Houger, 449 P.2d 766, 770 (Alaska 1969) for
proposition that a parents inability to work at a chosen trade
doesnt excuse child support obligation or justify failure to seek
other work).
19 Our decision makes it unnecessary to decide other
points raised in Caldwells briefs.
20 As we have recognized on other occasions, when a court
is asked to reduce a child support obligation where the parent
seeking the reduction is temporarily employed at an income level
that does not accurately reflect past and future income levels,
the court may properly consider the availability of liquid assets
to satisfy an ongoing child support obligation. Patch v. Patch,
760 P.2d 526, 530 (Alaska 1988); see also Nass v. Seaton, 904
P.2d 412, 416 & n.8 (Alaska 1995) (gift to obligor parent not
income under Rule 90.3 but may be considered under 90.3(c) if
clear and convincing evidence shows that variation to include
gift is necessary to avoid manifest injustice); cf. Clemans v.
Collins, 679 P.2d 1041, 1041-42 (Alaska 1984) (parents
imprisonment amounts to changed circumstance for modifying
support absent showing that parent has income or assets from
which support can be paid); Houger v. Houger, 449 P.2d 766, 771
(Alaska 1969) (cited in Patch for proposition that ability to
sell assets may be considered when parent disabled and unable to
work).
21 See Nass, 904 P.2d at 416 n.8.
