Birkhold v. Birkhold, 343 Conn. 786 (2022)(definition of “income” & alimony; earning capacity & modification; contempt)
Officially released June 28, 2022
In Short: (1) Husband was bound by separation agreement to pay 30% of his income, very broadly defined, as alimony. Husband then paid almost nothing in alimony on large sums of income in the forms of draws and consulting fees directed through his LLC over multiple years, which he kept and paid tax on. All of Husband’s lawyering failed to obfuscate the basic fact that Husband’s various forms of compensation did, in fact, constitute income under any reasonable definition of income. (2) Husband tried and failed to challenge the trial court’s modification of his alimony based his unsuccessful argument that the earning capacity and net income found by the trial court were not supported by the record. (3) The finding of contempt and order for counsel fees did not constitute abuse of discretion.
The Facts: The parties were divorced by separation agreement in 2009. The separation agreement required Husband to pay, inter alia, alimony of “30 percent of his ‘gross annual base income from employment’ as defined herein … and 25 percent of his gross cash bonus.”
The separation agreement defined “gross annual base income from employment” as “income actually received by [Husband] from employment … from any and all sources derived…. [which] shall include income from wages, salaries, consulting or other fees, commissions, director’s fees and compensation for or by reason of past, present or future employment, in whatever form received.” (emphases added). The separation agreement also required a party deemed by a court to have breached the separation agreement to pay the other party’s reasonable counsel fees.
At time of dissolution in 2009, Husband was CEO of a major corporation and he remained highly compensated until, in 2014, he became unemployed for a year. Thereafter, he accepted a position as a commercial real estate broker. He was paid a draw on future commissions, initially in the amount of $35k , which he claimed he would owe back if he did not earn sufficient commissions. Husband offered to pay 30% of the draw so long as Wife agreed she would pay it back if he did not earn it. Wife agreed at the time based on difficult financial circumstances she was under.
Husband’s draw then increased substantially, ranging from as high as $315k to as low as $138k between 2016 and 2019. Husband also received payments as a business consultant to other entities during that period totaling $630k. Despite the increased income, Husband continued to pay Wife only $875/month in alimony.
In 2017 Wife filed a motion for contempt for Husband’s failure to pay alimony consistent with the separation agreement. Husband filed a motion to modify his alimony alleging a substantial change in circumstances in the nature of his employment, contending that the definition of “gross income” was no longer workable due to the claw-back provisions of his employment and business expenditures he makes to generate income which are not accounted for.
Both motions were tried over multiple days and the trial court issued a memorandum of decision in 2019 finding Husband in contempt and awarding Wife past due alimony of $249k to be paid in $3,500 monthly installments and counsel fees of $80k to be paid in $4,000 monthly installments. The trial court granted Husband’s motion to modify by eliminating the 30% of gross annual base income and replacing it with a fixed alimony obligation of $6,500/month.
Husband appealed and the appeal was transferred directly to the Supreme Court pursuant to C.G.S. § 51-199(c) and PB § 65-1.
Husband’s first claim on appeal was that the trial court incorrectly interpreted the separation agreement and made a clearly erroneous finding that his draw was income subject to alimony. Husband argued that, because it was subject to repayment, the draw was not income actually received until he earns the commission.
The Supreme Court noted that interpretation of a separation agreement is guided by principles of contract law. When a contract is unambiguous its interpretation is a question of law. Where a contract is ambiguous its review is a matter of factual determination.
The Supreme Court agreed with the trial court that the clear and unambiguous definition of “gross annual base income” included income from self-employment or as an independent contractor. It was an expansive definition including income “actually received” for all manner of defined purposes. The Supreme Court stated, however, that the term “income” itself is ambiguous and will vary by case and context! Because the separation agreement defined “gross annual base income” to include “income actually received” the definition of income here is ambiguous. The Supreme Court noted, however, that “income” has been defined broadly in family cases, including even gifts if regularly and consistently received. However, loans are not assets and cannot properly be considered income.
Husband presented evidence that unearned draws could be clawed back if his employment was terminated. However, Husband presented no evidence about how repayment would be calculated, nor any evidence that any draw was ever even requested to be repaid, let alone actually clawed back. The monies were reported as income for all purposes except that Husband did not pay alimony. Husband presented no evidence as to why his purported debt to his employer fluctuated, how much of his commissions were applied to draws, or why he did not pay alimony on the commissions he earned. The Supreme Court held that the trial court’s findings were not clearly erroneous as to its interpretation of the separation agreement.
Husband’s second claim on appeal was that the trial court incorrectly interpreted the separation agreement and made a clearly erroneous finding that money earned by, and paid to, his LLC was income subject to alimony. Husband argued that although he rendered services on behalf of the LLC, money earned by the LLC is subject to business related expense deductions and the money is not received by him and therefore is not income for purposes of alimony.
The Supreme Court noted the ambiguity as to the term “income” and therefore analyzed whether payments to the LLC fell within the scope of that definition. Husband had created his LLC in 2014, was a 50% member with his new wife until 2019 and was then the sole member. Since 2017 he elected to have it taxed as an S-Corp. Husband chose to have his draws and money earned from other consulting services deposited into the LLC’s account.
The Supreme Court agreed with the trial court that Husband could not use the corporate form to shield income from alimony, even if there were tax benefits to structuring his dealings in this manner. The trial court had found that the business of the LLC appeared to be only taking money that Husband otherwise already earned and claiming deductions or expenses to shield it from Wife. Nothing in the separation agreement addressed business related expenses. The Supreme Court found no clearly erroneous factual findings. The Supreme Court conceded that income of an LLC may be considered separate and distinct from a member’s income, but that determination is a case-by-case one and not applicable here.
Husband’s third claim on appeal was that the trial court incorrectly modified his future alimony obligations based on a net annual income and an earning capacity not supported by the record. He argued that the trial court failed to consider all relevant statutory criteria and only considered his gross income.
The trial court stated that it found a substantial change in circumstances and stated that it considered all the relevant statutory criteria. The trial court found a net earning capacity of at least $250k, taking into consideration factors of § 46b-82 and the fact that Husband’s new state of residence had no state income tax. The trial court expressly considered the parties’ health. The trial court considered future conflict and litigation in the form of its modification.
The Supreme Court found sufficient evidence in the record to support the trial court’s findings of Husband’s earning capacity and that the $6,500 monthly award was not an abuse of discretion. It was based not only on past gross earnings but also a long and successful career as senior executive, broker, and consultant. The trial court provided a second look upon age sixty-five and considered the income and earning potential of both parties. The Supreme Court found no abuse of discretion.
Husband’s fourth claim on appeal was that the trial court erred in finding him in contempt because the separation agreement was not clear and unambiguous, and his actions were not willful because he relied on the advice of professional advisors.
The Supreme Court noted that contempt must be proved by clear and convincing evidence, the issue of ambiguity of an order is subject to de novo review, and the trial court’s determination of willfulness is subject to review under the abuse of discretion standard.
The Supreme Court concluded that, despite it being ambiguous from the separation agreement whether the draw was income or a loan, it was clear that Husband did not make any good faith attempt to meet his alimony obligation as to any of his sources of income, including those over which there was no such ambiguity. Further, the Supreme Court noted that the appropriate remedy to ambiguity is to seek judicial resolution rather than to resort to self-help. The Supreme Court found no abuse of discretion as to the contempt finding nor the award of attorney’s fees, which fees were provided for in the separation agreement in the event of a breach.
The Judgment was affirmed.