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HomeMy WebLinkAbout94-0964 Civil KIMBERLI J. OLAFSSON, : IN THE COURT OF COMMON PLEAS OF Plaintiff : CUMBERLAND COUNTY, PENNSYLVANIA : v. : CIVIL ACTION - SUPPORT : GUDJON J. OLAFSSON, : Defendant : NO. 964 SUPPORT 1994 IN RE: OPINION PURSUANT TO PA. R.A.P. 1925 Oler, J., April 17, 1995 In this case, a man who owns a company with gross receipts of close to a half million dollars a year has appealed a child support order of $700 a month. This opinion in support of the order is written pursuant to Pennsylvania Rule of Appellate Procedure 1925(a). STATEMENT OF FACTS The parties, Kimberli Jeanette Olafsson (Plaintiff) and Gudjon Jens Olafsson (Defendant), were married on June 17, 1989.~ One child was born of the marriage - Gudjon Jens-Kristjan Olafsson (Child)2 -- on July 31, 1991.3 The parties separated on September 17, 1994.4 Since the separation, the child has resided with Plaintiff at her parents' home at 217 South High Street, Mechanicsburg, Cumberland County, Pennsylvania.5 Defendant has resided in a home owned by him at ~ Vol. I, N.T. 66, Support Hearing, Olafsson v. Olafsson, No. 964 Support 1994 (hereinafter Vol. , N.T. __). Vol. III, N.T. 48. Vol. III, N.T. 4. Vol. III, N.T. 4-5. Vol. III, N.T. 3-5; Olafsson v. Olafsson, Complaint for Support, No. 964 Support 1994. NO. 964 SUPPORT 1994 3604 Golfview Drive, Mechanicsburg, Cumberland County, Pennsylvania.6 Plaintiff instituted the present action for child support on September 22, 1994.? Following a conference conducted by a domestic relations officer,8 a recommended order was entered by the court on November 1, 1994.9 The order directed that Defendant pay the sum of $700 per month, $200 of which was attributed to child- care expenses; that he pay $25 per month on accumulated arrearages; that Plaintiff maintain medical insurance on the child through her employer; and that the parties share equally any unreimbursed medical expenses.~° The order was predicated on net income of Plaintiff of $1,824 per month, net income of Defendant of $4,232+ per month, and child-care expenses of $392 per month.~ Defendant appealed from this order, and made no payments whatsoever on it.~2 A hearing on the appeal, as well as on a petition for contempt arising out of the absence of any payments by 6 Vol. I, N.T. 51, 57. 7 Vol. I, N.T. 3. An action for divorce was also commenced by Plaintiff, on September 20, 1994. Vol. I, N.T. 51. See Pa. R.C.P. 1910.11. Vol. I, N.T. 3. Recommended Order of Court, November 1, 1994. Domestic Relations Office -- Conference Summary, November 17, 1994. ~2 Vol. I, N.T. 3-4. 2 NO. 964 SUPPORT 1994 13 Defendant, was held by the writer of this opinion; the hearing consumed portions of three days.TM Evidence at the hearing indicated that the child was enrolled in day care at Magic Years in Camp Hill, Cumberland County, Pennsylvania, Monday through Friday.~5 The day-care cost was $94 per week,~6 or $407 per month.~7 As of the hearing, Plaintiff had been employed for about six months as a marketing coordinator with a company called Synergistech, Incorporated, and had a net biweekly income of $917,~8 or $1987 per month. She also had about $10,000 in certain retirement accounts, a part interest in a $91,00020 condominium ~3 Vol. I, N.T. 3. ~4 The hearing was held on Thursday, February 2, 1995, Thursday, February 9, 1995, and Friday, February 17, 1995. Vol. III, N.T. 5. Vol. III, N.T. 6. A stipulated figure of $392 per month was arrived at by the expediency of multiplying $94 by four. Vol. I, N.T. 50. ~8 Vol. III, N.T. 4. This was slightly higher than the figure used at the conference conducted by the domestic relations officer, although the parties stipulated that Plaintiff's income as reported at the conference was correct. Vol. I, N.T. 48-49. ~9 Vol. I, N.T. 75; Vol. III, N.T. 11. 20 Defendant's Exhibit 2, Support Hearing, Olafsson v. Olafsson, No. 964 Support 1994 (hereinafter Plaintiff's/Defendant's Exhibit __). 3 NO. 964 SUPPORT 1994 owned with her husband and his mother,2~ and title to a 1986 Honda automobile2~ and a Mitsubishi automobile.~3 Defendant was a graduate of Rutgers University with a degree in economics.~4 He was also the recipient of a master's degree in business administration from Penn State University.~s In April of 1992, he voluntarily left a position as marketing director of a local corporation at a salary of between $65,000 and $70,000 per year, because of a "personal goal of [his] to ... have [his] own business and accomplish something on [his] own."2~ He received severance pay,27 as well as proceeds in the amount of about $82,000 from a retirement account.28 He also had a bank account in Iceland.~9 Vol. I, N.T. 69; Vol. II, N.T. 29; Defendant's Exhibit 2. Vol. II, N.T. 8-9. Defendant was currently driving the Honda. Vol. II, N.T. 8. Vol. I, N.T. 76; An outstanding loan balance on thi~ automobile was $24,000. Id. Vol. I, N.T. 52. Vol. I, N.T. 52. Vol. I, N.T. 53-55. Vol. I, N.T. 77. The amount of severance pay was not divulged at the hearing. ~8 Vol. I, N.T. 37. 29 Vol. II, N.T. 27, 29. The amount of this account, established by Defendant's grandfather, was not divulged at the hearing. 4 NO. 964 SUPPORT 1994 With financial help from his parents,3° he bought a Perry County corporation which manufactured somewhat expensive glassware, such as lampshades, for $359,000.3~ About $94,000 worth of inventory was included.32 Gross sales of the business for 1993 were reported at about $550,000,TM and gross sales for 1994 were expected to be reported at $475,000.34 However, the corporate tax return for 1993 reported a loss of about $34,000;3s a similar loss was expected to be reported for 1994.36 The returns were prepared by a certified public accountant37 on the basis of "management's representations.-38 A substantial part of the deductions for tax purposes involved 30 Defendant's parents provided him with $165,000 at settlement, and about $35,000 more since then. Vol. I, N.T. 54-56. 3~ Vol. I, N.T. 8-9, 12, 15, 19, 24. The basic price was $335,000, but it increased by $24,000 because of additional inventory existing as of the settlement date. Vol. I, N.T. 8-9. 32 Vol. I, N.T. 8-9. Technically, Defendant's purchase was of the stock of the corporation. Vol. I, N.T. 9. A non-compete agreement from the prior owners was also involved. Vol I, N.T 41-43. ' ' Vol. I, N.T. 40. Vol. I, N.T. 21. Vol. I, N.T. 23, 36. Vol. I, N.T. 23-24. Stephen J. Kindler, C.P.A., Vol. I, N.T. 4-5. Vol. I, N.T. 38. This procedure, which essentially involves a compilation process, provides the lowest level of assurance in terms of professional accounting services. Id. 5 NO. 964 SUPPORT 1994 non-cash charges like depreciationTM and amortization of a covenant- not-to-compete item.4° Business expenses also included significant charges for travel by persons such as Defendant.4~ Defendant reported only minimal amounts of income from the corporation.42 On the other hand, the value of corporate inventory apparently increased by about $25,000 following his purchase,43 and a certain benefit must be said to have accrued to him accordingly. As of the hearing, Defendant was residing in a $200,000, four- bedroom home which he had owned prior to the parties' marriage.~4 The mortgage of $1242 per month on the home4s and utility expenses of $400 per month46 were being kept current.47 A college friend of Defendant was living rent-free in the home and helping in the business.48 The Defendant was also managing the aforesaid Vol. I, N.T. 42. Vol. I, N.T. 41. Plaintiff's Exhibit 1. E.g., wages of around $8,000 in 1993. Vol. I, N.T. 15. Vol. I, N.T. 44. Vol. I, N.T. 68-69; Vol. II, N.T. 21; Defendant's Exhibit Vol. II, N.T. 6. Vol. II, N.T. 7. Vol. II, N.T. 26-27, 34. Vol. II, N.T. 34-35, 45. 6 NO. 964 SUPPORT 1994 condominium of which he was part owner.49 When asked on cross-examination whether he intended to dispose of a business which he contended had generated only losses, Defendant responded as follows: Terminating the business is a lot more complicated, as you know, being a bankruptcy lawyer. There are debtors that have the moneys outstanding. There is also issues regarding the financial ability -- or the ability to borrow as a person that goes into bankruptcy. Anybody you owe money wants their money back. There are not enough assets at this time to cover the borrowed moneys. So, to answer your question, it's not an easy decision to do that. But I also believe that we have been laying a foundation for, now, almost three years, and sometimes it takes three or four or five years to lay a positive, solid foundation where you can build a business and have a good living and an income in the future. We believe in this still, and we see that these things are possible. One of our problems is we're very undercapitalized, which does not allow us to move fast -- as fast as we would like to do. Quite frankly, if we could borrow large sums of money, we would be in much better financial shape because we could turn product faster. But being undercapitalized, it does not allow us to move in that direction fast enough, which keeps the process slow.so Plaintiff testified, in a less philosophical vein, that Defendant made a practice of siphoning off cash paid by customers 49 Vol. I, N.T. 69. 50 Vol. II, N.T. 32. 7 NO. 964 SUPPORT 1994 at retail shows from the business without reporting it for income tax or show-commission purposes.5~ Defendant vehemently denied this accusation.52 Defendant testified that he had been able to meet expenditures to date only because of the influx of parental money, and that the funds so provided to him were only loans,s3 In this regard, however, it appeared that he claimed expenditures of around $24,000 during a period when his only admitted source of income was $8,000 from his mother;54 and it developed that a note providing for repayment of funds supplied by his parents in 1992 had been executed only in the midst of the present proceedings, on February 8, 1995.~ At the conclusion of the hearing, the Court entered the following Order: AND NOW, this 17th day of February, 1995, upon consideration of the Defendant's appeal from the recommended Order of Court dated November 1, 1994, and upon consideration of the Petition for Contempt, and following a hearing, the Court finds that the Plaintiff's net salary per month is $1,987.00, the child- care expenses with respect to the parties' son are $407.00 per month, and the Defendant's net Vol. III, N.T. 8-9. Vol. III, N.T. 19-48. Vol. I, N.T. 68, 77; Vol. II, N.T. 18, 27, 36. Vol. II, N.T. 27-30. Vol. II, N.T. 39-40, 44. 8 NO. 964 SUPPORT 1994 earning capacity/income is in excess of the $4,232.00 per month attributed to him by the support officer in computing the recommended Order. It appearing that the guidelines would call for child support in excess of the $700.00 per month ordered in the November 1, 1994, Order, the Defendant's appeal from the Order is DENIED; provided, pursuant to an agreement of counsel, that the Order is hereby modified to provide that the sum of $50.00 per month shall be paid on arrearages and that the Plaintiff shall maintain medical insurance on the Defendant through her employer conditioned upon the Defendant's payment in advance of any cost related to said coverage. On the Petition for Contempt, the Court will give the Defendant the benefit of the doubt by assuming that he was unaware that he had to pay an Order which was under appeal, and for that reason the Petition for Contempt is hereby dismissed. Defendant filed an appeal from the order on March 14, 1993. The basis for the appeal was given in a statement of matters complained of on appeal as follows: a. The Court committed error in the calculation of Defendant's income. b. The Court committed error by attributing Defendant with an earning capacity higher than the income which he actually has from his business. c. The Court committed error in the calculation of Plaintiff's income. d. The Court committed error in the calculation of child support. NO. 964 SUPPORT 1994 e. Other areas of reversible error may become known to the Defendant upon review of the transcript which has not been received at this time.s6 DISCUSSION Statement of law. It is a principle of Pennsylvania support law that "the financial support of a child is a primary obligation of each parent." Ball v. Minnick, __ Pa. , , 648 A.2d 1192, 1197 (1994). Stated simply, "[a] child's needs receive priority." Id. State-wide support guidelines have been promulgated in accordance with this principle. See Pa. R.C.P. 1910.16-1 et seq. Pursuant to legislative directive, the guidelines are based upon the reasonable needs of the child ... seeking support and the ability of the obligor to provide support. In determining the reasonable needs of the child ... seeking support and the ability of the obligor to provide support, the guidelines ... place primary emphasis on the net incomes and earning capacities of the parties .... Act of October 30, 1985, P.L. 264, §1, as amended, 23 Pa. C.S. §4322.s7 s6 Concise Statement of Matters Complained of on Appeal, paragraph 2, filed March 20, 1995. s7 "The reasonable needs of the child as well as the reasonable expenses of the obligor are factored into the support guidelines .... The clear intent of the guidelines ... was to do away with individual, case-by-case determinations of just what constitutes the reasonable needs and expenses of the particular parties involved and thus to limit the trial court's discretion." Ball v. Minnick, Pa. __, , 648 A.2d 1192, 1197 (1994). 10 NO. 964 SUPPORT 1994 "Deviation [from the guidelines] will be permitted only where special needs and/or circumstances are present such as to render an award in the amount of the guideline figure unjust or inappropriate." Ball v. Minnick, Pa. , __, 648 A.2d 1192, 1196 (1994). The guidelines vary according to the net income/earning capacity figures of the parties, and in this regard the general rule should be noted that "the earning capacity, not the actual earnings, is the determinative factor in ascertaining the ability to pay support." Beegle v. Rasler, 395 Pa. Super. 174, 178, 576 A.2d 1100, 1102 (1990). This general rule does not apply where "the income is reduced involuntarily through illness, layoff or some other factor over which the parent had no control." Id. at 179, 576 A.2d at 1102. A certain leeway can also be accorded to a parent reasonably attempting to better his or her situation. See, e.g., Weiser v. Weiser, 238 Pa. Super. 488, 492, 362 A.2d 287, 288-89 (1976). In attempting to determine the net income and earning capacity of a sole owner of a business, a court is faced with special difficulties. Cf. Pacella v. Pacella, 342 Pa. Super. 178, 492 A.2d 707 (1985). "Even though the ... business may be non-profitable for income tax purposes: The net income of a defendant as shown on income tax returns is not to be accepted in a support case as the infallible test of his earning capacity. Particularly is this true 11 NO. 964 SUPPORT 1994 where the defendant is in business for himself and is allowed substantial business 'expenses,' items of depreciation and sundry other deductions which enable him to live luxuriously before spending his taxable income." Murphy v. Murphy, 410 Pa. Super. 146, 154, 599 A.2d 647, 651 (1991) (citation omitted); appeal denied, 530 Pa. 633, 606 A.2d 902 (1992); cert. denied, U.S. , 113 S. Ct. 196, 121 L. Ed. 2d 139 (1992). The trier of fact is not, of course, required to accept as accurate every assertion as to income made by a person who owns a business. Id. Application of law to facts. In the present case, with respect to Defendant's net income and earning capacity, a number of factors led to the Court's unwillingness to accept Defendant's position that he had no net income or earning capacity for purposes of a child support obligation. First, the obligation must be viewed as a primary responsibility, secondary to other interests such as a desire for personal accomplishment. Second, Defendant had an excellent educational background, with experience in the field of his study. Third, Defendant voluntarily left a position in 1992 in which he had demonstrated a gross earning capacity of between $65,000 and $70,000 per year. Fourth, Defendant was the sole owner and manager of a $359,000 business with gross revenues of almost a half million dollars a year, tax returns prepared on the basis of management's representations, significant non-cash deductions, and substantial employee expenses. Fifth, Defendant 12 NO. 964 SUPPORT 1994 continued to reside in a $200,000 home which he owned, and continued to keep current a $1242 per month mortgage payment and a $400 per month utility charge. Sixth, the inference that all of Defendant'~s expenses were being paid by his mother was not one which the Court was willing to draw in its fact-finding capacity. In addressing the parties at the conclusion of the case, the Court noted that, had it not been limited by the amount of the order appealed from, it would have assessed a higher figure. In this regard, and based upon the foregoing facts and authority, the Court continues to believe that assignment of a net income/earning capacity in the amount of $4,232 per month to Defendant represented an understatement rather than an overstatement of the proper figure. With respect to Plaintiff's net income and earning capacity, the figure of $1987 per month utilized by the Court was in accordance with Plaintiff's testimony. This testimony was not contradicted, the figure was slightly more than that used at the conference conducted by the domestic relations officer, and the parties stipulated that her income as reported at the conference was correct,s8 The Court is at a loss to understand how it "committed error in the calculation of Plaintiff's income." With respect to the calculation of Defendant's support obligation from the net income/earning capacity figures of $4232 58 See note 18 supra and accompanying text. 13 NO. 964 SUPPORT 1994 per month for Defendant and $1987 per month for Plaintiff, and child-care expenses of $407 per month, Pennsylvania Rule of Civil Procedure 1910.16-3 contains the support guidelines formula to be applied, and the application itself is as follows: OBLIGOR OBLIGEE 3. Net income 4232 1987 4. Conversion to Monthly Amount same same 5. Combined Total Monthly Net income 6219 6. Proportionate Expenditure 13% 7. Basic Child Support 808 8. Total Support [same-child care added below] 9. Net Income Expressed as a Percentage of the Combined Amount 68% 32% 10. Each Parent's Guideline Obligation 549 259 Child care 203 203 752 462 Since Defendant's obligation under the formula was in excess of that imposed by the order from which he appealed, it is believed that the appeal was properly denied by this Court. Charles J. DeHart, Esq. 3631 North Front Street Harrisburg, PA 17110 Attorney for Plaintiff Maria Cognetti, Esq. 132 Walnut Street Harrisburg, PA 17101 Attorney for Defendant 14 NO. 964 SUPPORT 1994 Jeffrey R. Boswell, Esq. 315 North Front Street Harrisburg, PA 17101 Former Attorney for Defendant : rc 15