Opinion ID: 2581595
Heading Depth: 3
Heading Rank: 2

Heading: Stock Sale Proceeds

Text: 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 court's 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 CSED's proposal. Rule 90.3(a)(1) requires child support to be based on the non-custodial parent's adjusted annual income and looks to the parent's 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 rule's key phrase  parent's 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 commentary's 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 Caldwell's 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), CSED's proposal to spread two years of payments over a span of five years would directly conflict with the policies underlying Rule 90.3's 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 company's 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 Caldwell's 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 Caldwell's memorandum opposing its original theory. CSED thus left Caldwell no opportunity to respond to its revised theory before the court issued its ruling. Caldwell's 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 Caldwell's superior knowledge of the sale's 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 CSED's 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 CSED's five-year income-stream method. Caldwell's 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 Caldwell's 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 Caldwell's 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 Caldwell's child support payments. The continued availability of these funds could conceivably be treated as an exceptional factor warranting some increase in Caldwell's 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 children's need for support and Thornton's 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]