E.D. v J D.

[*1] E.D. v J D. 2013 NY Slip Op 52204(U) Decided on December 23, 2013 Supreme Court, Westchester County Duffy, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 23, 2013
Supreme Court, Westchester County

E.D., Plaintiff,

against

J D., Defendant.



634/05



Donna E. Abrams, Esq.

Harold, Salant, Strassfield & Spielberg

Attorneys for Plaintiff

81 Main Street

White Plains, New York 10601

Mary E. Flynn, Esq.

Y. David Scharf, Esq.

Morrison Cohen, LLP.

Attorneys for Defendant

909 Third Avenue

New York, New York 10022

Colleen D. Duffy, J.

At issue in this proceeding, is whether the income of a corporation, for which Defendant J. A. D. ("Defendant") is sole shareholder, should be imputed to Defendant, for the purposes of calculating child support and maintenance owed by Defendant to Plaintiff E. L. D. ("Plaintiff") pursuant to the parties' Judgment of Divorce, entered on February 23, 2005 ("Judgment of Divorce"), and Stipulation of Settlement, dated February 4, 2004 ("Settlement Agreement"), which was incorporated but not merged into the Judgment of Divorce. Plaintiff seeks a recalculation of child support and maintenance and a money judgment for arrears owed from 2007 through 2012.

On July 16, 2013, this Court issued a Decision and Order, and amended it on [*2]August 6, 2013 (the "August Decision"),[FN1] which is incorporated herein as if set forth in full, ordering a hearing to determine how much, if any, income of the corporation B.A., Inc. (the "Corporation") should be deemed "Earned Income," as defined in the Settlement Agreement, for the purposes of calculating Defendant's child support and maintenance obligations pursuant to the parties' Judgment of Divorce and Settlement Agreement.

On October 10, 2013, this Court held the hearing. The parties stipulated to the admission of certain evidence as well as to the payment of Plaintiff's legal fees in the amount of $19,530.00 up to October 9, 2013. Plaintiff then rested subject to rebuttal. Thereafter, Defendant testified on his own behalf and elicited the testimony of Plaintiff. The Court found Defendant to be incredible with respect to his personal income and that of the Corporation. As discussed below, Defendant's testimony evidenced that he kept his salary at an artificially low level and also that certain so-called corporate expenses were, in fact, his personal expenses paid for by the Corporation.[FN2]

At the conclusion of the hearing, the Court held that Plaintiff had successfully "pierced the corporate veil" of the Corporation, and that certain income that Defendant contended was income of the Corporation should be imputed as personal income of Defendant for the purpose of calculating child support and maintenance in accordance with the parties' Settlement Agreement. The Court directed the parties to submit, by letter, their positions as to the actual amount of child support and maintenance due and owing to Plaintiff consistent with the Court's determination as to imputation of the Corporation's income to Defendant.

On October 24, 2013, by letter of Donna E. Abrams, Esq. ("Abrams Letter"), Plaintiff set forth her calculation as to the amount due and owing to her for child support and maintenance. According to Plaintiff, for the time period at issue, Defendant owes her an additional $411,194.56.

On November 15, 2013, by letter of Mary E. Flynn, Esq. ("Flynn Letter"), Defendant contended that he owes only an additional $53,348.58 for child support and maintenance for that time period.

As set forth further below, the Court imputes certain additional income to Defendant for the years 2008[FN3] through 2012 based on claimed income of the Corporation. Accordingly, the Court finds that, for the years 2008 through 2012, Defendant owes Plaintiff an additional $282,244.89 for maintenance and child support.

Relevant Provisions of the Parties' Settlement Agreement

Pursuant to the express terms of the parties' Settlement Agreement, Defendant [*3]is obligated to pay Plaintiff as maintenance and child support 66% of his after tax "Earned Income" to $200,000.[FN4] See Settlement Agreement, Article VIII.

The parties' Settlement Agreement defines Earned Income as:

(I) monies and/or stocks and/or options . . . (hereinafter "compensation") received by the party:

(a)for personal services, including without limitation, compensation as salary, commissions, bonuses, partnership draw, distribution from any partnership, corporation, limited liability company, "S" corporation, non-profit corporation, business entity, and individual(s); and

(b)for an interest in any entity from which the party receives or had received compensation for personal service, including any deferred compensation;

(ii)compensation received as disability payments;

(iii)compensation received from self-employment; and

(iv)compensation received from unemployment insurance.Settlement Agreement, Article VIII, ¶ (b).

The only pre-tax funds that are excluded from Defendant's "Earned Income" are retirement contributions such as a 401k or similar plan in a percentage amount of five (5%) percent or less of [Defendant's] income from employment." Settlement Agreement, Article VIII, ¶ (c).

Conclusions of Law

A.Corporate Income Imputed to Defendant

The credible evidence adduced at the hearing established that Defendant, the sole shareholder of the Corporation, single-handedly controlled all significant decisions made by the Corporation including purchases, expenditures, hiring and setting of salaries, including his own. The credible evidence showed that Defendant deliberately reduced his personal income by giving himself an artificially low salary and yet was able to maintain his pre-Corporation standard of living by characterizing his personal expenses such as rent, travel, and food, as business expenses, in order to reduce his child support and maintenance obligation. Such acts by Defendant warrant the imputation of income to him. Matter of Collins v. Collins, 241 AD2d 725, 727 (3d Dept. 1997), app. denied, app. dismissed, 91 NY2d 829 (1997)(income may be imputed where court determines parent intentionally reduced his or her earnings to mitigate or avoid child support); Kelly v. Bovee, 9 AD3d 641, 641-42 (3d Dept. 2004).

Accordingly, as set forth further below, the Court imputes income to Defendant and finds that he owes Plaintiff, pursuant to the Settlement Agreement, an additional $282,244.89 for child support and maintenance.

A court has broad discretion to add an amount imputed as income based on a party's former income, if the Court determines that such party has reduced such income to reduce or avoid child support obligations. DRL § 240 (1-b)(b)(5)(v); Matter of Rohme [*4]v. Burns, 79 A.D3d 756, 757 (2d Dept. 2010)(court has broad discretion to impute income; where party's account of his income is not credible, court may impute income higher than claimed); Isaacs v. Isaacs, 246 AD2d 428, 428 (1st Dept. 1998)(evidence of manipulation of income in order to avoid child support obligations warrants imputation of income; see also Lilikakis v. Lilikakis, 308 AD2d 435, 436 (2d Dept. 2003).

Here, Defendant is the sole shareholder, board member and officer of a corporate entity which he established in 2007, and Defendant makes all decisions relating to the Corporation, including what purchases should be made and what he should pay himself as salary.

The most glaring evidence of Defendant's co-mingling the Corporation's assets with his own personal needs is his use of corporate money to pay his legal team in defense of this action. Notably, although the Corporation has not been named as a defendant in this action, Defendant testified that he has paid nothing toward his legal fees and the Corporation has paid the entire amount totaling approximately $20,000.00.In addition, Defendant's efforts to artificially deflate his income to avoid paying child support and maintenance is seen in the relationship between Defendant's salary and the gross receipts of the Corporation.

The evidence adduced at the hearing shows that Defendant kept his salary artificially low even as the Corporation grossed higher receipts. In 2008, Defendant paid himself $86,000 when gross receipts of the Corporation were $147,610; his salary that year was more than half of the gross receipts of the Corporation. He then reduced his salary to $22,700 in 2009 when corporate gross receipts were $76,890; in essence, although gross receipts had been reduced to about one half of the prior year, he slashed his salary so that now it was less than one third of his prior salary and less than one third of the gross receipts. Thereafter, he continued to maintain a deflated salary as gross receipts rose. In 2010, when gross receipts had increased to $188,848, an increase from 2008 of more than $40,000, Defendant paid himself a salary of only $28,600, $60,000 less than he paid himself in 2008 although the gross receipts of the Corporation were significantly more. Since that time, Defendant has continued to pay himself a low salary - $40,750 in 2011 and $43,400 in 2012 - despite greatly increased gross receipts of $203,722 in 2011 and $287,556 in 2012.

In short, in a case where, as here, Defendant has complete control over the Corporation, the Court need not simply accept Defendant's contentions regarding his salary. Malatino v. Malatino, 185 AD2d 605, 606 (3d Dept. 1992)(where defendant controlled amount of salary he was paid from family owned corporation, court erred in accepting his self serving statements regarding salary).

Moreover, Defendant was not credible with respect to the explanations he provided as to why certain expenditures of the Corporation constitute business expenses. For example, in 2010, Defendant paid each of his three sons, then ages 10, 15, and 19, $7,000.00 from the Corporation's coffers, and, in 2011, paid two sons $3,000.00 and the third $2,500.00, contending that they performed various jobs for the Corporation including modeling clothing, helping with videos, editing copy for advertising, and testing the gear manufactured by one of the Corporation's clients. Except for the checks paid to Defendant's sons and Defendant's testimony, no other [*5]evidence was submitted to support these activities.[FN5] Westenberger v. Westenberger, 23 AD3d 571, 571-72 (2d Dept. 2005)(court may impute income where reported income on tax return is suspect); F.M.C. v. F.A.C., 12 Misc 3d 1169A, 2006 NY Misc. LEXIS 1489, ***47 (Sup. Ct., Nassau Co. 2006)(where father paid personal expenses out of business and reported income on tax returns was suspect, court would impute income to father).

The Court also found that numerous other claimed business expenses of the Corporation actually were Defendant's personal expenditures. As noted above, his legal fees in this action have been paid by the Corporation. In addition, Defendant testified that he regularly charged restaurant meals with his children as a business expense to the Corporation, as well as monthly charges for the three children's cell phones, and the expense for use of Zip Cars, despite the fact that he used the cars to pick up and drop off his children. Defendant's claim that the transport of the parties' children was incidental to his business use of the Zip Cars was not credible; indeed, it appears that Defendant's business expenses were directly tailored to benefit his personal needs.

For example, in 2007, Defendant deducted travel expenses for a trip he took to Israel purportedly to meet with representatives of an Israeli clothing company, at the same time that his son's Bar Mitzvah was scheduled to take place there, and, in 2010, Defendant deducted expenses for a three week trip to Mount Everest, including costs for training to climb that mountain, purportedly because he was working on marketing for a company that sold mountaineering gear. Defendant's claim that "it was determined that he should go," was not plausible; instead, given his control of the Corporation, the Court finds that Defendant decided to go to Mount Everest and used corporate funds to pay for it. Notably, no receipts were produced to verify these "business" expenses nor evidence verifying the "business" nature of the trips taken.[FN6]

Moreover, even if such receipts had been provided by Defendant, the evidence shows that Defendant alone controlled the Corporation's travel decisions as well as all other expenditures and any such expenses reduced the amount of funds available to increase Defendant's salary had he wanted to increase his salary.

Moreover, Defendant testified that he lives and works out of his studio [*6]apartment, and that, since 2007, he has apportioned 75% of the rent for the apartment to the Corporation as an expense.

As the Court noted in its July Decision, the very items Defendant declared as corporate business expenses - travel, rent, phones, dinners - are expenditures that a court typically is mandated to consider in calculating child support to the extent that such business expenses reduce the personal expenditures of such party. DRL § 240 (1-b)(b)(5)(vi).

In light of Defendant's lack of credibility, his clear co-mingling of business expenditures with his own personal needs and the fact that he is the sole decision maker as to how much salary he earns from the Corporation, together with the precipitous drop in Defendant's reported income after 2007,[FN7] the year he formed the Corporation, this Court will impute income to the Defendant for the years 2008 through 2012. DRL § 240 1-b(b)(5(iv); Matter of Rubley v. Longworth, 35 AD3d 1129, 1130 (2006), app. denied 8 NY3d 811 (2007)(trial court may impute income based upon past employment experience, future earning capacity, and/or payment of personal expenses from business accounts); Kelly v. Bovee, 9 AD3d at 642; Brefka v. Dobies, 271 AD2d 876, 877, app. denied 95 NY2d 759 (2000).

For the years 2008 and 2010 through 2012, the Court imputes income to Defendant in the amount of the average of Defendant's Earned Income for the three preceding years, 2005, 2006 and 2007. Renzulli v. Renzulli, 251 AD2d 482, 482 (2d Dept. 1998)(child support determination properly based upon average of income reported over five years prior to date when defendant purportedly had a precipitous drop in income; under circumstances, court is not required to accept party's calculations). Defendant's Earned Income was $134,830 in 2005, $155,568.72 in 2006, and $141,429 in 2007 (See Flynn Letter, p.7 and Affidavit of E. D., sworn to April 19, 2012 ("D. 2012 Aff."), Ex. W). Thus, for each of the years 2008, 2010, 2011 and 2012, the Court finds Defendant's Earned Income to be $143,942.57.

In 2009, the gross receipts of the Corporation as reported on its tax return were $76,890. The Court will impute the full amount of the gross receipts as income to the Defendant in 2009, noting that in that year the Corporation had no other employees and the Corporation's expenditures were, and still are, at the sole discretion of Defendant.

Pursuant to the Settlement Agreement, with respect to the years 2008, 2009 and 2010, Defendant is obligated to pay Plaintiff as maintenance and child support 66% of his after tax "Earned Income" to Plaintiff up to $200,000. Settlement Agreement, Article VIII(a). Accordingly, Defendant's total obligation is $95,002.10 for the years 2008 and 2010 ($143,942.57 x .66) and $50,747.40 for 2009 ($76,890 x .66). As the parties agree that Defendant paid only $44,738 in maintenance and child support in 2008 (see Flynn Letter, pp 7-8; D. 2012 Aff., Ex. W, Sch. A), he still owes Plaintiff the amount of $50,264.01 for that year. As the parties agree that Defendant paid only $8,667.58 in 2009 (id.), he still owes Plaintiff the amount of $42,079.82. As the parties agree that, in [*7]2010, Defendant paid $11,304.96, he still owes to Plaintiff the amount of $83,697.14 for that year. Id.

For the year 2011, due to Plaintiff's remarriage, Defendant's obligation to pay Plaintiff was reduced to 49.5% of his after tax "Earned Income" up to $200,000. Settlement Agreement, Article VIII (d) and (g); Abrams Letter, p.1; Flynn Letter, p. 7. Accordingly, Defendant's total obligation for support for 2011 is $71,251.57 ($143,942.57 x .495). As Defendant paid $14,957.99[FN8] in child support in 2011, he still owes Plaintiff $56,293.58.

For the year 2012, Defendant's support obligation is 49.5% of his after tax

"Earned Income" through July 2012. Settlement Agreement, Article VIII; Abrams Letter, p. 1; Flynn Letter, p.7. After July 2012, Defendant's child support obligation was further reduced to 37.125% by the emancipation of the parties' eldest child. Settlement Agreement, Article VIII(f); Abrams Letter, p. 2; Flynn Letter, p.7. Accordingly, Defendant's total child support obligation for 2012 is $62,345.12 (($143,942.57 x .495) ÷ 2) + ($143,942.57 x .37125) ÷ 2)). Defendant paid $12,434.78 in 2012, and thus still owes Plaintiff the amount of $49,910.34 for that year.

Defendant's contention that he should receive a credit for the money he paid directly to the children is wrong. A noncustodial parent is not entitled to offset any voluntary payments made for the benefit of the children against the support he is required to pay to the custodial parent. Soltow v. Soltow, 47 AD2d 652, 652 (2d Dept. 1975)(voluntary payments by father for child's benefit may not be credited to him against amounts he owes for child support); LiGreci v. LiGreci, 87 AD3d 722, 724 (2d Dept. 2011) (father had no right to have voluntary payments deducted from sums he owed for child support); 1-21 Lindey & Parley: Separation Agreements & Antenuptial Contracts § 21.58.

Accordingly, based upon the amount of income imputed by this Court to the Defendant for the years 2008 through 2012, Plaintiff is entitled to additional maintenance and child support payments in the amount of $282,244.00.

B.Attorney's Fees

The Court notes that the parties stipulated that Defendant would pay to Plaintiff the amount of $19,530.00, which represent Plaintiff's legal fees through October 9, 2013. At the commencement of the hearing, Plaintiff reserved her right to seek additional attorney's fees with respect to the hearing. The Court will grant Plaintiff an additional award of reasonable attorney's fees for such work and will hold a hearing on February 10, 2014, at 9:30 a.m., as to the amount of such fees unless the parties consent to have the Court determine the issue on written submissions or reach a stipulation as to the amount.

The Court considered the following submission by the parties: Plaintiff's Order to Show Cause, dated April 25, 2012, Affidavit, Affirmation of Donna E. Abrams, Esq., and exhibits thereto; Defendant's Notice of Cross Motion, dated July 3, 2012, Affidavit, [*8]Affidavit of Burton Laskin, Affirmation of Y. David Scharf, Esq., and exhibits thereto; Plaintiff's Reply Affidavit and exhibits thereto, dated July 26, 2012, in Further Support of her Motion and in Opposition to Defendant's Cross Motion; Defendant's Memorandum of Law in Opposition to Plaintiff's Order to Show Cause and in Support of Defendant's Cross Motion, dated October 12, 2012 and Plaintiff's Memorandum of Law in Support of Plaintiff's Motion and in Opposition to Defendant's Cross Motion, filed October 15, 2012; letter of Donna E. Abrams, Esq., dated October 24, 2013; letter of Y. David Scarf, Esq, dated November 15, 2013.

This constitutes the Decision and Order of the Court.

Dated: White Plains, New York

December 23, 2013

HON. COLLEEN D. DUFFY

Justice of the Supreme Court

Footnotes

Footnote 1: The August 6, 2013 Amended Decision and Order corrected the Motion Sequence numbers listed in the caption. No other changes were made to the Decision.

Footnote 2: Defendant testified at the hearing that there was a single corporate entity, first known as O. the M. B., Inc., later as X. G., Inc., and finally as B.A., Inc. Certain evidence at the hearing, copies of the corporate tax returns, also show one entity. See Pl. Ex. 3, 4, 5, 6, 7 and 8.

Footnote 3: Although Plaintiff seeks to have the Court impute income for the year 2007, such application is denied. Defendant's Earned Income for 2007 was $141,429, which is consistent with his Earned Income for the prior years.

Footnote 4: For income above $200,000, Defendant is obligated to pay 50% of the his Earned Income between $200,000 and $250,000, 33% of the his Earned Income from $250,000 to $500,000, and 25% of his Earned Income above $500,000 to $1,000,000. Id. As Defendant did not have Earned Income above the $200,000 threshold at any time, these provisions are not relevant to this Decision.

Footnote 5: The Court notes that the parties share joint legal custody of their unemancipated children, pursuant to the Settlement Agreement (see Settlement Agreement, Article VII(a)), yet Defendant apparently never sought or obtained Plaintiff's agreement that the children be employed by Defendant's Corporation. Indeed, Plaintiff has contended and the Court agrees that such "employment" was a ploy by Defendant to circumvent his obligation to pay maintenance and child support to Plaintiff.

Footnote 6: Contrary to Defendant's contention, Plaintiff does not need to prove that each and every expense is illegitimate. Plaintiff met her burden of establishing that Defendant exercised complete domination over the Corporation, that he abused the privilege of doing business and perpetrated a wrong that resulted in injury to Plaintiff, and the Court has determined that the corporate veil should be pierced. Abbott v. Crown Mill Restoration Development, LLC, 109 AD3d 1097 (4th Dept. 2013)(to pierce corporate veil, claimant must establish that owners, through domination of corporate entity, abused privilege of doing business and perpetrated a wrong that resulted in injury to claimant); In re Estate of Moak, 92 AD3d 1040, 1042-43 (3d Dept.), app. denied 19 NY3d 812 (2102); Hollow Road Farms, Inc. v. Quo Vadis, 31 AD3d 1023, 1025 (3d Dept. 2006).

Footnote 7: After 2007, Defendant's Earned Income declined to $98,790 in 2008, to $19,502 in 2009, $24,391 in 2010, $36,318 in 2011, and $34,442 in 2012. See Flynn Letter, pp 7-8; Aff. of E. D., sworn to April 19, 2012, Ex. W.

Footnote 8: The parties disagree as to the amounts paid by Defendant for child support in 2011 and 2012. See Flynn Letter, pp 7-8; D., 2012 Aff., Ex. W, Sch. A. The differences are minor, but the Court has determined that Defendant paid $14,957.99 in 2011 and $12,434.78 in 2012.