Diez v. Davey

307 Mich.App. 366

861 N.W.2d 323

DIEZ

v.DAVEY.

Docket No. 318910.

Court of Appeals of Michigan.

Submitted Sept. 4, 2014, at Detroit.

Decided Oct. 23, 2014, at 9:05 a.m.

Judith A. Curtis, Grosse Pointe, for plaintiff.

Plunkett Cooney, (by Hilary A. Ballentine, Detroit and Karen E. Beach, Bloomfield Hills) for defendant.

Before: HOEKSTRA, P.J., and WILDER and FORT HOOD, JJ.

Opinion

HOEKSTRA, P.J.

In this child custody dispute, plaintiff/counter-defendant, Robert A. Diez (plaintiff), appeals as of right a trial court order that resolved issues involving child custody and parenting time, child support, and attorney fees. Because the trial court's award of custody and parenting time was not an abuse of discretion and the trial court did not abuse its discretion in awarding attorney fees to defendant/counter-plaintiff, Maria–Jesusa Cloma Davey (defendant), we affirm those portions of the trial court's judgment. However, for the reasons explained in this opinion, we vacate the trial court's award of child support and remand for reconsideration of plaintiff's income under the Michigan Child Support Formula (MCSF).

I. BACKGROUND

Plaintiff is the president and sole shareholder of Supreme Gear Company (SGC), a manufacturer of precision gears used in the aerospace industry. SGC is organized as a corporation and it has elected to be an S corporation for tax purposes under 26 U.S.C. § 1362(a)(1). The parties in this case met in 1994 and became romantically involved. They never married, but, over the course of a 16–year relationship, they had three children together.

After their relationship ended, plaintiff filed the present lawsuit in April 2010, seeking sole legal and physical custody of the three minor children. Following more than three years of litigation, on July 2, 2013, the trial court issued an opinion and order addressing the issues of (1) custody and parenting time, (2) child support, and (3) defendant's request for attorney fees. First, regarding custody and parenting time, the trial court awarded the parties joint legal and joint physical custody. The parenting-time schedule provided plaintiff with approximately 122 overnights per year, consisting of alternate weekends from Friday to Monday morning, alternate weeks in the summer, parenting time during spring break, and holiday parenting time in accordance with the “16th Judicial Circuit Reasonable Parenting Time Schedule.”

On the issue of child support, the trial court credited the testimony of an expert, Certified Public Accountant Justin Cherfoli, who opined that plaintiff had an average income of $723,000 over the course of three years, from 2009 through 2011. Included within this calculation of income were plaintiff's wages, distributions from SGC, “perks” such as car expenses paid by SGC, and a portion of “excess working capital” retained in SCG, meaning those amounts that, in Cherfoli's judgment, plaintiff could withdraw from the S corporation while maintaining a viable business. In light of this evidence, and accounting for defendant's income and plaintiff's award of 122 overnights, the trial court set plaintiff's monthly child support at $7,062.

Lastly, in regard to attorney fees, the trial court found that defendant was unable to bear her legal expenses, and that plaintiff should pay all defendant's attorney fees. After defendant submitted a bill of costs, the trial court awarded defendant $118,000 in attorney fees. In October 2013, a judgment reflecting the trial court's opinion and order regarding custody and child support as well as the award of attorney fees was entered. Plaintiff now appeals as of right.

II. CHILD SUPPORT

On appeal, plaintiff challenges the child support order entered by the trial court. In particular, plaintiff disputes whether the trial court erred by relying on an expert's determination of excess working capital in the S corporation when attributing income to plaintiff. He also contends that the trial court erred by including within its calculation of plaintiff's income funds distributed to plaintiff by SGC for purposes of paying the tax burden attributable to SGC's corporate income.

Relevant to plaintiff's arguments, the Friend of the Court referee held an evidentiary hearing on the topic of child support. The hearing took place over the course of three days, and it involved testimony from both parties and three certified public accountants who testified as experts. The experts reached various conclusions regarding plaintiff's actual income available for the payment of child support in the years 2008 through 2011, but, ultimately, the referee and trial court both relied on the opinion of Justin Cherfoli when determining plaintiff's income.

According to his testimony, Cherfoli estimated plaintiff's income as follows: $1,145,000 in 2011, $637,000 in 2010, $391,000 in 2009, and $2,116,000 in 2008. As a result, he offered a three-year average of $723,000 and a four-year average of $1,071,000. He arrived at his determinations of plaintiff's income by considering plaintiff's W–2 income, interest and dividends, actual distributions, perks, and “additional monies available for income, or for payment of child support that aren't in any of the other four categories....” Cherfoli included in his calculations for 2008 the amount distributed for the purchase of a house and, for all years, those sums from the company distributed to plaintiff for what plaintiff and his accountant testified was payment of SGC's taxes. In the final category, that is, additional monies, Cherfoli placed a portion of what he characterized as “excess working capital.” Specifically, he defined “working capital” as current assets—including cash, accounts receivable, and inventory—less current liabilities. He then considered what money was required to pay for the operations of the manufacturing side of the company and any amount beyond this, he considered excess working capital, or, in other words, funds in excess of what Cherfoli deemed required to meet SGC's ongoing operating expenses. Using calculations known as the “Bardahl analysis,” Cherfoli calculated excess working capital of $300,000 in 2010 and $797,000 in 2011. On the basis of his own judgment, he then concluded that 60 to 65% of SGC's excess working capital was available for distribution in a given year. Therefore, in his opinion, an additional $200,000 could have been distributed in 2010 and an additional $460,000 could have been distributed in 2011. He did not discern any excess working capital that could have been distributed in 2009.

By his own admission, Cherfoli had no study to support the percentages he chose as appropriate distributions of excess working capital. He based the numbers on his own opinion of what he viewed as “reasonable” when compared with the business's requirements. In doing so, he compared SGC with other corporations, noting that SGC operated under a more “conservative” business model insofar as it had “more cash and less debt than” other companies in the same industry. Compared to other companies, SGC had 22% of its total assets in cash and a zero debt-to-capital ratio, while others had 6% of total assets in cash and an average debt-to-capital ratio of 20%. Cherfoli further opined that distribution of additional capital would not hinder SGC's operations because many of SGC's purchases of needed equipment could be financed by acquiring new debt, rather than adhering to SGC's historical practice of purchasing equipment with cash.¹

Following the hearing, the referee recommended that plaintiff be ordered to pay $8,806 a month in child support. In arriving at this figure, the referee accepted Cherfoli's opinions and determined that plaintiff had an average monthly gross income, for 2010 and 2011, of $74,117.13, or $889,405.56 per year. Included in these figures were amounts paid to plaintiff for the purpose of satisfying SGC's tax liability. The referee concluded that taxes owed by SGC were plaintiff's liability.²

Plaintiff objected to the referee's recommendation, and the matter was considered by the trial court. The trial court acknowledged that it must conduct a de novo review, but framed the matter as whether the referee “erred in crediting Cherfoli's expert testimony” and ultimately found no error in the referee's reliance on Cherfoli's testimony. Specifically, the trial court concluded that “Michigan law treats the income of an S corporation as the income of the S corporation's shareholders” and, for this reason, “Cherfoli properly treated the income of plaintiff's S corporation as plaintiff's income.” Indeed, the trial court concluded that Cherfoli's analysis “worked to plaintiff's advantage” because Cherfoli considered only “excess working capital” rather than all of SGC's income as income available for distribution. Agreeing with the referee that Cherfoli was the most credible expert, the trial court accepted Cherfoli's excess-working-capital calculation and Cherfoli's conclusion that 60 to 65% of the excess working capital was available for distribution. In accepting Cherfoli's figures, the trial court made no findings regarding whether these figures included amounts disbursed for payment of SGC's taxes. The trial court used the average of three years, rather than the two-year average used by the referee, resulting in a gross average annual income of $723,000, and ultimately, a net monthly average income of $35,712. On the basis of these findings, and accounting for defendant's income and plaintiff's award of 122 overnights, the trial court set plaintiff's child support at $7,062 per month.

A. STANDARD OF REVIEW

This Court reviews child support orders for an abuse of discretion. Malone v. Malone, 279 Mich.App. 280, 284, 761 N.W.2d 102 (2008). In contrast, we review the trial court's factual findings for clear error. Borowsky v. Borowsky, 273 Mich.App. 666, 672, 733 N.W.2d 71 (2007). Issues involving statutory interpretation or the proper interpretation of the MCSF pose questions of law...