Barham v. Barham

• Decision Date: 05 August 1997
• Docket Number: No. COA96-742,COA96-742
• Citation: 487 S.E.2d 774,127 N.C.App. 20
• Court: North Carolina Court of Appeals
• Parties: Edward Lee BARHAM, Plaintiff, v. Kelli Moore BARHAM, Defendant.

Page 774

487 S.E.2d 774

127 N.C.App. 20

Edward Lee BARHAM, Plaintiff, v. Kelli Moore BARHAM, Defendant.

No. COA96-742.

Court of Appeals of North Carolina.

Aug. 5, 1997.

Gulley, Kuhn & Taylor, L.L.P. by Jack P. Gulley, Raleigh, for plaintiff.

Oliver & Oliver, PLLC by John M. Oliver and Cindy G. Oliver, Raleigh, for defendant.

McGEE, Judge.

Plaintiff and defendant were married in June 1968 and divorced in August 1988. Two children were born of the marriage. On 17 October 1990, the Wake County District Court ordered plaintiff to pay defendant permanent alimony of $686 per month and child support of $532 per month. In 1990, plaintiff owned one-half interest in Triangle Retirement Services, Inc. He drew $4000 monthly income solely from this corporation, and defendant had a gross annual income of $14,500. In the 1990 order, the court found defendant's reasonable needs, to maintain her accustomed standard of living, were in excess of $2500 per month but that plaintiff was unable to pay enough alimony to enable her to achieve her accustomed standard of living.

In 1994, both plaintiff and defendant moved to modify the 1990 order and defendant moved for attorney's fees. The motions were heard during the 24 May 1995 Domestic Session of Wake County District Court, Judge William C. Lawton presiding. The trial court found, as of the hearing date, plaintiff's annual net income drawn from the corporation was $62,000 ($77,500 gross) based on an agreement with a creditor bank in which an encumbered portion of the corporation's cash reserves could not be paid out as salary. Defendant earned a gross income of $2860 per month at the time of the hearing. By order entered 11 July 1995, the trial court decreased plaintiff's alimony obligation to $532 per month and increased his child support obligation to $699 per month and denied defendant's request for attorney's fees. On 28 September 1995 the trial court entered an order amending the 11 July 1995 order. Defendant appeals and plaintiff cross appeals from the 11 July 1995 order, as amended.

I. Defendant's Appeal

Defendant first contends the trial court erroneously calculated child support and alimony by failing to consider all of plaintiff's gross annual income in 1993 and 1994. Specifically, she contends the court erred by computing plaintiff's gross annual income based on the amount actually retained by him from the corporation ($62,000 net/$77,500 gross) rather than on the gross annual income he reported on his 1993 federal income tax return and his estimated gross annual income for 1994.

A. Gross Income Calculation for Child Support

N.C. Gen.Stat. § 50-13.4(c) provides, in pertinent part:

(c) Payments ordered for the support of a minor child shall be in such amount as to meet the reasonable needs of the child for health, education, and maintenance, having G.S. § 50-13.4(c)(1995).

due regard to the estates, earnings, conditions, accustomed standard of living of the child and the parties, the child care and homemaker contributions of each party, and other facts of the particular case.

The amount of a parent's child support obligation is determined by application of The North Carolina Child Support Guidelines (Guidelines). G.S. § 50-13.4(c); Rose v. Rose, 108 N.C.App. 90, 93, 422 S.E.2d 446, 447 (1992). A trial court may deviate from the Guidelines when it finds, by the greater weight of the evidence, application of the Guidelines: (1) would not meet or would exceed the reasonable needs of the child considering the relative ability of each parent to provide support; or (2) would be otherwise unjust or inappropriate. G.S. § 50-13.4(c); Guilford County ex rel. Easter v. Easter, 344 N.C. 166, 169, 473 S.E.2d 6, 7-8 (1996). Here, the trial court found the Guidelines apply and neither party challenges that finding.

The Guidelines define "income" as "actual gross income of the parent, if employed to full capacity, or potential income if unemployed or underemployed." Guidelines, at 2 (1 October 1994). The Guidelines further describe "gross income" as follows, in pertinent part:

(1) Gross income: Gross income includes income from any source, except as excluded below, and includes but is not limited to income from salaries, wages, commissions, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, social security benefits, workers compensation benefits, unemployment insurance benefits, disability pay and insurance benefits, gifts, prizes and alimony or maintenance received from persons other than the parties to the instant action....

(2) Income from self-employment or operation of a business: For income from self-employment, rent, royalties, proprietorship of a business, or joint ownership of a partnership or closely held corporation, gross income is defined as gross receipts minus ordinary and necessary expenses required for self-employment or business operation. Specifically excluded from ordinary and necessary expenses for purpose of these Guidelines are amounts allowable by the Internal Revenue Service for the accelerated component of depreciation expenses, investment tax credits, or any other business expenses determined by the Court to be inappropriate for determining gross income for purposes of calculating child support. In general, income and expenses from self-employment or operation of a business should be carefully reviewed to determine an appropriate level of gross income available to the parent to satisfy a child support obligation. In most cases, this amount will differ from a determination of business income for tax purposes.

Guidelines, at 2-3 (emphasis added).

In this case the trial court did not include in plaintiff's actual gross annual income an encumbered cash reserve owned by plaintiff's corporation. On this issue the court found:

27. While there is a sizeable cash reserve of Plaintiff's corporation (which would ordinarily be available to Plaintiff as an owner), this reserve is currently fully encumbered by a creditor bank of Plaintiff's corporation, and by contract cannot be used by Plaintiff or his current wife. It, therefore, is not considered by the Court as "income", though in the future, when the bank/creditor is out of the financial picture, this cash reserve fund of Plaintiff's closely held corporation may, indeed, be income. The current balance of this retained earnings account is now around $100,000.00.

Similarly, the trial court made the following conclusion of law:

7.... While cash reserves are generally liquid and available to owners (a portion of which is generally counted on, however, for use in capital improvements) where the cash reserve is required to be deposited in and is held by a creditor/bank, it is not considerable as "income" available in computing alimony and/or support.

We find the trial court's exclusion of plaintiff's corporation's encumbered cash reserve funds in its calculation of child support prejudicial error. The definition of gross income in the self-employment/business income This Court addressed a similar question in Lawrence v. Tise, 107 N.C.App. 140, 419 S.E.2d 176 (1992). In Lawrence, this Court held "[m]ortgage principal payments ... are not an 'ordinary and necessary expense' within the meaning of the Guidelines." Id. at 149, 419 S.E.2d at 182. The Court listed the following types of expenses as those which are properly deducted as ordinary and necessary: "expenses for repairs, property management and leasing fees, real estate taxes, insurance and mortgage interest." Id. The encumbered cash reserve at issue here is more like the mortgage principal payments in Lawrence than the expenses held ordinary and necessary in Lawrence. Like the mortgage principal payments and unlike the other expenditures, the encumbered cash reserve constitutes value retained by plaintiff. It is not like expenses for repairs, property management and leasing fees, real estate taxes, insurance and mortgage interest all of which are spent money never to be regained by the spender. Although technically encumbered, the cash reserves are available to plaintiff under the Guidelines because it was his choice to pledge them to the bank in exchange for business financing. Since the court erred in calculating plaintiff's gross annual income under the Guidelines, we reverse this portion of the court's order and remand for a re-calculation of child support under the Guidelines.

                context is "gross receipts minus ordinary and necessary expenses required for self-employment or business operation."   Guidelines, at 3.  The critical question, then, is whether the cash reserves pledged to the bank by plaintiff's corporation constitute an ordinary and necessary expense under this definition
                

B. Gross Income Calculation for Alimony

We also find prejudicial error in the trial court's calculation of gross annual income in regard to its decision to reduce plaintiff's alimony payments.

The two alimony statutes applicable here, N.C. Gen.Stat. §§ 50-16.5 and 50-16.9 were repealed and amended, respectively, on 1 October 1995. See 1995 Sess. Laws ch. 319, §§ 1, 7. These changes are applicable only to actions filed on or after 1 October 1995 and do not apply to pending litigation, or to future motions in the cause seeking to modify orders or judgments in effect on 1 October 1995. 1995 Sess. Laws ch. 319, § 12. Since the order the parties seek to modify in this action was entered prior to 1 October 1995, i.e. 17 October 1990, the statutes as they existed prior to 1 October 1995 apply here.

G.S. § 50-16.9 provided in pertinent part: "An order of a court of this State for alimony ... may be modified ... at any time, upon motion in the cause and a showing of changed circumstances." See G.S. § 50-16.9(a) (1995) (Editor's Note). In general, the change of circumstances required for modification of an alimony order "must relate to the financial needs of the dependent spouse or the supporting spouse's ability to pay."...