Morton v. Morton (In re Morton), F073689

• Decision Date: 26 September 2018
• Docket Number: F073689,F074243
• Parties: In re the Marriage of LAUNA and DAVID MORTON. LAUNA MORTON, Appellant, v. DAVID MORTON, Respondent.
• Court: California Court of Appeals Court of Appeals

In re the Marriage of LAUNA and DAVID MORTON.

LAUNA MORTON, Appellant, v. DAVID MORTON, Respondent.

F073689

F074243

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIFTH APPELLATE DISTRICT

September 26, 2018

CERTIFIED FOR PARTIAL PUBLICATION^*

(Super. Ct. No. S1501FL622454)

OPINION

APPEAL from a judgment of the Superior Court of Kern County. Stephen D. Schuett, Judge.

Michael R. Kilpatrick & Associates and Michael R. Kilpatrick for Appellant.

Law Offices of Edward J. Quirk, Jr., and Edward J. Quirk, Jr., for Respondent.

-ooOoo- Launa Morton appeals from a judgment entered in a marriage dissolution proceeding, contending the trial court erred in determining (1) child support, (2) spousal support, (3) attorney fees, and (4) her former husband's interest in an oilfield service business was a gift from his father and, therefore, was his separate property even though acquired during the marriage.

The published parts of this opinion address issues related to determining the income available for child support and to awarding attorney fees under Family Code section 2030.¹ First, we conclude Launa has established the child support award in the June 2016 judgment was based on the erroneous exclusion of respondent David Morton's income tax refunds from his net income available for child support. Second, we conclude the exclusion of David's voluntary contributions to a 401(k) retirement savings plan from his net income available for child support was error, unless on remand the trial court provides findings that justify the exclusion of all or part of those contributions from David's income. (See § 4059, subd. (c).)

As to attorney fees, we conclude the trial court erred in declining to award Launa additional attorney fees at the conclusion of the proceeding. Pursuant to mandatory language added to section 2030, subdivision (a)(2) by the Legislature in 2010, "the court shall make an order awarding attorney's fees and costs" if the findings required by that subdivision "demonstrate disparity in access and ability to pay." The issues on which the statute requires findings include "whether there is a disparity in access to funds to retain counsel, and whether one party is able to pay for legal representation of both parties." (§ 2030, subd. (a)(2).) On a novel question of statutory interpretation, we conclude a trial court must make explicit findings on the issues listed in subdivision (a)(2) of section 2030. Here, the record clearly demonstrates a "disparity in access and ability to pay" and, as a result, a further award of attorney fees and costs was mandatory.

The unpublished parts of this opinion resolve the following issues. First, substantial evidence supports the trial court's explicit finding that David acquired the interest in his father's Huddleston Crane business as a gift and its implicit finding that the gift was not remuneratory. Consequently, the trial court did not err in determining David's ownership interest in the business was his separate property. Second, the questions involving the child support award in the June 2016 judgment are not moot. Third, the calculation of that child support award erroneously failed to account for the percentage of time each party had custody of their daughter and did not properly analyze David's voluntary contributions to a health savings account (HSA) in determining his net income available for child support. Fourth, as to permanent spousal support, the trial court's determination of David's income for purposes of evaluating his ability to pay support erroneously excluded David's California and federal income tax refunds and did not properly analyze David's voluntary contributions to a 401(k) plan and to a health savings account. Fifth, the trial court's finding that David's net rental income is $7,650 per month—a finding that affects both the child support and the spousal support calculations—is supported by substantial evidence and, therefore, will be upheld.

We therefore reverse the judgment in part and remand for further proceedings regarding child support, spousal support and attorney fees.

FACTS

David was born in 1965, graduated from high school and attended Taft College for two years. Starting in high school, David worked weekends and part time for his father's business, Huddleston Crane. He finished college a few units short of receiving an AA degree in petroleum technology. After college, David worked full time for Huddleston Crane as a mechanic, truck driver and crane operator.

Launa was born in 1967 and was employed as a hairdresser for approximately eight and one-half years. Launa and David married in April 1991. In March 1996, Launa stopped working because she was pregnant with their first child. She was a stay-at-homemother for the rest of the marriage. They had two children, a son born in 1996 and a daughter born in early 1998. Launa and David separated in July 2012, after 21 years of marriage. In June 2016, their youngest child graduated from high school and was over the age of 18.

Huddleston Crane started doing business as an oilfield service company around 1940. David's father, John Morton (Father), acquired the business sometime before 1984 and owned and operated it as a sole proprietorship. When purchasing assets for the business, Father preferred to pay cash and was able to do so by accumulating profits and reinvesting them in the business. This approach avoided debt and was prudent because of the extreme volatility in the oilfield service business, which could result in dramatic variations in income from year to year.

The Partnership

In 1992, Father changed Huddleston Crane Service's form of business organization from a sole proprietorship to a partnership. According to his accountant, Father's goals were to (1) receive $10,000 per month from the business until he died or retired; (2) transfer ownership of the business to his son and son-in-law, David and David Noerr (Noerr),² without costing them anything and allowing them to continue to receive more than reasonable compensation for their services; and (3) structure the transaction to minimize or eliminate income and sales taxes. Father contributed the assets of the sole proprietorship to the partnership, which constituted 100 percent of its capital. The other two partners, David and Noerr, contributed no capital and their capital accounts started at zero. Father received the right to 10 percent of the partnership's future profits, while David and Noerr each received a right to 45 percent of future profits. The profits were credited to the partners' capital accounts. A partner's draws reduced his capital account.

The record contains a copy of David's Schedule K-1 (Form 1065) from the partnership for the year ending December 31, 1993. The Schedule K-1 lists David's percentage of profits and losses at 45 percent and his ownership of capital at one percent. David's Schedule K-1 contains an "[a]nalysis of partner's capital account" that states (1) David's capital account at the beginning of the year was $1,095; (2) his share of income and loss was $23,275; (3) his withdrawals and distributions were $65; and (4) his capital account balance at year's end was $24,305. If the statement that David owned one percent of the partnership's capital was accurate, the total capital of the partnership at the end of 1993 was approximately $2.4 million.

Huddleston Crane Services, Inc.

On August 1, 1997, articles of incorporation for a corporation named "Huddleston Crane Services, Inc." were filed with the California Secretary of State. On September 1, 1997, at the first meeting of the board of directors of the new corporation, the directors adopted bylaws for Huddleston Crane Services, Inc. and Noerr was named board chairman, president, chief financial officer and secretary. David was named vice president. Father, David and Noerr each were issued 10,000 shares of stock. For tax purposes, Huddleston Crane Services, Inc. is a subchapter S corporation.³

Huddleston Crane Services, Inc. was formed as part of a reorganization of the partnership. This reorganization resulted in Father, David and Noerr become equal owners of the business. In effect, David exchanged the value in his capital account in the partnership and his right to 45 percent of future profits for a one-third ownership interest in the business's equity and future profits. Noerr made the same exchange. Incomparison, Father exchanged the value of his capital account and his right to receive 10 percent of future profits for a one-third ownership interest in the business's equity and future profits. The appellate record contains no evidence of the value of the partners' capital accountants immediately before the partnership's reorganization as a corporation. As a result, it is not possible to determine who, if anyone, the exchange favored.

H.C.S. Mechanical, Inc.

H.C.S. Mechanical, Inc. is a California corporation incorporated on January 4, 2000. The same day, its bylaws were executed by all four of its directors. H.C.S. Mechanical, Inc. issued 2,600 shares to Noerr, 2,500 shares to David, 2,500 shares to Butch Hall, and 2,400 shares to Dennis Perreault. These shareholders were the four original directors.

H.C.S. Mechanical, Inc. owns equipment that it rents to Huddleston Crane Services, Inc. for use.⁴ For income tax purposes, H.C.S. Mechanical, Inc. is a subchapter S corporation.

Sometime no later than early 2006, David and Noerr had become the only shareholders and directors of H.C.S. Mechanical, Inc. Tax documents from 2011 state David owned 50 percent of the corporation's stock and Noerr owned the other 50 percent.

Papers filed by Launa in the trial court refer to "Huddleston Crane Services, Inc. and its wholly owned subsidiary HCS Mechanical, Inc."⁵ This description of a parent-subsidiary relationship between the two corporations is not supported by the record. California's General Corporation Law (Corp. Code, § 100 et seq.) defines the terms "parent" and "subsidiary." (...