Swan v. Hatchett
| Citation | 92 Cal.App.5th 1206,309 Cal.Rptr.3d 896 |
| Docket Number | A163825, A164764 |
| Decision Date | 29 June 2023 |
| Parties | Charles SWAN, Appellant, v. Krystle HATCHETT et al., Respondents. |
| Court | California Court of Appeals Court of Appeals |
Law Office of Stephanie J. Finelli and Stephanie J. Finelli, Sacramento, for Appellant.
Krystle Hatchett, in pro. per., for Respondent Krystle Hatchett.
Rob Bonta, Attorney General, Cheryl L. Feiner, Assistant Attorney General, Maureen C. Onyeagbako and Jennifer C. Addams, Deputy Attorneys General, for Respondent Alameda County Department of Child Support Services.
Charles Swan appeals from the trial court's orders denying his request to reduce the amount of child support he pays Krystle Hatchett for their triplets and awarding Hatchett about $10,000 in need-based attorney's fees. On his request to modify child support, Swan contends the trial court erred by casting aside all of his evidence of his income and ignoring other evidence that he had a new child and that Hatchett's income had increased. He further argues the trial court's refusal to consider his evidence of his income for child support purposes conflicts with its finding that he could pay a specific amount of Hatchett's attorney's fees and that the fees award is otherwise infirm. We agree that the trial court's reasons for ignoring all of Swan's evidence lack substantial evidentiary support. We further agree that the award of attorney's fees to Hatchett was improper because it conflicts with its disregard of Swan's evidence. We will therefore reverse the trial court's orders and remand for further proceedings.
Swan and Hatchett are the parents of triplets born in 2016. They share joint legal and physical custody of the children.
In November 2017, the trial court issued an order addressing child support. Swan testified from a profit and loss statement that he had prepared for his self-employment as a tax preparer, real estate broker, mortgage broker, and appraiser. The trial court found Swan's bookkeeping was poor, especially for someone who prepared tax returns for a living. Swan testified that his net income as of August 2017 was $40,498. But after adding back certain deductions Swan had taken that the trial court found were personal expenses, the trial court calculated Swan's monthly income to be $9,245 per month, which would amount to $110,940 per year. The trial court ordered Swan to pay child support of $2,350 per month, retroactive to the beginning of 2017, and to pay off the arrears at $350 per month. Hatchett was not working, and the trial court did not impute income to her due to insufficient information.
In September 2018, Swan filed a request to change the child custody and child support order. As relevant here, Swan asked the court to issue a new guideline support order, order Hatchett to seek work in order to provide for the children, and waive interest on certain arrears in his payments.
In early 2019, the trial court ordered Hatchett to undergo a vocational evaluation paid for by Swan. In advance of the hearing on Swan's request, the parties stipulated that Swan was "entitled to a hardship when calculating child support in this matter."
The trial court held the hearing on Swan's request on 14 different days between May 2019 and August 2020. The witnesses were Swan, Swan's financial expert Jeff Stegner, and Hatchett.
Swan owned three properties on the same street in Fremont. He rented out two of the houses and divided the third with 60 percent being used for his business and the remainder for his personal living space.
Swan prepared his own tax returns. He maintains separate personal, business, and rental accounts for his expenses, but he admitted that he sometimes commingled expenses. Swan explained that when he used the wrong account for an expense, he would make a Post-It note as a reminder to record the expense correctly. His employee would reconcile his bank statements and Post-It notes, and use receipts when available. Some expenses such as Costco appeared as both business and personal expenses, and Swan would use Post-Its to divide the expenses. For meals and expenses, some of which were business-related and some personal, Swan would reconcile his expenses monthly based on receipts, when available, and memory to avoid deducting personal expenses as business expenses.
Between 2017 and 2018, Swan changed how he reported his rental income on his tax returns. In 2017, Swan had reported his rental income and expenses on Schedule E of his returns and his other business expenses on Schedule C, but in 2018 he combined all of his business expenses together on Schedule C. He changed his reporting methods because he was told his earlier method was incorrect. As a result, the only way to separate out the 2018 expenses for his rental properties from those for the rest of his business would be to engage in a tedious process of categorizing expenses. The categories of expenses on his profit and loss statements did not match the categories on his tax returns.
Swan claimed variously that the IRS had audited him five or eight times and each time the IRS concluded he had underreported his deductions. Swan is conservative in his deductions, such as by claiming a smaller mortgage interest deduction than his lenders reported to the IRS or a lower amount of his auto expenses than the law allows. He does this so that if he is audited he will be owed a refund. As a result of the audits, Swan had a $2.3 million net operating loss on his returns. Swan's expert, Jeff Stegner, later explained that Swan could carry this loss forward on his tax returns so he would not be paying any federal income taxes for quite a number of years, although he would still pay federal self-employment tax.
The rental income on Swan's properties in 2018 was slightly higher than in 2017, but the repairs and maintenance were significantly higher. Swan said his maintenance expenses were higher in 2018 than 2017 because he was converting them to short-term rentals on Airbnb. He later admitted that the expenses he listed as rental supplies and repair and maintenance in his profit and loss statement included construction costs of placing a shed on each rental property that he worked on converting to rental units. Swan had previously converted the garage at one of the properties into a separate rental unit, which Hatchett had rented from him before the triplets were born. Because of this construction, Swan expanded from having three rental units to six. Still later, Swan revealed that the city had ordered him to cease renting the garage and one of the sheds because they were not up to code. Swan had not obtained any permits for any of the construction. He claimed he was not a contractor and not familiar with the rules and laws governing permits.
Although he works as a real estate appraiser, Swan initially could not give an estimate of the value of any of his properties. He then said the rental properties could possibly be worth $700,000 to $800,000, but he still could not say whether his property that he split between his business and his personal use would be worth more or less than that. Swan could not provide an estimate for how much he owed on the mortgage on his personal property but said it could be less than $500,000. He could not remember whether his mortgage payments for the rental properties had changed between 2017 and 2019.
Swan had declared chapter 11 bankruptcy and was still in bankruptcy when he testified. He was paying back payroll taxes through the bankruptcy for his one W-2 employee. He could not say how much longer he had to make those payments, but he thought it was under 10 years. When Swan filed his income and expense declaration, he did not include in his assets a Charles Schwab retirement account containing about $50,000 or $60,000. Swan explained that the form asked him to list stocks, bonds, and other assets he could sell easily, and he could not sell his retirement assets easily.
Swan's child from another relationship was born around the beginning of 2019. The child's mother, X.H., lives in one of Swan's rental units. X.H. is also one of Swan's employees, working in real estate and as the manager of his office. Hatchett had also managed Swan's office. Swan's new child spends time in the homes of Swan and X.H. For the calendar year of 2018, Swan paid her about $75,000, according to a 1099 form Swan prepared between hearing dates. Swan paid X.H. with cash withdrawals from an ATM, as he had done with other workers as well. Swan kept track of his cash payments to workers with ATM receipts and by memory.
When asked whether he had traveled out of the country with X.H. in 2018, Swan first said he could not recall. When prompted afterwards whether he had traveled with X.H. to Paris and Saint-Tropez, he admitted he had. He initially could not recall who paid for the trip and said it could have been a client, then said he might have paid for it. When he could only find less than $50 in expenses in his own records for the trip, he then said he did not think he had paid for the trip and said it could have been one of his clients who sent him to look for retirement or investment property. He claimed his airfare and hotels were paid for by a client but he still could not recall a specific client. He initially said the trip did not coincide with any special dates or events but then admitted it coincided with X.H.’s birthday.
Swan could not recall taking any other trips out of the country in the prior year, even though he generally took trips between one and 10 times per year, depending on the year, to places like Costa Rica, Panama, and Thailand. He admitted he traveled to Jamaica with X.H. in 2019, within two weeks of X.H.’s birthday. Swan could not recall who paid for the trip to Jamaica, even though it occurred only five months before he testified about it. He also took a business trip...
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