Terry v. Terry , 80 Cal. App. 4th 921 ( 2000 )

Opinion

REARDON, J.

Three times the trial court has ruled on the matter of spousal support in this case. Each time the supported spouse’s estate has grown and the supporting spouse’s income has diminished. Yet, on this last go-around, with the supported spouse enjoying an investment portfolio of nearly $3.75 million, retirement benefits approaching $1 million and real estate valued at $773,500, the trial court refused to invoke its independent authority under Family Code¹ section 4322 to terminate support. We reverse the order diminishing, but continuing spousal support, and concurrently affirm the subsequent order denying the supported spouse’s request for attorney fees.

I. Factual Background

Mary E. and Thomas D. Terry separated in April 1993 after a 34-year marriage. By then their three children were adults. Mr. Terry has remarried; Ms. Terry has not.

Mr. Terry has been one of the country’s leading tax experts in the area of employee benefits. He has been a partner with two Bay Area law firms, first with Morrison & Foerster and then with Pillsbury, Madison & Sutro (PM&S). In between, Mr. Terry served as a benefits tax counsel in the United States Treasury Department. In contrast, Ms. Terry has no significant out-of-home employment.

In December 1993 the trial court entered judgment dissolving the marriage. The parties reserved issues of property division and support. When all was said and done, by stipulation or court order, major items of property were disposed of as follows: (1) Mr. Terry’s retirement benefits from Morrison & Foerster and PM&S were divided equally; (2) the family home in Kentfield, valued at $773,500, was awarded to Ms. Terry; (3) the value of Mr. Terry’s law practice with PM&S, set at $276,868, was awarded to him; and (4) Ms. Terry made an equalizing payment of $220,830.50 to Mr. Terry.

A. Initial Spousal Support Award

Spousal support was hotly disputed at trial, in part because Ms. Terry had substantial separate property assets. Trial took place in late 1994.

In its May 1995 statement of decision and August 1995 order, the trial court found that with separate property assets of approximately $2 million, Ms. Terry’s net worth was “substantially greater than Mr. Terry’s.” Nonetheless it ordered Mr. Terry to pay spousal support of $8,750 per month based on the following: Ms. Terry’s reasonable needs were $10,000 to $12,000 per month, net of taxes;² Mr. Terry had the ability to pay support, with an annual income of $315,960 from PM&S and unearned income of $25,884; and Ms. Terry’s investment portfolio would generate an estimated 5 percent return,* *³ or approximately $82,908. The $8,750 per month in spousal support, combined with income from Ms. Terry’s investments, would meet her reasonable needs. Under these circumstances, the court saw no need for Ms. Terry to change her investment strategy or draw down on the retirement accounts.

B. Motion to Reduce Spousal Support

In February 1996 Mr. Terry moved to reduce spousal support by $2,000 a month because Ms. Terry had received an additional $303,000 from her mother’s estate, and his income had decreased. While the motion was pending, PM&S notified Mr. Terry that he would be converted to a “salaried” partner, with his 1996 income reduced to $250,000 and his 1997 income to $225,000. Meanwhile, Ms. Terry’s portfolio had increased to $2,702,597.65.

In a supplemental declaration, Mr. Terry asked to have his support obligation reduced to $5,200 per month. The trial court reduced spousal support to $5,500 per month.

C. Motion to Terminate Spousal Support

Upon learning that his employment with PM&S would permanently end effective January 1, 1998, Mr. Terry moved to terminate support. In the meantime he explored job possibilities in the private and public sectors, but to no avail. Mr. Terry explained in his moving papers that since he was 64 at the time and many private firms have a mandatory retirement age of 65, private employment was unrealistic, particularly since he did not have a personal “book of business.”

Due to these developments, Mr. Terry decided to start drawing $5,500 per month from his retirement account. As well, he started a consulting practice, earning gross receipts of $12,843.75 during the first three months.

During this time frame, Ms. Terry’s investments increased in value. Her February 1998 Merrill Lynch account statement revealed a net portfolio value of $3,545,788. Annual income was estimated at $95,130, for a current yield of approximately 2.7 percent. Ms. Terry also reported interest income in the amount of $9,472 on a $200,000 promissory note, as well as $787 from a government pension.

Mr. Terry pointed out that Ms. Terry’s portfolio consisted primarily of low-basis stocks, which she managed in a manner so as not to maximize income. Should Ms. Terry elect to increase income by reconfiguring her portfolio, there would be capital gains taxes, but the tax consequence would be substantially reduced because “1997 tax legislation reduced capital gains tax rates from 28% to 20% . . . .” He further explained that Ms. Terry’s retirement account had grown to $959,786. Ms. Terry turned 61 on January 20, 1998, at which time she could draw down on the retirement account without incurring any penalty.

Ms. Terry responded that (1) her portfolio had decreased slightly because of the $200,000 loan; (2) she should not be expected to withdraw from the retirement accounts until after Mr. Terry’s death; (3) Mr. Terry could easily affiliate with a major firm, obtain a government position or teach, thereby increasing his income; and (4) the expenses associated with his consulting business were unnecessarily high.

The trial court found there had been substantial changes in circumstances, namely the loss of Mr. Terry’s job and the increase in value of Ms. Terry’s separate assets. However, the court concluded the showing was insufficient to require Ms. Terry to begin drawing down on her retirement benefits or to change her investment strategy. The court further found that Mr. Terry’s business expenses “appear somewhat overstated” and imputed approximately $80,000 in annual income to him from the consulting practice. The court reduced spousal support to $2,750 per month. In so doing it took into consideration the funds that Mr. Terry was drawing from his retirement account. As well, the court observed that under the current order, Mr. Terry would “be unable to pay his living expenses” but that his spouse’s income would be available to reduce his own living expenses.

Mr. Terry requested specific findings as to Ms. Terry’s net worth and rate of return on her investments, but the court refused. Thereafter, the court ordered each party to pay his or her own attorney fees and cost of suit. Mr. Terry appeals from the modification order (case No. A083772); Ms. Terry cross-appeals from the fee order (case No. A083746).

II. Discussion

A. Support Order

1. Introduction; Standard of Review

The trial court has broad discretion to decide whether to modify a spousal support order based on a material change of circumstances. In exercising this discretion, the court considers the same criteria set forth in section 4320 as it considered when making the initial order and any subsequent modification order. (In re Marriage of Stephenson (1995) 39 Cal.App.4th 71, 76-78 [46 Cal.Rptr.2d 8].) These factors include the ability of the supporting party to pay; the needs of each party based on the standard of living established during the marriage; the obligations and assets of each party; and the balance of hardships to each party. (§ 4320, subds. (c)-(e), (j).)

As well, section 4322 provides that in original or modification proceedings, “where there are no children, and a party has or acquires a separate estate, including income from employment, sufficient for the party’s proper support, no support shall be ordered or continued against the other party.” (Italics added.) Denial of continued support is thus mandatory if the sufficiency threshold is met, irrespective of circumstances the court would otherwise consider under section 4320.

The trial court repeatedly found that Ms. Terry’s separate estate was not sufficient to meet her proper needs for support, and thus section 4322 did not apply. This, despite the fact that Ms. Terry’s separate estate has consistently grown.

The initial support order set Ms. Terry’s reasonable needs as totaling between $10,000 and $12,000 per month after taxes. She did not appeal that ruling and it is too late to do so now. This is the pivotal amount for ascertaining Mr. Terry’s support obligation, if any.

•The question under section 4322 is whether Ms. Terry’s separate estate is sufficient to fund this level of support. This is a mixed question of fact and law calling for (1) the establishment of the historical facts concerning the value and character of Ms. Terry’s separate estate as well as her support needs; and (2) the application of those facts to the legal standard of sufficiency with the resulting determination as to whether that standard is met. The facts are not in dispute.

When the inquiry into whether the standard is met “requires a critical consideration, in a factual context, of legal principles and their underlying values, the question is predominantly legal and its determination is reviewed independently.” (Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888 [264 Cal.Rptr. 139, 782 P.2d 278].) The trial court’s section 4322 determination that a separate estate is or is not sufficient for proper support is not a factual description or statement. Rather, it is a legal conclusion that an estate reasonably could, or could not, generate sufficient income to provide for a spouse’s proper support, with legal ramifications for both parties. Thus, our standard of review is de novo.

In re Marriage of McNaughton (1983) 145 Cal.App.3d 845 [194 Cal.Rptr. 176] (McNaughton) is not to the contrary. There, the husband claimed the wife’s separate estate was sufficient for her expenses, relying on Dallman v. Dallman (1959) 170 Cal.App.2d 729 [339 P.2d 636] (Dallman). Said the court in McNaughton: “The [Dallman] court, in reviewing a spousal support order of $750 a month, stated, ‘the mere fact that a party has a separate estate will not prevent the court’s awarding him or her alimony. It is only when such a party has a separate estate sufficient for his or her proper support that the court is denied the power to make such an award.’ (Id., at p. 734.) Whether an estate is sufficient for one’s proper support is a fact question for the trial court.” (McNaughton, supra, 145 Cal.App.3d at p. 850, original italics.)

The emphasis in this excerpt is on the needs of the party—what is necessary for one’s proper support—not on whether the estate is capable of generating that amount. In any event, unlike in the present case, the parties in McNaughton disputed the historical facts, in particular the amount of annual gross income actually generated by wife’s separate property. As well, unlike in the present case, McNaughton involved a spousal support order entered just after the community assets had been divided. The parties’ circumstances were in a state of flux and wife had not had an opportunity to put her own investment scheme in place. (McNaughton, supra, 145 Cal.App.3d at pp. 852-853.)

Here, the parties have accepted the Merrill Lynch account statements as accurately reflecting the actual income from Ms. Terry’s investment and money accounts. Moreover, Ms. Terry has adhered to an established investment strategy and its results have been traced over time. The issue at this juncture is whether, in light of the appreciation of Ms. Terry’s estate, section 4322 is implicated. That answer is subject to de novo review.

2. Analysis

a. The “Separate Estate” Concept

At the outset we clarify that the section 4322 concept of a “separate estate” is not limited to the income actually and presently produced by the estate. Ms. Terry asserts to the contrary that the court should look only to actual income, quoting from McNaughton, supra, 145 Cal.App.3d at page 850: “Civil Code section 4806 [(now § 4322)] is applicable only when the supported spouse’s income is sufficient to meet that spouse’s needs, which was not the case here.” (Italics added.)

It is important to place this quote in the context of the disputed issues raised, one being how much income the wife’s separate property generated. The quote immediately followed the court’s conclusion that the wife’s separate property generated considerably less income than the husband claimed. In any event, we reject the notion that the court should look only to the income currently produced by the estate of the supported spouse in resolving whether section 4322 applies.

The statute references the estate, not just the income from the estate. Had the Legislature intended to cut off or preclude spousal support only when a spouse has or acquires income sufficient for that party’s proper support, it could easily have said so. The concept of an estate, on the other hand, more broadly embraces “[t]he degree, quantity, nature, and extent of interest which a person has in real and personal property.” (Black's Law Dict. (5th ed. 1979) p. 490.)⁴

Having concluded that the section 4322 notion of the separate estate is not synonymous with income, we are not suggesting that courts look beyond the actual income produced from the supported spouse’s assets in cases where those assets are reasonably managed. Again, the ultimate section 4322 determination is whether a particular estate is, or is not, reasonably capable of providing for a spouse’s proper support. That determination will vary with the nature of the particular estate. Where, as here, the supporting spouse challenges the reasonableness of the supported spouse’s investment strategy, the court should look to the estate as a whole, including the actual and reasonable income potential from investment assets, as well as their total value, in resolving the issue of the estate’s sufficiency for proper support.

Additionally, we note that section 4322 does not restrict the source of property comprising the estate. The only requirement is that there be a separate estate. (§ 4322; Dallman, supra, 170 Cal.App.2d at p. 733.) Thus, assets acquired through the final division of community property should be considered in assessing the sufficiency of the estate for proper support. (See Dallman, supra, 170 Cal.App.2d at p. 734; In re Marriage of Biderman (1992) 5 Cal.App.4th 409, 413-414 [6 Cal.Rptr.2d 791] (Biderman); McNaughton, supra, 145 Cal.App.3d at pp. 850-853.)

b. Section 4322 Applies

At the initial trial the parties stipulated that the value of Ms. Terry’s Merrill Lynch account, as reflected in her November 1994 statement, was $2,037,884. The trial court estimated that the rate of return on that account was 5 percent—in reality it was in the neighborhood of 4.1 percent. Moving forward to the hearing on the motion to terminate support, the value of Ms. Terry’s Merrill Lynch portfolio had increased substantially, to $3,545,788 as reflected on the February 1998 account statement. Yet the estimated annual income from the Merrill Lynch account was $95,130, for a lower yield of approximately 2.7 percent. Taking into account the $200,000 promissory note and income thereon of $9,472, Ms. Terry had investments totaling $3,745,788, with income of approximately $104,602, for an overall yield of approximately 2.8 percent.

As of the final hearing, Ms. Terry’s retirement account had also grown substantially, from approximately $620,000 in 1995 to $943,423. At age 61, she could now draw on the account without penalty. She also owns a home worth at least $773,500, with nothing owing.

Biderman, supra, 5 Cal.App.4th 409 is helpful to our analysis. Biderman involved an appeal from an order extending permanent spousal support beyond the termination date. The trial court originally ordered support for one year to permit the disabled husband to convert his assets so they would generate increased income to competently care for him. It then granted an extension on grounds he was still disabled after one year, but the Court of Appeal reversed. Recognizing the legislative mandate of the predecessor to section 4322, the reviewing court approved the original order, explaining: “It is not unreasonable for a trial court to conclude that even a clinically depressed spouse with a net estate of $350,000 should be self-supporting.” (Biderman, supra, at p. 414.)

Similarly, we hold that the trial court erred in concluding that Ms. Terry’s estate was not sufficient to meet her proper support needs of between $120,000 and $144,000 per year, net of taxes. Despite the significant appreciation of Ms. Terry’s asset base from the time of the first hearing to the last—for example, her investment portfolio grew in value by $1,707,904 and her retirement fund grew by $323,423—the trial court persisted in its reticence to do anything that might prompt Ms. Terry to change her investment strategy, draw down on the retirement account or liquidate or leverage any of her substantial assets. This reticence persisted despite a parallel reduction in yield, the advent of a more advantageous capital gains tax rate, and the elimination of any penalty for accessing her retirement funds.

To put the matter in perspective: At most, a decision that Ms. Terry’s estate met the sufficiency threshold without continued support would implicate a small amount of the appreciation of her asset base, nothing more. The trial court’s reticence did not make sense in light of the totality of the facts.⁵ For purposes of section 4322, what made sense as an investment strategy for growth in 1994 no longer made sense in 1998, in light of the substantial appreciation of Ms. Terry’s estate and the other advantageous factors noted above. The legal standard of sufficiency having been met, the dictates of section 4322 compelled termination of spousal support. It is time for Ms. Terry to either generate more income or otherwise resort to a negligible portion of her growing capital to meet her needs.

Ms. Terry asserts that she should not be required to change her investment strategy “without at least being warned that the court expects her to do so.” We disagree. Ms. Terry has been aware of the court’s independent authority under section 4322 since entry of the first support order. Nothing more could be achieved by warnings because section 4322 applies, and its operation is mandatory, whenever a spouse has, or acquires, a separate estate adequate for proper support.

While we realize that a decision that an estate is adequate to meet the needs of a previously supported spouse without continued support can trigger reassessment of all matters financial, including investment strategies, that decision is the spouse’s, not the trial court’s. Under section 4322, it is not up to the trial court to direct Ms. Terry to do anything in particular. The trial court’s job is to ascertain whether the estate reasonably could generate sufficient income for proper support, not to second-guess how the spouse will manage that estate to ensure sufficient income. Thus a decision that an estate is adequate or sufficient is not a decision that any particular, investment strategy must change, although that may happen.

B. Attorney Fee Order

Ms. Terry separately appeals from the order denying her request that Mr. Terry pay $5,000 for her fees and costs on his motion to terminate support. The trial court may in its discretion award fees or costs reasonably necessary to maintain or defend any proceeding occurring after entry of judgment. (§ 2030, subd. (c).) The trial court is to decide “what is just and reasonable under the relative circumstances” (§ 2032, subd. (b)), taking into consideration “the need for the award to enable each party, to the extent practical, to have sufficient financial resources to present the party’s case adequately .... The fact that the party requesting an award of attorney’s fees and costs has resources ... is not itself a bar to an order that the other party pay part or all of the fees and costs requested. Financial resources are only one factor for the court to consider in determining how to apportion the overall cost of the litigation equitably between the parties under their relative circumstances” (ibid.).

In assessing the applicant’s relative “need” and the other party’s ability to pay, the court may take into account “all evidence concerning the parties’ current incomes, assets, and abilities, including investment and income-producing properties.” (In re Marriage of Drake (1997) 53 Cal.App.4th 1139, 1167 [62 Cal.Rptr.2d 466].) In light of the fact that Ms. Terry is by far the wealthier spouse, the trial court did not abuse its discretion in denying her fees.

III. Disposition

We reverse the order reducing, but continuing, spousal support with directions that the trial court enter an order terminating support and reserving jurisdiction only (case No. A083772). We affirm the. order requiring Ms. Terry to pay her own fees (case No. A083746). We deny both parties’ request for fees on appeal.

Hanlon, P. J., concurred.

1 All statutory references are to the Family Code.

2 The court made it clear that this baseline amount was not equivalent to the marital standard of living. That standard had been complemented and subsidized by infusions from both parties’ separate property and thus was an inappropriate measure with which to calculate Ms. Terry’s needs for purposes of spousal support. The court concluded; “A reasonable approximation of the marital standard, based on the funds which would have been available from community sources, for Ms. Terry alone, would require $10,000 per month after taxes .... This number is consistent with the after-tax amount available to them during the marriage.”

3 The court relied on Ms. Terry’s November 1994 Merrill Lynch account statement, which reflected a portfolio valued at $2,037,884. The account statement itself shows estimated annual income of $67,397 from priced investments plus a current yield of 4.32 percent on the “money accounts.” With money accounts totaling $364,587, the annual yield would be $15,750, for a total estimated annual income of $83,147. Whichever figure is used—$82,908 or $83,147—the rate of return is approximately 4.1 percent, not 5 percent.

4 For example, in Dallman, supra, 170 Cal.App.2d 729, the wife was awarded a $500,000 estate which generated a net income of approximately $978 per month. (Id. at p. 737.) Mrs. Dallman asserted she needed $1,600 per month for her proper support. (Id. at p. 735.) Among other things, the reviewing court observed that “disregarding any income [the estate] might produce” (ibid., italics added), her separate property would support her at the $1,600 per month rate “for more than 25 years” (ibid.). Ultimately, the court held it was error to find that the wife’s separate estate was insufficient for her proper support where no competent proof was made to support the items of monthly expenses identified by the wife. (Id. at p. 737.)

5 We recognize that the trial court made its section 4322 ruling without the benefit of expert testimony on such issues as rates of return or the tax consequences attendant to any reconfiguration of Ms. Terry’s estate. Expert testimony of course would not be inappropriate, but neither is it necessary in light of what is known about the size of the estate, the established level of support, the trajectory of appreciation, the reduction of the capital gains tax rate and the attainment of penalty-free access to retirement funds.