Stocks Go Up and Support Can Go Down

Husband [H] married Wife [W] in 1996. In 1997, the couple’s first of their four children was born. The couple decided that W, a pediatric nurse, would stay home to care for their children while H be the breadwinner. The couple’s fourth and last child was born in 2008.

In 2010, the couple separated, and later filed for divorce.

In 2012, H accepted a job as chief technology officer for a start-up tech company. His financial compensation consisted of a base salary, an annual performance bonus targeted around half of his base pay, and stock option grants. His stock options would begin vesting in 2013.

In 2013, H and W’s divorce was finalized and the decree stated, “[H]was to pay a base amount of monthly spousal support, plus 12.5 percent of John’s earnings over his annual base salary, up to a maximum of $1,200,000. In child support, he was to pay $5,200 per month in base child support and 14 percent of his earnings over his annual base salary as ‘bonus’ support. The agreement also allows for “add-ons” such as education and uncovered medical expenses. At the time of the decree, the children ranged from four to fifteen.

H’s income went from $800,000 per year in 2012, to $2.6 million in 2014. Because of the increase, H’s child support increased to $32,000 per month. He was also able to purchase stock in his company every year, and did so. In 2015, that amounted to over $1 million dollars.

Also, in 2014, H filed a Request for Order (a petition) to reduce his child support based on Family Code Section 4057 (a)(3), the state’s extraordinarily high earner provision. H argued that because W was getting spousal support and with her substantial assets, the cap he was requesting (limiting monthly support to $15,700) was more than adequate to cover the children’s needs. H also argued that this was in the children’s best interests, in particular because they can attend public schools. In effect, H argued that he should not have his child support based on his stock sales that did not exist until he sold his stock – not at the time of the divorce agreement.

W contended that the high amount of child support was expected and planned for when the initial divorce agreement was signed. There was no change in circumstances requiring a change in child support; nor she also argued, was H an extraordinarily high earner as provided by statute.

The trial court agreed with H, that he was an extraordinarily high earner and that his stock sales should not be included in his child support obligation. The court also capped H’s earnings for child support purposes at $2 million. W appealed.

The Appellate Court reversed the trial court stating:“We conclude that subdivision (a)(1) of section 4058 must be construed to include all compensation that has been conferred upon and is available to the employee. At that point, the available compensation from stock options (the market price less the “strike price”) should be included in gross income, regardless of whether the parent elects to exercise the option and sell shares of stock.” In other words, when H’s stock was available for sale, it should be included in his income.

Regarding H’s contention that he was an extraordinarily high earner, the Appellate Court sent the issue back to the trial court to determine.

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