PEARLSTEIN v. JULIE

Filed 3/28/06

CERTIFIED FOR PARTIAL PUBLICATION*

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

I. Introduction

Appellant Irwin Pearlstein (Irwin)[1] appeals from the family law court's decision to include, as part of his gross income for child support purposes, both cash and the value of stock he received for selling his business. In the published portion of this opinion, we conclude that the trial court erred by including the value of marketable, but unliquidated, stock in the calculation of Irwin's income. In doing so, we reject respondents' contention that the stock Irwin received for the equity in his business is analogous to a stock option commonly used as a form of executive compensation, which generally is considered gross income for support purposes. (In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 283 (Cheriton).)

In the unpublished portion of this opinion, we conclude the family law judge also erred: (1) in making other calculations pertaining to a determination of Irwin's income; (2) in directing Irwin to pay a portion of guideline support for 2004 into a Chandler trust[2] for his minor daughter's benefit; and (3) in imposing $5,000 in sanctions against Irwin. Accordingly, we reverse.

II. Facts and Procedural Background

Appellant Irwin Pearlstein and respondent Julie Pearlstein were married in October 1988. Their only child, Alexandra, was born on July 10, 1989. Irwin and Julie separated in November 1990, when Alexandra was still an infant. No formal visitation order was entered until much later; instead, for many years the parties handled Alexandra's custody schedule by informal agreement between themselves.

Three years after the parties separated, in November 1993, Irwin was ordered to pay child support in the amount of $800 per month, including childcare costs to be paid directly to the childcare provider, with the balance going directly to Julie. At the time, Irwin was apparently experiencing financial difficulties; he owed a considerable sum in back taxes, and had been the victim of embezzlement perpetrated by his accountant. By the time the November 1993 order was entered, Irwin was admittedly $10,000 in arrears on his child support. The court permitted him to defer paying it for a year in order to clear up his obligation for back taxes first.

Within a couple of months after the entry of the November 1993 child support order, Irwin's business failed, and in January 1994, he began working as a consultant for a new business, Professional Resource Screening, Inc. (PRSI), which his adult children from a former marriage were in the process of establishing. Irwin initially received no compensation from PRSI, but later earned a salary of $2,000 per month. During 1994, Irwin filed for bankruptcy, and moved to modify his child support, which was reduced to a total of $741 per month effective as of June 1994.

During the period between June 1994 and June 2001, Irwin continued to work for PRSI. In 1997, he remarried and moved into a home owned by his new wife. In late 1999, Irwin's children made him a gift of 51 percent of the stock of PRSI. Meanwhile, Alexandra entered middle school, and Irwin began picking her up regularly after school and taking responsibility for helping her with her homework. He also paid directly for at least some of the expenses of her health care and extracurricular activities, including religious school to prepare Alexandra for her bat mitzvah.

During the period from 1994 to 2001, it appears that Irwin paid some of his child support, but not all, and by 2001, a significant arrears had accumulated. In May or June 2001, Julie opened a child support collection case with the Contra Costa County Department of Child Support Services (DCSS). In August 2001, DCSS wrote to Irwin to inquire about why his employer was not garnishing funds from his paycheck for child support. Irwin responded by explaining that he was the majority shareholder of his employer, and his salary was so low that the maximum allowable wage garnishment would not cover his support obligation. He indicated that he could and would pay more from his own funds than could be obtained by garnishing his paycheck. By the end of 2001, although Irwin had started paying down his arrears, he still had a remaining unpaid balance of $14,184.21, including interest.[3]

On December 28, 2001, PRSI was sold to, and merged with, a company called US Search Screening Services, Inc. (USSI). As the majority shareholder of PRSI, Irwin received compensation for the sale of his stock in the form of stock in USSI, as well as a significant sum of cash to be paid over time. Under Securities and Exchange Commission (SEC) rules, the stock that Irwin received in the transaction was subject to stringent restrictions on transfer; he could not sell it at all for one year (i.e., until January 2003), and thereafter could only sell it in quantities determined by the volume of stock traded on the open market.

As part of the merger transaction, Irwin also entered into an employment contract with USSI under which he received a salary of $8,670 per month ($104,396 per year).[4] The terms of the merger transaction also included a covenant under which Irwin was prohibited from competing with USSI (or its successor) until after December 31, 2005, which was after Irwin's 64th birthday. He also paid $100,000 in legal fees in connection with the merger.

On January 15, 2002, Irwin received a lump sum payment of $204,000 as part of his consideration from the merger of PRSI and USSI. One week later, on January 22, 2002, Irwin met with Julie at the DCSS office and paid the entire amount of child support arrears that DCSS indicated he owed as of that date.[5] The next day, DCSS informed Irwin that Julie had requested that her child support collection case be closed.

Starting in February 2002, Irwin paid directly to Julie the $741 per month in child support that he owed under the order then in effect. Except for a deduction in February 2002 on account of Alexandra's uninsured dental or orthodontic expenses that month (a type of offset to which Julie had historically consented), he paid in full every month. In March 2002, DCSS filed a motion to modify the amount of support on the ground that Irwin's income had increased, but the motion was dropped from the calendar on April 11, 2002, after Irwin's counsel contacted DCSS.

On April 17, 2002, Julie asked DCSS to reopen its case, contending that she had received only partial payment of the child support due for February 2002, and none in April. DCSS promptly notified Irwin that it was reopening its case. On May 20, 2002, DCSS filed a second motion to modify child support (the modification motion), which ultimately led to the order at issue in the present appeal.[6] From the time DCSS reopened its case until over a year later, in July 2003, neither Julie nor Irwin reported to DCSS that Irwin was regularly making child support payments directly to Julie, and had been doing so since February 2002. As a result, by August 2002, DCSS's records reflected--incorrectly--that Irwin was $4,446.66 in arrears on his child support payments. Accordingly, on August 30, 2002, DCSS's automated procedures generated a notice to a federal government agency reflecting the amount due.

Irwin acknowledged at the hearing that, during 2002, DCSS regularly sent him statements regarding the child support amounts it believed he owed, and that he did not contact DCSS to inform it that its records were in error. For example, on October 15, 2002, DCSS notified Irwin that, according to its records, as of October 31, 2002, he would owe a total of $5,970.82 in accrued child support arrears and interest. In late October 2002, Irwin's counsel wrote to DCSS asking for the first time for an accounting of the child support arrears DCSS contended Irwin owed. Around the same time, the modification motion, which had originally been noticed for hearing on July 10, 2002, and later continued to November 1, 2002, was continued again, and set for a four-hour â€