Opinion
D071379
02-13-2020
IN RE the MARRIAGE OF Rosalinda and George DELUCA. Rosalinda Deluca, Appellant, v. George Deluca, Appellant.
Higgs, Fletcher & Mack, John Morris and Rachel E. Moffitt, San Diego, for Appellant Rosalinda Deluca. Stephen W. Hogan for Appellant George Deluca.
Certified for Partial Publication.
Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for publication with the exception of the discussion section, part A.
Higgs, Fletcher & Mack, John Morris and Rachel E. Moffitt, San Diego, for Appellant Rosalinda Deluca.
Stephen W. Hogan for Appellant George Deluca.
DATO, J. In this marital dissolution action between Rosalinda Deluca and George Deluca, both parties appeal from a judgment determining the division of property and other matters, including spousal support. During the marriage, George's sister transferred to him title to an apartment complex referred to in this case as the "Florida Street property" or simply "Florida Street." Rosalinda contends the trial court erred in ruling the Florida Street property was George's separate property rather than community property. George has custody of the parties' two children and contends the court erred by awarding Rosalinda spousal support in an amount greater than his total net income available to support the children. Specifically, he asserts the court erred by including the amount of monthly loan principal payments he is required to make on his income-producing properties as income available for spousal support.
As is customary in family law cases, we will refer to the parties by their first names for convenience and clarity, intending no disrespect.
In the unpublished portion of this opinion we reverse that part of the judgment awarding the Florida Street property to George as his separate property and remand with directions to determine the amount of reimbursement credit to which George is entitled for Florida Street, as well as to consider George's new contention that he should be awarded a fractional separate property interest in the property. In the published portion of this opinion we also reverse the spousal support award and direct the trial court to reconsider the amount of support after determining the extent to which George's loan principal payments reasonably and legitimately reduce his income for purposes of support. We otherwise affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
A. Background Facts
George and Rosalinda were married on September 7, 1996, and separated 15 years and two months later, on November 21, 2011. They had two children during the marriage—one born in 1998, and the other in 2003. At the time judgment was entered, George had sole physical custody of the children.
The parties' oldest child turned 18 years old and was emancipated in July 2016.
Before and during the marriage, George owned and operated an insurance agency. He also owned and managed several income-producing rental properties that the court found to be his separate property. Rosalinda has a bachelor's degree in political science and a paralegal certificate. She worked as a legal secretary for over 26 years, including throughout the marriage.
B. The Deluca Properties Trust Litigation
Before George's father died in 1990, he acquired multiple parcels of real property that he held in various trusts, including the Deluca Properties Trust that contained the Florida Street property. George, his brother Sylvester, and his sister Rosalie were the beneficiaries of the Deluca Properties Trust. After their father's death, disputes over his trusts led to four and one-half years of litigation between George and his siblings.
On October 25, 1996, just after George married Rosalinda, the three siblings entered into a written agreement (the settlement agreement) to resolve their litigation over the family properties. The settlement agreement noted the existence of "claims, demands and differences" between the parties relating to the ownership and management of the subject properties and the administration of the Deluca Properties Trust, and stated the parties had "settled all of these claims, demands, differences and disputes ...."
Under the settlement agreement, George received title to three properties: (1) a commercial property in Santee (referred to as the Santee property); (2) a commercial property in Encinitas (referred to as the Encinitas property); and (3) a commercial property on Orange Avenue in San Diego (referred to as the Orange property). Rosalie received title to the Florida Street property and a promissory note from George in the amount of $75,000. The note was to be secured by a first priority deed of trust encumbering the Orange property. Sylvester agreed to forgive an outstanding debt Rosalie owed him in the amount of $32,000. Sylvester received title to a property on West Palm Street in San Diego and a promissory note from George in the amount of $250,000. The note was to be secured by a third priority deed of trust encumbering both the Santee property and the Encinitas property.
The settlement agreement provided that "[i]n exchange for receiving the Santee, Encinitas and Orange Properties, GEORGE relinquishes his right to receive or claim an interest in any of the assets of the [Deluca Properties] Trust, and expressly agrees that he is no longer a beneficiary of the Trust," and that "all assets of the Trust belong solely to ROSALIE and SYLVESTER ...." The settlement agreement also provided: "This agreement may be amended only by a written agreement executed by all the Parties."
C. George's Later Acquisition of Florida Street
At trial, George testified that Rosalie never wanted the Florida Street property. So in September 1997, roughly one year after the original settlement agreement, George and Rosalie signed another agreement under which Rosalie transferred title to the Florida Street property to George. This second agreement, labeled "AMENDMENT TO SETTLEMENT AGREEMENT AND MUTUAL RELEASE," states that it amends "that Agreement of Settlement and Mutual Release ... executed October 25, 1996, by and between Rosalie ... George ... and Silvester [sic ].... This amendment does not in any way [affect] the terms of the original settlement with respect to George ... and Silvester ... or as between Rosalie ... and Silvester ..., and makes no other changes or modification, other than those set forth herein."
The "amendment" to the settlement agreement provided that Rosalie would transfer Florida Street to George by grant deed, and George would execute a promissory note to Rosalie in the amount of $164,700, secured by the property. George would "have the option to assume the first deed of trust on [the] property, in the approximate amount of $235,300 or continue making the monthly payments on [the] first deed of trust." George would also pay $20,000 in cash to Rosalie at the close of escrow. Thus, what George referred to at trial as the "transfer price" of Florida Street was $420,000 ($164,700 + $235,300 + $20,000), which was the value of the property when it was appraised in 1995, in connection with the original settlement agreement.
The amendment to the settlement agreement stated: "It is expressly agreed between the Parties that this exchange and transfer of ownership to the Florida Street property is an extension of and modification of the Parties' original settlement agreement ..., and the Parties' express intent herein is to redistribute trust assets." It also stated: "Except as expressly stated herein, all other terms and provisions of the original settlement agreement remain in full force and effect, without modification or change." George and Rosalie signed the amendment; Sylvester did not sign it.
At trial, George testified that he had many conversations with Rosalinda about the Deluca properties and that as "my fiancée, my wife, my confidant, [Rosalinda] was aware of everything that was happening in the litigation [with his siblings] so I'm sure she had a chance to see [the settlement agreement] numerous times if she wanted to or she glanced at it. It was available for her." He also testified that he provided Rosalinda a copy of the trust that was the subject of the litigation.
George testified that he told Rosalinda his sister was transferring Florida Street to him and the property was his inheritance. He explained that Florida Street had been part of his family trust, his parents had built the apartment building on the property, and it was to remain his separate property. He gave Rosalinda a copy of the amendment to the settlement agreement before the close of escrow on Rosalie's transfer of Florida Street to him, and he discussed the terms of the amendment with her. When asked if Rosalinda "[made] any reply" to him about the terms of the amendment, George testified, "She thought it was good."
At George's request in January 1998, Rosalinda signed a quitclaim deed transferring any interest she had in the Florida Street property to George as his sole and separate property. When George refinanced the property in 2002, Rosalinda signed a "SPOUSAL ACKNOWLEDGEMENT" document stating that she claimed no ownership rights in Florida Street.
Rosalinda testified at trial that when she and George were dating, he told her that he was involved in litigation with his brother regarding the "trust for his inheritance," but he did not tell her any details about his claims. He never provided her with a copy of any of the family trusts, and he never discussed the details of the terms of the settlement agreement between him and his siblings or the amendment to the settlement agreement before or during the marriage. The first time she saw the settlement agreement and the amendment to the settlement agreement was during the divorce proceedings, and George did not tell her anything about terms of the amendment to the settlement agreement when he asked her to sign the quitclaim deed to the Florida Street property. He told her that Florida Street was part of his inheritance and his sister was going to transfer it to him because she was unable to manage the apartments. He explained that his lender needed the quitclaim deed "to get everything through." Rosalinda did not seek legal advice before signing the quitclaim deed because she trusted her husband and "just signed it."
Rosalinda's counsel argued at trial that the Florida Street property should be divided as community property because George purchased it from his sister during the marriage with community funds. Counsel further argued that George induced Rosalinda to sign the quitclaim deed to the property by undue influence in breach of the fiduciary duty he owed her because she did not sign the quitclaim deed with full knowledge of the material facts, her signing it unfairly advantaged George, she waived a valuable right by signing it, and she received no consideration for signing it.
George's counsel argued that Rosalinda knew she had no interest in the Florida Street property, knew it was part of George's inheritance, and knew the effect of the quitclaim deed—i.e., she knew that if she had any interest in the property, she was transmuting it. He argued that the presumption of undue influence had been rebutted by evidence that Rosalinda "knew at all times that these properties were being handed down through the family. Even if he had to make a payment to his siblings, the payment was supported by the loans on the commercial properties and the loans on the commercial properties were supported by the commercial properties themselves ...." D. Statement of Decision and Judgment
1. Character of the Florida Street property
In its "Final Statement of Decision and Judgment," the trial court ruled that the Santee property, the Encinitas property, and the Orange property were George's separate properties under Family Code section 770 "in that they were received through inheritance and devise." The court relied on the fact that George acquired the properties through the settlement agreement between him and his siblings, which was reached before the marriage but executed two months after the marriage. It found that all of the properties at issue in the litigation between George and his siblings were "a direct result of an inheritance received and an agreement devising the real properties at issue."
All subsequent statutory references are to the Family Code unless otherwise specified. Section 770, subdivision (a) provides: "(a) Separate property of a married person includes all of the following: [¶] (1) All property owned by the person before marriage. [¶] (2) All property acquired by the person after marriage by gift, bequest, devise, or descent. [¶] (3) The rents, issues, and profits of the property described in this section."
Regarding the Florida Street property, the court determined that George "met his burden of proof to establish that the real property is his separate property ... in that it was received through inheritance and devise." His acquisition of Florida Street was "memorialized" by the amendment to the settlement agreement, which "provided for the same value of the property that existed at the time of the original Settlement Agreement and Mutual Release ...." Rosalinda, in turn, "freely and voluntarily executed a Quit Claim Deed at the time of the transfer of the property to [George]." She testified that she read the quitclaim deed before she signed it and that George did not threaten her to make her sign it. When George refinanced the property in 2002, Rosalinda "executed a spousal acknowledgement indicating that she claimed no ownership interest in the property ...." Noting that the Florida Street property was solely in George's name during the marriage, the court found that "[t]he community did not acquire an interest in the property by way of pay down of principal (as established through the tracing report of [George's expert witness, accountant Anna Addleman] )."
The court ruled that George met his burden of proof by substantial evidence to overcome any presumption of undue influence and unfair advantage in his relationship with Rosalinda, and that Rosalinda did not present sufficient evidence to support a finding of constructive fraud. Based on findings that Rosalinda had access to legal advice because she worked in a law firm, and that George discussed the amendment to the settlement agreement with her and informed her that his sister would transfer Florida Street to him under the agreement, the court concluded Rosalinda executed the quitclaim deed and spousal acknowledgment regarding the Florida Street property "freely and voluntarily, and with full knowledge of all the facts, and with understanding of the effect of the transfers."
The court found that Addleman's tracing report accurately traced the payments on the Florida Street property, reflecting that $974 of community funds were used to pay down the principal on the property, and that "the indirect tracing (Recapitulation/Family Expense) by Ms. Addleman [was] accurate and properly provide[d] for tracing of separate property. (See findings in (b) above)." Observing that the loans against the property were solely in George's name, the court found "the lender relied upon the rent/profitability of the property itself to underwrite the loan ...."
The "findings in (b) above" were the court's findings regarding the Santee, Encinitas, and Orange properties. In that section of its statement of decision and judgment, the court explained indirect tracing as follows: "Payments may be traced to a separate property source based upon a showing that the community income throughout the marriage was exhausted by family expenses, such that any sums devoted to separate property were necessarily separate in origin. This method is called the ‘Recapitulation’ or ‘Family Expense’ method. ‘Under the "family living expense" or "recapitulation" method, it is assumed that family living expenses are paid out of community property funds. [Citations.] Payments may be traced to a separate property source by showing community income at the time of the payments or purchase was exhausted by family expense, so that the payments or purchase necessarily must have been made with separate property funds.’ " (In re Marriage of Braud (1996) 45 Cal.App.4th 797, 823, 53 Cal.Rptr.2d 179 (Braud ).)
2. Income available for support
The court noted that George had self-employment income from his insurance agency and rental income from his real property. It found George's monthly self-employment income was $7,281, based on the "competing testimony" of George's expert witness Addleman, and Rosalinda's expert witness, accountant Karen Kaseno.
According to Addleman's report, George's monthly average income was $25,332 before principal payments on the loans against his commercial and residential properties. Kaseno testified it would not be appropriate to reduce George's income available for support by the amount of his principal payments on his separate property. Addleman testified that George's principal payments should be excluded from his income available for support because if those payments were not made, the properties would go into foreclosure and George would lose the income they generated. The court concluded Addleman's reasoning was "flawed," stating: "Payments made to solely benefit the separate property of [George] cannot operate to reduce his income available for support. If that were the case then any party could divert income to the benefit of their separate property at the exclusion of being considered income available for support." It added that "[n]either party provided the Court with any case authority addressing this issue." Based on Addleman's report but consistent with Kaseno's analysis, the court found George's combined self-employment income and separate property rental income available for support was $25,332. It imputed annual income of $60,000 to Rosalinda ($5,000 per month) based on her earning capacity.
Rosalinda's expert Kaseno testified that she disagreed with Addleman's subtracting George's loan principal payments from his income available for support. She explained, "Payments of principal [are] not normally deducted from a party's income available for support. When you're paying off your principal, you're basically increasing your net worth. You are paying money that is paid down on your debt obligation. It's not an expense, an accounting term, and it's basically increasing your net worth."
The court found that during the marriage the parties enjoyed an upper middle class lifestyle, which "was in large part supplemented by the separate property income of [George]." Rosalinda "had been living rent free for approximately the last three years," and George had been "living in a 2 million dollar plus residence in Point Loma." During the marriage, the parties traveled to Europe each year, which "in large part was supported by the separate property residence that [George] inherited from his mother." The court noted that Rosalinda had been able to put money into a profit-sharing plan and a 401(k) account when she was employed, the parties drove older vehicles, and the minor children were enrolled in private schools.
The court ordered George to pay spousal support of $7,500 per month. The court explained that although Rosalinda had made minimal efforts to become self-supporting and had the ability to earn $60,000 per year, George's total income was $25,332 per month and he lived with the children in a home valued in excess of $2 million. Rosalinda, on the other hand, "live[d] with her sister's extended family and no longer [had] any of the [lifestyle] comforts she once shared with [George]."
We will include additional relevant facts in our discussion of the legal issues.
DISCUSSION
A. Characterization of the Florida Street Property
See footnote *, ante .
B. Spousal Support Award
George contends the court erred by failing to reduce his income available for spousal support by the amount of monthly loan principal payments he is required to make on his income-producing properties. He argues the court abused its discretion by "imputing" the amount of his monthly loan payments to him as "phantom income" and awarding Rosalinda monthly spousal support of $7,500, despite finding that the maximum monthly income available to him to support the children after making his loan payments was $7,281.
At trial, George's expert Addleman testified that she determined the amount of George's income "less the principal payments" he made on the loans against his rental properties because "[t]he loans had been in place as of the date of marriage and prior to the date of separation ...." If George had taken out the loans after the date of separation, she would not have considered them, but the loans were "part of the [parties'] marital lifestyle, how they operated." She testified that George's principal payments should not be included in his income available for support because "[George] generates earnings from rental properties .... That income is generated because loan payments are made and that loan is in good standing. Should that property or loan be not in good standing there is potential that that property could ... be lost and, therefore, not generate the rental income that it is generating. [¶] In order for [George] to continue to earn this ... money, those loans need to be serviced and payments need to be made."
Rosalinda's expert Kaseno disagreed with Addleman's subtracting George's loan principal payments from his income available for support. She explained, "Payments of principal [are] not normally deducted from a party's income available for support. When you're paying off your principal, you're basically increasing your net worth. You are paying money that is paid down on your debt obligation. It's not an expense, an accounting term, and it's basically increasing your net worth." The court rejected Addleman and George's position and included George's principal payments in his income available for support. "Permanent spousal support ‘is governed by the statutory scheme set forth in sections 4300 through 4360. Section 4330 authorizes the trial court to order a party to pay spousal support in an amount, and for a period of time, that the court determines is just and reasonable, based on the standard of living established during the marriage, taking into consideration the circumstances set forth in section 4320.’ [Citations.] The statutory factors include the supporting spouse's ability to pay; the needs of each spouse based on the marital standard of living; the obligations and assets of each spouse, including separate property; and any other factors pertinent to a just and equitable award. (§ 4320, subds. (c)-(e), (n).) ‘The trial court has broad discretion in balancing the applicable statutory factors and determining the appropriate weight to accord to each, but it may not be arbitrary and must both recognize and apply each applicable factor.’ " ( In re Marriage of Blazer (2009) 176 Cal.App.4th 1438, 1442-1443, 99 Cal.Rptr.3d 42 ( Blazer ).) Failure to consider each applicable factor is reversible error. ( In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 304, 111 Cal.Rptr.2d 755 ( Cheriton ).)
Kaseno further testified that George had increased his mortgage payments shortly before the date of separation by refinancing certain properties, stating: "There were several refinances that took place shortly before separation that went from longer term loans down to 15 year loans or seven year loans and what this does is it increases the amount of principal that is paid down with each payment so it increases the payment and increases the amount that is being paid down on principal." Kaseno was specifically questioned about the portion of Addleman's written report/declaration stating that George paid $2,035,000 in cash to purchase the family residential property on San Fernando Street in San Diego, referred to as the "San Fernando property," and that $485,000 of the purchase price came from his refinancing the Encinitas property. When the court asked why it was "a problem" to deduct George's principal payments on the Encinitas property from his income available for support, Kaseno testified: "We're reducing someone's income available for support so they're going to have less money to pay support because they purchased their residence for cash. I just don't think that's what we do is deduct what we're paying down on a loan on another property to lessen our income that we have to pay support."
George contends the trial court committed reversible error because it failed to consider the factor set forth in section 4320, subdivision (e), which is "[t]he obligations and assets, including the separate property, of each party." We agree. George correctly notes that the court's final statement of decision and judgment lists and addresses each of the factors set forth in section 4320, and after listing the subdivision (e) factor, states: "(See discussion below)[.]" However, the remainder of the judgment/statement of decision does not address the "obligations and assets" factor, which is particularly important in this case because George's net worth is vastly greater than Rosalinda's, due largely to his real property assets. "Under [section 4320, subdivision (c) ], a key factor is the supporting party's ‘ability to pay,’ which encompasses assets as well as income. [Citations.] Thus, it is ‘proper for the court to look to assets controlled by husband, other than income, as a basis for the award [of spousal support].’ " (Cheriton, supra , 92 Cal.App.4th at pp. 304-305, 111 Cal.Rptr.2d 755.) We will direct the trial court on remand to consider all of the applicable factors specified in section 4320.
"As a general rule, we review spousal support orders under the deferential abuse of discretion standard. [Citation.] We examine the challenged order for legal and factual support. ‘As long as the court exercised its discretion along legal lines, its decision will be affirmed on appeal if there is substantial evidence to support it.’ [Citations.] ‘To the extent that a trial court's exercise of discretion is based on the facts of the case, it will be upheld "as long as its determination is within the range of the evidence presented." ’ [Citation.] [¶] Where a question of law is presented on undisputed facts, appellate review is de novo." ( Blazer, supra , 176 Cal.App.4th at p. 1443, 99 Cal.Rptr.3d 42.) "[W]e affirm the trial court's decision if it is supported in fact and law." ( Id. at p. 1447, 99 Cal.Rptr.3d 42.) The question raised by George's appeal is whether a trial court should deduct principal payments a spouse makes on business loans—including loans secured by income producing property—from income available for support. California case law provides little help in addressing this issue. George relies on Blazer in arguing it was an abuse of discretion to include his principal payments as income available for support. In Blazer , the parties principal marital asset was a company created by the husband and a partner. ( Blazer, supra , 176 Cal.App.4th at p. 1441, 99 Cal.Rptr.3d 42.) On appeal from her permanent spousal support award, the wife contended the court abused its discretion by excluding from the husband's income available for support a portion of his business income used to capitalize and vertically integrate the business. ( Id. at pp. 1441, 1444, 99 Cal.Rptr.3d 42.) The trial court excluded that income based on its finding that the business's need to maintain higher capitalization and diversify its work were reasonable business expenses that " ‘should be taken out of the company before assessing what [the husband's] reasonable income [was] for purposes of support.’ " ( Id. at p. 1444, 99 Cal.Rptr.3d 42.) The Blazer court concluded, among other things, that there was no abuse of discretion because the trial court's reasonable expense finding was supported by substantial evidence. ( Id. at p. 1447, 99 Cal.Rptr.3d 42.)
Blazer supports the proposition that reasonable business expenses may be properly excluded from a spouse's business income in determining income available for spousal support. However, the deduction from income allowed in Blazer was business income reinvested in the business; it was not income used for mortgage or business loan payments that directly increased the payor spouse's net worth by decreasing debt. Thus, Blazer does not specifically address the question of whether business income used to pay down business debt should be included in or excluded from income available for support. However, a number of out-of-state authorities provide guidance on this issue. Although most of those cases address income available for child support and we recognize that there are important differences between spousal support and child support, the analysis of available income for child support provides useful guidance in resolving available-income issues regarding spousal support.
Some decisions support a general rule that principal payments should be excluded from income. Ohio courts generally view principal payments on business loans or mortgages on income-producing properties as business expenses that should be excluded from income available for support, particularly when the loan is an "acquisition" loan rather than a refinancing or "equity" loan. ( Orecchio v. Colantoni (Ohio Ct.App., June 21, 2010, No. 2010-Ohio-2849) 2010 WL 2501203, *4, 2010 Ohio App. Lexis 2356 p. *29 ; DeCapua v. DeCapua , (Ohio Ct.App., Jan. 8, 1992, No. 2651) 1992 WL 2917, p. *3, 1992 Ohio App. Lexis 86, p. *8 [husband's principal payments on business loans represented ordinary and necessary business expenses to be subtracted from his income available for child support where the money borrowed was used for fixtures, leasehold improvements, and operating expenses, and the husband did not accelerate or prepay the principal on any of the loans, but rather paid the loans according to their terms].) And in Betancourt v. Betancourt (Fla.Dist.Ct.App. 2010) 50 So.3d 768, the Florida appellate court concluded the "trial court erred in attributing to the [husband] the gross rental income from a rental property without first deducting the mortgage payment and other expenses associated with the property." ( Id. at p. 769 ; accord, In re Albert (2007) 155 N.H. 259, 922 A.2d 643, 645, 647 [Trial court erred by including the husband's mortgage payments on two rental properties in determining his income available for child support where statutory definition of "gross income" for purposes of child support included "net rental income."].)
Rule 3.4 of the Ohio Supreme Court Rules for the Reporting of Opinions states: "All opinions of the courts of appeals issued after May 1, 2002 may be cited as legal authority and weighted as deemed appropriate by the courts without regard to whether the opinion was published or in what form it was published." (Ohio S.Ct. Rep. Op. Rule 3.4.)
Other jurisdictions have taken a seemingly opposite approach, adopting a general policy of including principal payments in income available for support either because such payments are not considered to be ordinary and necessary business expenses or because they benefit the payor spouse by increasing net worth. (See Lawrence v. Tise (1992) 107 N.C.App. 140, 419 S.E.2d 176, 182 [mortgage principal payments are not an ordinary and necessary business expense within the meaning of state child support guidelines]; Campo v. Roberts (La.App. 1996) 677 So.2d 1042 [same]; In re Marriage of Nikolaisen (1993) 257 Mont. 1, 847 P.2d 287, 292 [principal payments that increased husband's net equity should not have been deducted from his income available for child support]; In re Marriage of Dean (2018) 56 Kan.App.2d 770, 437 P.3d 46, 51 [principal payments are not properly deducted from income for purposes of support because they increase the payor's net worth].)
Noting different views articulated by courts on this issue, the Wyoming Supreme Court has adopted a middle-ground approach we find both thoughtful and workable. In Fleenor v. Fleenor (Wyo. 1999) 992 P.2d 1065 ( Fleenor ), the mother argued that the trial court abused its discretion in deciding the father's principal payment on a business mortgage was deductible from his income available for support as a reasonable unreimbursed business expense. ( Id. at p. 1069.) Highlighting a split of authority on the issue of whether such principal payments are properly deducted from a parent's income in determining support, the Fleenor court observed that North Carolina and Montana did not allow principal payments to be deducted as a legitimate business expense, whereas "Illinois, Indiana, Colorado, and Delaware appear to find it discretionary whether principal payments should be deducted from net income for child support purposes." ( Fleenor , at p. 1069.) Jurisdictions in this latter category have decided "that a parent's ability to pay was directly connected to debt reduction expenses reasonably necessary for the production of income. Rather than adopting a view that debt reduction represented increased net equity, these courts adopted the view that it is ‘unsound to consider the cash coming into the husband's business as flowing through to net income without deducting (to the extent that they are reasonable) the items which must be taken from his cash flow in order to maintain his business operations.’ " ( Ibid. ) Fleenor explains that "[a] trial court retains discretion concerning principal payments because it is recognized that principal payments may be unreasonably excessive or because assets were acquired to depress income to avoid support payments." ( Ibid. )
Courts in Utah and New Mexico have similarly ruled that trial courts have discretion to include or exclude principal payments based on the relevant circumstances. (See Bingham v. Bingham (Utah App. 1994) 872 P.2d 1065, 1067, fn. 2 ["deductibility of particular expenses poses a question of fact, turning on whether such expenses are necessary, and, if so, whether or not they exceed those required for the business's operation at a reasonable level"]; Klinksiek v. Klinksiek (N.M. App. 2004) 136 N.M. 693, 104 P.3d 559 [trial court erred in excluding payments that increased mother's equity in property from her income available for child support, although trial court on remand was to determine whether any portion of mother's rental income would properly be excluded as ordinary and necessary business expenses].)
The Wyoming high court ultimately concluded that "[t]he crux of this issue is whether principal payments resulting in increased asset value but decreased cash flow should be permitted to reduce a parent's income for purposes of child support.... [W]e find that reasonable principal payments can be considered unreimbursed expenses although, over time, net equity increases. Our review of the authorities persuades us that we should establish as our general rule that the principal portion of a business mortgage payment may be deductible if, in its discretion, the [trial ] court determines that the payment reasonably and legitimately reduces net income for child support purposes. The [trial ] court will retain the discretion to decide if the principal portion of business debt reduction payments is excessive, or assets were acquired to reduce child support payments, or [there are ] other circumstances indicating the principal payments are not reasonable, unreimbursed, or legitimate. " ( Fleenor, supra , 992 P.2d at p. 1070, italics added.)
We conclude that the italicized language in Fleenor articulates a reasonable and workable rule for trial courts faced with the issue of whether principal payments on loans against income-producing properties or business debt in general should be deducted from a party's income available for spousal or child support. Although such principal payments may increase an obligor spouse's net worth, a trial court retains the discretion to deduct a payment from income available for support if it finds, based on substantial evidence, that the payment reasonably and legitimately reduces the spouse's net income available for support, considering the totality of the relevant circumstances, including the extent to which the payment constitutes an ordinary and necessary business expense and whether disallowing the deduction would work a substantial hardship on the payor spouse. The trial court also has discretion to disallow the deduction of principal payments on business debt from a party's income available for support under appropriate circumstances, such as where the court reasonably finds the principal payments are excessive, the property encumbered by the loan in question was acquired for the purpose of lowering income available for support, or the payments are unnecessary for the operation of the business at a reasonable level. Accordingly, we will reverse the spousal support award and remand the matter for a redetermination of the support issue consistent with the principles outlined in this opinion.
Section 4320, subdivision (k) requires the trial court to consider "[t]he balance of the hardships to each party" in determining spousal support.
We recognize that in In re Marriage of Brandes (2015) 239 Cal.App.4th 1461, 192 Cal.Rptr.3d 1, this court declined to resolve a spousal support issue on appeal because the court's partial reversal of the judgment on a community property issue potentially rendered the support issue moot. The Brandes court noted that "[a]mong other key factors, in setting spousal support the court must consider the ‘assets, including the separate property, of each party.’ (§ 4320, subd. (e).) A spouse's share of community property are assets included in the equation." (Brandes , at p. 1490, 192 Cal.Rptr.3d 1.) Although Rosalinda 's share of the community's interest in the Florida Street property will likely increase her separate estate for purposes of the court's spousal support determination under section 4320, we have decided George's appeal on the merits because George's income from his rental properties will be a substantial factor in the court's redetermination of spousal support, and the court will have to decide whether his principal payments on those properties, or some portion of those payments, should be included in his income available for support, notwithstanding any increase in Rosalinda's separate property estate.
--------
DISPOSITION
The portions of the judgment finding that the Florida Street property is George's separate property in its entirety, finding that George's monthly income available for support is $25,332, and awarding Rosalinda monthly spousal support in the amount of $7,500 are reversed. The matter is remanded to the trial court for further proceedings to (1) determine the extent of reimbursement credit for or any fractional separate property interest in the Florida Street property in accordance with the views expressed in this opinion; and (2) reconsider the spousal support award in accordance with the views expressed in this opinion and all the relevant factors under section 4320. In all other respects, the judgment is affirmed. The parties are to bear their own costs on appeal.
WE CONCUR:
McCONNELL, P. J.
BENKE, J.