Arizona Court ofAppeals Division One Holds that (1) Family Court Erroneously Attributed Hypothetical Income and Childcare Expenses to a Voluntarily Unemployed Parent Because the Arizona Child Support Guidelines Do Not Support the Use of Hypothetical Attribution to Increase the Support Burden on the Employed Parent, and (2) the Court Further Erred in the Method It Used to Calculate the Father’s Stock Option Income.

The parties were divorced pursuant to a consent decree, which provided that Mr. Engel would pay child support in the amount of $2,000 per month, an amount slightly higher than the Arizona Child Support Guidelines mandated.  Mr. Engel then filed a petition to modify child support.  In support of his contention that there had been the necessary continuing and substantial change of circumstances, he presented evidence that Ms. Landman’s investment assets had substantially increased as a consequence of her receipt of an inheritance from her father and an annuity from his former employer.  The court ultimately found that Ms. Landman’s monthly income, excluding spousal maintenance, exceeded $13,000. Because she was voluntarily unemployed, Mr. Engel also sought to attribute income to her in an amount equal to her earning potential as an accountant.  Ms. Landman argued that any income the court chose to attribute to her should be offset by the childcare costs that would be necessitated by full-time employment, so much so that the result might be an increase, not a decrease, in child support.  The court ultimately adjusted the child support order downward.  It also awarded Ms. Landman her attorneys’ fees.  Mr. Engel in turn filed a motion for new trial.  Before the court ruled on the motion for new trial, however, Mr. Engel filed a notice of appeal on July 19, 2007.  Ms. Landman filed a notice of cross-appeal on August 14, 2007.  On September 11, 2007, the court ruled on Mr. Engel’s motion for new trial.  On October 9, 2007, Mr. Engel filed a supplemental notice of appeal from the September 11 order and from the earlier order modifying his support obligation.  Mr. Engel then pursued this appeal and Ms. Landman cross-appealed.       

The ArizonaAppeals Court vacated the family court’s rulings concerning the parties’ income and Ms. Landman’s attributed childcare costs and remanded for a recalculation.  Before reaching the merits, the Court concluded that Mr. Engel’s initial notice of appeal was premature because he had filed his notice while his own motion for new trial was still pending before the superior court.  Nevertheless, his October 9, 2007, supplemental notice of appeal following the signed minute entry disposing of the motion for new trial conferred jurisdiction on Court.  See Baumann v. Tuton, 180 Ariz. 370, 884 P.2d 256 (App. 1994).  For the same reason that Mr. Engel’s first notice of appeal was premature, Ms. Landman’s notice of cross-appeal was premature.  But unlike Mr. Engel, she never filed a supplemental notice of cross-appeal from the September 11 order.  Thus, the Court did not consider her cross-appeal.  Turning to the merits, the Court concluded that the family court had erred in attributing hypothetical income and childcare expenses to Ms. Landman, even though she was voluntarily unemployed because the result of such attribution was to increase, not decrease, the amount of child support owed by the working parent, Mr. Engel.  The Court held that the Arizona Child Support Guidelines, see A.R.S. § 25-320 app. (2007), do not allow hypothetical attribution “to transform a decision to remain unemployed into an increase in child support received.”  The Court also held that the family court had erred in computing Mr. Engel’s income from his matured, unexercised, vested stock options.  To capture the income, the family court adopted the following formula from an out-of-state judicial opinion: Each option grant is valued on the most recent date for which an option could be exercised minus the price on the date the option was granted.  Using this formula, the family court then calculated Mr. Engel’s stock option income for options granted in the years 2004 through 2006.   The Court ultimately rejected this formula because it makes the interest of the child dependent on market fluctuations that have no actual impact on the funds available to support the children; child support obligations, according to the Court, should not be governed by the volatility of the marketplace, and the implicit assumption in the family court’s formula that options will appreciate year to year does not comport with the realities of the market.  The Court declined to articulate a formula that must be employed in every case, but it noted that “one approach that serves the purposes of the Guidelines and reflects economic reality is to examine the value the parties placed on the stock options when they entered into their employment compensation agreement.”  This amount, “though not conclusive, purports to represent the amount that both Father and his company thought was a fair value of Father’s work during the year at issue.”                            

Judge Swann authored the opinion; Judges Brown and Barker concurred.