ELIZABETH S. HOLMES, Plaintiff-Appellant v RICHARD E. HOLMES, JR., Defendant-Appellee for publication, December 4 2008; No. 276470, Appeal from the Kent Circuit Court.
Statement of Facts
This is a case where the parties, both of whom are attorneys, were married in 1988, and divorced on July 15, 1996. There were two minor children. The key issue is interpretation of a contract regarding child support. The disputed portion provides the following language:
“Husband shall pay child support in the amount of One Thousand, Two Hundred Sixty-three ($1,263.00) Dollars per month (see attached calculations), which includes his portion of the payment for the children’s nanny. Further, Husband shall pay twenty-five percent (25%) of any net bonus he receives in any given year as additional child support. When the oldest child attains the age of 18 or completes high school, whichever event occurs last, this payment shall be reduced to fifteen percent (15%) of his net bonus, and shall terminate upon the youngest child’s attaining the age of 18 or graduating from high school, whichever last occurs.”
To settle their case, the parties have calculated the monthly child support by adding together the amount that would have due under the standard child support guidelines in the Michigan Child Support Formula, assuming sole custody residing with Plaintiff, which was $1,697.81, and the amount calculated under the shared economic responsibility formula (SERF) ($828.25), and then dividing by two. The parties recognized that Defendant’s substantial parenting time would potentially entitle him to application of the shared economic responsibility formula (SERF), but agreed on a compromise to avoid protracted litigation regarding both parenting time and child support.
The contract also had an additional child support provision which addressed future child support modification. It included an agreement that husband waived the right to assert shared economic participation and agreed not to introduce the shared economic concept into the support calculation for the minor child for a 10-year period. In addition, the child support was to remain fixed for one year after the entry of the judgment of divorce.
The parties then commenced litigation on numerous occasions. There were several contentious custody battles, and numerous motions, seeking child support modification that were filed during the 10- year period that was described in paragraph 8 of the contract. It was significant that the Defendant consistently paid 25% of his net bonuses as child support, which in some years, represented substantial six-figure sums.
Shortly before the 10-year anniversary of the divorce judgment, the Defendant-father moved for modification of his child support obligation. He contended the “shared economic concept” could now be introduced because the 10-year period of forbearance specified in the contract would soon expire. He sought a reduction of his child support obligation under shared economic responsibility to $636 per month. He also sought a commensurate reduction in the amount of the support payment deducted from his net bonus, from 25 percent to 4 percent. Plaintiff-mother argued there was no change of circumstances. There was a reference to the Friend of the Court, and then it was referred for review and recommendation by a mutually agreed upon mediator, David Sarnacki, who on October 2, 2006, issued his report and recommendations. In his report and recommendation he ruled that the bonus should be modified, and that in addition to monthly child support, Defendant-father was to pay Plaintiff-mother 9.30% of any net bonus income for the care of the two minor children, and 6.17% of any net bonus income for one minor child. Motions were filed in the circuit court where Plaintiff accepted the recommendation with the exception of the modification of the bonus arrangement.
There was an evidentiary hearing conducted in circuit court on January 19, 2007, where Plaintiff testified that she and the Defendant agreed that she would receive 25% of Defendant’s net bonus until the older child’s 18th birthday, with the bonus percentage to then drop to 15% and remain at that level until the younger child’s 18th birthday.
Defendant contended that when the bonus provision was negotiated, the 25 percentage figure was applied as the same percentage to his bonus as had been done to his income when calculating his monthly child support. He also asserted that he agreed to pay more than the SERF required so that Plaintiff would agree to allow him more overnights with the children. His position was that the 25% was to remain in effect for 10 years and that after 10 years the bonus percentage would change. He claimed that the language continuing the bonus until the child was 18 or had graduated high school was required standard language in every divorce judgment.
The circuit court applied the SERF formula, and also adopted the 9.3% of the bonus formula as recommended by the mediator.
The Court of Appeals
The Court of Appeals discussed contract law and stated that this was a de novo review. A Judgment of Divorce entered upon the settlement of the parties represents a contract which, if unambiguous, is to be interpreted as a question of law. In re Lobaina Estate, 267 Mich App 415, (2005).
The key principals of law regarding child support are governed by MCL 552.605(2) which provides that the formula must be followed, but the court may enter an order that deviates from the formula if the court determines from the facts of the case that application of the child support formula would be unjust or inappropriate, and sets forth in writing or on the record, all of the following:
(a) The child support amount determined by application of the child support formula.
(b) How the child support order deviates from the child support formula.
(c) The value of property or other support awarded instead of the payment of child support, if applicable.
(d) The reasons why application of the child support formula would be unjust or inappropriate in the case.
The court goes on to discuss the 2004 child support formula, which under 2004 MCSFM §1.02 sets forth the lengthy list of potential “Deviation Criteria,” including,
(i) One or both parents earn incomes of a magnitude not fully taken into consideration by the formula.
(j) One or both parents have varying amounts of irregular bonus income.
The court then discussed the fact that limiting a parent’s obligation to pay child support and deviating downward is strongly disfavored, but a voluntary agreement to pay additional child support incorporated into a judgment of divorce is enforceable. The court states that a contract enforced enhancing a parent’s child support obligation shall be enforced, absent a compelling reason to forebear. Defendant’s contention was that he agreed to pay a larger percentage of his bonus than he would have had to pay if the SERF applied, and therefore it exceeded the guidelines which benefitted the children. It also caused no demonstrable hardship for the Defendant during the 10 years that he paid it. The court went on to state that continued enforcement of the 25% bonus provision benefits the Holmes children without violating the court’s inherit ability to modify the child support award in the event the circumstances substantially changed, or that the child support amount qualified as unjust or inappropriate under MCL §552.605(2). Contract principals and their enforceability were discussed. The agreement of the parties clearly contemplates that the agreed percentages would apply until the children’s 18th birthdays. According to the court, the absence of specified contractual language prohibiting modification of the bonus provision does not render the bonus provision unenforceable. In this case, the parties included a review provision in section 8 of their contract, contemplating that the monthly child support payments would be “fixed for one year after the entry of the Judgment of Divorce, before it can be reviewed, and that support will be reviewed only in the event that either Husband or Wife is receiving greater compensation than at the time of the entry of the Judgment of Divorce.” The absence of a similar provision regarding the bonus percentage supports the provision that the parties did not intend that percentage to be modifiable. The circuit court, having the power to modify a child support award, does not give it the right to simply ignore an unambiguous contractual provision regarding child support. The circuit court had stated that the bonus provision, as written, would have been enforced if labeled as part of the parties property settlement, rather than it appearing in a child support paragraph. The Court of Appeals concluded that this is a distinction lacking a meaningful difference and the fact that the bonus provision was contractual, freely negotiated, and unambiguous, must be enforced as written.
The Court of Appeals reversed the circuit court and ruled that the 25% for two children and then 15% bonus provision for one child was to continue until each child reaches the age of 18 years.
This is a very interesting and important decision. It shows how important negotiating is, and spelling everything out in clear, concise language in a judgment or contractual agreement can be. If the bonus arrangement was intended to be negotiated or reviewable, it should have stated so based upon this ruling of the Court of Appeals. I believe this is a caution to attorneys to carefully negotiate and draft everything and advise clients of what the consequences can be. The fact that both parties were attorneys might have had some bearing, but the key is the contractual language.