Only One Bite at the Apple: The Nature of Settlement Agreements

By April 24, 2007all

The settlement of a divorce case, like the settlement of any dispute, usually involves compromises by both parties. Although neither party gets everything they want in the settlement of divorce, it is sometimes preferred to a trial where the cost of further proceedings — both emotional and financial — can be prohibitive. Parties to a settlement usually evaluate compromises in terms of the cost and risk of a trial versus the benefit that a trial will likely bestow if successful. Often it is the cost of a trial that most encourages a settlement (i.e., getting possession of a lawn mower is not worth the cost of a trial to get it, when an agreement can be reached on the other important issues), but just as often it is the risk that after a trial the court will rule against a litigant on an important discretionary issue, that encourages settlement (i.e., a court may not award custody favorably).

A further and frequently overlooked consideration in the settlement of a divorce case is the control that a settlement agreement provides in setting precise terms. Whether it be distributing assets, allocating and paying debt, modifying support, controlling conduct toward children, or a myriad of other matters, having the opportunity to consider all contingencies in a settlement agreement is a distinct advantage. With some issues, setting precise terms can be extremely important. A common example is the conduct of parents toward the children. Although it is a rare judgment entered after trial that would direct that neither parent is to allow a future step-parent to be called “mommy” or “daddy” or equivalent terms of endearment (unless one of the parties had already done something like cohabit with a third party to make this an issue at trial), a provision prohibiting this is a common feature of settlement agreements because it is readily foreseeable that the parties may re-marry.

An area where the benefit of a settlement agreement is often unappreciated, is the sale and distribution of the marital residence. It is not enough that the parties agree to sell their house. Just as parties often agree that they want a divorce, but then cannot agree on any of the terms by which their property will be split or their children raised, just an agreement to sell a house creates more questions than it answers. In agreeing to sell a house or, as often is the case, to sell it after a period of exclusive occupancy, the parties must consider numerous aspects of occupancy and sale of a house — i.e., who pays what bills for how long, what happens if they don’t, who occupies the house before and during the listing, who determines what to sell it for and under what terms, etc. The importance of properly drafting an agreement that anticipates and provides for all of these considerations varies, of course, with the importance of the issues. However, in the current seller’s market where house values have appreciated markedly in part because of the enhanced buying power provided by record-low interest rates, there is no question of the value of incorporating provisions into a settlement agreement that will control in the event of a downturn in the market before the house can be sold.

For example, it may be easy for the parties to agree to sell a house worth $250,000 five years ago, and now worth $400,000, three years from now when little Johnny graduates from high school. It might also be relatively easy for the husband to agree to let his wife remain in the house with his son for such a limited period where he has an expectation of getting half of the now-sizable equity once it is sold. However, if the house were to depreciate in the interim, serious problems will arise unless their settlement agreement considered and provided for this contingency properly.

Fortunately or unfortunately, the general rule is that once parties to a divorce action settle property issues the Court will not later modify the terms of their settlement agreement. There is no mechanism for the Court to reconstitute the parties’ agreement to make it fair in light of changed circumstances even if the parties did not consider those circumstances. For example, in DaLoia v. Burt, the Second Department of the Appellate Division of the New York Supreme Court recently applied this principle in a case where the plaintiff wife wished to compel the sale of the marital residence by court order. Their agreement had provided a set period of time in which the defendant husband could buy out his wife’s interest in the marital residence, and this option period had expired when the wife requested an order directing the sale of the house. The trial court denied her request, effectively granting an extension of the husband’s option. The Appellate Division reversed the trial court on appeal, holding that the lower court had no authority to modify the parties’ agreement.

The effect of failing to properly draft a settlement agreement that considers all reasonable contingencies is that the intentions of one or both of the parties may be frustrated. Taking our hypothetical scenario outlined above, the parties presumably intended when they entered into their settlement agreement that the husband would wait three years for the house to be sold at which time he would finally be able to realize his share of the equity value from the proceeds of the sale of the home. If, however, their agreement merely provided that the house would be sold at a price determined by a listing real estate broker, the house might never sell and the husband might never receive his interest. How can this be? Here, as with most things, the devil is in the details. If the wife is motivated to remain in the house, she might be tempted to take advantage of the poor draftsmanship of their agreement. If the broker (as often happens) listed the sale price too high in order to get the listing, the house could sit on the market for an indefinite period until a buyer is found at that price. The same result would occur if the market went down during the listing, or if the agreement did not require her to accept good faith offers to purchase within a certain range (a set dollar amount or a percentage of the listed price). It is especially important in the current seller’s market to draft an agreement that provides for a downturn in the market, or one of the parties — in our hypothetical, the husband who wants to sell the house — may effectively lose his interest in the house because the house cannot be sold by a strict application of the terms of the agreement. The courts will not compel the wife to do something which is not expressly provided for in the terms of the parties’ agreement, so our hypothetical husband must wait indefinitely for someone to come along and purchase at an unrealistic listing price. The husband will have “lost” his interest in the house because his settlement agreement did not adequately provide for the terms of sale.

Of course, what works to one party’s disadvantage, often works to the advantage of the other party, and counsel can sometimes import such an advantage into an agreement by purposefully drafting in general terms. It is usually the attorney for the party in possession or in title to an asset that is to be divided who might employ such a tactic. In one case involving the distribution of the husband’s pension, the parties agreed that the wife would receive one half of the portion of the husband’s teacher’s pension earned during the marriage. No language was inserted into the agreement directing the husband to select a retirement option that included a survivor benefit to the wife, so the husband was free to pick an option that did not include such an option. When the wife’s attorney later proposed a court order (a “QDRO” or qualified domestic relations order) directing the husband to select a retirement option that provided a survivor benefit, and also directing the pension administrator to name the wife as beneficiary, the trial court signed the proposed order. In Janofsky v. Janofsky the Second Department reversed the trial court and held that it was error to require the husband to do something with his pension that was not expressly agreed to by the parties in their settlement agreement. In that case (successfully briefed for the husband by the undersigned), the Second Department’s reversal left the husband free to select a pension option that did not provide a survivor option (and so paid more to him during his life), because there was nothing in the parties’ agreement that required him to do so. By keeping the language of the parties’ agreement in general terms, the husband was able to secure a greater pension payment each month during his life.

In conclusion, if a settlement is reached to avoid the risk and/or cost of a trial, the parties are well advised to be careful that their settlement agreement does not create additional risks for which there is no remedy, even on appeal. Careful draftsmanship that anticipates and provides for the unexpected is essential.

Clifford Petroske

About Clifford Petroske