Vacating Settlement Agreements on Grounds of Mutual Mistake

In is not unusual for a party to attempt to vacate a settlement agreement.  In order to do so, a party must meet a significant burden of proof that the agreement came as a result of a material, mutual mistake, fraud, or other relevant facts.  A interesting illustration of the above principles came in a recent decision, Simkin v. Blank, Sup. Co. New York County (December 22, 2009).

In 2006, Mr. Simkin, a partner at Paul, Weiss, Rifkind, Wharton & Garrison and his wife negotiated a settlement agreement in their divorce action.  One of the marital assets was an account the parties opened during their marriage with Bernard L. Madoff Investment Securities LLC which was worth $5.4 million.  As part of a 2006 equitable distribution agreement, Mr. Simkin  paid Ms. Blank $2.7 million, which represented what he thought was his ex-wife’s fair share of their Madoff investments.

After Mr. Madoff’s arrest, Mr. Simkin attempted to reform the agreement, claiming it was based on a “material, mutual mistake” and resulted in a “windfall” for Ms. Blank. He argued that the agreement did not accomplish the parties’ goal of ensuring that each would keep approximately half of the marital assets.  Ms. Blank responded that as long as Mr. Simkin could have redeemed the account for the value that the parties agreed to on the cut-off date, he received what he bargained for. Noting that Mr. Simkin had liquidated part of his investment to fund his ex-wife’s equitable entitlement, the court pointed out that in 2006 and “the several years after that plaintiff maintained this investment,” the account “could have been redeemed for cash, presumably significantly in excess of its 2004 value.”  While Mr. Simkin claimed the Madoff account held no assets, he did not allege it had no value, the judge wrote.  “An investor’s ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake,” the court found.

Justice Evans agreed with Ms. Blank holding that while Mr. Simkin’s decision to retain the Madoff account may have been “improvident,” that did not give the court an equitable basis to set the agreement aside. In dismissing Mr. Simkin’s complaint, Justice Evans wrote, “There is no evidence that defendant was unjustly enriched. In 2006, at the time of their agreement, each of the parties received the benefit of his and her bargain.”

The lesson of the above case is that clients and their divorce attorneys should be careful in fashioning settlement agreements.  Even when significant mistakes are made at the time the agreements are entered into, it is very difficult to set them aside, even in such extreme circumstances as described above.

What Is Required For A Document To Be Accepted As A Separation Agreement?

Periodically, I see documents that were prepared by the parties on their own while attempting to resolve whatever legal issues they were facing.  Occasionally, the parties will prepare their own separation agreements.  Unfortunately, in many cases, those self-prepared separation agreements do not meet the statutory requirement applicable to either child support, maintenance, or other significant issues.  A recent example of why such self-prepared agreements are problematic was illustrated in a recent case, Scully v. Haar,  2009 N.Y. Slip. Op. 08261 (4th Dept. 2009).

Plaintiff and defendant were married on May 8, 1993 and have three minor children.  The parties have lived apart since March 2005.  On March 4, 2005, plaintiff commenced an action for divorce.  After extensive and ultimately futile negotiations between the parties, plaintiff filed a complaint on August 11, 2006, that did not specify any misconduct on the part of defendant but requested that plaintiff be awarded custody of the parties’ children.  On September 15, 2006, Supreme Court granted defendant’s motion to dismiss the complaint based on the insufficiency of plaintiff’s allegations but “retained jurisdiction over ancillary issues.”

Thereafter, the parties entered into the agreement, the preamble to which provides that “the parties are now desirous of resolving custody and ancillary issues without a trial.”  The agreement granted sole custody of the parties’ children to defendant and establishes a detailed access schedule for plaintiff.  It further provided that the agreement “shall be submitted to any court in which either [p]arty may seek a judgment or decree of divorce and . . . shall be incorporated in such judgment or decree by reference.”  The agreement was signed by both parties, notarized, and filed with the Erie County Clerk’s Office on May 11, 2007.

On May 13, 2008, just over one year after the agreement was filed, plaintiff commenced this action fo divorce based on Domestic Relations Law §170(6), alleging that the parties had lived separate and apart pursuant to an agreement for a period of a year or more.  A copy of the agreement was attached to the complaint.  Defendant moved to dismiss the complaint on the ground that the agreement was not a “written agreement of separation” within the meaning of section 170(6) because it addressed only parenting issues, it did not expressly recite the parties’ intent to live separate and apart, and it was not intended to serve as a separation agreement.  Plaintiff cross-moved for summary judgment on the complaint, contending that the terms of the agreement clearly established that the parties were living separate and apart.  The trial court denied the relief requested by the plaintiff.

Domestic Relations Law §170(6) sets forth one of the two “no-fault” grounds for divorce in New York State.  Specifically, that section provides that an action for divorce may be maintained on the ground that “[t]he husband and wife have lived separate and apart pursuant to a written agreement of separation . . ., for a period of one or more years after the execution of such agreement”.  The section further provides that the agreement must be signed by the parties and “acknowledged or proved in the form required to entitle a deed to be recorded”. Moreover, the agreement must be filed in the office of the clerk of the county in which either party resides.

The Appellate Division affirmed the lower court’s decision holding that “No-fault divorce applies only where there is a previous decree of separation or a written separation agreement, as required by statute [and, here, t]he parties have neither”.  Plaintiff attempted to rely on a “Parenting Plan Agreement” executed by the parties after an earlier divorce action commenced by plaintiff was dismissed and the court in that action retained jurisdiction over ancillary issues.  The agreement related solely to matters of custody and visitation and, although it was signed and acknowledged by the parties and filed with the County Clerk by plaintiff, it neither purported to be a separation agreement as that term is generally understood, nor made any explicit reference to the parties’ separation.  The Fourth Department concluded, particularly in light of the circumstances in which the agreement was made, that the agreement did not “evidenc[e] the parties’ agreement to live separate and apart, [and] thus [it did not] satisfy[ ] the statutory requirement [with] respect to a separation agreement”.

As I stated previously, it important that the parties understand that New York does not make it easy for someone to prepare and execute a valid separation agreement.  In my opinion, even if someone decides to follow a self-help approach, any document should be reviewed by a family law lawyer to make sure that it fully represents the parties’ intent and complies with applicable law.  While it may be tempting for someone to do it for a variety of reasons, any future disputes involving such documents is likely to require involvement of lawyers.

All concur except Peradotto, J., who dissents and votes to reverse in accordance with the following Memorandum: I respectfully dissent and would reverse because I agree with plaintiff that the 30-page “Parenting Plan Agreement” (agreement) at issue in this matter constitutes a “written agreement of separation” within the meaning of Domestic Relations Law § 170 (6).
Plaintiff and defendant were married on May 8, 1993 and have three minor children. The parties have lived apart since March 2005. On March 4, 2005, plaintiff commenced an action for [*2]divorce by summons with notice. After extensive and ultimately futile negotiations between the parties, plaintiff filed a complaint on August 11, 2006 that did not specify any misconduct on the part of defendant but requested that plaintiff be awarded custody of the parties’ children. On September 15, 2006, Supreme Court granted defendant’s motion to dismiss the complaint based on the insufficiency of plaintiff’s allegations but, as noted by the majority, “retained jurisdiction over ancillary issues.”
Thereafter, the parties entered into the agreement, the preamble to which provides that “the parties are now desirous of resolving custody and ancillary issues without a trial.” The agreement, inter alia, grants sole custody of the parties’ children to defendant and establishes a detailed access schedule for plaintiff. It further provides that the agreement “shall be submitted to any court in which either [p]arty may seek a judgment or decree of divorce and . . . shall be incorporated in such judgment or decree by reference.” The agreement was signed by both parties, notarized, and filed with the Erie County Clerk’s Office on May 11, 2007.
On May 13, 2008, just over one year after the agreement was filed, plaintiff commenced this action for divorce based on Domestic Relations Law § 170 (6), alleging that the parties had lived separate and apart pursuant to an agreement for a period of a year or more. A copy of the agreement was attached to the complaint. Defendant moved to dismiss the complaint on the ground that the agreement was not a “written agreement of separation” within the meaning of section 170 (6) because it addressed only parenting issues, it did not expressly recite the parties’ intent to live separate and apart, and it was not intended to serve as a separation agreement. Plaintiff cross-moved for summary judgment on the complaint, contending that the terms of the agreement clearly established that the parties were living separate and apart.
The court granted defendant’s motion to dismiss the complaint and denied plaintiff’s cross motion. Although the court acknowledged that an agreement need not be in any specific form to qualify as a “written agreement of separation” pursuant to Domestic Relations Law § 170 (6), the court determined that defendant did not consent to the termination of the marriage by signing the agreement.
Domestic Relations Law § 170 (6) sets forth one of the two “no-fault” grounds for divorce in New York State. Specifically, that section provides that an action for divorce may be maintained on the ground that “[t]he husband and wife have lived separate and apart pursuant to a written agreement of separation . . ., for a period of one or more years after the execution of such agreement” (id.). The section further provides that the agreement must be signed by the parties and “acknowledged or proved in the form required to entitle a deed to be recorded” (id.). Moreover, the agreement must be filed in the office of the clerk of the county in which either party resides (id.).
Here, it is undisputed that the parties have lived separate and apart since March 2005, well in excess of the statutory period (see Domestic Relations Law § 170 [6]). It is also undisputed that the agreement was signed by both parties, acknowledged in the requisite manner, and filed in the County Clerk’s Office (see id.). Thus, the only issue before this Court is whether the agreement qualifies as a “written agreement of separation” pursuant to the statute (id.). In my view, the legislative history and intended purpose of Domestic Relations Law § 170 (6), the important public policies underlying the “no fault” divorce grounds, and the Court of Appeals’ precedent confirming the limited function of the written agreement, compel the conclusion that the agreement in this case constitutes a “written agreement of separation” within the meaning of section 170 (6).
In Gleason v Gleason (26 NY2d 28, 35), decided shortly after the enactment of Domestic [*3]Relations Law § 170, the Court of Appeals recognized that the “real purpose” of the statute’s no-fault provisions was “to sanction divorce on grounds unrelated to misconduct.” As the Court explained: “Implicit in the statutory scheme is the legislative recognition that it is socially and morally undesirable to compel couples to a dead marriage to retain an illusory and deceptive status and that the best interests not only of the parties but of society itself will be furthered by enabling them to extricate themselves from a perpetual state of marital limbo’ ” (id.).
Thus, it is the physical separation of the parties, not the written agreement, that supplies the ground for a divorce pursuant to Domestic Relations Law § 170 (6) (see Christian v Christian, 42 NY2d 63, 69; Littlejohns v Littlejohns, 76 Misc 2d 82, 86, affd on opn of Korn, J., 42 AD2d 957). Indeed, the written agreement “is simply intended as evidence of the authenticity and reality of the separation” (Gleason, 26 NY2d at 35; see Christian, 42 NY2d at 69; Harris v Harris, 36 AD2d 594). As the Court of Appeals reaffirmed in Christian, “[t]he vital and operative’ fact[] in subdivision (6) divorce cases[] is the actual living apart of the parties——pursuant to the separation agreement . . . Put a bit differently, the function of the document is merely to authenticate the fact of separation’ ” (42 NY2d at 69). The statutory requirement that the parties live separate and apart for the prescribed period pursuant to a written agreement is unique to New York State and “reflects legislative concern over the fraud and collusion which historically infected divorce actions involving adultery” (id. at 68; see Littlejohns, 76 Misc 2d at 86 [“the written agreement serves primarily as a means of preventing fraudulent or collusive claims of separation and so discourages quickie’ divorces”]).
The statute does not define the term “written agreement of separation,” nor does it set forth any specific provisions that are required in such an agreement (see Littlejohns, 76 Misc 2d at 86). In light of the limited function of the written separation agreement, i.e., to document and authenticate the physical separation of the parties, and the public policy underlying the statute, “the courts, where the parties have parted permanently, should not be excessively rigid or demanding in determining whether a writing satisfies the statutory requirement for an agreement of separation’ ” (id. at 87). All that a party seeking a divorce pursuant to Domestic Relations Law § 170 (6) must prove “is that there is some kind of formal document of separation” (Gleason, 26 NY2d at 37). As one court aptly observed: “Too great stress has been placed upon the instrument, the indicia of proof of the separation of the parties, rather than the fact of separation. It is not the decree, judgment, or agreement that is the essence of the ground for divorce. They are merely the documentary proof” (Markowitz v Markowitz, 77 Misc 2d 586, 587-588).
In light of the legislative history and manifest purpose of Domestic Relations Law § 170 (6) and the decisions of the Court of Appeals that liberally construe the documentation requirement, I cannot agree with the majority’s conclusion that the agreement in this case does not constitute a “written agreement of separation” within the scope of the statute. The agreement clearly and unambiguously “contemplate[s] permanent separation” (Morhaim v Morhaim, 56 AD2d 550, 552 [Silverman, J., dissenting], revd on dissenting mem of Silverman, J., 44 NY2d 785, rearg denied 44 NY2d 949). Implicit and recognized throughout the agreement is that the parties were in fact living apart when they entered into the agreement and that they intended to continue to live apart for years to come. The agreement lists separate addresses for plaintiff and defendant in its preamble and repeatedly references the parties’ separate residences throughout the remainder of the document. In setting forth plaintiff’s visitation schedule, the agreement recites that “[a]ll access shall take place away from the custodial residence of [defendant].” The article of the agreement establishing plaintiff’s access schedule includes a clause that the parties are free to agree on additional access “without setting a precedent for other calendar years,” thus emphasizing the long-term duration of the physical separation. [*4]
Moreover, the agreement specifically contemplates the possibility of the parties’ eventual divorce and the remarriage of either or both of the parties. In particular, the agreement states that “the provisions of this [a]greement shall be submitted to any court in which either [p]arty may seek a judgment or decree of divorce and . . . shall be incorporated in such judgment or decree by reference and shall not merge . . . .” With respect to the possible remarriage of either of the parties, the agreement provides that the parties’ children “shall not, for any purpose or for any reason, assume or use the name of any subsequent Husband of [defendant].” Thus, viewed as a whole, the agreement “can be consistent only with the fact of the parties’ then existing and continued separation” (Littlejohns, 76 Misc 2d at 86).
The fact that the agreement is not entitled a “separation agreement” and does not explicitly recite that the parties shall live separate and apart is of no moment (see Sint v Sint, 225 AD2d 606, 607). ” [T]he validity of the agreement . . . depend[s] upon the existence of the fact [of living apart], not upon a recital of it’ ” (Morhaim, 56 AD2d at 552; see Littlejohns, 76 Misc 2d at 85). Here, the agreement serves as ” evidence of the authenticity and reality of the separation’ ” (Christian, 42 NY2d at 68, quoting Gleason, 26 NY2d at 35), thereby fulfilling the statutory purpose.
Contrary to the contention of defendant, it is irrelevant whether she intended the agreement to serve as the predicate for a subsequent divorce action pursuant to Domestic Relations Law § 170 (6). Indeed, the Court of Appeals has held that Domestic Relations Law § 170 (5), which supplies the other “no-fault” ground for divorce, i.e., that the parties have lived apart pursuant to a decree or judgment of separation for a certain period of time, applied retroactively to separation decrees rendered prior to the enactment of the statute (Gleason, 26 NY2d at 34-36). The Court in Gleason recognized that the defendant wife who prevailed in a separation action commenced prior to the enactment of section 170 (5) “had no warning that the separation decree granted to her might later furnish basis or ground for divorce by [her] guilty’ husband” (id. at 40). Likewise, in Morhaim, the First Department noted that the six-year delay between the execution and filing of the written separation agreement in question “may indicate that the parties at the time of the execution of the agreement did not realize that the agreement might qualify as a separation agreement under the no-fault divorce statute. But that does not alter the legal effect of the agreement or the public policy involved” (56 AD2d at 552 [emphasis added]).
In sum, the agreement in this case “evidenced the parties’ actual and continued separation and thus satisfied the requirements of the statute” (id.; see Littlejohns, 76 Misc 2d at 86-87). I therefore would reverse the order, deny defendant’s motion to dismiss, reinstate the complaint, grant plaintiff’s cross motion for summary judgment on the complaint, and remit the matter to Supreme Court to grant judgment in favor of plaintiff and to determine the remaining issues.
Entered: November 13, 2009
Patricia L. Morgan
Clerk of the Court

Domestic Relations Law §255, Settlement Agreements and Judgments of Divorce

On October 9, 2009, Domestic Relations Law §255 will become effective.  DRL §255 is a replacement of DRL §177 which required:

1. Prior to accepting and entering as a judgment any stipulated agreement between the parties in the action for divorce, the judge shall insure that there is a provision in such agreement relating to health care of each individual.  Such statement shall either (a) provide for the future coverage of the individual; or (b) state that the individual is aware that he or she will no longer be covered by his or her spouse’s health insurance plan and that the individual will be responsible for his or her own health insurance coverage. Every agreement accepted by the court must contain the following statement, signed by each party, to ensure that the provisions of this subdivision are adhered to:

I, (spouse), fully understand that upon the entrance of this divorce agreement, I may no longer be allowed to receive health coverage under my former spouse’s health insurance plan. I may be entitled to purchase health insurance on my own through a COBRA plan, if available, otherwise I may be required to secure my own health insurance.

(Spouse’s signature) (Date)

2. Prior to rendering a decision in an action for divorce, the judge shall ensure that he or she notifies both parties that once the judgment is entered, a person may or may not be eligible to be covered under his or her spouse’s health insurance plan, depending on the terms of the plan. If, prior to accepting an agreement and entering the judgment thereon, the judge determines that the provisions of this section have not been met, the judge shall require the parties to comply with the provisions of subdivision one of this section and may grant a thirty day continuance to afford the parties an opportunity to procure their own health insurance coverage.

DRL§177 has been repealed to resolve the numerous practical problems it presented to the litigants.  Typical problems involved modifying previously executed separation and property settlement agreements.  Its replacement, DRL §255 provides as follows:

A Court, prior to signing a judgment of divorce or separation, or a judgment annulling a marriage or declaring the nullity of a void marriage, shall ensure that:

1. Both parties have been notified, at such time and by such means as the Court shall determine, that once the Judgment is signed, a party thereto may or may not be eligible to be covered under the other party’s health insurance plan, depending on the terms of the plan. Provided, however, service upon the defendant, simultaneous with the service of the summons, of a notice indicating that once the judgment is signed, a party thereto may or may not be eligible to be covered under the other party’s health insurance plan depending on the terms of the plan, shall be deemed sufficient notice to a defaulting defendant.

2. If the parties have entered into Stipulation of Settlement/Agreement on or after the effective date of this section resolving all of the issues between the parties, such settlement/agreement entered into between the parties shall contain a provision relating to the health care coverage of each party; and that such provision shall either (A) provide for the future coverage of each party, or (B) state that each party is aware that he or she will no longer be covered by the other party’s health insurance plan and that each party shall be responsible for his or her own health insurance coverage, and may be entitled to purchase health insurance on his or her own through a COBRA option, if available. The requirements of this subdivision shall not be waived by either party or counsel and, in the event it is not complied with, the Court shall require compliance and may grant a thirty-day continuance to afford the parties an opportunity to procure their own health insurance coverage.

As a result of its enactment, this section of the Domestic Relations Law will give judges greater discretion in insuring the time and method of notification of health insurance provisions and will eliminate DRL §177′ mandatory language, and replace with several different options that provide notification of the parties with respect to their health care coverage.   As stated in the Legislative Memorandum:

In sum, this measure should guarantee the most efficient processing of divorce actions while achieving section 177’s original objective, viz., to insure an awareness of the impact of divorce proceedings upon health insurance coverage, at less cost to and with fewer complications for the divorce litigants the statute sought to protect.

Divorce attorneys will have a greater degree of flexibility in providing appropriate notification during the course of divorce and that will certainly benefit their clients.

Making Deals in Divorce and Subsequent Change in Circumstances

I am asked occasionally whether a separation agreement, which was perhaps incorporated in the subsequent judgment of divorce, entered into years ago can be vacated because of subsequent changes in the parties’ circumstances.  My usual response is no, since in order to have the agreement vacated, the party must show grounds sufficient to vitiate a contract.  The burden of proof in those situations is very high and may also be subject to time limitations.  Similarly, with respect to modification of a child support obligation included in a stipulation or a separation agreement, the party must show an unreasonable and unanticipated change in circumstances since the time of the stipulation to justify a modification, and that the alleged changes in that party’s financial position was not of his/her own making. A recent decision by a trial court, Debreau v. Debreau, 2009 N.Y. Slip. Op. 51750 (Sup. Ct. Nassau Co.), demonstrated a good illustration of the above principles, holding that if the parties make a deal as a part of their divorce settlement, provided that the settlement was arrived at fairly, the settlement will stand despite the fact that the circumstances have changed.

In Debreau, the wife accepted title to the family home as prepayment for 15 years of child support.  After the house sold for only two-thirds of the value estimated at the time of the divorce, she sued for child support arrears.  The court held that “[t]he law is clear that both [the Domestic Relations Law] and the public policy in favor of finality require the enforcement of property distribution agreements pursuant to their terms, absent fraud, regardless of post-agreement changes in the values of the assets.”  The court stated that “[t]he law views the equitable distribution of marital assets as a snapshot, not a movie… If an agreement distributing marital assets is not subject to vacatur, on the date of its execution, on grounds sufficient to vitiate a contract, it may not be modified or set aside on the ground that future events have rendered the division of assets inequitable.”

When the parties divorced in 2007, they agreed by stipulation to allow the husband’s share of the marital home serve as a prepayment of the child support he would owe for the couple’s four children over the next 15 years. Mr. Deabreu’s child-support obligation was set at $2,972 per month, or a total of about $535,000. The parties agreed that the husband’s share of the $1.85 million Melville house, after paying off its $400,000 mortgage and other expenses, was comparable to that obligation. They therefore stipulated that his obligation would be met by transferring over title. In June 2008, the house sold for only $1.2 million, netting the wife $734,000 rather than the $1.45 million she had anticipated. Ms. Deabreu subsequently filed a motion seeking child support arrears of $484,492, the amount she contends her husband owes to her from 2006 through 2021.

The trial court rejected Ms. Deabreu’s motion, ruling that any shortfall in the sale of the house should be taken from the wife’s share of the marital assets, not from the husband’s prepayment of child support. “While the prepaid child support sum…was specified and fixed pursuant to the parties’ stipulation of settlement, the value of the marital assets distributed to each party was determined only as of the date of the stipulation,” Justice Falanga held. The sum that the wife was to receive for her marital share “was not guaranteed by the husband, but rather, was subject to various factors such as market fluctuations and the manner in which the premises was maintained.” The decision also mentioned that Ms. Deabreu was not without other methods of seeking redress. According to the decision, “[t]he receipt by the wife, upon the sale of the [house], of approximately $650,000.00 less than she expected when entering into a stipulation of settlement…may constitute an unanticipated and unreasonable change in her financial circumstances, and may have left her, as she has alleged in her within application, unable to provide for the financial needs of the parties’ four children, entitling her to seek an upward modification of child support.”

In my opinion, it is not likely that Ms. Debreau would be able to establish an unanticipated and unreasonable change in circumstances in the above situation.  I am also left wondering why the house was not sold earlier.  I also would like to know if Ms. Debreau entered into this stipulation after discussing the risk of decline in real estate values with her divorce lawyer. Personally, I don’t think that I would recommend this type of an arrangement to a client.  The risk of decline in the value of any asset subject to market forces is too great. As a divorce attorney, I would also be concerned about giving advice to the client to retain a fixed asset as a prepayment of future child support or maintenance obligation.

Equitable Distribution, Maintenance and Health Insurance – Upcoming Changes in the Domestic Relations Law

I am asked frequently what happens to health insurance as a result of divorce.  My usual response is that once the judgment of divorce is entered, if you were receiving health insurance benefits through your spouse, you will lose your right to receiving this coverage in the future, unless you elect to receive COBRA coverage.

In fact, the disclosure of the above facts has been formalized in Domestic Relations Law §177 which provides that prior to accepting and entering as a judgement any stipulated agreement between the parties in an action for divorce, the judge shall ensure that there is a  provision  in  such agreement  relating to the health care coverage of each individual. Such statement shall either (a) provide for the future coverage of the individual; or (b) state that the individual is aware that he or she will no longer be covered by his or her spouse’s health  insurance plan and that the individual will be responsible for his or her own health insurance coverage. Every agreement accepted by the court  must  contain a specific statement, signed by each party, to ensure that the provisions of this subdivision are adhered to.

At the same time, since in most situations the health insurance is tied to one or both spouses’ employment, the Domestic Relations Law did not provide any formal way to include the loss of health insurance coverage into either maintenance or equitable distribution calculations.  This is about to change.  Effective September 21, 2009, an additional subsection of Domestic Relations Law §236 will be going into effect and will require the trial court to consider the loss of health insurance coverage as a factor in fashioning equitable distribution and maintenance awards.  Specifically, the new statute will provide as follows:

AN ACT to amend the domestic relations law, in relation  to  maintenance

and equitable distribution of marital property

THE  PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM-

BLY, DO ENACT AS FOLLOWS:

1    Section 1.  Subparagraphs 5, 6, 7, 8, 9, 10, 11, 12 and  13  of  para-

2  graph  d  of  subdivision  5  of  part  B of section 236 of the domestic

3  relations law, subparagraph 13 as renumbered by chapter 884 of the  laws

4  of 1986, are renumbered subparagraphs 6, 7, 8, 9, 10, 11, 12, 13 and 14,

5  and a new subparagraph 5 is added to read as follows:

6    (5)  THE  LOSS  OF  HEALTH  INSURANCE BENEFITS UPON DISSOLUTION OF THE

7  MARRIAGE;

8    S 2. Subparagraph 10 of paragraph a of subdivision  6  of  part  B  of

9  section  236 of the domestic relations law, as amended by chapter 884 of

10  the laws of 1986, is amended to read as follows:

11    (10) any transfer or encumbrance made in contemplation of a matrimoni-

12  al action without fair consideration; [and]

13    S 3. Subparagraph 11 of paragraph a of subdivision  6  of  part  B  of

14  section  236 of the domestic relations law is renumbered subparagraph 12

15  and a new subparagraph 11 is added to read as follows:

16    (11) THE LOSS OF HEALTH INSURANCE BENEFITS  UPON  DISSOLUTION  OF  THE

17  MARRIAGE; AND

18    S  4.  This  act  shall take effect on the sixtieth day after it shall

19  have become a law and shall apply to any action or proceeding  commenced

20  on or after such effective date.

EXPLANATION–Matter in ITALICS (underscored) is new; matter in brackets

[ ] is old law to be omitted.

The bill memo provided the following justification for the bill:

The Equitable Distribution and Maintenance factors have not been updated much since their introduction close to 30 years ago.  While loss of health insurance was not one of the factors added at the time, in light of the health care crisis and rising costs of access to health insurance, loss of health insurance is a critical factor that should be considered by courts in making determinations relating to equitable  distribution and maintenance. The impact of a divorce can be challenging for families and the added loss of health insurance can be financially devastating. The proposal in this bill, to add loss of health insurance as a factor to be considered for equitable distribution and maintenance determinations, is essential to address the realities of our current times. This legislation is intended to promote the health, safety and financial stability of the parties post divorce.

I believe that the above will be a helpful addition to the Domestic Relations Law since, as a divorce lawyer, I have dealt frequently with situations where the parties who wanted to be divorced could not do so, solely due to the fact that the loss of health insurance coverage would be devastating to one of the parties. In those situations, I have counseled clients to enter into separation agreements and the parties would live pursuant to such agreements without getting divorced for very significant periods of time.  This allowed for retention of employer provided health care coverage.  While I am happy to see the changes to the Domestic Relations Law §236, at the same time, this provision may be a paper tiger primarily due to the cost of obtaining health insurance coverage on the open market.

As a result of the new provisions, divorce attorneys will have to carefully review the issues related to their clients’ health insurance coverage, the availability of replacement coverage and its costs, and the likely impact of those issues on maintenance and equitable distribution.

I should note one more thing related to the issues discussed above.  Effective on October 11, 2009, Domestic Relations Law § 177 has been repealed, and replaced by Domestic Relations Law §255. The new statute, while mostly similar, adds additional procedural requirements that need to be complied with, sometimes as early as the time of service. Domestic Relations Law §255, subdivision 1 provides that prior to signing a judgment of divorce or separation, or a judgment annulling a marriage or declaring the nullity of a void marriage, the court must ensure that both parties have been notified, at such time and by such means as the court determines, that once the judgment is signed, a party thereto may or may not be eligible to be covered under the other party’s health insurance plan, depending on the terms of the plan. In the case of a defaulting defendant, service upon the defendant, simultaneous with the service of the summons, of a notice indicating that once the judgment is signed, a party thereto may or may not be eligible to be covered under the other party’s health insurance plan, depending on the terms of the plan, shall be deemed sufficient notice to a defaulting defendant.

Domestic Relations Law §255, subdivision 2 provides that if the parties have entered into a stipulation of settlement or agreement, on or after its effective date, resolving all of the issues between the parties, the stipulation of settlement or agreement must contain a provision relating to the health care coverage of each party. The provision must either: (a) provide for the future coverage of each party, or (b) state that each party is aware that he or she will no longer be covered by the other party’s health insurance plan and that each party shall be responsible for his or her own health insurance coverage, and may be entitled to purchase health insurance on his or her own through a COBRA option, if available. The requirements subdivision 2 may not be waived by either party or counsel. In the event that it is not complied with, the court must require compliance and may grant a thirty day continuance to afford the parties an opportunity to procure their own health insurance coverage.

Modification of Child Support Orders and Family Court’s Jurisdiction

I frequently see child support petitions in Family Court seeking to modify child support provisions of either judgments of divorce, or stipulations or settlement agreements incorporated in the judgments of divorce. Sometimes these petitions argue that the child support provisions of the judgment of divorce, stipulation or settlement agreement are invalid as violating the Child Support Standards Act. Unfortunately, if brought in the Family Court, these petitions suffer from certain jurisdictional defects as demonstrated in Savini v. Burgaleta, 34 A.D. 686 (2nd Dept. 2006).

In Savini, in 1996, the father entered into a stipulation with the mother which provided that the father would “pay to the [mother] as and for child support 29 percent of his gross salary as defined under the Child Support Standards Act on a weekly basis calculated on actual income.” That stipulation was later incorporated but did not merge into a judgment of divorce.

In a 1997 handwritten agreement, which was neither incorporated nor merged into the divorce judgment, the mother allegedly agreed, inter alia, to accept the sum of $200 per week from the father as child support and not to commence any proceeding to recover the difference between that amount and the percentage of gross salary specified in the prior stipulation.

Subsequently, a child support proceeding was commenced in the Family Court by the mother, and the Family Court Support Magistrate, sua sponte, determined that “the prior Judgment of Divorce and the stipulations did not comply with the Child Support Standards Act” and therefore informed the parties that she would consider the issue of child support de novo. She directed the father, in the interim, to pay child support in the amount $446.15 per week effective February 11, 2005. After a hearing, the Support Magistrate determined, in relevant part, that the father should pay $559.78 per week in child support until June 29, 2005, and $482.57 thereafter, and made the order retroactive to the date of the petition. The Support Magistrate also awarded the mother an attorney’s fee in the sum of $11,990.

The father filed various objections to the Support Magistrate’s findings and order. He claimed that the Support Magistrate was without jurisdiction to hold a de novo hearing on the issue of child support as if the judgment of divorce had never existed. By order entered February 8, 2006, the Family Court, inter alia, denied the father’s objections and father appealed.

The Appellate Division agreed with the father that the Family Court was without subject matter jurisdiction, in effect, to vacate as illegal so much of the judgment of divorce as directed the father to pay child support and, thereafter, to determine the issue of child support de novo. What is particularly interesting in this case was its reasoning.  The Appellate Division made this determination on constitutional grounds, stating that New York Constitution, article 6, §13 (c) provides that the Family Court is vested with limited jurisdiction “to determine, with the same powers possessed by the [S]upreme [C]ourt, the following matters when referred to the [F]amily [C]ourt from the [S]upreme [C]ourt: . . . in actions and proceedings for . . . divorce, . . . applications to fix temporary or permanent support . . . or applications to enforce judgments and orders of support”. Similarly, Family Court Act §466 provides, in relevant part, that, unless the Supreme Court directs otherwise, the Family Court may entertain an application to enforce an order or decree of the Supreme Court granting support, or an application to modify such order or decree “on the ground that there has been a subsequent change of circumstances and that modification is required.” The Supreme Court’s judgment of divorce provided, in relevant part, that the Supreme Court “retain[ed] jurisdiction of the matter concurrently with the Family Court for the purpose of specifically enforcing such of the provisions of the stipulation of child support as are capable of specific enforcement, to the extent permitted by law”.

The Court held that “nowhere in the Constitution, in the Family Court Act, or in the judgment of divorce itself, is the Family Court empowered, in effect, to invalidate a stipulation incorporated into the judgment of divorce entered by the Supreme Court. Significantly, the purpose of the mother’s petition was to enforce the terms of the stipulation of October 29, 1996 – not to have it declared illegal. Had either party questioned the legality of the stipulation, the issue should have been determined by the Supreme Court, which had issued the judgment in which the stipulation was incorporated. Accordingly, the Family Court was without jurisdiction to invalidate the stipulation and determine the child support issue de novo.”

What makes this situation different from typical modification of child support, which I previously discussed, here and here, is that fact that the provisions of the judgment apparently violated the Child Support Standards Act. In those situations, the Supreme Court has the jurisdiction to vacate any child support provisions of the judgment and recalculate child support de novo, going back to the original date of the judgment or the parties’ agreement.  The Family Court does not have the jurisdiction to do so. Accordingly, this is an important procedural point that should be familiar to most divorce and family law lawyers handling child support issues.  If the provisions of the judgment of divorce dealing with child support violate the Child Support Standards Act, the proper venue to address such issues lies in the court that issued the judgment of divorce.

Downward Modification of Child Support

I have mentioned last week that I have been seeing a significant increase in Family Court and Supreme Court filings seeking downward modification of child support. Most of these filings were brought on by a non-custodial parent after a loss of employment. In today’s economy, a loss of employment is not uncommon, so the courts are dealing with a significant rise in downward modification petitions.

There are two different situations that may arise when a non-custodial parent seeks downward modification of child support. First, if the child support was established by a stipulation or an agreement, that parent must establish that the loss of employment represents an unreasonable and unanticipated change in circumstances since the time of the stipulation to justify a modification, and that the alleged changes in that party’s financial position was not of his/her own making. See Connolly v. Connolly, 39 AD3d 643 (2nd Dept. 2007); Terjesen v. Terjesen, 29 A.D.3d 705 (2nd Dept. 2007). Additionally the party who lost employment will also have to establish that he/she used his/her best efforts to obtain employment commensurate with his/her qualifications and experience. Cox v. Cox, 20 A.D.3d 527 (2nd Dept. 2005). Further, allegations of a reduction in actual income are insufficient to support an application for a downward modification, as a matter of law, where contractual support obligations are based on a payor’s ability to earn rather than on his or her actual income at the time of the execution of such stipulation or agreement. Ellenbogen v. Ellenbogen, 6 A.D.3d 1026 (3rd Dept. 2004).

If the child support order was set by the court after a hearing, the parent seeking the modification of a child support obligation has the burden of establishing that there has been a substantial and unforeseen change in circumstances warranting a change in the support obligation. See Ketchum v. Crawford, 1 A.D.3d 359 (2nd Dept. 2003); Cadwell v. Cadwell, 294 AD2d 434 (2nd Dept. 2002). This standard is much easier to meet than the one applicable to the situations where child support was set by a stipulation or an agreement.

Depending on the circumstances, a downward modification case will fall in one of the two situations discussed above. Before commencing any proceeding, discuss your situation with an experienced New York family law lawyer to make sure that the proceedings are properly commenced and that you can meet the applicable legal standard.

Overpayment of Child Support and Right of Recoupment

Periodically, I am asked about situations where an overpayment of child support has taken place. Most of the time in those situations, I, as a lawyer, have to deliver to the client the unpleasant news that the amount overpaid cannot be recovered. This is true whether the child support was being paid pusuant to a judgment of divorce, separation agreement, or an order of Family Court. With respect to child support, there is a strong public policy against restitution or recoupment of any overpayment. See Katz v. Katz, 55 A.D.3d 680 (2nd Dept. 2008). The strong public policy considerations as decided by the New York courts, prevent recoupment or refund of child support paid. However, a parent may be entitled to a credit, enabling him or her to re-coup the overpayment of the child support payments against his/her share of the statutory add-on expenses – the portion of child support intended to cover child care and a child’s educational and special needs. See Coull v. Rottman, 35 AD3d 198 (1st Dept. 2007).

There are also certain limited circumstances in which a refund of child support may take place. For example, a refund may be directed when there was a mathematical error in the calculation of the amount of support (Colicci v. Ruhm, 20 AD3d 891 (4th Dept. 2005); when the support amount in the final order of support is less than in the temporary award (Maksimyadis v. Maksimyadis, 275 AD2d 459 (1st Dept. 2000)); or when it is shown that the subject child is not the biological child of the payor and there is no finding of estoppel (Thomas v. Commissioner of Social Services, 287 AD2d 642 (2nd Dept. 2001). There may be another category of cases where a refund of child support may be ordered. In Spencer v. Spencer, previously discussed on this blog, the Court of Appeals hinted that the recoupment may be available where it is ultimately determined that New York court lacked jurisdiction to order payment of child support.

If you are in a situation where you believe that child support was or is being overpaid, speak with an experienced family law attorney and find out what your options are and what can done in your particular case.

Basics of Bankruptcy Discharge and Domestic Support Obligations

On occasion, a divorce may result in one or both of the parties filing for bankruptcy, often without an adequate understanding of the limited relief available in the bankruptcy court. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) directly addressed issues related to the dischargeability of marital debt and support obligations, as well as to the effect of the automatic stay on collection and enforcement proceedings out of divorce and family law litigation.

Under bankruptcy law, a “domestic support obligation” is any debt incurred before or after a bankruptcy filing that is owed to or recoverable by a spouse, former spouse, child or governmental unit; in the nature of alimony, maintenance or support; and established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination.

In Chapter 7 bankruptcy, essentially all marital and domestic relations obligations are not dischargeable, regardless of whether they are support in nature, property divisions or “hold harmless” agreements, provided they were incurred by the debtor in the course of a matrimonial proceeding or a divorce action which resulted in a separation agreement, divorce decree, court order or administrative determination.

A debtor’s obligation to pay marital debts directly to a third party ( ie., pay the mortgage on former marital residence) and to hold the former spouse harmless on said debts is also deemed to be non-dischargeable if the obligation has the effect of providing support to the former spouse. A debtor’s duty to pay the following expenses are usually deemed to be in the nature of support and not dischargeable: educational expenses of a minor child; medical insurance coverage for a minor child; and life insurance, with the minor children as beneficiaries.

Attorney’s fees owed by debtor to his own lawyer are clearly dischargeable in bankruptcy, but as a general rule, attorney’s fees owed by debtor to a former spouse’s attorney are not dischargeable, if the underlying legal proceeding resulted in the entry of an order or judgment directing payment of maintenance or spousal support to the former spouse.

The division of a debtor’s pension benefits during the divorce action is usually accomplished by entering a Qualified Domestic Relations Order (“QDRO”). Since division of a pension is considered to be a transfer by debtor of a present interest in his pension, and as such, it is not a debt that can be discharged in bankruptcy.

In Chapter 13 bankruptcy, past due domestic support obligations owed by a debtor are not dischargeable, unless they are paid in full over the life of the Chapter 13 plan. However, if a debt created by a separation agreement or judgment of divorce is not in the nature of support, it sometimes can be discharged in Chapter 13 without being paid in full.

For a Chapter 13 Plan to be confirmed by the Bankruptcy Court, it must: pay in full to the former spouse all domestic support obligations owed by debtor at the time of the bankruptcy filing, and the debtor must be current on all domestic support obligations incurred after the bankruptcy filing.

A Chapter 13 Plan, even if confirmed by the bankruptcy court, is subject to dismissal if the debtor fails to pay any post-petition or post-confirmation domestic support obligations, and a Chapter 13 discharge will not be entered by the bankruptcy court unless and until a debtor certifies that all domestic support obligations have been paid and that the debtor is current on such obligations.

The automatic stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding to establish paternity; to establish or modify a child support order, determine child custody or visitation issues, or dissolve a marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest. In those situations, the divorce can be granted without first obtaining relief from the automatic stay, but the marital property cannot be divided without obtaining such relief.

The automatic stay also does not prevent the post-petition collection of domestic support obligations such as alimony or child support from any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in the same property; from automatic wage deduction orders created by a statute or judicial or administrative order; from the interception of debtor’s federal or state income tax refunds, or
from the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license. Therefore, Bankruptcy Court does not offer much protection for someone seeking to avoid the domestic support obligations.

The above rules will apply to the proceedings in New York State courts. In Ross v. Sperow, 57 A.D.3d 1255 (3rd Dept. 2008), the Appellate Division had to address a situation where one of the parties was seeking to enforce a counsel fee award after the other party filed for bankruptcy. In Ross, multiple violation petitions had been filed by the parties over the course of several years. In August 2006, Family Court upheld mother’s motion for counsel fees and directed father to pay $5,000 of the mother’s counsel fees. Father filed for a Chapter 7 bankruptcy thereafter, and listed the award of counsel fees as an unsecured debt. Father’s bankruptcy was discharged in January 2007. Mother brought a violation petition which alleged that father failed to pay the counsel fees. Father moved to dismiss petition on ground that he discharged counsel fee award in bankruptcy. The Appellate Division stated that state and federal courts have concurrent jurisdiction over issue of dischargabilityof a particular debt and held that domestic support obligations in the nature of support are exempt from discharge in bankruptcy. While father contended that counsel fees incurred were for custody and visitation proceeding, the record reveals that mother’s initial petition commencing the proceeding raised issues of financial need and hardship. According to the Appellate Division, term “in the nature of support” is broadly interpreted in the context of discharge of debt obligations in bankruptcy and held that the award of counsel fees was in part in the nature of support, and as such, exempt from discharge in bankruptcy.

Downward Modification of Maintenance

In these uncertain economic times, someone obligated to pay maintenance may lose a job, experience significant investment losses, or suffer other adverse financial events. Can something be done about maintenance under those circumstances? The answer, as I have often written, depends on the specific facts.

A party seeking the reduction of a maintenance obligation bears the burden of establishing a substantial change of circumstances. Klapper v. Klapper, 204 A.D.2d 518 (2d Dept. 1994). In Klapper, the Second Department held that, in determining whether there was a substantial change in circumstances sufficient to warrant downward modification, the change is to be measured by a comparison between the payor’s financial circumstances at the time of the motion for downward modification and at the time of divorce or, as the case may be, the time that the order of which modification is sought was made.” Id. at 519. The Appellate Division, Fourth Department utilized the same standard of review in Able v. Able, 245 A.D.2d 1026 (4th Dept. 1997).

In Simmons v. Simmons, 26 A.D.3d 883 (4th Dept. 2006), defendant lost his job and subsequently moved for a downward modification of his maintenance obligation. The Appellate Division held that since despite defendant’ diligent job search, he had little prospect of finding employment at a salary comparable to his salary at the time of the divorce, the downward modification was warranted.

The party seeking to modify the maintenance provisions of a judgment of divorce in which the terms of a stipulation of settlement have been incorporated but not merged, must demonstrate that the continued enforcement of the party’s maintenance obligations would create an “extreme hardship”. Beard v. Beard, 300 A.D.2d 268 (2d Dept. 2002) (the proper amount of support payable is determined not by a parent’s current economic situation, but by a parent’s assets and earning powers). See also, Domestic Relations Law § 236(B)(9)(b).

A reduction in the payor’s income will not result in decreased maintenance where it is the result of a voluntary action, such as self-imposed retirement. Fendsack v. Fendsack, 290 A.D.2d 682 (3d Dept. 2002); DiNovo v. Robinson, 250 A.D.2D 898 (3d Dept. 1998). In Dallin v. Dallin, 250 A.D.2d 847 (2d Dept. 1998), the Second Department held that Family Court properly rejected the father’s claims that his financial situation, prolonged unemployment, and illnesses warranted a drastic reduction of his maintenance and child support obligations. The father had failed to produce any competent evidence to support his claim that he used his best efforts to obtain employment commensurate with his qualifications and experience or that his medical conditions rendered him unemployable.

In Lenigan v. Lenigan, 146 Misc.2d 627 (Sup.Ct., Albany County 1990), the defendant sought to reduce his maintenance and child support obligations. The defendant claimed that, in the prior three months, his compensation as a stock broker had been reduced. It is well settled that the party seeking to obtain a reduction of support bears the burden of establishing a substantial change of circumstances. Id. A drastic change in income can constitute a substantial change of circumstances. Id. In Lenigan, the defendant was a stockbroker, and by the very nature of his business, his income would fluctuate throughout the year. The Supreme Court held that, adopting the defendant’s theory of allowing a modification based upon temporary fluctuations in income would lead to a ludicrous result. Although the defendant asserted a three-month lull in business, there was nothing to establish that sales would not pick up in the following months.

In conclusion, an experienced divorce lawyer faced with a significant change in client’s economic situation, must carefully construct an argument for the court that the change was not created by his/her client, that the change is significant, that it is likely to last for a some time, and that the client has exhausted all other alternatives.
In Watrous v. Watrous, 292 A.D.2d 691 (3d Dept. 2002), at age 55, the plaintiff voluntarily retired from State employment and, shortly thereafter, moved to terminate or, in the alternative, reduce his maintenance obligation. The plaintiff asserted as a substantial change in circumstances that he took early retirement due to his poor health and would be experiencing a significant reduction in income. A hearing was held and, at the close of plaintiff’s proof, Supreme Court granted defendant’s motion to dismiss, finding that plaintiff had failed to establish a sufficient change in circumstances. The Third Department affirmed on appeal, stating that a maintenance obligation established by a judgment of divorce will not be modified absent clear and convincing proof of a substantial change in circumstances. The record revealed that, at the time of the divorce, Supreme Court was aware of both the medical restrictions on plaintiff’s employment and the possibility that his poor health might cause him to retire early. Accordingly the circumstances existing at the time of the plaintiff’s application for downward modification were foreseeable, and anticipated at the time of the parties’ divorce. Furthermore, the record was devoid of evidence that the reduction in the plaintiff’s income would substantially diminish his standard of living or his ability to satisfy his maintenance obligation. The Third Department therefore concluded that the plaintiff failed to establish a substantial change in circumstances.