Divorce and Reformation of Settlement Agreement

I have previously written about vacating settlement agreements on the grounds of mutual mistake.  Here is a case where the court actually reformed the parties’ settlement agreement on the grounds of mutual mistake.

In Banker v. Banker, 53 A.D.3d 1105 (3rd Dept. 2008),  the parties’ oral stipulation of settlement, which was incorporated but not merged into their 2005 judgment of divorce, provided that the parties would subdivide a parcel of property located in Delaware County.  However, despite that provision, after the judgment of divorce was entered, the defendant refused to do so.  In response to a motion by plaintiff to enforce the stipulation, Supreme Court, in February 2006, ordered defendant to obtain subdivision approval from the Town.  The Planning Board denied defendant’s subsequent subdivision application after discovering that the property was encumbered by a restrictive covenant against further subdivision.  In March 2006, defendant moved to reargue and/or renew February 2006 order, and requested a hearing to determine equitable distribution.

Supreme Court reserved decision on all pending matters pertaining to the parties until an appraisal of the property was completed.  Because the parties could not agree on an appraiser, the court appointed one and directed the parties, once the appraisal was complete, to settle the matter in a private auction or buyout.  The appraiser completed the appraisal in June 2006.  By letter dated October 4, 2006, defendant requested the opportunity to offer further proof of value.  Plaintiff made a similar request and explained that the parties had not been able to settle the matter or agree on a private auction.

Plaintiff responded with a motion seeking that the parties’ interests in the property be declared in conformance with the terms set forth in the stipulation and the values established in the appraisal, as well as an order allowing her to buy out defendant’s share of the property.  Defendant opposed the motion, arguing that the appraisal should not be adopted without an opportunity by the parties to cross-examine the appraiser and submit other evidence of valuation.  Supreme Court ordered a hearing to permit the parties to cross-examine the appraiser, but made it clear that no other testimony or evidence of valuation would be permitted.

Following the hearing, at which Supreme Court again denied defendant’s request to submit further evidence, the court determined the interests of the parties in the property to be 83% for plaintiff and 17% for defendant.  The court, fixed the parties’ interests as indicated above, appointed a receiver, and ordered the   public sale of the property.  Defendant appealed.  The Appellate Division rejected defendant’s argument that Supreme Court exceeded its authority by reforming the parties’ stipulation of settlement.  Where, as here, a mutual mistake rendered a portion of the parties’ settlement agreement impossible or impracticable, “the relevant settlement provision was properly set aside”.  No dispute existed that the parties’ agreement to physically divide the property could not occur given the restrictive covenant; and even defendant was not attempting to have the parties’ stipulation enforced.  Thus, after giving the parties ample opportunity to reach a new agreement,  the trial court was correct to move forward by appointing an appraiser so that an equitable distribution of the property, in as close accordance as possible with the intent of the parties as expressed in their settlement, could be achieved.

The Appellate Division noted that to achieve reformation or recission of the stipulation of settlement, one of the parties should have commenced a plenary action, rather than proceeding by motion but, in the context of this matter, concluded the defect to be nonfatal.  However, the lower court erred in resolving this matter without a full hearing permitting the parties to offer proof of valuation.  The court is authorized to appoint an independent appraiser in a matrimonial action but, unless the parties have stipulated otherwise, the court must afford the parties the opportunity to review the appraisal, cross-examine the appraiser and offer additional evidence on valuation.  Although the record contained evidence that the parties consented to Supreme Court’s appointment of the appraiser, it did not suggest that the parties agreed to be bound by the resulting appraisal.

This is an example of a situation where the mutual mistake allowed the court to reform the parties’ settlement agreement.  While those circumstances tend to be limited, the lawyers in Banker recognized that since the property could not be subdivided, it had to be sold or one of the parties would buy out the other party’s interest.  The question of valuation was secondary to the remedy chosen by the court as a result of reformation of the agreement.  At the same time, it is rather surprising that neither divorce attorney was aware of the covenant, since both parties, presumably, had access to the real property records and the property’s abstract of title.

Appreciation of Separate Property and Equitable Distribution

One issue that periodically comes up in my divorce practice here in Rochester has to do with appreciation of separate property during the marriage.  I have previously written about this issue in the past.  A recent case decided by the Appellate Division, Third Department, Albanese v. Albanese, 2010 N.Y. Slip. Op. 00036 (3rd Dept. 2009), has illustrated a related aspect of this issue.  In Albanese, the critical issue before the court was whether or not the wife’s lawyer was able to establish how much the husband’s law practice has appreciated during the marriage.  In this type of situation, the divorce attorney has to be concerned about two different valuations.  The first one is the valuation of the business at the time of the marriage, and the second one is the valuation of the business at the time of commencement of the divorce action.

However, during the trial, the wife’s divorce attorney appears to have not established what the value of the law practice was at the time of the marriage.  The Appellate Division stated,

Here, the only evidence in the record regarding the value of defendant’s law practice related to the purported value at the time the divorce action was commenced. Plaintiff, who was represented by seasoned counsel and retained an experienced expert, presented no proof of a baseline value at the time of the marriage or of an appreciation in the value of the practice during the marriage. While plaintiff’s role as homemaker and mother to the parties’ children established that she was entitled to a share of any appreciation, there was no evidence offered from which appreciation could be found. Under such circumstances, an award for the value of the law practice was inappropriate.  (Citations omitted).

In such situations, the non-titled spouse bears the burden of proof, and any appreciation in value of such separate property may be subject to distribution if there is a nexus between the titled spouse’s efforts and the increase in value and those efforts were aided or facilitated by the nontitled spouse.  However, without the starting point value, the non-titled spouse simply could not prove her case. As a result, the wife has received no portion of the law practice that has likely appreciated since the parties’ marriage in 1987.

The above illustrates that sometimes even the most obvious issues occasionally escape the attention of counsel.  Therefore, the Appellate Division’s reference to the plaintiff’s attorney as “seasoned counsel” and her expert as “experienced expert” indicates its likely surprise that this issue was overlooked during the trial.