Court Opinion

ID: 4428047
Source: CourtListenerOpinion
Date Created: 2019-08-20 19:00:06.536188+00
Date Added: 2024-06-11T14:56:34.185624
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
              APPROVAL OF THE APPELLATE DIVISION

                                   SUPERIOR COURT OF NEW JERSEY
                                   APPELLATE DIVISION
                                   DOCKET NO. A-3073-17T1

FRANK HOLTHAM, JR.,
                                       APPROVED FOR PUBLICATION
     Plaintiff-Appellant,
                                                 July 10, 2019
v.                                         APPELLATE DIVISION

KATHERINE LUCAS,

     Defendant-Respondent.
__________________________________

           Submitted December 19, 2018 – Decided July 10, 2019

           Before Judges Ostrer, Currier and Mayer.

           On appeal from the Superior Court of New Jersey,
           Chancery Division, Family Part, Bergen County,
           Docket No. FM-02-1695-14.

           Ameri & Associates, LLC, attorneys for appellant
           (Nima Ameri, of counsel; John J. Clark, IV, on the
           brief).

           Respondent has not filed a brief.

     The opinion of the court was delivered by

OSTRER, J.A.D.

     According to well-settled contract law, a provision that stipulates an

unreasonably large amount of damages for a future breach is an unenforceable
penalty. Invoking that "penalty rule," plaintiff-husband Frank Holtham, Jr.,

challenges a provision in his marital settlement agreement (MSA) that charged

him a "per diem penalty of $150" for breach of any duty under the agreement.

Holtham did not, as required, timely pay off a loan on an automobile th at the

MSA equitably distributed to his wife, defendant Katherine Lucas, and tender

her title to the car. She sought relief, and the trial court ordered Holtham to

pay $150 for each day of his noncompliance, totaling $18,450, plus attorney's

fees.    Holtham contends on appeal that $18,450 was not a permissible

liquidated damage award but instead an unenforceable penalty.

        We agree that $18,450 would constitute an unenforceable penalty under

traditional contract law principles, which are founded on the premis e that

contracting parties are rational economic actors, and which limit damages to

measurable compensable losses.       The penalty rule is intended to avoid

oppression, excessive recovery, and deterrence of efficient breach.

        However, the penalty rule does not apply with equal force to marital

settlement agreements embodied in final divorce judgments.            A principal

reason to enforce such agreements is to secure post-divorce harmony and

stability. Enforcement of penalty provisions may appropriately deter post -

divorce non-compliance that is not economically motivated, and it may

compensate for the emotional harm resulting from such a breach. Although we

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conclude the penalty rule does not govern divorce settlement agreements, we

emphasize that the family court retains the inherent power to modify such

provisions to assure fairness and equity. Since no modification is warranted

under the circumstances of this case, we affirm the award.

                                        I.

      The parties divorced after five years of marriage.       The judgment of

divorce (JOD) incorporated the MSA, which the parties entered with their

counsels' advice. 1 Without addressing the MSA's "merits," the JOD declared

that "the parties entered into it freely and voluntarily, and that it is therefore

binding and enforceable."

      The MSA enforced the parties' prenuptial agreements and resolved

several property and insurance-related matters.        For example, the MSA

required Holtham to pay Lucas $315,000 in two installments; authorized her to

retain a Florida condominium and required him to lift a lis pendens; and

required him to help Lucas obtain health insurance and to pay for it for two

years. Relevant to this appeal, the MSA also provided that Lucas would retain

exclusive use of the 2009 Mercedes she then possessed, and that Holtha m

would continue paying for the car's insurance and financing. Holtham was

1
   The handwritten MSA, entitled "Memorandum of Understanding," was
signed by the parties and witnessed by their attorneys.

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required to complete payment of the roughly $50,000 remaining of the auto

loan by July 9, 2017, and then to transfer clear title.

      Almost all the MSA's executory provisions, including the automobile

provision, pertained to Holtham's actions. The MSA stated that if Holtham

defaulted "in any obligations" in the MSA, Lucas would be entitled to

reasonable counsel fees incurred to enforce, and "a per diem penalty of

$150.00 for every day that husband fails to comply with this agreement." The

MSA included a mutual release of all prior claims, and Holtham's

representation that he had "the ability and resources to comply with" its

obligations. According to a past financial statement, annexed to the parties'

prenuptial agreement, Holtham was a multi-millionaire.

      Holtham did not pay off the car loan or transfer title by July 9, 2017.

The parties' attorneys exchanged letters in October 2017 about Holtham's non -

performance. His attorney alleged that Holtham had met his obligations under

the agreement and was prepared to transfer title, but asserted various offsetting

claims exceeding $65,000. Lucas's counsel requested immediate transfer of

title and payment of $150 for each day of non-compliance. He asserted the

mutual release barred Holtham's claimed offsets and threatened to file a

motion to enforce the MSA.

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      Holtham does not dispute that he waited until early November 2017 to

pay off the remaining car loan balance. He delivered title on December 1,

2017 – a delay that he blamed on the lienholder – two weeks after Lucas filed

a notice of motion for relief under the MSA.

      Citing MetLife Capital Financial Corp. v. Washington Avenue

Associates, L.P., 159 N.J. 484, 493 (1999), Holtham's counsel argued that the

per diem charge did not constitute reasonable liquidated damages and was

instead an unenforceable penalty. Lucas's counsel argued that Holtham was

contractually bound by the MSA's penalty provision.        After taking limited

testimony from Holtham, the court enforced the penalty provision, ordering

Holtham to pay $18,450 (which consisted of $150 for each day between July 9

and November 8), plus $6,013.50 in attorney's fees.        The court noted that

although Holtham had the ability to comply, he unjustifiably delayed by

interposing offsetting claims he had already forfeited in the mutual release.

      On appeal, Holtham renews his argument that the $150 daily charge is

an unenforceable penalty.

                                       II.

      The enforceability of a stipulated damages clause presents a legal issue.

Wasserman's Inc. v. Middletown, 137 N.J. 238, 257 (1994). Therefore, we do

not defer to the trial court and review the matter de novo. Manalapan Realty,

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L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). But, we review

for abuse of discretion a family court's exercise of equitable authority to

modify a property settlement agreement it finds "unjust, oppressive or

inequitable." Schwartzman v. Schwartzman, 248 N.J. Super. 73, 77 (App. Div.

1991).

                                      A.

      Courts scrutinize stipulated damages provisions for "reasonableness."

MetLife, 159 N.J. at 493. If reasonable under the totality of the circumstances,

courts will enforce such damages, labeling them "liquidated damages." Id. at

493, 495. If unreasonable, courts will deem such damages "penalties" and will

not enforce them. Id. at 493. "The purpose of a stipulated damages clause is

not to compel the promisor to perform, but to compensate the promisee for

non-performance." Wasserman's, 137 N.J. at 254. In other words, liquidated

damages are an "estimate in advance [of] the actual damage that will probably

ensue from the breach," while a penalty is "a punishment, the threat of which

is designed to prevent the breach." Westmont Country Club v. Kameny, 82

N.J. Super. 200, 205 (App. Div. 1964).

      The enforceability of stipulated damages turns primarily on two factors:

the extent the stipulated amount is within a plausible range of actual damages,

viewed from either the time of contracting or breach; and the difficulty of

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calculating damages upon breach.      MetLife, 159 N.J. at 493-95; see also

N.J.S.A. 12A:2-718(1) (applying these two perspectives to liquidated damages

for breach of a sales agreement).

      Regarding the first factor, "[d]etermining enforceability at the time

either when the contract is made or when it is breached encourages more

frequent enforcement of stipulated damages clauses." Wasserman's, 137 N.J.

at 251-52.2   Regarding the second factor, "[t]he greater the difficulty of

estimating or proving damages, the more likely the stipulated damages will

appear reasonable." Id. at 250 (quoting Wassenaar v. Panos, 331 N.W.2d 357,

363 (Wis. 1983)). "[T]he parties' characterization of stipulated damages as

'liquidated damages' or as a 'penalty' should not be dispositive." Wasserman's,

137 N.J. at 251. Since "considerations of judicial economy and freedom of

contract favor enforcement of stipulated damages clauses," a party challenging

such a clause bears the burden to show it is unreasonable. MetLife, 159 N.J. at

496, 504 (quoting Wassenaar, 331 N.W.2d at 362).

      Under these principles, Holtham met his burden to demonstrate the $150

per diem charge is a penalty. The harm Lucas suffered from Holtham's delay,

2
   In other words, if the stipulated damages clause is sustainable from one
perspective but not the other, it survives. "Thus a court should look to the
actual loss to sustain provisions that might otherwise be unenforceable, but not
to strike down provisions that would otherwise be enforceable." 3 E. Allan
Farnsworth, Farnsworth on Contracts § 12.18, at 310 (3d ed. 2004).

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to the extent compensable as contract damages, fell short of $18,450.          She

retained full use of the Mercedes. While Holtham's delay prevented her from

transferring the vehicle, the record provides no basis for approximating her

loss at $18,450. The breach would also not require him to compensate Lucas

for any emotional distress or irritation she experienced, even if Holtham

purposely delayed performance and dredged up old claims to upset his ex-wife.

See Buckley v. Trenton Saving Fund Soc'y, 111 N.J. 355, 364-65 (1988)

(stating that contract breach generally provides no basis to recover for "mental

suffering").

      The clause fares no better from the parties' perspective at the time of

contracting.      The $150 per diem provision is akin to a "'shotgun' or

'blunderbuss' clause, one that fixes a single large sum for any breach,

substantial or insubstantial." See 3 Farnsworth on Contracts § 12.18, at 310.

For example, Holtham would be liable for the same charge whether he delayed

paying Lucas $315,000 as required or delivering title to the car after satisfying

the loan.      We decline to consider the $150 per diem charge a reasonable

prediction of damages when those damages could range from substantial to

virtually non-existent.3

3
  Professor Farnsworth argued persuasively that a blunderbuss clause should
be enforced "as long as it is a reasonable forecast in the light of the breach that
                                                                       (continued)

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      In sum, applying traditional contract principles, the $150 per diem

charge would constitute an unenforceable penalty. However, that does not end

our analysis. The policies underlying those contract principles do not apply

with equal force in the divorce context.       Rather, judicial enforcement of

agreements to settle divorce actions implicates policy goals that justify

relaxing the penalty rule, and instead subjecting a penalty to the family court's

broad power to assure equity and prevent unconscionability.

                                       B.

      The family court is not bound by the contract principles underlying the

penalty rule. We recognize that "[a]n agreement that resolves a matrimonial

dispute is no less a contract than an agreement to resolve a business dispute."

Quinn v. Quinn, 225 N.J. 34, 45 (2016).         However, "[t]he interpretation,

application, and enforceability of divorce agreements are not governed solely

by contract law." Konzelman v. Konzelman, 158 N.J. 185, 194 (1999); see

also ibid. (stating that "contract principles have little place in the law of

domestic relations" (quoting Lepis v. Lepis, 83 N.J. 139, 148 (1980))).

(continued)
actually occurred." 3 Farnsworth on Contracts § 12.18, at 310-11. He
contended that a non-complying party "should not be given the loophole of
escape that, if he had committed a different breach, the sum named would not
have been reasonable." Ibid. (quoting C. McCormick, Law of Damages § 151
(1935)). However, as we have observed, $150 was not "a reasonable forecast"
of the ordinarily compensable damages from Holtham's actual breach.

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      "Divorce    agreements    are   necessarily   infused    with   equitable

considerations and are construed in light of salient legal and policy concerns."

Ibid. Therefore, "for equitable reasons normal tenets of contract interpretation

are sometimes not applicable to matrimonial matters." Quinn, 225 N.J. at 46.

"'[T]he law grants particular leniency to agreements made in the domestic

arena' and vests 'judges greater discretion when interpreting such agreements.'"

Id. at 45-46 (quoting Pacifico v. Pacifico, 190 N.J. 258, 266 (2007)). That

discretion allows a court, upon finding a change of circumstances, to modify a

divorce agreement if continued enforcement would be "unfair, unjust, and

inequitable." Konzelman, 158 N.J. at 194.

      On the other hand, the court will not generally make a better agreement

than the parties themselves made. Quinn, 225 N.J. at 45. Here, ironically,

equitable principles warrant enforcement of the parties' agreement where

normal contract principles – the penalty rule – would compel their non-

enforcement.

      It is worthwhile to review the purpose of contract damages and the

rationale of the penalty rule. "[T]he law's goal on breach of contract is not to

deter breach by compelling the promisor to perform, but rather to redress

breach by compensating the promis[ ]ee." 3 Farnsworth on Contracts § 12.18,

at 301. "Compensatory damages are designed 'to put the injured party in as

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good a position as he would have had if performance had been rendered as

promised.'" 525 Main St. Corp. v. Eagle Roofing Co., 34 N.J. 251, 254 (1961)

(quoting 5 Corbin on Contracts § 992, at 5 (1951)).          While "damages for

breach of contract, by their nature, induce performance," liquidated damages

are invalid when they coerce performance "by making breach unreasonably

costly." 24 Williston on Contracts § 65:1 (4th ed. 2018).

      Based on its historic roots, the penalty rule is said to protect against both

oppression and excessive recovery – that is, recovery that far exceeds the

economic losses normally recoverable for breach of contract.                    See

Wasserman's, 137 N.J. at 248 (stating that "[d]isapproval of penalty clauses

originated at early common law when debtors bound themselves through

sealed penalty bonds for twice the amount of their actual debts"); Charles J.

Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just

Compensation Principle: Some Notes on an Enforcement Model and a Theory

of Efficient Breach, 77 Colum. L. Rev. 554, 556 (1977) (stating that one goal

of the penalty rule is to protect against "unfair recovery in excess of justifiable

reliance"). The penalty rule is said to assure so-called efficient breach, since

penalties may encourage a promisor to perform when breach and compensation

would be more beneficial to the promisor and, ostensibly, no less beneficial

than performance to the promisee. Goetz & Scott, 77 Colum. L. Rev. at 556

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(noting that the penalty rule is "envisioned as a protection against . . . the

performance of a contract through fear of the penalty, where it would be more

efficient economically to breach").

      However, the penalty rule deprives a non-breaching party of adequate

compensation for "idiosyncratic value," such as sentimental attachment, as

opposed to "objective market valuation." Id. at 569-70. "[T]he [penalty] rule

denies true compensation to the promisee with non-provable idiosyncratic

wants, inducing him [or her] either to protect those wants with inefficient third

party insurance or to suffer exposure to inefficient breaches."       Id. at 594

(footnotes omitted).

      The penalty rule's failure to account for non-market-based "idiosyncratic

value" highlights a shortcoming of the rule in the matrimonial setting. The

rule does not recognize the premium that the court and parties place on post-

divorce peace.    See Konzelman, 158 N.J. at 194 (noting that "[t]he very

consensual and voluntary character of [marital settlement] agreements render

them optimum solutions for abating marital discord . . . and assuring stability

in post-divorce relationships"); Borodinsky v. Borodinsky, 162 N.J. Super.

437, 443 (App. Div. 1978) (noting that "post-divorce peace is more conducive

to the welfare of the parties"). The court favors enforcement of voluntary

divorce agreements largely because they presumably represent the parties' best

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effort to resolve often intensely personal and vexatious problems. Konzelman,

158 N.J. at 193-94.

      The penalty rule also does not account for the fact that parties to

matrimonial agreements may behave far differently than the rational economic

actors presumed to participate in typical contractual relationships. A party to a

MSA may decide to breach not to promote efficiency but to inflict some harm,

emotional or economic, on the former spouse. Consequently, a per diem fee

that may fail as a penalty under traditional contract principles may reasonably

deter or remedy the emotional harm caused by a breach of post-marital peace.

      Existing judicial sanctions to deter breach of marital settlement

agreements reflect a public policy that is receptive to penalty clauses designed

to achieve the same end. Under Rule 5:3-7, a court may economically sanction

a party for violating an order on custody, parenting time, or spousal or child

support. Although the Rule does not address equitable distribution orders or

judgments, the court may impose sanctions under Rule 1:10-3. See Pressler &

Verniero, Current N.J. Court Rules, cmt. 4.4.3 to R. 1:10-3 (2018) (addressing

monetary relief).     Like penalties imposed under an MSA, such judicially

crafted sanctions are not limited to actual damages, but they must be

"rationally related to the desideratum of imposing a 'sting' on the offending

party within its reasonable economic means." Innes v. Carrascosa, 391 N.J.

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Super. 453, 498 (App. Div. 2007) (affirming a per diem penalty for custody

order violations (quoting Pressler & Verniero, Current N.J. Court Rules, cmt.

4.4.3 on R. 1:10-3 (2007))). The sting of a sanction, unlike the specter of

contract damages, is designed to deter and coerce.

      In sum, consistent with the policy favoring enforcement of divorcing

parties' own resolution of their marital controversies, and the policy favoring

sanctions to deter non-compliance with matrimonial orders, we decline to

apply the penalty rule to matrimonial settlement agreements. 4

      Our view finds support in the decisions of other courts. In Dougan v.

Dougan, 970 A.2d 131, 133 (Conn. App. Ct. 2009), aff'd on other grounds, 21

A.3d 791 (Conn. 2011), the Appellate Court of Connecticut declined to void as

against public policy a provision that imposed ten-percent interest on an

amount payable, to run from the date of a divorce settlement agreement instead

4
   The Supreme Court suggested that different rules might apply to penalty
provisions within consumer contracts. MetLife, 159 N.J. at 500 & n.2
(enforcing a fixed late charge in a loan contract "between sophisticated
commercial entities" but declining to address such a provision in consumer
contracts); Wasserman's, 137 N.J. at 253 (declining to "reach the issue of the
enforceability of liquidated damage clauses in consumer contracts"); see also
Nohe v. Roblyn Dev. Corp., 296 N.J. Super. 172, 177 (App. Div. 1997)
(declining to enforce a liquidated damages clause in a consumer contract).
However, an MSA is neither a commercial contract between sophisticated
entities nor a consumer contract between a business and a consumer.
Addressing the family-related concerns of former spouses, it may, as in this
case, be the product of arm's length, counseled negotiations.

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of the date the payment was due. The court noted that the promisor -husband

was a sophisticated multi-millionaire, both parties received the help of counsel

and participated in lengthy negotiations, and the provision was unambiguous.

Id. at 138.    The appellate court held that "the public policies in favor of

enforcement [of the interest provision] outweigh the public policy against."

Id. at 138 n.11. A concurring judge noted that family cases present special

concerns that "may sometimes justify a departure from the rules that ordinarily

apply to other civil disputes." Id. at 142 (Borden, J., concurring) (citation

omitted).     Enforcing the interest provision furthered the public policy

supporting private settlement of estranged marital partners' financial affairs.

Id. at 143 (citation omitted).

      In Varner v. Varner, 666 So.2d 493 (Miss. 1995), the court upheld a

divorce settlement provision imposing a "ten percent penalty" for late -paid

child support and alimony.       The court recognized that divorce decrees are

"quasi-contracts," and when parties enter settlement agreements "there is more

at work than general contract law." Id. at 496-97 (citation omitted). The

reviewing court noted the chancellor had approved the parties' agreement,

endowing it with the status of a court order.      Id. at 497.   In view of the

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promisor's consistent failure to meet his financial obligation, the court found

that the chancellor acted appropriately in enforcing the provision. Ibid.5

      Although we hold that the penalty rule does not apply to MSAs, we

emphasize that the family court retains broad power to invalidate or reform a

penalty provision in an MSA if it is unconscionable or the product of fraud,

undue pressure, or coercion, or where one party lacks independent counsel.

See Miller v. Miller, 160 N.J. 408, 418 (1999) (recognizing the court's power

to reform an unconscionable divorce settlement agreement); Conforti v.

Guliadis, 128 N.J. 318, 323 (1992) (noting the court's power to modify

property distribution provisions of a divorce judgment); Glass v. Glass, 366

N.J. Super. 357, 371 (App. Div. 2004) (reviewing factors relevant to

determining whether an agreement is fair and equitable); Massar v. Massar,

279 N.J. Super. 89, 93 (App. Div. 1995) (stating that "[m]arital agreements . . .

are enforceable only if they are fair and equitable"); Peskin v. Peskin, 271 N.J.

Super. 261, 276 (App. Div. 1994) (stating an MSA must be set aside if

"achieved through coercion, deception, fraud, undue pressure, or unseemly

conduct, or if one party was not competent"); Guglielmo v. Guglielmo, 253

5
  We are unpersuaded by the view of other courts that have applied the penalty
rule to divorce settlement agreements. See Willner v. Willner, 538 N.Y.S.2d
599 (App. Div. 1989); Jessen v. Jessen, 810 P.2d 987 (Wyo. 1991). Those
courts did not recognize the special nature of divorce settlement agreements
that justifies departing from traditional contract principles.

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N.J. Super. 531, 542 (App. Div. 1992) (finding an agreement unconscionable

where one party lacked adequate independent counsel).

      A family judge should scrutinize a penalty provision in light of the

totality of circumstances. Regarding negotiations preceding the provision's

adoption, the court may look to the parties' relative bargaining power and

sophistication, their understanding of the provision, and whether they were

assisted by independent counsel. Regarding enforcement in a specific case,

the court may consider the size of the penalty in light of the actual brea ch, and

may reduce a penalty to assure it is proportionate to the violation and resulting

harm, which may include emotional distress and disruption of post-divorce

peace. While the court may also consider the breaching party's ability to pay,

a lack of resources should not license a party to purposely shirk negotiated

duties with impunity. Also relevant is the breaching party's good faith or

whether he or she acted deliberately or without reasonable justification. In

short, the family court, in exercising its broad authority, may reform a penalty

provision to achieve fairness and equity.

      In this case, the totality of the circumstances supports enforcement of the

penalty provision.   Plaintiff is a sophisticated businessman and, as of the

parties' prenuptial agreement, a person of great wealth. He was represented by

counsel in negotiating the MSA. We may presume that he understood the

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nature of the penalty provision and was prepared to abide by it when he

entered the agreement. While defendant did not suffer substantial financial

harm, we recognize the significant impact of plaintiff's breach on post-divorce

peace. The trial court found that plaintiff's breach was deliberate and lacking

any reasoned justification, as plaintiff insisted upon offsets that he clearly

waived in the mutual release provision of the MSA. Therefore, we discern no

basis to disturb the trial court's order enforcing the penalty provision and

requiring plaintiff to pay $18,450 to defendant.

      Affirmed.

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