The CFL Credential has helped you with several financial aspects of divorce cases, from dividing stock options to calculating child support payments and separating property. One sometimes overlooked part of the law are cases that involve penalty provisions to fine a party as a form of punishment. In divorce matters, one spouse intends to use these clauses as a “sword of Damocles” to intimidate the other into complying with a request.
The recent New Jersey appeals court case of Holtham v. Lewis is an example of such a situation. It involved the use of a penalty provision to enforce the ex-husband’s car loan payment obligation.
The couple divorced after five years of marriage. Their divorce judgment included their marital settlement agreement (MSA). Without addressing the MSA’s merits, the judgment declared that “the parties entered into it freely and voluntarily, and that it is therefore binding and enforceable.”
Among the MSA’s provisions, it enforced the couple’s prenuptial agreements and resolved several property and insurance-related matters, including the ex-wife’s exclusive use of their 2009 Mercedes. The ex-husband would continue paying the car’s loan and insurance. He owed about $50,000 on the loan, which he had to pay off by July 9, 2017.
If Frank defaulted “in any obligations” in the MSA, Katherine would be entitled to reasonable counsel fees incurred for enforcement, and Frank would face a $150.00 daily penalty if he failed to comply. The MSA included a mutual release of all prior claims, and Frank’s representation that he had “the ability and resources to comply with” its obligations.
Despite the requirements, Frank failed to meet the car loan payment obligation or transfer the title by the appointed date. Katherine filed an application for enforcement of the underlying payoff obligation and the financial penalty provision.
Frank didn’t dispute that he had paid the balance on the car loan in early November 2017. Two weeks after Katherine filed a motion for relief under the MSA, Frank provided the title on December 1st, and blamed the delay on the lienholder. Katherine still sought $18,450 under the monetary penalty provision for the 123-day delay in the loan payment. The trail court sided with her and ordered Frank to pay her the $18,450 penalty.
Frank appealed. As he had argued at trial, he felt the “per diem” or daily loan payment penalty didn’t constitute reasonable liquidated damages and was an “unenforceable penalty.”
Superior Court of New Jersey, Appellate Division Ruling
To explain its decision, the Appellate Division defined the difference between a penalty provision in a business contract and one in the context of a divorce.
The court agreed that “$18,450 would constitute an unenforceable penalty under traditional contract law principles, which are founded on the premise 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…”
According to the appeals court, the policies of traditional contract principles don’t apply with equal force under a divorce. “…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 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.”
It’s not who you know, it’s what you know. The CFL Credential is your financial “tool-kit” for settling divorce cases successfully. Learn how the knowledge you gain can advance your career and your earning potential in our free information packet today.
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Google Scholar. (2019). HOLTHAM v. Lucas, NJ: Appellate Div. 2019. [online] Available at: https://scholar.google.com/scholar_case?case=10594222572897025526&q=Holtham+v.+Lucas&hl=en&as_sdt=40000006&as_vis=1 [Accessed 20 Sep. 2019].