Holtham v. Lucas

460 N.J.Super. 308

214 A.3d 1226

Frank HOLTHAM, Jr., Plaintiff-Appellant,

v.Katherine LUCAS, Defendant-Respondent.

DOCKET NO. A-3073-17T1

Superior Court of New Jersey, Appellate Division.

Submitted December 19, 2018

Decided July 10, 2019

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

Respondent has not filed a brief.

Before Judges Ostrer, Currier and Mayer.

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 that 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 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.

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

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, 732 A.2d 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, 645 A.2d 100 (1994). Therefore, we do not defer to the trial court and review the matter de novo.

Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378, 658 A.2d 1230 (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, 590 A.2d 246 (App. Div. 1991).

A.

Courts scrutinize stipulated damages provisions for "reasonableness." MetLife, 159 N.J. at 493, 732 A.2d 493. If reasonable under the totality of the circumstances, courts will enforce such damages, labeling them "liquidated damages." Id. at 493, 495, 732 A.2d 493. If unreasonable, courts will deem such damages "penalties" and will not enforce them. Id. at 493, 732 A.2d 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, 645 A.2d 100. 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." Westmount Country Club v. Kameny, 82 N.J. Super. 200, 205, 197 A.2d 379 (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 calculating damages upon breach. MetLife, 159 N.J. at 493-95, 732 A.2d 493 ; 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, 645 A.2d 100.²

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, 645 A.2d 100 (quoting Wassenaar v. Panos, 111 Wis.2d 518, 331 N.W.2d 357, 363 (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, 645 A.2d 100. 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, 732 A.2d 493 (quoting Wassenaar, 331 N.W.2d at 362, 111 Wis.2d 518 ).

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, 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, 544 A.2d 857 (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

In sum, applying traditional contract...