The failure of a spouse to disclose a material change in facts that occurred during settlement negotiations may result in an invalidation of the related settlement provisions.
So held the he Appellate Division, Third Department in its May 11, 2017 decision in Flikweert v. Berger, invalidating one paragraph of a divorce settlement separation agreement and remanding the matter to address the appropriate equitable distribution of the funds in issue.
The parties were married in 1997 and had one child. In June 2014, the wife commenced this action for a divorce. After extensive negotiations, the parties executed a separation agreement on September 15, 2015 that addressed issues including equitable distribution, child support, custody and spousal maintenance.
Paragraph 21 of the separation agreement concerned the wife’s ownership interest in her employer, a privately held company. The wife began employment with the company in February 2012. In August 2013, the wife was awarded unvested equity incentive units by the employer. By September 2015, half of the units were vested.
As to those units, paragraph 21 of the agreement specified that “[t]he wife expects to receive consideration” for her equity interest, and that she agreed to pay the husband 10% of the full value of the compensation received. The agreement further specified that the wife would “provide the [h]usband with all reasonable and necessary documents or information to value the consideration of the [o]wnership [i]nterest.” By all accounts, the parties negotiated this provision given the difficulty of defining an actual value of her interest, and to account for her continued employment or separation from employment in the future.
After the agreement was signed, the wife informed the husband that the privately held company had been sold on September 1, 2015 (two weeks before the separation agreement was signed) and that she received 230,000 for her equity interest in her employer. She then remitted 10% of the payment to the husband.
The husband moved to set aside paragraph 21 and for a hearing to address the equitable distribution of the funds. Madison County Supreme Court Justice Dennis K. McDermott denied the motion. The husband appealed. The Third Department reversed.
A core tenet of equitable distribution is a full financial disclosure by the parties (see Domestic Relations Law § 236[B][a]). Contrary to the wife’s argument, she had both a statutory and contractual obligation to inform the husband that the sale had occurred before the agreement was finalized.
The Third Department noted that two disclosure provisions in the agreement came into play. As noted above, paragraph 21 specified that the wife would provide documentation or information pertinent to the value of her equity interest. Under paragraph 37, each party represented that they “have fully and completely disclosed their finances.”
The disclosure obligation was a continuing one.
While the parties appear to have agreed on the language of paragraph 21 in advance of September 15, 2015, the sale on September 1, 2015 effectively rendered that provision academic because the value had been defined.
The issue distills to whether paragraph 21 should be invalidated. In the appellate court’s view, the wife’s withholding of the sale information was inequitable and overreaching because it undermined the negotiations as to how this marital asset should have been distributed between the parties. This was a closely held company, the wife was clearly in a position of superior knowledge over the husband as to the company’s affairs and both parties acknowledged that it would have been extremely difficult to value the wife’s equity interest. Paragraph 21 represented an attempt to account for the distribution of this asset in the future, the value of which was unknown to both parties. In this context, the husband could justifiably rely upon the representations made by the wife in the agreement.
The actual sale on September 1, 2015 dissipated the uncertainty and resulted in a specific asset subject to equitable distribution.
In our view, the wife had a duty to timely disclose this information, which was highly relevant to the parties’ negotiations.
As such, the Third Department concluded that paragraph 21 should be invalidated and the matter remitted to Supreme Court to solely address the appropriate equitable distribution of the funds.