Opinion
No. 15/3188.
10-04-2017
D.S.C., Plaintiff, v. P.C., Defendant.
Lewis J. Heisman, Esq., Rochester, Attorney for Plaintiff. Francis C. Affronti, Esq., Rochester, Attorney for Defendant.
Lewis J. Heisman, Esq., Rochester, Attorney for Plaintiff.
Francis C. Affronti, Esq., Rochester, Attorney for Defendant.
RICHARD A. DOLLINGER, J.
When a litigant gets only half a loaf—or slightly more—in a post-divorce financial dispute, does the couple's attorney's fee clause trigger a right for this Court to slice the fees for the cost of coming to Court?
In this matter, a former husband and wife fight over attorney fees that arise from a post-divorce dispute regarding their separation agreement. The issues before the court are relatively simple. In a post-judgment enforcement action, claiming a violation of the agreement, does this court need to find a violation of the agreement—in, essence, a prevailing party or a party at fault—to award attorney fees and what options does a court have if the party seeking fees does not prevail on all the issues in their application?
The couple signed a separation agreement in late 2016, after extended settlement discussions. The agreement provided that a 529 college savings account, established by the couple through the husband's GI benefits, "will be applied to college expenses" before either party was obligated to pay out of their own pocket. The parties also agreed on percentage contributions to the college expenses, once the 529 funds were exhausted. When the fall 2017 college expense bill arrived, the husband, who controlled the 529 account, insisted that he and his former wife begin their contributions to the daughter's college expenses rather than invade the 529 account. The wife claims that his actions were a default under the agreement. In addition, the wife also claimed that the husband violated another portion of the agreement regarding the payment of certain marital debts. The agreement provided that the parties, to pay off secured debt, would liquidate post-tax assets and apply those sums to the secured debt and that "any excess funds shall be held ... to be applied to pay the taxes associated with liquidating the parties assets." The excess funds in this matter were created when the couple sold the marital residence and received a tax refund. It is undisputed that these funds, held in escrow, were "excess funds" under the agreement. The agreement also contained a tax specific provision regarding a 2011 loan, taken by the husband on an insurance policy. The agreement required the husband to repay the loan without contribution from his wife.
529 college savings accounts are funded with tax-deferred dollars for qualified tuition programs. See 26 USC § 529 (2017)(hereinafter 529 accounts); see e.g., Matter of McNair v. Fenyn, 149 AD3d 747 (2d Dept 2017) (discussion of funding 529 accounts).
The wife claims that she repeatedly asked the husband to pay the daughter's college expenses out of the 529 account, but he did not. Then, when the wife filed her order to show cause, alleging that the husband had violated the agreement by failing to pay those expenses from the 529 account, the wife alleges that the husband quickly changed his tune. In his response to the order to show cause, he agreed to pay the 2017 college expenses from the account. With respect to the insurance provision, the husband alleges that when he cashed-in his policy, the proceeds were turned over to the attorney trust account. In contrast, when the wife turned over her proceeds from a liquidated Individual Retirement Account (IRA), she authorized only a net distribution: her share of the proceeds was reduced by the amount of income tax that she would have had to pay on the premature distribution from the IRA. The husband argued in his response to the wife's application that the agreement required her to turn over all the proceeds and not just the net after payment of her income taxes. The husband, in his affidavit, also indicates that his wife said that the IRA liquidation would not have any tax consequences, but that her estimate was wrong. She was required to pay more than $7,000. Under those circumstances, the husband demanded that the tax paid by the wife be added back into the escrow funds when their respective shares of the account were paid out.
The chronology of the dispute is disputed. Wife's counsel suggests that a series of emails, from the wife to her husband, and letters from her counsel to her husband's counsel did not produce a settlement. In December, 2016, the husband's counsel offered a settlement on the tax issues but never mentioned the 529 account. In January 2017, wife's attorney sent a letter to husband's attorney, demanding distribution of the 529 account and adding "neither party should have to incur additional legal expense to resolve this issue." The husband's counsel responded and made a second attempt to settle the tax issues through two letters in late January but did not mention the 529 account. In early April 2017, wife's attorney sent another settlement proposal which was not accepted and the husband responded but did not mention the distribution from the 529 account. Then in May, the wife's attorney, indicating that the parties could not agree on using the 529 account to pay the pending college bills for their daughter, suggested arbitration to avoid litigation that could cost each party "$5,000–6,000" in legal fees. That option was also rejected.
In response, the wife brought the order to show cause, seeking an order requiring payment of the college debts for the unemancipated child from the 529 account, and an adjudication of the parties responsibilities to pay marital debts and taxes. After the order to show cause was heard, this court attempted to resolve the dispute and met with the parties' counsel. After extended discussions, the dispute was settled, based on a compromise offered by the court. In that compromise the wife left open the question of whether she was entitled to legal fees because she invoked court intervention to resolve the matter.
Legal fees are governed by the parties agreement, which was designed, unmistakably, to deter intransigence by either party. The agreement provides that if a party defaults in his or her duties or obligations to the other and/or children of the parties, the non-defaulting party shall be entitled to reasonable and necessary counsel fees, costs, and disbursements to enforce the agreement. The agreement also includes a provision that no fees will be allowed if the claims of a party are "substantially reduced" after trial or if the claim lacks merit, then the meritless party shall be required to pay fees. The agreement specifically allows this court to award fees upon the presentation of a copy of the aggrieved party's attorney bill for services, costs and disbursements.
The wife established that the husband defaulted on his obligation to use the 529 account up-front to cover the child's college education costs. The agreement specifically required that the 529 account be exhausted before either parent paid college expenses. The husband virtually conceded this dispute when, after commencement of the order to show cause, he immediately agreed to advance funds from the account to cover that cost. In this court's view, the husband was "holding his breath," apparently seeking concessions on other issues in exchange for his compliance on the payments from the 529 account. But he was in default when he failed to immediately advance the funds from that account. He cannot, after the fact, cure that default by agreeing in his affidavit response, to now abide by the agreement. Because of this default, the wife is entitled to attorney fees.
The 529 account was not the only dispute. The adjustments in the escrow fund, because the wife deducted her necessary tax payments from the Roth IRA distribution, were also brought before the court in the wife's application. The wife alleges that the husband had violated the agreement by seeking to have the couple pay a portion of his tax debt related to a loan from an insurance company. In this respect, the agreement does not directly cover the wife's assertion. The agreement provides that the husband would "repay" the loan from the insurance carrier and the wife would not contribute to that payment. The husband did not repay the loan and when he cashed in the policy, there were tax consequences. The husband argues that these "tax consequences" were swept under the language of the agreement that the parties would pay from available proceeds. On this issue, both parties had goodfaith positions. The final settlement involved a compromise in the distribution of the escrow fund that equalized the out-of-pocket tax impacts for both parties, but there is no concession by the husband that he defaulted under the agreement on this issue.
The Domestic Relations Law provides little guidance on the allocation of fees in this instance. The husband is the lesser monied spouse and, under DRL § 237(a), he is presumed to be awarded fees. But it was his actions-refusal to pay the college costs out of the 529 account-that brought the wife to court and triggers the contractual claim to attorney fees. New York frowns on awards of attorney fees unless authorized by statute or agreement. Baker v. Health Mgmt. Sys., 98 N.Y.2d 80, 88 (2002) ; see 214 Wall St. Assoc ., LLC v. Medical Arts–Huntington Realty, 99 AD3d 988, 990 (2nd Dept.2012). New York public policy disfavors any award of attorneys' fees to the prevailing party in a litigation. Pickett v. 992 Gates Ave. Corp., 114 AD3d 740, 740 (2nd Dept.2014) ; Horwitz v. 1025 Fifth Ave., Inc., 34 AD3d 248 (1st Dept.2006).
However, this judicial antagonism to fee awards has not deterred New York courts from awarding fees when the litigants (especially ex-spouses or family members), have agreed to an award of fees as a deterrent to curb excessive litigation or to protect a party who is victimized, at significant cost, by their former spouse's intransigence in negotiations. Eshaghian v. Eshaghian, 146 AD3d 529 (1st Dept.2017) (under the terms of the letter agreement, defendants, as the prevailing parties in the Surrogate's Court proceeding, are entitled to their reasonable attorneys' fees and costs incurred in that proceeding); Matter of Milark v. Meigher, 56 AD3d 1018 (3rd Dept.2008) (counsel fees were appropriate as the separation agreement expressly entitles a prevailing party in an enforcement proceeding to an award of such fees). In short, a former married couple can, as an inducement to avoid costly in-court resolution of disputes under their agreement, spell out the standards for such an award, i.e., whether the fees are triggered by a simple default, whether wilfulness is a prerequisite, or whether the party seeking court intervention must substantially prevail on the disputed issue. Parnes v. Parnes, 41 AD3d 934 (3rd Dept.2007) (agreement for fees enforceable without regard to the willfulness of the defaulting party or the means of the non-defaulting party); Martin v. Martin, 92 AD3d 646 (2nd Dept.2012) (entitled to fees under the stipulation)
A complication rises if, as in this case, the party seeking judicial intervention prevails on some issues-the payment of the college tuition from the 529 account-but not on others. In this case, the dispute over the escrow account and the respective tax obligations of the couple was settled with a compromise with each side taking a portion of the escrow and sharing the tax liability. There is precedent to guide trial judges in unraveling an award of fees in such "partial success" circumstances. In Hensley v. Eckerhart, 461 U.S. 424 (1983), the Supreme Court held that under the statute limiting fee awards to prevailing parties, unrelated claims should be treated as if they had been raised in separate lawsuits, and that no fee may be awarded for services on the unsuccessful claim. New York courts have embraced the Hensley analysis. In McGrath v. Toys "R" Us, Inc., 3 NY3d 421 (2004), the Court of Appeals, citing Hensley, held that where a plaintiff obtains only partial success, the procedure for assessing a reasonable counsel fee award is more complex. Emphasizing that calculation of an appropriate fee award is a discretionary procedure best left in the hands of trial courts who have a "superior understanding of the litigation," the court noted that the trial court "should make clear that it has considered the relationship between the amount of the fee awarded and the results obtained." Id. at 437. If plaintiff has attained only partial success, the award may be adjusted accordingly. The New York courts have repeatedly restated that view. Graham Ct. Owner's Corp. v. Taylor, 24 NY3d 742 (2015) ; Nestor v. McDowell, 81 N.Y.2d 410, 415–416 (1993) (only a prevailing party, who has achieved "the central relief sought," is entitled to attorneys' fees); Ram I v. Stuart, 248 A.D.2d 255, 256 (1st Dept.1998) (attorneys' fees denied where outcome of litigation was not substantially favorable to either side). In Chainani v. Lucchino, 94 AD3d 1492 (4th Dept.2012), the agreement allowed fees to a "prevailing party." The party seeking fees had not obtained the requested injunctive relief, and there was no determination that the respondent in the proceeding had breached the underlying agreement. The Fourth Department, acknowledging that the trial court was "significantly involved in the discussions that led to the stipulated order," noted that the lower court concluded that while the petitioner had obtained "some of the relief requested," it would be "disingenuous to declare that they were the prevailing party." Id. The court noted that when a "mixed result" exists, and a party discontinues some claims and abandons others, they fail to meet the prevailing party status. In another matter, the Second Department held that determining prevailing party status requires "an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope." DKR Mtge. Asset Trust 1 v. Rivera, 130 AD3d 774 (2nd Dept.2015) (no fees when voluntary discontinuance and no determination on merits); see also Paysys Int'l, Inc v. Atos Se, 2017 U.S. Dist. LEXIS 105622 (SDNY 2017) (a party that clearly fares better than the other is the "prevailing party" under New York law).
In dissent, Judge Carni argued that under the definition of prevailing party in the agreement, the petitioner did not need to attain a "full measure" of relief and simply needed to prevail on "the central claims advanced." Chainani v. Lucchino, 94 AD3d 1492 (4th Dept.2012) (Carni, J., dissenting). He added that when a party expressly reserves the right, in a stipulation or settlement agreement, to seek attorneys fees or other costs, "they recognized and agreed that the absence of an express determination on the merits by the court was no barrier to the recovery of such sums under the 2000 agreement."
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The "substantially prevailed" test has been used in fee disputes in hotly contested matrimonial matters. In Millard v. Millard, 246 A.D.2d 349 (1st Dept.1998), the Appellate Division noted that the parties had a seemingly endless dispute, commenting that "the parties appear to be completely willing to bring before the court virtually any disagreement, no matter how minor, and which has already consumed an inordinate proportion of the IAS court's resources in its ultimately successful efforts to effect a settlement of the apparently endless disputes between these parties." Relying on a "prevailing party" standard set in the agreement, the appellate court held that "the fact that the parties settled their disputes does not necessarily preclude an award pursuant to the language of the agreement." Id. The court remanded the matter to determine what percentage, if any, of the attorney fees were connected to claims in which plaintiff prevailed, in which case "plaintiff is entitled to an award of attorney's fees as to those claims." See also Colyer v. Colyer, 83 AD3d 559 (1st Dept.2011) (fees awarded when it was necessary to bring enforcement action on college expense payments).
Here, the parties elected not to utilize the "prevailing party" language in their agreement. The agreement broadly provides for fees if either party has to resort to the courts and has only one pre-condition: a default in "duties or obligations to the other." But the agreement also states that fees are not permitted if the wife's claims are "substantially reduced after trial" or dismissed for "lack of merit." Despite the absence of the "prevailing party" language, this court elects to utilize the bifurcated analysis broadly embraced in New York to award fees here. If the husband defaulted on any obligation and the wife brought this proceeding to recover for that default, the wife is permitted fees for that work. The husband admits that he was in default on that "obligation" to pay the college expenses from the 529 account. That claim-which required immediate payments to cover the daughter's pending college expenses-was the "central relief sought" in this proceeding. The agreement unequivocally required the college expenses to be paid from the 529 account before either parent paid from their pocket. The husband, who controlled the 529 account, refused to do so and hence, defaulted under the agreement.
With respect to the remaining claims, the agreement is silent on allocating attorneys fees for claims that are not adjudicated by the court. In this court's view, the settlement agreement did not result in a "substantial reduction" in the wife's claims regarding the tax liabilities and this distribution of the escrow account. The wife compromised her claims and the husband did as well. Significantly, the wife's claims regarding the tax liability and escrow account distribution were never "dismissed for lack of merit," a factor that under the agreement would curtail any claim to fees or reduce the amount of any attorney fee award. Husband's counsel argues that his client committed no wrong and that he was "not at fault." However, the agreement does not insulate the husband from an award of fees on that basis. There is no language requiring that the husband be "at fault" or be "wrong" as a condition for an award of fees against him. The agreement simply requires evidence of a default, and the wife incurring legal fees to bring that default to the court.
The court has reviewed the attorneys fees submission from the wife's counsel. There is no claim for fees relating to pre-enforcement negotiations, which, under the agreement, are not permissible as the agreement restricts fees only to "enforcement of the agreement." The claimed fees only include consultations with the client, the preparation of affidavits, pleadings, and conferences with the court The fees requested also do not include any costs related to the creation of the settlement agreement which followed the oral agreement to resolve the underlying disputes. The fees charged by counsel are reasonable and fair and there is no objection to the rates charged by the husband's counsel.
This court awards the wife 75% of her claimed fees. This court acknowledges that the allocation of the tax/escrow account was a portion of the underlying dispute and required negotiations. But, the critical fact, under the couple's agreement, was that the wife had to initiate the court proceeding to move the dispute out of the hands of lawyers and into the court. The cost of initiating the proceeding—the filing of the order to show cause, the preliminary affidavits, the conferences with the client to assure accuracy—is what is justified under the agreement. This court awards all those fees, including the filing costs and any other out-of-pocket costs. Once the matter arrived in the court, the husband conceded the primary issue and negotiation of tax liability and the escrow account were more easily resolved. In essence, the wife is entitled to the cost of "getting here,"—to a forum where the dispute could be resolved, but not to the entire amount demanded. The wife seeks $3,241. Seventy-five percent of that amount is $2,430. That sum, plus costs and disbursements, is awarded to the wife.
Submit order on notice. 22 NYCRR 202.48