Oftentimes parties will agree to settlement terms that are memorialized in a written settlement agreement spanning ten, twenty, thirty pages or more depending on the complexity of the issues and marital estate involved. While we do what we can as practitioners to avoid potential pitfalls, loopholes and ambiguities in the agreement language, occasions do arise where parties disagree about what they actually agreed to.
Such was the case in Mariana v. Mariana, a newly unreported (not precedential) decision from the Appellate Division addressing the parties’ respective responsibilities for tax consequences stemming from the sale of stocks during the divorce matter. Here is what you need to know:
- The parties were divorced on December 11, 2018 with the terms of a settlement agreement incorporated into the final judgment.
- The agreement provided for numerous terms, including indications that the agreement was “fair, just, adequate[,] and reasonable”. The parties acknowledged that the agreement was a final, negotiated and integrated agreement with a purpose to resolve all issues of support and equitable distribution.
- Paragraph 14 of the agreement addressed the division of five investment accounts, two of which were the subject of the appeal. Specifically, paragraph 14 stated:
The assets in the above-listed investments accounts shall be equally divided "in kind" between the parties to equalize the potential taxes and/or losses to each party. The parties shall work with their brokers and/or a mutually acceptable accountant to divide these investment accounts "in kind" within ten . . . days of the date of this [a]greement. The cost of the broker or mutually acceptable accountant, if any, shall be equally shared by the parties.
- Paragraph 25 detailed both parties’ representations that: 1) there were no outstanding debts in their joint names; 2) they had not incurred any debts or obligations for which the other may be liable; and 3) if "either party has incurred such debts or obligations, they shall be solely responsible for them and, in the event that the other party is called upon to make any payment or contribution towards the same, they shall indemnify and hold said party harmless . . . ."
- The parties agreed to file separate 2018 state and federal income tax returns and acknowledged in paragraph 38 that there may be tax consequences associated with the equitable distribution of the marital property. There also included an acknowledgment that the parties could "obtain independent tax advice from qualified tax accountants or tax counsel" prior to executing the MSA.
- Approximately eight months before signing the MSA, the husband – with the wife’s knowledge and consent – exercised stock options obtained from a prior position of employment. It was his assertion that all required taxes were withheld, so he deposited the net proceeds into an account subject to division and purchased mutual funds. The parties then liquidated said investments and distributed the funds from this same account per the MSA.
- Upon filing his 2018 income tax returns, the husband was advised that he owed additional taxes stemming from his prior exercising of the stock options. The accounts from which the parties distributed funds also had untaxed dividends and capital gains, which also resulted in further tax consequences.
- The husband asked the wife to pay for 50% of the resulting tax liability (approximately $150,000) and she declined.
- Motion practice ensued, in which the husband asserted that neither party was aware additional taxes/fees would be due stemming from the option exercise. By contrast, the wife argued that she would not have made certain concessions during the negotiating process had she known of said tax issues.
- The trial court denied the husband’s application holding, in part, that pursuant to the agreement the husband exercised the options and had “ample time to explore all issues related to tax consequences and to further negotiate based upon the anticipated tax burden." The trial court further found that the husband should have known based on the agreement that taxes would be assessed against him. Ultimately, it concluded, “[n]othing set forth by [d]efendant was an unforeseeable consequence or should have been unknown to him."
- The husband moved for reconsideration and asserted his belief that the agreement required both parties to be "equally responsible for the capital gains taxes and taxes on dividends emanating" from those accounts. He further argued he did not know of said tax issues and that the agreement supported his position. By contrast, the wife argued that the agreement only addressed future tax issues (not ones involving past transactions). The trial court agreed with the wife’s position.
In reversing and remanding back to the trial court for further proceedings, the Appellate Court emphasized how public policy favors the enforcement of agreements and quoted precedent providing that agreements must so be enforced “when the intent of the parties is plain and the language is clear and unambiguous . . . .unless doing so would lead to an absurd result.” Where there exists ambiguity (the language is subject to at least two reasonable interpretations), however, a hearing may be necessary to determine the parties’ intent when the agreement was entered so that said intent could be implemented.
As the parties’ competing certifications provided for two reasonable potential interpretations of the language at issue, the Appellate Division remanded to the trial court for a plenary hearing “to resolve issues regarding the parties’ intent as to their respective responsibility for the taxes related to the investment accounts” at issue. In so doing, the Court held:
We reach this conclusion because the MSA is not clear and unambiguous on this point and is subject to two different, reasonable interpretations each supported by the parties' competing certifications. Indeed, the text of the MSA does not clearly limit the parties' tax liabilities to "future sales" as the court concluded, or to "the income generated by these assets after the division" as plaintiff certified.Ultimately, Mariana presents a cautionary tale regarding parties’ agreements and the written settlement agreement memorializing the terms reached. This is not the first time parties have argued about ambiguous language so as to favor their respective positions and it will certainly not be the last. It is important, however, that you as a litigant going through a divorce matter understand what you are agreeing to, understand the potential ramifications, and understand all potential outcomes. Otherwise, you, too, may find yourself going through a lengthy and costly litigation just to determine that what you thought you said is not necessarily what you meant when you signed your agreement.