WHEN CAN FINANCIAL PENALTIES BE USED TO DETER NON-COMPLIANCE WITH A MARITAL SETTLEMENT AGREEMENT?

20-2-2066 Holtham v. Lucas, N.J. Super. App. Div. (Ostrer, J.) (18 pp.) Plaintiff appealed from the trial court’s order requiring him to pay defendant $150 per day of plaintiff’s non-compliance with a provision of the parties’ marital settlement agreement that required plaintiff to timely pay off the loan of a vehicle equitably distributed to defendant and tender her title to the car. The MSA also imposed a “per diem penalty of $150” for any breach of the agreement. On appeal, plaintiff argued that the $150 per diem charge constituted an unenforceable contractual penalty. The court agreed that, under traditional contract principles, the per diem charge would constitute an unenforceable penalty as contractual damages should be limited to measurable compensable losses. The court noted that contractual penalties were disfavored to avoid oppression, excessive recovery, and deterrence of economically efficient breach. However, the court affirmed the award entered in favor of defendant and against plaintiff. The court ruled that contractual rules disfavoring penalties did not apply with equal force to marital settlement agreements. The court ruled that marital settlement agreements were intended to foster post-divorce stability and thus enforcement of penalty provisions in MSAs could serve that purpose by deterring non-compliance that was not economically motivated and compensating the non-breaching party for the emotional harm that can result from the breach of an agreement that arises from a personal relationship. Specifically, the court noted the trial court’s finding that plaintiff’s breach was deliberate and lacking any reasoned or economic justification. However, the court noted that although penalty provisions in divorce settlement agreements were enforceable, it held that trial courts retained their inherent authority to ensure that penalty provisions were fair and equitable and to modify such provisions to correct any excessiveness or unfairness.

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