Bernice Fritz v. Warren Fritz (2013)

MEMORANDUM OF DECISION

The issues before the court are (1) whether the defendant has standing to modify a severance agreement, incorporated into a separation agreement, where the business is not a party to the dissolution action;  and (2) whether the severance payments are considered property or support.

FACTS

The parties to this action were divorced on September 28, 2012, pursuant to a judgment of dissolution entered after an uncontested hearing.   At that time, the court approved the separation agreement entered into by the parties and incorporated it by reference into its judgment of dissolution.   Incorporated into the separation agreement was a severance agreement between Perfection Centerless Grinding, Inc. (the “business”) ¹ and the plaintiff, Bernice Fritz.

The defendant, Warren Fritz, filed a postjudgment motion seeking to modify section 6 of the separation agreement, which provides:  “BUSINESS.   The parties are currently joint owners of the business known as Perfection Centerless Grinding, Inc. The Wife shall resign as an officer of the corporation and her employment shall be terminated immediately.   The business shall continue to pay the Wife a weekly salary of $1,200 a week until October 5, 2012 and from October 5, 2012 until October 1, 2015 the business shall pay the Wife a weekly salary of $1,050, in accordance with the severance agreement signed by the parties ․”

The defendant asserts that the amounts currently being paid to the plaintiff, in accordance with the severance agreement, are in the nature of support payments.   According to the defendant, the parties elected to continue paying the plaintiff a salary through the business, rather than entry of standard orders of child support and alimony.   During the three-year period covered by the severance agreement, the defendant is subject only to nominal support orders, i.e., one dollar per year in alimony and one dollar per year in child support.   Once the three year period concludes, the separation agreement contemplates standard alimony and child support orders.   The defendant asserts that if the severance payments were intended to be a division of the parties' property, it is unlikely that any court would have approved such nominal support orders.   Therefore, according to the defendant, he should be entitled to seek modification of these amounts upon a showing of a substantial change in circumstances.

The plaintiff objects to the motion to modify on the ground that section 6 is part of the property settlement and, therefore, is nonmodifiable.   According to the plaintiff, paragraphs 10 and 11 of the separation agreement expressly relate to alimony and child support, and state that the child support and alimony orders are modifiable only when the plaintiff is no longer receiving her severance pay.   The plaintiff notes that neither the separation agreement nor the severance agreement contains a provision allowing for the decrease in the amount or duration of the severance pay, and that the obligation of the business to make severance payments to the plaintiff is the quid pro quo for her early and voluntary termination and the relinquishment of her other valuable substantive rights against the company.

DISCUSSION

A Standing

“When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue and not whether the controversy is otherwise justiciable, or whether, on the merits, the plaintiff has a legally protected interest that the defendant's action has invaded ․ It is axiomatic that an action upon a contract or for breach of a contract can be brought and maintained by one who is a party to the contract sued upon ․” (Internal quotation marks omitted.)  Chila v. Stuart, 81 Conn.App. 458, 464, 840 A.2d 1176, cert. denied, 268 Conn. 917, 847 A.2d 311 (2004).   Here, the severance agreement is between the plaintiff and the business, not the defendant.   Thus, the defendant ordinarily would not have standing to bring an action on the severance agreement in his individual capacity.   See Smith v. Snyder, 267 Conn. 456, 461, 839 A.2d 589 (2004) ( “[i]t is commonly understood that ‘[a] shareholder—even the sole shareholder—does not have standing to assert claims alleging wrongs to the corporation’ ”).

However, it is “a basic principle of contract law that parties to a contract may incorporate into their agreement the terms and conditions of another document by reference, so that the two will be interpreted together as the agreement of the parties.”  Housing Authority v. McKenzie, 36 Conn.Sup. 515, 518, 412 A.2d 1143 (1979).   Thus, as the incorporation of the severance agreement into the separation agreement made it part of the dissolution decree between the plaintiff and the defendant, the defendant is a proper party to request an adjudication of whether the severance payments constitute a property settlement in the dissolution action.

B

Nature of the Payments

“Where a judgment incorporates a separation agreement, the judgment and agreement should be construed in accordance with the laws applied to any contract ․ The interpretation of the agreement is a search for the intent of the parties ․ This intent must be determined from the language of the instrument and not from any intention either of the parties may have secretly entertained ․ The court must consider the agreement as a whole and give efficacy to each part where appropriate.”  (Citations omitted.)  Sweeny v. Sweeny, 9 Conn.App. 498, 500–01, 519 A.2d 1237 (1987).

The issue before this court is the characterization of the severance payments as either in the nature of alimony, maintenance or support, or a property award.   Our Supreme Court has provided some basic principles useful in beginning this analysis.  “Although an award of property is usually considered ․ as a property assignment pursuant to General Statutes § 46b–81, as distinguished from periodic or lump sum alimony in the form of money pursuant to [General Statutes] § 46b–82 ․ [our Supreme Court] has never held that alimony based upon a continuing duty to support could not consist of an award of property ․ The difference between an assignment of a specific portion of an estate and alimony is in their purposes ․ The purpose of property assignment is equitably to divide the ownership of the parties' property ․ On the other hand, periodic and lump sum alimony is based primarily upon a continuing duty to support.”  (Citations omitted.)  Dubicki v. Dubicki, 186 Conn. 709, 714 n.2, 443 A.2d 1268 (1982);  see Lewis v. Lewis, 35 Conn.App. 622, 628, 646 A.2d 273 (1994) (“the purpose of a property settlement is to unscramble property ownership, giving to each spouse an equitable share”).

“A family business is most often distributed to one of the parties with the other spouse receiving some sort of offsetting distribution of other assets, cash, periodic payments or such other arrangements as the circumstances of the parties allow.   This course seems to be preferred because it is usually seen as advisable to terminate any continued joint involvement by the parties such as an ongoing business might require.   In addition, a sale or liquidation of the business would frequently deprive at least one and sometimes both of the parties of their source of income thereby creating additional problems.”   A. Rutkin, S. Oldham & K. Hogan, 7 Connecticut Practice Series:  Family Law and Practice (2010) § 29:13, p. 618.

For example, in Kroop v. Kroop, 186 Conn. 211, 213, 440 A.2d 293 (1982), a husband and wife jointly owned a family business, which initially had been financed primarily by the wife and her family.   The court ordered the husband's interest in the business transferred to the wife.  Id., 215–16.   In return, the husband received an offsetting payment from the proceeds of the family home together with an award of severance pay for one year.  Id., 216.

Kroop strongly suggests that the severance payments in the present case are in the nature of a property settlement.   However, research failed to locate any additional cases with factual underpinnings similar to the present case.   Nonetheless, cases addressing the characterization of a debt owed to a former spouse for purposes of determining dischargeability in bankruptcy may provide guidance to the court.  “Section 523(a)(5) of the Bankruptcy Code denies debtors discharges from debts owed to former spouses for alimony, maintenance or support.   In contrast, property settlements to former spouses are dischargeable.”  Lewis v. Lewis, supra, 35 Conn.App. 627.

In Lewis v. Lewis, supra, 35 Conn.App. 622, our Appellate Court affirmed the trial court's characterization of a $50,000 debt owed to an ex-wife under a dissolution decree as in the nature of support and nondischargeable in bankruptcy.   In beginning its analysis, the Appellate Court noted that “[c]ourts have a list of factors to examine in determining whether a particular transaction constitutes a nondischargeable duty such as alimony, maintenance or support, or whether it is a property settlement and, therefore, dischargeable ․ The following factors are taken into account:  (1) whether the obligation terminates on the death or remarriage of the debtor's spouse;  (2) whether the payments appear to balance disparate income;  (3) whether the payments are made to a third party or the ex-spouse;  (4) whether the obligation terminates at the end of a specified event (i.e., children are out of school, debt is satisfied, etc.);   and (5) what was the intent of the parties.”  (Citation omitted;  internal quotation marks omitted.)  Id., 627–28.

“The trial court observed that the purpose of a property settlement is to unscramble property ownership, giving to each spouse an equitable share ․ [T]he trial court found that there was no property ownership to unscramble.   The dissolution decree neither required any property to be sold nor tied payment of the $50,000 to the disposition of any particular asset.   Thus, the evidence suggests that the $50,000 was not a property settlement.   The trial court noted that the dissolution decree stated that ‘no alimony is to be awarded to either party.’   The trial court stated that this assertion was belied by the intent of the parties as evidenced during a hearing on the proposed decree ․ [which] [suggested] that the plaintiff intended that the $50,000 payment was in the nature of alimony.”  Id., 628–29.   Because the trial court found that the dissolution decree “was at best ambiguous,” it also reviewed the parties' prenuptial agreement in an attempt to divine the intent of the parties.  Id., 629.   The prenuptial agreement revealed that the parties contemplated alimony when the prenuptial agreement was signed.  Id., 630.  “The trial court also observed that at the time of the dissolution, the plaintiff owned no house or car and used those provided by the defendant.   The dissolution decree permitted the plaintiff to use the defendant's house and car until the $50,000 payment was made.   The trial court interpreted this link between use of the house and car and the payment as demonstrating that the payment was intended to provide a house and transportation for the plaintiff.”  Id. “As both are necessities of life, the trial court concluded that the payment was in the nature of alimony, support or maintenance rather than property settlement.”  Id.

Similarly, in Taylor v. Taylor, Superior Court, judicial district of New Haven, Docket No. FA 00 0436771 (May 2, 2006, Frazzini, J.), the court held that an ex-husband's mortgage payment obligation constituted alimony that was not dischargeable in bankruptcy.   The court explained that “[c]ertain aspects of that obligation do support its characterization ․ as a property settlement.   The provision that the defendant pay off the second and third mortgages was contained, for example, in a section of the agreement captioned ‘Real Property,’ and the mortgages were for debt owed on real property.”   Id. The court noted, however, that “the positioning of the obligation in that section of the separation agreement [was] not very persuasive ․ as to whether it was, or was not, in the nature of support.   The mortgage payment obligation was not specifically labeled as a property distribution.   The portion of the separation agreement captioned alimony, moreover, specifically provided that the husband would pay alimony to the wife of one dollar per year for the ‘purpose of insuring that payment is made on the second and third mortgage[s].’  “ Id. The court found that “[a]lthough the evidence [did] not show the exact amount due weekly on the second and third mortgages, the husband's obligation to make those payments had the effect of partially balancing out the parties' disparate incomes.   Pendente lite support orders [showed] that the parties recognized that the plaintiff would need more than the $150 in child support to meet her needs and those of their two children and continue living in the family home ․ The defendant's promise and obligation to pay for the second and third mortgages were thus obviously intended to help the plaintiff continue living in the family home with the children.”  Id.

The Taylor court also noted that “[a]s the court recognized in Lewis v. Lewis, supra, 35 Conn.App. 630, payment toward necessities of life such as shelter supports a finding that an obligation was intended to be in the nature of support, rather than an unscrambling of property claims.”  Taylor v. Taylor, supra.   Notably, the Taylor court further found that “the dissolution judgment tied the defendant's obligation to pay the second and third mortgages to alimony by including the provision that alimony could be modified if he failed to meet that obligation.   Thus ․ the wife ․ did not waive alimony;  she simply deferred her right to claim alimony of more than a dollar per year so long as her ex-husband complied with his mortgage payment obligation.   The episodic nature of that obligation also earmarked it as a support.”  Id.

In contrast, in Andreucci v. Andreucci, Superior Court, judicial district of New Haven, Docket No. CV 93 0349049 (August 28, 2000, Robaina, J.) [28 Conn. L. Rptr. 86], the court held that a lump sum payment of $17,500 in exchange for an undivided one-half interest in real estate was properly characterized as a property settlement.   There, the stipulated agreement, incorporated in the judgment of dissolution, provided that each party was to pay the other the sum of one dollar a year as alimony for three years from the date of the agreement, and the alimony was modifiable as to amount, not as to term.  Id. The section of the stipulated agreement designated as “property settlement,” provided that the wife was to receive “a lump sum property settlement amount of $17,500 as ‘settlement in full for her undivided one-half interest which she now has in real estate known as 1634–36 Chapel Street.’   The agreement called for the wife to quitclaim her interest in that property to the husband and for him to assume liability for payment of the outstanding debts on the property.   The agreement specifically recited the existence of a first and second mortgage, together with approximate amounts ․ [T]he agreement further provided that the payment to the wife would be secured by a mortgage lien against that property, and also a lien against any inheritance which the husband might receive.   The provisions of the agreement advised that the property was in foreclosure, and in the event the property was foreclosed the husband's duty to pay the property settlement would not be extinguished.   Finally, the lump sum property settlement was to be paid within four years of the date of the agreement, together with statutory interest unless the property was sold before that time, which sale would trigger payment of the lump sum property settlement.”  Id.

In reaching its decision, the Andreucci court reviewed the parties' financial affidavits filed at the time of the stipulated agreement and “the wording of the entire agreement including the provisions as to child support, alimony, property settlement and personal property.”  Andreucci v. Andreucci, supra, Superior Court, Docket No. CV 93 0349049.   The court then applied the factors set forth in Lewis v. Lewis, supra, 35 Conn.App. 628, and found that the debt did not terminate upon the death or remarriage of the debtor's spouse, the payment was not clearly intended to balance the disparate income of the parties, the obligation was clearly tied to a specific asset, i.e., real estate, the obligation was payable at a specific time but did not terminate, and a separate provision for alimony was included in the agreement.   Andreucci v. Andreucci, supra.   In light of those findings, the court concluded that “the property settlement was indeed properly labeled and [was] not a debt in the nature of alimony, maintenance or support.”  Id.

In the present case, the defendant asserts that the amounts currently being paid to the plaintiff, in accordance with the severance agreement, are in the nature of support payments and that the parties elected to continue paying the plaintiff a salary through the business, rather than entry of standard orders of child support and alimony.   According to the defendant, during the three year period covered by the severance agreement, the defendant is subject only to nominal support orders, i.e., one dollar per year in alimony and one dollar per year in child support, and once the three year period concludes, the separation agreement contemplates standard alimony and child support orders.   The defendant asserts that if the severance payments were intended to be a division of the parties' property, it is unlikely that any court would have approved such nominal support orders.

However, as demonstrated in the aforementioned cases, the characterization of a debt as in the nature of support does not automatically follow simply because nominal alimony or child support is ordered.   Our courts have recognized “that a nominal alimony award may often be appropriate when the present circumstances will not support a substantial award.   Nominal awards, however, are all that are necessary to afford the court continuing jurisdiction to make appropriate modifications.   We have stated that because some alimony was awarded, [one dollar per year] with no preclusion of modification, if the circumstances warrant, a change in the award can be obtained at some future date.”  (Internal quotation marks omitted.)  Chyung v. Chyung, 86 Conn.App. 665, 676 n.6, 862 A.2d 374 (2004), cert. denied, 273 Conn. 904, 868 A.2d 744 (2005);  see Utz v. Utz, 112 Conn.App. 631, 633 n.1, 963 A.2d 1049, cert. denied, 291 Conn. 908, 969 A.2d 173 (2009) (an award of nominal alimony “is typical when the court chooses to preserve for a future date the power to ascertain and to determine the appropriate amount of periodic alimony”).

To determine the proper characterization of the severance payments, this court must review the wording of the entire separation agreement.   The sections relevant to the issue before this court are paragraphs 6, 10 and 11.   Paragraph 6, entitled “BUSINESS,” states that “[t]he parties are currently joint owners of the business known as Perfection Centerless Grinding Inc. The Wife shall resign as an officer of the corporation and her employment shall be terminated immediately.   The business shall continue to pay the Wife a weekly salary of $1,200 a week until October 5, 2012 and from October 5, 2012 until October 1, 2015 the business shall pay the Wife a weekly salary of $1,050, in accordance with the severance agreement signed by the parties ․ Until October 1, 2015 the business shall continue to keep the Wife enrolled on its medical insurance and shall pay all of Wife's reasonable and necessary unreimbursed medical, dental, prescriptions and related expenses as has been the practice of the business ․ The Wife shall sign the documents necessary to transfer her stock in the business to the Husband.   The stock transfer documents shall be held in escrow ․ until the business has met all of its obligations under the severance agreement.   On October 15, 2012 the Wife shall be paid a bonus from the business of Five Thousand ($5,000) Dollars;  a second bonus of Five Thousand ($5,000) Dollars shall be paid to the Wife before January 31, 2013 and a third and final bonus of Five Thousand ($5,000) Dollars shall be paid to her by May 31, 2013.”

Paragraph 10, entitled “SUPPORT,” states that “[d]uring the period that the Wife is receiving payments pursuant to the severance agreement referenced herein, the Husband shall pay the Wife the sum of One Dollar per year child support ․ When the wife's employment with the company ends the Husband shall pay child support to the Wife in the amount of Three Hundred Fifty (350) Dollars per week for the two minor children.   Either party shall have the right to seek a court modification of this order if it does not comply with the child support guidelines in effect at the time that the modification takes effect.”

Paragraph 11, entitled “ALIMONY,” states that “[f]rom the date of this agreement until October 1, 2015, the Defendant shall pay the Wife the sum of One (1) Dollar per year alimony modifiable if the husband defaults on any provision under this agreement or if he or the business files bankruptcy.   When Plaintiff's payments under the severance contract end, the Defendant shall have the option to pay the Plaintiff a lump sum of Seventy–Five Thousand ($75,000) Dollars as a one-time lump sum alimony payment, which shall not be taxable to the Wife, or periodic alimony in the amount of Three Hundred Fifty (350) Dollars a week for a period of six and one-half years until March 31, 2022.   Said alimony shall be modifiable as to amount but not as to term.   Periodic alimony shall terminate upon the death of either party or the remarriage of the Wife but not upon the cohabitation of the Wife.”

The severance agreement, attached to the separation agreement and incorporated therein, was entered into by Perfection Centerless Grinding, Inc., its shareholders, officers and employees, and the plaintiff in order to settle fully and finally any and all issues related to the plaintiff's termination.   Paragraph 9 provides that “[t]he parties expressly agree and acknowledge that [this agreement] shall be read in conjunction with and integrates as applicable a certain judgment of dissolution entered by the Superior Court, Judicial District of Tolland at Rockville, in Docket Number TTDFA11–4015561 S.”

The foregoing provisions demonstrate that “[t]he judgment in this case was a mosaic of inter-linked parts.”   Vanagas v. Vanagas, Superior Court, judicial district of Tolland, Docket No. FA 89 43033 (March 22, 1995.Klaczak, J.).   This mosaic reveals that certain aspects of the severance pay support its characterization as alimony, whereas other aspects support its characterization as a property division.

The provision for the severance payments is contained in a section of the separation agreement entitled “BUSINESS” and the payments are clearly tied to a specific asset, i.e., the business.   It is clear that the severance payments are made directly to the plaintiff in exchange for her resignation from the business and a return of her stock.   The severance agreement provides that the payments are in satisfaction of any claims she may have against the business, and the separation agreement provides that the stock transfer is to be held in escrow until the business has met all of its obligations under the severance agreement.   Moreover, the payments are to be made to the plaintiff pursuant to the business' normal payroll schedule and are subject to the normal withholding and payroll taxes.   The severance agreement also precludes the plaintiff from seeking unemployment benefits chargeable to the business and should she do so, the severance payments will be reduced weekly by the gross amount of any such unemployment benefits.   However, the severance agreement expressly states that the plaintiff may seek other employment opportunities.   These facts indicate that the payments are in lieu of wages and ownership benefits, and are the responsibility of the business, not the defendant, personally.   Moreover, the severance payments are payable at specific times, but do not terminate on the death or remarriage of the plaintiff, only upon satisfaction of the debt on a specific date.   The foregoing facts support a finding that the severance payments are intended to unscramble the parties' ownership interest in the business.

There is evidence that the severance payments are, in some ways, related to alimony and child support.   The positioning of the severance payments in the “business” section of the separation agreement is not dispositive as to whether the payments are in the nature of support.   Like in Taylor v. Taylor, supra, Superior Court, Docket No. FA 00 0436771, the separation agreement in the present case ties the severance payment obligation to alimony by allowing alimony to be modified if the defendant defaults on any provision under the separation agreement or if he or the business files bankruptcy.   Moreover, the nominal alimony award continues only until October 1, 2015, which is the date upon which the severance payments to the plaintiff cease.   A reasonable inference can be drawn from these facts that the severance payments were intended as support since the alimony payments could be adjusted upward to compensate for an early stop to the severance payments, causing a disparity in income.   Such an inference can also be drawn from the fact that after the severance payments are completed, the defendant becomes obligated to make a lump sum or periodic alimony payments to the plaintiff, as well as to begin making child support payments.

The foregoing facts demonstrate that the parties did not clearly express an intent to address the unequal earning capacity of the parties, which would suggest a support obligation, or to allocate the martial asset, i.e., the business, suggesting a property division.   Rather, the allocation of the business is intertwined with the support awards in such a manner as to create an almost impenetrable gray area.   As such, the court is permitted to review extrinsic evidence to divine the intent of the parties at the time of the dissolution.   See Lewis v. Lewis, supra, 35 Conn.App. 629–30 (trial court did not err in reviewing parties' prenuptial agreement to discern the intent of the parties concerning alimony at the time of divorce).   In the absence of such additional evidence, however, certain basic principles may help to navigate this murky situation and, ultimately, would weigh in favor of a finding that the severance payments are a property settlement.

“Severance pay” is defined as “[m]oney (apart from back wages or salary) paid by an employer to a dismissed employee.”   Black's Law Dictionary (9th Ed.2009) p. 1498.   In the present case, the severance agreement makes it clear that the money the plaintiff will receive is in exchange for her stock and her voluntary resignation from the business.   Thus, from the perspective of the business, the payments are intended to compensate the plaintiff for lost future earnings and the value of her ownership interest in the business.

The correlation made by the defendant between the severance payments and the nominal support awards is enticing on its face but not persuasive on the merits.  “[T]he purpose of alimony [is] the obligation of support that spouses assume toward each other by virtue of the marriage ․ [A]limony is always represented by money and is damages to compensate for loss of marital support and maintenance ․ [A]limony represents the court's finding, measured in dollars, of the financial needs of the receiving spouse at the time of the dissolution.”  (Internal quotation marks omitted.)  Lehan v. Lehan, 118 Conn.App. 685, 696, 985 A.2d 378 (2010).   In determining an alimony award, General Statutes § 46b–82 “requires the court to consider the amount and sources of income of each of the parties in making a determination as to alimony ․ Our appellate courts have emphasized the importance of using an expansive definition of income when formulating financial orders during the course of marriage dissolution proceedings ․ This entails considering both current and future income.”  (Citations omitted;  internal quotation marks omitted.)   Nedder v. Nedder, Superior Court, judicial district of Middlesex, Docket No. FA 10 4019331 (May 2, 2013, Adelman, J.).   The court has “broad general equitable powers that effectually allows [it] to evaluate criteria that it deems necessary outside of those specifically enumerated” in General Statutes § 46b–82.  Id.

Accordingly, absent a separation agreement, a court would have considered the severance payments as one factor in determining whether the plaintiff was entitled to alimony.   The separation agreement, read as a whole, indicates that the nominal alimony award takes into consideration the severance payments and is in recognition of the plaintiff's earnings, not in lieu of alimony, such that an award of alimony was unnecessary until such time that the plaintiff's financial condition changed, whether that be at the completion of the severance payments or upon default by the defendant or the business.   There are no facts indicating that the severance payments were payments toward necessities of life, such as shelter, or to balance out any disparities in income.

Consequently, the court concludes that the severance payments were intended as a property settlement.   The severance payments are tied directly to the plaintiff's ownership and employment interests in the business.   The purpose of entering into the severance agreement and incorporating it into the separation agreement was for the purpose of terminating any continued joint involvement by the parties in the business.   In the absence of any more explicit suggestion in the separation agreement that the parties contemplated that the severance payments were meant in lieu of alimony and child support, not to allocate the business, such an interpretation of the separation agreement is precluded.   The court finds that the severance payments were intended to be in the nature of a property division, and the nominal alimony award was made to secure the satisfaction of those severance payments and to provide the court with the jurisdiction to address any resulting disparity in income resulting from a failure to do so.

By the Court,

Holly Abery–Wetstone, J.

FOOTNOTES

FN1. The severance agreement is signed by the defendant, Warren Fritz, on behalf of Perfection Centerless Grinding, Inc..  FN1. The severance agreement is signed by the defendant, Warren Fritz, on behalf of Perfection Centerless Grinding, Inc.

Abery–Wetstone, Holly, J.