KORZAN v. ARNONE (2020)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

M. Antonia Korzan (wife), the former spouse of Miles Arnone (husband), appeals from an amended judgment issued by a judge of the Probate and Family Court on October 24, 2017, ordering the parties to comply with an arbitrator's final award. We affirm.

Background. After an extraordinary amount of postdivorce litigation, a judge of the Probate and Family Court ordered the parties to engage in binding arbitration in 2014. The parties had previously agreed to binding mediation for alimony disputes in their separation agreement. They signed an agreement of binding arbitration in April 2014, with respect to questions involving child support and childcare expenses. The parties then expanded the arbitrator's authority to cover alimony, contempt, and discovery matters in August 2015.

The parties originally agreed that the wife would receive $3,134, in weekly alimony from the husband (base alimony), with additional alimony determined by their relative incomes (additional alimony).² Since the dissolution of the marriage, the parties' circumstances have changed. The husband was awarded sole custody of the parties' five children in Massachusetts. The wife moved to South Dakota and was employed by Jackalope Industries LLC. She now owns the Dakota Prairie Lodge and Resort (Lodge).

In March 2015, the husband filed a complaint for modification seeking to terminate his alimony obligation, arguing that the wife no longer had a need for alimony as her income had increased significantly since her acquisition of the Lodge. The arbitrator then determined that the wife's financial information was essential to all future financial determinations regarding alimony. The wife filed an amended complaint for contempt on June 4, 2015, alleging that the husband failed to meet his additional alimony obligation due for tax years 2012 to 2014. She further alleged that the husband failed to provide his end-of-year pay stubs, tax returns, W-2 forms, and K-1 forms from 2012 to 2014, so that the additional alimony could be calculated.

During the litigation, however, the wife failed to comply with discovery requests for information that might have shed light on her actual income. Under a South Dakota statute, S.D. Codified Laws § 34-18-21 (1998), the wife is required to keep records for the Lodge, including the number of guest registrations, length of each stay, and room rates she charged (innkeeper information).³ In addition, while the wife employs several independent contractors at the Lodge, she refused to produce their names and contact information so that the husband could contact them in an investigation of the wife's business at the Lodge. The wife eventually produced 1099 forms for them, but she redacted all of the workers' identifying information and still has not produced their names and addresses. It is undisputed that these records (unredacted employee records) would assist the husband and the court in determining the wife's actual income. Her financial statements and tax returns indicated that her businesses were operating at significant losses; however, at the same time, in applying for a loan to purchase hundreds of acres of land, the wife reported that her monthly salary was $58,000.

On January 15, 2016, the arbitrator ordered the wife to produce, among other documents, 1099's issued to independent contractors working at the Lodge for 2013 to 2015, and “all financial books of account and other records” for the Lodge. The arbitrator warned the wife that if she failed to produce the documents from her properties in South Dakota within ten days, the husband's alimony payments to the wife would be suspended and would instead be paid into an escrow account. The parties at the time had several ongoing disputes regarding what alimony the husband owed to the wife from 2013 to 2015. By May 2016, the wife had not produced all of the documents required, claiming that she did not possess the innkeeper records for the Lodge. The arbitrator did not credit the wife's claims that she lacked these records, noting that South Dakota law required her to keep them. The arbitrator ordered that the escrow of alimony payments remain in place until the wife produced the outstanding discovery.

By October 2016, the husband owed, but had not met, his full additional alimony obligation from the parties' income differential (totaling $589,188.52) for tax years 2013 to 2015. “These [were] monies previously found due to [the wife] by agreement.” The husband sought relief on the basis that the wife was lying about her income. The husband argued that he was entitled to discovery “in order to prove [the wife's] income is substantially more than she has represented.”

The arbitrator ruled in an October 21, 2016 award that he could not fully decide the alimony issue until discovery was complete –- nor could he rule on whether, as a discovery sanction, the wife should forfeit any alimony due. He ordered as a continuing discovery sanction that any alimony payments be placed in the escrow account. As to the ongoing alimony dispute, he found that the husband was at a disadvantage as to proof, and that he (the arbitrator) could not decide the issue until discovery was complete. The October award specified that after the wife produced the records, the arbitrator should immediately be given notice of her compliance. The funds in the escrow account were to be used “only as further ordered by the Arbitrator or the Court.” The matter stood continued for ninety days when, on January 20, 2017, the judge ordered the arbitrator to resolve the outstanding matters in a final award by March 31, 2017.

By March 30, 2017, the date of the final award, the wife still had not produced the unredacted employee records or the innkeeper information. During an arbitration session on April 7, 2016, the arbitrator asked the wife directly whether she would produce the names of her employees. She said no. In his final decision, the arbitrator concluded that “[the husband] should be able to challenge [the wife's] substantial weekly financial losses including her business losses cited herein. [The wife's] failure to comply with discovery orders, prevents him from reasonably doing so. Sanctions shall be imposed.”

The arbitrator found that the husband was not in contempt for failing to pay alimony; however, he ordered that any 2013, 2014, and 2015 alimony that had not been paid, but that was due under the separation agreement formula, must be paid into the escrow account, and that all the payments the husband had made for 2013, 2014, and 2015, be “preserved as additional alimony.”

In discussing sanctions, the arbitrator made clear that he needed the wife's discovery in order to issue “FINAL awards on alimony (past and present).” The arbitrator concluded that, based on the wife's annual earning capacity of $350,000 to $500,000 (which had been established in 2016), the husband's alimony obligation terminated as of April 1, 2015, the date of service of his complaint for modification. The husband was allowed to remove amounts representing what otherwise would have been such alimony payments from the escrow account.

The arbitrator did not order the remaining escrowed funds released to the wife. While the parties were free to agree on where and how to hold the funds, some funds were ordered to be held “readily available” for the child-related expenses. The wife was also ordered to pay fifty percent of all children's expenses, fifty percent of all uninsured healthcare costs, and $1,500 per week in childcare expenses. The arbitrator ordered that, rather than the wife paying these amounts to the husband directly, the husband would be permitted simply to withdraw such amounts from the escrow account going forward.

The wife was permitted to seek modification of the distribution of the escrowed funds, but only upon a showing of a substantial change in circumstances. Significantly, the award required that, before the wife can seek such modification, she must provide the unredacted employee information and her innkeeper information for the years 2015 and after, although the final award also suggests that, by agreement of the parties, those escrowed funds may be distributed at any time.

By stipulation, the parties submitted the final award to the trial court. The wife filed applications for modification and correction of the arbitration award before the trial court. The husband opposed those applications and argued that the award should be confirmed as-is. On May 8, 2017, the parties stipulated that the arbitrator would adjudicate the wife's applications for modification and correction of the final award, that the parties would jointly seek confirmation from the trial court of the resulting award, and that “[f]ollowing confirmation of Arbitrator's Award, all rights of appeal shall continue to be preserved.”

The arbitrator ruled on the wife's applications, making minor amendments, but in large measure denying the relief sought by the wife. The judge confirmed the arbitrator's final award and entered a judgment, as amended on October 24, 2017, which incorporated the reasoning in both the final award and the arbitrator's denial of the applications for modification and to correct the arbitration award. The wife has appealed from that amended judgment.

Discussion. There is a preliminary issue in this case about the standard of review. This is an arbitration award, which would ordinarily be reviewed under an utterly deferential standard, see Plymouth-Carver Regional Sch. Dist. v. J. Farmer & Co., 407 Mass. 1006, 1007 (1990), but with respect to at least some aspects of the award, the trial court may retain the obligation to exercise its “nondelegable duty to make the final and binding resolution of the case.” Gravlin v. Gravlin, 89 Mass. App. Ct. 363, 366 (2016), quoting Ventrice v. Ventrice, 87 Mass. App. Ct. 190, 194 (2015).⁴ By agreement, the parties purported to have preserved their appellate rights with regard to the court's rulings on the arbitration, but that does not clarify matters. Although the parties did not brief the issue, the Supreme Judicial Court has held that parties to an arbitration agreement may not by agreement alter the scope of judicial review of an arbitration award. See Katz, Nannis & Solomon, P.C. v. Levine, 473 Mass. 784, 794 (2016) (“If parties were able to redefine by contract language the scope of what a court was to review with respect to every arbitration award, it would spawn potentially complex and lengthy case-within-a-case litigation devoted to determining what the parties intended by the contractual language they chose”). However, we will assume for purposes of this decision, without deciding, that the standard of review is the broader one urged by the wife, that is, the abuse of discretion or other error of law standard applicable to an order of the court, rather than to an arbitration award.

A. The wife complains first about the condition imposed on her before she may gain “access to the escrowed past-due alimony or as a condition precedent to any future legal filings,” specifically that she produce the unredacted employee records and the innkeeper information for 2015 onward. Before us, with respect to these conditions, the wife raises three arguments.

i. The wife argues first that the condition that she turn over the innkeeper information would require her to violate South Dakota criminal law; therefore, the arbitrator conditioning her ability to seek a modification of the distribution of the escrowed funds upon her producing the records was an abuse of his discretion and beyond his authority.

As this argument was not raised below, it is waived. In any event, were we to reach the merits we would find it unavailing. An examination of the statute reveals that it has no application to the person conducting a lodging establishment who must collect the information and maintain records of it. See S.D. Codified Laws § 34-18-21 (1998). Rather, this provision requires the South Dakota Department of Public Health to keep the information confidential when and if it takes possession of that information as a result of an inspection of the records. See id. It has no bearing on what is required of a person in the position of the wife.

ii. The wife argues second that the condition that she turn over the unredacted employee records in order to access escrowed funds is punitive because it serves no remedial purpose “given the information already in the arbitrator's possession.” This argument, too, was not raised below and is waived.⁵ In any event, were we to reach it, it, too, would be unavailing.

Although the wife acknowledges that the “the employment records could have impacted the income differential calculus,” she argues that “they only would have had value in combination with the Lodge's tax/income filings relative to profits and losses for the purposes of determining any distributions made to Wife as self-employment income all of which were already before the arbitrator,” and that “production of the Lodge employment records would have, ultimately, had de minim[i]s impact on any such calculation given that the arbitrator could have simply used Wife's attributed income of $350,000 [to] $500,000 and Husband's newly reported/attributable income as the basis for an income differential calculation.”

This argument fails, however, for two reasons. First, without knowing what the unredacted employee records show, the accuracy of the wife's assessment that their impact would have been de minimis cannot be tested. Second, and more fundamentally, neither a court nor an arbitrator is required to attribute income as a response to a discovery violation, rather than order compliance as a condition of relief.

iii. Finally, the wife argues that imposition of the conditions was unduly punitive given that the arbitrator also imputed income to her resulting in the termination of all alimony from April 1, 2015, onward. She notes, however, that the arbitrator's discretion is broad and, even applying an abuse of discretion standard, we see none here.

B. The wife also argues that the arbitrator abused his discretion by allowing the husband to make withdrawals from the escrowed funds for child support and childcare expenses rather than having to seek payment from the wife in the first instance. She argues that this amounted to the improper creation of a constructive trust, involved the commingling of alimony and child support funds, and would unjustly enrich the husband; thus, amounting, in essence, to a prospective finding that the wife would engage in contumacious conduct in the future through failure to pay child support and childcare expenses, relieving the burden on the husband to show contempt.

To be sure, the result of the arbitrator's award in this respect, assuming that the wife would otherwise be entitled to the money from which the withdrawals are made, will be to shift the burden to the wife to demonstrate an error in the husband's calculations. She will have to challenge withdrawals if she is unwilling to pay the amounts the husband seeks, instead of the husband having otherwise to justify his calculations. Nonetheless, having found no error in the court's insistence that the funds remain in escrow until the wife complies with discovery, and given the wife's history of nonpayment of funds even when ordered by the court to pay them, we cannot say that it was an abuse of the broad, equitable discretion of the Probate and Family Court judge to impose this arrangement to ensure that child support and childcare payments, which after all are for the benefit of the children, are actually made in a timely fashion. This does not amount to the improper creation of a constructive trust, an unjust enrichment of the husband, or any commingling or misuse of alimony funds for child support, as the wife argues. Even under the abuse of discretion standard, again, we see none.

Amended judgment dated October 24, 2017, affirmed.

FOOTNOTES

2.   The wife received one-third of the difference between the gross income that the husband received above $700,000 per year, and the gross income that the wife received above $200,000 per year.

3.   The wife must keep a registry with “the name of the guest, the number in the party, the place of permanent residence of the guest, the date of registration, the date of departure, the daily rate charged, and the motor vehicle license number of the registrant. The record shall also include each rate, price, or fee charged to the guest for the guest's stay at the lodging.” S.D. Codified Laws § 34-18-21 (1998).

4.   “While no statute explicitly governs arbitration within the Probate and Family Court, the overarching principles governing the review of arbitration awards equally apply” to divorce cases. Gravlin, 89 Mass. App. Ct. at 367.

5.   The wife's entire argument in her application for modification with respect to the conditions on release of funds in escrow was “despite the sanctions being imposed for [her] failure to identify her employees and produce 1099s, and despite the fact that alimony is terminated, the Award wrongly imposes a continuing requirement on the [wife] to do what she has refused to do and for which she was already severely financially punished. The sanctions are done and the fractional amount of total alimony that would otherwise be owed to which she is entitled and which is held in escrow must be released to her forthwith subject to any adjustments that need to be made per the Award.” The arbitrator described this as an argument that “the sanctions are disproportionate to the offense,” and denied relief, concluding that he had authority to impose sanctions up to and including “striking pleadings or dismissing any action or proceeding or any part thereof,” and that “[the wife] still holds the ‘keys’ to unlock the release of escrowed alimony monies.”