JOSEPH DALE SMITH v. HEATHER PETTY SMITH NOW FLYNN

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Court of Appeals of Kentucky.

JOSEPH DALE SMITH v. HEATHER PETTY–SMITH, NOW FLYNN

NO. 2010–CA–001178–MR

Decided: January 13, 2012

BEFORE:  MOORE, STUMBO, AND WINE, Double JUDGES. BRIEFS FOR APPELLANT:  Gregory D. Simms Louisville, Kentucky BRIEF FOR APPELLEE:  Angela M. Call Steven Casey Call Campbellsville, Kentucky

Joseph Dale Smith appeals from a Taylor Circuit Court order which denied his Kentucky Rules of Civil Procedure (CR) 60.02 motion to set aside a settlement agreement.   Smith alleged that the agreement was obtained by fraud, and that its terms were unconscionable.   Having reviewed the record, we affirm.

Joseph Dale Smith and Heather Petty–Smith (now Flynn) were married on October 12, 2002.   Prior to the marriage, both parties owned their own homes in Campbellsville.   After the marriage, Heather took out a mortgage of $60,000 against her house at 1039 Blue Hole Road. Joseph used the money to pay off the mortgage on his home, located at 107 Grandview Drive, as well as some of his personal debts.   The parties also purchased real property at 115 Elm Street in Campbellsville with funds that Heather transferred from her premarital savings account to the parties' joint checking account.   During the course of the parties' marriage, Joseph worked sporadically;  his highest annual income was approximately $13,000.   Heather possessed substantial financial assets from insurance proceeds that she received following the death of her first husband.   In 2008, Heather's savings account contained over $282,000.

On December 28, 2006, Heather filed a petition for dissolution of marriage.   Shortly afterwards, the couple signed a property settlement agreement which was incorporated into the final decree of dissolution, entered on January 30, 2007.

The primary point of contention concerning the agreement is the disposition of the three parcels of real property located at Grandview Drive (Joseph's premarital residence), Blue Hole Road (Heather's premarital residence), and Elm Street (the residence purchased during the marriage).   The agreement provided that Joseph would retain the residence at Grandview Drive.   He was to pay Heather $56,000 for her interest in the property, and she was to execute a quitclaim deed.   Joseph also agreed that he would finance any and all debt on the Grandview property in his own name within sixty days of entry of the divorce decree.   The settlement agreement stated that the Blue Hole and Elm Street properties were owned by the Heather Petty revocable trust and were not marital property subject to division.   The agreement concluded with the following paragraph:

The Husband hereby acknowledges that he has had an opportunity to review the foregoing document with counsel of his own choosing, and that he enters this agreement of his own free will.   He is not under duress, or the influence of any drug or alcohol upon signing same.   The Husband acknowledges that he is not represented by the Hieneman Law Office [the law firm which prepared the agreement], nor has he been advised in any way regarding the contents of this document by said law office.

Joseph did not consult an attorney before signing the agreement.

Eighteen months after entry of the final decree, Heather moved the circuit court to enter an order requiring Joseph to show cause for his failure to pay $56,000 for her interest in the Grandview property as required under the settlement agreement.   In response, Joseph filed a motion to set aside the agreement pursuant to CR 60.02, alleging that the agreement was fraudulent and unconscionable.

The circuit court held a hearing on November 25, 2008, and also left the record open for Heather to submit proof of her pre-marital assets.   On May 19, 2010, the circuit court entered an order denying Joseph's motion, finding that the agreement was not unconscionable and that there was no evidence of fraud in the negotiation of the settlement.   Joseph was ordered to pay $56,000 within thirty days, or, in the event that he was unable to pay, to execute a quitclaim deed transferring the Grandview property to Heather.   If he chose the latter course, he was also required to pay Heather the difference between $56,000 and the current fair market value of the property.   This appeal by Joseph followed.

A settlement agreement “is an enforceable contract between the parties [.]”  Pursley v. Pursley, 144 S.W.3d 820, 826 (Ky.2004).  “The provisions as to property disposition may not be revoked or modified, unless the court finds the existence of conditions that justify the reopening of a judgment under the laws of this state.”  KRS 403.250(1).   Thus, an agreement may not be disturbed by the courts “absent some showing of fraud, undue influence, overreaching or manifest unfairness.”  Pursley, 144 S.W.3d at 826.

Joseph argues that there was substantial evidence of fraud with respect to the settlement agreement and the dissolution of the marriage itself.   According to Joseph, he was fraudulently induced to sign the agreement by Heather's claim that the parties needed to divorce in order for Heather to continue receiving health insurance benefits from her late husband's policy.   He contends that the couple never intended to split up, and that it was for this reason that he did not review the agreement, did not obtain counsel, and did not take any steps to protect his marital and non-marital property interests.   As proof for his claim, he contends that the couple continued to cohabitate for four months after the entry of the decree of dissolution and engaged in sexual relations on several occasions during that period.

Having reviewed the record, we agree with the circuit court that there was no evidence of fraud in the negotiation of the settlement agreement.   As we have already noted, Heather's savings account contained over $282,000.   She also owned real property, two vehicles, a boat, a camper and two jet skis.   It is not credible that she would go through a sham divorce simply in order to keep her health insurance benefits, or that Joseph would sign an agreement in reliance upon such an implausible story.   At the CR 60.02 hearing, Joseph admitted that Heather could have easily afforded to purchase health insurance.   Heather also introduced evidence that Joseph had presented a proposal for a settlement agreement, dated June 6, 2006, whose terms closely resembled those of the agreement that was eventually adopted.   In the June agreement, Joseph agreed to reimburse Heather $45,500 for the Grandview Drive property and to pay $12,500 in credit card debt.

These factual circumstances are entirely distinguishable from those cases in which a reopening was allowed on the grounds of fraud.   In Burke v. Sexton, 814 S.W.2d 290 (Ky.App.1991), for example, the wife, who was unrepresented by counsel, signed an agreement in which she was left with one vehicle and custody of the couple's child.   The husband received all the real estate, household furniture and two vehicles.   The wife waived any claim for child support or maintenance, agreed to be responsible for an $800 debt and waived service of process and notice of any further proceedings.   Although the husband then told the wife that he had dropped the divorce and the couple attempted to reconcile, he nonetheless went ahead with the proceedings.   The wife was not made aware that a final decree had even been entered, which prevented her from filing a timely motion to alter, amend or vacate the judgment under CR 59.05.   The appellate court found that this behavior amounted to “fraud affecting the proceedings” under CR 60.02(d).  Similarly, in Terwilliger v. Terwilliger, 64 S.W.3d 816 (Ky.2002), a husband persuaded his wife that she needed to sign a settlement agreement immediately or risk losing her home to creditors.   Her share of the marital property consisted of the marital residence, valued at $67,000 and subject to a $51,000 mortgage;  a vehicle valued at $1,800;  $2,550 in other cash and assets;  some stock valued by her husband at $11,000;  and $6,000 in credit card debt.   The husband received ninety percent of the stock of several corporations, which he valued at $100,000.   Within two weeks of the signing of the settlement agreement and before the divorce decree was entered, the husband told a potential buyer that one of the corporations was worth $1.7 million dollars, and after the dissolution was final, he sold it for $1.6 million.

There is no evidence of such unfairness and deceit here.   The alleged inducement to sign the agreement is simply not credible.   Furthermore, Joseph was fully aware of the proceedings at all times, and was free to challenge the agreement at any time.   By his own admission, the couple stopped living together four months after entry of the final decree.   He nonetheless chose to ignore the terms of the judgment for over a year thereafter, and filed his CR 60.02 motion only when he was confronted with a show cause motion.   The trial court did not err, therefore, in finding no evidence of fraud.

Joseph also argues that the trial court applied the wrong standard in finding that the terms of the agreement itself were not unconscionable.   Joseph contends that the trial court looked only for evidence of fraud, when under Shraberg v. Shraberg, 939 S.W.2d 330 (Ky.1997), the unconscionability inquiry must be much broader.  “[F]raud, deceit, mental instability or the like, are not required to obtain invalidation of a separation agreement.   What is required is a showing of fundamental unfairness[.]”  Shraberg, 939 S.W.2d at 333;  KRS 403.180(2).   The Shraberg court quoted with approval from McGowan v. McGowan, 663 S.W.2d 219 (Ky.App.1983), which stated that “a separation agreement is unconscionable and must be set aside if the court determines that it is manifestly unfair and unreasonable[,]” and identified “[f]raud, undue influence, and overreaching ․ as entirely separate grounds.”  Shraberg, 939 S.W.2d 330 at 333.   Joseph argues that the only statement to support the trial court's finding that the agreement was not unconscionable is its conclusion that there was no evidence of fraud, and that the trial court failed to consider whether the agreement was manifestly unfair and unreasonable.

Under CR 52.04, a final judgment will not be reversed or remanded if the trial court failed to make findings of fact on an essential issue unless such failure “is brought to the attention of the trial court by a written request for a finding on that issue[.]”  There is no indication in the record that Joseph made a CR 52.04 motion, or a CR 52.02 motion to amend the judgment.   If an alleged failure to make adequate findings of fact is not brought to the trial court's attention as required under CR 52.02 or CR 52.04, a party has waived its right to raise the issue on appeal.  Cherry v. Cherry, 634 S.W.2d 423, 425 (Ky.1982).

In any event, substantial evidence supports the trial court's determination that the agreement was not unconscionable under the Shraberg standard.   It should be stressed that “[g]iven the nature of our no-fault divorce statute, coupled with the desirability of imparting some degree of finality to settlement agreements, a party challenging an agreement as unconscionable should have a relatively high burden of proof.”  Peterson v. Peterson, 583 S.W.2d 707, 712 (Ky.App.1979).   An agreement cannot “be held unconscionable solely on the basis that it is a bad bargain.”  Id. Joseph's objections to the agreement all fall within this “bad bargain” category.   For instance, he contends that the agreement was manifestly unfair and unreasonable in requiring him to pay $56,000 to Heather for the Grandview property, which six months later was valued at only $45,000.   Heather cannot be held responsible for the decline in property values.   As to his contention that the Grandview home was his premarital property and that Heather was not entitled to any interest in it, it is undisputed that Heather gave Joseph $60,000 from her premarital funds to pay off the mortgage on the property, as well as some of his debts.   There is nothing manifestly unfair or unreasonable about the agreement requiring repayment of this amount, as Joseph is essentially placed in the same position he was in prior to the marriage.   Joseph also argues that it is unfair that Heather has been receiving rent from the property, totaling over $30,000 to date.   Had he paid Heather promptly as required under the judgment, however, she would not have received this rental income.   Her receipt of the income is attributable to Joseph's delay in paying the judgment, not to any fundamental unfairness in the agreement.

He further argues that the characterization of the Elm Street and Blue Hole properties as non-marital also created a severe imbalance in Heather's favor.   It is undisputed that both properties were purchased with Heather's premarital funds.   In essence, the agreement restored to Heather her non-marital property.   There is nothing manifestly inequitable, unfair or unreasonable in the property agreement that would justify reopening the settlement.

The order of the Taylor Circuit Court is affirmed.

ALL CONCUR.

WINE, JUDGE: