To Merge or Not to Merge: How to Handle Your Property Settlement Agreement

by Carmen Mope R.

It is not uncommon for family law practitioners to draft a separate settlement agreement to resolve the property issues (and sometimes issues of child support) in a divorce case. This is particularly true when the marital estate is substantial or when the parties wish to protect their privacy. Whatever the reason, practitioners must decide whether it is best to incorporate, but not merge, the property settlement agreement ("PSA") into the Judgment of Divorce. The choice depends on one's perspective.

The Benefit of Incorporation Without Merger

Property settlement agreements are contracts which carry a six year statute of limitations. Judgments, however, are subject to the constraints of MCR 2.612. These timeframes are critical when a party seeks to enforce or obtain relief from the terms of the settlement. This is especially true when the nonmoving party has committed fraud.

Our court rules set forth the grounds upon which a party may seek relief from a final judgment. If the basis for relief is fraud, the moving party must bring a motion within one year from the date the judgment is entered. MCR 2.612(C) (1)(2). This is true even if the fraud isn't discovered until after the 12-month limitations period has elapsed. Thus, if a party discovered that her husband concealed assets during the divorce proceeding 18 months after the Judgment of Divorce was entered, she would be time-barred from challenging the judgment. If she had a separate property settlement agreement, however, she might have a contract remedy, depending on whether or not the PSA was merged into the final Judgment of Divorce.

The Big Three: Nederlander, Grace and Foreman

These seminal cases define the law on incorporation and merger. In Nederlander v. Nederlander, more than one year after the divorce judgment was entered, the plaintiff (ex-wife) sought to reopen discovery in an attempt to set aside the judgment under MCR 2.612(C)(1)(c). She claimed that her husband had misrepresented the value of his interest in two of his businesses during the divorce proceeding. The trial court determined that the plaintiff's motion for relief from judgment was untimely under MCR 2.612(C)(2), but allowed her to file an amended complaint. Plaintiff then filed an independent action based on fraud and sought monetary damages. The court granted Defendant's summary disposition motion on the fraud claim under MCR 2.119(C)(8) and Plaintiff appealed. The Court of Appeals affirmed, holding that a party who suspects that fraud was committed during the divorce proceeding may file an action for relief from judgment within one year, but may not file an independent action for fraud. The court specifically said:

If a party suspects that the other party has committed fraud during a divorce proceeding, then MCR 2.612(C)(1)(c) and (2) allows the party to seek redress within one year after the judgment is entered. On the other hand, we believe that allowing a party to file an independent action for fraud whenever the other party, more than one year after the divorce judgment is entered, liquidates assets or consummates a business transaction is contrary to the public policy behind the finality of judgments. The exercise of due diligence during the course of liberal discovery should expose any intrinsic fraud that may be present in the divorce proceeding.

In Grace v Grace, the Court of Appeals carved out an exception to this harsh rule. The parties in Grace had entered into a separate property settlement agreement during divorce proceedings. They executed the agreement, which was incorporated, but not merged, into the judgment of divorce. Plaintiff later filed an independent action against her ex-husband for fraud in the inducement of the settlement agreement and sought monetary damages. Defendant filed a motion for summary disposition based on Node/kinder; supra. The trial court granted the motion based on this authority. Plaintiff appealed and, in an unpublished opinion (Docket No. 1E33202, June 14, 1996) the Court vacated the trial court's order, finding that the separation agreement was a separate contract to which those remedies applied and that the claim of fraud related to the contract and not the divorce judgment. Plaintiff's claim proceeded to trial and a jury unanimously found in her favor in the amount of $3.1 million. Not surprisingly, Defendant appealed.

The Court ordered the parties to brief the issue of whether plaintiff's action was barred under Nederlander.5 The Court agreed with the prior panel's decision that the rule of Nederlander did not bar plaintiff's fraud claim, specifically because the separation agreement was incorporated, but not merged into the divorce judgment. The court reasoned that when a property settlement agreement "is incorporated and merged in a divorce judgment, it becomes a disposition by the court of the property. But, when not merged in the divorce judgment, the property settlement agreement may only be enforced by resort to the usual contract remedies and not as part of the divorce judgment."

The holding in Grace was affirmed in Foreman v. Foreman. In that case, the parties reached a settlement agreement as a result of mediation. The PSA was incorporated, but not merged, into a final judgment. The primary marital assets were a Ford dealership owned and operated by defendant, the marital home, and a vocation home in northern Michigan (the "Indian River" property.) The property settlement was structured around defendant's expressed intention to keep, and not sell, his dealership, as well as on the $1.7 million value attributed to the dealership by the mediator. Shortly after the settlement was reached, plaintiff discovered that defendant was going to sell the dealership. She then filed a motion challenging the agreement. At the hearing on that motion, defendant testified that the dealership was worth no more than $1.1 million and that he intended to continue operating it until he retired, which was at least 11 years. The court denied plaintiff's motion and ordered the parties to enter into the settlement agreement. Just a few months later, after the PSA had been executed, Defendant secured an agreement to sell the dealership for $56.6 million. Defendant had also represented during mediation that he wished to keep the Indian River property for himself because he "loved every nook and cranny." At the time, it had been appraised for $1.25 million. Based on Defendant's representations, Plaintiff agreed to let him buy her out. Before the ink was dry on the PSA, Defendant listed the property, and sold it in June 2001 for $1.775 million, including contents. About 18 months after entry of the judgment, Plaintiff filed an independent action for fraud against her ex-husband. The jury verdict was $1.417 million in favor of Plaintiff. Defendant appealed.5 The Court of Appeals upheld the jury verdict, finding that prior case

law established that when a PSA is not merged into the judgment, the underlying settlement agreement retains its separate identity as a contract, enforceable by resort to the "usual contract remedies."9

These cases make clear the benefits of incorporation but not merger for a party wishing to challenge the underlying settlement agreement (i.e., an expanded limitations period). As Foreman illustrates, the former wife benefited from the merger because of the expanded time period. The husband, however, would have benefited from merging the PSA into the final judgment. Had the parties done the latter, wife's claim would have been time-barred under the court rule and husband would be $1.417 million richer.

Conclusion

Whether or not to merge a property settlement agreement depends on which party would benefit from an expanded period of limitations within which to challenge the agreement. For clients who desire finality and want to prevent their former spouse from contesting the settlement, merger is best. For those who wish to protect against fraud or the other evil acts of a former spouse, incorporation without merger is the better choice.1°

Endnotes

1. 205 Mich App 123; 517 N.W.2d 768 (1994).

2. See Nederlander, supra, at 124-125.

3. Id. at 126-127.

4. 253 Mich App 357;655 N.W.2d 595(2002).

5. Grace, supra, at 362-363.

6. Id. at 364-365.

7. 266 Mich App 132;701 N.W.2d 167 (2005).

8. See Foreman, supra, at 134-135.

9. Id. at 139 (internal citations omitted).

10. I would like to thank the Family Law List Serve for rekindling interest in this issue during a series of spirited responses to a query I posted earlier this month, and especially Jeanne Hannah, who directed me to the cases set forth in this article.