Faherty v. Faherty

• Decision Date: 19 July 1984
• Citation: 97 N.J. 99,477 A.2d 1257
• Parties: Susan FAHERTY, Plaintiff-Respondent, v. J. Roger FAHERTY, Defendant-Appellant.
• Court: New Jersey Supreme Court

Page 99

97 N.J. 99

477 A.2d 1257

Susan FAHERTY, Plaintiff-Respondent, v. J. Roger FAHERTY, Defendant-Appellant.

Supreme Court of New Jersey.

Argued March 6, 1984.

Decided July 19, 1984.

Patrick J. Monaghan, Jr., Hackensack, for defendant-appellant.

Theodore Sager Meth, Westfield, for plaintiff-respondent (Meth, Nagel, Rice & Bausch, Westfield, attorneys).

The opinion of the Court was delivered by

GARIBALDI, J.

The question posed in this appeal is whether an arbitration provision in a separation agreement, entered into by the parties prior to their divorce and incorporated in their divorce judgment, is enforceable. The Chancery Division and the Appellate Division enforced the arbitration provision. We granted certification, 94 N.J. 616, 468 A.2d 245 (1983), and now modify and affirm, as modified, the Appellate Division's judgment.

I

Susan Faherty (Susan) and J. Roger Faherty (Roger) were divorced in 1977 after seventeen years of marriage. At that time, they had four dependent children. Prior to their divorce, the parties, both of whom were represented by counsel, negotiated and executed a Property Settlement Agreement (Agreement). The trial court incorporated the Agreement in the final judgment of divorce, which expressly recited that the court had made no "findings as to the reasonableness thereof."

The Agreement is detailed and governs equitable distribution, spousal support, child custody, and child support. Paragraph 25 of the Agreement provides that any financial dispute arising out of the Agreement must be arbitrated as a condition precedent to court action; the arbitration must be conducted under the rules of the American Arbitration Association (AAA); and the arbitrator's decision is binding on the parties. Paragraph 20 permits modification of payments due to changed circumstances but, in the event of a dispute over the necessity for such modification, requires arbitration as a condition precedent to judicial relief.

The Agreement also contains several paragraphs dealing with the equitable distribution of the parties' assets. Under the terms of the Agreement, Roger transferred the marital home in Summit, New Jersey to Susan, who also retained all the tangible personal property in the home and a Jeep. Paragraph 7 required Roger, over a ten-year period, to pay Susan ten promissory notes totalling $165,000 as "an adjustment of accounts as part of the division in lieu of statutory equitable distribution of marital assets." ¹ In the event of Roger's death the notes were to be treated as a debt of his estate. As security for the payment of the notes, Roger was required to furnish stock to be held in an escrow account and to secure a $100,000 term life insurance policy.

Paragraph 29 provides for adjustment of support under certain circumstances. Roger was a successful investment banker employed by his closely-held family corporation. The parties recognized that Roger's ability to meet his spousal-support obligations under the Agreement was contingent on his company's earnings. To avoid the possibly unjust consequences of requiring Roger to pay the full support required in the Agreement in years when his company did not make a profit, the parties in paragraph 29 provided:

29. (a) The parties to this Agreement recognize that the husband's obligation provided for in paragraph 2 may, under the circumstances that his employer, Faherty & Swartwood, Inc., may not have substantial pre-tax earnings, be difficult for him to perform.

(b) Any arrearages which may develop in payment of the obligations provided for in paragraph 2 shall be weighed in connection with the amount of his fixed annual salary and the fiscal year-end pre-tax earnings of the said employer, since a distribution of said earnings or a loan on the basis of such earnings is expected to be the sole way in which the husband could meet the said obligations, or make up any arrearages which may accumulate thereunder.

(c) Nothing in this paragraph shall be deemed to apply to, modify or limit any portion of this Agreement with the exception of the said paragraph 2. [Emphasis added.]

Further, the Agreement included the following clauses: a release by each party of all equitable division of marital assets and all community property interests except for those provided in the Agreement; an integration clause stating that the Agreement represented the parties' entire understanding and that "there are no representations, promises, warranties, covenants or undertakings other than those expressly set forth herein"; a default clause, whereby Roger agreed that if he should default in performing any obligation under the Agreement, he would pay to Susan counsel fees she reasonably incurred to enforce her rights under the Agreement; and a provision that the Agreement shall be governed by the laws of New Jersey.

The present case arose when Susan moved in the Chancery Division for an order fixing past-due alimony and child support and compelling discovery of defendant's business records. Susan claimed that Roger was in arrears of $25,400 in support payments and had defaulted on one of the equitable-distribution promissory notes of $25,000. Roger cross-moved, seeking to compel arbitration of the arrearages pursuant to paragraphs 20 and 25 and seeking arbitration as to the amounts of future payments because he claimed significantly changed circumstances. The Chancery Division issued an order compelling arbitration of arrearages of alimony and child support as well as the issue of modification of future payments of alimony and child support in accordance with the Agreement.

Subsequently, the parties selected an arbitrator according to the rules of the AAA. The issues submitted to arbitration were Susan's claims for arrearages in alimony and child support, for future alimony and child support, as well as Roger's claim that both the arrearages in alimony and child support and future payments thereof should be reduced due to his changed circumstances.

The arbitration took several months. It included several lengthy days of examination, cross-examinations, exchange of post-hearing and reply briefs, and, finally, the entry of the arbitrator's award on January 18, 1981. The arbitrator made no written findings of fact and neither of the parties requested a written transcript.

The arbitrator's award fixed the alimony arrearages of $37,648 and child support arrearages of $12,284. The award also denied Roger's requests for reduction in future alimony, if any, and future child support. Thereafter, Susan moved in the Chancery Division to confirm the arbitration award. Roger cross-moved to vacate the arbitrator's award and to obtain court hearings for modification of his prior and future payments due to his changed circumstances and for modification of his payments in lieu of equitable distribution.

The Chancery Division confirmed the arbitration award and denied Roger's motion. Although Roger had originally petitioned the court to compel arbitration, in his appeal to the Appellate Division, for the first time, he challenged the validity of the arbitration clause and also sought to overturn the Chancery Division's confirmation of the arbitration award. The Appellate Division, in a brief per curiam opinion, found that all issues of law raised by Roger were clearly without merit.

Roger makes two basic claims. The first is that arbitration of domestic disputes between former spouses regarding alimony and child support should not, as a matter of public policy, be permitted to be settled outside the courts, and therefore the arbitration clause in the Agreement should not be enforced. The second is that the arbitration award in this case was erroneous and should be overturned.

II

Although it is clear that marital separation agreements are enforceable in this state insofar as "they are just and equitable," Schlemm v. Schlemm, 31 N.J. 557, 158 A.2d 508 (1960), this Court has never before addressed the question of the enforceability of an arbitration clause in a separation agreement.

In this state, as in most American jurisdictions, arbitration is a favored remedy. It permits parties to agree to resolve disputes outside of the court system. A court generally will enforce an arbitration agreement unless it violates public policy. E.g., Barcon Assocs., Inc. v. Tri-County Asphalt Corp., 86 N.J. 179, 186, 430 A.2d 214 (1981) (arbitration favored by the courts of this state); Johowern Corp. v. Affiliated Interior Designers, Inc., 187 N.J.Super. 195, 453 A.2d 1370 (App.Div.1982) (same); Ukrainian Nat'l Urban Renewal Corp. v. Joseph L. Muscarelle, Inc., 151 N.J.Super. 386, 376 A.2d 1299 (App.Div.), certif. den., 75 N.J. 529, 384 A.2d 509 (1977) (same); Hudik-Ross, Inc. v. 1530 Palisade Ave. Corp., 131 N.J.Super. 159, 329 A.2d 70 (App.Div.1974) (same); New Jersey Mfrs. Ins. Co. v. Haran, 128 N.J.Super. 265, 319 A.2d 768 (App.Div.1974) (same).

In recent years arbitration has been used more frequently as a viable means of resolving domestic disputes that arise under separation agreements. See Comment, "The Enforceability of Arbitration Clauses in North Carolina Separation Agreements," 15 Wake Forest L.Rev. 487 (1979). In other jurisdictions around the country courts have consistently enforced arbitration clauses to settle matrimonial disputes. See Sterk, "Enforceability of Agreements to Arbitrate: An Examination of the Public Policy Defense," 2 Cardozo L.Rev. 481, 493 (1981); cf. In re Mesmer's Estate, 94 Cal.App. 97, 270 P. 732 (Ct.App.1928) (parties may leave matters concerning support of wife to arbitration); Masterson v. Masterson, 22 Ky. 1193, 60 S.W. 301 (1901) (agreement to arbitrate issues of alimony, custody, and child support); Schneider v. Schneider, 17 N.Y.2d 123, 216 N.E.2d 318, 269 N.Y.S.2d 107 (1966) (agreement to arbitrate child support disputes held to be enforceable); Sheets v. Sheets, 22 A.D.2d 176, 254 N.Y.S.2d 320 (App.Div.1964) (agreement to submit...