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Balogh v. Balogh

Supreme Court of Hawai'i

August 7, 2014

SANDRA C.J. BALOGH, Respondent/Plaintiff-Appellant,
v.
DONALD RAYMOND BALOGH, Petitioner/Defendant-Appellee

Page 632

[Copyrighted Material Omitted]

Page 633

CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS. CAAP-11-0001074; FC-D NO. 10-1-0149.

Rebecca A. Copeland, for petitioner.

Stephen T. Hioki, for respondent.

RECKTENWALD, C.J., NAKAYAMA, MCKENNA, JJ., AND CIRCUIT JUDGE CHAN, IN PLACE OF ACOBA, J., RECUSED, WITH POLLACK, J., CONCURRING AND DISSENTING SEPARATELY.

OPINION

Page 634

[134 Hawai'i 32] RECKTENWALD, C.J.

We consider whether various documents signed by a husband and wife should control the division and distribution of their marital partnership property upon divorce. Donald Raymond Balogh (Ray) and Sandra C.J. Balogh (Sandra)[1] married in New Jersey in 1981. After moving to Oahu in 2003, the couple began constructing a home on a vacant lot they had purchased (Kahalakua property or the property). The parties held title to the property as tenants by the entirety.

On October 6, 2008, following a period of tension between Ray and Sandra, they each signed a handwritten document stating tat if they separated, Sandra would receive seventy-five percent of the profit from the sale of the property, the contents of their home (excluding Ray's tools and clothes), and all of their vehicles. A few weeks later, on October 24, 2008, the parties signed a typewritten Memorandum of Understanding (MOU) stating that upon separation or divorce, Sandra would receive seventy-five percent of the proceeds from the sale of the property, the contents of their home (excluding Ray's tools and building equipment), all of their vehicles, and $100,000 from Ray in lieu of alimony and court proceedings.

After a period of continued tension between Ray and Sandra, Ray agreed to move out of the couple's home on August 15, 2009. On September 1, 2009, Ray signed a quitclaim deed transferring his entire interest in the property to Sandra for ten dollars and " other valuable consideration."

In January 2010, Sandra filed a complaint for divorce in the Family Court of the First Circuit. Notwithstanding the quitclaim deed and two agreements, the family court awarded Ray and Sandra each a one-half interest in the property, which it valued at $1.6 million at the time of divorce.[2] The family court concluded that it would be unconscionable to enforce the quitclaim deed and that all three agreements were unenforceable because Ray acted under duress and coercion when he signed them.

Sandra appealed, and the Intermediate Court of Appeals vacated in part the family court's divorce decree and its findings of fact and conclusions of law, and remanded for further proceedings. The ICA concluded that both the quitclaim deed and MOU were enforceable. The ICA explained that the quitclaim deed was not unconscionable and that Ray executed both the deed and the MOU voluntarily. The ICA also concluded that the deed superseded the MOU only to the extent it modified the disposition of the Kahalakua property, and therefore remanded to the family court to determine whether Ray owed Sandra an additional $100,000 pursuant to the MOU.

In his application, Ray presents two questions: (1) whether the ICA erred in vacating the family court's decision that the postmarital agreements and the quitclaim deed were unenforceable because they were unconscionable; and (2) whether the ICA erred in vacating the family court's decision that the postmarital agreements and quitclaim deed were unenforceable because they were entered into involuntarily.

As a threshold matter, we hold that the quitclaim deed does not constitute a separation agreement that alters the parties' rights to an equitable division of their marital partnership property, such that Sandra should receive the entire value of the Kahalakua property. The ICA therefore erred in concluding that the quitclaim deed was an enforceable separation agreement.

Page 635

Because the quitclaim deed did not affect the disposition of the couple's marital partnership property upon divorce, we must also consider whether the MOU is enforceable. We hold that the MOU is enforceable because it is not unconscionable and was entered [134 Hawai'i 33] into voluntarily. Because we conclude that the MOU is enforceable, we do not consider the October 6, 2008 handwritten agreement. The ICA's judgment is therefore vacated, the family court's divorce decree and findings of fact and conclusions of law are vacated in part, and we remand this case to the family court for further proceedings consistent with this opinion.

I. Background

The following factual background is taken from the record on appeal and the family court's findings of fact and conclusions of law.[3]

A. Factual background

Ray and Sandra married in 1981 in New Jersey. At the time of the marriage, Sandra owned two properties in Monmouth County, New Jersey. Sandra sold the first property in 1982 for $89,000. The second property was a vacant lot which Sandra had purchased for $28,750 (Wall Township property). At the time of the marriage, Ray owned one property which he sold shortly thereafter for $40,000. According to Ray, after he and Sandra married, they built a home on the Wall Township property.

Ray and Sandra are both well educated. Ray has a bachelor of science and a master's degree in electrical engineering. Sandra has a bachelor of science in biological science and a master's degree in education and student personal services. While living in New Jersey, Ray worked as a contractor for various companies. Before retiring in 2002, Sandra worked as a high school guidance counselor for more than twenty-five years.

While Ray and Sandra were living in New Jersey, they regularly vacationed in Hawai'i. In 2002, Ray and Sandra purchased the Kahalakua property, which was a vacant lot on O'ahu on Kahalakua Street, for $280,000. Ray and Sandra took out a home-equity loan on the Wall Township property to pay for the Kahalakua property. Ray and Sandra held title to the Kahalakua property as tenants by the entirety.

In 2003, Ray and Sandra decided to move to Hawai'i so that Sandra could care for her elderly parents. The couple sold the Wall Township property for $545,000.

Soon after arriving in Hawai'i, Ray and Sandra hired a contractor to build a home on the Kahalakua property for $595,000. The couple used the proceeds from the sale of the Wall Township property, as well as approximately $350,000 Ray had inherited and money from their joint savings, to help pay for the Kahalakua property and the construction of the home on the property.

Construction on the property began in 2004 and the home was supposed to be completed within two years. There were problems with the construction process from the start. The builder showed up only sporadically and eventually walked off the project without completing the work. In 2006, the builder placed a mechanic's lien on the property, even though there was a list of approximately 150 incomplete items.

The homeowner's association then sought to assess Ray and Sandra a penalty totaling $350,000 because the house had not been completed within the prescribed two-year period. The couple sued the homeowner's association, and the parties agreed on a reduced penalty of $5,000 with an additional two-year period to complete construction of the home.

In order to complete the home, Ray and Sandra paid a total of $60,000 to six additional subcontractors, but the home was still not completed. About six months after the original builder had walked off the job, Ray and Sandra were able to move into the house.

Page 636

[134 Hawai'i 34] During this time, Sandra was working as a part-time secretary, and Ray was working for Northrop Grumman. Sandra coordinated the work of most of the subcontractors, and Ray worked on the house when he was home from work. For example, Ray finished the kitchen.

Tension arose between Ray and Sandra after Ray began going outside their home without clothes on. Ray's behavior resulted in complaints from neighbors and a visit to the couple's home by the police. Sandra also suspected that Ray was having an affair because he had lost weight, was working out, and was well tanned. Sandra also observed Ray giving other women what she described as " lecherous looks."

Ray stopped working in July 2008, after his contract with Northrop Grumman had expired and he was unable to find additional work. At the time of his retirement, Ray was earning between $115,000 and $120,000 per year. Following his retirement, Ray continued to work on the house.

After months of arguing and still questioning Ray's fidelity, Sandra told Ray that if he was serious about being committed to the marriage, that they should " write something up." On October 6, 2008, Ray wrote an agreement, as dictated by Sandra, that provided the following:

If Sandy and Ray Balogh are to separate from each other their assets are to be divided as such:

I Donald Raymond Balogh agree that my wife Sandra C. Balogh will receive:

1. 3/4 or 75% of the profits of the sale of [] Kahalakua St.
2. The entire contents of the house excluding Ray's tools and clothes
3. All vehicles at time of separation[.]

Both Ray and Sandra signed the agreement. Sandra was not thinking about divorce when she asked Ray to sign this agreement; instead, Sandra thought that Ray was committing to saving their marriage. Ray acknowledged that he had agreed to the terms of the agreement, and Sandra testified that she did not threaten Ray to get him to sign the agreement. According to Ray, he was not in his right mind when he signed the agreement, but nevertheless signed the agreement to show his good faith and commitment to save the marriage. Ray thought that if he did not sign the agreement, his and Sandra's relationship would further degrade and he would be thrown out of the house.

Sandra, however, remained suspicious of Ray's fidelity. Just over two weeks after they had signed the first agreement, Ray and Sandra executed the MOU in front of a notary. The MOU provided the following:

This Agreement between Donald Balogh and Sandra Balogh will be implemented if they are to separate and/or divorce from each other.
Their assets will be divided as follows:
1. In regards to the contents of the house at [] Kahalakua St., Honolulu, HI []: Donald Balogh (Ray) will receive his tools and building equipment. Sandra Balogh (Sandy) will receive the entire contents of the house, furniture, appliances, electronics (televisions, etc.)
2. In regards to vehicles: Sandy will receive the vehicles.
3. In regards to the proceeds of the house, due to a sale: Sandy will receive 75% of the sale proceeds and Ray will receive 25% of the proceeds.
4. In regards to compensation: Ray agrees to pay $100,000.00 to Sandy in lieu of Alimony and court proceedings.

Again, both Ray and Sandra signed the agreement. Sandra testified that the MOU was intended as an inducement for Ray to work on the marriage because if Ray was " going to sign something like that, which gives [Sandra] quite a bit, then [Ray] must [have been] serious about working on the marriage." Sandra testified that she added the additional term requiring Ray to pay her $100,000 to obtain further commitment from Ray to their marriage and to " see how serious he was." Ray acknowledged that he agreed to the terms of the MOU, and Sandra testified that she did not threaten Ray before he signed the MOU. Because Ray signed the MOU, Sandra thought that Ray would tell her the truth and stop his inappropriate behavior. Ray signed the MOU in a " desperate attempt to hold the marriage together."

Page 637

[134 Hawai'i 35] In November 2008, an attorney representing the homeowner's association mailed a letter to Ray and Sandra. The letter stated that a number of individuals had complained about Ray's behavior. In January 2009, a second letter was mailed to Ray and Sandra. This letter detailed another incident involving Ray and demanded that Ray cease and desist. Ray hid both of these letters from Sandra. Ray's behavior, however, did not stop.

In June 2009, Ray and Sandra were walking on the Makapu'u Trail when police stopped Ray to question him about exposing his buttocks. The following month, Ray and Sandra were at Ala Moana shopping center when security officers again stopped the couple to question Ray about exposing his buttocks. Ray was issued a trespass warning, banning him from the shopping center for one year. Following both incidents, Ray told Sandra that he had not exposed himself.

Ray sent a written request to Ala Moana, asking that the one-year ban be lifted, but on August 10, 2009, that request was denied. Upon receiving the letter denying Ray's request, Sandra wanted to contact a lawyer because she believed Ray that he had done nothing wrong. Ray then admitted to exposing his buttocks at Ala Moana. Sandra was shocked. Ray agreed to move out of the couple's home the following day.

Ray testified that by that point, the marriage had " melted down," the anxiety and friction were constant, and there was " just so much tension in the house," that he " decided that it'd be best that [he] leave." Before Ray left, Sandra asked him to call their relatives to tell them what was happening. While Ray was speaking to his sister on the telephone, Sandra heard Ray mention the possibility of divorce and she got upset. Sandra then told Ray, " I need security, Ray, I need security, I need you to sign the house over to me." Ray agreed to do so, and Sandra said that she would make the necessary arrangements. Ray moved out of the couple's home on August 15, 2009.

On September 1, 2009, Ray and Sandra met to execute a quitclaim deed, in which Ray granted his interest in the Kahalakua property to Sandra in exchange for ten dollars and " other valuable consideration." According to Ray, he thought the deed was only a " temporary agreement," that would protect the home from potential lawsuits, and that title would eventually be transferred back to joint ownership. Ray testified that he signed the deed in an effort to save the marriage and that he signed the document " in a panic."

On September 24, 2009, Ray and Sandra met with Dr. Renee Robinson for marriage counseling. Dr. Robinson referred Ray to a specialist on obsessive-compulsive behavior. Ray saw the specialist three times, who recommended ways for Ray to deal with his behavior.

B. Family court proceedings

Ray and Sandra attempted to execute an uncontested divorce, which failed because Ray refused to sign the divorce documents. On January 14, 2010, Sandra filed a Complaint for Divorce. Following a trial, the family court rendered an oral decision. As relevant here, the family court stated the following:

The Court considered what it thought to be the appropriate motivations and reasonings of the parties. What was clear to the Court is that at the time the documents were done, both were focused -- both husband and wife were focused on I think, in their own words, saving the marriage. That was the primary motivation for the documents. At some point those actions -- what may have been intent became actions. A quitclaim was signed. But it is unclear as to what the motivations of both parties were, and that's why, again, you folks went to trial. Based on the relevant case law, the Court finds that this would be an inequitable provision to hold both parties to.
Court's going to rule as follows:
With regard to the marital property, which is the Kahala home, the Court is going to basically award Mr. Balogh a one half interest. That one half interest may be satisfied either by way of a sale of the property, in which case the net proceeds are cut in half, or Mrs. Balogh may buy out Mr. Balogh.

Page 638

[134 Hawai'i 36] The Court's going to set the buy-out price -- I'm sorry, the value of the property at 1.6 based on the relevant testimony. Again, the Court comes to that number based on what was presented in court. I know there's conflicting testimony, but that's the price the Court's going to -- or the -- the value the Court will set. Again, if it comes to an actual sale, it may be more, it may be less. For purposes of a buy-out, the Court will set it at 1.6. So basically it's 800,000, if it's a buy-out.

On December 2, 2011, the family court issued the divorce decree. The decree provided the following:

a. The Court finds that it is inequitable to enforce the agreements entered into by the parties on October 6, 2008, October 24, 2008, and September 1, 2009, as to the real property located at [] Kahalakua Street, Honolulu, Hawaii (marital residence).
b. The gross value of said property is $1,600,000.00.
c. Said property shall be sold in a commercially reasonable manner. From the proceeds of the sale, the realtor commissions, escrow fees, and costs of sale shall be paid. Thereafter, the net proceeds shall be divided equally between the parties.
d. Either party may buy-out the other party.
e. The foregoing provisions shall be enforced upon the expiration of 90 days from the effective date of this Decree.
f. The parties [are] to cooperate on resolving the mechanics lien.

On February 15, 2012, the family court issued its findings of fact and conclusions of law. As relevant here, the family court made the following conclusions of law:

K. To enforce the parties' agreement or the Quitclaim Deed is to award Sandra with a marital asset worth $1,600,000. In doing so, Sandra would be receiving more than 85% of the marital estate.
L. In addition, Ray contributed $350,000 of his inheritance and $40,000 of his premarital asset[s] to the marital partnership, for which he is not receiving a credit. Sandra contributed $89,000 of her premarital asset[s] to the marital partnership for which she is not receiving a credit.

M. If Ray received credit for his $390,000 capital contribution, Ray's share of the retirement/securities accounts would just be sufficient to repay him his capital contribution. He would in essence receive 0% of the marital estate if Sandra is awarded the Kahala Kua property.

N. After thirty years of marriage, the Court concludes it would be unconscionable to award Sandra the Kahala Kua property by enforcing the Quitclaim Deed. Kuroda v. Kuroda, 87 Haw. 419, 958 P.2d 541 (Haw. App. 1998); and Lewis v. Lewis, 69 Haw. 497, 748 P.2d 1362 (1988).
O. Further, after considering their testimony, the Court finds that the parties were motivated to save the marriage when they signed the various agreements. When Ray signed the Quitclaim Deed, Ray was protecting their marital home from potential lawsuits and had no intent of permanently transferring his interest to Sandra. Neither party intended their marriage to result in a divorce and to divide their marital estate accordingly.
P. The Court finds Ray was suffering from extreme distress as a result of the ongoing construction of their Kahala Kua residence, the contractor's walk-off and lawsuit in 2006, the penalties assessed by the [homeowner's association] and parties' lawsuit against [the homeowner's association], his high security clearance job which also required twenty-four hour/seven days on call one week a month, the continuing issues with the subcontractors, and his uncontrollable obsessive behavior that escalated from his backyard nudity to public display, his shame and embarrassment, his fear of being discovered, and the constant argument with Sandra about his inappropriate behavior. At the same time, Sandra suspected him of infidelity which further exacerbated the marital relationship and escalated the tension and the friction in their home. Ray was thus under duress and coercion when he signed the agreements. Prell v. Silverstein, 114 Haw. 286, 162 P.3d 2 (Haw. App. 2007).

Page 639

[134 Hawai'i 37] Q. Therefore, the Court concludes that the parties' agreements on October 6, 2008, October 24,2008, and September 1, 2009, are not enforceable.

R. Accordingly, each party shall be awarded fifty-percent (50%) interest in their Kahala Kua property. The parties may sell said property and divide the net sales proceeds equally or Sandra may buyout Ray's interest for the amount of Eight Hundred Thousand and No/100 Dollars ($800,000.00). Said provision shall take place within 90 days of the effective date of the Divorce Decree.

C. ICA proceedings and proceedings in this court

On December 20, 2011, Sandra timely filed a notice of appeal. In her amended opening brief -- and as relevant here -- Sandra argued that the agreements and the quitclaim deed were not unconscionable, Ray was not under duress when he signed each agreement and the deed, and in signing the three documents, Ray did not intend to protect the Kahalakua property from the claims of third parties. Sandra argued, therefore, that the agreements and the deed were enforceable.

The ICA agreed with Sandra that the family court erred with regard to the agreements' enforceability. The ICA first concluded that the quitclaim deed was not unconscionable. The ICA noted that " nothing in the record indicates unfair surprise," and that " this is not an exceptional case where the agreement was so one-sided that it is unconscionable even without a showing of unfair surprise." The ICA explained that " [t]he fact that [Ray's] (perhaps shortsighted) decision to quitclaim his interest to [Sandra] ultimately turned out to be a bad one from his perspective is irrelevant and does not warrant invalidating the quitclaim deed."

The ICA further concluded that Ray " freely and voluntarily entered into the agreements." Specifically, the ICA noted that both Ray and Sandra were well educated, and that " there is nothing in the record showing that [Sandra] used threats or any other improper methods of persuasion." The ICA also rejected Ray's argument that he never intended to convey his interest in the Kahalakua property. The ICA explained that Ray's statements regarding intent " were inadmissible for purposes of contradicting the deed's clear language, under which he granted his interest in the [Kahalakua property] to [Sandra] as tenant in severalty." The ICA further explained that because the deed was unambiguous, extrinsic evidence of the facts and circumstances surrounding the execution of the deed was not " competent to contradict, defeat, modify or otherwise vary the meaning or legal effect of the deed." (Internal quotation marks and citation omitted). The ICA concluded, therefore, that the " Family Court erred in failing to classify the [Kahalakua property] as [Sandra's] separate property pursuant to the plain language of the deed."

In a concurring opinion, Judge Foley stated that unconscionability encompasses two basic principles: one-sidedness and unfair surprise, and indicated that both must be present in order for the doctrine to apply. Specifically, Judge Foley noted that, even assuming the quitclaim deed ...


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