Rescission and Set Aside of Family Law Settlements and Judgments: When You Can (And Can’t) Get Out Of A Deal
Author: Belinda Hanson, Jeff Makoff (Partner Valle Makoff LLP)
Published: ACFLS Family Law Specialist
Issue: Summer/Fall 2018, No. 3/4
It’s an increasingly common scenario – you engage in multiple rounds of settlement negotiations and mediations and finally, very late in the day, the parties reach agreement and sign aMemorandum of Understanding (“MOU”). The MOU states that it is enforceable under California Code of Civil Procedure (CCP) section 664.6. A key deal point is that your client gets the house in exchange for the other party taking the business. A few months later, perhaps while you are still arguing with the other side about the form of the final Marital Settlement Agreement(“MSA”), or perhaps after a judgment has been entered on the MOU or a long-form MSA, your client believes she has information that the business taken by her ex-husband was grossly undervalued. Maybe the husband hid something, maybe neither party knew something that was important to the valuation, maybe the valuation expert made a mistake. She wants out of the deal.
This article reviews what you – wife’s counsel in our scenario – do next to pursue your client’s concerns.
Is Your Remedy Rescission Or Set-Aside?
The first issue is whether your remedy is (a) rescission, (b) a motion to set-aside or (c) both. If a judgment has not been entered, your remedy is rescission – “self-help” rescission by notice under Civil Code section 1689 and/or a motion/RFO to rescind the MOU. If a judgment has been entered, your remedy is a motion to set-aside under Family Code sections 2120-2129. If a judgment has been entered but the settlement documentation or judgment provide that an underlying agreement is not “merged” into the judgment, the safest course is to move to rescind and set-aside. The rescission remedy is used to attack a contract. A set-aside motion is used to attack a judgment.
I. Rescission.
A. How Do You Rescind A MOU Or MSA Before Entry Of Judgment?
Rescission’s roots are in equity, although the doctrine is now codified in Civil Code sections 1688-1693. The Family Code specifically preserves contract remedies: “Nothing in this chapter changes existing law with respect to contract remedies where the contract has not been merged or incorporated into a judgment.” Note that Family Code sections 3690-3693 are separate set-aside provisions for support orders.
Although all rescissions now derive from Civil Code sections1688-1693, there remain two basic approaches to rescission: “self-help” and court-ordered rescission. In self-help rescission, the party who seeks rescission sends the other side a notice in compliance with Civil Code section 1691 and need not file an action or motion. In court-ordered or “judicial” rescission, the rescinding party files an action or motion in court to obtain/validate a rescission and/or to obtain restitution of a contract benefit conferred on the non-rescinding party. Under Civil Code section 1691, the filing of a pleading seeking rescission is itself deemed a sufficient rescission notice. The decision whether to pursue self-help, court-ordered rescission or both is tactical, based on the strength of the grounds for rescission and an assessment of the other side’s likely response. A party who sends a notice of rescission and refuses to perform a contract is often faced with a claim of breach, and possibly liability for damages, specific performance and other contract remedies. If a notice of rescission is sufficiently well-founded, however, the non-rescinding party may accede to the rescission. In that case, the notice of rescission will have turned out to be a dramatically low-cost way to void a deal. If the rescinding party already has performed, a rescission notice may not be enough to avoid a court case: action may be required to obtain a restitution order.
Due to the risks of liability, self-help rescission must be used with great caution, usually in these circumstances:
The grounds for rescission are so clear that the other party may not fight it, or will likely lose.
There are compelling reasons to avoid the costs or delays of asking a court to validate a rescission.
The consequences of a breach present an acceptable risk in the event non-performance is found improper, or harm to the non-rescinding party can be minimized while the issue is being decided.
A judicial action is not needed to, e.g., obtain restitution of a benefit already conferred under the contract.
Rescission is a superior remedy to damages, such as damages for fraud in the inducement of the contract.
The client understands that by rescinding without court approval, the client may be breaching a contract and that breach of contract litigation is a frequent outcome of self-help rescission.
When self-help is warranted, the rescinding party often should take steps to reduce potential breach liability (i.e., lower the risk to the rescinding party of an incorrect refusal to perform a contract). Until it is certain that the rescission was proper or accepted, the rescinding party reduces risk by taking affirmative steps to reduce the consequences of a rescission to the non-rescinding party. Even in self-help rescission, the rescinding party’s counsel should consider filing a confirmatory judicial action (e.g., declaratory relief) to have the rescission validated. The benefit of such an action is that it avoids a lengthy period in which the rescinding party must wait to determine whether the rescission will be challenged – during which breach damages may mount.
When self-help rescission is not warranted, a court-ordered rescission claim is how rescission is accomplished. In family court the rescission claim would most likely be brought as a “Request for Order Rescinding [Identify Agreement] on Grounds of [State Grounds].” Beyond the costs and delays of judicial proceedings, protracted rescission litigation may raise complex issues of what performances are due during the proceedings, and how the parties and courts can ensure that if rescission is granted the parties will be restored to their prior positions and how, if rescission is denied, the non-rescinding party can obtain the full benefit of the contract.
B. Do Not Count On Partial Rescission.
The general rule is that a contract must be rescinded in its entirety – and there is authority that “partial rescission” does not exist under California law. Civil Code section 1692, however, begins “When a contract has been rescinded in whole or in part . . .”, which suggests that partial rescission exists. Some courts have held that partial rescission is available if the rescinded clause is severable from other provisions. Whether a contract provision is severable is a question of fact to be determined by the court according to the intention of the parties. It is difficultin most cases to predict with confidence that a contract provision is severable. Therefore, a party who seeks rescission ordinarily should assume the whole deal is at risk. We note that the Family Code post-judgment set-aside statutes expressly permit a court to set-aside part of a judgment, and in this sense the set-aside law is clearer on the issue.
C. What Time Limits Apply To Seeking Rescission Of An Agreement?
It is important to remember that the applicable statutes of limitation for bringing a rescission action are, in most cases, virtually irrelevant to how a rescission claim will play out: rescission is subject to a variety of defenses which mandate that rescission claims be asserted promptly. These defenses include laches, estoppel, acquiescence, consent, ratification and other defenses mostly based upon the non-rescinding party’s reliance on the existence of a binding contract. Civil Code section 1691specifically provides that rescission must be sought “promptly.” Of course, many rescission claims are based on fraud, which cannot be pursued until it is discovered. But once a party discovers possible grounds for rescission, there should be no delay.
Under CCP section 339(3), the statute of limitations for bringing a claim to rescind an oral contract is two years. Under CCP section 337(3), the statute of limitations for bringing a claim to rescind a written contract is four years. Due to possible defenses, these limitations periods should be regarded as outer limits, subject to the principle that a party who seeks rescission should move promptly and not be perceived to be enjoying the benefits of a transaction that the party seeks to undo. A rescission claim may be barred by time or conduct well before the statutory period expires.
D. Restoration Of Benefits To The Non-Rescinding Party.
The goal of the rescission remedy is to place the parties in the position they occupied before the rescinded contract was made. Upon a grant of rescission, a court will seek to place both parties in the position they were in before the contract was entered, typically through restitution orders. Even when the rescinding party uses a rescission notice, Civil Code section1691 requires the rescinding party to restore or offer to restore value received under the contract. In a judicial proceeding, the court has broad discretion to make adjustments to the relationship between the parties so as to avoid unjust enrichment due to the rescission. In any case, a party who is considering a rescission should be advised that any benefits received under the contract are at risk.
E. Grounds For Rescission.
Among the grounds for rescission commonly asserted in family cases, rescission is available for fraud, mistake, duress, undue influence and/or failure of consideration. Each ground requires a different showing, and more than one potential ground for rescission may exist in a family law settlement:
Fraud: The rescinding party must show that the other party intentionally induced the settlement contract by knowingly misrepresenting, concealing or omitting a material fact. Normally the rescinding party also must show that she justifiably and detrimentally relied on the misstatement or omission and was damaged by such reliance. Given the broad fiduciary disclosure duties between spouses, in addition to a variety of specific disclosure obligations under the Family Code, fraud is fertile ground for rescission in family cases especially when one party intentionally fails to fully disclose a community asset.
Mistake: The rescinding party must show that either the rescinding or both parties were under a misapprehension about a material fact, that the rescinding party did not accept the risk of the mistake by neglecting a legal duty and that rescission would be fair because enforcement of the settlement contract would be unconscionable. Unlike fraud, mistake does not require that either party have engaged in wrongful conduct, but in the case of unilateral mistake it is important that the rescinding party not be perceived by the court as blameworthy.
Duress: There is plenty of stress in divorce cases, but legal duress is difficult to prove, especially when the parties were represented by counsel. Duress requires a party to show that the other party “intentionally used threats or pressure to induce action or nonaction to the other party’s detriment.” Because (unlike fraud or mistake) duress generally is known at the time the deal was made or shortly after, a rescission claim based on duress should be sought as soon as possible after the agreement was entered-into.
Undue Influence: Undue influence under family law often involves issues of breach of fiduciary duty, disclosuredefects and sometimes elements of duress. California law presumes the presence of undue influence whenever one party to a marital settlement agreement obtains an advantage over the other party.
Failure Of Consideration: Failure of consideration existswhen the counter-party to the agreement has not performed a material term. If a party is dragging his or her feet in performing obligations under a family law settlement, a threat of rescission can secure performance. If you represent a party who is satisfied with the terms of the settlement, however, a motion to enforce the settlement and possibly seek damages for delay makes more sense.
Other Grounds: The foregoing list is non-exclusive and the statute and case law should be consulted.
II. Setting Aside The Judgment.
Once a settlement agreement is entered as a judgment, the Family Code set-aside statute applies. The proper remedy to avoid the deal is a motion to set aside the judgment. There are two statutory frameworks for a family court to set aside a judgment: CCP section 473(b) and Family Code sections 2120-2129. Note that there is no equivalent to “self-help” rescission. A family law judgment may be set aside only by an order of the family court upon granting of a set aside motion.
A. Set-Aside Due To A “Mistake” – General CCP Section473(b) Relief.
CCP section 473(b) allows courts to grant relief from a judgment entered into by “mistake, inadvertence, surprise, or excusable neglect.” The motion must be brought within “a reasonable time” but not longer than six months after the entry of judgment or dismissal. CCP section 473(b) has historically tended to be invoked when there is a default, and is not specifically tailored to the types of issues that arise in family law settlements. Under CCP section 473(b), you must act as soon as you know there is a potential problem, or the court could determine that the delay was not reasonable and deny the motion on the ground that it was untimely (even if it is brought within six months).
B. Set-Aside Rules Specific To Family Law.
Family Code sections 2121 and 2122 offer a more comprehensive basis on which to seek to set aside a family law judgment. Family Code section 2121 provides that the court may “on any terms that may be just” relieve a party from a judgment adjudicating support or division of property. Family Code section 2122 provides that a party may move to set aside a judgment based on fraud, perjury, duress, mental incapacity, mistake or failure to comply with family law disclosure requirements. The time limitations, described below, are more generous than CCP 473(b)’s six months.
In deciding whether to set-aside a judgment, the Court has discretion to fashion an equitable result, including:
The Court may set aside all or part of a judgment (i.e. “partial set-aside” is available);
The date of valuation is subject to equitable considerations;
Equal division is not required; and
Undivided asset motions are still permitted.
C. Time Limits for Family Code Set-Aside.
D. How The Court Will Balance Basic Fairness and Finality of Judgments.
The Legislature recognized that “[i]t occasionally happens that the division of property or the award of support . . . is inequitable when made due to the nondisclosure or other misconduct of the parties.” Setting aside a signed judgment is a higher “hurdle” than rescinding a contract because “[t]he public policy of assuring finality of judgments must be balanced against the public interest in ensuring proper division of marital property, in ensuring sufficient support awards, and in deterring misconduct.” A party who wants a set-aside must prove that there is a material defect with the terms of the judgment: “ajudgment may not be set aside simply because the court finds that it was inequitable when made, nor simply because subsequent circumstances caused the division of assets or liabilities to become inequitable, or the support to become inadequate.” Because the Family Code set-aside rules permit the court to fix the judgment on “any terms that may be just”, a set-aside may result in a new judicially-imposed transaction. Be careful of what you wish for because the court may "fix" the judgment with terms your client does not like.
E. Rescission, Set-Aside And The Judge.
When you seek to rescind or set-aside a deal, you likely will be met with at least initial skepticism. Judges want parties to settle, and recognize that parties often have second thoughts about a deal. Judges also want justice and most can be persuaded in an appropriate case that a deal was procured improperly and should be undone, in whole or in part. Here are some tips on how to approach the judge:
Show you know getting out of a deal is serious;
Show the identified issue is material;
Show that relief is essential to avoid major inequity;
Don’t ask for more than you need;
Show you will pay the price (i.e., give up the benefits received under the deal);
Act quickly as soon as the facts are known; and
If you have strong suspicions but not enough evidence, ask the judge to allow you to investigate the situation.
Under Fam Code 3690-3690 a support order can be set aside.
Family Code section 2128, subdivision (b).
Civil Code section 1688 (“A contract is extinguished by reason of rescission”); Flagship West, LLC, v. Excel Realty Partners, L.P. (E.D. Cal. 2010) 758 F.Supp.2d 1004, 1021 (quoting Douglas v. Dahn (1950) 101 Cal.App.2d 125, 128 (“‘Rescission of a contract must be of the contract as a whole and not in part. It is the undoing of a thing and means that both parties to the contract are entirely released as if it had not been made.”’)); Larsen v. Johannes (1970) 7 Cal.App.3d 491, 501 (quoting Lemle v. Barry (1919) 181 Cal 1,5 (“When a contract is rescinded, it ceases to exist.”)).
Cal. Civ. Code § 1692 (emphasis added).
Howell v. Courtesy Chevrolet, Inc., 16 Cal. App. 3d 391, 404-405 (1971) (holding that the general rule that contracts can only be rescinded in whole is not controlling in cases of severable or divisible contracts).
Keene v. Harling, 61 Cal.2d 318, 320 (1964).
Cal. FC § 2121(a) (“the court may, on any terms that may be just, relieve a spouse from a judgment, or any part or parts thereof, adjudicating support or division of property . . .”) (emphasis added).
Cal. Civ. Code § 1691 (“to effect a rescission a party to the contract must . . . (b) Restore to the other party everything of value which he has received from him under the contract or offer to restore the same upon the condition that the other party do likewise, unless the latter is unable or positively refuses to do so.”).
Id. at § 1692 (“the court may require the party to whom [rescission] is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.”).
Id. at § 1689.
Odorizzi v. Bloomfield School Dist., 246 Cal. App. 2d 123, 128 (1966).
Rubenstein v. Rubenstein, 81 Cal. App. 4th 1131, 1150-1151 (2000).
M.F. Kemper Const. Co. v. City of Los Angeles, 37 Cal. 2d 696, 701-702 (1951).
In re Marriage of Baltins, 212 Cal, App. 3d 66, 85 (1989) (citations omitted) (“Lack of independent advice, standing alone, is not sufficient to support a finding that Wife’s consent was obtained through coercion. . . But, it ‘. . . is a fact to be weighed by the trial court in determining whether [that party] acted voluntarily and with a complete understanding of the transaction.’”); see also Marsiglia v. Marsiglia, 78 Cal. App. 2d 701, 704 (1947) (citations omitted) (“‘[Property settlement agreements] are usually made with the advice of counsel after careful negotiations . . . When the parties have finally agreed upon the division of their property, the courts are loath to disturb their agreement except for equitable considerations.’”).
See In re Marriage of Stevenot, 154 Cal. App. 3d 1051, fn. 6 (1984).
In re Marriage of Kieturakis, 138 Cal. App. 4th 56, 84 (2006).
Id.
Wilson v. Corrugated Kraft Containers, 117 Cal. App. 2d 691, 696 (1953) (defining failure of consideration as when “the contract was manifestly an entire and indivisible one with interdependent covenants . . . and plaintiffs’ default in performance went to the very root of the consideration bargained for, such breach amounted to a failure of consideration entitling defendant to rescind.”).
Cal. FC § 2125.
Id. at § 2126.
Id. at § 2126.
Id. at § 2128(a).
Id. at § 2120(b).
Id. at § 2120(c).
Id. at § 2123.
Id. at § 2121.