Facts: In April 2021, Husband and Wife executed a marital dissolution agreement (“MDA”) that, among other things, addressed the disposition of the marital residence. It provided:

• Wife would refinance the mortgage out of Husband’s name, pay Husband $40,000 for his equity, and Husband would sign a quitclaim deed giving up his interest in the property.
• Wife applied to refinance the mortgage out of Husband’s name and expected to close on the refinancing by May 15, 2021.
• When Wife refinanced the mortgage, equity would be extracted to pay certain marital debts.
• After Wife refinanced the mortgage, she would be responsible for all debts associated with the property. Before the refinancing, Husband would remain responsible for paying the mortgage payment and utilities per the parties’ practice.
• If Wife could not refinance the mortgage, the marital residence would be sold, specific marital debts would be paid from the proceeds, and the remaining proceeds would be divided equally.

In other words, Husband would receive $40,000 if Wife refinanced the mortgage but would receive more money if the property had to be sold because Wife could not refinance the mortgage.

After the trial court approved their divorce, Wife learned that her application to refinance the mortgage was stalled because Husband entered into a forbearance agreement shortly before signing the MDA. A forbearance agreement allows the debtor more time to repay a loan after the date on which the payment is due.

Although the MDA obligated Husband to pay the mortgage until the home was refinanced or sold, the forbearance agreement let Husband withhold payments for several months.

In August 2021, Husband petitioned to sell the marital residence. Wife counter-petitioned to enforce the MDA. The trial court ordered Husband to cooperate with Wife’s efforts to refinance the mortgage.

In February 2022, Wife again moved to compel Husband to cooperate with the lender so Wife could complete the refinancing application. This resulted in another order requiring Husband to cooperate with Wife’s efforts to refinance the mortgage.

In May 2022, Husband moved to sell the marital residence. Per an agreed order, the property was sold soon after. At closing, the parties paid the expenses listed in the MDA, leaving a balance of $211,756.04.

Husband argued the MDA required the proceeds to be “divided equally” because the property was sold.

Wife argued Husband only had the right to $40,000.

The mortgage banker who handled the refinancing attempts testified that he could not obtain a payoff amount from the existing lender because the existing loan was in only Husband’s name, and Husband refused to authorize the mortgage banker to obtain this information. Once Husband was ordered to provide the authorization, the mortgage banker learned that Husband executed a forbearance agreement that prevented the refinancing until Husband paid the arrearage.

The trial court found the MDA limited Husband’s equity to $40,000. Wife was also awarded attorney’s fees over $20,000 per the enforcement provision in the MDA. The trial court also found Husband violated his duty of good faith.

Husband appealed.

On Appeal: The Court of Appeals affirmed in part and reversed in part.

As an enforceable contract, an MDA has an implied covenant of good faith and fair dealing both in the performance and in the interpretation of the contract. A covenant of good faith protects the parties’ reasonable expectations and the right to benefit from their agreement. The duty of good faith requires a contracting party to do nothing that will impair or destroy the other party’s right to receive the benefits of the contract.

The Court agreed with the trial court’s finding of bad faith on Husband’s part but concluded the trial court erred in limiting him to $40,000 because his bad faith prevented the refinancing:

Here, the MDA unequivocally states, “Pending Wife’s refinance, Husband shall be responsible for the payment of the house note and utilities as per the parties’ prior customs and practices.” Husband agreed to this unambiguous provision without disclosing that he had already executed a forbearance agreement with the mortgage company that allowed him to withhold the payments. This conduct reflects a lack of good faith. Moreover, the forbearance agreement did not prevent Husband from paying the house note; it merely afforded him the option of not doing so without being in default on the mortgage. Yet, after the MDA went into effect—and although Wife asked Husband to remit the mortgage payments to allow her to refinance the mortgage—Husband did not do so. Thus, once the MDA went into effect and while Husband had the affirmative duty to remit such payments, Husband voluntarily chose to not pay the mortgage as he was obligated to do….

The record also reveals that Husband had an ulterior motive for not remitting the mortgage payments, that being his desire to force Wife to sell the property, in which case he believed he would receive half of the net proceeds rather than the originally agreed-upon $40,000. This is clear from his actions and his frequent requests to sell the property shortly after entering into the MDA. Rather than following the letter and spirit of the MDA [by taking the steps necessary to take the existing loan out of forbearance], Husband took no affirmative action other than to repeatedly urge Wife to sell the property….

Thus, despite several court orders instructing Husband to take the mortgage out of forbearance and to cooperate with the refinance process, Husband did not do so in a meaningful manner. And the evidence shows that Husband was motivated by the belief that he would financially benefit if he could force the sale of the property. This shows a lack of good faith.

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The MDA is not a model of clarity and has provisions that seem to be inconsistent; still, we conclude that these provisions can be construed “in harmony” with each other.

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The MDA also contemplates the possibility that Wife would not obtain the financing to complete the purchase in which event the parties were to list the property for sale on the open market. This is unequivocally stated in the last paragraph in the MDA, which reads: “In the event Wife is unable to qualify for the refinance of the marital home, the marital home shall be listed and sold and the [itemized expenses] shall be paid from the net proceeds with the balance divided equally.”

Having considered each provision in light of the entire MDA, we find that the parties agreed Husband would sell in quit claim his interest in the property to Wife in consideration for $40,000 if Wife refinanced the mortgage. But Wife was unable to refinance the property, and it was sold to a third party. Therefore, this dispute is controlled by the last paragraph of the MDA, which states, “In the event Wife is unable to qualify for the refinance of the marital home, the marital home shall be listed and sold and the [itemized expenses] shall be paid from the net proceeds with the balance divided equally.”

For these reasons, we respectfully disagree with the trial court’s ruling that “it was the intention of the parties that Husband would receive the $40,000 upon the sale of the home.”

The Court reversed the trial court’s judgment and remanded the case with instructions for the trial court to recalculate the parties’ respective entitlements to the net proceeds from the sale of the property.

K.O.’s Comment: Could Wife have tried to invalidate or reform the MDA because of Husband’s bad faith when it was entered into? I hate seeing a bad actor get rewarded for their bad acts.

Source: Wilhite v. Wilhite (Tennessee Court of Appeals, Middle Section, September 16, 2024).

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