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Unconscionability of Premarital Agreements – Pt 2 of 2

Oct 18, 2022 | General Estate Planning, Podcasts, T&E Administration, T&E Litigation, Uniform Law, Multi-State Issues & Laws

“Unconscionability of Premarital Agreements,” that’s the subject of today’s ACTEC Trust and Estate Talk.

This is Lois Ann Stanton, ACTEC Fellow from Austin, Texas. Estate planning sometimes requires the creation and execution of premarital or post-nuptial agreements. Last week in part one, ACTEC Fellow Rich Gorini from San Jose, California shared a review of a statutory framework governing marital agreements. This week, in part two, he will explore some actual cases involving disputes based on unconscionability. Welcome, Rich.

Thank you, Lois Ann. So, in terms of giving you some examples of how the courts will find unconscionability such that they will not enforce a premarital agreement, I think it’s helpful to look at some of the cases. I’m first going to talk to you about some California cases and then I’m going to expand that and talk about cases from New York, Virginia, and Hawaii. Okay.

Case Example: Facter Premarital Agreement

So, the first case that I want to talk about is in re Marriage of Facter. Facter is spelled F (as in Frank) -A-C (as in Charles) -T (as in Tom)-E-R, 2013 (212 Cal.App.4th 967). That’s 212 Cal.App.4th, 967. The story of Jeff and Nancy, spouses who entered into a premarital agreement in 1994. The husband is an attorney and the court obviously was making a particular point of the fact that he was a graduate of Harvard Law School and a partner in a firm practicing securities and corporate governance litigation. He had disclosed at the very beginning a separate property of about $3,000,000, with annual earnings of $475,000 to $700,000 in the prior five years per year. The wife, on the other hand, was selling shoes part-time at Nordstrom.

So, you can see where this is going. So, she testifies that she didn’t like that job. She wanted to become a real estate agent. Husband financed that and then when they got married, she decided she didn’t want to be a real estate agent so she stopped working. She was going through a divorce at that point in time. So, she wasn’t exactly as innocent as she might have portrayed herself to be. And in fact, she knew much more about the divorce process than her husband had. Anyway, the premarital agreement provided that the husband would retain all of his income and all of the assets as his separate property.

The wife would receive $100,000 plus an additional $100,000 if the marriage lasted at least 15 years and he was a partner at his law firm for at least seven years; half of the equity of the residence less his down payments (which were substantial) and any expenses and fees and taxes that were incurred with that sale; and she also got a Jaguar automobile. So, the fact that the agreement predated the statutes that I referred to in the first podcast, the court, in any event, they said that they were not precluded from examining the unconscionability at the time of execution and at the time of enforcement.

And so, the court went through a fairly detailed analysis of the existing law referring back also to a Supreme Court case in California called Marriage of Pendleton, which came down exactly on the same date as the Marriage of Bonds case. And in Pendleton, the wife was found to have a master’s degree. She was an aspiring writer. She and her spouse had approximately net worth that were equal, at about $2.5 million. Each of them had been represented by independent counsel and she was asking for spousal support in spite of a waiver of that support in their premarital agreement.

And the court said, “It is enough to conclude here that no public policy is violated by permitting enforcement of a waiver of spousal support executed by intelligent, well-educated persons, each of whom appears to be self-sufficient in property and earning ability, and both of whom have the advice of counsel regarding their rights and obligations as marital partners at the time they execute the waiver. Such a waiver does not violate public policy and is not per se unenforceable.”

In Facter on the other hand, the court found that the wife was not a well-educated person. She was not self-sufficient in property and earning capacity at the time she signed the agreement. She was, in fact, a recently unemployed high school graduate with two minor children selling shoes at Nordstrom, living rent-free in the home that the husband financed for them. At the time of the divorce, the husband was earning about $500,000 a year and had 3 million of separate property, including a home in Tiberon which, for those who are not familiar with that area, is pretty high-rent land. The wife had no property of her own.

So, the court makes a note of the great disparity in the parties’ respective incomes and assets at the time they entered the agreement and they also suggest that this is indicative of a significant inequality of bargaining power. So, because of that, at the time of the divorce the husband now has separate property in excess of $10 million earning a million dollars per year, whereas the wife has no separate property of her own and no income. The court found that agreement to be unconscionable. 

Case Example: Zucker Premarital Agreement

The next case was in re the Marriage of Zucker, a 2022 California appellate case and that Zucker is Z-U-C-K-E-R, 75 Cal.App.5th 1025. That’s 75 Cal.App.5th 1025. There we have a husband who is a co-founder and CEO of a hedge fund and a bond broker, had a net worth at that time of about $10 million and was making $2 million per year. So, you see, folks, we’re in the wrong business here. 

The wife had a history of psychological troubles including anorexia. She graduated from high school, and took a few classes at college, but never graduated and she had admitted herself into a psychiatric hospital for anorexia and then, because of a low-level crime, she was transferred to a locked ward where she was raped at knifepoint. She was first married, but that marriage was dissolved. She met husband number two, in this case, Mark Zucker in 1993. He was 33. She was 29. She got pregnant in 1993 and, at her second husband’s request, had an abortion. She became pregnant again late that year and, even though the husband asked her to get another abortion, she refused.

So, in January of 1994, the parties signed a premarital agreement that waived the wife’s community property interest, gave her a one-time payment of $10,000 upon moving out of the house, which husband number two had the right to enforce, and limited her spousal support to $6,000 per month with modest increases and also waived her inheritance rights. At that time, she disclosed her assets of about $242,000. The husband had assets of about $5.8 million. During the marriage, she bears him six children. Now, if I’m the judge, right there she wins the case, but and wife’s attorney advised her not to sign the premarital agreement.

So, despite the trial court and the appellate court finds that the wife had voluntarily executed the premarital agreement and that there was no duress or undue influence, the court found that the disparity in the parties’ income –he husband had at that point in time, at the time of the divorce, $32 million net worth, $4 to $5 million of yearly income. While the wife stayed and home and raised those six children, had no current employment, and that she would need between $37,000 and $86,000 per month to meet the marital lifestyle. Both the trial court and the appellate court found that the spousal support provisions were unconscionable and unenforceable.

Post-Nuptial Case Example: New York 

Some other cases are similar in that regard. From New York, Gardella v. Remizov, R-E-M-I-Z-O-V, that’s 144 A.D.3d 977 from 2016, 144 A.D.3d 977. The parties married in 2000. They entered into a couple of post-nuptial agreements. The wife was a neurologist and had a medical practice and the premarital agreement basically allowed for all of those assets to be her separate property.

They also signed a separation agreement in 2010. At the time she was earning $600,000 a year. Her husband was a wine salesman earning about $40,000 a year. So, you see love is not only blind, it’s also ignorant about economics. The separation agreement provided that the husband would have no interest in any of the assets acquired during the marriage and the husband was not represented by counsel when he signed that agreement. The court found that in view of the fiduciary relationship between the spouses separation agreements are more closely scrutinized than ordinary contracts.

So, what the court said was that even though the post-nuptial agreements were executed voluntarily and were enforceable, the separation agreement gave rise to issues that required the court to remand it for a determination as to whether it was unconscionable.

Post-Nuptial Case Example: Virginia

Sims v. Sims, 2009, Virginia case 55 Va. App. 340. That’s 55 Va. App. 340. The spouses married in ’68 and separated in 2006. Initially, the husband offered the wife to give her $2,000 per month until she received half of everything. The wife refused to sign that agreement because it didn’t include the husband’s retirement and deferred compensation.

Thereafter, the wife started talking to people, including her son and the husband’s attorney, that she didn’t want anything from the marriage. She just wanted to have a divorce. Well, as you might imagine, the husband’s attorney and the husband thought that they had died and went to heaven. So, the husband’s attorney drafted an agreement that waived everything on behalf of the wife. The only thing she received was a 1999 pickup truck and some tangible personal property. She ultimately – and of course at that point in time husband had substantial assets.

The wife thereafter does hire an attorney and that attorney files an action to invalidate the agreement based upon unconscionability and the court finds that, because of her disability regarding depression, high blood pressure, rheumatoid arthritis, diabetes, etcetera, that she was unable to understand what she was signing. Also, they point out she had “a third-grade education, was married at age 16, and had been married for 38 years during which time she didn’t really have any ability to take care of herself.”

So, the court finds that the agreement was unconscionable. And similarly, they make a distinction between that case and a prior Virginia case called Galloway v. Galloway where the wife had been a nurse’s aide for 20 years and had been working with the husband in his heating and air conditioning business during which time she had worked as an installer and the fact that she’d also received an inheritance from her family. So, the court said based upon that, nothing in the records suggests that the wife is incapable of enjoying financial independence.

Agreements Predating Adoption of Uniform Premarital Act 

There is also a case in Hawaii, Lewis v. Lewis, that’s L-E-W-I-S versus L-E-W-I-S 1988, 69 Hawaii 497. That’s 69 Haw.497. There the courts had found that this agreement, as was in some of the other cases, pre-dated Hawaii’s adoption of the Uniform Premarital Agreement Act; but that the court nevertheless had the right to take a look at the circumstances at the time of divorce and found that, because of the disparities, that this agreement potentially was unconscionable and remanded the case back to the trial court.

Conclusion

So, the bottom line to all of these cases I think I can summarize in three adages: 1) don’t be stingy; 2) you have to understand, and you have to explain to your clients, that they’ve got to pay to play; and 3) don’t take advantage of your shoe-selling spouses or wine-selling spouses. From a practical standpoint, when you ask yourself, “Well, how can I put together a valid premarital agreement?” I think that the safest approach is to determine what the normal support would be and maybe use a discounted percentage of that.

That may certainly be a lot more than your clients would want to pay, but you’ve got to explain to them in the form of that CYA letter that anything less could potentially leave them exposed for that agreement being invalidated. 

Well, thank you, Rich. And that’s a great sharing of a sample of the case law where marital agreements were attacked based upon unconscionability.

 

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