PRENUPTIAL AGREEMENTS

Introduction

Creating prenuptial agreements is often a very difficult and emotional experience for couples. While any contract can be difficult to negotiate, the combination of a need to create potentially long lasting and complex financial arrangements with the emotional tension seemingly inherent in negotiating a prenuptial agreement can make the process the most difficult task confronting a couple planning to marry.  Or, as one client on his third marriage once told the writer, “Everyone hates doing these and because of that, most people give up and just hold their nose, close their eyes and jump in the pool, hoping for the best. Then, if things go wrong, you attorneys make all the money in the divorce courts."

More and more couples wish to better control their economic future by their own planning as to what occurs if things go wrong.  Put simply, one can either negotiate what will happen voluntarily or one can have a judge determine what will happen according to the law. Most people wish to keep control of their own economic decisions rather than have the general law as interpreted by a court apply and the only way to do that is by mutual agreement…either before the marriage or later. And it is a sad but true fact that if one waits until later, the parties may be too estranged to rationally undertake the negotiations required to make a fair and appropriate agreement.

One should realize that if there is a divorce years down the road, that most divorces end up with the couple creating an agreement before trial actually occurs, called a Marital Settlement Agreement. Thus, in reality, couples usually do contract as to how to divide property…even those who reject the concept of a prenuptial agreement. The question is whether one wishes to wait until the marriage is in trouble or not. 

A quite intelligent business woman once commented that if she has to negotiate an unpleasant contract, she likes to do it when rested and before emotions can color the discussions. She was referring to business contracts, but the same thinking can apply to agreements between husband and wife.

Another business person, considering marriage, put it more simply. “Rather than have an elderly judge in a black robe possibly decide our economic future, we decided to create the plans ourselves. We know ourselves better than he knows us.”

But the process can be difficult and a basic understanding of the law is vital. This article shall discuss the California requirements for an enforceable prenuptial agreement.

The Basic Law:

In 1976 the California Supreme Court in the landmark decision of In Re Marriage of Dawley  California’s Supreme Court recognized that prenuptial agreements that contemplated divorce were not invalid per se and against public policy but should be reviewed on a case by case basis to determine if they promoted marital breakdown. In1986 California took another important step in recognizing the validity of prenuptial agreements by adopting its version of the Uniform Premarital Agreement Act which was further amended in 2002. This Act is now adopted in twenty four other states. The current version of California’s Premarital Agreement Act is contained in Family Code sections1600-1617.

In order to ensure its enforceability a party drafting a prenuptial agreement (also referred to an antenuptial or premarital agreement) should be familiar with the provisions of California’s Premarital Agreement Act and the case law.

For prenuptial agreements executed after January 1, 2002, the Family Code provides that an agreement will not be enforceable if either (1) the agreement was involuntary or (2) the agreement was unconscionable and there was no adequate disclosure or (3) the agreement violates public policy.

The following general conclusions can be learned from these requirements which are discussed in more detail below:

•        Both parties should be represented by independent counsel
•        Never wait until just before the wedding to sign a prenuptial agreement
•        Always provide full, fair and reasonable disclosure of all income, assets and liabilities of both sides
•        Ensure that the agreement is fair and does not leave one party without any means of support in the event of divorce

1. The Agreement Must be Voluntary

Family Code 1615 places on the party seeking to avoid enforcement the burden of demonstrating that the agreement was involuntary.  (In Re Marriage of Bonds (2000) 24 Cal, 4th 1, at 37. ) All prenuptial agreement executed after January 1, 2002 are deemed to be involuntary and therefore unenforceable unless the court finds that all of the following requirements are met.:

1.        Independent counsel: The party had independent counsel or was advised to seek independent counsel but waived that right in a separate legal writing. This means that if you can only afford one attorney, the non-represented party must sign a separate written acknowledgment that they have been advised to retain an attorney but declined to do so. It is not enough that the acknowledgement is contained in the prenuptial agreement itself. It is often the case that the idea for a prenuptial agreement is initiated by one spouse: usually the one with the greater assets and income. That person may be tempted to provide assistance in finding and paying for the other’s attorney. It is good practice to find and pay for one’s own attorney. If you must rely on a referral from the other party or their attorney then get at least three referrals. Further, if a party cannot afford to pay an attorney, the other party should loan the money for legal fees rather than paying that attorney directly in order to avoid the appearance that the attorney is not independent.

2.        Seven day waiting period: At least seven days must have elapsed between the date that the parties were “first presented” with the agreement and advised to seek independent counsel and the time the agreement was signed. This means that if you decide to consult an attorney about drafting a prenuptial agreement a few days before the wedding, you are too late. Even if you wait until a few weeks before the wedding, you may run afoul of this provision because it is not clear whether the seven days runs from the first or last draft of the agreement. A conservative interpretation of the statute requires that once you have negotiated a final draft of the agreement, you must wait a further seven days before signing the agreement.

3.        Full disclosure to an unrepresented party: If a party waives their right to independent counsel, for the agreement to still be enforceable the court must find the following: (a) they were fully informed about the terms and basic effect of the agreement and the rights they were relinquishing by signing the agreement (b) they were proficient in the language of the prenuptial agreement and in the language in which explanation of the effect of the agreement was given. Further this advice must be memorialized by the attorney in writing and given to the unrepresented party before they sign the prenuptial agreement. These requirements make it very difficult for only one party to be represented by an attorney. If you think that you are saving money by having only one attorney, you are not. That is because that attorney will have to prepare a lengthy opinion letter to the unrepresented party explaining not only the effect of the prenuptial agreement but also all the rights they will be relinquishing under California law. Therefore, both sides should always be represented by independent counsel in preparing a prenuptial agreement.

4.        Duress, Fraud and Undue Influence: The court must also find that in signing the agreement or any of the other writings referred to above, a party did not act under duress, fraud, or undue influence. Fraud is an intentional concealment of a material fact with intent to deprive the other of a legal right. Duress is where a person has been deprived of their free will by a threat to the safety of their person, family or property. Undue influence takes place where one takes a “grossly oppressive and unfair advantage of another’s necessities or distress” or takes unfair advantage of a confidential relationship.

The leading case of In Re Marriage of Bonds (2000) 24 Cal. 4th suggests that there is a high burden to prove duress or undue influence. The Court found that there was no confidential relationship between parties contemplating marriage. The Court also stated that the overall fairness or unfairness of the agreement was not relevant to the test of its validity.  The Court further found that the agreement was voluntary in spite of the fact that Bond’s fiancé was unrepresented, was presented with the agreement a day before the marriage, Swedish was her main language and it was unclear whether there had been full disclosure.

In December 1987, Barry Bonds, the baseball player, told his fiancé, Sun, a Swedish waitress and make-up artist who was unemployed at the time, that he wanted a prenuptial agreement prior to the planned wedding that was scheduled to take place the following year. The couple were living in Phoenix, Arizona and planned to fly out to Las Vegas on February 5, 1988 and get married the day after. On the day of the flight, Barry and Sun met at his attorney’s office where she was presented for the first time with a prenuptial agreement to sign.  According to evidence at trial, she was advised to consult an independent counsel but declined because she had no assets.  The agreement also referred to a schedule of the party’s property and assets but there was no such schedule attached. The Supreme Court of California upheld the trial court’s finding that the agreement was voluntary:

The trial court determined that there had been no coercion. It declared that Sun had not been subjected to any threats, that she had not been forced to sign the agreement, and that she never expressed any reluctance to sign the agreement. It found that the temporal proximity of the wedding to the signing of the agreement was not coercive, because under the particular circumstances of the case, including the small number of guests and the informality of the wedding arrangements, little embarrassment would have followed from postponement of the wedding. It found that the presentation of the agreement did not come as a surprise to Sun, noting that she was aware of Barry's desire to, "protect his present property and future earnings," and that she had been aware for, “at least a week before the parties signed the formal premarital agreement that one was planned.”

But note that If the facts had been the same but the prenuptial agreement had been executed after January 1, 2002  under the new law, there may well have been a different result since there was no written waiver of the right to obtain independent counsel, no seven day waiting period and no written explanation in Swedish of the effect of the prenuptial agreement and the rights that Sun was relinquishing.

A court might find duress or undue influence if there is a history of domestic violence. The case of In Re Marriage of Balcof (2006) 141 Cal App. 4th 1509, while dealing with a postnuptial agreement signed after the marriage, is illustrative. In that case the court invalidated a post nuptial agreement on the grounds of duress and undue influence where the husband signed a post nuptial agreement transferring a percentage of his business to his wife as a result of continued verbal and physical abuse from the wife, including being hit in the face front of the children and threats by his wife to undermine his relationship with his children.

In the Dawley case, the Supreme Court held that the fact that wife entered the prenuptial agreement because she was pregnant and was concerned about her financial security did not amount to under influence but only because, “James, threatened with a paternity suit and likely loss of his position, was in no position to take advantage of her distress reflecting this rough equality of bargaining power.” This appears to leave the door open that the threat not to marry a pregnant woman may be partial evidence of duress or undue inference. In other States, the courts are split on the issue and one commentator has stated that where pregnancy is the only evidence of duress or undue influence, the cases tend to find agreements valid but where there are other aggravating factors in addition to the pregnancy, the agreement is more likely to be invalidated.  

2.  Planning to Avoid the Claim that the Agreement was Unconscionable and Lack of Disclosure

A party may claim that a prenuptial agreement is invalid because it was both unconscionable when the agreement was executed and that there was no adequate disclosure.

The burden is on the party claiming that the agreement is invalid. Unfortunately, there are no California cases that address whether or not a prenuptial agreement is unconscionable in this context. Applying the test of contractual unconscionability, most commentators argue that there must be both procedural and substantive unconscionability. Procedural unconscionability has been defined as oppression caused by unequal bargaining power and surprise due to hidden and unexpected provisions. Substantive unconscionability involves a one sided and unreasonable agreement lacking in any justification. (Little v. Auto Steigler, Inc. (2003) 29 Cal. 4th 1064.)

Factors which might have a bearing on the issue of unconscionability would be whether a party was presented with the agreement as a fait accompli at a lawyer's offices just before the wedding or was given advanced warning and had an opportunity to review a draft before signing; whether any revisions were made to the agreement at the request of the party challenging enforcement; whether they were represented by counsel; whether they considered the agreement fair at the time of signing; and whether the agreement’s terms were clearly set out and not hidden in small print. There are many cases upholding prenuptial agreements which seem unfair but are, “well within the permissible scope of advantage to one of the parties.”  

Even if the agreement is unconscionable there must also be a finding that there was no full disclosure for the agreement to be invalidated. The person claiming that the agreement was invalid must also prove all of the following elements: a) the party was not provided a fair, reasonable, and full disclosure of the property or financial obligations of the other party, (b) the party did not voluntarily and expressly waive, in writing, any right to disclosure of the property or financial obligations of the other party beyond the disclosure provided, and (c) that party did not have, or reasonably could not have had, an adequate knowledge of the property or financial  obligations of the other party.  

It is therefore good practice to provide for full disclosure of all the parties’ income, assets and liabilities within the body of the agreement and for the parties to acknowledge that they have exchanged tax returns. The parties should also state in the agreement that they have waived any disclosure beyond that provided.

3. Avoiding Allegations of Violation of Public Policy

Provisions in an agreement that seek to impose moral or religious conduct upon the parties during the marriage, limit child support obligations and divest the Court of the power to make custody decisions in the event of a divorce are against public policy and may make the entire agreement unenforceable. Therefore it is a good idea to have a provision that the agreement is severable.

Agreements which attempt to impose a penalty upon a party as a result of that party’s “fault” during the marriage (e.g. infidelity) are generally held to be unenforceable as contrary to the public policy underlying no-fault divorces in California.

In one case a provision in an agreement that contained a liquidated damages clause of $50,000.00 payable by a party who was unfaithful rendered the entire agreement unenforceable.  (Diosdad v. Diosdado (2002) 97 CA4th 470.) That case clearly makes it problematical to draft any provisions which seek to place restrictions on the division of property or support on the basis of fault.

A more difficult question is whether an agreement that makes provisions for lump sum payouts is unenforceable on the grounds that it promotes divorce.  In the landmark Dawley case the Supreme Court drew a distinction between terms which encourage or promote dissolution (invalid) and terms which reorders the property rights of the parties to fit their needs (valid).  Therefore, in one case a Jewish couple signed a “Kethuba” in which the husband promised in the event of divorce to give wife his separate property house and $500,000 or one half of his assets, whichever was greater.  The court believed that the settlement was so substantial that it, "threaten[ed] to induce the destruction of a marriage that might otherwise endure" and invalidated the agreement. (Marriage of Noughrey (1985) 169 Cal App. 3d 326.)  In another case, the court upheld the agreement where the 76 year old husband millionaire promised to pay his 46 year old fiancé $100,000 if they divorced on the grounds that this payment was calculated to compensate her from the loss of spousal support from a former marriage and was therefore a proper, "reordering of property rights to fit the needs and desires of the couple" even though the marriage only lasted a year. (In Re Marriage of Bellio (2003) 105 Cal App. 4th 630.) For this reason it is good practice to ensure that any payments following divorce are in the form of support instead of lump sum property payments.

4.  Special Rules for Spousal Support:

A waiver or a restriction of spousal support in the agreement is unenforceable if either the party was not represented by independent counsel or the agreement was unconscionable at the time of enforcement.There is no provision for a knowing waiver of the independent counsel requirement. It is impossible to know in advance whether the spousal support provision is unconscionable because it is tested at some time in the future. We know that a spousal waiver will not be enforced if it leaves an ill or disabled spousal unable to support themselves. (In Re Marriage of Rosendale (2004) 1119 Cal App. 4th, 1202.) 

There is little California authority for the meaning of unconscionability in the support context. A leading Oregon case which has been cited by California cases suggest that a waiver of support will be upheld unless the other spouse has no other reasonable source of adequate support.  (Unander v. Undander (Ore. 1973) 506 P. 2d 719.) That case made it clear that adequate support means the minimum amount a person needs to support themselves and is not related to the parties’ marital standard of living.  A Colorado Supreme Court upheld a spousal support waiver between a millionaire husband and wife who was earning only $1500 after the divorce.  (Newman v. Newman (Col 1982) 653 P.2d 728.) An Arizona Court of Appeals adopted what it called the “majority rule” established in these cases that spousal support waivers will be enforced unless it would render one spouse without a means of reasonable support or a public charge either because of a lack of property or unemployment.  (Williams v Williams (Ariz 1990) 801 P.2d 495.)

Note that these cases are not binding on California courts which have not shown any reluctance to follow a “minority” rule if they feel that to be the enlightened position. It may be prudent to contain restrictions on the payment of support rather than an outright waiver in any agreement if one seeks to restrict spousal support.

Conclusion:

In the past twenty years, with women entering the workforce and earning salaries often greater than their husbands, the restrictions on spousal support and division of property have become often desired by prospective wives as well as husbands. It is no longer uncommon for spousal support to be awarded to men, thus the gender issue is no longer an underlying factor in developing these types of agreements.

Child support and custody is a matter that the Court will determine based on the best interests of the child, but the Courts now routinely give great latitude to the couple who seek to divide their assets and plan any potential division of property if in accord with the above restrictions.  It should also be noted that various estate planning tools, such as probate homestead and family allowance, must be considered in determining what rights may be waived.

It is a personal decision, of course, and a decision that can require tense discussions and negotiations…but this writer knows of no couple that regretted having such a document prepared after finally completed. It is certainly worth seriously considering whether a couple can more appropriately determine division before emotions become aroused than wait for a Court to do so in a contested hearing.

These Articles are to give the reader a general description of certain areas of the law. Legal advice is necessary to apply these legal concepts to your particular situation. The Reader should obtain competent legal advice before relying on the Articles.

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