Saturday, November 8, 2014

On Prenuptial Agreements

I write a fair amount of pre-nuptial agreements and my clients often have difficulty with same requests from me. I decided it would be beneficial if I explain them in my blog.

Following is a list of common issues:

First, I always ask to disclose all property and debt of each party and it always surprises me when people resist the disclosure. One of many questions is “why do I need to show what I have?”

 Second, I always schedule a meeting to explain terms of the agreement and I always ask my clients to read the agreement closely and ask me questions on everything they did not understand. Some people follow that advice, majority however do not. They also tend not to listen during our meeting. That concerns me.

Third, I always recommend that their fiancé hired an independent counsel before signing the agreement. Unfortunately I cannot force them to hire one. I wish I could though.

Why am I so concerned about the items on the list? Here is why: in a recent appellate case In re the Marriage of Kaye, which was unpublished, Division One upheld trial court’s decision to invalidate the parties’ prenuptial agreement on the grounds of substantive and procedural unfairness. Meaning they said the agreement was invalid because the parties did not provide full disclosure of the assets, they did not understand terms of their agreement and the wife did not have an attorney for the agreement review and thus did not fully understand the terms of the agreement.

From legal point of view, when analyzing enforceability of prenuptial agreement, the court undertakes a two-prong test:

1.      The court determines if the agreement is substantively fair. If it is fair, then the agreement is enforceable.

2.      If the court finds that the agreement is not fair, the court checks if it was procedurally fair when executed. The term “procedurally fair” means:

a.       Both spouses made full disclosure of the amount, character, and value of the property; and

b.      The agreement was freely entered into on independent advice from counsel with full knowledge by both spouses of their rights.

 “Substantive fairness” means that the agreement fairly provides for the spouse not seeking enforcement of the agreement, including (1) the proportional benefit between the parties; (2) restrictions on the creation of community property; (3) prohibitions on the distribution of separate property upon dissolution; (4) the economic means of each spouse; (5) preclusion of common law and statutory rights to both community and separate property under dissolution; (6) limitation on inheritance; (7) prohibitions on awards of maintenance, and (8) limitations on the accumulation of separate property.

The court in our case found the agreement both substantively and procedurally unfair. On substantive unfairness the court held:

“In the context of the parties’ economic means at the time of execution, these paragraphs [the court referred to specific paragraphs in the agreement] limited the accumulation of community property and disproportionally benefited Karl. When Barbara and Karl married, Barbara owned modest property assets. Her primary source of income was the salary she earned working for a local bank. Conversely, Karl owned substantial property assets and various real estate investments, stocks, and bonds that generated his primary source of income. He had not worked for years, and there was no expectation that he would work during the marriage. By its terms, the agreement essentially ensured that Karl’s property would always remain separate. … Karl’s substantial property assets and its proceeds remained his separate property even if those assets increased in value or became commingled with community assets. Any community funds that directly benefited separate property would be deemed a gift. There was no requirement that a party be reimbursed for community or separate funds gifted to the other party.”

In addition, the agreement prevented accumulation of community property and “it ensured that Karl would retain and interest in half of Barbara’s salary or any asset obtained with the proceeds of her salary. Further, no other clause in the agreement expressly designates any assets as community property. By the agreement’s terms, the only sources of community property are wages, salaries, and employment benefits – assets and only Barbara was expected to contribute when the signed the agreement.”

The court also analyzed other provisions of the agreement and found it to be substantively unfair. “Given the parties’ economic circumstances at the time of execution, the agreement disproportionally favors Karl, restricts the creation of community property, prohibits the distribution of separate property upon dissolution, limits inheritance rights, and precludes statutory rights upon dissolution or death.”

It would have been ok, if the agreement was procedurally fair though. In this case, the court held that the agreement was procedurally unfair because (1) neither party understood what was in the agreement, and (2) Barbara did not receive independent legal advice.

 Even though a person is not required to seek legal counsel, when the agreement is substantively unfair courts routinely find that legal advice is necessary because otherwise a party is “ill equipped to identify its [agreement’s] patently unreasonable terms on her own.”

That is the main point, both parties will benefit if they have reasonable time to review proposed agreement, go over each and every provision with their attorney, and both parties have an attorney to review that agreement.

My recommendation is always to have an attorney review proposed prenuptial agreement, and always make sure that you understand all provisions of the agreement.

Tuesday, August 5, 2014

About Petition for Dissolution of Marriage

When preparing a case for filing with the court, I receive many questions from my clients as to whether certain items should be disclosed early on. One of those questionable items is a request for spousal maintenance. I assure everyone that each and every possible claim should be brought up in the initial Petition for Dissolution of marriage. Before I explain why I want to give short background information on the dissolution procedure and significance of the Petition.

In order to start a divorce procedure a petitioner needs to prepare and file with the court Petition for Dissolution of Marriage. The Petition is a formal way to tell a court and spouse what the petitioner wants.

Because it is official it could be and would be used by the opposing party during the divorce proceedings. That means that a party preparing a Petition must take their time when filling it out. It is not easy to change it. Unfortunately, some people take wording of the Petition lightly.

For example, many of my clients, especially those who try to negotiate with their spouses and think they might have an amicable divorce, ask me whether they in fact have to make any allegation about spousal maintenance. In a recent decision Division III of the Washington Court of Appeals answered that question. Full opinion could be found here.

 In the Marriage of Hasan Tahatand Mary Tahat Mary was a Petitioner. She initially stated in her Petition that she did not need spousal maintenance. Later at her deposition when asked whether she needed spousal maintenance she again responded negatively. However, when the trial started she changed her mind about spousal maintenance. That is when she requested to amend her Petition because that was the only way to bring the issue of spousal maintenance up at the trial.

Of course Hasan Tahat, the Respondent, claimed he was not prepared to address the issue of spousal maintenance at trial. As he did not consent to her request to amend, Mary needed court’s permission to do so. The trial court denied Mary’s request to amend the Petition. As a result Mary was not able to bring up spousal maintenance at trial. Mary appealed.

Court of appeals noted that the following rules applied to the situation:

 Superior court rule 15(a) provided that leave to amend should be freely given, “except where prejudice to the opposing party would result.” In previous court opinions, courts explained that “prejudice to the opposing party” include “undue delay, unfair surprise, and jury confusion.” Delay must be accompanied by prejudice to the nonmoving party. In Oliver v. Flow Int’l Corp, court of appeals held that the need for additional discovery was sufficient prejudice to deny a motion for amend.

 After applying above-stated rules to the situation at hand, the court of appeals held:

“We discern valid arguments on both sides as to whether the motion to amend should have been granted. The motion came on the first day of trial. Hasan would have needed to defend against additional claim, for which he had not time to prepare. He forewent questioning Mary Tahat about the claim, during the deposition since she denied seeking spousal maintenance. Since Hasan Tahat raised legitimate concern of prejudice, we conclude the trial court did not abuse its discretion when denying the motion to amend.”

In essence this court opinion demonstrates clear necessity to state all possible claims in the Petition for Dissolution of Marriage. It is easy to abandon a stated claim later on but it might be impossible to bring up a new claim at the trial level.