A Decade-Post Button v. Button: Drafting Prenuptial Agreements

By Randall R. Garczynski

ll marriages will end in a divorce or death. In either case, any prenuptial agreement you draw - your work product - likely will come under critical scrutiny by adversarial parties seeking to have it put aside, or rendered invalid or unenforceable. It will be analyzed more than any other document you will ever draft.

Newsmakers and celebrities have touted the fact that a good prenuptial agreement is a necessary prerequisite for any marriage. Ivana Trump on her remarriage stated, "Get a good prenuptial and be prepared to live with it." Whether it be to create certainty in the event of divorce or to preserve estates in the event of death, the drafting and use of marital agreements is unquestionably a growth "industry."

Over a decade ago, the Wisconsin Supreme Court in Button v. Button¹ set forth some well-reasoned guidelines and tests by which to measure premarital agreements. That case set up a series of procedural and substantive fairness tests that are used to evaluate agreements upon their drafting and, pursuant to Wisconsin Statutes section 767.255(11), at the time of divorce.

At the time of drafting, an agreement must meet three fairness tests. An agreement meets the procedural fairness tests, if:

1) each spouse makes a fair and reasonable disclosure to the other of his or her financial status; and,
2) each spouse enters into the agreement voluntarily and freely.

An agreement meets the substantive fairness test, if:

3) upon drafting, the provisions of the marital property agreement dividing the property are fair to each party.

Agreements are presumed to be equitable as to both parties. The party who wishes to set aside such agreements must produce evidence to overcome the presumption. If the agreement fails any one of the three tests, the agreement will be deemed inequitable and set aside. Following Button v. Button, litigation has further defined these guidelines. That litigation involved some lawyers' work product.

Test 1: Procedural Fairness - Financial Disclosure

A written disclosure, actual knowledge, or a waiver can meet this test.

Written Disclosure. A written disclosure of all assets and income, attached to the marital agreement, should suffice. Since most clients seeking such agreements have significant assets and/or income, a financial statement prepared by their accountant is preferable. However, even such attachments have been challenged in courts. Since the financial status of your client may be subject to change, the courts determined early on that the de minimus failure to disclose would not invalidate an agreement.² A de minimus amount, however, is a relative figure and can be a rather large number.³

Valuation Caveat. Valuing an asset for disclosure, like a privately held business, can be a problem. In Gardner v. Gardner⁴ book value of stock at $2 million was challenged as not being a fair and reasonable disclosure. Expert testimony put the fair market value, as of the same date, between $18 - 20 million. The appellate court upheld the trial court's finding there was a fair and reasonable disclosure. The difference between various valuation methods of stock was explained. In a footnote on the financial disclosure, the parties indicated the particular formula used (that is, book value) and identified the fact that a market value approach may be substantially higher.

What is interesting in Gardner is the fact that the trial court evaluated the drafting attorney's performance. The court determined that the party challenging the agreement had the difference between book and fair market value explained by its attorney. That attorney had a background in accounting. In addition, the court found there was an independent decision, by counsel, that it was unnecessary to seek an appraisal of the assets. Finally, the court even noted that the attorney told his client that it was not in her best interest to sign the agreement. The statements and actions of the drafting attorney were critical evidence; unfortunately that evidence ultimately weighed against the former client's claims.

Actual Knowledge. In Greenwald v. Greenwald⁵ there was no formal exchange of financial records and the challenger of the agreement claimed an ignorance of the other party's true worth. The court found that the spouse challenging the agreement had certain factual knowledge of the financial status of her husband because she assisted in keeping the financial records. That knowledge included entries of income in ledger books (for example, from mortgages, rentals, and interest), payment of mortgages and discussions of property values during objections to tax assessments on various properties. The court denied the challenge to fair disclosure as form over substance when the challenger clearly had actual knowledge of the finances.

Waiver of Specific Knowledge. A waiver, de facto or in writing, is consistent with case decisions. In Greenwald the court acknowledged that, despite the less than exact knowledge regarding finances, the party "desperately wanted to marry" and "was set on marrying ... and whose headstrong belief could hardly be deterred by the revelation of more assets." The court cited Button's concerns that "if a party's conduct demonstrates that a specific knowledge of the other party's finances is not important to the marital decision and if the agreement is otherwise freely and voluntarily made, there is no sound reason why the law should later intervene and undo the parties' contract." The appellate court in Gardner acknowledged the purpose of the financial disclosure and agreed that "the conduct of the party demonstrated specific knowledge of the assets and finances was not an important component in the decision to marry." A drafter could certainly put in writing the type of de facto waiver the courts have recognized.

Practice Considerations. When possible, use a written comprehensive financial statement compiled by the client's accountant or other suitable third party knowledgeable of the finances.⁶ In cases where an asset is subject to alternative valuations, it should be the practice to include an explanation of precisely what formulas were used to arrive at the values and the statement that there are alternative formulas that may result in different values. This especially should be done where there is no independent valuation and parties simply use the book value. On any waiver, clearly state what rights or information are being waived and affirm that specific knowledge of the other party's assets are not important to the marital decision. If there is actual knowledge, still obtain a written waiver and cite specifically the basis of the actual knowledge. Reliance on undocumented actual knowledge may become a necessary trial tactic, but should not be a drafting practice

Test 2: Procedural Fairness - A Meaningful Choice

Do both parties need counsel and, if so, how long before the wedding?

Button put forth basic touchstones to see if a meaningful choice existed. They were:

• each party is represented by independent counsel;
• each party has adequate time to review the agreement;
• the parties understand the terms of the agreement; and,
• the parties understand their financial rights absent an agreement (or what rights they are giving up).

It clearly is preferred that each party have separate counsel. Independent counsel is the first touchstone set forth in Button and basically creates a presumption that touchstones 3 and 4 are met.

In Greenwald, however, the parties were not represented by separate counsel. That court's decision underscores the tendency to look for substance over form and the likelihood of an attorney/drafter becoming a witness (that is, if only one counsel is involved). In Greenwald, the appellate court upheld the trial court's finding that there was a meaningful choice even without separate counsel. The attorney testified that he advised the challenger of the contract of her right to separate counsel, which she declined. He also gave a thorough reading and explanation of the proposed agreement to the party. It also was clear that the party had received a handwritten copy and later a typewritten copy of the agreement prior to the date of execution. This underscores a consistent trend of the courts to seek to uphold agreements and not set them aside for what might be perceived as a technical irregularity, if good faith effort is made to comply with the philosophic guidelines of Button. It also underscores the necessity of an attorney/drafter keeping contemporaneous notes and documentation in a file so that appropriate testimony can be given later should the agreement be challenged, especially in the instance where the parties are not represented by separate counsel.

What is adequate time to review? In Gardner the challenger of the agreement claimed she was presented with the final draft five days before the wedding, which precluded her from having a meaningful choice. The trial court found that significant negotiations had gone on for several months before the final draft was presented. What is most interesting, however, is that the appellate court clearly stated that a party's statement requiring a marital property agreement as a condition of marriage is not coercion. A party is not robbed of a meaningful choice, as perceived in Button, just because one party insists upon the signing of the marital property agreement before a marriage takes place. The other is always free to leave the relationship if he or she finds the agreement objectionable.

Practice Considerations. The best practice is for each party to have separate counsel. Acting as sole attorney increases the probability of the attorney being called as a witness and excluded as an advocate under Supreme Court Rule 20:3.7. If your client insists on proceeding without separate counsel, draft a disclosure letter to the client that outlines the risks. Acknowledge that you may become a witness and be precluded from representing the client in any later action.

Even though Wisconsin courts may suggest that a party can say "no" even as the "wedding music plays," as an attorney/drafter you do not have to participate in "eleventh hour" agreements. If you believe you have not had adequate time to review the agreement, do not give your approval to your client. It may not save your client, but it can save you. In Gardner, counsel specifically advised the client not to sign; the client signed, and the court upheld the agreement.

The burden of removing the presumption of equity, as to procedural fairness at drafting, seems to have grown heavier since Button and the courts repeatedly look to substance over form in evaluating irregularities or deviations from Button's guidelines.

Test 3: Substantive Fairness - At Time of Execution

The court in Button freely admitted that this substantive fairness test at execution is "an amorphous concept which must be determined on a case by case basis."⁷ A determination of substantive fairness should consider:

• objectives of the parties executing the agreement,
• economic circumstances of the parties,
• the property brought to the marriage by each party,
• each spouse's family relationship and/or obligations to persons other than the spouse,
• the earning capacity of each person,
• the anticipated contribution by one party to the education, training, or increased earning power of the other,
• the future needs of the respective spouses,
• the age, physical, and emotional health of the parties, and
• the expected contribution of each party to the marriage given the appropriate economic value to each party's contribution to homemaking and child care.

The appellate court in Greenwald readily admitted that the above stated factors rarely will lead to a clearly indicated resolution on the issue of substantive fairness.

The Greenwald court then considered the two principal legislative concerns reflected in section 767.255(11) of the Wisconsin Statutes: 1) protection of the parties' right to contract; and 2) the protection of the parties' financial interest in divorce. A significant addition to case law was made by concluding that all factors must be considered with a view toward giving effect to the parties' right to contract. In Greenwald the trial court decision was overturned for failure to meaningfully apply that right of freedom to contract. This freedom of the parties to contract, which is a virtual raison d'etre of prenuptial agreements, is a critical factor in determining substantive fairness.

Case law has further acknowledged that an agreement on divorce is not unfair simply because the application of the agreement results in a property division not equal between the parties or which the court may not have ordered under section 767.255. In Greenwald the appellate court overturned a trial court's determination that the marital property agreement was unenforceable because is was substantively unfair, as it precluded the wife from becoming a "full economic equal in the marriage."⁸ The appellate court appropriately determined that the preclusion of one spouse from ever becoming the full economic equal in the marriage was precisely what the parties intended with the agreement in the first place. An agreement that is equitable and fair does not have to be equal in its division of property. As the Gardner court noted, "any other ruling would in effect say that no agreement of this type would ever be valid."⁹

Practice Considerations. The idea of an "equitable" marital agreement being synonymous with an "equal" division of marital assets should be dead once and for all. The emphasis on the parties' freedom to contract appears to be an attempt by the courts to make this test a bit less amorphous by relying more on sound contract law principles. The Gardner court found an agreement denying maintenance as valid and enforceable. It even denied temporary maintenance during the challenge of the agreement. However, substantive fairness has some limitations. If an agreement exceeds these limitations it may be set aside and thereby defeat its very purpose. Agreements that deny a party completely from sharing in the marital estate, when they have no separate assets or where they make significant contributions to it, are illogical and probably substantively unfair.¹⁰ Public policy may invalidate any agreement that forced one party, upon divorce or death/probate, on to public assistance.¹¹

Test 3 (later): Substantive Fairness - At Time of Divorce

In Button fairness at the time of divorce involved consideration of significant changes in circumstances from those at the time of execution. Those changes made the results of the agreement's application at divorce different from the reasonable expectations of the parties (at the time of drafting). A significant change in circumstances must not have been reasonably foreseeable. The adoption of this unforeseeable change in circumstances has been articulated in Wisconsin and other states. It is another effort to remove the "amorphous" label from the concept of fairness.

Warren v. Warren stated: "'Fairness' without further elaboration, gives no guidance concerning which agreement should be binding and which should be struck down. Measuring an agreement by an undefined judicial standard of 'fairness' is an invitation to the very wealth redistribution that these agreements are designed to prevent."¹² In Warren the appellate court reviewed the trial court's determination that the premature retirement of one of the parties was not a "contracted for consequence" of the agreement. The trial court had found the agreement substantively unfair at the time of divorce. The appellate court viewed this as the wrong analysis. It stated that the proper test was to determine if the parties were reasonably able to predict a particular event. The test was not to be whether the parties would actually agree or contract as to whether the event would occur or would not occur. The appellate court overruled the trial court and stated that when an elderly party marries and then later retires, it is a foreseeable event.

Examples of significant changes of circumstances not reasonably foreseeable by the parties involved a substantial deterioration of health of one of the parties after marriage or a middle-aged couple with grown children suddenly facing an unplanned pregnancy. Absent these types of unforeseen changes in circumstances, the court goes back to basic contract law and underscores the fact that a person signing an agreement undertakes all the normal anticipated risks, including that the agreement may not prove to be a wise one.

A more usual change of circumstance is set forth in Brandt v. Brandt.¹³ In that case, the significant change in circumstance at the time of divorce was the commingling of the parties' assets. That commingling resulted in an inability to trace those assets. That change made enforcing the marital agreement an impossibility. The court concluded that the "party's request to enforce the marital agreement carries with it a concomitant responsibility to trace the property such that a reliable identification and valuation of the assets governed by the agreement can be made."¹⁴ The appellate court further concluded that the trial court was absolutely correct in its determination that the enforcement of the agreement under these circumstances would not only have been inequitable, it would have been impossible.

Practice Considerations. It is appropriate to annually remind clients who have outstanding marital agreements that they should determine, identify, and address any significant changes in their circumstances. A timely amendment, if acceptable to both parties, can address the new issue. Agreements during the marriage are permitted under section 767.255(3)(L) of the Wisconsin Statutes. Anything the agreement drafter can do to help the courts further remove "amorphous" as a modifier in this concept of "substantive fairness" is appropriate and a significant service to clients. It is absolutely necessary to advise clients of the need to be able to trace and identify the assets that the agreement controls. This also involves an understanding of whatever business venture or financial opportunities the client is, or is likely, to become engaged in. This often can mean that concurrently with drafting the marital agreement, attorneys must establish holding companies, corporations, business entities or procedures necessary to reasonably ensure the enforceability of the agreement at a later date.

A Parting Caveat

Litigation of a marital property agreement is litigation of an attorney's work product. The courts have stated that the drafter is not an insurer of the agreement, but at least one court has allowed a professional negligence claim against the drafter ... even where experts agreed the document was enforceable.¹⁵ When drafting an agreement, attorneys should think like a litigator. At the time of drafting, consider what evidence would be necessary to defend the agreement. Briefly outline a strategy and list supportive evidence. Remember, at divorce or death - two highly charged emotional times - is when the drafting attorneys' work product, maybe your work product, will be scrutinized by others.

Endnotes

¹ Button v. Button, 131 Wis. 2d 84, 388 N.W.2d 546 (1986).

² Schumacher v. Schumacher, 131 Wis. 2d 332, 388 N.W.2d 912 (1986).

³ An unpublished case gives an idea of how "relative" a de minimus amount can be; a $129,000 deviation was viewed as de minimus in light of the $1.3 million of assets being valued - a 10 percent error was tolerable. Stayer v. Stayer, (Ct. App., No. 95-2534, Nov. 27, 1996).

⁴ Gardner v. Gardner, 190 Wis. 2d 216, 527 N.W.2d 701 (Ct. App. 1994).

⁵ Greenwald v. Greenwald, 154 Wis. 2d 767, 454 N.W.2d 34 (Ct. App. 1990).

⁶ The court in discussing professional negligence has said, "If an attorney drafts a prenuptial agreement without attaching a financial statement, the factfinder could conclude that the attorney failed to use reasonable care, that is, that the attorney was negligent. It is immaterial that the agreement might later be enforced after a finding that the widow already knew the financial information." Estate of Campbell v. Chaney, 169 Wis. 2d 399, 485 N.W.2d 421 (Ct. App. 1992).

⁷ Button, at 551.

⁸ Greenwald, at 41.

⁹ Gardner, at 707.

¹⁰ An unpublished case found an agreement "substantively" unfair when it excluded the farm wife from a share of the marital estate after working diligently at the farm for 12 years; she had no independent assets or significant outside employment. In re Marriage of Seefeldt v. Seefeldt, (Ct. App., No. 96-3708, Oct. 28, 1997).

¹¹ Wis. Stat. §§ 266.58(9)(a) and (b).

¹² Warren v. Warren, 147 Wis. 2d 704, 434 N.W.2d 295 (Ct. App. 1988).

¹³ Brandt v. Brandt, 145 Wis. 2d 394, 427 N.W.2d 126 (Ct. App. 1988).

¹⁴ Id., 145 Wis. 2d at 416, 427 N.W.2d at 134.

¹⁵ Estate of Campbell v. Chaney, 169 Wis. 2d 399, 485 N.W.2d 421 (Ct. App. 1992).

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