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Vol. 72, No. 7, July 1999

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

When drafting prenuptial agreements, attorneys should take care to follow the
procedural and substantive fairness tests used to evaluate such 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.

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