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
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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.
Randall R. Garczynski, Marquette
1980, a shareholder in Garczynski & Brennan Law Offices S.C.,
Elkhorn, argued Button v. Button for the appellant before the
Wisconsin Supreme Court. Garczynski has presented numerous seminars on
marital property law and agreements, and has litigated agreements in
divorce and probate courts for plaintiffs and defendants.
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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).
14Id., 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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