Court of Appeals reverses family court determination that prenuptial agreement was unconscionable on equitable distribution

Posted Friday, April 18th, 2014 by Gregory Forman
Filed under Equitable Distribution/Property Division, Of Interest to Family Court Litigants, Of Interest to Family Law Attorneys, South Carolina Appellate Decisions, South Carolina Specific

The April 16, 2014 Court of Appeals opinion in Hudson v. Hudson408 S.C. 76, 757 S.E.2d 727 (Ct. App. 2014), reversed the family court’s determination that the parties’ prenuptial agreement was unconscionable on the issue of the equitable distribution of Husband’s pre-marital businesses.

The prenuptial agreement included a mutual waiver of alimony, as well as a waiver of any interest in the other’s premarital businesses or any property acquired by the other during the marriage. Among Husband’s premarital businesses were a life-guarding business and a flea market. Husband failed to list the flea market and a franchise fee on his financial declaration for the prenuptial agreement. He claimed he failed to list the flea market because his mother owned a life estate to the property and he only owned a remainder interest. He claimed he failed to list the franchise fee because he leased it to the lifeguard business and considered it part of that business.

Wife signed the prenuptial agreement two weeks prior to the wedding. She used an attorney selected by Husband, who was a non-practicing attorney, to witness the agreement, she did not read the agreement prior to signing it, and the attorney did not thoroughly review it with her. Wife’s psychological expert testified she would have been devastated to cancel the wedding but that she was legally capable at the time she signed the agreement.

Wife testified that during the parties’ 8 ½ year marriage she helped Husband in the lifeguard business. Husband acknowledged that she paid for renovations to his home. Wife’s financial expert concluded the marital portion of Husband’s earnings during the marriage was $551,878 and conservatively estimated the value of Lifeguards at $1.1 million and attributed $500,437 to a “marital allocation.”

The family court bifurcated the matter for trial, first deciding whether to enforce the agreement. It found Wife was not under duress when she executed the agreement. However in deciding whether to enforce the prenuptial agreement, the court determined:

This Court does not find that the [A]greement is unconscionable as far as it deals with alimony and support. However, as it deals with equitable division of marital property – in other words, the earnings, marital earnings or increase in value of non-marital property, I do find that to be unconscionable in this action.

Because Wife’s expert provided the only testimony on the value of Husband’s businesses, the court accepted his valuations and awarded Wife 45% of the net marital earnings of $552,378, along with $52,000 in attorney’s fees and costs. Husband appealed.

The Court of Appeals found the agreement on equitable distribution was not unconscionable. Because both parties waived any interest in the other’s marital earnings, it found “the Agreement’s terms were not so one-sided or oppressive that no reasonable person would make them and no fair and honest person would accept them; therefore, the Agreement was not unconscionable as to equitable division.”

It further found Wife was not under duress when she executed the agreement, noting:

Wife testified she would have signed the Agreement regardless of its fairness, so long as it was not fraudulent. Although we have concern regarding Husband’s referral of Wife to a friend for legal counsel, we find Wife willingly agreed to use Solomon as her counsel, and she knew of his failure to adequately advise her when she signed the Agreement. Wife admitted Solomon did not discuss the details of the Agreement and merely told her Husband was a good guy. Additionally, her psychologist testified Wife was capable at the time she signed the Agreement. We find the circumstances when the Agreement was signed did not render the Agreement unconscionable.

It also disagreed with the family court’s determination that Wife’s circumstances had changed so substantially during the marriage that it was no longer equitable to enforce the agreement, as:

Wife entered the marriage with insignificant assets and was unemployed. At the time of the separation, Wife was employed and had substantially the same assets as when she entered the marriage, although she had a debt of $16,783 from a loss incurred due to the sale of her own business.

Because the Court of Appeals reversed Wife’s award of equitable distribution it also reversed the award of attorney’s fees.

There is always the possibility that the Court of Appeals’ opinion shades the facts to justify the reversal but, based on the fact pattern presented, this did not appear to be a close case on the issue of unconscionability. Wife did not change her position to her detriment during the marriage and it is not considered unconscionable to have each party waive an interest in the other party’s pre-marital business(es)–in fact that is often one of the primary purposes of such agreements.

Experience indicates that family courts sometimes refuse to enforce prenuptial agreements because, at the time of the divorce, the agreements appear “unfair” to the less wealthy party even if that party is no worse off than he or she (generally she) would have been had she not entered the marriage. This makes it hard to advise parties contemplating marriage on the enforceability of any contemplated prenuptial agreement and to advise spouses considering divorce on whether such agreements will be enforced. Due to this uncertainty such agreements are often merely leverage to be used in settlement negotiations, as opposed to the final resolution of the issues within the parties’ agreement. If Hudson provides more confidence on the enforceability of such agreements, and makes family courts more reluctant to void such agreements, it will make prenuptial agreements more valuable for South Carolina spouses.

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