Are you familiar with the adage, "It is not a problem until it is a problem?" With most spouses, the premarital agreement does not undergo judicial scrutiny for years, perhaps decades, after its execution. The problem spouses encounter is when they discover potential vulnerabilities with the contract when enforcement is sought by one or both parties. As with any agreement, the ideal time to make corrections and adjustments is after a review by independent counsel and before signing it. However, that is not how things always play out.
Problems with the premarital agreement surface quickly when one party asks the court to enforce it while the other party objects on one or more grounds. A challenge initiates multi-factor analysis by the court, something a bit more in-depth than establishing "who drafted it?"
Statute of Limitations
Enforcement of the premarital agreement in probate or family court often occurs many years after the instrument was signed. By contrast, with a breach of contract or personal injury lawsuit, the years gone by without the plaintiff taking any legal action would result in dismissal because the complaint was filed too late, outside of that statute of limitation period.
With the enforcement of a premarital agreement, though marriage tolls the clock for allowing a spouse to sue and enforce the premarital agreement decades after the agreement was entered into. A special limitation period exists for premarital agreements under the Texas Family Code Section 4.008:
"LIMITATION OF ACTIONS. A statute of limitations applicable to an action asserting a claim for relief under a premarital agreement is tolled during the marriage of the parties to the agreement. However, equitable defenses limiting the time for enforcement, including laches and estoppel, are available to either party."
Consequently, arguments that premarital agreement enforcement should be time-barred are only available in equity. Those equitable defenses include:
- Latches because of the spouse's unreasonable delay in seeking premarital agreement enforcement
- Estoppel, given the spouse's previous conduct, and
- The spouse's unclean hands for having acted in bad faith, among others.
For laches to apply, the proponent must establish that a party unreasonably delayed asserting their rights and that this delay caused the to proponent changed their legal position in good faith to their detriment because of the delay.
An example of a case where laches were applied was in Fazakerly, 996 S.W.2.D. 265. A daughter, with knowledge of a premarital agreement between her deceased father and her stepmother, signed a settlement agreement with her stepmother and then waited five years to contest the premarital agreement later. The stepmother developed Alzheimer's during the intervening period and was no longer competent to testify about the premarital agreement.
This is a defense that can be raised, for example, if the party had made representations that caused the delay for filing suit after the limitations period had run.
Who Carries the Burden of Proof in Court?
When a premarital agreement's validity is challenged in a divorce or probate action, the responsibility for carrying the burden of proof is an essential aspect of a case.
At the trial or hearing, the court opens with the legal presumption the spouses' premarital agreement is valid. From there, the spouse challenging the validity of the premarital agreement carries the initial burden of proof and must make a case of the agreement's invalidity. The burden of proof then shifts to the proponent of the premarital agreement, who must offer evidence of the premarital agreement's validity. The judge will analyze the agreement regarding voluntariness.
Texas Law for Agreements Made on or Before September 1, 1993
In 1993, the legislature amended the Family Code by eliminating common-law defenses to the enforcement of premarital agreements executed on or after September 1, 1993. Thus, for premarital agreements executed on or after September 1, 1993, involuntary execution and unconscionability are the only grounds for contesting the enforcement of a premarital agreement.
Tex. Fam. Code §4.006(c). While Family Code §4.006(c) indicates that involuntary execution and unconscionability are the exclusive defenses to enforcement of a premarital agreement, a specific term of an agreement (as opposed to the agreement as a whole) can still be challenged if it is a prohibited contractual term.
With a divorce or probate pending, the premarital agreement's validity may be challenged by either spouse, by a deceased spouse's executor, or by a third-party beneficiary of the contract. A premarital agreement could be set aside for a number of reasons.
Factors that the court should consider when determining whether the agreement was voluntarily entered into include:
- Advice of Counsel
- Amount of information
- Withheld information
Independent Legal Advice
Several Texas courts have held that lack of separate representation does not make an agreement unenforceable. Marsh v. Marsh, 949 S.W.2d 734 (Tex. App.–Houston 1997, no writ).
Although having an attorney is not required to find a premarital agreement to be valid, obtaining independent legal counsel is an indicator of voluntariness. It is also probably the single most crucial factor supporting voluntariness when the contract is challenged in court by a spouse.
The best practice would be for both fiancés to have attorneys and to participate in drawing up the premarital agreement.
What if the attorney's recommendation was "do not sign the premarital agreement as written?” The lawyer's guidance was still independent legal advice despite the client's rejection.
What if the drafting party recommended the other fiancé obtain legal advice before deciding whether or not to sign the agreement? Still, the other party rejected the recommendation and signed without a lawyer reviewing the agreement? Knowing and having the opportunity to obtain independent legal advice will be evidence of voluntariness.
The court may consider whether any misrepresentations were made in obtaining the agreement. Was there any fraud to induce the party to sign the premarital agreement? Did a party materially misrepresent his or her property and debts? Misrepresentation occurs when a party misleads or hides assets or liabilities from the other party.
Amount of Information
A court may also consider how much information was provided prior to the signing of the agreement. Parties to a premarital agreement may include a recital or statement about how they know everything they need to know and how they made financial disclosure before executing the contract.
Full financial disclosure of assets and debts is essential, but the right to fair and reasonable disclosure of property and financial obligations may be waived. Not surprisingly, the waiver must be voluntary, express, and in writing.
There are various ways to make sufficient financial disclosures:
- Itemized statements
- Statements of net worth
- Income summary
- Provision of financial records
- Verbal exchange of financial information
- Business profit and loss statement and
- Informal disclosure providing "constructive knowledge."
Constructive knowledge is based upon pre-existing informally obtained financial information. Knowledge is gathered by observation and communications occurring before and during the couple's courtship. Relying on the outward appearance of someone's lifestyle without concrete evidence of net worth and income should be avoided.
The court can consider whether any information was withheld from the parties signing the agreement. A person may enjoy a high standard of living but be massively in debt. Hence the need for full disclosure of property and finances.
Worse, a carefully planned façade of wealth could rise to the level of intentional fraud. If a spouse was purposely inducing a fiancé into marriage by rubbing elbows with the right people and appearing on exclusive occasions, this could be considered fraud.
Conversely, someone who appears to be of modest means may, in fact, be quite wealthy. Sam Walton, the founder of Walmart, even after becoming a billionaire, drove a pickup truck and wore clothes from his own discount store. Looks can be deceiving.
Evidence of Fraud Duress, Undue Influence
The law of whether Texas courts can consider evidence of fraud, duress, and undue influence in whether an involuntary execution of a premarital agreement is uncertain. This is due to the Texas Family Code, which makes involuntary execution and unconscionability the exclusive defenses to a premarital agreement as of September 1, 1993. Courts agree that these defenses can be considered for agreements made on or before September 1, 1993. They are less certain for agreements made after.
Whether there was overreaching, duress or undue influence depends upon the circumstances and is not always obvious. Consider the voluntariness of the following circumstances:
Were there threats? Duress includes a threat of violence, which would be persuasive evidence of involuntariness. By contrast, threatening not to marry unless a premarital agreement is signed is not compelling evidence.
Competency is a question of whether a person could understand the agreement. Did the spouse have the legal capacity to contract at the time he or she signed the agreement? Was he or she mentally incompetent at the time? Did the spouse sign the premarital agreement under the influence of drugs or alcohol?
When the premarital agreement was presented for execution is yet another essential factor when considering voluntariness. Generally, premarital agreements should be finalized as far in advance of the wedding date as possible
An agreement executed too close to the wedding date has a higher probability of being challenged on the grounds of duress or undue influence. However, several Texas cases have upheld premarital agreements that were executed close in time to the wedding. Williams v. Williams, 720 S.W.2d 246 (Tex. App.–Houston [14th Dist.] 1986, no writ)
A better plan would be to allow sufficient time for a reasonable reflection. What is considered a reasonable time may depend on the circumstances involved.
Knowledge of Marital Rights
The voluntariness factor also considers the importance of obtaining independent legal advice and knowing the fiancé's financial situation. This involves the couple knowing how Texas Law handles Marital Rights and Obligations without a premarital agreement.
Generally, the most significant impact is usually on community property rights and alimony. A waiver of these rights must be voluntary for a premarital agreement to be enforced against the waiving spouse.
There are limits on what a fiancé can waive. Before signing any agreement, discuss those rights and obligations with a lawyer.
It is not persuasive for the woman to be so worried about being pregnant that she signed the premarital agreement.
With a potential language barrier, as with an immigrant who is not fluent in English, the requisite communication level in English sufficient to support validity is low.
It is not enough for a spouse to testify in court that "I did not want to sign the agreement." A party with emotional opposition to signing the premarital agreement, but does so anyway, is not considered evidence of involuntariness.
Videorecording the signing ceremony could ensure the enforceability of a premarital or postmarital agreement. A video recording may provide evidence of a lack of duress and involuntariness should a disagreement later arise.
Testimony Before a Court Reporter
Either in conjunction with a videorecording signing ceremony or separately, having a court reporter swear in the parties to the premarital agreement and asking them questions on the record about duress, voluntariness, and understanding of the contract may provide evidence in the future should a party attempt to contest the agreement in the future.
Unequal Bargaining Power
This is not persuasive because premarital agreements almost always involve an imbalance of bargaining power. Negotiating a fair deal is a key reason why both individuals should obtain legal advice.
Verbal agreements that were never written into the premarital agreement are not persuasive evidence of involuntariness. However, on the issue of whether a party's waiver was involuntary, it may be useful to show in advance the written document presentation for the party's signing.
What if a party was adequately presented with the agreement but opted not to read it? Choosing not to read the premarital agreement before signing it is a personal choice. However, failure to read the document and choosing to sign it is not persuasive evidence of an involuntary agreement.
Does love change everything? For example, the party who wanted a premarital agreement made extraordinarily generous provisions for their fiancé. But in their divorce, that same spouse argued the premarital agreement should be set aside for undue influence because he was blinded by love. As one might expect, being blinded by love is not persuasive evidence of involuntariness.
Unconscionable at Time of Execution
Whether an agreement was unconscionable when it was signed is a question of law. Neither the Family Code nor Texas courts have defined the term "unconscionable" in the context of a premarital agreement. (Marsh, 949 S.W.2d at 739; see Tex. Fam. Code §4.001 et seq).
To help define the term, courts have looked to the definition of unconscionability in the commercial context. In the commercial context, an agreement is unconscionable if, given the parties' general backgrounds and their particular needs, the contract is so one-sided that no reasonable person would consider it an arms-length transaction. The principle underlying the concept of unconscionability is the prevention of oppression and unfair surprise. Courts conduct both a procedural and a substantive review of the contract to determine whether the agreement was unconscionable when it was signed.
Procedural unconscionability focuses on the actual making or inducement of the contract. This form of unconscionability addresses how the parties arrived at the terms of the contract by reviewing the facts surrounding the bargaining process. Under this form of review, courts look at:
- the presence of deceptive, overreaching, and sharp business practices,
- the absence of a viable alternative, and
- the relative understanding, knowledge, education, and financial ability of the parties involved.
Substantive unconscionability focuses on the terms and conditions of the agreement. Under the Family Code, the agreement's terms and conditions must be unconscionable when the agreement was signed for the agreement to be unenforceable.
Texas courts had followed the statutory directive, focusing on the circumstances when the agreement was signed, not on any resulting disproportionate effect. For instance, in Marriage of Smith, 115 S.W.3d at 135, although the division of marital property under contract disproportionately favored one spouse, the court reviewed the circumstances when an agreement was signed, not whether a contract was unconscionable years later.
As a result, an agreement that is simply "unfair" because it disproportionately favors one party over another is not substantively unconscionable.
Texas Courts and Unconscionability
Texas courts have addressed the issue of unconscionability on a case-by-case basis, looking to the entire atmosphere in which the agreement was made. The simplicity of the statutory language notwithstanding, the determination of "unconscionability" may be quite complex and usually involves a detailed inquiry into the facts and circumstances surrounding a disputed marital agreement.
In determining whether a contract is unconscionable or not, the courts must look to the entire atmosphere in which the agreement was made, the alternatives, if any, which were available to the parties at the time of the making of the contract; the nonbargaining ability of one party; whether the contract is illegal or against public policy; and, whether the contract is oppressive or unreasonable.
At the same time, a party who knowingly enters a lawful but improvident contract is not entitled to protection by the courts. In the absence of any mistake, fraud, or oppression, the courts are not interested in the wisdom or policy of contracts and agreements voluntarily entered into between competent and reasonable parties.
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