Prenuptial Agreement May Not Be Fair, But Must Be Followed

Prenuptial Agreement May Not Be Fair, But Must Be Followed

15 September, 2014 by Lawrence in Divorce, Prenuptial, Property Division

This case is about how a prenuptial agreement can come back to haunt you if you don’t carefully abide by all of its provisions.

Husband and Wife were married in 2006.  At the time the parties were married, Wife had a large trust fund, which she wanted to keep as separate property.  It’s pretty clear that it was Wife’s desire to not only keep the trust fund separate, but she wanted to make sure that anything she purchased with money from the trust fund would also be hers if the marriage were to fail.

To accomplish this, the parties entered into a prenuptial agreement which states as follows:

6.1 Definition.  The parties acknowledge that they are each free to acquire property during the marriage either in their own name or in joint names. Any property acquired during the marriage shall conclusively be deemed the Separate Property of the party in whose name such title is held unless such property is expressly acquired and held in the name of both parties as evidenced in a writing clearly expressing an intent that the property covered by the writing is to be so held (“Co-Owned Property”) or as to which the deed or document evidencing title is in the name of both parties and creates, expressly or as a matter of law, a tenancy in both parties with the right of survivorship.

The agreement went on to say that “Co-Owned Property” would be equally divided if the parties were to be divorced.  In the event that one party wants to keep the property, he or she would have to purchase the other’s half at fair market value.

The parties buy a house

In 2009, the parties purchased some property and proceeded to build their dream home.  According to Wife’s testimony, all of the money used to buy the land and build the house came from her.  She withdrew about $960,000 from her trust fund, and the rest came from a mortgage, to which Wife was the only applicant.  In addition, Wife claimed that she paid Husband $600 per week to serve as general contractor for the construction of the home.  Wife said that it was the parties’ intention that the property be entirely in Wife’s name, although they would share the house as the marital residence.

Construction on the parties’ “dream home” took two years, and when complete the property had an estimated value of $1,144,000, and the debt against it was only $388,000.

The problem is that while it may have been the intention of the parties that the property be in Wife’s name, the deed to the property was in both their names.  During the process of purchasing the property, wife had insisted that all of the documents be drafted in her name only.  However, when the parties arrived at the closing, they were told by the closing agent that state law required that both of their names be on the deed because they were married.  Of course, there is no such law.  Apparently Wife was very upset that Husband’s name was on the deed, but the parties proceeded to close on the property anyway.

Wife never made any attempt to change the deed such that it would be in her name only.

Wife filed for divorce in 2012.  In her complaint she alleged that the prenuptial agreement should control all aspects of the property division, and she also asked the court to reform the deed because Husband’s name was added by mistake.  Husband filed an answer in which he agreed that the prenuptial agreement should control the property division, but he denied that the deed should be reformed.  (He actually used a defense called “estoppel by deed”, which essentially means the Wife shouldn’t be able to deny a deed that she entered into voluntarily.)

The trial court gives the house to Wife

At trial, Wife made the same argument as above:  That all of the funds to purchase the land and build the house had come from her, that she had paid Husband for the work he did building the home, that it had been the parties’ intention that the home would be in Wife’s name only, and that Husband’s name was added to the deed in error.

Husband claimed that the $600 per week Wife had given him was more like an “allowance” Wife gave him while he supervised the construction of the house.  He was not a licensed contractor, and she never issued him any 1099s for the income.  Since he was not a licensed contractor, he had only been able to get the necessary permits for the construction because he was a co-owner of the property.  Furthermore, he had been able to use his status as a co-owner to get discounts from vendors for materials used in the construction.  Finally, Wife had always referred to the property as “their” home, implying they were co-owners.

The Trial Court agreed with the Wife.  While the Court did not reform the deed, the Court found that, regardless of the provision quoted above, treating the property as “Co-Owned Property” would be inconsistent with other provisions of the prenuptial agreement.  The court further added that including Husband’s name on the deed was clearly and convincingly shown to be both unexpected by both parties and not desired by either party.  The opinion does say what the other language in the prenuptial agreement was, but there was almost certainly language in the agreement that stated that any property purchased with separate funds would be separate property.  The Court awarded the home to Wife, then separated the remaining property according to the prenuptial agreement.

The Appellate Court uses plain meaning of prenuptial agreement

The Appellate Court first considered whether it would be appropriate to reform the deed the parties executed when they bought the property, to place the property in the name of Wife only.  The deed is essentially a contract, and contracts can be altered (or reformed) by a court if the parties can prove that, due to a mistake, the terms of the contract are different than what the parties had intended.  The Court noted that:

The judicial alteration of the provisions of a written agreement is an equitable remedy known as “reformation.” The basic purpose of reformation is to make the contract conform to the real intention of the parties. It is driven by a respect for the parties’ intent and gives effect to the terms mutually agreed upon by the parties. Because the law strongly favors the validity of written instruments, a person seeking to reform a written contract must do more than prove a mistake by a preponderance of the evidence. Instead, the evidence of mistake must be clear and convincing.

In order to obtain reformation on the basis of mistake in expression, a party must present clear and convincing evidence that: (1) the parties reached a prior agreement regarding some aspect of the bargain; (2) they intended the prior agreement to be included in the written contract; (3) the written contract materially differs from the prior agreement; and (4) the variation between the prior agreement and the written contract is not the result of gross negligence on the part of the party seeking reformation.

In this case, even though Wife insisted that Husband’s name had been added to the deed by mistake, at the time she actually signed the instrument she knew his name was on the deed and she knew that having his name on the deed meant the two of them shared ownership of the property.  Therefore, from a legal standpoint there was no mistake that the court can correct.

After determining that the deed could not be reformed as Wife requested, the Court considered how to treat the property within the provisions of the prenuptial agreement.  The court decided that:

We conclude that the real property at issue falls squarely within the definition of Co-Owned Property as defined by the prenuptial agreement. The warranty deed transferred title into the names of both parties as husband and wife, thereby creating a tenancy by the entireties that inherently establishes a right of survivorship. See Weaver v. Hamrick, 907 S.W.2d 385, 388 (Tenn. 1995). As such, the subject prenuptial agreement dictates that the real property at issue be deemed Co-Owned Property because “the deed or document evidencing title is in the name of both parties and creates, expressly or as a matter of law, a tenancy in both parties with the right of survivorship.”

Pursuant to the express terms of the section regarding Co-Owned Property, the real property at issue qualifies as Co-Owned and therefore is no longer Wife’s separate property, even though her separate property was used to purchase it.

The prenuptial agreement further provides that Co-Owned Property “shall be divided into equal shares by the parties in further settlement of the respective marital rights,” and that if one party desires to retain the Co-Owned Property, he or she can purchase the other party’s interest at fair market value. As this real property clearly fits the definition of Co-Owned Property pursuant to the terms of the prenuptial agreement, the trial court erred in vesting title solely in Wife’s name without awarding Husband his equal share.1 We therefore reverse the trial court’s award of the real property solely to Wife and remand this action for further proceedings by the trial court to effectuate an equal distribution of this asset to both parties. Pursuant to the prenuptial agreement, the court can either transfer a one-half interest in the real property to Husband or allow Wife to pay Husband one-half of the asset’s fair market value in order for her to retain it as her sole property.

Conclusion

Is the result fair?  Perhaps not, but it’s a court of law, not a court of fair.  The lesson in a case like this that while a prenuptial agreement can be a valuable document for many couples, they must be willing to put in the effort to abide by the provisions they agreed on.  Wife should have sought out another opinion on whether Husband’s name was required to be on the deed to the house.  If you’re wanting to keep separate property separate, don’t do things that make it look like joint property.  Such as putting it in joint accounts or adding both names to the title or deed.

If you need help with any kind of family law, divorce, or similar issues, contact me to find out how I can help you.

Want to read the case for yourself?  There’s a lot more to it.  I simplified it quite a bit.  Heaton v. Heaton