With the Los Angeles Dodgers back in the National League Championship Series, the team is in the headlines because of its on-the-field performance. But a little over a year ago, the team was in the headlines because of what happened in divorce court.
After the team won the World Series in 1988, a decade of under-achieving teams deflated fan interest, meaning that ballpark attendance and broadcast ratings both fell precipitously. As revenue went down, the team was in financial distress at the time that Frank and Jamie McCourt became the owners. Reportedly, the team was so short of cash at one point that it would be unable to make payroll, and it filed bankruptcy shortly thereafter.
At about that same time, the McCourts were divorcing. With the team’s value at essentially zero, Jamie McCourt agreed to give up her half of the team in exchange for about $180 million in property and other considerations. When Mr. McCourt sold the team for a then-record $2 billion, Ms. McCourt asked a judge to overturn the property agreement. What happened next is a textbook case regarding the burden of proof in such cases.
Even though the premarital agreement left Ms. McCourt roughly $900 million short of a 50-50 division, the judge refused to overturn it, ruling that the agreement was both voluntary and fair when it was made. The judge even ordered Ms. McCourt to pay her ex-husband’s attorneys’ fees.
Uniform Premarital and Marital Agreements Act
In California and most other states, the Uniform Premarital and Marital Agreements Act governs this area. Premarital agreements can be single documents that are drafted and executed with a great deal of legal formality, they can be more informal written agreements, or they can be oral contracts. The presumption in favor of spousal agreements is so strong in family court that all these pacts are binding, although it is difficult, and sometimes even impossible, to clearly establish the contents of informal agreements.
The McCourt accord was almost entirely a property division agreement. Under the UPMAA, these contracts can also touch on a number of other matters, including:
- Spousal Support: The parties can agree to limit the amount and/or duration of payments, or even agree to forego alimony claims altogether.
- Inheritance: Many spouses draw up other executory documents, like wills and trusts, to help ensure that the preferences in the premarital agreement are fully carried out.
- Succession: Spousal agreements can end protracted disputes about the rights of children or stepchildren before these conflicts begin.
Child custody and child support matters are completely off-limits in these agreements, as are any other items void under public policy.
Challenging Premarital Agreements
Ms. McCourt sought to overturn the property agreement on two fronts and she failed in both efforts, which highlights how difficult it is to challenge these contracts.
When most of us hear the word “voluntary” in a contracts context, we think about undue coercion. However, with regard to premarital agreements, the word often has a different meaning. Although one spouse can certainly force another spouse to sign, most courts require physical coercion, as even an ultimatum like “sign this or else” is often insufficient. Instead, vountariness essentially means that the challenging spouse had access to all the important financial or other information.
Additionally, even if the challenging spouse proves that the other spouse intentionally withheld this information, the challenge still fails if the information was available elsewhere. Ms. McCourt argued that her husband had withheld financial documents, but evidence indicated that Mr. McCourt had turned over about 170,000 pages of information, and as a former co-owner, Ms. McCourt could have probably obtained missing information elsewhere.
Agreements are also invalid if they are unconscionable (i.e. it is so uneven that no reasonable person can believe that it is fair). A 60-40 division is certainly uneven, but in many circumstances, it is probably not unconscionable. At first blush, the McCourt property agreement seems unconscionable, because $900 million is an awful lot of money. But, under the UPMAA, the agreement must be unconscionable when it was made. When Ms. McCourt signed the agreement, the Dodgers were essentially worthless and the deal was fair.
The appeals court subsequently affirmed this idea, by ruling that “Jamie simply chose the security of a guaranteed $131 million payment, plus more than $50 million in real and personal property, over the uncertainty and risk presented by the valuation and sale of the Dodger assets.”
The same items apply to all other premarital agreements. If Husband gives up interest in a startup company’s stock in exchange for other considerations, the agreement is still valid even if that company goes public later and the stock’s value increases exponentially. Husband could still challenge the agreement based on voluntariness, but he would have to show that Wife withheld information and he could not have researched the company or consulted a broker on his own. A final note: Most property agreements contain severability clauses, so if one part is overturned the rest remains in force.
Premarital and marital agreements typically make future divorce litigation much less adversarial and less costly. For a free consultation with an experienced family law attorney in Los Angeles, contact Fernandez & Karney.