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Prenuptial Agreements: The Iowa Supreme Court Takes a Strong Pro-Enforcement Stance |
By JOANNA GROSSMAN |
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| Tuesday, January 06, 2009 |
In a case of first impression, the Iowa Supreme Court has come out strongly in favor of the enforcement of prenuptial agreements – adding to a long-term trend of greater enforceability that may or may not be wise.
The Basic Law of Prenuptial Agreements: A History
As readers likely know, a prenuptial (or premarital) agreement is a contract between prospective spouses made in contemplation of marriage. The purpose of most premarital agreements is to regulate the economic consequences of marital dissolution by divorce, annulment, or the death of one spouse.
It is possible in some jurisdictions to use a premarital agreement to regulate any aspect of marriage, including "personal rights and obligations." There are, however, relatively few cases involving such provisions and at least some palpable resistance on the part of courts to enforcing them. A couple made headlines a few years ago with a fight over a prenup that included, among other provisions, mandatory backrubs, a $5 fee for nagging, and a promise by the husband not to wake the wife up on her "off days." But these sorts of agreements end up being mostly aspirational in nature, as the likelihood of judicial enforcement is slim.
Typically, premarital agreements are used to decide, at the time of the marriage, what will happen to the money and property if the union ends. Though the validity of premarital agreements is now widely-accepted, the law's treatment of them has evolved considerably over the last century.
Couples have entered into premarital agreements for centuries. But courts have only recently warmed to the idea of legal enforceability. Historically, courts were hostile to the very idea of a prenuptial agreement. Marriage traditionally was mostly a legal "status," the terms of which were uniform for all couples and dictated by the state. In this conventional view, states regulated the terms upon which couples could marry (for example, bigamy is prohibited and couples must obtain a marriage license), the terms upon which marriage was to be carried out (for example, husbands had a duty to support their wives), and the conditions for dissolution, including both the grounds necessary to justify divorce or annulment and the economic consequences of dissolution.
As part of a long-term trend through which the law moved from a focus on status to a focus on contract, however, couples have earned greater control over their own marriages – before, during, and after. This trend includes the right to enter into contracts with one another and dictate the terms upon which they will part.
Before they became more popular, premarital agreements were used primarily by individuals entering into a second or subsequent marriage who worried about preserving property for their children from a first or prior marriage. To the extent that these agreements attempted only to regulate the distribution of the estate upon the first spouse's death, courts began to enforce them.
Beginning in the 1960s and 1970s, however, an increasing number of agreements tried to regulate the economic consequences of divorce, as well as those of widowhood. Courts were skittish, though, about enforcing these provisions, for fear that doing so would create incentives for divorce: The more propertied spouse would have less to lose by divorce if the terms of dissolution were predetermined. These agreements, which customized rights like alimony and property division, also directly challenged the state's authority to regulate marriage as a legal status.
As with many other aspects of family law, however, the 1970s witnessed a sea change in the law of premarital agreements. The traditional hostility to premarital agreements began to crack under the weight of legal changes like the no-fault divorce revolution, and social changes like greater equality for women and a sharp rise in divorce and remarriage rates.
The Modern Law of Prenuptial Agreements: The Pro-Enforcement Approach
In the modern era, prenuptial agreements are tolerated to a much greater extent than they were historically. While states vary in their approach to regulating such agreements, they all agree that it is possible for most couples to enter into an enforceable prenuptial agreement that will dictate, at a minimum, the economic consequences of marital dissolution.
The basic tension among states is whether to treat premarital agreements just like any other contract, or whether to apply special standards, in this context, that take account of the particular context in which they arise. The choice dictates how likely it is that premarital agreements will be enforced.
Outside of the family law context, contracts are presumptively enforceable. Courts do not generally "police the bargain," which means they neither conduct a fairness or reasonableness inquiry when evaluating contracts, nor concern themselves with each party's knowledge or understanding of a contract's terms. Contracts are presumed to reflect voluntary, mutually-beneficial exchanges. Absent evidence of fraud, duress, or some other recognized defense to the contract's initial formation, individuals are bound by their agreements, even when the terms are obviously unfair or ill-considered.
As applied to prenuptial agreements, these basic rules of contract law would result in a strong pro-enforcement regime that produces potentially unfair results. For example, in a 1990 Pennsylvania case, Simeone v. Simeone, the court applied contract principles to enforce a prenup between a neurosurgeon and a nurse. His attorney drafted the agreement and presented it to the would-be wife, without advising her of her legal rights. The agreement limited her collection of alimony to a total of $25,000, a paltry sum when compared with his very high income.
The court said the agreement was binding without regard to whether the wife understood the terms, and regardless of whether the agreement was substantively unreasonable or unfair. It was more important, according to this court, to protect the parties' freedom of contract and to promote the reliability of premarital agreements generally, than to ensure fair, reasonable treatment for the contract parties.
An approach that favors enforcement was catalyzed by the Uniform Premarital Agreement Act (UPAA), which was adopted by the National Conference of Commissioners on Uniform State Laws in 1983. The purpose of the act was two-fold: to create greater uniformity in the treatment of premarital agreements across states, and to promote greater judicial acceptance of them. More than half the states have since adopted this act.
Under the UPAA, one spouse can avoid enforcement of a premarital agreement only if she or he can prove that: (1) the agreement was executed involuntarily; or (2) the agreement was unconscionable when executed and signed without fair and reasonable disclosure of the other party's financial circumstances. These standards, in practice, are hard to satisfy. The only limitation on the enforcement of an otherwise-valid agreement is this: If a waiver of spousal support results in that spouse's becoming eligible for public assistance (welfare), the court can ignore the waiver and require the monied spouse to provide minimal support.
In re Shanks: A Pro-Enforcement Case
Iowa's version of the UPAA (the IUPAA) governed the enforceability of the agreement between Randall and Teresa Shanks in the case with which I began this column. When they met, he was a successful personal-injury lawyer and she was his employee. They had both been married before and each had children.
Randall proposed a premarital agreement, and Teresa agreed, stating that she was not marrying him for his money. Randall presented a first draft of the agreement on April 13, ten days before they wed in Jamaica. The agreement essentially provided that the parties did not intend to share premarital assets, and did not intend to hold joint assets other than a marital home and joint checking account. It also provided that Randall would maintain a life insurance policy and name Teresa as the beneficiary. Teresa asked questions about the draft, but was advised by Randall to seek independent legal advice. She did consult an attorney, though not one licensed in Iowa. Randall made some, but not all, of the changes that Teresa's lawyer had suggested. He presented the final agreement to her on April 17, and they left the next day for Jamaica.
After the marriage failed, Teresa sought to avoid the enforcement of the pre-marital agreement under the IUPAA. The Iowa Supreme Court ultimately upheld the agreement – not an unreasonable result on these facts – but, in the course of doing so, staked out a strong pro-enforcement position on premarital agreements.
The IUPAA is less pro-enforcement than the UPAA, in two important respects. First, it permits avoidance of the prenuptial agreement based on a showing of either unconscionability (meaning, roughly, that the contract is shockingly immoral or unfair) or lack of financial disclosure, whereas the UPAA requires both. Second, it does not permit a premarital agreement to adversely affect spousal support, whereas the UPAA permits a waiver of alimony unless such a waiver results in eligibility for public assistance. Yet, even with a more moderate statute, the Iowa court has made clear that premarital agreements will be very difficult to avoid.
Teresa alleged all three permissible bases for avoidance: lack of voluntariness, unconscionability, and lack of adequate financial disclosure.
First, she alleged that the agreement was not executed voluntarily because Randall --as an attorney, her one-time boss, and the propertied spouse -- had substantially greater power than she did. Prior to the adoption of the IUPAA, Iowa courts had used "broad notions of procedural fairness" to assess the voluntariness of premarital agreements. The court in Shanks, however, held that "voluntariness," as used in the IUPAA, means simply the absence of duress or undue influence. As long as she had a reasonable alternative to signing the agreement, there was no duress. And walking away from the wedding and the marriage, the court held, was a "reasonable alternative" in this context. And as long as she was not deprived of her own free will, there was no undue influence.
Second, Teresa alleged that the agreement was unconscionable. The court held that the waiver of spousal support was invalid under the IUPAA, but that the rest of the agreement was not unconscionable. The court suggested that the IUPAA permits a more searching fairness review than does the UPAA. But, in the end, the court borrowed the standard for unconscionability from contract law, which is an extremely tough standard to meet. Given that the agreement was mutual in scope and gave Teresa some benefits, the court ruled that it was not substantively unconscionable. And given that she had the opportunity to seek legal advice and have input into the final agreement, it ruled it was not procedurally unconscionable either.
Third, she alleged insufficient financial disclosure prior to signing the agreement. She claimed she did not have full access to her fiance's bank account balances and pension information at the time. Here, however, the court reasonably ruled that she was sufficiently knowledgeable about his financial circumstances to satisfy the statutory requirements. Precise valuation is not necessary, the court held, only a "general knowledge of the true nature and extent of each other's properties."
The Need for a Hybrid Approach
The ruling in Shanks is far from obviously wrong. While the agreement was one-sided and largely shaped by one party, that is almost always true in cases where prenuptial agreements are used. Neither this particular agreement, nor the circumstances under which it was executed smack of exploitation or excessive unfairness. Yet, the standards applied by the Iowa court would tend to uphold most premarital agreements – even those that do seem to violate minimum standards of fairness and decency.
The "traditional contracts" approach to premarital agreements – endorsed by the UPAA and its analogs, as well as by some court rulings in other states -- is appealing because it allows courts to tap into an existing set of doctrines, rather than requiring them to develop a new set of rules for one type of agreement. By making agreements presumptively enforceable, it also gives parties entering into prenups greater confidence that their agreements will be enforced. This certainty, in some cases, may promote marriages that parties would otherwise shy away from.
But the costs of such an approach are almost certainly greater than the benefits. It's probably not fair to assume that an affianced couple is similar in most, or even any, respects to a customer and an appliance store, or a homeowner and a contractor. The emotional vulnerability of the parties, the long-term nature of the contract, and the inability of most of us to make rational assessments about the likelihood of divorce when we are about to marry, are just some of the key differences that might justify a special approach.
In many jurisdictions, courts or the state legislature have recognized that premarital agreements occur in a unique context, where the usual assumptions about arms-length transactions and the self-interested, wealth-maximizing behavior of the parties are not warranted. In my view, this recognition calls for a hybrid approach that promotes enforcement of premarital agreements while protecting less-propertied and less-powerful spouses against some typical abuses and oppressively unfair outcomes.
In states that follow a hybrid approach, the emphasis is on procedural and substantive fairness as a condition of enforceability. Procedural fairness is accomplished through the full and fair disclosure of each party's assets, and, perhaps more importantly, independent counsel for both parties. A rule of substantive fairness must entail at least some judicial review at the time the agreement is implemented, rather than just when it was executed.
The American Law Institute's Principles of the Law of Family Dissolution tend in this direction. The ALI Principles require the party seeking enforcement to prove the agreement was executed with informed consent, and not under duress. It creates a presumption of enforceability only when certain conditions are met, including that the agreement was executed at least 30 days prior to marriage, that both parties had a reasonable opportunity to seek independent legal advice, and that, if one party does not have a lawyer, the agreement is written in ordinary language.
But even if these conditions are met, an agreement can be avoided if certain triggering factors are present and enforcement would "work a substantial injustice." The party eligible to seek avoidance can rely on a number of factors to satisfy that standard. This type of approach, while messier, draws a finer line between sensible advance financial planning, and exploitation between intimates – and thus is preferable.