Postnuptial Agreements-The Challenges

ADVICE FROM THE COURT ON THE DRAFTING OF POST NUPTIAL AGREEMENTS-the EXAMPLE FROM THE LA DODGER OWNERS

 

 

Introduction:

While a prenuptial agreement is a contract between a couple as to property and rights entered into before marriage occurs, a postnuptial agreement occurs after the marriage has happened.

As difficult as it is to draft a prenuptial agreement, creating a property agreement after the couple are married is even more difficult. The reason is simple: fiduciary duty applies between the parties since they are spouses, thus the negotiations must be carefully conducted and disclosure complete. Further, by the time of the agreement, assuming no prenuptial agreement already exists, community property already may exist, thus confusing the current status of the existing property while the postnuptial agreement is created.

Often the confusion and lack of disclosure go hand in hand with one or the other spouses not really knowing the status or details of the property at issue, or its value, thus failing to comply with the fiduciary obligation of disclosure, even if the failure is not intentional.

Courts see these issues often enough so that in one recent decision the Judge finally gave a lecture to the parties and their attorneys which is worth reading.

In Re: Marriage of McCourt, Los Angeles County, Super. CT Nos BC 509736 & BD514309

The Court voided the postnuptial agreement, concluding that there was no meeting of the minds of the parties relative to the terms of a post-nuptial agreement. In re Marriage of McCourt illustrates many issues that can arise regarding postnuptial agreements (and marital dissolutions generally) in a family law matter and provides a set of best practices for family law and business attorneys alike. Document management, proofreading, client communication, thoroughness, principles of good drafting, candor, good judgment, and discretion are all issues highlighted by the McCourt divorce case.

 

Facts:

In 1979, Baltimore native Jamie Luskin married Boston native Frank McCourt. They lived in Boston and raised their four sons. Jamie, having a law degree from University of Maryland and business degree from M.I.T, worked as a real estate and (ironically) a family law attorney. Frank started a commercial real-estate business, the McCourt Company. Jamie later joined the McCourt Company as her husband’s general counsel.

The McCourts’ major projects included development of mixed-use waterfront property in South Boston and converting a defunct Penn Central railroad property into parking lots. The McCourts made a great deal of money and used their good fortune to purchase several homes throughout the country, including a $16 million-dollar mansion in Brookline, Massachusetts, a $19.5 million-dollar estate on Cape Cod, and a $6 million-dollar ski home in Vail.

The times were not only good. After a business creditor placed a lien on the McCourts’ Brookline home, the couple agreed to shelter their non-business assets by putting their homes into Jamie’s name only. It is unknown if they obtained legal advice before taking this remarkable step.

 

Having amassed a great wealth, the McCourts wanted to realize their dream of owning a sports team. Baseball was in Frank’s blood, as his grandfather was part-owner of the Boston Braves.

After several failed attempts to purchase a baseball franchise (including the Boston Red Sox, the Anaheim Angels, and the Tampa Bay Devil Rays) the McCourts purchased the Los Angeles Dodgers from Rupert Murdoch’s News Corp. for $421 million in 2004. The franchise included the team, Dodger stadium and 276 acres of land surrounding the stadium.

Frank signed $119 million in personal guarantees to purchase the team and financed $125 million using a commercial property owned by The McCourt Company in Boston. Again, to protect their personal assets from business creditors, the Dodgers franchise was purchased in Frank’s name and the properties remained in Jamie’s name. Jamie was hired as the team’s CEO.

After the franchise was purchased, and before Frank and Jamie relocated from Boston to Los Angeles, they consulted with their joint estate planning attorney, Larry Silverstein, of Bingham McCutchen LLP in Boston. Silverstein was not a family law attorney, nor was he admitted to practice law in the State of California. Rather, he proclaimed to have “sufficient” understanding of California law.

Nevertheless, with the assistance of an estate planning attorney at his firm’s California office. Silverstein prepared a postnuptial agreement and presented it to the parties’ assets and presented it to the parties for signature. There was no disclosure as to the values of the parties’ assets. Eventually, Silverstein witnessed the parties as they executed three originals in Boston before they moved. Then, to be, in his own words, “super cautious.” he had all the parties execute three more originals right after they settled into their home in California. At this point, there were six original signed versions of what was believed to be the same document.

The McCourts spent the next few years on a financial rollercoaster. They spent lavishly to maintain their powerful image, and carried a large payroll for the Dodgers. Their combined salaries were $7 million dollars, and they reportedly took $108 million dollars in personal distributions from the team in a period of 5 years, tax free. They were able to avoid paying taxes on the distributions because the team was operating at a loss.

But, the spending took a toll, and mounting debt and rumors of Jamie’s infidelity put a strain on their high-profile marriage. On October 22, 2009, the parties announced that after 30 years of marriage they were separating They assured the public that Jamie would stay on as the Dodgers’ CEO and turned the focus away from their divorce and onto the Dodgers’ playoff run. But on October 22, 2009, one day after the Dodgers were eliminated from the playoffs, Jamie was fired as CEO.

Less than one week after her firing, Jamie filed for divorce, requesting that she be awarded half of the team, which she valued at an estimated $800 million dollars, and half of the couple’s other assets, which she believed to be worth at least $1.2 billion dollars. She also requested spousal support to cover her expenses, including multiple mortgages, a private jet, a full-time hair and makeup person, and a half-dozen country club memberships.

In the family law matter, Frank claimed he had little wealth due to the personal and professional debts he carried. The parties also disagreed over ownership of the team. Frank said that the postnuptial agreement made the Dodgers his sole property, while Jamie insisted she was an equal owner. While Jamie prepared to litigate the validity of the postnuptial agreement, a judge awarded her $225,000 per month in temporary spousal support and $412,159 per month to pay the mortgages on the properties and all costs associated with seven homes.

Even though he was saddled with a significant temporary spousal support payment, Frank continued to make low-ball settlement offers to Jamie in the divorce action. Confident that the family law court would find him to be the sole owner of the franchise, Frank reportedly offered to settle the divorce with Jamie by giving her all of parties’ properties, in addition to a cash payment between $35 and $40 million. Jamie turned down his settlement offer, claiming the postnuptial agreement was invalid because she never intended to give up her right to half ownership of the Dodgers.

The first part of the divorce trial in August 2010 focused on the validity of the postnuptial agreement. Exhibit A, the last page of the postnuptial agreement, listed all the parties’ assets (although without any of their values) and how they were to be divided in the event of a divorce. All six originals of the postnuptial agreement had Frank as the sole owner of the Dodgers. Jamie’s only defense was that she did not understand that she was giving up her right to the franchise when she signed the postnuptial agreement, which was a tough argument to swallow considering her education and experience (she had been a family law attorney) with complex agreements and business dealings. It appeared as if Jamie was going to lose her pursuit of the team in the divorce.

When Jamie’s forensic experts examined the six originals, they made a surprising discovery. In all six originals of the postnuptial agreement, the parties’ signature page immediately proceeded Exhibit A. So, when the parties signed the postnuptial agreement, there should have been indentations on Exhibit A from those signatures. The experts determined that the Boston copies had indentations on Exhibit A, but the California copies did not.

Silverstein was called to testify about this inconsistency and Jamie’s luck in the divorce turned. Silverstein explained that after the California originals were signed, he noticed a small, but crucial, typo in each of the California exhibits. Specifically, the three Boston exhibits stated that Frank was the sole owner of all property “including” the Dodgers franchise, but the three California exhibits substituted the word “including” with “excluding.” Therefore, of the six originals, three had Frank owning the franchise solely and the other three had Frank owing the franchise equally with Jamie.

After he discovered this mistake, Silverstein chose not to mention it to the McCourts. Instead, Silverstein, believing he had his clients’ “implicit permission” to act in such a manner, simply printed out three more copies of the Boston exhibit and swapped them with the incorrect California exhibits, bringing all six agreements into accord.

In his opinion, the family law Judge, Scott Gordon, explained that the testimony in this matter “paints a picture of two people who had no involvement in the drafting or execution of the [agreement] and related documents and further that they so entrusted all maters regarding the [agreement] to their lawyers, that they did not closely read or did not read at all, the drafts or final copies of the various [agreements] in this case. This testimony… does not reconcile with the sophisticated business people who testified at the trial and who were well versed on all of the details of the issues and their very complex business affairs.”

The Court repeatedly commented that neither Frank nor Jamie were credible witnesses in that regard. The Court also found that Silverstein’s actions, although “troubling” and without any “reasonable explanation,” were not enough to invalidate the agreement in and of itself, because Silverstein acted without the parties’ specific permission and after they already signed the agreement.

 

Nevertheless, because two materially different versions of the executed agreement existed, and neither side presented sufficient evidence indicating which of the two versions represented the parties’ true intent, there was no mutual assent or meeting of the minds when they executed the agreement. The postnuptial agreement was, therefor, invalid, and Jamie and Frank were equal owners of the Dodgers franchise under California’s community property laws.

In June 2011, the Dodgers filed for bankruptcy protection just days before the team was expected to miss payroll. Frank tried to broker a deal with Fox Television which have advanced him $385 million, but MLB Commissioner Bud Selig refused to approve the terms fearing that Frank would use about half of the money to settle his divorce.

After months of high-stakes divorce negotiations, the McCourts settled the family law matter in October 2011, with Jamie relinquishing her one-half interest in the Dodgers in exchange for Frank paying her a reported $130 million dollars. It is estimated that Frank and Jamie had the most expensive divorce in California history, collectively spending $20 million in legal fees.

 

Lessons:

The divorce court pointed out a number of best practices:

1. Keep close watch of drafts

 

It is typical for agreements to go through several drafts before the final version is reached. Each draft should be carefully numbered by version number and date. Changes should be clearly indicated using highlighting tools (preferably Word redlining/comments, or simply handwriting). Changes to a draft document that is being passed around between firms should be drawn to other counsel’s attention.

 

2. Review the agreement with a “fresh set of eyes.”

 

After proofreading the same document many times, one can still miss a glaring error. (It may even become more likely as the number of proofreads rises.) It may help to step away from the document and come back to in another date and time with “fresh eyes.” Alternatively, if a firm has the resources to do so, someone else in the office who did not play any part in drafting should proofread the document.

 

3. Have the client review the agreement one more time in your presence

 

Attorneys must adequately communicate information to clients and explain the material risks and alternatives so that the client can give his informed consent. It is helpful that these conversations take place in a face-to-face setting and be documented in the case file. Final versions of an agreement should always be gone through with clients one additional time. Attorneys should essentially voir dire their clients in the office before final versions of agreements are signed. Notably, a factor in the Court’s decision to invalidate the postnuptial agreement that both Frank and Jamie McCourt testified that they did not read the incorrect documents closely enough to ever detect the errors.

 

4. Have only one fully executed original agreement, with each page initialed

 

Photocopies of the original have the same force and effect as the original. Each page (including exhibits) should be numbered and initialed by both parties.

 

5. Always include a severability clause in postnuptial agreements

 

The provisions in an agreement can be severable from one another so that if one is deemed invalid, then the other provisions remain in full force and effect. In the McCourts’ case, the agreement contained such a clause, but the Court could not sever the contradicting exhibits without any evidence of what the parties’ true intentions were when they executed the agreement.

 

6. Admit when you made a mistake, or better yet, refrain from making it altogether

 

Attorneys have an ethical responsibility to be candid in their responsibilities of clients. Rather than trying to fix a mistake in an unethical manner, the best practice is to admit to it and try to make it right. Practitioners should also not be afraid to turn down a case in an area of the law that they are not competent in and can not become competent in.

 

7. Understand the unique burdens of fiduciary duty in a postnuptial agreement.

 

Either spouse may enter into any transaction with the other, or with any other person, respecting property, which either might if unmarried. Except as provided in Sections 143, 144, 146, 16040, and 16047 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:

1. Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
2. Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
3. Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.

The lesson from the McCourts’ divorce is that all attorneys who draft agreements – postnuptial or otherwise – need to carefully protect themselves and their clients. One small mistake can be extremely costly, as Frank McCourt and his lawyer learned the hard way.

Additionally, there are numerous potential pitfalls associated with the drafting of a postnuptial agreement that necessitate extreme care in the negotiations and drafting, such as rebutting the presumption of undue influence, ensuring that adequate consideration is given by both parties, enforcing duties of disclosure, and making a clear record and easy-to-follow paper trail between the parties and in the case file.

 

The Ethos of Post Nuptial Agreements:

Anyone who has ever negotiated a prenuptial agreement is aware that the emotions and tensions can be high as a couple is forced to consider the potential results of dissolution of marriage, child custody and division of property even before the ceremony.

A couple already married and already sharing their lives faces equally difficult emotional decisions, at times even more intense than the couple about to marry. No one likes negotiating and discussing these types of agreements and there is a tendency to rush through them and simply sign documents as soon as possible so the unpleasant discussions can be at an end.

Thus, an agreement imposing difficult hurdles due to existing fiduciary duty is precisely the agreement that both sides want to finish as soon as possible and get “out of the way.” It is vital to slow it down, to carefully consider each aspect of the agreement, and to understand that all the effort and emotional turmoil will be for nothing if the process is not professionally and carefully followed.