The Pitfalls of Making “Side-Deals” in Divorce

By Robert B. Kornitzer, Esq., and Zach Levy, Esq.

A Property Settlement Agreement (“PSA”) is the blueprint for how the parties to a divorce agree to divide assets, and establish custody and support, among other issues to be resolved. Before the court can properly incorporate the PSA into a Judgment of Divorce, however, it is necessary to establish on the record, that both parties actually understand the agreement and are not entering into the agreement under duress, under the influence of drugs or alcohol, and believe that the agreement is fair. If a party does not completely understand the PSA, does not believe it to be fair, or agreed to it as a result of some improper threat, it is critical that the party speak up prior to a final Judgment of Divorce being entered.  Parties are generally not permitted to re-litigate their divorce later, simply because they decide later on that they could have done better, or agreed to something that they probably shouldn’t have agreed to.

In Corman v. Corman, the plaintiff-wife waived equitable distribution to certain real property owned by the defendant-husband located in Brooklyn, New York. Why the wife agreed to waive equitable distribution with respect to these assets was perplexing to all involved, and something her attorney specifically advised her was a bad deal. Nevertheless, before the Judgment of Divorce (which would incorporate the PSA) was finalized, the wife gave testimony that she understood the terms of the PSA and intended to be bound by it. The wife also denied the existence of any side deals. About one year after the divorce was finalized, however, the wife moved to set aside certain portions of the PSA, including the portion regarding the Brooklyn properties. Contrary to her earlier testimony, the wife now argued that the PSA was essentially a contract of adhesion, and she only agreed to it primarily because of the husband’s promise to keep the family intact after the divorce. The wife also argued that the husband represented to her that the Brooklyn properties were in a state of financial collapse, and he wanted to secure a divorce so he could file for bankruptcy without damaging the wife’s credit.[1]

In the end, the court disagreed with the wife’s position, and declined to set aside the requested portions of the PSA. Applying well-established principals of contract law, the court noted that a party to an agreement (such as a PSA) is bound by the apparent intention that he or she outwardly manifests to the other party according to the actual terms of the agreement. To that end, it is immaterial if the party had some secret or unknown intent, even if that intent differs from the actual terms of the agreement. Accordingly, even if the wife secretly believed she was giving up rights to the Brooklyn properties in exchange for the husband’s promise to keep the family together, that understanding was not evident in the terms of the PSA itself and therefore cannot be a basis to reform the PSA.

The result in Corman shows the major risk a party to a PSA takes by making a side deal that differs from the actual terms of the PSA. If the other party fails to follow through with their end of the side deal, there is a strong likelihood that no recourse will be available to the other party, and they will be stuck with the terms of the PSA as written.

 

[1] It is unclear if this was a misrepresentation.

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Prenuptial Agreement Basics

Prenuptial Agreement
Prenuptial Agreement

Previously in this blog, we have touched upon the use of a prenuptial agreement to shelter business interests and alternative legal mechanisms to achieve the same, or similar, results (i.e. shareholder agreements and trusts). However, prenuptial agreements, or colloquially “prenups,” may be appropriate even when there is not a business interest to protect. For people entering into a second or third marriage, and who as the primary breadwinner earn significant income, they may wish to limit their exposure to lengthy, and costly, litigation over alimony. In other instances, the prenup may specifically insulate one spouse from substantial debt either brought into the marriage by the other or anticipated to be incurred by the other sometime during the marriage. In any event, parties should have a basic understanding of how a prenup functions to better understand how it may, or may not, be a worthwhile investment.

Initiating the discussion of a prenup with your fiance’ will force you to confront some potentially difficult questions. This can no doubt chill the heat of a romance. However, parties avoid this discussion to their own detriment and true love should be able to survive the reasonable concerns that a prenup is intended to address. Much of the negative reputation comes from a lack of basic knowledge regarding the intent and mechanics of the process. As with many things, knowledge is power and can allow the parties to broach the subject of a prenup as rational adults.

Obviously the purpose of a prenup is to fix and establish the rights of each spouse as to the division of property and/or support upon death or divorce. In New Jersey, the standards of such agreements and their enforcement are governed by statute (N.J.S.A. 37:2-38). To be valid, a prenuptial agreement must be in writing. As it is a contract, it must also be supported by proper consideration. That is, there must be a bargained for exchange of the terms. It must be entered into voluntarily, without coercion, and the parties must represent their competence to enter into such agreements. Importantly, the statute provides that the parties must each make a full and fair disclosure of assets, liabilities and income. Finally, it is critical that the parties consult with independent legal counsel, or else waive their right to do so in writing. Once these requirements are met, it is difficult to set aside the agreement, whether in part or in its entirety, though it is possible per the statute. (See N.J.S.A. 37:2-38 (a) – (c)).

The results of prenuptial agreements when put into effect can be far reaching. But people are marrying later in life after having already established careers and accumulated sometimes significant asset portfolios.  Since it is good planning, and with a desire to limit costs of divorce, there is no reason that prenuptial agreements should not become more commonplace – and lose some of the negative connotations that they invoke.

Protecting Business Assets From Divorce

I have been writing and giving media interviews extensively on this subject.  I will shortly be attaching some of the articles and links.  The issue of how a business (even one owned prior to the marriage) can be affected by a divorce, is an issue that touches on a sbustantial number of couples going through a divorce.

It is safe to say that the best time to begin protecting your business from a divorce is before you get married.  Once the marriage begins, the build-up of “marital assets”  begins and can have an increasing affect when it comes time to distribute marital assets as part of equitable distribution.

Preparation of a premarital agreement (which I have previosly discussed) is a popular manner of protecting a premarital business.  However, there are other ways of accomplishing the same results, such as shareholder agreements or placing your business in a trust.  These, and additional ways to protect your business, will be discussed in my future blogs.

Assets Purchased By One Party During Cohabitation Prior to Marriage

Often during a divorce, assets purchased by one party during cohabitation prior to marriage are considered marital assets.  But this is not always the case.  Courts need to review the facts surrounding the parties’ relationship.  Questions must be asked, such as: Was the asset purchased as part of a shared enterprise leading to the marriage?  Was the asset purchased as a regular part of the purchaser’s lifestyle and had nothing to do with the plans for a shared life (ie., adding to a comic book collection)?  Did the non-purchaser then act in reliance of an expectation that [s]he would have an interest in that asset?

Additional factors also come into play.  For instance, at the time of divorce, did the non- Continue reading “Assets Purchased By One Party During Cohabitation Prior to Marriage”

Fault And The Division Of Property

Frequently, matrimonial attorneys have someone come in for a consultation and offer some variation of the following: “I had an adulterous affair.  My spouse says that because I am at fault for breaking up the marriage, [s]he will get everything. ”  While it is true that in New Jersey there are fault and no-fault grounds for obtaining a divorce, except in the most extreme instances (such as hiring a “hit-man” to kill your spouse), fault in the break-up of a marriage has little meaning in the division of assets or awards of support.  Marital property is divided in New Jersey by what is referred to as equitable distribution.   This does not necessarily mean that assets are automatically divided on a 50/50 basis.  Rather, Continue reading “Fault And The Division Of Property”

Forcing the Sale of the Marital Home

Frequently during a matrimonial litigation, there is one spouse who wants the marital home sold immediately (e.g., the husband who moved out of the home) and one spouse who wants to wait to sell the home (e.g., the wife with the children).  Can the husband force the sale of the home over the wife’s objection?  The answer, as you might expect, is: sometimes.  But those “sometimes” have more to do with the financial condition of the family than of the individual preference of the one party who wants to sell. 

Generally, it is true that a Court will not order a final distribution or sale of an asset until time of judgment.  But if it is clear to the Court that this house is “underwater” and that this family does not have the financial means to  maintain the house and pay the mortgage, a Court will often direct that the house be sold.   The thought process is that the parties’ assets should be preserved to the extent possible.  If foreclosure proceedings have already commenced, the likelihood of a Court-ordered sale become much higher than if there are no foreclosure proceedings.  In fact, in these economic times, the short-sale of a home may be a prudent business decision that may help salvage limited marital assets.

Selling and Dividing the Marital Home in Today’s Real Estate Market

In the past, the equity in the marital home was often the parties’ most significant asset.  The equity in the marital home was used to offset value in other assets for purposes of asset division.  In the current real estate market, however, given the drastic reduction in property values and the frequent inability to sell at any “reasonable” price, the marital home (or any other real estate subject to equitable distribution) may instead become a liability, not an asset.  Instead of wanting to keep the asset, the parties may be fighting over who is responsible to financially maintain that property.

Continue reading “Selling and Dividing the Marital Home in Today’s Real Estate Market”

Death of a Spouse During the Divorce

What happens when one of the parties dies during the litigation?  Can the estate of the now-deceased spouse intervene and secure part of the marital estate or does the entire divorce action collapse and the surviving spouse keeps it all?

In a recent case, the estate of the deceased spouse intervened to prevent the “unjust enrichment” of the surviving spouse, who the estate alleged had committed fraud against the deceased spouse.  The court decided that the estate will have its “day-in-court” and would not be prevented from trying to recover monies from the surviving spouse.

The above scenario of a litigant dying happens more than one may think (it tragically happened to one of my clients).  How would a new will drafted by that litigant, after the complaint was filed, have affected the outcome?