Court Upholds PRENUPTIAL AGREEMENT Where Wife Alleged Husband Falsely Stated Net Worth

In Re Marriage of Hill and Dittmer (1/18/12), B226017

While prenuptial agreements were once viewed with suspicion by trial courts, a recent decision reflects the current trend to uphold them particularly when the complaining party has competent legal representation and practical access to all relevant information concerning the other person's finances - whether they took advantage of that opportunity or not. One lesson is that people need to take the waivers set forth in these agreements quite seriously, because there is high likelihood you will become stuck with them.

One of the useful aspects to the Second Appellate District's decision in In Re Marriage of Hill and Dittmer is that the justices kindly include an Appendix setting forth selected portions of the prenup which were upheld as fully enforceable, providing family law practitioners who draft premarital agreements a useful partial template for language that will likely pass muster.

The opinion also demonstrates how important it is for the parties, and their attorneys, to maintain a complete file of the negotiations leading to the execution of such agreements including maintaining copies of the succession of drafts that come to be altered as discussions evolve, as potential evidence when the agreement is (inevitably?) attacked. Whether premarriage agreements will be enforced years later is a highly fact specific inquiry. Many lawyers are reluctant to be involved in drafting them, because they are seen to be potential malpractice traps. Those that do often charge significant fees as a result, in order to justify the risks of subsequently being sued by their own former clients. This case is interesting because the wife, who came to challenge the agreement some seven years after she signed it, ultimately had her own attorney be the primary drafter of the agreement. That attorney evidently did a good job in helping to create an agreement that would be, and turned out to be, binding - which is not what the wife wanted to have happen years later, after the fact. Where one party later perceives that they will be better off if their premarital agreement can be set aside, the first thing their (new) lawyer will do is to try to find a "hook" for attacking its enforceability. This case represents a creative attempt by wife's attorneys to create such a hook by contending that the husband had misrepresented his net worth when it was signed, but their efforts failed.

Parties' Circumstancs

Sandra Hill and Thomas Dittmer married in April, 2001. Some six months prior to the wedding, Dittmer insisted that before he would marry, they needed to execute a premarital agreement. At that time, Hill agreed. Each was wealthy and business savvy by any standard. Hill had a net worth of at least $10 million, and Dittmer possessed at least $40 million. Each had "high-pressure jobs which required deadlines to be met and contracts reviewed, edited, and signed." Hill had been a magazine editor and published author, and had her own television production company; Dittmer was the founder of a major commodities trading company.

Hill hired Santa Barbara family law attorney Jamie Raney to represent her, and they first met to discuss it three months before the marriage. While Dittmer's attorney prepared an initial draft, Raney decided that it would be better for her client if Raney drafted the agreement and Dittmer agreed to allow this to occur. Numerous versions were created and exchanged as the agreement took shape, and evidently these drafts were maintained in the attorneys' files over the ensuing years and so came to be admitted into evidence in the subsequent trial. The more drafts that are generated, as they agreements are being formed, the greater the inference that both parties are actively engaged in an arm's length transaction to create a contract that they both intend to be binding and which they both fully understand. Hence, when one soon to be spouse is favored over the other, or gains benefits they view as important, that spouse's counsel very much wants the other party's attorney to actively input into changes to the agreement. For instance, when I draft them on behalf of the person with greater income or assets, the last thing I hope for is that the other side will just accept my version. Indeed, some lawyers intentionally leave mistakes in a draft (misidentifying parties, misspellings, provisions they know aren't acceptable) exactly so there is a record that these were corrected or changed.

The agreement came to be signed on the day of the wedding, before the ceremony. It included a waiver of spousal support and precluded the creation of community property during the marriage by reason of the contributions of time, skill, and efforts of each party, that would otherwise have belonged to them jointly but for the prenup.

As is often the case where the enforceability of a premarital agreement is in issue, the trial court bifurcated the proceedings and permitted an early trial of that issue alone since if the agreement was upheld, the overall case would be severely truncated and shortened.

Hill's best argument to challenge her agreement was evidently that Dittmer had failed in the agreement to actually disclose the nature and extent of his income and assets beyond a generalized representation that his net worth amounted to $40 million. To prove this assertion Hill attempted to obtain discovery of Dittmer's net worth when the agreement was signed, which would likely have consisted in the information she could have obtained but did not then obtain. Dittmer resisted this discovery as largely irrelevant, but the trial court allowed some limited inquiry by Hill but not to the degree that she had wanted.

Dittmer's attorney had smartly insisted a provision be added to the agreement that acknowledged that Dittmer had provided Hill's legal counsel with full and complete access to Dittmer's financial information, including an opportunity to consult with Dittmer's attorney and his accountants and other representatives "as to the nature, value and cash flow from any of his assets and the nature and extent of his liabilities." This turned out to be Hill's undoing - Hill never availed herself of this invitation, and conducted no inquiry. This effectively waived her right to contest the agreement on this basis later, notwithstanding the fact that the first draft that Raney circulated was presented on March 23, 2011, and that the revision with this acknowledge came "a week later" and therefore on or about April 1. Raney faxed Dittmer's attorney the final draft of the agreement on April 11, 2001, three days before the wedding day, when it came to be signed. Hence, evidently the "opportunity" to inspect Dittmer's net worth representations, including what would certainly have been questions about a complex financial estate, was open for just the two weeks leading up to the marriage. As a practical matter relating to how we humans are hard-wired, I find it difficult to imagine how Hill could have undertaken any kind of real investigation within that time period (without, for instance, canceling or moving the wedding date). Nonetheless, she had the chance to do so and her decision not to deprived her of a legal basis to claim fraud for nondisclosure, or inadequate disclosure, of Dittmer's holdings and income as of that time.

Apparently the terms that the parties came to agree upon had little to do with specifics relating to their assets - one can speculate that if Hill cared enough then about what she claimed to care about now, had her inquiry resulted in the discovery that Dittmer was worth $50 million rather than merely $40 million, her attorney might have been motivated to negotiate a better deal or request some additional provisions. Of course, what is unsaid but implied in the decision is that Hill loses because her theory of the case is simply a technical ruse to invalidate what she doesn't like today - something that evidently didn't matter then.

How the Court Ruled

The court's opinion states:

"The contention that the Agreement is tainted by fraudulent and inadequate disclosures is refuted by evidence that Hill, both in the Agreement itself and in her conduct during the three-month period of negotiation, waived this claim. The Agreement states in part: 'Each party waives the provisions of California Probate Code Section 143 and California Family Code Section 1615 relating to financial disclosures. . . . The absence of disclosures shall not create any legal right in favor of either party, nor any legal remedy by either party against the other including, but not limited to, challenging the validity or enforceability of this Agreement. Based upon each party's knowledge of the other's income and assets and their access to same, and in consideration of the prospective marriage, each party acknowledges that this Agreement is fair and equitable at the time of its execution. The foregoing waivers of disclosure are voluntary and express and shall be deemed conclusive for the purposes of Section 1615 (a)(2)(8) of the California Family Code and for all other purposes.'
The circumstances surrounding the execution of the premarital Agreement provide substantial evidence that Hill entered into the Agreement voluntarily. She had the advice of two attorneys specializing in family law and estate planning during the nine months the Agreement was being discussed and negotiated. Hill's lawyer drafted the Agreement and revised drafts of the Agreement in consultation with Dittmer and his attorney. These facts, coupled with Hill's professional background and evident skills are strong evidence that she entered into the Agreement voluntarily.
There is no evidence that Hill took any steps to obtain financial disclosures from Dittmer during the negotiation period, although she was invited to do so by Dittmer's attorney. Dittmer's attorney sent a memorandum to Rainey in this regard as follows: 'Article IV (perhaps in Section 4.4) should acknowledge that the financial information provided by Tom includes his Trust and that 'Tom has provided Sandy's legal counsel and representatives with full and complete access to the books and records of Tom and his Trust, with the opportunity to consult with him, and any of his accountants, agents and representatives as to the nature, value and cash flow from any of his assets and the nature and extent of his liabilities.' This provision was contained, in substance, in the Agreement.
Hill's additional argument, that she did not see the final draft of the Agreement until the date of the wedding and that the agreement she signed was incomplete, is not persuasive. As the trial court found, the record shows that the provisions upon which Hill bases her claims of invalidity had been in prior drafts of the Agreement. Hill's assertions that she was too busy with wedding preparations to read or understand the Agreement ring hollow in light of her education and her extensive business experience....
The trial court found as a fact that Hill had adequate opportunity to review the various drafts of the agreement and that she was aware of and understood its contents. Substantial evidence supports this finding. Furthermore, even if it were true that she was unaware of portions of the final Agreement, her failure to take reasonable steps to become aware of the contents of the Agreement, particularly given her business background, her awareness of earlier drafts, and her access to counsel, precludes a finding of that she entered into the Agreement involuntarily."

Hill also contended that the changes to Family Code section 1615 that became effective a year later, in 2002, should be retroactively applied to the question of the agreement's validity and that if they were a different result would have occurred. Specifically, current section 1615(c)(2) creates a presumption that a prenup is not executed voluntarily unless the court makes a finding that the party against whom enforcement is sought had at least seven calendar days between the date he or she was "first presented" with the agreement and advised to seek independent counsel, and the time he or she signed the agreement.

Hence, the amended provisions that are no effective presumes a premarital agreement is unenforceable when the party who is challenging it did not receive it at least seven days before it was signed - Hill argued that the final version was only given her the day of the wedding. The decision ignores the question whether the "final, final" draft needs to be presented more than seven days before, because the Court (and an earlier decision) have found that the 2002 revisions to the Uniform Premarital Agreement Act are not to be applied retroactively to agreements entered into prior to January 1, 2002.

The language that Dittmer's attorney requested will likely become the standard for future agreements like this one, and will create a method of by which actual disclosure of assets and debts in the prenup can be avoided - which, the standard of professional care now suggests based on this decision should become the rule and not the exception. Why now ever give a detailed financial disclosure, whether by way of exhibits or statements made in the agreement itself, when that can be waived? Giving detailed facts in an agreement would appear to be unwise, since the party who is attacking enforceability then has something specific to challenge. A 'multitude of sins' can be shielded if the opportunity to investigate is extended, but not undertaken.

It bears repeating that the provisions attached in the Appendix, including a form of spousal support waiver, are a very good starting point for drafting the language for your own agreements.

T.W. Arnold, CFLS