Postnuptial and Premarital Agreements and the Invasion of Separate Property

Take-Away: The Michigan Court of Appeals just published a decision in which it found that not all postnuptial agreements made by a happily married Michigan couple are invalid per se and against public policy. This decision also provides an interesting interpretation with regard to prenuptial agreements which have been of questionable enforceability in light of the Allard court decisions a few years back, which held that the parties to a prenuptial agreement could not tie the hands of a divorce judge in making a property division in their divorce to protect their separate property.

Case: Skaates v. Kayser, Michigan Court of Appeals, No. 34648 (Published, July 16, 2020)

Facts: The couple started cohabitating in 2004. By 2011, they started talking about marriage. At that time each of the parties had their separately owned businesses and assets. They talked about entering into a prenuptial agreement for over 16 months before it was finally executed in 2012. The problem was they were married six weeks before the agreement was actually signed so, in effect, it became a postnuptial agreement.

Under the agreement the wife was to retain her dental practice (which her husband was then managing.) Substantial other assets were also to be divided in the event of a divorce based on preexisting ownership interests, e.g. LLC membership interests.
The agreement also included a ‘cooling off’ provision that was to be used when either of them contemplated a divorce- one had to wait 4 months before one could actually file for divorce. They also, as part of their 4 month ‘cooling off’ provision, agreed to attend a minimum of 3 joint marital counselling sessions. The wife filed for divorce in 2016 without waiting the 4 month ‘cooling off’ period, and without attending any marriage counselling sessions.

Claims: The wife filed a motion that asked the divorce court to enforce the postnuptial agreement. The husband responded to that motion with four separate defenses: (i) the agreement was contrary to public policy because it was made in contemplation of a future divorce which left the wife in a more attractive financial position in the event of a divorce; (ii) the agreement was signed by the husband under duress because the wife, a dentist with her own professional practice, had uneven bargaining power over him; (iii) the wife breached the agreement by not following the ‘cooling off’ provisions; and (iv) the wife had failed to fully disclose her assets- apparently she possessed some gold coins that she had later sold.

Note: I will ignore in this summary the husband’s three other arguments as they are fact specific. What follows will only focus only the public policy argument where the husband claimed that all postnuptial agreements are invalid as they tend to promote divorce. It will also address the Allard interpretation.

Divorce Court: The trial judge granted the wife’s motion to enforce the postnuptial agreement. The judge found that postnuptial agreements are not unenforceable per se and they are acceptable if they “intended to promote harmonious martial relations and keep the marriage together….[N]othing in the agreement itself or the record suggests that the parties contemplated a separation in the near future when they signed the agreement. On the contrary, the agreement was made in large part to fulfill the desire of the parties to define and clarify their respective rights in each other’s property and in any jointly held property that they owned prior to the execution of the marital agreement or thereafter.”

The trial judge concluded that the postnuptial agreement did not leave either party in a far more favorable position were they to abandon the marriage, and that overall, the agreement actually favored the husband in light of the short duration of the marriage.

Appeals Court: The appellate panel acknowledged the general rule under Michigan’s common law that a couple that is maintaining a marital relationship and living together may not enter into an enforceable contract that anticipates and encourages a future separation or divorce. “To allow such agreements would encourage separation or divorce, which is not an appropriate public policy…One way a postnuptial agreement encourages separation or divorce is if its terms are calculated to leave one party in a much more favorable position to abandon the marriage.” Hodge v. Parks, 303 Mich App 552 (2014).

However, postnuptial agreements are not invalid per se, because some are intended to promote harmonious marital relations and keep the marriage together. Those postnuptial agreements do not implicate Michigan’s public policy concerns. Accordingly, if the agreement seeks to promote marriage by keeping the spouses together, a court may enforce the agreement if it is equitable to do so.
In its analysis of this postnuptial agreement the Court focused on several provisions and circumstances:
The agreement, not surprisingly, had the parties acknowledge their mutual desire to define and clarify their respective rights in each other’s property. This provision was broadly phrased to cover an end of the marriage by either divorce or by death. Standing alone, this provision did not suggest that the agreement was created solely in contemplation of a future separation or divorce;
The ‘cooling off’ provision reflected the parties desire to refrain from making hasty decisions and to take affirmative steps to preserve the marriage, if possible. Therefore, this provision demonstrated that the agreement was created for the purpose of the harmonious continuation of the marriage;
Multiple financial provisions actually favored the husband. He was awarded a 25% interest in the wife’s dental practice building, and a 50% interest in the marital home that the wife had purchased prior to the marriage with her own funds. In addition, the husband retained control of all of his premarital assets and bank accounts; and
“We also think it important that the parties discussed and negotiated the agreement for 16 months, most of which was prior to the marriage. It was undisputed before the trial court that the agreement was supposed to be a prenuptial agreement, and that it became a postnuptial one only because of time constraints prevented earlier finalization. Accordingly, we agree with the trial court that this was not an agreement that contemplated a future divorce; nor was it an agreement that encouraged divorce. Instead, the agreement reveals that the parties clearly wished to be married and remain married, and the agreement was meant to help facilitate this.”

Living and Cohabitating Together: One important fact that the appellate court glossed over was that the parties were living together at the time that they signed their agreement. Longstanding Michigan common law is if the spouses are living and cohabiting together at the time that they sign their separation agreement, their agreement is invalid solely by virtue of their living and cohabitation arrangement. Day v. Chamberlain, 223 Mich 278, 281 (1923). The appellate panel merely noted in passing: “Based on the trial court’s findings, though living together, the parties’ agreement was not in contemplation of them separating or divorcing.” This is probably why the Court emphasized that what was intended by the parties was a prenuptial agreement, yet it morphed into a postnuptial agreement since it was signed only 6 weeks after the marriage due to ‘time constraints.’ If living together at the time the agreement was signed is no longer dispositive of the public policy issue, perhaps the Court should have just announced that Day is no longer the law in Michigan.

Separate Property: The Allard decision also surfaced in the appellate panel’s decision. In Allard v Allard, 318 Mich App 583 (2017) the Court of Appeals held: “to the extent that parties attempt, by contract, to bind the equitable authority granted to a circuit court under MCL 552.23(1) and MCL 553.401, [divorce property division authorization] any such agreement is necessarily void and against both statute public policy codified by our Legislature.” Restated, the Court said that parties to a prenuptial agreement cannot compel a court of equity, i.e. a divorce court, to order a property settlement that is inequitable, or prohibit the divorce court from exercising its equitable powers granted under the divorce property-award statutes to ‘invade’ their separate property. The impact of Allard is that parties cannot completely protect their separate property, e.g. property that they owned prior to the marriage, or property that came to them during their marriage by gift or inheritance, from the divorce court awarding some of that separate property to the soon-to-be-former-spouse. Consequently, Allard creates a major hurdle when an individual tries to protect their inherited or gifted property if they are later in a divorce. What was once thought the utility and benefit of a prenuptial agreement seemingly went out the window with Allard. A ‘what’s mine is mine, and what’s yours is yours’ prenuptial agreement is unenforceable if the divorce judge finds that agreement, and its result, to be ‘unfair.’

Here, the husband, citing Allard, complained that the trial judge was unable to determine if the property division was equitable without first determining the value of the various properties. Specifically, the husband argued that such a valuation was necessary for the trial judge to properly analyze whether an invasion of the wife’s separate, premarital, property was warranted.
The Court found the husband’s argument to be a mischaracterization of the Allard According to the Court, there is no statutory right of a spouse to invade the other spouse’s separate property. Rather, only the divorce judge possess that authority, or right, if equity demands it.
According to the Court, the Allard decision presupposed an inequitable agreement; otherwise there would be no issue in dividing property following that agreement’s terms (and not invading the separate property of the other spouse.)

Frankly, the law of prenuptial agreements and postnuptial agreements in Michigan is a mess right now. There is no assurance that either a prenuptial agreement, or a postnuptial agreement, that seeks to protect gifted an inherited assets will be respected by a divorce court. Everything turns on whether the divorce judge finds the agreement’s terms fair. However, the fairness of the agreement’s terms is determined at the time of the divorce, not at the time when the agreement was signed.

Example: A couple on the eve of their marriage enter into a prenuptial agreement. It is a second marriage for both. Each spouse owns $1.0 million of assets that are identified as their separate property, to be retained by them in the event of a future divorce or death. They also agree to divide any assets acquired during their marriage 50%-50% if there is a future divorce. During the years of their marriage, the wife gifts $500,000 of her separate property assets to her children from her prior marriage. The husband permits his separate property to grow. Later, after ten years of marriage and now deep into their divorce, the husband’s separate property is worth $2.0 million, and the wife’s separate property is worth $500,000. The assets acquired during the marriage are worth $200,000. The ‘we each keep our separate property assets in the event of our divorce’ provision, while obviously fair when the agreement was signed, no longer looks all that fair to the wife, despite the fact that it was her gifts to her children that reduced her separate property. How will the divorce judge look at the prenuptial agreement in light of the disparity in separate property amounts, which provides at the end of the marriage that husband will walk from the marriage with $2.1 million and the wife $600,000?

Conclusion: Thankfully the Michigan State Bar’s Probate and Estate Planning Council is currently looking at a legislative ‘fix’ to the Allard decision that would provide more predictability to the enforcement of prenuptial agreements that are intended to protect separate property interests in the event of a divorce.