Business Decisions & Divorce
In 2004, Frank McCourt purchased the Los Angeles Dodgers.
At the same time, Frank McCourt entered into a postnuptial agreement with wife Jamie McCourt. Jamie intended for the agreement to protect her separately-titled assets from her husband’s business creditors.
In 2007, Jamie retained a California estate attorney who discovered that Jamie had inadvertently given up her ownership interest in the Dodgers by signing the postnuptial agreement.
Jamie attempted to correct her mistake by requesting that her husband sign a new agreement, wherein all of the parties’ assets would become community property. Frank refused to sign the agreement, and instead, terminated Jamie’s position as CEO for the Dodgers.
Shortly thereafter, Jamie filed for divorce. What followed became one of the most expensive and highly publicized divorce cases in California history.
After receiving pleadings, testimony and lengthy argument from both parties, the California Superior Court held that the postnuptial agreement was invalid.
Under California’s community property law, Jamie may then have been entitled to one-half ownership of the Los Angeles Dodgers. However, following the Court’s decision, the parties were able to reach a divorce settlement, whereby Frank McCourt agreed to pay $130 million to his wife in exchange for sole ownership of the Dodgers.
Bankruptcy and Divorce
Discovery during the divorce case revealed that the McCourts borrowed approximately $100 million in loans from Dodgers businesses. With business creditors pursuing collection efforts and his divorce settlement due, Frank McCourt forced the Los Angeles Dodgers into bankruptcy.
Following the parties’ divorce, the bankruptcy trustee ordered the Dodgers sold to the highest bidder. Frank McCourt’s dream to own a professional sports franchise came to a dramatic end.
Validity of Postnuptial Agreements in Utah
In Utah, prenuptial and postnuptial agreements must stand up to ordinary contract principles. Estate of Beesley, 883 P.2d 1343, 1346 (Utah 1994). For a written agreement to be valid:
- Both parties must have capacity.
- There must be consideration: Each side must give something up in the exchange.
- There must be a meeting of the minds: Both parties must assent to the same thing in the same sense, so that their minds meet as to all terms.
Additionally, due to the unique relationship between a husband and wife, marital agreements may be deemed invalid where there is evidence of fraud, coercion or material nondisclosure. D’Aston v. D’Aston, 808 P.2d 111, 112-13 (Utah 1990). The Utah Appellate Court explained:
“Unlike a party negotiating at arm’s length, who generally will view any proposal with a degree of skepticism, a party to a premarital agreement is much less likely to critically examine representations made by the other party. The mutual trust between the parties raises an expectation that each party will act in the other’s best interest. The closeness of this relationship, however, also renders it particularly susceptible to abuse. Parties to premarital agreements therefore are held to the highest degree of good faith, honesty, and candor.” Estate of Beesley, 883 P.2d 1343 at 1346.
The McCourt Postnuptial Agreement – What went wrong?
The California court likely considered ordinary contract principles in determining whether Frank McCourt’s postnuptial agreement was valid.
- Was there a meeting of the minds?
- Did Jamie receive fair consideration for giving up her interest in the Dodgers?
- Did Frank breach his fiduciary duty to Jaimie?
The lawyer retained to draft the postnuptial agreement created numerous versions of a contract. Both parties testified that they did not review the versions and relied on the lawyer to communicate the content of the agreement. At trial, the lawyer testified that he changed the agreement to give Frank sole ownership of the Dodgers, without informing Jamie of the change.
The lawyer’s testimony tended to establish that (a) the parties did not agree to the same terms, (b) Jamie did not have the opportunity to negotiate fair consideration for giving up her ownership interest in the Dodgers, and (c) Frank breached his duty of honesty and candor to his wife by not disclosing all relevant information.
Avoid Becoming Frank McCourt
Approximately half of today’s marriages end in divorce. As a result, many middle aged individuals – particularly those with considerable property or income– prefer cohabitation to marriage. Zirkle v. Zirkle, 304 S.E.2d 664 (W.Va. 1983). However, cohabitating couples are not entitled to the benefits of social security or pension programs or the rights of intestate succession.
If you desire to enter into marriage, but wish to ensure predictability with your future financial situation, you should think about drafting a marital contract. In doing so, consider the following:
1.If possible, draft the agreement before you get married. It may be easier to establish consideration with a prenuptial contract than a postnuptial contract.
2.Disclose all of assets, investments, debts, income and other relevant financial information. Any material nondisclosure may result in your agreement being deemed invalid.
3.Ensure that your spouse understands what he/she would be entitled to, if she did not sign a marital agreement. If possible, arrange for independent counsel to advise your spouse on her rights under the law.
4.Retain an attorney or do your homework to ensure that your marital agreement complies with the laws of your state. Certain rights cannot be waived by contract.