All in the Family: State Supreme Court tosses out unfair prenuptial agreement

By Jason Brown and Cynthia Brown
BridgeTower Media Newswires

MINNEAPOLIS — Last week the Minnesota Supreme Court issued an opinion surrounding the enforceability of prenuptial agreements. Kremer v. Kremer is a “must-read” for all family law and estate planning practitioners.
Even if you don’t draft prenuptial agreements, you are likely to encounter enforceability issues as part of your dissolution work.

The facts in Kremer are rather straightforward. For about three years prior to marriage, the parties lived together on a farming enterprise owned by Husband. Husband informed Wife that he would require a prenuptial agreement if they ever married. Wife was reluctant to enter into such an agreement.

In August 2000, the parties decided to get married. They scheduled a destination wedding in the Cayman Islands for March 2001.

As the wedding approached, and without informing Wife, Husband contacted an attorney to prepare a prenuptial agreement. They met over a period of approximately 30 days to discuss terms. On February 26, 2001 (three days before they were scheduled to leave for the Cayman Islands), Husband signed the agreement.

Later that day, he presented the prenuptial agreement to Wife, making it clear that if she did not sign, the wedding was off. Family members had paid for their lodging and airfare, and some were already in route.

After being presented with the agreement, Wife attempted, unsuccessfully, to meet with her prior divorce attorney. Two days later, she met with a different attorney – with whom she had no previous experience. The attorney explained the terms of the agreement, her rights under the law and the potential impact of the agreement in the event of the marriage ending by divorce, or Husband’s death.

Wife signed the agreement. The following day, the parties travelled to Grand Cayman for their wedding.

The prenuptial agreement was rather vanilla flavored, with each party retaining his or her pre-marital property interests, assets acquired during the marriage divided pro rata, and a waiver of spousal maintenance. The typical disclosures were attached.

The parties had a child together in 2008. Throughout the marriage, Wife contributed to Husband’s farming operation, the value of which increased significantly. However, she earned little income.

In 2010, Wife petitioned for divorce and moved to set aside the prenuptial agreement, arguing it was “unfair.” The District Court agreed, finding that the agreement was executed in a procedurally unfair way because: (1) Wife did not have an opportunity to meet with a lawyer of her own choice; and (2) Husband used the wedding deadline to create an atmosphere of coercion.

In a published 2-1 opinion, the Minnesota Court of Appeals affirmed – but on different grounds. Citing the multi-factor common law test articulated in the 2007 In re Estate of Kinney decision, the court determined that the prenuptial agreement was executed in a procedurally unfair manner.

The Minnesota Supreme Court granted review.

Justice David Lillehaug, writing for the majority, began with a historical overview concerning the law of procedural and substantive fairness relative to prenuptial agreements – citing Kinney, McKee-Johnson v. Johnson, and the legislative history associated with Minn. Stat. sec. 519.11.

Of note, the second sentence of Minn. Stat. sec. 519.11, subd. 1 provides that agreements “made in conformity with this section may determine what rights each party has in the ‘non-marital’ property.” The court noted in McKee-Johnson that during the legislative process an amendment to address “marital” property had been added, but was later removed.

Until the Kremer decision, the Minnesota Supreme Court had not considered the relationship between Minn. Stat. sec. 519.11 and the common law, as applied to prenuptial agreements that address marital property.

The central issue presented to the court involved which common law standard applied.

In McKee-Johnson, the court determined that the relevant factors under the common law were “substantially identical” to those in Minn. Stat. sec. 519.11: (1) full and fair disclosure; and (2) access to independent counsel.

To the contrary, in Kinney, a four-part test emerged: (1) full and fair disclosure; (2) adequate consideration; (3) knowledge of agreement particulars and ultimate impact; and (4) evidence of abuse of fiduciary relations, undue influence or duress. Under the Kinney doctrine, the opportunity to consult with counsel remains a “relevant factor,” but is not determinative of whether an agreement is procedurally unfair.

In short, Lillehaug opined that “[w]e hold that the multifactor Kinney test is the common law test applicable to antenuptial agreements…[and] McKee-Johnson is overruled to the extent that it determined that the common law and statutory procedural tests were ‘substantially identical.’ They are not.”

The court was ultimately left to determine whether the agreement of Husband and Wife was executed in a procedurally fair way – in light of the Kinney factors. Analyzing the agreement as a whole, the court opined that it was not “equitably and fairly made.”

First, Lillehaug noted inadequate consideration. While the adequacy of consideration is not normally tested (a mere peppercorn is typically sufficient), he noted that “antenuptial agreements typically involve parties in a confidential relationship, capable of exploitation.”

The sufficiency of consideration hinges on the value that the disadvantaged party to the agreement gives up as part of executing the contract. In this instance, the court noted that “the language of the [a]greement appears equitable on its face…but the circumstances reveal that these terms are patently one-sided.”

Husband came into the relationship with significant assets which increased in value over the course of the marriage, while Wife came into the marriage with very little. Lillehaug suggested that “[i]f the agreement were enforced, she would leave the marriage with very little…[y]et [she] contributed to [the] farm operation throughout the marriage, maintained the household and cared for the couple’s child.”

Second, Lillehaug concluded that the agreement was procured by duress.

According to the court, “duress is coercion by means of threats or other circumstances that destroy the victim’s free will and compel her to comply with some demand of the party exerting the coercion.” Moreover, “[t]he test is not the nature of the threats, but rather…whether or not the [victim] really had a choice.”

Lillehaug outlined a multitude of facts in concluding that “there was overreaching” by Husband, including: (1) threatening to call off the wedding if Wife didn’t sign; (2) the limited time he afforded Wife to consider entering into the agreement; (3) the limited time he afforded Wife to meet an attorney of her choosing; (4) knowledge that Wife had reservations about signing such an agreement; (5) lack of negotiation of terms; and (6) secretly meeting with his own lawyer for approximately one month prior to presentation of the agreement to Wife.

In his lone dissent, Justice G. Barry Anderson disagreed with the majority in two ways: (1) suggesting that the majority ignored the plain language of Minn. Stat. sec. 519.11; and (2) suggesting that the majority read McKee-Johnson too broadly. Rather than an outright affirmation by the court, he preferred to remand the case to the District Court to make factual findings consistent with the common law standard – not merely Minn. Stat. sec. 519.11, as occurred the first time around.

What are the key takeaways?

First, keep in mind that the Kremer factors only apply to “marital” interests; the statute affords a mere two-part test concerning “non-marital” interests allocated within a prenuptial agreement.

Recall, however, that assets brought into a marriage (like a home, business, or retirement account), may ultimately be classified as having both a marital and non-marital component at the time of divorce. For that reason, draft all prenuptial agreements with Kremer in mind.

Second, consideration must now be valued as part of prenuptial agreements.

On maintenance, for example, an outright waiver may be sought. In light of Kremer, it probably makes sense to include a cap concept, both amount and duration, in an effort to satisfy sufficiency of consideration.

Third, timing plays a huge role in perceived fairness.

Warn the client who comes to you a week before the wedding and suggests that a prenuptial agreement is needed. It’s not that you can’t help them. However, a letter informing them of the risk associated with the execution of such an agreement will make your malpractice carrier smile.

Finally, take special care in dealing with a client who has a destination wedding planned.

Work with clients to get their prenuptial agreement executed before friends and family drop thousands of dollars on non-refundable travel expenses (placing exponential pressure on the future bride or groom). At least a month prior to the wedding date seems appropriate.