Attacking a Postnuptial Agreement in Arizona
In the Arizona Court of Appeals case of Austin v. Austin, the court determined the validity of an arbitration clause that requires parties to have a third party arbitrator settle their dispute if there is a disagreement. This arbitration clause was created in an agreement between the spouses that created a company to hold their assets. The nature of the property transactions in this case are complex, requiring a review of the background facts.
Attacking a Postnuptial Agreement: Facts of the Case
In 1982, Mr. Austin (“Mr. Austin” or “Husband”) married his wealthy (“Wife”) and he took over her financial affairs. With Wife’s understanding, Husband formed a holding company that helped manage the extensive assets owned by Wife prior to the marriage. Wife made clear that certain assets would be transferred to her children (from a previous marriage) at future dates. During the party’s marriage, Wife admitted that it was her practice to trust her husband, and sign what her husband presented to her without reviewing it or consulting with legal or financial advisors.
In fact, Wife admits that she was not advised on the operating agreement, its arbitration clause, or its effects on her rights or property. In 1996 an asset holding company was formed. In that same time period, Husband testified that he gave Wife only the signature page for the 1997 operating agreement, instructing her to sign it. In 2000, he presented her with a document creating the a Family Revocable Trust. Once again, Wife was not advised that this trust document might change and/or transfer her sole and separate property into community property. Nor was she advised of the potential ramifications involved, should a divorce occur.
As of 1997 Wife’s separate assets were valued at approximately $58 million dollars. In 2005, Husband once again provided Wife with the signature page only, for an Amended Restated Operating Agreement for the couple’s asset holding company. Wife was not provided with the text of the new, amended operating agreement, and signed it based on her husband’s direction. This arrangement allowed Husband to assume control of Wife’s assets, giving him community property rights to some of them, and control over all of the assets of Wife, while undoing the effect of the irrevocable trusts she had set up for her children.
The operating agreements, which created the company, contained clauses requiring arbitration of disputes. Wife signed them without reading or otherwise paying attention, trusting in her husband to watch out for her and her children’s best interests. When Wife filed for divorce, disputes concerning the company came up. Husband moved to force arbitration of these disputes per the terms of the operating agreements and the trial court denied it. Husband appealed and the Court of Appeals affirmed the trial court’s order.
Attacking a Postnuptial Agreement: Facts of the Case: Argument of the Facts and Law
In the prior Arizona Supreme Court of In re Harber’s Estate, the Supreme Court held that postnuptial agreements are valid but that if one spouse challenges an agreement then the burden is on the other to prove, by clear and convincing evidence, that it was not fraudulent, coerced, unfair, or inequitable. The trial court used this standard in denying Husband’s motion. Husband’s position was that standard contract law should apply, under which Wife is presumed to know what she signed, even if she did not read it. The rule from the In re Harber’s Estate case had only been applied to postnuptial property settlements; Husband argued that it should be limited to postnuptial agreements.
It was pointed-out by the appellate court that the holding company’s effects “were no less severe than a traditional postnuptial property division agreement.” The appellate court found that because the agreements were made during the marriage ‘and altered each spouse’s property rights in the event of death’ they were postnuptial agreements subject to the ruling in In re Harber’s Estate.
Husband’s argument was based on this type of contract requiring separate counsel for spouses that create trusts “or other complex estate documents.” The lower court and appellate court responses appear to question Husband’s true intentions and, why such an inquiry is necessary or supported by the law. Mothers’ two separate children were parties to the agreements because of their rights in those named trusts; however, it was ruled by the trial court that the children were not bound by the arbitration agreement because they had not signed it.
Moreover, the court held that the children’s rights had been reduced, in violation set forth in the agreements. Husband also argued that Wife and her two children were not allowed by law to dispute the arbitration clause. The Court ruled against Husband. The children were not parties to the agreement.
Attacking a Postnuptial Agreement: Facts of the Case: Ruling of the Court
The record in this case produced no evidence of a benefit or exchange of promises between Husband and the children, and the children did not receive benefits that they were not already entitled to receive as beneficiaries. The Appellate Court found that the children would not benefit at all from the asset holding company’s amended operating agreement and their interests were detrimentally impacted by Husband’s efforts to transfer the children’s assets into the asset holding company without their knowledge.