Pasternak & Fidis Reporter

April 1, 2014

How Much Financial Disclosure is Adequate for a Valid Premarital Agreement?

Too Much is Enough.

Two recent cases, one from Maryland and one from Virginia, point up the importance of financial disclosure in premarital agreements. In each case the challenging spouse launched a multi-faceted, and ultimately unsuccessful, attack on the agreement. Inadequate financial disclosure was but one facet of the attack. Had the financial disclosure been done better, in both cases, the litigation might have ended sooner with less expense to the defending spouse.

In Stewart v. Stewart, 76 A.3d 1221 (Md. Ct. Spec. App. 2013), the husband identified his major assets, a farm and a concrete business. However, he did not provide any values. Maryland case law has described a complete list of assets with fair valuations as the gold standard for financial disclosure. The Stewart agreement did not meet this standard, nor did it need to do so in order for the court to uphold the agreement as valid. However, to prevail, the husband had to convince the court that the wife had sufficient informal knowledge of his financial affairs. Whenever an outcome depends upon whom a judge believes, the risk that the truthful party will not be believed is always present. The longer the marriage, the greater the chance that witnesses will forget or die and documentary evidence will disappear.

In Chaplain v. Chaplain, 2011 Va. App. Lexis 15, the husband, who was worth about $20 million, did not provide any written financial disclosure. However, the wife learned through her association with him that he owned a 50-unit apartment building, a 150-acre farm and other real estate. There were two appeals in this case. The first resulted from a trial court summary ruling in the husband’s favor. The Virginia Court of Appeals reversed the summary ruling. Only after a full trial and a second appeal did the husband prevail. Like Stewart, the result in Chaplain depended, in part, on whom the judge believed.

There is an important distinction between the amount and form of financial disclosure that courts will tolerate and the best practices that create a higher level of protection for the party who wants the agreement. Stewart and Chaplain are among the many cases where something less than complete, detailed written disclosure of all assets with current and accurate values, and all sources and amounts of income, was sufficient for a court to uphold an agreement. However, in all cases, a proponent was forced to defend the agreement with all the expense and risk entailed in litigation. Memories fade, files are destroyed or lost, and witnesses die or become incompetent. A case that goes to trial often involves competing factual narratives. When resolution turns on credibility, the trial judge’s decision is virtually unreversible on appeal. The proponent who fails to adequately disclose, and document that disclosure, runs the risk that his or her story will be disbelieved even if true. The best opportunity to reduce this risk is before the agreement is signed.

Adequate financial disclosure is just as important to an economically disadvantaged party. The purpose of financial disclosure is to allow a party to make an informed decision about whether to sign a premarital agreement waiving marital rights that would otherwise accrue or to negotiate for more favorable terms. It is difficult to negotiate in the absence of adequate information. Therefore, his or her lawyer will need to insist on a complete financial disclosure statement before starting negotiations.

Mechanics and Content of Financial Disclosure

A written, itemized list of major assets and liabilities and their values, as well as amounts and sources of income is the best evidence of adequate disclosure. A detailed written disclosure provides a record of what was disclosed that survives death, loss of memory, destruction of files, or a change of heart. A detailed disclosure will only protect the proponent, however, if it is available when the dispute arises; if the agreement states that a disclosure is attached but it has become lost by the time the dispute arises, validity will be greatly compromised.

Disclosure Regarding Closely Held Business

Disclosure of an interest in a closely held business presents a special challenge. The value of the business may not be readily ascertainable. There is no requirement for a formal appraisal. However, an owner who fails to provide meaningful disclosure of known data does so at his or her own peril. He or she could provide the gross revenues of the business, the number of employees, his or her percentage interest, salary or other compensation received from the business, and the like. It is a mistake for the owner to assume that the other party’s knowledge of the existence of the business is tantamount to an understanding of its value. The owner’s statement as to value should be appropriately qualified. When the value is stated at book value it is especially important that the disclosure include an acknowledgment that actual value may be higher.

The business owner should discuss with his or her lawyer any recent appraisals of the business, or of any major assets of the business, such as a building, a recent loan application or application for key person insurance, any purchase offers or plans for an initial public offering, and whether the owner has stated a value on a personal net worth statement. In a lawsuit about validity, the challenging party will be able to obtain these documents in discovery. Therefore, the disclosure for the premarital agreement should not conflict with other statements of value or should disclose the other statements and, if appropriate, explain any difference.

Counsel for the owner must consider the quantity and quality of information to provide. The owner’s financial advisor or CPA will often be helpful in formulating a disclosure statement that will strike a reasonable balance between the need for disclosure to insure validity and the interest of the business owner in the confidentiality of the business’ records and business information.

Disclosure of Future Inheritance

A party is under no obligation to disclose his or her family’s wealth, and, in some cases, may not be able to do so. However, when a party has a reasonable expectation of a substantial future inheritance, it will often be in that party’s interest to make some disclosure. When a party has vested interests, such as benefi ciary rights in an irrevocable trust, he or she should disclose the essential terms of the interest and its approximate value.

Addressing Privacy Concerns in the Disclosure of Financial Data

Many parties prefer that their financial data be kept confidential. There may be particular matters, such as business information, that is especially sensitive. A party may have concerns about the disclosure of financial information to a new spouse’s adult children or other family members, or in a court proceeding between a new spouse and his or her former spouse. The agreement can include a confidentiality provision that prohibits each party from disclosing the other’s financial information to a third party, with an exception for his or her lawyer or other professional advisors, or in response to a court order. It can also provide for the right to seek a court order, in the event of future litigation, to protect this information.