Does a Breach of a Prenuptial Agreement Create a Right of Rescission? Part I

Earlier this week I posted the introduction to this post, in which I examined the cases from Pennsylvania and other jurisdictions that lead me to believe that a breach does not create a right of rescission unless the breach is so substantial that it cannot be remedied through money damages. The Pennsylvania cases are not conclusive, but lend their support to this theory.

Pennsylvania Cases

Estate of Barilla, 535 A.2d 125 (Pa.Super.1987). Widow of a decedent alleged that the executors of the decedent’s estate, his children, breached the prenuptial agreement by padlocking the entrance to the marital residence in violation of a contractual provision that granted the widow a life estate in the property. Trial court found no breach because the executor of the decedent’s estate was neither a party to the contract nor an intended third party beneficiary. Furthermore, it was held that the widow’s right to a life estate was conditional upon her occupancy of the marital residence at the time of decedent’s death and continued payment of real estate taxes. The widow did not occupy the residence for 17 years after the decedent’s death and did not pay the taxes. Since these conditions failed, the widow’s right to a life estate did not attach. Affirmed.

Estate of Cummings, 493 Pa. 11, 425 A.2d 340 (1981). In this pre-Simeone case, the parties conceded that the prenuptial agreement executed by the decedent and his widow was valid and binding. The widow alleged, however, that the decedent’s failure to perform contract provisions, which required him to leave his wife a life estate in his cottage on leased premises and a lifetime income interest in a trust fund in the principal amount of $30,000.00, rendered the agreement invalid. The trial court held that the decedent breached the contract by conveying the cottage to his wife during his lifetime and leaving her the furniture in his will (rather than conveying the life estate to her in his will) and granting her a life estate in stock worth $29,440.00. The trial court allowed the widow to elect against the decedent’s will, despite the contractual waiver of such election. The Supreme Court of Pennsylvania reversed the trial court’s decision, holding that the decedent had complied to the best of his ability with the former provision; and that the estate of the decedent could cure the breach of the latter provision by supplementing the income that the widow would receive from the trust fund. The Supreme Court rejected the estate’s argument that the $560.00 deficiency was de minimus, but held that the breach neither negated the essential fairness of the agreement nor altered the promise for which she bargained. Since the widow had an adequate remedy at law, the Supreme Court refused to rescind the entire contract.

Estate of Harrison, 456 Pa. 356, 319 A.2d 5 (1974). In another pre-Simeone case, the decedent failed to comply with a provision of the parties’ prenuptial agreement that required him to make a new will prior to his death, in which he was to create a $150,000.00 trust for his wife. Notably, there were no other covenants in the parties’ agreement except for mutual waivers of their testamentary rights. When the husband died without having made a new will, more than a year after signing the prenuptial agreement, his widow made a claim against his estate for family exemption. The trial court dismissed the widow’s claim, holding that the decedent’s breach of the prenuptial agreement could be cured by creating a trust for the widow out of the decedent’s estate. The trial court also held that there had been substantial performance of the prenuptial agreement because the parties had been married as provided by their agreement. The Supreme Court of Pennsylvania reversed, holding that “Were we to accept appellees’ contention, once two persons married, their antenuptial agreement would be enforceable even if neither performed any of the terms of the agreement.” Thus, in Pennsylvania, the parties’ marriage itself is not adequate consideration to uphold a prenuptial agreement that is not otherwise performed by the parties. This decision was subsequently limited to its facts by the Supreme Court of Pennsylvania in Cummings, supra, wherein the Supreme Court held that a technical breach of a prenuptial agreement is not grounds for total rescission, where other provisions were substantially performed and a remedy at law existed. Furthermore, the precedential value of this decision may have been weakened by the Supreme Court’s subsequent decision in Simeone v. Simeone, 525 Pa. 392, 581 A.2d 162 (1990), which relaxed the standards for enforceability of prenuptial agreements by eliminating the requirement that such agreements must make a reasonable provision for the dependent spouse.

Does a Breach of a Prenuptial Agreement Create a Right of Rescission?

In Pennsylvania, under the long-standing authority of Simeone v. Simeone, 525 Pa. 392, 581 A.2d 162 (1990), premarital agreements are inviolate unless there has been a lack of full and fair disclosure. Prior law which required that a prenuptial agreement make a reasonable provision for the dependent spouse has been eliminated. Moreover, the standards for finding a lack of full and fair disclosure are exceedingly difficult to meet, as subsequent case law demonstrates. Yet, where it is not possible to prove a lack of full and fair disclosure, may a contracting party have a prenuptial agreement invalidated by proving a breach of contract?

Under Simeone, prenuptial agreements are governed by the general law of contracts. Thus, it is appropriate to look to general contract cases to determine whether a breach of contract renders the entire contract unenforceable. Clearly, the law abhors a forfeiture where there is an adequate remedy at law. In Widmer Engineering Inc. v. Dufalla, 837 A.2d 459 (Pa.Super.2003), appeal denied, 578 Pa. 701, 852 A.3d 313, the Superior Court adopted the approach of the Restatement 2d of Contracts § 241 to judge whether a breach was so material as to warrant rescission of the entire contract. The Restatement 2d of Contracts § 241 lists the following criteria:

(a) the extent to which the injured party will be deprived of the benefit which
he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) the extent to which the party failing to perform or to offer to perform will suffer
forfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. These criteria would preclude rescission of the contract unless it is impossible to cure the breach through specific performance, money damages or other remedies at law. The court might also consider whether the non-breaching party may be precluded by waiver or estoppel from asserting a contractual forfeiture.

Part I of my research will examine the few cases where our Pennsylvania courts have considered an alleged breach of a prenuptial agreement. Part II will examine decisions from other jurisdictions. Those cases suggest that a breach is grounds for rescission of the entire prenuptial agreement only where there has been no partial performance of the promises made in the prenuptial agreement and the breach is so material as to constitute a failure of consideration. Although one Pennsylvania case, Estate of Harrison, supra, might suggest a less stringent standard for invalidating a prenuptial agreement on the grounds of breach, the precedential weight of that decision must be questioned in light of the subsequent Cummings and Barilla decisions that distinguished Harrison and the sweeping changes brought to the law by Simeone.

Part I will be posted later this week; stay tuned.

Marital Settlement (TV Style)

I heard about it, and read about it (thanks, Death&Taxes!), but I didn’t see the episode of the TV series 30 Rock when Jack and his wife Bianca settled their divorce. The negotiations were heated:

Bianca: I want our divorce to be final.
Jack: All right. I want back all the jewelry I ever bought you.
Bianca: Fine.
Jack: I want the art supplies that I gave you on your 40th birthday, and any subsequent art projects you made with them.
Bianca: Fine.
Jack: I want all of our love letters.
Bianca: (chuckling and waving her hand) Oh, fine.
Jack: I want all of your parents’ love letters.
Bianca: Fine.
Jack: I want full stake in the Arby’s franchises we bought outside of Telluride.
Bianca: Oh, damnit Johnny, you know I love my Big Beef n’ Cheddar!

As one of my colleagues tells her clients: “It’s not about the toaster, but it’s really about the toaster.”

Variations on a Double Dip Theme: The Moore Case

The Tennessee Court of Appeals issued a decision in May 2006 that addresses the lingering question of whether gains from the sale of marital property may be included in income for child support purposes: the old “double dip” dilemma. In Moore (2006), the partial owner of a cycle shop settled his divorce in 1991, retaining his interest in the business as part of his equitable distribution. Child support was set at the time of the divorce, and modified later based on an increase in the owner’s salary.

Years later, the business owner sold his interest in the cycle shop to his sister, who was the other owner. In exchange for his interest and a non-compete clause, the seller received 20% of the sales proceeds up front and a five year note in monthly installments with interest. When the former wife of the seller filed a petition for modification of child support, alleging an increase in the father’s income due to the sale of the business, the trial court determined that the sales proceeds should not be included in his income for support purposes.

On appeal, the Tennessee Court of Appeals noted that the statutory definition of income in that state includes “capital gains.” Yet, the father in this case relied upon a Tennessee precedent that excludes “isolated capital gains” from income. Moreover, Father cited a Tennessee law which provides that “assets distributed as marital property will not be considered as income for child support or alimony purposes, except to the extent that asset will create additional income after the division.”

The Tennessee Court of Appeals remanded to determine what portion of the proceeds received by the husband from the sale of his business interest could be considered “additional income” under Tennessee law. At first blush, it appeared that the Tennessee court blurred the distinction between the net income or profits generated by a business (which are included in the value to be divided in an equitable distribution proceeding) and passive income such as interest, dividends and capital gains on marketable securities (which are truly “created” after the division of property).

Yet, the Moore opinion set forth a methodology which intentionally or unintentionally measures the portion of the sales proceeds that were not divided in equitable distribution. The appellate court held that the difference between the actual sales proceeds and the value used in equitable distribution should be divided pro rata over the five year payback period as “additional income.” In essence, the Tennessee court pro-rated the margin of error between the valuation and the actual sale price. That seems to be an appropriate way of capturing the difference between theory and practice.

Happy Valentine’s Day – Divorce Lawyer Style

The mid-winter blahs have slowed down my posting. Hopefully this little gem will prime the pump. From the Pittsburgh Post-Gazette:

Man accused of giving severed kitten’s head to his ex

Friday, February 02, 2007
Pittsburgh Post-Gazette

An Aliquippa man is accused of giving his ex-girlfriend a gift-wrapped package containing the severed head of a kitten.

According to the Animal Friends organization, a Mt. Washington woman called police Jan. 28 when she arrived home to find a package wrapped with red bows and pink tissue paper. She suspected that the package was from her former boyfriend, who had been leaving her photos of the two of them with her face destroyed.

Police found inside the package the severed head of a black, 12-to-16-week-old kitten and a note reading, “I love you, Your Ben.”

Pittsburgh Police Officer Christine Luffey, who specializes in animal welfare cases, joined with Animal Friends’ Humane Officer Katie Waters, in the investigation.

Animal Friends said Officer Luffey arrested Benjamin Gregory at 11:30 a.m. today on charges of stalking and cruelty to animals.