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To Disclose or Not to Disclose? The Importance of Disclosure in Prenuptial Agreements
What are the three most important things when it comes to real estate? That’s right: Location, location, location.
Likewise, when it comes to prenuptial and postnuptial agreements, the three most important things are disclosure, disclosure, disclosure!
In pre- and postnuptial agreements, the spouses lay out terms for how assets will be divided should the marriage end in divorce. For example, the agreement may state that each spouse will leave the marriage with the same assets they entered with and anything acquired by the pair during the course of the marriage will be divided equitably, but assets can be retained or divided in any manner as long as both parties agree. Each party must disclose their assets – what they are and what they are valued at – so that the other party has full knowledge of what they are potentially waiving their rights to. They must also disclose their debts. They need to disclose what they own, if it’s of value.
Disclosure is a fundamental concept when it comes to pre- and postnuptial agreements. Yet a case that went before the South Carolina Court of Appeals calls into question the absolute necessity for full disclosure. Frankly, we do not agree with the court’s decision, but it has been upheld so we decided to look at this important case today.
Hudson v Hudson Background
This case (read it here) was heard in the SC Court of Appeals in early 2014. H. Eugene Hudson (Husband) and Mary Lee Hudson (Wife) began dating in the mid-90s and became engaged in 1999. On February 4, 2000, they entered into a prenuptial agreement (Agreement) and married a couple weeks later, on February 19, 2000. They separated in October 2018 and Husband subsequently filed for divorce.
There are a number of interesting things about this case. For one, Wife testified Husband insisted she consult a particular attorney – who was allegedly a close friend of his – and was not free to choose her own attorney. Also, the Agreement was presented to her just two weeks and a day before the wedding date when wedding preparations were in full swing and after she had already sold her car and quit her job in anticipation of getting married.
But the pertinent issue here is that Husband did not disclose everything he had an interest in. He did include his own business, Myrtle Beach Lifeguards, Inc., in the Agreement, but did not include a flea market that his family owned or a franchise fee agreement.
In family court, Husband said he didn’t include the flea market because his mother had a life estate in the flea market and he had just a remainder interest (meaning he would take control of it upon his mother’s death). As for the franchise fee agreement, he said he didn’t include it because he leased it to Myrtle Beach Lifeguards and considered it the company’s asset even though the agreement was in his name.
The family court found that the Agreement was “unconscionable” in the way that it dealt with division of the marital property and ordered that marital earnings of over half a million dollars should be split by Husband and Wife.
What Makes a Prenuptial or Postnuptial Agreement “Unconscionable”?
The case went to the SC Court of Appeals on appeal, where, among several other issues, Wife argued that Husband’s failure to disclose the flea market and the franchise fee agreement rendered the Agreement unconscionable.
In South Carolina, whether or not a prenuptial or postnuptial agreement is unconscionable is one of the tests to determine if such an agreement can be enforced. Citing a 2003 SC Supreme Court Case, Hardee v Hardee (read it here), the Court of Appeals lays out the three prongs to determine enforceability:
- Was agreement obtained through fraud, duress, or mistake, or through misrepresentation or nondisclosure of material facts?
- Is the agreement unconscionable? [emphasis added]
- Have the facts and circumstances changed since the agreement was executed, so as to make its enforcement unfair and unreasonable?
“Unconscionability,” as defined in Hardee, is “the absence of meaningful choice on the part of one party due to one-sided contract provisions together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.”
The Court of Appeals stated that in this case, Husband’s failure to disclose the assets was “not substantially significant” and “did not affect the unconscionability of the Agreement.” That’s all it had to say on the subject. It reversed the lower court’s decision and therefore reversed the award to Wife.
Disclose, Disclose, Disclose Anyway
Despite the findings of the SC Court of Appeals, which we already stated we don’t agree with, we still think it’s wise to disclose all assets (and debts) when entering into a prenuptial or postnuptial agreement.
For help drafting or reviewing a prenuptial or postnuptial agreement, or other estate planning needs, contact Gem McDowell and his associates at the Gem McDowell Law Group in Mt. Pleasant, SC by calling 843-284-1021. Gem has decades of experience working with individuals and families to ensure their interests are protected so they can have peace of mind. Call today to schedule a free consultation.