PAMELA FORD BLUE v. DAVID STANLEY BLUE
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RENDERED:
MAY 4, 2001; 2:00 p.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1999-CA-002904-MR
PAMELA FORD BLUE
APPELLANT
APPEAL FROM JEFFERSON FAMILY COURT
HONORABLE JOAN L. BYER, JUDGE
ACTION NO. 99-FC-000644
v.
DAVID STANLEY BLUE
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
HUDDLESTON, KNOPF, AND MILLER, JUDGES.
KNOPF, JUDGE:
By orders entered October 25, 1999, and November
10, 1999, the Jefferson Family Court upheld a premarital property
agreement between David Blue and Pamela Blue.
The trial court
erred, Pamela contends, by failing to recognize that a large
increase in the value of the property has rendered the agreement
unconscionably favorable to David and hence unenforceable.
Pamela further asserts that the trial court evaluated the
agreement according to an incorrect standard of validity and
failed to demand from David a sufficiently detailed statement of
his holdings and net worth.
Although we agree with Pamela that
the trial court’s scrutiny of the agreement seems to have been
unduly limited, we are persuaded that the error was harmless.
Accordingly, we affirm.
David and Pamela married each other for the second time
on May 2, 1988.
They had previously married in March 1982.
marriage ended in divorce in November 1987.
That
During the pendency
of the first divorce, David and Pamela considered reconciling,
and those considerations led to their remarriage the next year.
They both had children during earlier marriages, but no children
were born during their marriages to each other.
Among the couple’s concerns as they contemplated
reconciling and remarrying was a property settlement.
David was
president of Louisville Scrap Material Company, Inc., with
extensive ownership interests in that company and in other
assets.
His net worth immediately following the 1987 divorce was
estimated to be in excess of five million dollars.
Pamela’s
estate at that time was approximately $190,000.00, including what
had been awarded to her in the divorce.
The settlement agreement the parties had entered prior
to their 1982 marriage needed to be revised, so in February 1988
Pamela’s attorney began preparing a new agreement.
After some
negotiations, David and Pamela reached a consensus on the terms
of their new prenuptial agreement, which they both signed on May
2, 1988.
Under their agreement, only property acquired in their
joint names or expressly designated during the marriage as
“joint” would, in the event of divorce, be subject to division.
Otherwise,
[a]ll property owned by each party on the
date of the marriage shall be deemed to
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be the owner’s separate property and
shall remain his or her separate property
after the marriage unless converted to
joint property . . . . Any appreciation,
improvements to or income earned by
separate property shall be separate
property and belong to the owner of the
property which produced it. Any
purchase, exchange or acquisition of
other property from the proceeds or
exchange of either party’s separate
property shall be deemed the separate
property of that party who exchanges,
sells or otherwise converts his or her
separate property. All income earned by
the parties after the marriage shall be
the separate property of the party who
earned the income. Any gift,
inheritance, bequest, or devise shall be
the separate property of the party who
received it.1
In essence, the agreement provides that in lieu of the
statutory provisions with respect to marital property, David and
Pamela’s separate holdings and incomes will remain separate and,
in the event of divorce, Pamela will receive a vehicle,
furniture, certain personal effects, and cash in an amount
reflecting the length of the marriage--here, according to Pamela,
about $650,000.00.
In February 1999, David filed a petition for
dissolution of the marriage.
About two months later, he moved
for a declaration of rights holding that the May 1988 property
agreement is valid and enforceable.
David’s motion.
The trial court granted
The court noted that Pamela does not allege that
the agreement was obtained through fraud, duress, mistake, or
nondisclosure of material facts.
The trial court further found
that the agreement was not unconscionable when it was executed.
1
Antenuptial Agreement, ¶ 1.2 (Separate Property).
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Pamela argued that circumstances had changed since 1988 when she
and David executed the agreement, to the extent that the
agreement has now become manifestly unfair and thus
unenforceable.
In particular, she notes that David’s net worth
has increased substantially, to as much as twenty-four million
dollars according to one of his discovery responses and possibly
even more, inasmuch as another late-filed discovery response
indicates that in 1998 David sold his interest in Louisville
Scrap Material Company for a gross amount in the neighborhood of
seventy-seven million dollars.
Because as David’s wife Pamela
contributed various homemaker services to David’s business
ventures and did not pursue an outside career of her own, she
contends that it would now be unconscionable to enforce the
prenuptial agreement strictly according to its terms and to deny
her any share of what, absent the agreement, would be her and
David’s very large marital estate.
In granting David’s motion to uphold the agreement, the
trial court found that no increase in David’s net worth, however
great, would render the agreement unconscionable with respect to
Pamela “absent some negative change in her financial condition.”
The court found no evidence that Pamela’s financial condition had
deteriorated during the marriage.
The trial court also found
that, given the explicit terms of the agreement, Pamela had no
reasonable expectation that she would share in the appreciation
of David’s assets, “whether she served as a business hostess,
traveled with her husband, [or] gave up her career . . . .”
-4-
On appeal, Pamela alleges three grounds of error by the
trial court.
First, she asserts that the trial court failed to
use the correct legal standard to determine whether the
prenuptial agreement was unconscionable at the time enforcement
was sought.
Second, Pamela contends that the trial court failed
to make specific findings concerning the extent of David’s
assets.
And third, she argues that the trial court failed to
consider the enormous increase in David’s wealth as a basis for
holding the agreement unconscionable.
Since 1972, Kentucky’s version of the Uniform Marriage
and Divorce Act, KRS Chapter 403, has provided as a general rule
that the property a husband and wife acquire during the course of
their marriage shall be subject to equitable division between
them in the event of divorce.
By virtue of the prenuptial
agreement executed May 2, 1988, Pamela and David agreed to forego
this right of equitable division.
Under the agreement, Pamela
has no rights to much of the property acquired during the
marriage, or to the increase in value of David’s nonmarital
assets.
Traditionally, in such cases as Stratton v. Wilson and
its progeny, Kentucky courts recognized the validity of
prenuptial agreements only so far as they were intended to take
effect upon death.2
But to the extent that any provisions of a
prenuptial agreement contemplated divorce or separation, our
courts held that they were against public policy and therefore
2
Stratton v. Wilson, 170 Ky. 61, 185 S.W. 522 (1916). See also Lipski v. Lipski, Ky.,
510 S.W.2d 6 (1974); Collins v. Bauman, 125 Ky. 846, 102 S.W. 815 (1907); and Forwood v.
Forwood, 86 Ky. 114, 5 S.W. 361 (1887).
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void.3
In 1990, the Kentucky Supreme Court specifically
overruled Stratton, and held that premarital contracts which
provide for the disposition of property in the event of divorce
may be enforced.4
However, in Gentry v. Gentry, our Supreme
Court stated that enforcement of such agreements is subject to
three limitations:
[T]he trial judge should employ basically
three criteria in determining whether to
enforce . . . [a prenuptial] agreement in a
particular case: (1) Was the agreement
obtained through fraud, duress or mistake, or
through misrepresentation or non-disclosure
of material facts? (2) Is the agreement
unconscionable? (3) Have the facts and
circumstances changed since the agreement was
executed so as to make its enforcement unfair
and unreasonable? 5
In her statement of the case, Pamela claims that there
were irregularities in the execution of the agreement.
However,
she does not assert that these irregularities amount to fraud,
duress, mistake, or a misrepresentation or nondisclosure of
material facts.
Furthermore, Pamela does not contest the trial
court’s finding that the agreement was conscionable at the time
it was made.
Rather, Pamela argues that the trial court
misconstrued the third criterion in the Gentry test: Have the
facts and circumstances changed since the agreement was executed
so as to make its enforcement unfair and unreasonable?
3
Stratton, 185 S.W. at 525.
4
Gentry v. Gentry, Ky., 798 S.W.2d 928, 936 (1990); and Edwardson v. Edwardson, Ky.,
798 S.W.2d 941, 945 (1990).
5
Gentry, 798 S.W.2d at 936 (quoting Scherer v. Scherer, 249 Ga. 635, 641, 292 S.E.2d
662, 666 (1982)).
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We agree with Pamela that prenuptial contracts are
subject to review for conscionability at the time enforcement is
sought.
Unlike parties who execute a property settlement
agreement at the end of a marriage, parties entering into a
prenuptial agreement at the beginning of a marriage are sometimes
not as likely to exercise the fullest degree of vigilance in
protecting their respective interests.
Often there will be many
years between the execution of a prenuptial agreement and the
time of its enforcement.
It is, therefore, appropriate that the
court review such agreements at the time of termination of the
marriage, whether by death or by divorce, to ensure that facts
and circumstances have not changed since the agreement was
executed to such an extent as to render its enforcement
unconscionable.6
Nevertheless, the definition of the word
“unconscionable” remains the same for both separation and
prenuptial agreements.
An agreement is unconscionable and must
be set aside if the court determines that it is manifestly unfair
and unreasonable.7
The opponent of the agreement has the burden
of proving the agreement is invalid or should be modified.8
Neither Gentry nor its companion case Edwardson v.
Edwardson discusses what type of a change in circumstances at the
time enforcement is sought will render a prenuptial agreement
unconscionable.
In Gentry, the husband’s financial condition had
6
Gentry, 798 S.W.2d at 936.
7
Shraberg v. Shraberg, Ky., 939 S.W.2d 330, 333 (1997).
8
Rupley v. Rupley, Ky.App., 776 S.W.2d 849 (1989).
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declined substantially during the marriage and the wife’s
financial condition had remained about the same.
Our Supreme
Court held that trial courts should consider the parties’
respective financial conditions at the time of divorce as well as
any joint efforts toward the accumulation of marital property.9
Nevertheless, the Court found that the agreement was not
manifestly unfair in light of the respective financial conditions
and contributions of the parties.
In Edwardson, the Court
further held that the fairness of prenuptial agreements must be
considered on a case-by-case basis.10
In determining the fairness of the prenuptial agreement
in this case, the trial court also relied on the opinion of the
Indiana Court of Appeals in Justus v. Justus.11
In Justus, as in
the present case, the couple entered into a prenuptial agreement
freely, without fraud, duress, or misrepresentation.
Furthermore, the agreement was fair to both parties at the time
it was entered.
As in Gentry, the Indiana Court of Appeals found
that the provisions of a prenuptial agreement may become voidable
as unconscionable due to circumstances existing at the time of
dissolution.
After reviewing cases from other jurisdictions,12 the
Indiana court noted the general rule among states which consider
9
Gentry, 798 S.W.2d at 936.
10
Edwardson, 798 S.W.2d at 946.
11
581 N.E.2d 1265 (Ind. App., 1991)
12
MacFarlane v. Rich, 132 N.H. 608, 614, 567 A.2d 585, 589 (1989); Lewis v. Lewis, 69
Haw. 497, 748 P.2d 1362 (1988); and Newman v. Newman, 653 P.2d 728 (Colo. 1982).
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the validity of prenuptial agreements at the time enforcement is
sought:
[a] court may decline to enforce an
antenuptial agreement, but only where
enforcement would leave a spouse in the
position where he would be unable to support
himself. At that point, the state’s interest
in not having the spouse become a public
charge outweighs the parties’ freedom to
contract.13
Turning to the facts of the case before it, the Indiana
Court agreed that there was evidence to support the trial court’s
finding that the husband had suffered drastic financial
reversals.
However, the trial court there did not make any
findings concerning his ability to support himself.
The Indiana
Court of Appeals concluded that the husband could only be
relieved of his obligations under the agreement if there was
evidence that he would be unable to provide for himself if the
prenuptial agreement was enforced.14
Following the same reasoning, the trial court in this
case took note of the fact that while David’s net worth increased
substantially during the marriage, Pamela’s financial condition
has either remained the same or improved slightly.
Since David
and Pamela’s financial conditions were already disparate when
they married in 1988, the trial court concluded that an increase
in David’s assets, by whatever percentage, does not render the
agreement unconscionable to Pamela in the absence of some
negative change in her financial situation.
13
581 N.E.2d at 1273.
14
Id. at Justus, 581 N.E.2d at 1274-75.
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We are concerned that this narrow focus may have
precluded consideration of other grounds which might justify
setting aside a prenuptial agreement.
We certainly agree that
trial courts retain broad discretion to review prenuptial
agreements to prevent one spouse from being unjustly enriched
while another spouse is left destitute.15
But Edwardson also
goes on to explain that “[r]egardless of the terms of the
agreement and regardless of the subsequent acquisition or loss of
assets, at the time enforcement is sought, the court should be
satisfied that the agreement is not unconscionable.”16
Therefore, we do not agree with the Indiana Court of Appeals that
a party must prove that he or she will be impoverished before a
court may set aside a prenuptial agreement.
Rather, a broader and more appropriate test of the
substantive fairness of a prenuptial agreement requires a finding
that the circumstances of the parties at the time the marriage is
dissolved are not so beyond the contemplation of the parties at
the time the contract was entered into as to cause its
enforcement to work an injustice.17
Pamela argues that the vast
increase in the value of David’s assets renders the agreement
unconscionably one-sided to David.
15
16
She further argues that the
Gentry, 928 S.W.2d at 934.
Edwardson, 798 S.W.2d at 945.
17
See McKee-Johnson v. Johnson. 444 N.W.2d 259, 266-67 (Minn, 1989); MacFarlane
v. Rich, 132 N.H. at 614, 567 A.2d at 589; McHugh v. McHugh, 181 Conn. 482, 485-86, 436
A.2d 8, 11 (1980).
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trial court erred in failing to allow her to complete discovery
into David’s true net worth.
We agree with Pamela that a finding of
unconscionability requires a comparison of the situations of the
two parties, and that a gross disparity between the parties’
resources may render a prenuptial agreement unconscionable.18
However, the emphasis of this inquiry relates to the reasonable
expectations of the parties as contemplated by the agreement.
As
noted by the trial court, the parties’ financial situations were
already disparate when they entered into the agreement.
Pamela agreed to forego any share in the increase in
value of Donald’s assets.
She took the risk that Donald’s assets
could appreciate substantially.
The trial court further found
that Pamela’s contributions to the increase in value of David’s
nonmarital property were not beyond the contemplation of the
parties in the agreement.
Furthermore, Pamela will receive about
the same amount of assets as she bargained to receive, and she
remains eligible to receive maintenance from David should the
trial court determine that maintenance is justified.
Given these circumstances, the mere increase in the
value of David’s nonmarital property, by whatever percentage,
does not render the prenuptial agreement unconscionable as to
Pamela.
Additional discovery with respect to David’s assets
would therefore serve no purpose.
To set aside the agreement,
Pamela must show more than that David’s position has improved.
She must also show that her position has suffered in a manner
18
Rider v. Rider, 669 N.E.2d 160, 164 (Ind., 1996).
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which was beyond the contemplation of the parties when they
signed the agreement.
In the alternative, Pamela must establish
that the agreement is oppressive or manifestly unfair to her at
the time of dissolution.
Despite the limited scope of the trial
court’s consideration of the issue of unconscionability, Pamela
did not present any evidence to support such findings.
Consequently, we find that the trial court was correct in holding
that the prenuptial agreement is not unconscionable and may be
enforced.
Accordingly, the judgment of the Jefferson Family Court
is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Dan L. Owens
Charles M. Pritchett, Jr.
Kathy P. Holder
Brown, Todd, & Heyburn, PLLC
Louisville, Kentucky
Cynthia Compton Stone
Vicki L. Buba
Stone, Pregliasco, Haynes,
Buba, LLP
Louisville, Kentucky
ORAL ARGUMENT FOR APPELLANT:
ORAL ARGUMENT FOR APPELLEE:
Kathy P. Holder
Louisville, Kentucky
Vicki L. Buba
Louisville, Kentucky
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