Community Property Summer 2018
Class #2 Notes
General Definitions for Use in Analyzing Premarital Agreements
1. Community property is “All property, real or personal, wherever situated, acquired by
[the labor of] a married person during the marriage while domiciled in California”
with certain exceptions.
2. Separate property (FC § 770) is property held individually by either spouse that includes:
a. all property owned by the person before marriage
b. all property acquired by the person after marriage [occurs] by gift or inheritance
c. the rents, issues, and profits of the property described in this section 770
3. In California, a couple can decide not to be subjected to community property law.
a. The couple signs a premarital/prenuptial agreement, which provides that
when they become married, their assets won’t be subject to CP law. Stated
another way, the couple can contract out of the CA CP law system by signing a
premarital agreement.
b. If the premarital/prenuptial agreement is valid, then the couple’s assets,
upon divorce:
i. will not be split according to CP law (which would have divided CP
½ to H and1/2 to W.
ii. will be split according to the terms of their agreement
4. Katie Holmes was born December 18, 1978; on 11/18/2008,
she married Tom Cruise; they divorced in July 2012 (so, marriage was about 3.75 years)
a. What are the terms of Katie and Tom’s prenuptial agreement?
According to one online article:
“The happy couple and their lawyers have come up with a contract that will give
Holmes $3 million a year up to $33 million for each year that she is married to
Cruise, as well as a palatial home in Montecito, California, according to Life &
Style Weekly.”
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“If the marriage lasts longer than eleven years, the contract becomes void and
California's community property law kicks in — giving Holmes half of
Cruise's rather sizeable fortune.”
[Implicit in the foregoing paragraph is a usual provision of a premarital/prenuptial
agreement: That property acquired by labor by the spouses during the marriage
that would be community property if community property law applied is the
separate property of the earning spouse.]
b. Remember: The online article says that $3 million a year up to $33 million for
each that she is married
i. Assume they’re married for 5 years; upon divorce, does Katie receive ½
of
the CP earnings during their marriage? No.
A. Are there any CP earnings by the couple during the marriage?
B. ½ of zero CP is 0.
C. Upon divorce, pursuant to the premarital agreement, Katie gets
$5 million.
c. Remember: The online article says that, if the marriage lasts longer than 11
years, “the contract becomes void and California’s community property law kicks
in—giving Holmes half of Cruise’s rather sizeable fortune.”
i. Would Katie really get "half of Cruise's rather sizeable fortune"?
A. What if Cruise’s “sizeable fortune” consists of earnings he
received before he married Katie?
I. Is all of his fortune CP? No.
II. What is the character of his earnings from before he
married Katie? SP.
B. If the contract becomes void and CA CP law applies, what does
Katie upon divorce [after a marriage longer than 11years]?
ii. Did this marriage last longer than 11 years? No.
iii. Did anyone think this marriage would last longer than 11 years? No.
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d. FAKE FACTS for the hypos on this page. Assume for his film, "Valkyrie,"
Tom earns $100 million for his work performed during the marriage.
i. Without the prenuptial agreement, what is the character of the $100M?
CP
ii. With the prenuptial agreement, what is the character of the $100M? SP
e. Assume Tom Cruise has $300 million cash, stock, and real property before
marrying Katie (stated another way, he brings $300 million into the
marriage). What is the character of that property after Tom and Katie married?
i. Does a premarital agreement affect the character of the $300 million?
No.
ii. Why not? Its SP
iii. Asked another way, even if there was no premarital agreement and
CA CP law applies, what is the character of the $300 million? Tom’s SP.
f. Assume the cash, stock, and real property of $300 million (that Tom brought into
the marriage) earns interest, dividends, and rents of $15 million annually after
Tom and Katie are married. What is the characterization of that $15 million
after they marry?
i. Does a premarital agreement affect the character of the $15 million? No.
ii. Why not? It’s SP
iii. Asked another way, even if there was no premarital agreement and
CA CP law applies, what is the character of the $15 million? No.
g. Assume that, 10 years from now (i.e., the marriage does *not* last longer than
eleven years), Katie and Tom divorce when Tom has $400 million in assets all
attributable to the $300 million in assets Tom brought into the marriage.
What is the characterization of that $400 million?
h. Under the foregoing facts, what is Katie’s CP interest in the $400 million?
k. Upon divorce in the tenth year of marriage (before 11 years are up/the marriage
does *not* last longer than eleven years), how is Katie protected?
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i. By property distribution of CP?
ii. By the prenuptial agreement?
A. Under the prenup, what does Katie receive, as to Tom’s assets,
a ½ CP interest in anything?
B. If the prenup applies, what does Katie get
upon divorce (after, say, 6 years of marriage)?
Remember, the terms of the prenuptial
agreement are: “$3 million a year up to $33 million for each
year that she is married to Cruise, as well as a palatial home in
Montecito, California”
6 years x $3 million for each year married =
AND the home in Montecito, CA
C. After 6 years of marriage, Katie wants a divorce and wants a 1/2
share of ALL of Tom’s earnings acquired during the marriage.
To get a 1/2 CP share of those earnings, Katie would have to argue
what about the prenup—that the prenup is valid or invalid?
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Premarital Agreements (aka Prenuptial Agreements)
I. Waiver of Community Property Rights
Family Code section 1612(a)
provides that parties to a premarital agreement may contract with respect to all of the following:
We’re emphasizing 1612(a)(1) and (3):
1. section 1612(a)(1): The rights and obligations in any of the property of either or both
of them whenever and wherever acquired or located
a. for example, a premarital agreement can provide that a person’s earnings during
the upcoming marriage shall be that person’s SP [because, without this
provision, what is the character of those earnings?]
b. this is generally what celebrities provide in their premarital agreements
c. without a provision such as “a person’s earnings shall be that person’s SP,” what
is the characterization of that person’s earnings?
d. if you’re a celebrity and if you don’t want your soon-to-be spouse to have CP
interest in your millions, then you include such a provision in your premarital
agreement (see Tom Cruise)
e. Marriage of Dawley: premarital agreement upheld
i. under the premarital agreement in the case, what was the characterization
of the salary of each of husband James and wife Betty?
ii. without the premarital agreement, what would be the characterization of
the salary of each of husband James and wife Betty?
iii. even though California has a CP system, a couple can opt out of it by
contracting out of it under a premarital agreement
iv. why does California allow people to opt out of the CP system?
(1) contractual freedom
(2) freedom to arrange your affairs the way you wish
(3) recognition of increased numbers of second marriages, kids from a
previous marriage
2. section 1612(a)(3): The disposition of property upon separation, marital dissolution,
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death, or the occurrence or nonoccurrence of any other event
a. in other words, a premarital agreement can provide that, upon separation or
divorce:
i. Husband will pay Wife $1M cash, or
ii. Wife will pay Husband $1M cash, or
iii. Wife will pay Husband $100K for each year that they were married, etc.
b. why have this provision?
i. generally because the parties have contracted out of the CP system under
section 1612(a)(1) and the non-wage earning spouse has no CP rights, and
ii. the wage earner needs and wants to provide something for the non-wage
earning spouse
iii. For example, let’s assume Tom Cruise requires that, in order to marry
him, Katie Holmes had to agree to give up whatever community property
rights she would have had if she married him and if he had earnings
during marriage.
(1) What is Katie giving up?
(2) Is Katie giving up something of value?
(3) Should Katie get something in return for what she is giving up?
(4) Should Katie get something out of the marriage?
(5) If she’s not going to get CP rights to property from the marriage,
what is she going to get?
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II. Treatment of Child Support
Family Code section 1612(b)
provides that the right of a child to support may not be adversely affected by a premarital
agreement.
In other words, one spouse cannot, under a premarital agreement, agree to give up the
right of a child to support.
III. Waiver of Spousal Support
Family Code section 1612(c)
provides that any provision in a premarital agreement regarding spousal support, including,
but not limited to, a waiver of it, is not enforceable:
1. if the party against whom enforcement of the spousal support provision is sought was not
represented by independent counsel at the time the agreement containing the provision
was signed
OR
2. if the provision regarding spousal support is unconscionable at the time of enforcement
[even if the party against whom enforcement is sought was represented by independent
counsel (see next sentence)]
Additionally, an otherwise unenforceable provision in a premarital agreement regarding spousal
support [i.e., because it is unconscionable at the time of enforcement] may not become
enforceable solely because the party against whom enforcement is sought was represented by
independent counsel.
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Facts of Barry Bonds case:
Barry Bonds met his then-future wife, Sun, a 23-year old Swedish immigrant working as
a bartender and studying to be cosmetologist. After living together for some time, they decided
to get married.
Just before their scheduled flight to Las Vegas, where they planned to get married two
days later, Barry’s attorneys gave Sun and Barry copies of the premarital agreement, which
neither had previously seen. The attorneys read the agreement, which contained numerous
errors and omissions, to Sun and Barry, and attempted to explain its many provisions to them.
Sun signed the agreement, and the parties were married as planned.
[Assume that, under the premarital agreement, Sun agreed that “all of Barry’s earnings
shall be Barry’s SP” and that she gives up and will make no claim to any CP rights she would
have had under their marriage.]
[Side questions: who benefits under this premarital agreement? ]
[ ]
[ who wants to enforce this premarital agreement? ]
[ ]
[ who loses out under this premarital agreement? ]
Sun was not represented by independent counsel and, although the evidence was mixed,
there was substantial evidence that neither party grasped the import of the agreement. For
example, it was reported in newspapers that Sun’s English was very poor and that she did not
understand the operation of community property. Sun believed that, because Barry earned his
$106K salary while single and owned all of that, Barry would, when they were married, also
own all of his salary because he earned it. [Does Sun have a correct understanding of California
CP law?]
Six years after marrying, Barry files for dissolution and seeks to enforce the premarital
agreement (including that Sun is not entitled to any spousal support). At the time Barry files for
dissolution, Barry is earning a multi-million dollar salary and endorsements (which is much
higher than what he earned when he signed the premarital agreement six years earlier).
< Why does Barry want to enforce the premarital agreement?
< Why does Sun want that the premarital agreement not be enforced?
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Family Code section 1615(a)
provides that a premarital agreement [whether addressing spousal support and/or property
distribution] is not enforceable if the party against whom enforcement is sought [Sun] proves
either of the following:
1. Agreement was not Executed Voluntarily. That party (against whom enforcement is
sought) [Sun] did not execute the agreement voluntarily [“voluntarily” is addressed in
Family Code section 1615(c) below]
OR
2. Unconscionability and Disclosure Problems. The agreement was unconscionable when it
was executed and, before execution of the agreement, all of the following applied to that
party against whom enforcement is sought [Sun]:
A. That party [Sun] was not provided a fair, reasonable, and full disclosure of the
property or financial obligations of the other party [Barry]
B. That party [Sun] did not voluntarily and expressly waive, in writing, any right to
disclosure of the property or financial obligations of the other party [Barry]
beyond the disclosure provided
C. That party [Sun] did not have, or reasonably could not have had, an adequate
knowledge of the property or financial obligations of the other party [Barry]
[3.] Agreement Promotes Divorce. A third way (in addition to the two statutory provisions
in Family Code section 1615(a) above) a premarital agreement is not enforceable if the
premarital agreement promotes divorce. Marriage of Noghrey.
Noghrey: upon divorce, Wife gets the greater of: (1) $500K, and (2) one-half of
Husband’s assets
The court in the Marriage of Noghrey case concluded that the Wife was incentivized to
divorce—she was, essentially, encouraged to divorce because she would collect at least
half of Husband’s assets, maybe more.
Under the formula: if Husband had $600K of assets, what would Wife take upon divorce
under their premarital agreement?—the greater of (1) $500K, and (2) ½ of $600K.
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Family Code section 1615(c) [anti-Barry Bonds provision]
provides that, for purposes of Family Code section 1615(a), it shall be deemed that a premarital
agreement was not executed “voluntarily”unless the court finds in writing or on the record
all of the following numbered elements:
1. A. The party against whom enforcement is sought [Sun] was represented by
independent legal counsel at the time of signing the agreement, OR
B. After being advised to seek independent legal counsel, the party against whom
enforcement is sought [Sun] expressly waived, in a separate writing,
representation by independent legal counsel
2. The party against whom enforcement is sought [Sun] had not less than seven calendar
days between (A) the time that party [Sun] was first presented with the premarital
agreement and advised to seek independent legal counsel, AND (B) the time the
premarital agreement was signed
3. A. The party against whom enforcement is sought [Sun], if unrepresented by legal
counsel, was:
i. Fully informed of the terms and basic effect of the premarital agreement
as well as the rights and obligations he or she was giving up by signing the
premarital agreement, and
ii. Was proficient in the language in which the explanation of the party’s
rights was conducted and in which the premarital agreement was written
AND
B. The explanation of the rights and obligations relinquished [by Sun] shall be
memorialized in writing and delivered to the party [Sun] prior to signing the
premarital agreement,
AND
C. The unrepresented party [Sun] shall, on or before the signing of the premarital
agreement, execute a document declaring that he or she received the information
required by this paragraph 3 and indicating who provided that information
4. The premarital agreement and the writings executed pursuant to paragraphs 1 and 3 were
not executed under duress, fraud, or undue influence, and the parties did not lack
capacity to enter into the premarital agreement
AND
5. Any other factors the court deems relevant
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