Pennsylvania Courts Examine Full and Fair Disclosure in Family Law Agreements
Marriage and divorce are not cold business transactions. Couples who are about to marry or divorce have emotions and intimate relationships that may compromise their ability to negotiate at arm’s length like business people. For this reason, the law of Pennsylvania prior to 1990 imposed two special requirements upon family law agreements, such as prenups and divorce settlement agreements. Pennsylvania law prior to 1990 required (i) full and fair disclosure of each party’s property, income and statutory rights; and (ii) the agreement had to make a reasonable provision for each spouse upon divorce or death. Many other states imposed these same requirements and still do.
In 1990, the Supreme Court eliminated the requirement a prenuptial agreement or marriage settlement must be substantively fair to each spouse, so long as there is full and fair disclosure (informed consent). Over time, the Pennsylvania courts have continued the relax the special requirements that once distinguished family law agreements from business transactions. Increasingly, the Pennsylvania courts are treating couples who are about to marry or divorce like business people, fully capable of negotiating deals without letting emotion interfere with their judgment.
Two recent decisions by the Pennsylvania Superior Court examine the parameters of full and fair disclosure in family law agreements. Like most Superior Court decisions, these are the opinions of a three judge panel, which may or may not represent the views of a majority of appellate judges across the state. The first is a published precedent that may be cited in court, the second is an unpublished opinion without precedential value in court.
In Lugg v. Lugg, 2013 Pa.Super. 67 (April 1, 2013), a husband and wife cohabited for 13 years and raised three children when they decided to negotiate a post-nuptial agreement. A post-nuptial agreement is an agreement between spouses who contemplate divorce in their future or plan to stay together but separate their assets, liabilities and financial obligations. In this case, the wife offered to waive full and fair disclosure, as well as her right to seek child support. Husband’s counsel drafted an agreement and submitted it to wife’s lawyer, but wife decided to negotiatedirectly with husband instead. After several weeks of negotiations, Husband pressured wife to sign the post-nuptial agreement, as well as a deed surrendering her interest in the marital residence. Husband filed a divorce complaint two weeks later, and wife asked the court to rescind the post-nuptial agreement for lack of full and fair disclosure. The trial court refused to rescind the agreement.
In her appeal, Wife argued that a contracting party cannot waive his or her right to full and fair disclosure when signing a family law agreement. A three judge panel of the Superior Court disagreed, holding that full and fair disclosure can be waived, some long as the waiver is voluntary and in writing. The Superior Court held that wife was not the victim of fraud or misrepresentation because she knew that she was giving up the right to disclosure. The Court also dismissed wife’s claims of duress and legal misconduct.
In Serfass v. Serfass, No. 1888 EDA 2012 (unpublished, April 4, 2013), the wife challenged the validity of a prenuptial agreement when her huband initiated a divorce after 17 years of marriage. The wife claimed that the disclosure was not sufficiently specific, when it described an asset as “Ownership Interest $511,000.00” without identifying the company or asset by name. Husband claimed that the dollar amount accurately represented the aggregate value of his interests in several companies. The trial court upheld the agreement, and the Superior Court affirmed. In its decision, the Court referenced a well-established principle that “disclosure may be imprecise only to the extent that it does not obscure the general financial resources of the parties.” Since wife did not meet her burden to prove fraud or misrepresentation by clear and convincing evidence, the Court had no grounds to invalidate the prenup.
In Pennsylvania, crafting an effective family law agreement – whether it is a prenup, settlement agreement or otherwise – requires full and fair disclosure. It is well-established here that the courts will not inquire into the underlying fairness of the bargain, so long as both contracting parties were well informed of the assets, liabilities and income involved in the deal. Typically, this requires the parties to exchange account statements and tax returns, or create a spreadsheet or detailed list.
Perhaps Lugg demonstrates the principle that divorcing parties, who likely have personal knowledge of their assets, liabilities and income, do not need the formalities of spreadsheets and lists to meet the requirement of full and fair disclosure. Both Lugg and Serfass illustrate the high standard that spouses must meet to prove fraud when challenging the family law agreements. Does Lugg mean that contracting parties can waive full and fair disclosure when negotiating prenuptial agreements, where they likely have limited knowledge of each other’s assets and income? Perhaps, if Lugg is followed by other courts in other contexts. Still, it might be unwise for family lawyers and their clients to adopt this practice, particularly if there is any chance the parties might migrate to a jurisdiction where full and fair disclosure and/or reasonable provision are legally required. And what if Lugg is confined by future courts to its unique context or overruled by subsequent precedent? The prenups that were drafted without full and fair disclosure might be unforceable. It’s not worth the risk.