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Property Settlement Agreements: Balancing the Special Fiduciary Relationship Between Spouses and “Fairness” - December 2015

December 01, 2015

When dealing with a property settlement agreement between spouses going through a separation or divorce, it is easy to assume, like many contracts, that when the agreement is signed, it’s a “done deal.” However, Virginia courts have addressed numerous instances in which one party has claimed their spouse committed fraud to induce them into signing an agreement or that the agreement was “unconscionable.” This is only one of many reasons we advise our clients to discuss these issues/proposals with counsel, no matter how amicable things may seem during what is sure to be a difficult time.

In Velez v. Lizardi, 2015 Va. App. LEXIS 68 (March 3, 2015), Wife appealed an order of the trial court entering a final decree of divorce and incorporating a property settlement agreement entered into by the parties in December 2010. When the parties separated in July 2005, they each retained counsel, but negotiations stalled until December 2010, when at a Christmas Eve dinner at the marital residence, Husband spoke to Wife in private and asked her to sign a document (which he prepared on his own), titled “Property Settlement and Separation Agreement.” But Husband described the documents to Wife as being related to the purchase of a home in Maryland. Wife later claimed that Husband committed constructive fraud in having her sign the agreement. However, the court held that “a party is not entitled to rescind a separation agreement for the other’s concealment of material facts where the confidential relationship between husband and wife has been severed and the parties are dealing at arm’s length.” Id. (internal citation omitted). Though the court found that Husband’s behavior was far from blameless, Wife could not show by clear and convincing evidence that there was a “special relationship” existing between the parties at the time Husband presented the property settlement agreement to Wife. Id. "If a husband and wife separate and employ attorneys to negotiate an agreement in settlement of their property rights, they become adversaries and their former fiduciary or confidential relationship ends." Id.
On the issue of the property settlement agreement’s “unconscionability,” the court held that Wife was required to prove (1) a gross disparity existed in the division of assets; and (2) overreaching or oppressive influences by clear and convincing evidence. Id. Although the “overreaching conduct” of Husband was established, the “gross disparity” requirement had not been satisfied despite the fact she would likely have received more without the property settlement agreement. Id. The circuit court even noted that although the terms of the property settlement agreement were “not fair” and “not equal,” the Virginia courts “cannot relieve one of the consequences of a contract merely because it was unwise.” Id. (internal citation omitted). Though it may seem unfair to many, courts will often err on the side of caution when it comes to rescinding any type of contract, especially on grounds of “unfairness.”
In Galloway v. Galloway, 47 Va. App. 83, 622 S.E.2d 267 (November 29, 2005), Wife appealed the trial court’s finding that the subject property settlement agreement she entered into with her husband was unconscionable. Wife had the opportunity to obtain counsel to review the property settlement agreement proposed by Husband but chose not to do so and signed anyway, which lead to her appeal. Although the property settlement agreement gave Husband 94% of the marital assets, a “grossly disparate” amount, there was no evidence of overreaching or oppressive behavior by Husband. Id. Therefore, her claim of unconscionability failed. The court’s ruling represents yet another cautionary tale in entering property settlement agreements without the assistance of counsel.

Although we always encourage our clients to cooperate with their spouses in the hopes of an amicable settlement of divorce, it is of utmost significant to be cautious when it comes to any agreement. It is important to keep counsel involved at every turn, not in an attempt to facilitate a hostile “back and forth,” but to ensure one’s interests are protected.

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