In the event of a dissolution of marriage where there is no prenuptial or postnuptial agreement, think of that divorce as dividing up a business.
Recently, my law partner, Zachary Markham, wrote an article in Flagstaff Business News discussing the merits of entering a prenuptial agreement prior to marriage. Markham appropriately and aptly likened a prenuptial agreement to “marriage insurance.” However, in my practice I would roughly estimate that less than 5% of cases have a prenuptial agreement. I understand why, despite possibly knowing better, one does not even want to consider a prenuptial agreement. After all, my wife gently and lovingly advised me that she would “kick my butt” if I asked her to sign a prenuptial agreement prior to our marriage nearly a decade ago. As such, this article focuses on looking at marriage generally as a business or a contract, because that is how Arizona law and the courts view it.
Arizona is a community property state. In simple terms, this means once two people get married, they are viewed by the law as contractually bound to be one and the same for financial purposes (barring a few nuanced exceptions, which are likely to be litigated). In other words, the flowery promise of “for richer or for poorer” in reality translates to “we have started our own business where we are both equally going to be financially benefiting but also financially liable.”
While the above paragraph may seem relatively obvious and simple, in practice, it is not. I regularly have discussions with my clients where I must advise them, they are on the proverbial hook for his or her spouse’s poor financial choices. Similarly, I routinely have conversations with my clients where I explain that their individual business ventures (and the hard-earned successes that come with it) fall into a bucket that, upon divorce, will be equitably (often equally) shared with their soon-to-be ex-spouse. This can make an already stressful and emotional situation worse. In addition, lawyers are confined by applicable laws and ethical restrictions and therefore do not possess the magical, sweeping ability to produce a satisfactory result in every case despite their best efforts. Finally, Arizona is a “no-fault” state, which means that an Arizona Court will not consider why two parties are divorcing (e.g. infidelity) but instead start with the fact that they are and will preclude either party from explaining why in most circumstances.
As such, dissolving a marriage often works the same as dividing a company’s business assets. I liken the division of my client’s community property (which may include liquid funds, investments, real estate, whole life insurances, pensions, 401Ks, and actual businesses) to dividing a pizza pie. Let us assume that there are eight slices to a community’s “pizza.” Now, given that Arizona law requires an equitable division of that pizza, it is a near certainty that neither party walks away with the entire pizza (and neither party can ever walk away with more than the eight slices). When two parties hire lawyers and litigate, often each party’s attorney gets a slice – leaving the community with six slices to divide. It is difficult for a person going through divorce to walk away with just three slices; though, arguably, that is a “fair” outcome under the law. Further, the slices may be of unequal size or both parties may want the same slice (which I assume must be pepperoni, versus a slice with pineapple on it). As one can imagine, this complicates negotiations.
The proactive way to head off possible issues upon dissolving a marriage – or, put differently, to pre-determine which party would get which pizza slice – is for the parties to enter into a postnuptial agreement, either prior to or upon obtaining an asset. These agreements are usually enforceable provided they are clearly drafted, and the terms are not grossly unfair at the time of signing. A lawyer should draft the agreement and both sides will need independent counsels upon signing. Such a document may very well head off far more expensive future litigation.
In the event of a dissolution of marriage where there is no prenuptial or postnuptial agreement, think of that divorce as dividing up a business (I will often encourage my clients to put on their “business hats” when going into settlement discussions). The court and lawyers will view it this way. It can be a cold, dry process that cannot be more different than the joyful process of actually getting married.
Finally, a dissolution of marriage may require dividing a business that is owned by the “community,” which marries the two principles discussed in this article. In those situations, I will commonly bring on an attorney who handles “business divorces,” which, in my firm, is Jennifer Mott. I anticipate her writing an article on this very topic in this publication in the near future. FBN
By Michael Wozniak
Michael Wozniak is a partner with the law firm Aspey, Watkins & Diesel where he practices family law and criminal defense. He moved to Flagstaff with his family in 2019. He is available for free consultations to discuss any family law issue and can be reached at 928-774-1478.