TN Court of Appeals Divided over Applicability of Prenuptial Agreement: Heaton v. Heaton

October 2, 2014 K.O. Herston 0 Comments

Facts: Husband and Wife divorced after seven years of marriage. Prior to the marriage, the parties entered into a written prenuptial agreement, which recites, inter alia, that the parties desired for all separate property obtained by them during the marriage to remain separate. The agreement also provides that the only property to be considered jointly owned would be that property specifically designated as such. At the time of the marriage, Wife was beneficiary of a substantial irrevocable trust.

The prenuptial agreement, in relevant part, contains a provision entitled “Co-Owned Property,” which states:

6.1 Definition. The parties acknowledge that they are each free to acquire property during the marriage either in their own name or in joint names. Any property acquired during the marriage shall conclusively be deemed the Separate Property of the party in whose name such title is held unless such property is expressly acquired and held in the name of both parties as evidenced in a writing clearly expressing an intent that the property covered by the writing is to be so held (“Co-Owned Property”) or as to which the deed or document evidencing title is in the name of both parties and creates, expressly or as a matter of law, a tenancy in both parties with the right of survivorship.

The prenuptial agreement also provides that, upon divorce, Co-Owned Property will be “divided into equal shares by the parties in further settlement of the respective marital rights.”

In 2009, the parties purchased some real property, with the deed reflecting that title was being acquired by both parties as husband and wife. The parties then began building a home. Construction took approximately two years. During construction, Husband was paid $600 per week by Wife, which he utilized to pay his bills and contribute to expenses of the household.

Both parties agreed the prenuptial agreement controlled all financial issues relative to their divorce. Wife sought reformation of the deed to the marital residence on the grounds that Husband’s name was erroneously included on the deed.

Knoxville divorce lawyersWife asserted her intent was to be the sole owner of the property because it was purchased entirely with her separate funds. Wife claimed she instructed the realtor to have the deed drafted to name her as the only grantee. She was also the sole applicant on the accompanying mortgage. Wife explained that although she objected to Husband’s name on the deed at closing, she was told by the closing agent that because the parties were married, Husband’s name was required by state law to appear on the deed. According to Wife, she relied upon this advice to her detriment and did not learn that no such requirement existed until the divorce proceedings were underway. Wife admitted she knew upon leaving the closing that Husband’s name appeared on the deed. Wife also admitted she had never attempted to correct the deed prior to the divorce proceedings.

Wife explained that Husband had never paid any monies toward the purchase, construction, or maintenance of this real property. Wife said the parties kept all of their finances separate during the marriage. As such, Wife paid Husband $102,000 for his services as contractor in the construction of the home.

The realtor who drafted the sales contract testified the agreement listed only Wife as the buyer, per the parties’ instructions. The realtor further explained the sales contract specifically provided for the deed to be prepared in Wife’s name only. The realtor said Wife was upset at the closing when the deed contained both parties’ names. The realtor testified that Wife adamantly insisted the deed be in her sole name. Despite Wife’s objections, the closing proceeded with Wife signing the necessary documents.

The trial court found the inclusion of Husband on the deed “was clearly and convincingly shown to be both unexpected by both parties and not desired by either party.” The trial court further found that including Husband on the deed “would result in an unequivocally inequitable windfall” to Husband. Accordingly, the trial court awarded the marital residence to Wife.

Husband appealed.

On Appeal: In a 2-1 decision, the Court of Appeals reversed the trial court.

Husband argued that because the deed to the property reflected the names of both parties, the property is “Co-Owned Property” under the prenuptial agreement and, therefore, is subject to equal division upon divorce.

Wife claimed the trial court properly reformed the deed because of a mistake and, therefore, the property was properly determined to be her separate property, which was not subject to division.

The judicial alteration of the provisions of a written agreement is an equitable remedy known as “reformation.” The basic purpose of reformation is to make the contract conform to the real intention of the parties. It is driven by a respect for the parties’ intent and gives effect to the terms mutually agreed upon by the parties. Because the law strongly favors the validity of written instruments, a person seeking to reform a written contract must do more than prove a mistake by a preponderance of the evidence. Instead, the evidence of mistake must be clear and convincing.  A “mistake” is an act which would have been done, or an omission which would not have occurred, but from ignorance, forgetfulness, inadvertence, mental incompetence, surprise, misplaced confidence, or imposition.

An important subcategory of mistake is mistake in the expression, or integration, of the agreement. A mistake in expression occurs where one or both parties to a written contract erroneously believe that the contract embodies the agreement that both parties intended it to express. In such cases, the courts may adjust the provisions of the written contract to make it express the true agreement reached by the parties.

In order to obtain reformation on the basis of mistake in expression, a party must present clear and convincing evidence that: (1) the parties reached a prior agreement regarding some aspect of the bargain; (2) they intended the prior agreement to be included in the written contract; (3) the written contract materially differs from the prior agreement; and (4) the variation between the prior agreement and the written contract is not the result of gross negligence on the part of the party seeking reformation. Reformation is not automatically barred simply because one of the parties denies there was a prior agreement or claims the mistake was not mutual.

As long as the party seeking reformation establishes the elements of a mistake in expression, any discrepancy between the parties’ prior agreement and their written contract is presumed to be the result of a mutual mistake (unless, of course, there is evidence of fraud).

After reviewing the record, a majority of the Court reasoned:

[T]he evidence demonstrated that although Wife initially requested that the deed be drafted to reflect Wife as sole grantee, when she arrived at the closing, she discovered that the deed included both of the parties’ names. Notwithstanding this fact, Wife accepted the deed and allowed the closing to go forward. Therefore, there exists no mistake warranting instrument reformation inasmuch as it was not shown that “one or both parties to a written contract erroneously believed that the contract embodied the agreement that both parties intended it to express.” Wife clearly knew that the deed contained both names when she accepted it. Further, there is no mutuality because the alleged mistake is not common to both parties to the instrument….

We conclude that the real property at issue falls squarely within the definition of Co-Owned Property as defined by the prenuptial agreement. The warranty deed transferred title into the names of both parties as husband and wife, thereby creating a tenancy by the entireties that inherently establishes a right of survivorship. As such, the subject prenuptial agreement dictates that the real property at issue be deemed Co-Owned Property because “the deed or document evidencing title is in the name of both parties and creates, expressly or as a matter of law, a tenancy in both parties with the right of survivorship….”

Pursuant to the express terms of the section regarding Co-Owned Property, the real property at issue qualifies as Co-Owned and therefore is no longer Wife’s separate property, even though her separate property was used to purchase it….

As this real property clearly fits the definition of Co-Owned Property pursuant to the terms of the prenuptial agreement, the trial court erred in vesting title solely in Wife’s name without awarding Husband his equal share. We therefore reverse the trial court’s award of the real property solely to Wife and remand this action for further proceedings by the trial court to effectuate an equal distribution of this asset to both parties.

Accordingly, the trial court was reversed and the case remanded for division of this asset.

Dissent: Judge Susano wrote a dissenting opinion in which he said:

Considering the “mountain” of evidence supporting Wife’s assertion that the marital residential property was to be her separate property, I cannot say that the evidence preponderates against the trial court’s determinations on the subject. I would reform the deed and award the property to Wife as her separate property.

K.O.’s Comment: The marital residence is valued at $1,144,000 with an outstanding mortgage indebtedness of $388,000. Wife claims she borrowed money from her trust to finance construction of the home such that there is no equity in the home. If the trial court disagrees (which the opinion suggests it did), there is $756,000 of equity to be equally divided, i.e., $378,000 to be distributed to each party. That’s an expensive mistake by the closing agent.

To add insult to injury, the prenuptial agreement provides for an award of attorney’s fees to the prevailing party. Consistent with that provision, the Court directed the trial court to award Husband his reasonable attorney’s fees on remand.

Update: On January 20, 2015, the Tennessee Supreme Court denied Wife’s request for permission to appeal.

Heaton v. Heaton (Tennessee Court of Appeals, Eastern Section, August 29, 2014).

Information provided by K.O. Herston: Knoxville, Tennessee Divorce, Matrimonial and Family Law Attorney.

TN Court of Appeals Divided over Applicability of Prenuptial Agreement: Heaton v. Heaton was last modified: January 27th, 2015 by K.O. Herston

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