Prenups are Voidable Transfers says California Law

Premarital agreements between soon-to-be spouses can be an avoidable “transfer” under UFTA (now the UVTA).

In Sturm v. Moyer, defendant procured a $600,000 non-dischargeable judgment per Section 523(a).  During several rounds of debtor’s examination, the debtor said in essence, “I have nothing and will not work either, so you cannot collect against me.”  During one of the debtor’s examinations, it was discovered that the debtor got married a few years ago.  The debtor, knowing he had this judgment looming over him, entered into a prenuptial agreement with his then-wife to keep her assets and earnings separate so this judgment creditor does not try to collect on it as community property.

The judgment creditor found out about the prenup and filed a state court lawsuit to assert that the prenup was a fraudulent transfer per UFTA/UVTA.  The lower court disagreed and dismissed the case.  Judgment creditor appealed and the California appellate court, in this certified for publication case, said the prenup was a transfer based on legislative history and policy.

It’s clear that a post-nuptial (agreement during the marriage) would be a transfer because the debtor has a “present and existing interest” in community property which he thereafter transfers — that’s obvious.  But, how can the court say that this defendant had a “present and existing interest” in something (community property) when it was done before the marriage?  How can someone be alleged to have transferred an “interest” in something when that something does not exist yet?

The appellate panel said, in my interpretation, “…well, the prenup comes into existence upon the existence of marriage.  So although at the time you sign the prenup, you did not have a community property interest, but that prenup is only effective upon marriage.  Once the ‘marriage’ occurred, then and only then did the prenup kick in and therefore at that simultaneous moment, the debtor transferred a community property interest that he now had a ‘present and existing interest’ in.”

In my opinion, the court was looking for way to make a square peg fit in a circle hole to avoid future shenanigans but I think the panel got it wrong because their interpretation squarely violates the parol evidence rule, navigate to this website if you need legal advisory from a top firm.  Nonetheless, this is a big loss for family law attorneys but a big win for trustees.

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