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Buyer Beware: It’s Important to Know what You’re Agreeing to in a Marital Settlement Agreement – In re Marriage of Childs

A marital settlement agreement is an important tool for divorcing spouses. It allows a couple to resolve many or all of the issues related to their divorce without having to resort to drawn-out litigation. As a recent case out of California’s Fourth District Court of Appeals shows, however, it’s important when negotiating such an agreement to understand just what it is that you are agreeing to.

paperwork-3-488174-mHusband and Wife separated in 2012, following a nine-year marriage. The couple had a son during the marriage, and Wife also had a daughter from a previous relationship, who was about 11 years old at the time of the split.

Husband worked as a financial adviser during the course of the marriage and moved to a position with a new employer in 2010. Under the terms of that arrangement, he was paid two bonuses totaling about $1 million up front. The bonuses were designed as a “loan,” under which Husband was supposed to pay the money back over time. His contract further entitled him to annual “bonuses,” which were intended to cover his payments on the initial bonus/loan. The only problem was that the employer had to withhold state and federal taxes from the annual bonuses. That left the bonuses short of Husband’s annual amount owed on the initial bonus/loan. The rest of the payment was deducted from his paychecks.

A trial court ultimately ruled that the bonuses were community property but that Wife was not on the hook for paying off the related debt, citing the Fourth District’s decision in a case called In re Marriage of Finby. The court also noted that the parties reached a settlement agreement in which they did not mention the bonuses or repayments.

The Fourth District agreed on appeal. “Given that the bonuses totaled over $1 million, it is inconceivable that counsel and the litigants, one of whom was a financial advisor, simply forgot about them when negotiating the settlement,” the Court said. “It was not for the family court to change the parties’ bargain.” Specifically, the Court observed that both parties acknowledged being aware of the Finby case and said they negotiated what they called a “complete” settlement that didn’t include a sharing of the debt obligation. Indeed, the parties agreed how to specifically divide their community property, and Wife pledged not to seek spousal support. The absence of any discussion of the bonus debt indicated that they did not agree to share it, according to the Court.

If you’re considering a divorce or are grappling with community property and other issues in California, contact San Jose divorce lawyer John S. Yohanan. With more than 30 years of experience, Mr. Yohanan is an accomplished family law attorney who has helped a number of clients resolve a wide variety of marital disputes. Call our office at (408) 297-0700 or contact us online to schedule a consultation.

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