Nice Try! The Use Of Premarital Agreements To Avoid Collections Doesn't Work In California

Prenuptial Agreement

The reasons why people enter into premarital agreements vary, however attempting to avoid collections from a judgment should not be one of them. In the recent decision of Sturm v. Moyer, the Appellate Court held that premarital agreements might be invalid when parties sign such agreements to avoid collections from a judgment.

In Sturm v. Moyer, Mr. Sturm was successful in suing Mr. Moyer, in that the court-ordered Mr. Moyer to pay him $600,000. After Mr. Moyer lost, he did not pay the $600,000 to Mr. Sturm, causing Mr. Sturm to begin efforts to collect on the judgment. Consequently,

Mr. Moyer found himself having to attend several judgment debtor examinations. During one of these judgment debtor examinations, Mr. Moyer maintained that he had no assets and he did not intend to work ever again; therefore, he would not have to pay any portion of the judgment.

However, Mr. Sturm learned that Mr. Moyer had married someone after executing a prenuptial agreement. Mr. Sturm got a hold of the prenuptial agreement and learned the following:

  • The prenuptial agreement provided that each parties' income, earnings, and property acquired during the marriage would be separate property, not community property.
  • Attached to the prenuptial agreement were lists of each parties' significant real and personal property and liability. Mr. Moyer's list included the judgment that Mr. Sturm obtained against him, plus other liens and pending lawsuits.
  • The agreement also provided that if all of Mr. Moyer's listed liabilities became unenforceable for any reason, the parties' earnings, incomes, and property purchased with those funds would become community property, with certain listed exceptions.
  • The prenuptial agreement also permitted Mr. Moyer and his wife to open a joint checking account to meet their living expenses but specified that the account would not create any community property interest.

Upon reading the terms of the prenuptial agreement, Mr. Sturm understandably believed that Mr. Moyer had created the prenuptial agreement so that he would have no assets to pay him $600,000 according to the judgment. Mr. Sturm then filed a lawsuit against Mr. Moyer and his wife, seeking to set aside the alleged transfer of the community property interest in Ms. Moyer's earnings and income in the parties' prenuptial agreement, arguing it was a fraudulent transfer under the Uniform Fraudulent Transfer Act.

Mr. Moyer and his wife filed a demur to Mr. Sturm's complaint and was successful in persuading the court to dismiss the case. The Trial Court found that Mr. and Mrs. Moyer were within their legal rights to enter into a prenuptial agreement that altered the statutory presumptions of community property, and therefore, they were not subject to the Uniform Fraudulent Transfer Act.

However, on appeal, the Appellate Court found that there is nothing within the statutory language, legislative history, or underlying public policy that specifically prohibits prenuptial agreements from being subject to the Uniform Fraudulent Transfer Act. Thus, the Court of Appeal held that the Trial Court erred by dismissing the case and remanded the case for further rulings.

The lessons we learn from the Sturm v. Moyer case are plentiful. First, we learn that it is not a good idea to attempt avoiding collections from a judgment by entering into a premarital agreement. Also, anyone marrying somebody who is avoiding collections from a judgment should know that their income and one-half of community property is subject to the collections.

The better way for non-debtor spouses to keep their income and assets safe from their spouse's collections problems is to keep their assets and income separate from the debtor spouse such as keeping separate bank accounts and not co-mingling funds. Prenuptial agreements may be used as well to protect non-debtor spouses unless of course, they are entered into with the intent to defraud the debtor spouse's creditor.