In the latest issue of The Wright Toolbox:
- Pre-Nuptial Agreements as a Business Value Protection Tool – read now
- The Importance of Claim Notices and Lien Waivers –read now
Pre-Nuptial Agreements as a Business Value Protection Tool
You have worked hard for several years and built your business from the ground up; and now it is just starting to take-off. To add to your good fortune, you finally found that special someone you want to spend the rest of your life with, and a marriage proposal is imminent. Exciting times! However, while most people don’t enter into a marriage intending for the marriage to fail, the statistics show that more than half of marriages end in divorce. So, what will happen to that business you have been building if your impending marriage ends in a divorce after say ten years? In most jurisdictions, the business, or at least the increase in value of the business after the marriage, will become a marital asset and the other spouse will be entitled to some portion of the value of the business as part of a marital award. This division of the value of a business can be very disruptive and expensive. It doesn’t have to be that way! A business owner can protect their business assets prior to marriage with a Pre-Nuptial Agreement (“Pre-Nup”). Pre-Nups are no longer just for the rich and famous.
There really is no mystery to a Pre-Nup; it is nothing more than a contract between two adults with capacity to contract. The parties to a Pre-Nup are contemplating marriage and desire to define rights that are generally defined by the state as the result of marriage, i.e. marital property rights and support rights. Pre-Nup agreements are not one size fits all. They need to be tailored to each couples’ individual needs, family wealth, and lifestyle. One Pre-Nup may address alimony, and another may not. A Pre-Nup can determine how to handle the acquisition of assets and real estate during the marriage. It can also be used as an estate planning tool for older adults, or to accomplish a waiver of estate rights where a party may be required or desire to preserve their estate for their children. A Pre-Nup is also perfect for deciding who will have what interest in that business you have been building and in what amount. In order to be enforceable, a Pre-Nup must be fair and equitable. But, because no one can predict with certainty who will accumulate what assets during the marriage, fairness is measured when the Pre-Nup is entered into, not at the time of the divorce.
For a Pre-Nup to be binding, and not easily set aside, the agreement must be in writing, executed by both parties and both parties must fully disclose their assets at the time they enter into the agreement. The law requires that the waiver or relinquishment of rights in the agreement must be made “knowingly and voluntarily.” Thus, in the case of your business, to ensure enforceability of the Pre-Nup agreement, it is advisable to have the business valued as of the date of the agreement. Further, if both parties have legal counsel for the negotiation and execution of the agreement, it is also more likely to withstand a challenge, if and when the parties divorce. Generally, a Pre-Nup results in a quid pro quo, substituting financial payments or other assets for rights otherwise available because of the marriage, in order to satisfy the requirement that the consideration in the contract is sufficient for the rights waived.
Pre-Nup agreements can serve many purposes, including protecting your business assets. Accordingly, it makes sense to give some thought, before the marriage, as to whether a Pre-Nup can help you.
The Importance of Claim Notices and Lien Waivers
A recent case from the United States District Court for the District of Maryland points out the fact that with governing subcontract terms you can’t just rely on what you have been told, you must follow the terms of the subcontract. In the case of Hagen Construction, Inc. v. Whiting-Turner Contracting Company (2/4/19), Hagan was a subcontractor to Whiting-Turner tasked with performing drywall, rough carpentry, millwork and case work on a project in New Jersey. Hagan contended that the project was mismanaged by Whiting-Turner and as a result Hagan was forced to work out of sequence and inefficiently, which impacted its ability to perform its work and caused increased costs. Hagan estimated that its impact claim was worth approximately $750,000. Hagan contended that it discussed these impacts on a nearly weekly basis with Whiting-Turner and that it was assured by Whiting-Turner’s project manager that it was aware of the impacts and that it would work with Hagan and treat Hagan fairly. However, Hagan did not provide any formal written notice of a claim for the impact as required by the subcontract and did not provide any support for its alleged damages to Whiting-Turner. In addition, throughout the project, Hagan executed lien release and waiver forms with each pay application, but did not specifically identify and preserve its impact claim on the forms in the space provided. As a result, the Court granted summary judgment in favor of Whiting-Turner with respect to the impact claim holding that Hagan failed to provide proper notice of its claim and that Hagan had waived its impact claim in the lien release and waiver forms. Hagan made other arguments such as estoppel and waiver by Whiting-Turner, but the court held that such defenses did not apply under the facts of the case.
There are many instances where one party will say to the other “don’t worry about it, we will settle up at the end.” The Hagan case serves as a reminder that you should “worry about it” and you should document any claims that you have during the course of a project in accordance with the terms of the subcontract and that such claims should also be carved out of any lien release and waiver form.
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