Separation Agreements (A.R.S. § 25-317)
Sometimes married couples decide to separate, either in anticipation of divorce, giving one or both of the parties “some space,” or simply living separately for a while in hopes of sorting out their feelings and possibly reconciling. Under Arizona law, married couples can remain married but enter into a legal contract governing their financial matters – the handling of property, debt or even support. This is called a separation agreement and is controlled by A.R.S. § 25-317. The Court of Appeals recently ruled that per the statute, for these separation agreements to be enforceable, the terms cannot be unfair. Buckholtz v. Buckholtz, No. 1 CA-CV 17-0596 FC, filed January 15, 2019.
The statute provides in pertinent part:
25-317. Separation agreement; effect
- To promote amicable settlement of disputes between parties to a marriage attendant on their separation or the dissolution of their marriage, the parties may enter into a written separation agreement containing provisions for disposition of any property owned by either of them, maintenance of either of them, and support, custody and parenting time of their children. A separation agreement may provide that its maintenance terms shall not be modified.
- In a proceeding for dissolution of marriage or for legal separation, the terms of the separation agreement, except those providing for the support, custody and parenting time of children, are binding on the court unless it finds, after considering the economic circumstances of the parties and any other relevant evidence produced by the parties, on their own motion or on request of the court, that the separation agreement is unfair.
Separation Agreements aim to help amicably resolve disputes between married parties either in anticipation of legal separation or dissolving their marriage. They give couples the opportunity to resolve potential areas of disagreement, such as support, division of assets, or debt, in a fair and informal manner. Thus, a married couple may negotiate their own separation terms. In the Buckholtz case, the Court confirmed, however, that those terms must be fair. Id.
In Buckholtz, the parties had been married 35 years, when they entered into a “Marriage Separation Agreement,” after each consulted separately with an attorney. There were no minor children and both agreed to waive spousal maintenance (alimony). The agreement purported to divide “all assets, owned or possessed by them as marital property or separate property … [and] are in possession of all of those assets to which he or she is respectfully entitled.” The parties also agreed that any “debt accumulated as of the date of this Agreement is the debt of the individual party, regardless if the debt was incurred as a result of joint credit.” The agreement did not specifically reference any other assets or debts, other that stating that husband “will remain” in their marital residence.
After entering into the agreement, wife quit-claimed her interest in the family home to husband. The same day the agreement was signed, husband paid wife $127,435, about one-half of the net equity or value of the family residence. To pay wife, husband refinanced the home. Wife received her 401(k), a community asset (the only other significant marital asset), but did not pay husband anything for his interest in it. Husband continued to receive a monthly payment from the military, a sole and separate asset, because it was earned prior to the marriage. The agreement did not reference wife’s 401(k), the equity in the community home, or husband’s sole and separate military benefit.
Three years after entering into this separation agreement, husband petitioned for dissolution of their marriage and as a part of the divorce proceedings, claimed that the separation agreement was not fair and equitable. At trial, husband argued that the agreement was unfair because it inequitably divided the parties’ home and wife’s 401(k). The trial judge disagreed with husband and ruled that the parties freely, knowingly and voluntarily entered into the agreement, and that the agreement was valid and binding, and fairly and equitably divided the community property and debts as of the date of the separation agreement.
The Court of Appeals reversed and remanded finding that the trial court must determine first, if the agreement is enforceable and, if the agreement is enforceable, whether it is then “unfair.” In reaching this conclusion, the Court first examined the separation agreement as a contract and found that contract law governs a separation agreement. In order for there to be an enforceable contract, there must be an offer, acceptance, consideration, a sufficiently specific statement of the parties’ obligations, and mutual consent. See Muchesko v. Muchesko, 191 Ariz. 265, 268 (App. 1997). “Before a binding contract is formed, the parties must mutually consent to all material terms … and until all understand alike there can be no assent.” Hill-Shafer P’ship v. Chilson Family Tr., 165 Ariz. 469, 473 (1990). The Court of Appeals found that, based on the record, they could not say that husband and wife here shared a common understanding regarding husband’s payment of the home equity to wife, such that there was mutual assent. Husband and wife both testified that it was their understanding that husband would keep the house and wife would keep the 401(k), but then husband paid wife $127,435, about half of the house equity. Buckholtz, p. 5. The matter was remanded to the family court judge to consider the equity payment made by husband and as well as other property owned by husband and wife not accounted for in the agreement.
The Court also determined that the family court must determine, if a binding separate agreement exists, whether it is unfair or not. In determining if the agreement is unfair, the judge can consider both community and separate property owned by the parties. Thus, on remand, the trial judge may take into consideration husband’s sole and separate property (his military payment) in determining if the separation agreement is unfair and if the parties considered the separate property as a basis for making the agreement. The standard is one of being “unfair.” The Court noted that: “While often what is fair will also be equitable, it is plausible that a separation agreement could be inequitable and unequal, yet not ‘unfair’ under the specific facts of a case. Buckholtz, p. 7.
Separation agreements are good tools to resolve potential issues that might arise in anticipation of divorce or parties agreeing to live separately for a while. But the result of this case and A.R.S. § 25-317 means that there has to be full disclosure (full knowledge of the property involved) – and a clear identification of the community and separate property and debt existing at the time. Further, there needs to be clear and concise terms of the agreement, reflecting a “meeting of the minds” as to the terms of the separation agreement. With full disclosure of all property and debt, both community and separate, and a clear agreement as to how all property is to be treated and divided, a separation agreement should be upheld by the courts as long as it is not unfair.
If you or anyone you know has questions regarding separation agreements or any other family law matter, call or email today to schedule a consultation with Jim Mueller.
James P. Mueller is a Partner with Provident Law®. Originally from Iowa and graduating from the Iowa College of Law with distinction, Jim has been licensed in Arizona since 1990 and focusing his practice on family law for over 25 years. He has been AV-rated by Martindale-Hubbell for over 20 years, which connotes the highest possible rating in both legal ability and ethical standards. Jim handles the following type of matters: divorces and legal separations; questions concerning covenant marriages; disputes over child support and spousal maintenance (alimony); child custody and parenting time controversies; property and debt division in dissolution of marriages; paternity and maternity actions; step-parent adoptions; the administration of guardianship and conservatorship matters; and representation of personal representatives in probate cases.