A Scary Prenuptial Omission Bites One Party Hard

Anyone who writes prenuptial agreements knows that they involve predictions of future conduct and future conduct is hard to predict. A couple years ago I was consulted by a husband about a second marriage prenuptial where the couple agreed to keep their finances separate and to waive any rights to equitable distribution. He had insisted on the agreement because he had just sold his business and was sitting on a stack of proceeds from that sale. His second spouse was a mid-level employee at a start-up pharma company who had been granted stock options during the marriage. They had essentially no value until her company went public. Lo and behold, the husband now wanted to know if he was entitled to what might otherwise be marital stock. No, sir, you waived all rights to each other’s property.

Silver v. Bertenthal, decided by the Superior Court illustrates another wrinkle where clients can foil their own intentions by “assuming” they understand a transaction they don’t. The parties marry in 2012 after signing a prenuptial agreement that says there will be an equal division of marital property in the event of divorce. Shortly after that clause is one that says each will be solely responsible for his/her individual debt contracted during the marriage. Both of these are pretty standard clauses in second marriage prenuptials. Seems simple, until it isn’t.

In 2013, the year following their marriage husband put wife’s name on a residence he owned solely in his name. In so doing, he took it from non-marital/pre-marital property to joint/marital property. The facts are a bit thin here, but when he did that he did not insist that wife join him as a co-signor on the note associated with the home mortgage. Meanwhile, it also seems that wife did sign a mortgage instrument because the case tells us she was on the mortgage but not the note.

In a day when people prefer to “go it alone” when financing real estate, about 99% of them don’t know that a “note” and a “mortgage” are two different legal animals. Candidly, a lot of lawyers miss the point as well and therein lies the trouble of Sammy Bertenthal.  So, let’s review.

When you go to the typical home real estate closing today there are three legal documents that come out of that transaction. You went into the settlement under an agreement of sale; the thing you signed to buy the house. At closing that document is said to “merge” into the documents that come out of the closing. The first document is the deed. That’s the document signed by the seller conveying to you, the buyer, all of seller’s interest in the real estate. Almost all real estate transactions involve outside financing by a bank or other lender. The lender makes the buyer sign two documents at settlement before it forks over the money it is lending. The first is a promissory note. As borrower, you promise to pay the bank in monthly installments until the full amount of the borrowed funds are paid with interest. That document, called the promissory note is ordinarily not recorded with the transfer of title (the deed). What is recorded is a document called a mortgage. A mortgage is a document that states you, as borrower, acknowledge that your ownership of the house is subject to the amount due the lender; the money you promised to pay in the promissory note.

In just about every real estate purchase the names on the mortgage are the same as the ones on the promissory note. But there are exceptions to every rule and many times, the property is jointly titled (as happened here) but only one of the owners owes the debt. In signing the mortgage, Ms. Silver (2^nd wife) acknowledges to the world her rights to her new husband’s house were subordinate to the bank’s loan. But unless she also joined in the promissory note (by signing it), she does not owe that debt.

In this case, the house was worth $735,000. The case doesn’t say but public records tell us that husband bought the property in 2002 for $425,000. If we assume he took a 90% mortgage back then, it started out at $380,000. So, let’s assume he paid down 2/3 of that mortgage by the time he and his second wife separated. He would still owe roughly $125,000 to the lender. His expectation was likely that he would owe his wife half of $735,000 less the $125,000 mortgage. That would be $625,000/2= $312,500. But the agreement says he would pay her half of the value of the marital property. It did not add the words “net of the outstanding mortgage.” So, the Court ignored the mortgage and ordered him to pay $735,000/2= $367,500.

Sammy argued, that’s not what was intended. The Court responded: “Perhaps, but your agreement is explicit that she gets half the value, not half the value after subtracting the outstanding mortgage.” There is a doctrine out there called the parol evidence rule. If the agreement is set forth in a clear legal document, courts will not hear testimony which seeks to alter the words the parties used in their agreement.

The lesson here is that if you are about to marry a second time, even if you don’t want a prenuptial agreement, it may be worth stopping by your attorney’s office to just review what happens once you do marry. If new spouse will live with you, what becomes of the title to your house and the mortgage? If things don’t work out, who will leave and when? Understand as well that if you die, your new spouse is the automatic beneficiary of your 401K plan. Are you satisfied with that?

Nota bene: The facts in the opinion are slightly different than reported above. Apparently, the house was refinanced during the marriage but wife did not sign the promissory note; only the mortgage. The result is the same either way. We could spend pages speculating why the bank did not insist that she sign the promissory note but we don’t know and the opinion tells us that she signed the mortgage only; not the note. Had she executed the note, Sammy wins his argument, marital debt.

Silver v. Bertenthal 1156 WDA 2023 (1/30/25)