In Babbio v. Babbio, the Appellate Division, First Department, on July 17, 2014 defined “the” and otherwise interpreted a prenuptial agreement in ways that cost a husband millions of dollars of separate property credits he sought in his divorce action.
Under the parties’ agreement, marital property, generally, was to be divided equally. However, the agreement also provided:
[i]n the event of an Operative Event, Marital Property [as defined elsewhere in the agreement] shall be distributed equally between [the parties] in accordance with the following provisions, except that if the parties have been married for ten (10) years or less and either party is able to identify One Million ($1,000,000) Dollars or more of Separate Property that was used for the acquisition of the Marital Property, that party shall first receive the amount of his or her contribution of Separate Property prior to the division of the remaining value of such property, if any. [emphasis added]
“Operative Event” was defined, inter alia, as “the delivery by [either party] to the other of written notification … of an intention to terminate the marriage.” Here, the Court held that it was the date of the notification, and not the date of distribution that was determinative. As a result, the husband became entitled to the benefits of this provision.
However, construing the parties’ prenuptial agreement in what the Court viewed as being in accord with the plain meaning of its terms, and interpreting every part of the agreement “with reference to the whole”, the First Department found that the party seeking the credit must have contributed $1 million or more of his or her own separate property directly to the acquisition of the particular item of marital property at issue.
As a result of this construction, the First Department modified the holding of New York County Supreme Court Justice Laura E. Drager. Justice Drager on his motion for partial summary judgment had granted the husband specific amounts of credits for his separate property contributions to several assets including the parties’ Park Avenue apartment, their Connecticut residence, and the Connecticut parcels. Justice Drager also denied without prejudice the husband’s request for credits on the parties’ joint Goldman Sachs and JP Morgan accounts and their interest in Greycroft Partners, L.P. Justice Drager declared that although the husband was entitled to separate property credits with respect to those items, the amounts of the credits could be determined at present.
The First Department concluded that for the husband to recoup his separate property contributions, the husband was required to show that he contributed $1 million or more of separate property to the acquisition of each item of marital property for which he sought credit. The husband was not entitled to recoup all of his separate property contributions to all acquired assets upon his demonstration that he contributed $1 million or more either in the aggregate or to any one asset.
To ascertain the parties’ intentions in regard to the operation of the separate property credit, the First Department considered the phrasing of the separate property credit exception; interpreting it with reference to the apparent purpose of the paragraph and the general purpose of the entire agreement as a whole. The general purpose of the agreement was to provide a degree of protection to both parties. In the event the marriage lasted less than 10 years, the agreement protected the husband from the absolute loss of large amounts of separate funds he contributed to the marriage. However, the appellate court also held the purpose of the paragraph was to protect the wife from having everything that was purchased for their use as a married couple reclaimed by the husband.
The use of the definite article “the” before “Marital Property,” and the later reference to “such property,” reflect an intent to apply the credit to each piece of marital property as it is being divided. The First Department held that view was supported by the subparagraphs that immediately follow, which specifically contemplate an item-by-item consideration of the marital property for purposes of its division.
Moreover, the appellate court noted, “Marital Property,” was defined, inter alia, as “all property used jointly by the parties with a cost value of $100,000, or less.” The First Department held that under the husband’s aggregation theory, he would get all the proceeds of every sale, and the wife would lose the benefit of the provision, rendering it meaningless. Indeed, the Court noted that given the husband’s enormous wealth and the parties’ stated intention to reside in New York, under the aggregation theory, the husband’s contribution of more than $1 million to a marital residence alone would meet the threshold, rendering the creation of a threshold provision meaningless.
[The assumption that husband would get “all the proceeds of every sale” appears to assume that no marital funds were used to acquire assets, and that none of the assets appreciated above the initial separate property contribution. There is no discussion of this issue.]
Moreover, to be recoupable, the contribution had to be made directly from a separate asset of the husband to the purchase of the asset. Where the husband first deposited his separate property in a joint account, and then use the joint account to purchase an asset, the husband did not qualify for recoupment.
The prenuptial agreement provided that separate property transferred into any form of joint ownership became marital property. Separate property placed into joint ownership did not retain its character as separate property. The First Department noted that the agreement’s definition of marital property as property transferred into joint ownership, made no exception for transfers made as a convenience. Moreover, and contrary to the husband’s contention, the appellate court held it was not reasonable to interpret the term “acquisition” so broadly as to include the act of obtaining marital property via transfer.
Thus, the husband was not entitled to recoup separate property contributed to the acquisition of the Connecticut parcels, or the parties’ interest in Greycroft Partners. The husband failed to demonstrate that he contributed $1 million or more in separate property to their individual acquisition.
The husband did show that approximately $5 million of his separate property was used to acquire the Connecticut residence. Accordingly, he was entitled to a separate property credit for that contribution.
The husband was not entitled to an $8.5 million separate property credit for his contributions to the acquisition of the Park Avenue apartment. The purchase was made using the parties’ joint account. Although those funds were previously the husband’s separate property, they became marital property when he transferred them into the joint account.
Since the husband’s transfer of separate funds into a joint account transformed those funds into marital property for all purposes, when funds from that joint account were then used for the purchase of the parties’ apartment, there was no use of separate property for the acquisition of the apartment.
In any event, there was no evidence that the joint account was established only for convenience, or that the fund transfer was merely transitory, although [the First Department used the word “since”] the funds remained in the joint account [only] for a month.
However, the husband was found to be entitled to a credit for the $2.3 million credit he paid from his separate property for renovation costs on the Park Avenue apartment. Those costs were inextricably bound to the acquisition of the apartment itself. As a result, a separate property credit was also available the $910,00 down payment on the Park Avenue apartment that the husband did pay from his separate property (since the $1 million threshold for the separate property contribution to the apartment was met).
[As Justice Drager apparently agreed, “the” did not mean “each piece of” and “such property” did not mean “such piece of marital property.” Rather, the question may have been whether “Marital Property” was a singular or collective term, or both, or either. Thus in the provision:
[i]n the event of an Operative Event, Marital Property [is this term without the “the” a collective term for all marital property, or does it, itself, mean each piece of marital property?] [as defined elsewhere in the agreement] shall be distributed equally between [the parties] in accordance with the following provisions, except that if the parties have been married for ten (10) years or less and either party is able to identify One Million ($1,000,000) Dollars or more of Separate Property that was used for the acquisition of the Marital Property [is Marital Property, here, individual or collective?], that party shall first receive the amount of his or her contribution of Separate Property prior to the division of the remaining value of such property [is “property” individual or collective? Does “such” does not mean “each such piece of”], if any.]