Mixing marriage and business has proven to be a formula for success for many Americans—and a recipe for disaster for others. Whether the business is small or large, like a professional sports franchise, owners should be aware of the potential pitfalls. The love and affection which leads to sharing can change, as circumstances change, to bitterness and vengeful acrimony with a devastating impact on a family business.
But state rules vary widely. For instance, work devoted to business in a community property state is generally considered to be marital labor, and each spouse shares equally in its value. So business owners, beware—as recent headlines once again show.
Do marriage and business really mix?
It's easy to find couples who drive to the office together, work effectively all day as a team, and then go home at night to marital bliss. Then there are the others whose squabbling and mean spirit spills over from one arena into the other, complicating (and at times poisoning) the atmosphere of both.
As the Los Angeles Dodgers struggle in the early going of the 2010 baseball season, that question is front and center as Frank and Jamie McCourt fight very publicly over their ownership of the storied franchise, even as they struggle over the property the two accumulated during their now-foundering 30-year marriage. Their shares may—or may not–be governed by an agreement the two signed in happier times.
Marital Agreements – Buyer Beware
“Marital agreements are evaluated by different standards than are applied to people doing business with each other,” said Hillel Chodos, a prominent Los Angeles attorney involved in some high-profile cases, such as the lawsuit against Orange County billionaire developer Donald Bren by his children.
“Husbands and wives are in a fiduciary relationship with each other, and that's a very high duty,” Chodos said. “Therefore many of the rules that control business deals don't apply to those between husbands and wives.”
Because the 50 states each control their own laws, each sets its own policy on the level of honesty required between spouses, and how that requirement is enforced.
In California, Jamie McCourt was fired as a Dodgers executive by her estranged husband during last year's playoffs. She went to court to ask a judge for $1,000,000 in monthly support if she does not get that job back to maintain her lifestyle, and $9 million to pay lawyers to prepare for a late-summer trial.
“Hello Dear, You're Fired”
Frank sent her an abrupt termination letter reading, according to media accounts, "Dear Jamie: This is to inform you that your employment with and positions as Chief Executive Officer and Vice Chairperson of the Los Angeles Dodgers are hereby terminated effective immediately.” He claimed he was exercising his authority under an agreement the two signed after they bought the Dodgers which gives him control of the baseball team, while she received ownership of their mansions in Malibu and Holmby Hills.
Married people can enter into agreements with each other, just as anyone can. “The only difference is that married couples have a fiduciary duty to each other, which means they have to act with the utmost good faith and honesty in the transaction. As long as they've done that, the agreement will be upheld.” said Los Angeles lawyer Christopher Melcher, an expert in the field of California community property law.
Jamie McCourt has claimed that she did not fully understand the deal when she signed it. In general, one spouse does not have a right to interfere with the marital business if the other party has preexisting management rights.
Share and Share Alike
“If one party is operating the business, even though it's a community asset, the spouse operating the business has the right of management and control, and can make any business decision without consultation with the other party,” Melcher said. The controlling spouse even has the power to sell the business, and the other spouse only has a right to notice.
“If one spouse is president, and the other is vice president, the law takes the normal business structures into marital enterprise. The president can fire the vice president, and the family courts are not normally going to interfere with that,” Melcher said.
Divorce is an emotional dispute that causes people to act out of anger and revenge in ways that can hamper good judgment, family law attorneys say. Melcher said that impulse can show up “when an upset wife contacts her husband's partners or clients and tells about an affair that occurred, or how the husband is cheating them. That can ruin the entire business, just out of vengeance.”
Those hazards can be multiplied when husband and wife work together.
When There's No Degree of Separation
“There's no separation between business and pleasure, or business and family,” said Melcher. “And that adds a lot of pressure. The power structure of workplace and home might be very different. A dispute about how the business is run might lead to a disagreement about how a child is raised.”
The McCourts are also contending over their 15,000-square-foot, 10-bath Holmby Hills mansion, bought for $20 million, and a waterfront Malibu retreat.
The whole case likely will turn on the validity of the agreement the McCourts signed after they bought the Dodgers. Had the deal been made before marriage, the outcome could have been different, thanks to another baseball icon–slugger Barry Bonds.
Before he married, Bonds persuaded his wife-to-be to sign a document that gave up her rights to much of the wealth he was on the verge of accumulating as a professional sports star. She even surrendered in advance any right to alimony, in the event the impending marriage went wrong.
McCourts and the Barry Bonds Legacy
It did, and the courts upheld the agreement. But the California Legislature then stepped in, and in 2002 added strict new rules about how spouses-to-be must treat each other. It's one of the few areas of California law where a lawyer may be required to be consulted. If the spouses enter a prenuptial agreement without a lawyer, the agreement is void unless the spouse was fully informed about giving up rights and signed a separate document declaring that the information was received and identifying its source.
The McCourts have been business partners for much of their 30-year marriage, according to newspapers in their hometown of Boston. In court documents, Jamie claims she gave her husband $1,000 seed money for his first company.
As the Los Angeles Times's Steve Harvey has pointed out, one thing is certain: the judge won't award her custody of the Dodgers during the week and him custody on weekends.
LegalZoom's prenuptial package: http://www.legalzoom.com/prenuptial/prenuptial-overview.html
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