agreements

An issue that befuddles some business owners during the course of their divorce litigation is how to regulate the operation and management of their businesses. In cases where both spouses own interests in the business, they may struggle for control of important business and financial decisions.

Some issues may be resolved under the company’s partnership agreement, shareholders’ agreement, limited liability company (LLC) agreement, or corporate by-laws. Yet, these agreements are often too vague to deal effectively with disputes between divorcing spouses who own businesses together.

Early in the evolution of the Divorce Code, the Superior Court of Pennsylvania authorized the Courts to appoint receivers or trustees to prevent the dissipation of an ongoing business concern. Mayhue v. Mayhue, 485 A.2d 494 (Pa.Super.1984). The Superior Court in Mayhue held that 23 Pa.C.S. § 3505(a) and 23 Pa.C.S. § 3323(f) authorized the Courts to enter an injunction to prevent a spouse from continuing a course of conduct calculated to defeat his wife’s property rights in the business. The Superior Court in Mayhue approved the trustee’s powers to liquidate assets to pay business debts, pay delinquent taxes, and satisfy intercompany debts.

The appointment of a receiver is not practical in every case because the expense of paying a receiver may not be justified. Still, there are some cases in which third party supervision of the business might be the only practical way t0 ensure continued smooth operation of a business caught in the middle.

The Chicago Sun-Times, Huffington Post, and The Daily Beast are reporting that Elin Nordegren, the wife of golfing billionaire Tiger Woods, is demanding that Woods renegotiate the terms of their prenuptial agreement after learning of Woods’ multiple infidelities. Under their 2004 agreement, Woods allegedly agreed to pay Nordegren the sum of $20 million if they should separate after ten years of marriage. The recent news reports claim that Nordegren is now demanding $55 million to stay with Woods for another two years, seven years in total.

If the reports are true, why would Woods agree to such terms?  The obvious answer would be “to induce Nordegren to commit to marital reconciliation.” Yet, a less obvious, perhaps more cynical answer would be “to let the negative publicity abate before announcing that the couple is divorcing.” By letting the media firestorm subside, even temporarily until the couple can make a plausible announcement about having attempted to reconcile, Woods might be able to preserve his valuable sponsorships. Pure speculation on my part, sure, but if his sponsorship worth hundreds of millions of dollars per year were at stake, wouldn’t it make sense to throw a little money her way?

The Superior Court of Pennsylvania will be publishing my successful result in Mackay v. Mackay (2009), a case in which a parent attempted to enforce a casual conversation about college plans for their young children as a “verbal agreement” to pay college expenses. The Superior Court held that their conversation was merely an expression of plans or intentions, rather than an enforceable verbal contract.

The incident from which the dispute arose was a dinner conversation held between the parents when their children were pre-teens. The mother declared that she would like to retire after 30 years of service to her employer, and the father admonished her that both parents would have to continue working to pay for college expenses. Many years later, the parties divorced. In the divorce action, the mother testified about the dinner conversation but did not attempt to assert a contract claim in connection with the divorce. When the eldest child graduated from high school, the father pursued a reduction of his child support obligation, and the mother counter-claimed for enforcement of the alleged oral agreement.

The Superior Court examined the record exhaustively and concluded that a discussion of future plans for college did not constitute a verbal contract between the parents. The Court accepted my argument that the parents did not have an intention when they conversed to enter into a legally-binding agreement. This decision recognized and honored the difference between verbal contracts versus plans made by harmonious married couples, which are not understood or intended to have legal consequences after divorce.

192 WDA 2009

During the statewide broadcast of PBI’s Family Law Update today, my colleague David Ladov asked me to post the features that a marital settlement agreement would have to contain in order to qualify as a QDRO (qualified domestic relations order). A QDRO is one of two possible ways that someone may waive his or her right to receive a share of his or her ex-spouse’s retirement benefits (the other being a beneficiary designation form). According to the U.S. Supreme Court’s 2009 decision in Kennedy v. Dupont, a marital settlement agreement by itself was not good enough to waive an ex-wife’s interest in an employer-sponsored pension plan, in the absence of a QDRO or beneficiary designation form.

I suggested during the broadcast that some divorce lawyers might wish to avoid this problem by crafting marital settlement agreements that would qualify as QDROs.  The requirements for QDROs under federal law are summarized on the website of the employee benefits administrator Hewitt Associates, as follows:

1. The instrument must be a court order, judgment or decree signed by a judge or other state-approved court official.
2. The instrument must relate to marital property rights or alimony, or the support of a child of the participant.
3. The instrument must contain a statement that it is issued pursuant to state domestic relations law.
4. The instrument must include the name, last known address, social security number and date of birth of the participant and alternate payee.
5. The instrument must describe the amount or percentage of benefits to be awarded to the alternate payee.
6. The instrument must indicate the manner of payment and when payments begin.

There are a couple of additional requirements (actually, three things the QDRO cannot do) that are described on Hewitt’s web site. In a case where a spouse is waiving his or her rights to an ex-spouse’s retirement benefits, these last few requirements might be irrelevant.

The first requirement listed above could be an obstacle in counties where settlement agreements are not routinely attached to the divorce decree or filed of record. Yet, a consent order incorporating a marital settlement agreement should be sufficient to satisfy this requirement. It is less clear that a consent order referring to an unattached settlement agreement might satisfy the requirement.

The Tennessee Court of Appeals recently held that a business owner’s spouse who signed a buy-sell agreement was bound by the value in a divorce action. In Inzer (2009), the husband and wife both signed a buy-sell agreement when they formed an LLC to purchase a Sonic Drive-In franchise. The buy-sell agreement granted other partners a right of first refusal to buy the interests of a withdrawing partner for the lesser of book value or the offer procured by the withdrawing partner. The owner’s expert presented evidence that the owner’s 24% interest in the franchise was worth $120,000 to $135,000 using capitalized cash flow or market methods, but only $16,000 net book value after discounts. Wife’s expert testified to a value of more than $500,000 after making adjustments to the owners’ compensation and ignoring discounts for lack of marketability, lack of control or the restrictive operating agreement.

The trial court valued the owner’s interest at $200,000 without much explanation. The Tennessee Court reversed, holding that the franchise was worth $33,000 book value without consideration of intangible value or discounts (as specified in the buy-sell agreement). The appellate court distinguished cases in which buy-sell agreements were not controlling, since the non-owner spouse in those cases did not sign the buy-sell.

Consider whether it was appropriate for Wife’s expert to perform  Type I adjustments in his normalization of the income statement, i.e., adjusting the owners’ compensation. Could a purchaser of a 24% interest compel the other owners to reduce their compensation? Even if the Court had not held the buy-sell to be controlling, it seems unlikely that Wife’s expert would have prevailed.

In divorce litigation where one of the spouses owns a professional practice, such as a medical practice, dental practice, law firm or accounting firm, the lawyers and their experts have to determine whether the business has value. Their determination depends upon whether the professional practice is believed to have enterprise goodwill.

Briefly, enterprise goodwill is the price that a buyer would pay for a professional practice over and above the value of its hard assets like equipment and supplies. In theoretical terms, enterprise goodwill is the reputation of the business that is not closely associated with a particular owner or professional. The opposite of enterprise goodwill is personal goodwill, which is the reputation and skill of the professional. Enterprise goodwill has value because it is transferrable but personal goodwill is not. Someone might be willing to pay for a name like Aspen Dental Systems, but what about Jane Doe, PC?

Increasingly, there is a market for professional practices that are not part of a regional or national chain. Dental practices, even those with a single location and single dentist, are bought and sold frequently. The same is true for specialty medical practics. Yet, primary care medical practices and legal practices are rarely bought or sold. So, how does a lawyer decide whether a professional practice should be evaluated by a business valuation specialist? Here are three signs that a professional practice might have value:

1. Actual transactions. If a professional or his/her partners have bought or sold their practices, it is more likely that there is transferrable enterprise goodwill. However, you must distinguish market transactions from succession planning. If the only transactions are between retiring partners and advancing associates, then there may not be much enterprise goodwill.

2.  Subordinates and equipment.  One reason why dental practices are increasingly transferrable is that dental procedures are performed by hygenists and associate dentists. If the owner of the practice is earning profit from other professionals and paraprofessionals, then a buyer might be willing to pay something to step into those shoes.

3.  Excess compensation. If a professional is earning substantially more than industry standards, then the professional’s practice might have enterprise goodwill. No buyer would pay to assume an existing practice if he or she could start a new practice for free – except if the existing practice were more profitable than a new practice would be. This criteria is based on the principle of substitution.

The U.S. Court of Appeals for the Seventh Circuit recently took up the case of Menard v. Commissioner, 560 F.3d 620 (2009), considering whether the CEO of a privately-held company was receiving a dividend disguised as salary from the business he controlled. The CEO whose salary was questioned was John Menard, founder and controlling shareholder of Menards, a chain of retail hardware and building supply stores. The Tax Court took the position that John Menard’s $20 million salary was really a disguised dividend because it was much greater than the salaries of the Home Depot and Lowe’s CEOs, who earned $2.8 million and $6.1 million respectively.

The appellate court’s opinion in this case is so well-researched that I cannot help but include large blocks of text, starting with its introduction to the subject:

The Internal Revenue Code allows a business to deduct from its taxable income a “reasonable allowance for salaries or other compensation for personal services actually rendered,”[or] “payments purely for services.” Occasionally the Internal Revenue Service challenges the deduction of a corporate salary on the ground that it’s really a dividend. A dividend, like salary, is taxable to the recipient, but unlike salary is not deductible from the corporation’s taxable income. So by treating a dividend as salary, a corporation can reduce its income tax liability without increasing the income tax of the recipient. . . As a result of a change in law in 2003, dividends are now taxed at a lower maximum rate than salaries—15 percent, versus 35 percent for salary. 26 U.S.C. § 1(h)(11). This makes the tradeoff more complex; although the corporation avoids tax by treating the dividend as a salary, which is deductible, the employee pays a higher tax. But depending on its tax bracket, the corporation may still save more in tax than the employee pays, and in that event, if the employee owns stock in the corporation, he may, depending on how much of the stock he owns, prefer dividends to be treated as salary. . . . Even before the change in the Internal Revenue Code, treating a dividend as salary was less likely to be attempted in a publicly held corporation, because if the CEO or other officers or employees receive dividends called salary beyond what they are entitled to by virtue of owning stock in the corporation, the other shareholders suffer. But in a closely held corporation, the owners might decide to take their dividends in the form of salary in order to beat the corporate income tax, and there would be no one to complain—except the Internal Revenue Service.

The usual case for forbidding the reclassification (for tax purposes) of dividends as salary is thus that “of a corporation having few shareholders, practically all of whom draw salaries,” Treas. Reg. § 1.162-7(b)(1), especially if the corporation does not pay dividends (as such) and some of the shareholders do no work for the corporation but merely cash a “salary” check. A difficult case—which is this case—is thus that of a corporation that pays a high salary to its CEO who works full time but is also the controlling shareholder. The Treasury regulation defines a “reasonable” salary as the amount that “would ordinarily be paid for like services by like enterprises under like circumstances,” § 1.162-7(b)(3), but that is not an operational standard. No two enterprises are alike and no two chief executive officers are alike, and anyway the comparison should be between the total compensation package of the CEOs being compared, and that requires consideration of deferred compensation, including severance packages, the amount of risk in the executives’ compensation, and perks.

Courts have attempted to operationalize the Treasury’s standard by considering multiple factors that relate to optimal compensation. [Citations omitted.] We reviewed a number of these attempts in Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir.1999), and concluded that they were too vague, and too difficult to operationalize, to be of much utility. Multifactor tests with no weight assigned to any factor are bad enough from the standpoint of providing an objective basis for a judicial decision [citations omitted]; multifactor tests when none of the factors is concrete are worse, and that is the character of most of the multifactor tests of excessive compensation. . . . All businesses are different, all CEOs are different, and all compensation packages for CEOs are different.

In Exacto, in an effort to bring a modicum of objectivity to the determination of whether a corporate owner/employee’s compensation is “reasonable,” we created the presumption that “when . . . the investors in his company are obtaining a far higher return than they had any reason to expect, [the owner/employee’s] salary is presumptively reasonable.” But we added that the presumption could be rebutted by evidence that the company’s success was the result of extraneous factors, such as an unexpected discovery of oil under the company’s land, or that the company intended to pay the owner/employee a disguised dividend rather than salary. 196 F.3d at 839.

The strongest ground for rebuttal, which brings us back to the basic purpose of disallowing “unreasonable” compensation, is that the employee does no work for the corporation; he is merely a shareholder. [Citations omitted.] Comparison with the compensation of executives of other companies can be helpful if—but it is a big if—the comparison takes into account the details of the compensation package of each of the compared executives, and not just the bottom-line salary. This qualification will turn out to be critical in this case.

Having explained the context of this case, the Circuit Court next explained why the Tax Court’s analysis was wrong, especially its comparison of John Menard’s salary to the salaries earned by the Home Depot and Lowe’s CEOs in that year. The appellate court first rejected the notion that the taxpayer’s $17 million bonus, which was equal to 5% of the company’s net income before taxes, was more likely to be a dividend than salary because it was paid at year’s end; was approved by a board that the CEO controlled without outside directors; must be returned if the IRS should disallow the company’s tax deduction as salary; and exceeded the salaries earned by the CEOs of publicly-traded competitors (Home Depot and Lowe’s). The appellate court noted that the managers of privately-held companies often face greater risk than public companies, warranting greater reward for success:

Of particular importance to this case is the amount of risk in the compensation structure. Risk in corporate compensation is significant in two respects. First, most people are risk averse, and the scholarly literature on corporate compensation suggests that risk aversion is actually an obstacle to efficient corporate management because managers tend to be more risk averse than shareholders. Shareholders can diversify the risk of a particular company by owning a diversified portfolio, but a manager tends to have most of his financial, reputational, and “specific human” capital tied up in his job. [Citations omitted.] So the riskier the compensation structure, other things being equal, the higher the executive’s salary must be to compensate him for bearing the additional risk.

That is not a critical consideration in this case because, as we said, management and ownership in Menards are not divorced. But a second significance of risk in a compensation structure is fully applicable to this case. A risky compensation structure implies that the executive’s salary is likely to vary substantially from year to year—high when the company has a good year, low when it has a bad one. Mr. Menard’s average annual income may thus have been considerably less than $20 million—a possibility the Tax Court ignored. Had the corporation lost money in 1998, Menard’s total compensation would have been only $157,500—less than the salary of a federal judge—even if the loss had not been his fault. The 5 percent bonus plan was in effect for a quarter of a century before the IRS pounced; was it just waiting for Menard to have such a great year that the IRS would
have a great-looking case?

The appellate court also noted that the Tax Court had not considered the total compensation packages of the CEOs from the public companies, such as equity compensation, severance packages, retirement plans, and perks. The appellate court noted that the CEO of Home Depot, whose salary was used as a benchmark, actually earned $124 million over six years, and a $210 million severance package when he was forced out. The Court of Appeals also noted that the Tax Court had not considered the salaries of other senior managers, both of Menards and of the benchmark public companies, which may have indicated that this CEO was more productive and delegated less than average. The Court observed that John Menard worked 14 to 16 hours per day, six to seven days per week.

The Seventh Circuit adopted a skeptical, even sarcastic, tone toward the Tax Court’s remark that the owner of a business has no need for incentive compensation because ownership is incentive enough. The Court of Appeals held that owners should not be treated differently from other managers.

Having concluded that John Menard’s $20 million salary was not excessive, the Court of Appeals reversed.

Asking your fiance for a prenup doesn’t have to spoil the joy of your engagement. First, be sure to give your betrothed plenty of time to think about it. No one likes to be rushed. Next, try to put it in context and explain why you need a prenup. You might present the prenup along with wills, health care powers of attorney, living wills, insurance policies and other estate planning documents. Finally, encourage your fiance to hire independent legal counsel. You might even offer to pay the bill. Having separate representation will allow your loved one to ask questions that might be uncomfortable for you or your lawyer to answer. It also might ensure that your agreement is enforceable.

It’s hard to believe an entire month got away from me without a blog posting. I realized it when I saw this article in Forbes magazine, describing the top 10 most expensive celebrity divorces. Paul McCartney’s settlement may eventually eclipse them all, but for now, the biggest losers are Neil Diamond and Michael Jordan, each of whom paid more than $150 million! Anyway, the winter freeze has begun to thaw and I will be posting more frequently in the coming weeks. Stay tuned for more substantive articles, but in the meantime, check out the celebrity divorces.

At last! the conclusion of the story. Here is the law of other states, which like Pennsylvania, hold that a breach of a prenuptial agreement does not render the entire contract void if there has been partial performance of other covenants and the breach does not render the entire contract illusory.

Other States

Brees v. Cramer, 322 Md. 214, 586 A.2d 1284 (1991). Widow of a decedent sought to be appointed as administrator of decedent’s estate (and to receive a widow’s share of the intestate decedent’s estate), alleging that the decedent’s breach of a contractual provision to name widow as beneficiary of his life insurance policies rendered the separation agreement invalid, including mutual waivers of the parties’ testamentary rights. Widow argued that her waiver of testamentary rights was conditional upon decedent’s obligation to name her as beneficiary of his life insurance. The Maryland Supreme Court noted that the widow could not argue that the alleged condition was an express condition. Rather, the widow argued that it was a constructive condition implied by law, as described in Restatement (2d) of Contracts § 237. The Maryland Supreme Court disagreed.

“First, breach of a covenant in a prenuptial or separation agreement does not, ipso facto, excuse performance of another covenant by the other party. See Schnepfe v. Schnepfe, 124 Md. 330, 92 A. 891 (1914) (wife’s breach of prenuptial agreement, by deserting husband, does not relieve husband’s estate of liability under husband’s promise to bequeath a specific sum of money to wife). And see D. Thomas, Maryland Divorce and Separation Law, at 4-25 (MICPEL 4th ed. 1987) (“Where one breaches a provision in a marital settlement agreement which is not dependent upon other provisions, enforcement of the other provisions is unaffected”). Thus, a clearer expression of the intent of the parties than appears in this instrument is required before concluding that the parties to the Agreement intended the waiver of rights in Earl’s probate estate to be dependent on insurance for Joy’s benefit.

“Reinforcing this conclusion is the express severability provision quoted above. Joy argues that the severability clause applies only if a provision “is held to be void or unenforceable,” an event which has not occurred here. Dependency of Joy’s waiver on the performance of Earl’s promise to insure is inconsistent with the provision that, in effect, Joy’s waiver would be operative despite the invalidity or unenforceability of Earl’s promise.

* * *

“The absence of interdependency between the covenants to insure and the waiver means that the materiality of the assumed breach by Earl must be measured against the whole of his promises in the Agreement.

“The circuit court found nineteen considerations given by Earl, excluding that pertaining to the $34,000 life insurance benefits. Among these are Earl’s fulfilled promises to live apart from Joy and to act as sole custodian of Michael. Aspects of these performances are not quantifiable in monetary terms. Clearly they are not insignificant performances in the couple’s “Agreement for Settlement of Marriage, Custody of Child, and Property.” Moreover, it was uncontested that Earl performed his obligation to name Michael as the beneficiary of at least $17,000 of life insurance. In fact he provided even more than the additional $83,000 benefits to Michael included as an option in the Agreement. This is also consideration moving to Joy. See McClellan v. McClellan, 52 Md.App. 525, 534-35, 451 A.2d 334, 340 (1982), cert. denied, 295 Md. 283, cert. denied, 462 U.S. 1135, 103 S.Ct. 3119, 77 L.Ed.2d 1372 (1983). On the other hand, breach of a covenant to maintain life insurance in a specific amount of money ordinarily can be remedied by a money judgment. It is not necessary, in order to give Joy adequate relief from the assumed breach, to strike down waivers valid when made. Thus, the circuit court did not err in finding that the nature of Earl’s assumed breach, weighed against Earl’s performance of other agreed considerations, did not produce a material breach of a constructive condition of substantial performance of the Agreement as a whole.

“Joy contends that the circuit court did not make the required determination of materiality because it viewed materiality as bearing on rescission of the contract. The circuit court concluded that the violation, if any, of the covenant to insure was only a partial, and not a total, “failure of consideration.” The terminology “failure of consideration” describes the same legal doctrine which more currently is described as the constructive condition of substantial performance. See 3A A. Corbin, Corbin on Contracts § 658 (1960); 6 S. Williston, Law of Contracts § 814 (Jaeger 3d ed. 1962); Restatement (Second) of Contracts § 237, comment a (1981). Accordingly, the trial court applied the operative legal principle in its decision, and it applied that principle correctly to the facts of this case.”

Thus, finding substantial performance by the decedent of most of the covenants of the separation agreement, the Maryland Supreme Court refused to rescind the entire contract as requested by the widow.

Garrett v. Garrett, 637 So.2d 1276 (Ala.Civ.App.1994). Wife argued, in the context of a divorce action, that the parties’ prenuptial agreement was invalidated by husband’s breach of two contractual provisions:(1) a promise to purchase or build a jointly-titled residence; and (2) a promise to place $5,000.00 into a bank account in wife’s name. The trial court upheld the validity of the prenuptial agreement, and the appellate court affirmed, holding that “[m]arriage alone may furnish sufficient consideration for a prenuptial agreement.” Id. at 1378, citing Woolwine v. Woolwine, 519 So.2d 1347 (Ala.Civ.App.1987). The appellate court also noted the husband had substantially performed under the contract by constructing a home (which was not placed into joint names because the parties separated before it was completed) and placing $5,000.00 into an account for the wife. Notably, the prenuptial agreement held that the failure of husband to place $5,000.00 into an account for wife would be considered a material breach of contract, rendering the agreement null and void. There was a dispute as to how and why the funds in that account were spent, and the trial court ordered husband to reimburse wife in the amount of $3,500.00. That portion of the trial court’s decision was sustained on appeal under an abuse of discretion standard.

Shepherd v. Shepherd, 876 P.2d 429 (Utah.App.1994). In a divorce action, the husband argued that the parties’ prenuptial agreement was void because the wife had breached a promise to convey title to her premarital home into joint names if the parties resided there for more than six months following their date of marriage. The parties resided in that home for thirteen years before their separation. No conveyance into joint names was made. The trial court held that the breach did not avoid the entire contract, since the wife was willing to cure the breach, the husband had enjoyed the use of the home throughout the marriage, and the parties had acted as though the home were jointly titled by pledging the home as security for a joint mortgage loan to repay the husband’s debts.

Dutton v. Marshall, 729 So.2d 860 (Ala.Civ.App.1998); LeMaster v. Dutton, 694 So.2d 1360 (Ala.Civ.App.1997). Upon the death of the husband, his widow contested the validity of their prenuptial agreement, which the decedent had breached by failing to buy her a house and car. The trial court held the agreement invalid due to a lack of full and fair disclosure, as well as an alleged breach by the decedent. In LeMaster, the appellate court reversed and remanded to determine the nature and effect of the alleged breach. On remand, the trial court was direct
ed to consider whether the alleged breach might constitute a failure of consideration and whether adequate remedies were available at law.

“Second, we would like to address the widow’s defense of failure of consideration. Generally, the term “failure of consideration” is described as “the neglect, refusal and failure of one of the contracting parties to do, perform, or furnish, after making and entering into the contract, the consideration in substance and in fact agreed on.” 17 C.J.S. Contracts § 129 (1963). In addition, a failure of consideration is “predicated on the happening of events which materially change the rights of the parties, which events were not within their contemplation at the time of the execution of the contract.” Id.

“Typically, a total failure of consideration is used as an excuse for nonperformance of a contract. 17A Am.Jur.2d Contracts § 670 (1991). In this particular case, although she does not specify whether the failure of consideration she alleges is total or partial, the widow cannot allege a total failure because she and Mr. Dutton were married, and marriage itself is sufficient consideration for an antenuptial agreement. See Woolwine v. Woolwine, 519 So.2d 1347, 1349 (Ala.Civ.App.1987). However, where an agreement recites additional consideration for a relinquishment of property rights, as does this agreement, and that recited consideration totally fails, some authority exists for the proposition that the party asserting the defense of failure of consideration may be released from the agreement and may assert those property rights. 41 Am.Jur.2d Husband and Wife § 293 (1968). The antenuptial agreement at issue here recited additional consideration in the form of a house and a car to be purchased for the widow; according to the evidence in the record, the widow has at least received physical possession of a car. If that fact is true, then the enumerated consideration has not totally failed, and the widow cannot be released from the agreement.

In effect, a failure of consideration is the failure to perform a promise contained in the agreement, and it is much like a breach. 17A Am.Jur.2d Contracts § 670 (1991). Because “a partial failure of consideration [also] imports a breach of contract,” 17A Am.Jur.2d Contracts § 671 (1991), the widow can proceed with her action for breach of the antenuptial agreement. The trial court should apply traditional rules of contract law in determining whether Mr. Dutton breached the antenuptial agreement, whether the administratrix has any defenses to the breach, and whether the widow should receive damages as a result of the breach.

“A breach of contract is defined as a “failure, without legal excuse, to perform any promise which forms the whole or part of a contract.” Black’s Law Dictionary 188 (6th ed. 1990); see also 17A Am.Jur.2d Contracts § 716 (1991). To establish that a breach of contract occurred, a “claimant must prove: (1) the existence of a valid contract binding the parties in the action, (2) [her] own performance under the contract, (3) the defendant’s nonperformance, and (4) damage[ ].” Southern Medical Health Systems, Inc. v. Vaughn, 669 So.2d 98, 99 (Ala.1995) (citations omitted). Because we have determined that the antenuptial agreement between Mr. Dutton and his widow is valid and enforceable, the first prong of this test is already satisfied. On remand, the trial court should consider whether the widow (a) has proven her own performance under the contract, (b) has shown that Mr. Dutton failed to perform his obligations under the contract, and (c) has demonstrated damage or harm as a result of the failure of performance.

“If the widow proves on remand that Mr. Dutton breached the antenuptial agreement, the trial court may award damages. The rule in Alabama is that damages for breach of contract “should return the injured party to the position [she] would have been in had the contract been fully performed.” Garrett v. Sun Plaza Development Co., 580 So.2d 1317, 1320 (Ala.1991) (citations omitted). In no event, however, should the injured party be placed in a better position than she would have been had the contract been performed. Id. (citation omitted).

“Accordingly, the judgment of the trial court is reversed and this cause is remanded for additional proceedings on whether Mr. Dutton’s failure to purchase a house and a car for the widow resulted in a breach of the antenuptial agreement and, if so, whether the widow is entitled to damages as a result of that breach.”

The trial court on remand found that the agreement had been breached and awarded damages to the widow in the amount of $29,000.00. The widow appealed, again arguing that there was a total failure of consideration, and the appellate court again rejected that argument.

Estate of Johnson, 202 Kan. 684, 203 Kan. 262, 452 P.2d 286 (1969). In their prenuptial agreement, the decedent agreed to make a new will granting ¼ of his estate to his wife if she should survive him. The decedent breached the contract by failing to make a new will before his death five years later. Upon his death, the widow filed an election against the decedent’s will to take 1/3 of his estate and 160 acres of the decedent’s land where the parties had established a homestead. The executor of the will petitioned to set aside the widow’s election, which was denied by the probate court. The executor appealed to the district court, which reversed the probate court’s decision. The widow appealed to the appellate court, arguing that the prenuptial agreement was void and unenforceable due to the decedent’s breach of his promise to make a new will. The widow relied on her hearing testimony that she was told, at the time of signing the agreement, that the prenuptial agreement would not be valid unless a new will were made by her husband. The widow also relied on an earlier Kansas precedent, in which it was held that the prenuptial agreement and the will constitute one contract, and when a husband fails to provide by will that which he agreed, the prenuptial agreement must fail. The Kansas appellate court distinguished that case, because in that case the disputed prenuptial agreement made no provision for the dependent spouse and was a result of the husband’s misrepresentations to her. The Kansas appellate court, in this case, held that the decedent’s breach of a prenuptial agreement did not give rise to a right of rescission.

“Hazel, in effect, seeks to rescind the antenuptial agreement because of Charles’ purported breach of its terms. But the right to rescind a contract is extreme and does not necessarily arise from every breach. To warrant rescission, the breach must be material and the failure to perform so substantial as to defeat the object of the parties in making the agreement. A breach which goes to only a part of the consideration, which is incidental and subordinate to the main purpose of a contract, does not warrant a rescission. (Baron v. Lyman, 136 Kan. 842, 18 P.2d 137; 17 Am.Jur.2d, Contracts s 504; 17A C.J.S. Contracts s 422(1); Corbin on Contracts s 1104.)

“In respect to the right of a party to rescind an antenuptial agreement, we find the following statement from 41 Am.Jur.2d, Husband and Wife s 293, which was quoted in substantial part in In re Estate of Ward, supra:”

‘The general rule is that where parties enter into an antenuptial agreement, each must perform the terms and conditions of that agreement before he or she can claim the benefits to be derived therefrom. However, the rule that equity will not compel a rescission where there had been partial performance has been applied to a marriage settlement where the marriage has occurred but the claim is made that other considerations, such as to be a kind and dutiful spouse, to use property for the joint benefit of the spouses, and to take care of the other spouse in old age, have not been complied with. It has been ruled that since marriage is a consideration that c
annot be restored, covenants in a marriage settlement or agreement are independent, and failure of their performance by one party does not defeat his or her right to performance by the other, if the former is willing and can perform or the latter has a right to damages for the breach, * * *.’

“(Also, see, 41 Am.Jur.2d, Husband and Wife s 310.)

“One of our early cases, Gordon v. Munn, 87 Kan. 624, 125 P. 1, rehearing denied 88 Kan. 72, 127 P. 764, while factually not on all fours, is strongly indicative of the reluctance of courts to rescind or deny specific performance of an antenuptial agreement in the absence of fraud or other equitable considerations. There, an antenuptial contract provided by its terms that the prospective wife waived all right, title, interest and inheritance in property of her intended husband in consideration for his agreeing to convey to her by deed two pieces of real estate to be her sole property. The husband failed to execute the deed as promised. This court held that under the circumstances, where there was no deceit or fraud, the agreement vested equitable title to the real estate in the wife, and the failure of the husband to execute the conveyance did not prevent the enforcement of the agreement.

“Similarly, in In re Estate of Ward, supra, the parties had executed an antenuptial agreement providing that the intended husband was to purchase a home for his future wife to live in for the rest of her life in the event he predeceased her. The husband died eighty-three days after the marriage and before a home could be purchased. The widow requested that she be permitted to take under the law, and sought to set aside the antenuptial contract for various reasons, including its execution had been obtained by fraud, and that the decedent had failed to comply with the provisions regarding the purchase of a home. The court held there was no proof of fraud, the contract was not void for lack of consideration, and that the decedent’s failure to fulfill his promise to buy a home during his lifetime, standing alone, was insufficient to invalidate the contract or render it unenforceable.

“For cases from other jurisdictions holding that in the absence of fraud a wife is not entitled to rescind an antenuptial agreement, although the husband has failed to perform a covenant thereof, see, Wellington v. Rugg, 243 Mass. 30, 136 N.E. 831; Cantor v. Cantor (Ohio Prob.), 174 N.E.2d 304; In re Eisner’s Will, 15 Misc.2d 361, 181 N.Y.S.2d 327.”

The Kansas Supreme Court in Johnson held that the decedent’s failure to make a new will did not constitute a substantial or fundamental breach going to the very heart of the agreement. Since the widow could receive the substantial benefit of her bargain, there was insufficient cause to void the entire agreement. The widow also claimed that the executor’s sale of the land subject to her life estate (homestead rights) depressed the sale price, thereby impairing the value of her ¼ share under the prenuptial agreement. This, she argued, was another breach of the agreement rendering it void. The appellate court noted that the widow could have waived her life estate, which would have removed the alleged impairment to the sale of the land. Having failed to do so, she could not complain that the purposes of the agreement were defeated by the decedent or his estate.

Estate of Gillilan v. Estate of Gillilan, 406 N.E.2d 981 (Ind.App. 1980). Wife’s estate sued Husband’s estate for breach of a prenuptial agreement which required husband to make a will granting his wife the entire net income of his estate for the remainder of her lifetime. Instead, Husband left his wife a life estate in his tangible personal property, an annual sum certain from a charitable remainder trust, the net income from another charitable remainder trust, an annual percentage distribution from a residuary trust, and the net income from her husband’s estate during the interim period until the other trusts were fully funded. Wife’s estate argued that husband’s failure to make a will in compliance with the prenuptial agreement constituted an offer to rescind the prenuptial agreement, which offer the wife had accepted by electing her statutory share of his estate upon his death. Husband’s estate admitted that there was a partial breach of the prenuptial agreement, but opposed rescission of the agreement, denying that the husband had expressed an intention not to be bound by the prenuptial agreement. The trial court enforced the prenuptial agreement, holding there were no grounds for rescission. On appeal, the appellate court examined an earlier Indiana precedent in which a husband had contracted by prenuptial agreement to grant his wife a life estate in real property. During their marriage, the husband and wife sold and conveyed the land in which the wife was to have her life estate. Upon the husband’s death, his children sued for partition of other property owned by their father at his death, and the wife sought a one-third share, claiming that the prenuptial agreement had been breached. The appellate court in that ancient case refused to find the prenuptial agreement unenforceable, holding that the parties had partially performed the prenuptial agreement and that the breaching party by his action had neither made it impossible to cure the breach nor clearly expressed an intention to abandon the contract. The Indiana court also examined the Ohio court’s prior decision in Cantor, infra, where it was held that a non-breaching party could rescind the contract only if the breach was so material as to constitute a complete failure of consideration.

“Our courts in dealing with contract cases outside of the antenuptial agreement context have similarly recognized a principle of substantial breach which produces a rescission in such cases. See, e. g., Smeekens v. Bertrand, (1974) 262 Ind. 50, 311 N.E.2d 431, where the Court citing 17 Am.Jur.2d Contracts s 504, supra and s 502, observes, in the context of a land contract where the vendor covenants to deliver property in return for the vendee’s periodic payments, “(i)f the vendor, for one reason or another, wrongfully withholds possession of such premises from a non-defaulting vendee, he has failed to supply to the vendee the very thing for which the vendee contracted. (emphasis in original)” Id. at 56, 311 N.E.2d at 435. The Court stated there may thus be a rescission where one party “materially breached” a contract so as to produce a “complete failure of consideration.” Id.”

In the end, the Gillillan court held that there was substantial performance of the agreement by the decedent, and any breach could be remedied. On these grounds, the appellate court affirmed the summary judgment in favor of the husband’s estate.

Cantor v. Cantor, 174 N.E.2d 304 (Ohio.Prob.1959). When the decedent’s estate in this case sought to enforce a prenuptial agreement signed by the decedent’s widow, the widow claimed that the agreement was void due to fraud and failure to make reasonable provision, that the decedent had breached the agreement by failing to make a will leaving $15,000.00 to her as agreed, and that the parties had mutually rescinded the agreement prior to the decedent’s death. The trial court held, and the appellate court affirmed, that the widow’s fraud and mutual rescission defenses were waived and barred by the Dead Man’s Statute. Therefore, the widow proceeded on the claim that the decedent had breached the agreement. The appellate court first examined precedent by which it was held that the marriage itself was partial consideration for the prenuptial agreement. The court also noted that the covenants of the prenuptial agreement, particularly the parties’ mutual waivers of testamentary rights, were independent promises, not conditional upon each other. Still, the court did not rely heavily upon either of these principles in reaching its decision to enforce the agreement. Instead, the appellate court held
that there was substantial performance of the prenuptial agreement, and since there was sufficient money in the decedent’s estate to cure the breach, the breach did not warrant rescission of the entire contract.

“In Dickson v. Wolin, 1934, 18 Ohio Law Abst. 107, on page 108, the Court of Appeals of Summit County states:”

‘It is an elementary rule of contracts that upon a material breach of a contract by one party thereto, the other contracting party may, at his option, elect to rescind the contract, or continue it in force and sue for damages for the breach.’

“The court further states on pages 108 and 109:”

‘In other words, the conduct of the parties, as shown by the evidence, was such that, in our opinion, a mutual abandonment of the contract may be properly implied.

‘The general rule is that, in the absence of fraud or mistake, one of the parties to a contract cannot rescind or withdraw from its performance without the consent of the other party; but where one party’s failure to perform is of such a nature as to clearly indicate an intention not to further be bound by the contract and to justify the inference that he repudiates or abandons it, such defaulter is presumed to consent to the termination of the contract if the other party so elects, and in that event such other party may maintain an action in equity to rescind the contract.’

“In other words, not every breach of a contract warrants rescission and such is the rule in this country.”

“In 12 Am.Jur., Contracts, Section 440, page 1020, it is stated:”

‘It is not every breach of a contract or failure exactly to perform-certainly not every partial failure to perform-that entitles the other party to rescind. A breach which goes to only a part of the consideration, is incidental and subordinate to the main purpose of the contract, and may be compensated in damages does not warrant a rescission of the contract; the injured party is still bound to perform his part of the agreement, and his only remedy for the breach consists of the damages he has suffered therefrom.’

“In 12 Am.Jur., Contracts, Section 343, page 901, it is stated:”

‘Ordinarily, however, not every breach of a contract will authorize the other party to abandon the contract and to refuse further performance. Ordinarily, the right to claim a discharge of the whole contract depends, not on whether the act constituting the breach was inconsistent with the terms of the contract, but upon whether it was inconsistent with an intention to be further bound by its terms or upon whether the breach was such as to defeat the purpose of the contract. The circumstances attending a breach of contract, the intention with which it was committed, and its effect upon the other party and upon the general object sought to be accomplished by the contract must be considered in determining whether or not the breach will operate as a discharge.’

Doster v. Doster, 853 So.2d 147 (Miss.App.2003). Husband sought rescission of a prenuptial agreement when the parties divorced one year following their marriage. In their prenuptial agreement, Husband had promised to contribute the down payment toward the purchase of a new home, and Wife agreed to make the monthly mortgage loan payments. The agreement further provided that upon death or divorce, the home would be sold, and Wife would receive the first $25,000 of the sales proceeds. After the parties’ separation, Husband argued that Wife had breached her promise to make the mortgage loan payments and had fraudulently induced him to promise her the first $25,000 of sales proceeds by misrepresenting to him that her former husband’s retirement survivor benefit would be terminated as a result of their marriage. The trial court noted that Wife had stopped paying the mortgage loan after separation when she lost her job. The trial court refused to rescind the premarital agreement, awarding the wife her $25,000 from the sales proceeds but deducting $8,600 in mortgage loan payments that she had failed to make after losing her job. The appellate court affirmed.

“The termination of a contract is an ‘extreme’ remedy that should be ‘sparsely granted’…. Termination is permitted only for a material breach. A breach is material when there ‘is a failure to perform a substantial part of the contract or one or more of its essential terms or conditions, or if there is such a breach as substantially defeats its purpose,’ or when ‘the breach of the contract is such that upon a reasonable construction of the contract, it is shown that the parties considered the breach as vital to the existence of the contract….’”

UHS-Qualicare, Inc. v. Gulf Coast Cmty. Hosp., Inc., 525 So.2d 746, 756 (Miss.1987) (citations omitted).