A landmark case: wealthy spouses and prenups

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May 18, 2010

A model for breaking up

By Jane Croft

The UK’s Supreme Court is set to rule shortly on a landmark case that could have far-reaching consequences for wealthy individuals seeking to avoid big-money divorce settlements. The court will decide whether to uphold a prenuptial agreement signed by Katrin Radmacher, a German paper industry heiress worth more than £100m, which is being challenged by her ex-husband Nicolas Granatino, a former investment banker.

The couple married in late 1998 and had signed a prenuptial agreement four months earlier. According to Ms Radmacher, she was worried that she could be targeted for her wealth and would not have married without a prenuptial agreement. Mr Granatino, meanwhile, admits that he willingly entered into the deal but claims he did not know the extent of his wife’s wealth and did not receive independent legal advice.

The case is also being watched closely because it could have far-reaching consequences for the legal industry. Since 2000, when the case of White v White made it clear that the starting point for any divorce should be an equal split of assets, London has gained a reputation as the “divorce capital of the world”, with the spouses of wealthy individuals choosing the city as the jurisdiction in which to fight their legal battles.

The Radmacher v Granatino case, however, is being seen as a test of whether prenuptial agreements are enforceable in English law. Such agreements, which specify the division of real estate and personal property such as family heirlooms, are not legally binding in England and Wales unlike in the US or in most European countries. But a number of recent court rulings have signalled that English courts could be prepared to give some weight to them.

According to many family lawyers, this, in turn, has meant the wealthy are now increasingly signing prenuptial agreements. Pauline Fowler, a lawyer at family law firm Hughes Fowler Carruthers says: “There have been some prenuptial agreements for many years, but over the past few years there really has been a groundswell of interest from people, including people entering second marriages or where the desire for a prenup comes from a parent or grandparent wanting to protect their family assets.”

But the industry is not only having to deal with changes to the legal framework behind divorce law. The uncertainty has been muddied further in the past two years by the fallout from the credit crisis. Family lawyers say they have seen a big increase in the number of City of London executives flocking to the courts arguing that their wealth has been hit by the downturn and so they need to renegotiate – or cannot afford – a big divorce settlement.

In one high-profile case, Scot Young, a property entrepreneur, has been locked in court battles with his ex-wife Michelle for the past three years over what has happened to his reputed £400m fortune as the couple attempt to reach a divorce settlement. Mr Young, who was declared bankrupt last month, has always maintained he lost his money in the credit crisis but his wife claimed she had evidence he was still worth millions.

At the same time, lawyers say they are seeing a substantial increase in applications of so-called “varying maintenance orders”, whereby mostly wealthy businessmen – hit by a fall in shares and property values – are asking the court to reduce the levels of annual maintenance that must be paid to former spouses.

Camilla Baldwin, who runs the eponymously named specialist family law firm, says she has seen a 40 per cent rise in applications to vary maintenance orders, mostly by City earners who have lost their jobs or bonus payments.

With so much at stake in big-money divorce cases, it is perhaps not surprising that there is often suspicion that some husbands are “hiding” their wealth so it cannot be included in any divorce settlement.

In these situations, divorce lawyers are turning to a small circle of specialist forensic accountants who can value a couple’s wealth and investigate allegations of non-disclosure. This can include tracing assets through a web of offshore locations to work out whether someone is underplaying their own net worth to win a cheaper settlement.

Most firms have not brought forensic accountants in-house, partly because they view the process as more independent if the service is provided by an external company.

Steven Philippsohn, a senior partner of international asset recovery lawyers PCB Litigation and chairman of the Commercial Fraud Lawyers Association, says that since the White v White settlement there has been a greater motivation for husbands getting divorced to hide assets from their spouses. “The trend is upwards as we are getting larger and larger divorce settlements and there is more and more incentive to hide the assets and income,” he says.

Nick White, a specialist in forensic accountancy and a partner at Stowe Family Law, dealt with the case of a woman considering a divorce who suspected her husband had one or two bank accounts that she did not know about.

The wife was friendly with her husband’s secretary, who tipped her off about various bank accounts he had in the Channel Islands and about a trust he had set up in Bermuda without her knowledge. The husband had declared his assets were worth £100,000, but the firm established he had assets worth millions.

Mr White says: “The situation we have, really, is the wife is kept in the dark and does not know about the husband’s day-to-day business and is happy to live the lifestyle and no questions are asked about where the money comes from. You can evaluate and appraise this disclosure. The husband is often very secretive and so you start to dig and find things are not what they seem and don’t stack up. It all builds from that point.”

Jeremy Posnansky QC, a partner specialising in family law at Farrer & Co, says entrepreneurs sometimes try to reduce the profits and stock held by their business ahead of a divorce settlement. “I was involved in one case where the husband had a manufacturing business,” he says. “He was getting divorced at about the same time as the annual stock-taking took place, which would have an influence on the figures for the business. He decided to move a large amount of stock out of his factory and he put it in his best friend’s storage facility. However, he didn’t know that his wife was having an affair with his best friend. As is often the case, he got caught – but perhaps in a pretty unusual way.”

Other forensic accountants say such extreme examples are the exception rather than the rule. Jeffrey Nedas, one of a select group of forensic accountants who specialises in matrimonial cases, says about 85 per cent of his work relates to the value, divisibility and liquidity of assets and income streams rather than tracking down supposedly hidden assets.

It is against this complex legal backdrop that family law experts hope the Supreme Court will bring some clarity to the muddled state of English family law with its ruling on Ms Radmacher’s prenuptial agreement. The Law Commission, which advises the government on legal reforms, is also looking at prenuptial agreements.

But until the legal situation is clarified this will not be the last time the Supreme Court will be called on to determine the divorce settlements of wealthy couples. And for an industry keen on greater clarity to enable it to advise its clients more effectively, that means continuing to work through an uncertain strategic framework.

How the law forced the industry to adapt

Prenuptial agreements

The challenges . . .

Such agreements, which specify the division of real estate and personal property such as family heirlooms, are not legally binding in England and Wales, unlike in the US or most European countries Some wealthy executives have claimed that the level of their wealth has plunged, in terms of the value of their assets and the size of their bonuses

In some cases, wealthy spouses try to ‘hide’ their wealth, so it cannot be included in any divorce settlement

. . . and how the law – and legal industry – is evolving

The case between German heiress Katrin Radmacher and her ex-husband Nicolas Granatino is being seen as a test of whether prenuptial agreements could become enforceable in England and Wales An increase in applications of so-called varying maintenance orders, with spouses asking the courts to reduce the levels of annual maintenance they must pay. In some cases, the spouse has declared bankruptcy Law firms are turning to specialist forensic accountants to value a couple’s wealth and to investigate allegations of non-disclosure. Most firms use an external supplier because it is seen as more independent

Credit crunch

The challenges . . .

Some wealthy executives have claimed that the level of their wealth has plunged, in terms of the value of their assets and the size of their bonuses

. . . and how the law – and legal industry – is evolving

An increase in applications of so called varying maintenance orders, with spouses asking the courts to reduce the levels of annual maintenance they must pay. In some cases, the spouse has declared bankruptcy

Hidden assets

The challenges . . .

In some cases, wealthy spouses try to ‘hide’ their wealth, so it cannot be included in any divorce settlement

. . . and how the law – and legal industry – is evolving

Law firms are turning to specialist forensic accountants to value a couple’s wealth and to investigate allegations of nondisclosure.

Most firms use an external supplier because it is seen as more independent

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