Barbara Sowards v. Tommy Sowards

IN THE

SUPREME COURT OF THE STATE OF ARIZONA
IN RE THE MATTER OF:

BARBARA SOWARDS,
Petitioner/Appellant,

v.

TOMMY SOWARDS,
Respondent/Appellee.

No. CV-22-0065-PR
Filed August 17, 2023

Appeal from the Superior Court in Maricopa County
The Honorable Suzanne Scheiner Marwil, Judge
No. FN2019-093369
REVERSED IN PART, REMANDED

Memorandum Decision of the Court of Appeals
Division One
No. 1 CA-CV 21-0098 FC
Filed Mar. 8, 2022
AFFIRMED IN PART, REVERSED IN PART

COUNSEL:

Stanley David Murray (argued), Attorney at Law, Scottsdale, Attorney for
Barbara Sowards

Steven H. Everts (argued), Udall Shumway PLC, Mesa, Attorneys for
Tommy Sowards
 BARBARA SOWARDS V. TOMMY SOWARDS
Opinion of the Court

JUSTICE MONTGOMERY authored the Opinion of the Court, in which
CHIEF JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER and
JUSTICES BOLICK, LOPEZ, BEENE, and KING joined.

JUSTICE MONTGOMERY, Opinion of the Court:

¶1 In this case we consider whether an injury settlement
agreement between a married couple and a third party constitutes a valid
and binding property settlement or postnuptial agreement. Because the
settlement agreement in this case only addresses the disposition of the
funds in question as between the third party and the husband and wife and
does not address any division of the funds nor any respective rights as
between the spouses, we hold that this settlement agreement is not a valid
property settlement or postnuptial agreement.

I. FACTUAL AND PROCEDURAL BACKGROUND

¶2 Tommy Sowards (“Husband”) had open heart surgery to
install a pacemaker. Barbara Sowards (“Wife”) subsequently learned that
the procedure was unnecessary. Consequently, Husband and Wife sued
the doctor, hospital, and the pacemaker manufacturer for medical
malpractice, claiming personal injury to Husband and loss of consortium
on Wife’s behalf. The couple also alleged injury to the marital estate.
They eventually entered into a confidential settlement with the doctor and
hospital for compensatory damages. After a trial, they were awarded $2
million in compensatory damages and $60 million in punitive damages
against the pacemaker manufacturer. The trial court reduced the punitive
damage award to $5.4 million.

¶3 Husband and Wife thereafter entered into a written
settlement agreement (the “Agreement”) with the pacemaker
manufacturer, which each signed. The Agreement provided for a lump
sum payment of $6.6 million that was made “to the MCML Trust Account”
(“trust account”) and specified that $2,383,673 was “attributable to personal
injuries alleged by the Plaintiffs.” The Agreement also required Husband
and Wife to use $5.4 million of the settlement to fund a series of “Non-
Qualified Periodic Payments” (“annuity payments”) payable to “Settling
Plaintiffs” per a detailed payment schedule.

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Opinion of the Court

¶4 With respect to the annuity payments, Paragraphs 2(a)–(d)
and (h) of the Agreement provided that certain payments “will be paid to
[Husband] for his lifetime.” In the event of his death, payments would
then be made to Wife and, in the event of her death, to certain beneficiaries.
Paragraphs 2(e)–(g) of the Agreement, though, provide that payments are
made payable to “Settling Plaintiffs.” The payments were all deposited
into a joint checking account.

¶5 Wife filed a petition for legal separation in 2019, which was
converted into a dissolution proceeding. After a trial, the court entered a
dissolution decree in December 2020. The court ruled that $2,383,673 of
the settlement amount was Husband’s sole and separate property and
found that the remainder of the settlement was for punitive damages.
Given that the language in the Agreement directed payments “to
[Husband] for his lifetime” and after his death “to [Wife] for her lifetime”
and then to designated beneficiaries, the court further found that the parties
had agreed to the allocation of the settlement funds. The court thus
concluded that the settlement agreement took the payments “out of the
community property realm.”

¶6 On appeal, Wife argued that the punitive damages portion of
the Agreement is a community asset that the trial court should have
equitably divided. The court of appeals disagreed and found that the
Agreement was a valid postnuptial agreement 1 and affirmed the trial
court’s interpretation, concluding that its “net effect . . . was to give
Husband the sole interest in the annuity payments during his life, with Wife
having a right to receive them only upon his death.”

¶7 We granted review to determine whether the court of appeals
erred in interpreting the Agreement as a binding property settlement or
postnuptial agreement. We have jurisdiction under article 6, section 5(3)
of the Arizona Constitution.

1 Husband did not raise this argument before the trial court. Thus, Wife
never had the opportunity to contest whether this was an accurate
characterization of the settlement agreement, let alone whether it satisfied
the requirements of a valid postnuptial agreement as set forth in In re
Harber’s Estate, 104 Ariz. 79, 88 (1969). See infra II.A.
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Opinion of the Court

II. DISCUSSION

¶8 Postnuptial agreements are a product of the right to contract.
See In re Harber's Estate, 104 Ariz. 79, 87 (1969) (acknowledging “that
married couples should not be deprived of the right by contract to divide
their property as they please, both presently and prospectively, assuming
the contract is voluntary, free from fraud and is fair and equitable”); 5
Williston on Contracts § 11:7 (4th ed.) (discussing fact “that a husband and
wife . . . may contract between themselves to settle and adjust all their
property rights which have arisen out of the marital relationship”). We
thus review issues regarding interpretation of a postnuptial agreement de
novo. Andrews v. Blake, 205 Ariz. 236, 240 ¶ 12 (2003) (stating that
“[b]ecause interpretation of . . . contracts involves questions of law,
we . . . review de novo any issues relating thereto”).

¶9 Husband argues that the Agreement is a valid and binding
postnuptial agreement because it was not made incident to a contemplated
separation or divorce, it covered less than all of the property of the parties,
it was drafted by an independent financial advisor, and the parties
allegedly acknowledged in the Agreement that all payments were to be
made to Husband only. He contends that Wife’s only interest in the
annuity is contingent upon his death.

¶10 Wife argues that the Agreement is not a postnuptial
agreement because neither party testified that it was intended as an
agreement for distribution of a community asset and Husband admitted in
his briefing before the court of appeals that the Agreement was not a
property settlement agreement between Husband and Wife.
Additionally, she claims the Agreement is not a binding postnuptial
agreement because it does not state that the annuity payments are
Husband’s sole and separate property and no language within the
Agreement disclaims her interest in the community property. She alleges
that the Agreement’s annuity payments “constituted non-probate transfers
that terminated by operation of law upon dissolution of their marriage”
under A.R.S. § 14-2804.2

2 Our resolution does not require us to address § 14-2804.
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 BARBARA SOWARDS V. TOMMY SOWARDS
Opinion of the Court

A. Postnuptial Agreements

¶11 To determine whether Husband and Wife intended the
Agreement to function as a postnuptial agreement, we examine its
language and consider its terms in the overall context of the Agreement.
Apollo Educ. Grp., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 250 Ariz. 408,
411 ¶ 11 (2021). Furthermore, we give that language its “plain and
ordinary meaning.” Teufel v. Am. Fam. Mut. Ins. Co., 244 Ariz. 383, 385 ¶ 10
(2018).

¶12 As Husband notes, spouses may enter into a postnuptial
agreement absent contemplation of separation or divorce. Harber, 104
Ariz. at 88; see also Austin, 237 Ariz. at 206–07 ¶ 14 (“A postnuptial
agreement is defined as ‘[a]n agreement entered into during marriage to
define each spouse’s property rights in the event of death or divorce.’”
(alteration in original) (emphasis added) (quoting Postnuptial Agreement,
Black’s Law Dictionary (10th ed. 2014))). Any such agreement must have
been entered into “with full knowledge of the property involved and [the]
rights therein.” Harber, 104 Ariz. at 88.

¶13 No party argues that the Agreement is not a valid contract.
But the contract is between Husband and Wife as a couple and the settling
defendants in a personal injury lawsuit. Nowhere does the Agreement
state that Husband and Wife have agreed to distribute their property
between each other in a particular way. Although the annuity payment
schedule conditions payments to Wife on Husband’s death, the Agreement
states, “Settling Plaintiffs hereby acknowledge and understand that Settling
Plaintiffs will receive Non-Qualified Periodic Payments payable as follows.”
(Emphasis added.) This language indicates that Husband and Wife, as the
settling plaintiffs, are to receive the payments under a schedule that simply
lays out how the payments are to be made. The Agreement never
delineates Husband and Wife as individuals for purposes of an express
agreement between the two of them and nowhere provides that the
payments are the sole and separate property of Husband or that Wife has
no interest in any of the payments.

¶14 Although we have not required specific language to create a
valid postnuptial agreement, the agreement must clearly express the

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Opinion of the Court

spouses’ intent to divide and delineate their separate property interests.
For example, Harber illustrates the explicit division of property:

And, Whereas the parties hereto 3 have mutually agreed
while in health and strength, to divide their property, each
releasing to the other his or her separate estate so that each
party may deal with his or her separate estate as they desire.

104 Ariz. at 80. The language clearly expresses a mutual intent to
“release” each spouse’s interest in the other’s property and render it
separate. The parties in Harber also used explicit language setting forth
the rights attendant to the separate property:

Each of the parties hereto agrees that the property set over
herein to the party of the second part, is to be and constitute
her [separate] property and is hereby accepted by her as her
just and equitable division of all the properties owned at this
time by the parties hereto, with full power and authority on
her part to sell, give away, dispose of by gift, conveyance or
will, any and all of the said property to whomsoever she may,
without the knowledge or consent on the part of the other
party hereto.

Id. at 81.

¶15 In stark contrast to Harber, the Agreement here contains no
language setting forth any terms or conditions that reflect an intent to
allocate the settlement monies as between Husband and Wife. Nor does
any provision support the inference that Husband and Wife contemplated
making any agreement between each other. Thus, we find that the
Agreement is not a valid postnuptial agreement and the court of appeals
erred in concluding otherwise.

B. Division Of Remaining Property

¶16 Because the Agreement is not a valid postnuptial agreement,

3 “[T]he parties hereto” are the husband and wife expressly named at the
beginning of the document. Harber, 104 Ariz. at 80.
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 BARBARA SOWARDS V. TOMMY SOWARDS
Opinion of the Court

we must consider how the settlement monies should be distributed.
Generally, “[p]roperty acquired by either spouse during marriage is
presumed to be community property.” Cockrill v. Cockrill, 124 Ariz. 50, 52
(1979); see A.R.S. § 25-211(A) “[T]he spouse seeking to overcome the
presumption has the burden of establishing the separate character of the
property by clear and convincing evidence.” Cockrill, 124 Ariz. at 52.

¶17 Husband has overcome the presumption that a significant
part of the settlement is community property. The Agreement states that
$2,383,673 of the settlement amount is attributable to “personal physical
injuries.” The only personal injuries of record are Husband’s. Therefore,
as Wife concedes, this sum is Husband’s sole and separate property. See
Jurek v. Jurek, 124 Ariz. 596, 598 (1980).

¶18 But Husband has not overcome the presumption that the
remaining $4,216,327 is community property. He claims that all of the
Agreement’s scheduled annuity payments were for punitive damages that
are his sole and separate property. But the Agreement does not support
Husband’s claim.

¶19 The only payment in the Agreement with a specified purpose
is in paragraph one, which states that $2,383,673 is “not for economic
damages or for punitive damages.” This necessarily leads to the
conclusion that the remaining amount is for punitive and economic
damages. Yet, the Agreement fails to apportion any amount for Wife’s
separate loss of consortium claim, the community’s loss of wages and
medical expenses, or for punitive damages. Additionally, Husband has
not provided, beyond a general reference to the Agreement, a credible
method for allocating the punitive damages award between the $5.4 million
used for the annuity payments and the remaining $1.2 million. 4

¶20 The fact that the Agreement makes Husband the payee is
insufficient by itself to establish that the annuity payments are his sole and
separate property. See Carroll v. Lee, 148 Ariz. 10, 16 (1986) (“The
presumption [of community property] applies to property acquired during
marriage even though title is taken in the name of only one spouse.”);

4 In fact, the record is silent as to what happened with $1.2 million of the
$6.6 million settlement payment.
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 BARBARA SOWARDS V. TOMMY SOWARDS
Opinion of the Court

O’Hair v. O’Hair, 109 Ariz. 236, 238 (1973) (explaining the “intention of the
depositor” is controlling when determining whether funds are sole and
separate property of a particular spouse); McNabb v. Fisher, 38 Ariz. 288, 295
(1931) (accord); Neely v. Neely, 115 Ariz. 47, 51 (App. 1977) (to same effect).
Instead, the facts that: (1) Wife signed the Agreement; (2) annuity payments
were made into a joint checking account; and (3) the Agreement bound
Husband’s use of the funds all serve to cast doubt on the argument that the
annuity payments are Husband’s sole and separate property. Finally, any
compensatory damages awarded for loss of wages and medical costs
incurred by the marital community are community property. Jurek, 124
Ariz. at 598.

¶21 Consequently, on the record before us, Husband has not
overcome the presumption that the remaining $4,216,327 paid into the trust
account was community property, nor has he shown that the community
disclaimed an interest in the amount or that Wife gifted her interest. To
the contrary, the record suggests that Husband and Wife treated the money
as community property by initially depositing the lump sum into a trust
account and then depositing distributions from the annuity the couple
purchased into a joint checking account.

¶22 On remand, if the trial court is unable to determine whether
it can allocate the annuity amount that is attributable to Husband’s sole and
separate property, Wife’s sole and separate property, and community
property, it should deem all of the annuity payments community property
and proceed accordingly. See Morris v. Morris, 685 So. 2d 673, 676 (La. Ct.
App. 1996) (discussing the fact that although “an award of damages can be
classified as both community and separate property . . . without sufficient
evidence to permit an equitable apportionment of the damages . . . the court
is unable to adequately do so”); Moreno v. Alejandro, 775 S.W.2d 735, 737–38
(Tex. Ct. App. 1989) (finding trial court erred in granting summary
judgment where portions of a recovery on an injured spouse’s claim for
personal injuries could have been community property, and the injured
husband had failed to prove which portions were his separate property).

III. CONCLUSION

¶23 For the foregoing reasons, we vacate the second sentence of
paragraph one and vacate paragraphs six through ten of the court of

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 BARBARA SOWARDS V. TOMMY SOWARDS
Opinion of the Court

appeals’ memorandum decision, and we reverse the trial court’s
determination that the annuity payments are not community property
based on the settlement agreement and remand to the trial court. We
decline both parties’ requests for attorney fees under A.R.S. § 25-324.

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