Sowards v. Sowards, No.CV-22-0065-PR (August 17, 2023) (J. Montgomery) https://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2023/CV220065PR.pdf

PI SETTLEMENT THAT DOES NOT ADDRESS DIVISION OF FUNDS NOR RIGHTS OF HUSBAND AND WIFE IN DISSOLUTION OF THEIR MARRIAGE NOT A VALID PROPERTY SETTLEMENT OR POST-NUPTIAL AGREEMENT/PRESUMPTION FUNDS ARE COMMUNITY PROPERTY

Husband had open heart surgery for the installation of a pacemaker he later learned was unnecessary. He and his wife settled their medical negligence case against the hospital and doctor.  A jury awarded them $2 million in compensatory damages and $60 million punitive damages against the pacemaker manufacturer. The trial court reduced the punitive award to $5.4 million. Thereafter, husband and wife each signed a settlement agreement with the manufacturer for $6.6 million that was made payable  “to the MCML Trust Account” and allocated $2,383,673 for Plaintiffs' personal injuries with $5.4 million of the settlement to fund a series of structured annuity payments payable to “Settling Plaintiffs.” The agreement further provided that certain if these annuity payments were to go to husband for life and upon his death to wife.

Later, wife filed for separation then dissolution of the marriage. The family law court found the settlement agreement rendered the annuity payments “out of the community property realm.”

Wife appealed arguing the punitive damage portion of the payments should have been included in the community property pool. The Arizona Court of Appeals affirmed the trial court finding the settlement agreement to be a binding post-nuptial agreement rendering all the annuity payments the separate property of the husband for life. Should wife live longer than husband, upon his death the payments became hers. Because the agreement specially provided that $2,383,673 of the settlement amount was to be for  “personal physical injuries” the court of appeals found this amount to be husband's separate property. The agreement made no specific allocation for wife's loss of consortium damages.

The Arizona Supreme Court reversed the trial court in part and remanded the case while affirming the court of appeals in part and reversing in part.

Because the settlement agreement did not address whether the funds were to be treated as separate or community property and did not purport to be a property settlement agreement, the agreement was not properly treated as a post-nuptial agreement.  Because the agreement specifies that $2,383,673 of the settlement amount is attributable to “personal physical injuries” and only husband experienced “personal injury” those funds are properly treated as his separate property.. That said, the absence of any language designating the remaining $4,216,327 of the settlement his separate property and the silence of the agreement on any allocation of funds for the wife's loss consortium claim, rendered the presumption these funds are community funds irrefutable. This finding is further supported by the fact husband and wife had the funds paid to a trust and deposited into a joint checking account.

Finally, to the extent the trial court on remand is unable to allocate annuity payments as husband, and/or wife's separate property or community property it should sustain the presumption the funds are community property and deem all the annuity payments to be community property.