The Houston 14th Court recently handed down a decision regarding the characterization of assets in a premarital agreement, distinguishing between a "bank" account and a "brokerage" account in determining the characterization of certain assets.  IMOMO McNelly, __SW3d__, No. 14-13-00281-CV,  (Tex. App.—Houston [14th Dist.], no pet. h.) (05/15/2014).

Prior to Husband and Wife’s marriage, Husband owned and operated a business. Husband and Wife executed a premarital agreement in July 2008. The premarital agreement provided that separate property funds and proceeds from the sale of separate property would remain separate property but also provided that those funds and proceeds “may be deposited into any bank account styled in their joint names” and that such monies “shall become and remain community property.” The parties married later that same month. In September 2008 Husband sold his interest in the business for $1.3 million and later deposited $100,000 of the sale proceeds into two joint bank accounts and the remaining $1.2 million two separate joint brokerage accounts. Wife filed for divorce in 2010. Following the trial, the trial court found that Husband’s owned andoperated his business prior to the marriage, making his interest in the business Husband’s separate property.However, the trial court concluded that Husband converted all $1.3 million in his separate property proceeds from the sale of his business into community property by depositing the proceeds into joint accounts and comingling the proceeds with community funds. Husband appealed, arguing that the trial court divested him of his separate property when it characterized the $1.2 million deposited into joint “brokerage” accounts as community property.

The Court held, under the plain language of the premarital agreement, the couple clearly intended that the fruits of the business, such as the earnings that might result from the sale of the business, should remain Husband’s separate property. Resolution of the issue therefore turned on the meaning of “bank” in the premarital agreement.

Dictionaries generally define “bank” as a financial establishment for the deposit, loan, exchange, or issue of money and for the transmission of funds. In contrast, “broker” is defined as an agent who acts as an intermediary or negotiator, especially between prospective buyers and sellers; a person employed to make bargains and contracts between other persons in matters of trade, commerce, or navigation. According to the Houston Court, these definitions illustrate that banks and brokers are distinguishable, particularly with respect to the scope of their respective services; banks tend to offer a broader spectrum of financial services than brokerage firms. Additionally,federal and state statutory definitions, including those under the U.S. Code Title 15 (Commerce and Trade), the Texas Finance Code, and the Texas Business and Commercial Code, illustrate that banks and brokerage firms generally fall under distinct statutory and regulatory regimes. Finally, federal case law suggests that mere overlap in the services provided by a nonbanking entity, such as a brokerage firm, with the services provided by a bank does not transform the nonbanking entity into a bank.

In this case, the premarital agreement stated that any separate-property funds deposited into joint “bank” accounts would become community property. The contested $1.2 million was deposited into joint “brokerage” accounts, not joint “bank” accounts. Therefore, that $1.2 million did not become community property. Accordingly, the trial court erred when, based on its erroneous interpretion premarital agreement, it characterized as community property the $1.2 million from the sale of Husband’s separate property business.

This is a significant opinion because most people do not distinguish between bank accounts and brokerage accounts as a practical matter.  Both types of accounts are for the purpose of holding money.  But, lawyers who are drafting a premarital agreement should be aware of the distinction between the two types of accounts and counsel clients in the application of the premarital agreement accordingly.