Florida Probate & Trust Litigation Blog

Florida Probate & Trust Litigation Blog

By Juan C. Antúnez of Stokes McMillan Antúnez P.A.

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Fla.S.Ct: DIY estate planning + technical execution defects = partial intestacy contrary to grantor’s “true” intent. Should we adopt the Uniform Probate Code’s “harmless error” rule for technical execution defects?

Posted in Will and Trust Contests

Aldrich v. Basile, — So.3d —-, 2014 WL 1240073 (Fla. March 27, 2014)

“Unfortunately, I surmise that, although this is the correct result under Florida’s probate law, this result does not effectuate Ms. Aldrich’s true intent. . . . Ms. Aldrich’s true intent was to pass all of her “worldly possessions” to her brother, James Michael Aldrich.” Justice Barbara Pariente (concurring opinion).

If you make your living drafting wills or enforcing them in court, here’s what this case should NOT be about for you: inflicting post-mortem punishment on a woman for engaging in DIY estate planning (which was the slant reflected in this short ABA piece reporting on the case). Instead, what this case is really about is how strict compliance with Florida’s execution formalities for wills and codicils, which are meant to be intent-serving devices, ironically produced intent-defeating results.

Part 1: Ms. Aldrich’s 2004 will:

This story has two acts, only one of which was addressed in the 1st DCA’s underlying decision (which I wrote about here). Part 1 involves an “E-Z Legal Form” the testatrix, Ms. Aldrich, wrote her will on in April 2004. Under that will Ms. Aldrich listed all of the assets she owned at the time and stated she wanted those assets to go to her sister Mary Jane Eaton, if she survived here, otherwise to her brother James Michael Aldrich. Ms. Aldrich’s will didn’t contain a residuary clause, nor did she otherwise provide for who should receive any after-acquired assets. If nothing had changed in the five years between 2004 (the year Ms. Aldrich signed her will) and 2009 (the year she died) all would have been well. But the facts did change. Her sister predeceased her, leaving new assets (cash and land) to Ms. Aldrich.

Ms. Eaton did die before Ann, becoming her benefactor instead of her beneficiary. Ms. Eaton left cash and land in Putnam County to Ms. Aldrich, who deposited the cash she inherited from Ms. Eaton in an account she opened for the purpose with Fidelity Investments.

Since Ms. Aldrich’s 2004 will didn’t address who was to receive this after-acquired property and her form will didn’t contain a residuary clause, she was deemed to have died partially intestate by the 1st DCA (see here), a conclusion upheld by the Fla. S.Ct. in this opinion for very practical reasons: if your will doesn’t tell us what to do with all of your stuff when you die, we don’t ask our probate judges to fill this gap on a case-by-case basis, instead we apply the one-size-fits-all distribution scheme found in our intestacy statutes:

There must be a clause in a will that alludes to the after-acquired property in order to avoid distribution of that property through the intestacy statute. Although Mr. Aldrich was the sole devisee under the will, without a residuary clause or general devises, only the property specifically referenced passes to him under the will. Further, if a testator does not allude to after-acquired property in any way, a court would have difficulty deciding how to divide the after-acquired property between multiple beneficiaries. In that instance, the court would be required to equitably distribute the testator’s property. This is a task that has been reserved for the Legislature and has been accomplished through the intestacy statute. See §§ 732.102, 732.103, Fla. Stat.

Also, according to the Fla. S.Ct., if we limit ourselves only to the four corners of Ms. Aldrich’s 2004 will, one could reasonably conclude her intent was to NOT pass her after-acquired property to her brother.

Further, section 732.6005(2) states that “[t]he rules of construction expressed in this part shall apply unless a contrary intention is indicated by the will.” § 732.6005(2), Fla. Stat. (emphasis added). The will in the instant case does in fact indicate a contrary intention to that proposed by Mr. Aldrich. The testator’s will specifically devised all possessions “listed,” to Mr. Aldrich. Therefore, it is clear that the testator did not intend for any property not listed to be distributed by the will.

Bottom line: if we limit ourselves to the four corners of Ms. Aldrich’s 2004 will, the outcome of this case is perhaps unfortunate, and great advertising for why DIY estate planning can be a problem, but not particularly troubling. Here’s and excerpt from Justice Pariente’s concurring opinion on the dangers of using store-bought form wills:

While I appreciate that there are many individuals in this state who might have difficulty affording a lawyer, this case does remind me of the old adage “penny-wise and pound-foolish.” Obviously, the cost of drafting a will through the use of a pre-printed form is likely substantially lower than the cost of hiring a knowledgeable lawyer. However, as illustrated by this case, the ultimate cost of utilizing such a form to draft one’s will has the potential to far surpass the cost of hiring a lawyer at the outset. In a case such as this, which involved a substantial sum of money, the time, effort, and expense of extensive litigation undertaken in order to prove a testator’s true intent after the testator’s death can necessitate the expenditure of much more substantial amounts in attorney’s fees than was avoided during the testator’s life by the use of a pre-printed form.

Part 2: Ms. Aldrich’s 2008 codicil:

But there’s more to this story than Ms. Aldrich’s 2004 will. After her sister died in 2007 Ms. Aldrich hand wrote a note (which was in effect a codicil to her will) making clear her “true” intent was to leave all of her estate, including the after-acquired assets she inherited from her sister, to her one surviving brother, James Aldrich. This is part 2 of the story, and for me it changes everything. Here are the key facts as stated by the court:

Ms. Aldrich’s sister, Ms. Eaton, died on November 10, 2007. Administration of Ms. Eaton’s estate was concluded and an Order of Discharge was entered on July 23, 2008, leaving Ann Aldrich personal and real property. Two days later, Ann Aldrich opened an investment account to deposit the inherited money. Evidence in the record suggests that, later that year, Ms. Aldrich attempted to draft a codicil to her original will. Along with the original will was a piece of paper bearing the printed title “Just a Note” and dated November 18, 2008, below Ms. Aldrich’s handwriting and signature. The handwritten note read as follows:

This is an addendum to my will dated April 5, 2004. Since my sister Mary jean Eaton has passed away, I reiterate that all my worldly possessions pass to my brother James Michael Aldrich, 2250 S. Palmetto, S. Daytona FL 32119.

With her agreement I name Sheila Aldrich Schuh, my niece, as my personal representative, and have assigned certain bank accounts to her to be transferred on my death for her use as she seems [sic] fit.

The note/codicil was signed by Ms. Aldrich and one witness, her niece. So what’s the problem? The note fell short of the two-witness requirement needed for a validly executed codicil, which means it’s legally unenforceable.

Although Ms. Aldrich signed the “addendum,” the signature of Sheila Schuh, Mr. Aldrich’s daughter, was the only other signature that appeared on the face of the document; therefore, the document was not an enforceable testamentary instrument under the Florida Probate Code. See §§ 732.502(1)(b) Fla. Stat. (2004) (requiring signature of the testator along with two attesting witnesses); 732.502(5), Fla. Stat. (2004) (codicil must be executed with the same formalities as a will).

Clearly, Ms. Aldrich’s true intent, as reflected in her 2008 codicil, was to pass all of her “worldly possessions” to her brother, James Aldrich. As observed by Justice Pariente in her concurring opinion:

Unfortunately, I surmise that, although this is the correct result under Florida’s probate law, this result does not effectuate Ms. Aldrich’s true intent. While we are unable to legally consider Ms. Aldrich’s unenforceable handwritten note that was found attached to her previously drafted will, this note clearly demonstrates that Ms. Aldrich’s true intent was to pass all of her “worldly possessions” to her brother, James Michael Aldrich.

If Florida’s strict-compliance approach to will/codicil execution formalities is blocking our courts from effectuating what appears to be Ms. Aldrich’s “true” intent, then maybe her DIY estate planning isn’t the problem here, maybe it’s Florida law that needs fixing.

Could Florida’s new will-reformation statute save the day? NO

In recent years there’s been a movement in many American states away from the all-or-nothing formalism that produces the kind of intent-defeating results we see in the Aldrich case. This movement’s been crystallized in two Uniform Probate Code provisions, the first, UPC § 2-805, loosens the rules for when drafting errors in wills can be corrected (or “reformed”), and the second, UPC § 2-503, codifies the “harmless error” rule for technical execution defects. As I reported here, in 2011 Florida adopted its version of UPC  § 2-805 (F.S. 732.615). This is a good first step, but it’s not a cure all, and it’s probably not the right tool for the Aldrich estate.

As noted in the Florida Bar’s amicus brief, our new will-reformation statute’s meant to correct drafting mistakes that occur at the time the will is signed, not rewrite wills that no longer reflect a person’s testamentary intent based on after-the-fact changed circumstances, which is what happened in the Aldrich case (i.e., her will was fine in 2004, it stopped being fine after-the-fact when sister died in 2007). According to the amicus brief:

In 2011, the legislature created section 732.615, Florida Statutes, which allows a court to reform mistakes made by a testator in his or her will even if the mistake does not appear on the face of the will. . . . [However,] this law does not permit the speculative inclusion of words and intent. See Morey v. Everbank, 2012 WL 3000608, 7 (Fla. 1st DCA July 24, 2012) (interpreting equivalent reformation statute for trusts and holding reformation cannot be used to adjust to changed circumstances or after-thoughts of a settlor).

In the Morey case, which I wrote about here, the 1st DCA expanded on this point as follows:

Reformation is not available to modify the terms of a trust to effectuate what the settlor would have done differently had the settlor foreseen a change of circumstances that occurred after the instruments were executed. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers. at cmt. h (2003) (Reformation is not “available to modify a document in order to give effect to the donor’s post-execution change of mind … or to compensate for other changes in circumstances.”).

So if F.S. 732.615 isn’t the answer, what is? Think: “harmless error” rule.

Harmless error rule:

Florida’s already taken the first important step away from intent-defeating, all-or-nothing formalism by adopting its version of UPC  § 2-805 (F.S. 732.615). Maybe it’s time we took the next logical step and adopted UPC  § 2-503, the UPC’s harmless error rule as well. Under the harmless error rule a noncomplying will is treated as if it had been executed in compliance with the statutory formalities, if the proponent establishes by clear and convincing evidence that the decedent intended the document as his or her will. If this rule were in place today, Ms. Aldrich’s “true” intent, as reflected in her 2008 codicil, would have likely prevailed. UPC  § 2-503 provides as follows:

Although a document or writing added upon a document was not executed in compliance with Section 2-502, the document or writing is treated as if it had been executed in compliance with that section if the proponent of the document or writing establishes by clear and convincing evidence that the decedent intended the document or writing to constitute:

(1) the decedent’s will,

(2) a partial or complete revocation of the will,

(3) an addition to or an alteration of the will, or

(4) a partial or complete revival of his [or her] formerly revoked will or of a formerly revoked portion of the will.

Professors John H. Langbein (Yale) and Lawrence W. Waggoner (Michigan) report in Curing Execution Errors and Mistaken Terms In Wills that the UPC’s harmless error rule for technical execution defects has already been adopted in 8 states (Colorado, Hawaii, Michigan, Montana, New Jersey, South Dakota, Utah, and Virginia).

Harmless error rule = less litigation:

But wouldn’t this kind of rule open the door to more estate litigation? According to Langbien and Waggoner, evidence from jurisdictions that have adopted the rule indicates otherwise, it actually leads to less litigation, not more.

[T]he harmless-error rule actually prevents a great deal of unnecessary litigation, because it eliminates disputes about technical lapses and limits the zone of dispute to the functional question of whether the instrument correctly expresses the testator’s intent. Persons who under the strict-compliance rule would have benefitted from proving an intent-defeating technical defect now lose the incentive to do so under the new rule, because under the harmless-error standard the court will validate the will anyhow.

Below is the abstract for Curing Execution Errors and Mistaken Terms In Wills, in which Langbien and Waggoner sum up the current state of affairs on this front and encourage working probate attorneys to run with these ideas, even in jurisdictions — like Florida — that have yet to legislatively adopt both legs of the UPC’s reform agenda (i.e., in the absence of UPC-type legislation, look to authority/ideas contained in the new Restatement of Property).

Recent years have seen a remarkable change emerge in the way American courts treat cases involving errors in the execution or the content of wills. The courts have traditionally applied a rule of strict compliance and held the will invalid when some innocuous blunder occurred in complying with the Wills Act formalities, such as when one attesting witness went to the washroom before the other had finished signing. Likewise, the courts have traditionally applied a no-reformation rule in cases of mistaken terms, for example, when the typist dropped a paragraph from the will or the drafter misrendered names or other attributes of a devise; the court would not correct the will no matter how conclusively the mistake was shown.

Leading modern authority in a number of American states has now reversed the strict compliance and no-reformation rules. Both by judicial decision and by legislation, the courts have been empowered to excuse harmless execution errors and to reform mistaken terms. Section 2-503 of the Uniform Probate Code treats a noncomplying will as if it had been executed in compliance with the statutory formalities, if the proponent establishes by clear and convincing evidence that the decedent intended the document as his or her will. The new Restatement of Property endorses the harmless-error rule.

The new Restatement authorizes courts to reform mistaken terms in a will. The new Restatement’s reformation provision, which has now been codified in § 2-805 of the Uniform Probate Code and § 415 of the Uniform Trust Code, provides that a court may reform any donative document, including a will, “to conform the text to the donor’s intention if it is established by clear and convincing evidence (1) that a mistake of fact or law, whether in expression or inducement, affected specific terms of the document; and (2) what the donor’s intention was.”

The provisions of the new Restatement and the Uniform Probate Code endorsing the harmless-error and reformation rules for American law bring new opportunities and responsibilities for probate lawyers. The older conventions of the strict-compliance rule and the no-reformation rule are now open to challenge everywhere. Lawyers processing probate matters need to be alert to the opportunity they now have to raise issues that used to be foreclosed. Sad cases of defeated intent that used to be beyond hope may now be remediable. Innocuous formal defects can be excused, and mistaken terms can be reformed, but only if counsel sees the issue and brings it forward and, in jurisdictions that have not codified the new rules, if the court is hospitable to them.

Lesson learned?

Florida’s always been at the forefront when it comes to inheritance law, and that includes the trend away from intent-defeating formalism. Step one was the 2011 passage of F.S. 732.615, Florida’s new will-reformation statute. Sad cases of defeated intent caused by obvious drafting errors that used to be beyond hope may now be remedied. That was a good beginning, but it’s not a cure all. Whether a person’s testamentary intent is carried out shouldn’t turn on innocuous execution defects and the type of “gotcha” litigation it spawns. We’ve gone half way, now we need to take the next logical step and adopt the UPC’s harmless error rule.

Texas Supreme Court weighs in on enforceability of mandatory arbitration provisions in trust agreements; votes YES

Posted in Other Articles

In Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013), the Texas Supreme Court upheld a trust’s mandatory arbitration clause. What’s most interesting about this case is that the court upheld the arbitration clause on testamentary-intent grounds — in the absence of a specific authorizing statute. The key here is to think “conditional” gift. By accepting a share of the estate, the beneficiaries also accept the strings attached to that gift, including the mandatory arbitration clause.

Readers of this blog know I’m a big fan of mandatory arbitration clauses in wills and trusts, which are expressly authorized by statute in Florida (see here). Mandatory arbitration is often good for everyone involved in an estate dispute. Grantors are assured that their private lives remain out of the courts and therefore free from public exposure. Fiduciaries can protect estate and trust assets, while limiting their liability, thus reducing the overall cost of administration. Beneficiaries can avoid the emotional damage and cost of protracted litigation. And the public doesn’t have to fund a legal process in which the wealthy battle over their inheritances.

Which is why an article recently published by John T. Brooks and Jena L. Levin of Foley & Lardner in Chicago caught my eye. Entitled Enforceability of Mandatory Arbitration Provisions in Trust Agreements, the article does a good job of summarizing Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013), a recent Texas Supreme Court decision upholding a mandatory arbitration clause in a trust. What’s most interesting about this case is that the court upheld the arbitration clause on testamentary-intent grounds — in the absence of a specific authorizing statute.

Even though we have a specific authorizing statute in Florida (F.S. 731.401), the Texas opinion is helpful for Florida lawyers because it points the way towards universal enforceability of arbitration clauses — even if challenged in a jurisdiction (like Texas) that has NOT adopted specifically authorizing legislation. The key here is to think “conditional” gift. By accepting a share of the estate, the beneficiaries also accept the strings attached to that gift, including the mandatory arbitration clause. Here’s an excerpt from Enforceability of Mandatory Arbitration Provisions in Trust Agreements:

In a unanimous opinion, the Texas Supreme Court reversed the appellate court and concluded that the arbitration clause was enforceable against John for two reasons. First, as the settlor, John’s father determined the conditions attached to his gifts, and the father’s intent in this case was to arbitrate any disputes over the trust. Second, the Texas Arbitration Act requires enforcement of written agreements to arbitrate. Although such an agreement requires mutual assent and a party typically manifests his assent by signing an agreement, the Rachal court recognized that assent may be proven by the beneficiary’s acceptance of the benefits of the trust and/or his suit to enforce the terms of the trust. Applying the doctrine of direct benefits estoppel, the court held that John was bound by the arbitration clause. While John could have disclaimed his interest in the trust or challenged the validity of the trust entirely, because he attempted to enforce rights that wouldn’t have existed without the trust, he was estopped from challenging the arbitration provision therein.

 While there’s sudden newfound clarity in Texas with respect to this particular question, the state of the law remains wide open in the vast majority of states, as there are very few statutes governing enforcement of an arbitration clause in a trust agreement and virtually no published decisions analyzing whether such a clause is enforceable against trust beneficiaries. Depending on the language of the particular state’s Arbitration Act and on the courts in that state apply doctrines of equitable estoppel, the Rachal opinion may prove to be very instructive for courts around the country if and when they’re faced with this issue of first impression in their jurisdiction.

For those of you looking for sample arbitration clauses specifically tailored for wills and trusts, there are two good resources to start with: the sample clause published by the American Arbitration Association or “AAA” (click here) and the sample clauses provided in a 2005 ACTEC article entitled Resolving Disputes with Ease and Grace. The ACTEC article contains a sample clause incorporating the type of conditional-gift language that seems to have won the day in the Rachal case.

2d DCA: When can a second wife subpoena confidential business records of a closely-held corporation founded by her deceased husband?

Posted in Spousal Elective Share Claims

McDonald v. Johnson, — So.3d —-, 2012 WL 246468 (Fla. 2d DCA January 27, 2012)

Can second wife subpoena MCC’s business records in connection with a potential elective-share claim? 2d DCA says YES

What divorce attorneys do and what trusts-and-estates lawyers do overlaps all the time. Often that overlap occurs at the planning stage, when working together on drafting a pre-nuptuial or marital settlement agreement, but not always. Sometimes it happens in the probate context, which appears to be the case in this instance.

Case Study:

Paul D. McDonald lived quite a life. Among his many accomplishments was founding the McDonald Construction Corporation (MCC), a large and apparently successful construction company in Lakeland, Florida. Mr. McDonald was survived by descendants of his first marriage as well as a second wife, Sandra Gill McDonald. (Blended family: think automatic litigation red flag!) The 2d DCA’s opinion doesn’t go into MCC’s ownership structure post Mr. McDonald’s death, but I’m guessing it remained closely held, and the majority owners (either directly as shareholders or indirectly as trust beneficiaries) were descendants of Mr. McDonald’s first marriage.

At issue in this opinion was whether Mr. McDonald’s second wife could subpoena MCC’s confidential business records to figure out if she should assert an elective share claim. Whether or not the elective share claim  made sense apparently turned on whether the appreciation in value of Mr. McDonald’s MCC stock (which he’d previously transferred to his revocable trust) was a marital asset (as defined by F.S. 61.075). Note the overlap between core inheritance and family law issues going on here. Also, as to why this discovery issue was litigated to the extent it was, my guess is that MCC’s run/owned by folks who aren’t exactly thrilled by the prospect of second wife gaining access to their private financial affairs (e.g., who’s getting paid what). As explained by the 2d DCA, the trial court said NO to the MCC subpoena:

To assist her in deciding whether to take the elective share, see § 732.201, Fla. Stat. (2010), the surviving spouse sought financial information from MCC that she asserted was relevant to determining whether the value of MCC’s stock had increased during the marriage due to the efforts of the decedent. See § 732.2155(6)(c). The probate court ruled that the MCC stock was not part of the probate estate, and therefore, the information requested was not relevant. It further ruled that the value of the MCC stock is excluded from the surviving spouse’s elective share calculation pursuant to section 732.2155(6).

Can second wife subpoena MCC’s business records in connection with a potential elective-share claim? YES

What’s most interesting about this case isn’t why the 2d DCA reversed (“quashed”) the trial court’s discovery order, it’s how the court tied together two tricky statutes (one familiar mostly to probate lawyers and the other familiar mostly to divorce attorneys) to addresses a question that apparently hasn’t come up before. All parties agreed the discovery order being litigated turned on an interpretation of subsection “(c)” of section 732.2155(6), which cross references to F.S. 61.075. According to the 2d DCA, “[t]here are no cases interpreting subsection (6)(c),” which provides as follows:

(6) Sections 732.201-732.2155 do not affect any interest in property held, as of the decedent’s death, in a trust, whether revocable or irrevocable, if: . . . (c) The property was a nonmarital asset as defined in s. 61.075 immediately prior to the decedent’s death.

The trial court read this statute to mean it applied only to nonmarital assets. Since second wife’s elective-share claim depended on the opposite conclusion (i.e., appreciation of the MCC stock was a marital asset), the trial court concluded the elective-share statute didn’t apply, thus no discovery. When it comes to discovery disputes, arguing for a narrow ruling (i.e., limiting discovery) is always an uphill battle. So it’s no surprise the 2d DCA read the statute way more expansively than the trial court, opening MCC’s doors to second wife’s subpoena of its business records. Here’s why:

We conclude that the fact that section 732.2155(6)(c) cites to section 61.075 without a specific citation to the subsection defining nonmarital property indicates the legislature’s intent that the entire statute, which defines both marital and nonmarital property, is to be considered in determining whether the property in the revocable trust was nonmarital at the time of death. The definition of marital assets includes “[t]he enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both.” § 61.075(6)(a)(1)(b), Fla. Stat. (2010). In other words, if the value of the MCC stock in the decedent’s revocable trust increased pursuant to the terms of section 61.075(6)(a)(1)(b), that increase would not be excluded from the elective share under section 732.2155(6)(c). Thus, to the extent the information sought by the surviving spouse is necessary to her determination whether the MCC stock value was enhanced during the marriage due to the efforts of the decedent, it is relevant.

Accordingly, we grant the surviving spouse’s petition for writ of certiorari and quash the probate court’s order sustaining the Respondents’ objections to her discovery request.

Lesson learned?

When a case is being litigated, the process is often much worse than the outcome (even if you lose at trial). One reason for this dynamic is the wide-ranging and open discovery process encouraged by Florida law. There’s lots of good reasons for our generous discovery rules, but (like everything else) they can be abused. And when that abuse happens, a tool that’s supposed to discourage litigation by narrowing the issues in dispute is instead improperly used as a “club” against an adversary. I’m not saying that’s what’s going on in this case, but it’s possible.

So what’s it all mean for divorce attorneys and trusts-and-estates lawyers working on these kind of cases at the planning stage? You need to factor in creative post-death elective-share litigation when crafting marital agreements. Even if her elective-share claim is unsuccessful, the discovery afforded to a second wife often viewed as “hostile” by the family members of the first marriage can’t be overlooked.

By the way, reading between the lines, I think the risk of abusive discovery tactics was hinted at by the 2d DCA when it made clear that just because it was ruling against the estate’s categorical discovery objection (which turned on a very specific reading of 732.2155(6)(c)), didn’t mean the target of the subpoena, MCC, was barred from asserting all of the generally applicable discovery objections open to it once the subpoena was served. In other words, the game’s not over yet.

Our holding does not affect MCC’s right to file objections to any subpoena it is served in conjunction with the surviving spouse’s discovery request. See Fla. R. Civ. P. 1.351.

1st DCA: If my will gives everything to one of my three sons to divide among my heirs as he sees fit, can he keep it all for himself?

Posted in Will Construction Litigation

Cody v. Cody, — So.3d —-, 2013 WL 6171299 (Fla. 1st DCA November 26, 2013)

According to the 1st DCA, “the will’s lack of restrictions on Buford Cody’s discretion to share the property with his brothers gave him the authority to divide it in any way he saw ‘fit,’ including no division at all.”

The wills at the center of this case were ticking time bombs from the moment Mr. and Mrs. Martin signed them in 2007. Mrs. Martin died later that same year. Mr. Martin died in 2010. When both parents passed away, their wills devised their home and surrounding 12.5 acres in Pace, Florida (a small town in Florida’s Panhandle) to one of their three sons, Buford Cody, to divide among their heirs “as he sees fit and proper.” Here’s how the two key clauses of the will at issue in this case were drafted:

I devise the house and 12.5 acres located at 2800 Myree Lane, Pace, FL 32571, to . . . my son, Buford Cody, to divide between my heirs, as he sees fit and proper. . . . All the residue of my estate . . . shall be divided among my heirs, as [Buford Cody] see[s] fit.

What?! Not surprisingly, when mom and dad passed away Buford’s brothers didn’t waste any time filing a lawsuit asking the court to construe dad’s will in a way that effectively re-wrote it by dividing the estate “into roughly three equal shares” for the couple’s three sons. Mistake number one: the challengers filed their will-construction suit before the will was even admitted to probate. This kind of procedural sloppiness is easy to deal with if your judge doesn’t go along with it. Unfortunately, that wasn’t the case in this estate.

The Order Construing Will must be reversed for several reasons. First, the probate court’s order construing will is premature because the record does not contain an order admitting the will to probate or appointing Buford Cody the PR under the provisions of the will. “A will may not be construed until it has been admitted to probate.” § 733.213, Fla. Stat. While Mr. Martin’s will is self-proving, pursuant to section 732.503, Florida Statutes, and is thus admissible to probate without further proof pursuant to section [733.201], the probate court has not actually admitted the will to probate.

The power of social convention:

What’s most interesting about this case isn’t that they got the procedure wrong, it’s what it tells us about how estate planners need to anticipate the power of social convention when drafting wills, and how these conventions can undermine any estate plan that falls outside of the traditional “all to spouse, then to my children in equal shares” box. We usually speak of this problem in terms of litigation “red flags.” But what do we really mean by that phrase? In my opinion it’s any estate plan that falls outside of the social conventions typical to your local community.

If my will gives everything to one of my three sons to divide among my heirs as he sees fit, can he keep it all for himself? YES

According to the 1st DCA, “the will’s lack of restrictions on Buford Cody’s discretion to share the property with his brothers gave him the authority to divide it in any way he saw ‘fit,’ including no division at all.” In other words, 2 of the Martins’ 3 sons were effectively disinherited (which is contrary to the social norm followed by most parents). Ergo: litigation red flag! So what happened? The trial court basically ignored the clear text of the will and entered an order “construing” it in a way that divided the estate in equal shares among the three surviving sons. That result may have seemed “equitable” (as defined by the judge), but it certainly wasn’t what Mr. Martin’s will said. Bottom line, you can’t re-write someone else’s will to better suit your own subjective sense of fairness, so saith the 1st DCA:

Mr. Martin’s directive to the PR to divide both the real property described, and any residuary estate not specifically devised, “between my heirs, as he sees fit and proper” does not require the PR to equally divide the property. When a will devises estate property to a person, expressing the testator’s hope that the person “will honor all of [the testator's] ‘requests,’ ” then “the unambiguous language of the [will] devises the entire residuary to [that person], who then has the discretion to honor [testator's] requests.” Glenn v. Roberts, 95 So.3d 271, 273 (Fla. 3d DCA 2012). As stated in In re Estate of Barker, 448 So.2d 28, 31–32 (Fla. 1st DCA 1984):

The court may not alter or reconstruct a will according to its notion of what the testator would or should have done…. It is not the purpose of the court to make a will or to attempt to improve on one that the testator has made. Nor may the court produce a distribution that it may think equal or more equitable.

See also Owens v. Estate of Davis, 930 So.2d 873, 874 (Fla. 2d DCA 2006).

Here, Mr. Martin’s devise to Buford Cody vested Buford’s interest in the real property upon Mr. Martin’s death. § 732.514, Fla. Stat. The will’s lack of restrictions on Buford Cody’s discretion to share the property with his brothers gave him the authority to divide it in any way he saw “fit,” including no division at all. The fact that his brothers disagreed with his actions did not render the will ambiguous or invalidate any portion of the will. In addition, the will did not provide any requirement that the brothers agree on a distribution of the estate property. The will specifically provided Buford Cody with the power and authority to decide how the property would be divided. The probate court’s orders . . . determining a particular division of the real estate as the court saw fit usurped Buford Cody’s authority under the will without legal basis.

Lesson learned?

Chalking this case up to “judicial activism” would be a mistake. Anytime a client signs a will that deviates from the traditional “all to spouse, then to my children in equal shares” social convention, he or she needs to take extra precautions. Why? Because if the will gets challenged the single most important witness — the testator — is dead, so he obviously isn’t around to explain to an overworked and underfunded probate judge why “yes”, the will says exactly what he meant it to say.

Hindsight is 20-20, but based on the 1st DCA’s opinion, if the will at issue in this case had contained a few extra lines making clear the estate was to go exclusively to Buford Cody, making clear that any reference to a division among heirs was completely precatory, and also explaining the testator’s intent, the legal fees and family acrimony inherent to this kind of litigation might have been avoided. If you’re looking for a solid checklist of defensive estate planning techniques, look no further than Will Contests — Prediction and Prevention by Prof. Gerry Beyer of the Texas Tech University School of Law. Here’s what Prof. Beyer has to say about incorporating explanatory text into a defensive-planning strategy:

EXPLAIN REASONS FOR DISPOSITION

An explanation in the will of the reasons motivating particular dispositions may reduce will contests. For example, a parent could indicate that a larger portion of the estate is being left to a certain child because that child is mentally challenged, requires expensive medical care, supports many children, or is still in school. If the testator makes a large charitable donation, the reasons for benefiting that particular charity may be set forth along with an explanation that family members have sufficient assets of their own. The effectiveness of this technique is based on the assumption that disgruntled heirs are less likely to contest the will if they realize the reasons for receiving less than their fair (intestate) share.

It is possible, however, for this technique to backfire. The explanation may upset some heirs, especially if they disagree with the facts or reasons given, and thus spur them to contest the will. Likewise, the explanation may provide the heirs with material to bolster claims of lack of capacity or undue influence. For example, assume that the testator’s will states that one child is receiving a greater share of the estate because that child frequently visited the aging parent. Another child may use this statement as evidence that the visiting child unduly influenced the parent. If the explanation is factually incorrect, heirs may contest on grounds ranging from insane delusion to mistake or assert that the will was conditioned on the truth of the stated facts.

The language used to explain reasons for a disposition must be carefully drafted to avoid encouraging a will contest or creating testamentary libel. An alternative approach is to provide explanations in a separate document that could be produced in court if needed to defend a will contest, but which would not otherwise be made public.

Is this kind of protective drafting guaranteed to work? Heck no! Might it have worked? No one will ever know for sure. But this I do know: anytime a client signs a will that deviates from traditional social convention, he or she needs to take extra precautions. As explained in Prof. Beyer’s article, defensive, pre-suit estate planning involves all sorts of tools. One of those tools is defensive drafting designed to be so blindingly obvious that no one — not even an overworked/underpaid judge who thinks your will is morally reprehensible — will have any doubt it’s exactly what your client wanted. This kind of estate planning may cost a little more up front, but when compared to the cost of litigation, it’s a bargain.

The Town Where Everyone Talks About Death

Posted in Trust and Estates Litigation In the News

La Crosse, Wisconsin spends less on health care for patients at the end of life than any other place in the country, according to the Dartmouth Health Atlas.

NPR’s Planet Money did a great piece on Living Wills entitled The Town Where Everyone Talks About Death. The report draws a direct line between good estate planning (which always involves a Living Will) and good economic policy. Who knew?

As always, the reporting was excellent. It’s a radio show, so if you didn’t catch it the first time around you’ll want to listen to the podcast. Here’s the show’s intro:

George Phillips has his death planned out. His wife Betty has planned hers. They have filled out an advance directive, outlining how they want to die.

Their neighbors across the street have filled out the same paperwork, as has the family next door. In fact, in La Crosse, Wisconsin, you’re unusual if you don’t have a plan for your death. Some 96 percent of people who die in La Crosse have an advance directive or similar documentation. Nationally, only about 30 percent of adults have a document like that.

In this community, talking about death is a comfortable conversation — neighbors gossip about who on the block hasn’t filled out their advance directive.

It’s become such a comfortable conversation basically because of one guy in town. Bud Hammes works as a medical ethicist at a local hospital called Gundersen Health System. For years, he was called when someone’s dad had a stroke, was in a coma, on machines. Bud would sit down with the family and try to help them figure out what to do next. And every time, he says, the discussion was excruciating.

“The moral distress that these families were suffering was palpable,” he says. “You could feel it in the room.”

Most of the time, Bud says, they’d be talking about a patient who had been sick for years. Why not have that conversation earlier?

So Bud started training nurses to ask people ahead of time, would you like to fill out an advanced directive. It took a while but the idea caught on.

Nurses started asking patients questions like: If you reach a point where treatments will extend your life by a few months and side effects are pretty serious, would you want doctors to stop, or continue to do all that could be done? And a lot of patients said: Stop.

And stopping, of course, is less expensive than continuing treatment.

“It turns out that if you allow patients to choose and direct their care, then often they choose a course that is much less expensive,” says Jeff Thompson, CEO of Gundersen.

In fact, La Crosse, Wisconsin spends less on health care for patients at the end of life than any other place in the country, according to the Dartmouth Health Atlas.

Reducing costs wasn’t the reason La Crosse has its advance directive program. Bud Hammes was trying to help their patients, and the reduction in spending was an accident. But now, lots of other communities want to copy the La Crosse program.

Bud Hammes thinks this is the moment his big idea in La Crosse might actually go national. The Affordable Care Act encourages providers to figure out how to reduce spending. Bud is getting calls from hospitals and doctors, and he’s putting off retirement to help them make the rest of America look more like La Crosse.

What can Florida lawyers learn from the “Newell v. Johns Hopkins University” charitable donation case?

Posted in Gifts and Charities Litigation

Newell v. Johns Hopkins University, 215 Md. 217, 79 A.3d 1009 (Md. App. November 21, 2013)

Tim Newell, the nephew of the late Elizabeth Banks, is fighting the university’s plan for the farmland. (Mike Morgan/For The Washington Post)

Tim Newell, the nephew of the late Elizabeth Banks,  sued Johns Hopkins University in 2011, charging that Banks conveyed her family’s 138-acre dairy farm to Hopkins in 1989 for $5 million — far below its market value — with the understanding that the university would protect it from the encroaching commercial development she disdained. Banks died in 2005. According to Bank’s family, she envisioned a small campus with extensive green and open space. Which may have been the university’s original plan as well. But a lot’s changed in the 20+ years since the farm was sold/gifted to Hopkins (Ronald Reagan was still president in 1989!). Whose vision should control the Banks-family donation 20+ years after the fact is at the heart of this case, which is headed to Maryland’s highest court (the Court of Appeals).

The Banks family has lost twice so far, first at the trial court level and then in the linked-to opinion above at the Court of Special Appeals (Maryland’s intermediate appellate court), both of which ruled in favor of Hopkins and its plans for the farm land, as reported in Johns Hopkins vs. MoCo farm: Whose wishes should prevail?, a cover story on the case that recently ran in the Washington Post Magazine:

Johns Hopkins University and Montgomery County plan a $10 billion “science city” that could surround the farm with nearly 5 million square feet of commercial space. Banks’s heirs say this plan bears no resemblance to the small, bucolic research campus Banks thought she had been promised when she sold the land in 1989 at a cut rate to Hopkins. She had no intention of selling for any other reason to the university. Family members say Hopkins is acting more like the commercial developers Banks had rebuffed repeatedly. The family is mounting a legal challenge, so far without success.

[A trial court and Maryland's intermediate appellate court] have said Hopkins can move ahead with its plans. Now Banks’s heirs are making a last attempt to stop the project, to prove their claim that Hopkins is reneging on a deal.

The impact of the Belward Farm case could extend well beyond Hopkins and Montgomery. It is being closely watched by institutions that receive millions each year in charitable donations. Many receive donations with instructions attached, but would prefer to use the gifts for other purposes.

Banks’s heirs say her intentions were always clear: She did not want massive development, and she thought she had been promised a place of learning and research, not commerce. Hopkins says the university is keeping to the terms of the written deal, and any other representations that might have been made by university officials, or that the family thought were made, were never written into the sales contract and therefore don’t matter.

Now judges on Maryland’s Court of Appeals, 50 miles away in Annapolis, will have to decide: Is Hopkins playing by the rules? Was Elizabeth Banks betrayed?

A fundamental failure to manage expectations:

At its core, the Hopkins case and other donor-intent cases like it (including the Florida Bower Foundation case I wrote about here and the Princeton University case I wrote about here), represent a fundamental failure to manage expectations. Donors making large gifts are often wooed for years (as Banks was in this case). They expect to be treated like valued members of a community, not adverse parties in a contract negotiation. Here’s an excerpt from the Maryland-court opinion reflecting this point:

Mr. Newell’s answer to one interrogatory suggests that the Family views the spirit of the Contract differently than Hopkins does:

[Hopkins] represented that the campus would be occupied and developed by [Hopkins] for [Hopkins] as a university campus, including all the things that would go along with that. This was done in an atmosphere of trust and confidence where it wasn’t thought necessary to spell out “do’s” and “don’t's” in extensive detail.

Hopkins, on the other hand, had very different expectations: Banks made a deal, now she has to live with it. This position may seem harsh, but it’s clearly the right answer as a matter of law. Here again from the Maryland opinion linked-to above:

[B]ecause we agree with the circuit court that the operative provisions of this Contract are not ambiguous, the inquiry ends there—not because we find that Hopkins’s vision for the Farm necessarily is true to the Family’s (we make no such finding), but because the unambiguous words the parties used to memorialize their agreement limits Hopkins’s future development of the Farm only in terms of how it uses the Farm, not in terms of scale or density or ownership structure.

. . .

The Family no doubt believes it has been genuinely aggrieved by the way that Hopkins seeks to implement the Contract, and we do not mean for an instant to diminish its anger or disappointment if Hopkins’s current vision for the Farm deviates from what Ms. Banks or other Family members thought would happen. But again, our task is to examine the agreement the parties did sign, not the agreement that one or the other now wishes they had negotiated instead. And although it may seem cold to hang our decision on rules of construction, certainty in contracts is important too, especially when the language of the contract is unambiguous.

By the way, the result is the same whether Banks received fair consideration for her farm, or the deal was a part gift, part sales transaction. Here again from the Maryland court:

[I]t makes no difference whether this transaction is characterized as a sale, a gift, or both. The existence (or not) of charitable intent may bear on questions related closely to that intent, such as formation of a charitable trust . . . or whether and how to save a charitable bequest no longer capable of execution in the construction of a will . . . but not to the pure contract interpretation question presented here.

Elizabeth Banks with Johns Hopkins president Steven Muller in 1989, the year she sold the farm to the university.

Lesson learned?

The last thing any university or charitable foundation needs is to end up on the receiving end of a donor’s lawsuit. Even if you win, you still lose in terms of bad PR and squandered resources: a lesson the folks at Princeton University learned the hard way just a few years ago in their litigation with heirs to the A.&P. grocery fortune (see here). The lengthy litigation was an embarrassment to Princeton, and a worst-case scenario for university development officers. Even without going to trial, each side spent more than $40 million in legal fees. This is no way to run a charity.

So what’s the solution? Do a better job of managing expectations. How do you do that? Start with a clearly drafted gift agreement, then adopt institutional policies ensuring your donors and the development officers working with them understand exactly what to expect going forward. In The Unraveling of Donor Intent: Lawsuits and Lessons, by Kathryn Miree and Winton Smith, the authors provide this model form of gift agreement and, just as importantly, solid policy recommendations for charities seeking to better manage donor expectations and long-term gifts:

Charities also have much to learn about the management of long-term gifts. Change in the effectiveness of a long-term gift is inevitable, although it is always less clear how that need for change will manifest. The best approach for charities is to plan for change and manage those changes wisely. Consider these five recommendations:

1) Develop standard gift agreements for use in planning long-term gifts that provide flexibility over time and encourage donors and their advisors to use these agreements. The standard gift agreement should include either term-limits on donor gift restrictions or make provision for change in the document subject to certain triggers.

2) Review current gift agreements with living donors to identify documents that may need changes. It is far easier to craft solutions or alternatives during the donor’s lifetime than to struggle with the options for change after the donor’s death.

3) Once the gift agreement (and amendments to the agreement) are complete, keep the documents in a safe place. This seems obvious, but too many charities are unable to put their hands on key donor documents even 20 years after the gift – and have little chance of finding those documents after 50 or 100 years. Gift purposes become more a matter of folk lore than legal reality. (Institutional policies are the smartest way to ensure consistency.) Also keep records of planning sessions and donor conversations. These contemporary recorded observations may be valuable to later generations in interpreting donor intent. Some charities include these records as a part of board minutes (when the gift is reported and accepted) because these records are retained as a matter of law.

4) Adopt policies and procedures governing long-term gift management that includes donor stewardship, reporting, and the process for initiating gift changes. Stewardship involves engaging in regular communication with donors and their families about the use and outcomes of the gift. Engaging with lower generations helps build relationships that may later avoid conflict. The donor’s descendants may not have the same goals, objectives, or perspectives as the donor. In fact, they rarely do. Sharing the donor’s conversations, goals, and regular reports on how those objectives are met are powerful tools in managing expectations. The policies should also create an internal committee to that provides oversight of long-term gift management, and identifies problems early.

5) Avoid crisis management. When things begin to go bad – either because of disagreements with family members or an unanticipated turn in the road – address the issues early. In most cases, it will be beneficial to involve family or original advisors to provide input about options. Problems generally grow worse – and relationships deteriorate – when no action is taken. Just deal with it.

Three Florida firms learn the hard way: asset protection planning = DANGER FOR LAWYERS

Posted in Creditors' Claims, Musings on the Practice of Law

Asset protection planning is a classic example of lawyers taking on “uncompensated risk”. Even if only 1 asset-protection case in 100 blows up on you, this is no way to run a law practice.

Asset protection planning’s a high risk practice area that many estate planners “dabble” in. In my opinion, that’s a big mistake. Why? Because this kind of work is a minefield of potential liability for lawyers, no matter how careful you think you are or how lawful your planning advice may be. But the money’s good, right? Probably not. No matter how good the fees may seem (especially when compared to traditional estate planning), properly weighed, I believe asset protection planning is a classic example of lawyers taking on “uncompensated risk” (a term used in finance that we always tell our fiduciary clients is a big no-no). Even if only 1 asset-protection case in 100 blows up on you, this is no way to run a law practice.

Viewed in retrospect by an unsympathetic judge who has lost all patience with your deadbeat client, your ostensibly legitimate legal advice might all of a sudden morph into a scheme (nothing good ever comes of a “scheme”) to defraud creditors . . .  and you, as lawyer (not your client), all of a sudden become the target of some judge’s scornful attention (and maybe a malpractice claim to boot). And you can’t chalk this kind of risk up to rookie mistakes either. All three cases discussed below involve experienced practitioners, two of which are partners at large firms. These aren’t “rogue” solo’s desperately trying to stay afloat by taking whatever client falls through the door. These are seasoned pro’s. And yet, they’ve all been drawn into the kind of position no one wants to be as counsel: playing defense in someone else’s lawsuit.

CASE NO. 1:

James Grieff v. [lawyer/firm], Circuit Court, Miami-Dade County, FL (Case No. 13-21888-CA).

Apparently there’s a good bit of support for using spousal agreements for asset protection planning (click here, here). Well, what might seem like solid, perfectly legitimate legal advice in the cozy confines of your office when Mr. and Mrs. debtor walk through the door with a tale of woe and ask you to please help them fend off evil creditor’s ill-gotten judgment (or threatened judgment), can end up looking entirely different when the you-know-what hits the fan and all of a sudden you find yourself on the receiving end of decidedly unflattering headlines, like: Client who lost $6M to pin-up ex-wife sues lawyer for advising him to put money in wife’s name, which appeared in the ABA Journal. Here’s an excerpt:

Facing a $2 million clawback suit by the bankruptcy trustee in the Bernard Madoff case, an Atlanta entrepreneur says, he sought advice from the New York office of [firm].

They referred him to asset protection specialist [lawyer] in the firm’s Miami, Fla., office, alleges now-former client James Greiff in a recent malpractice suit, and, following [lawyer's] advice, he transferred some $6 million in assets to his wife via a postnuptial agreement. Three months later she filed for divorce, and at that point, contends Greiff in the Miami-Dade Circuit Court suit, the [firm] special counsel abandoned him and began representing his wife, reports the Daily Business Review (sub. req.). . . .

Although Greiff tried to invalidate the postnuptial agreement, claiming it was a sham, a divorce court in Florida upheld it in 2012, the article recounts. He is now reportedly penniless and living with his mother.

[Lawyer] declined comment but his law firm called the suit meritless and said it intends to mount a vigorous defense.

Assume everything defendant asset-protection lawyer did in this case was perfectly legal and he at all times acted in the best interest of his client. It doesn’t matter! The risk of this outcome was always present, and even if lawyer wins the malpractice suit, he still loses: no one’s paying him to engage in the litigation he now finds himself the target of (a cost that will likely dwarf his fees in this case by many multiples), nor will any of the publications reporting on the case run eye-catching headlines when the malpractice claim is ultimately resolved (even if lawyer wins across the board).

CASE NO. 2:

Sardis v. Frankel, 978 N.Y.S.2d 135 (N.Y.A.D. 1 Dept. January 07, 2014)

We all know that Florida’s homestead laws are asset-protection nirvana. Not only is a Floridian’s homestead property bullet proof from prospective creditor claims, our supreme court’s held it’s also immune to fraudulent-transfer claims by existing creditors (see here). And that’s not the only asset-protection goody we have. For example, if you’re a Florida estate planner you can’t turn a corner without someone telling you how great multi-member LLC’s are for “charging order” asset-protection planning, especially after our LLC statute was beefed up post the Olmstead decision (see here). Our supreme court’s also made clear that asset-protection lawyers can’t be sued for aiding and abetting a fraudulent transfer if all the lawyer did was give advice (see here). This all sounds great in the abstract. In the real world of litigation, none of it matters if you look like the guy hired by the bad guys to hide assets.

Bottom line, it doesn’t matter how legally sound your planning advice might be, if it doesn’t pass the smell test, expect your judge to tell you so, and expect your appellate panel (staffed by judges who never go to our estate planning conferences) to uphold your trial-judge’s presumably less-than-flattering assessment of your work in a published opinion. Then, some reporter or blogger (the world’s full of them) writes about the appellate opinion and all of a sudden a case that’s costing you money turns into bad PR as well.

In this case a well regarded national firm is at the center of a decidedly unsympathetic appellate decision involving asset protection planning based on black-letter Florida law. Here are the key facts, as recounted by the NY appellate court in the linked-to case above:

During the time Sofia Frankel was employed as a broker for Goldman Sachs & Co., plaintiffs entrusted her with some $19 million to invest on their behalf, and they remained her clients when she later left Goldman to join Lehman Brothers, Inc. By 2004, however, plaintiffs alleged that they had sustained more than $9.6 million in losses as a result of Sofia’s fraudulent churning of their account. They commenced arbitration proceedings before the Financial Industry Regulatory Authority (FINRA) in May of that year, naming Sofia and Lehman Brothers as respondents. On October 30, 2008, some two weeks before Lehman filed for bankruptcy protection, an arbitration panel rendered an award in the amount of $2.5 million, holding Sofia and Lehman jointly and severally liable for plaintiffs’ losses. This Court affirmed Supreme Court’s confirmation of the award, expressly rejecting Sofia’s contention that the arbitrators had improperly imposed joint and several liability . . .

So what does debtor do after she’s been nailed by a $2.5 million judgment? What else, she hires a lawyer to get her out of the mess she’s created for herself. Again, below are the facts as recounted by the NY appellate court in the linked-to case above. Note what’s going on in Florida: standard defensive planning involving basic Florida homestead and LLC charging-order law. Note also there’s yet another case pending in Miami involving the subject Florida homestead property (think: yet more litigation no one’s paying attorney for).

Within days after the October 2008 award was issued, Sofia met with [attorney], a partner at the firm of [firm], to engage the firm’s services. [Firm's] attorney time records for November 2008 describe a conversation of November 7 “with Sofia and Michael re: asset protection plan,” followed two days later by a conversation “with Michael Frankel re: asset protection planning.” The various items under consideration included the “sale/transfer of N.Y. condos,” “homestead waiver issues,” the “option of filing claim in bankruptcy court to obtain indemnification for arbitration award” and “efforts to identify insurance coverage or indemnification for arbitration award.” . . . The asset protection plan was put into action in early 2009.

[FL HOMESTEAD]

In January, Sofia withdrew $3,296,431.51 from her Fidelity account, depleting its value to $16,371.88. That same month, she paid $2.9 million in cash for another beachfront condominium apartment in Miami Beach, title to which is unencumbered and held solely in her name. This property, also claimed by Sofia as a homestead, is the subject of another action pending in Miami–Dade County, Florida.

[FL LLC]

At some time before August 25, 2009, Sofia’s sole interest in Applied Medicals LLC was relinquished when Michael became a 10% member of the company. Florida law provides that a court may “order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment” (Olmstead v. Federal Trade Commn., 44 So.3d 76, 78 [Fla. 2010]), but limits the court to issuing a “charging order” against a debtor’s ownership interest in a multi-member limited liability company (id. at 79).

No matter how defensible this planning may be as a matter of law, if it doesn’t look good to your trial judge or appellate panel, it’s probably not going to work. And guess who gets blamed for “devising” this scheme? The lawyer:

It is apparent that Sofia’s conveyance of the subject Manhattan condominium apartment to her son was but one of a series of transactions undertaken as part of an “asset protection plan” devised with the assistance of counsel immediately after the arbitration award was rendered against her. The emptying of a brokerage account, the purchase of Florida real estate claimed as a homestead and the transfer of the subject apartment held in fee simple demonstrate not merely a series of transactions coincidental to estate planning, as her affidavit intimates, but a concerted effort to place her assets beyond the reach of impending judgment creditors. Finally, the addition of Michael as a member of Applied Medicals LLC, of which Sofia was formerly the sole member, precludes plaintiffs from obtaining an order from a Florida court directing the surrender of her entire interest in the company to satisfy the award against her. Notably, defendants do not contend that Sofia acted in good faith, and the record before us affords no basis for such finding.

CASE NO. 3:

In re Cutuli, 2013 WL 5236711 (Bkrtcy.S.D.Fla. September 16, 2013)

Things went really bad for this debtor in California, where she resided prior to moving to Florida and declaring bankruptcy. In California, all of the debtor’s asset-protection planning not only didn’t work, it actually made things far worse: the California court entered judgment for compensatory damages for fraudulent transfers of almost $2.8 million, plus another $1.8 million in attorney’s fees, and $227,032 in interest — for a total of $4.8 million. The California court then tacked on an additional $10 million in punitive damages! See Judge orders couple to pay $14.8 million in alleged financial fraud. By the way, the risk of punitive damages in a fraudulent transfer case isn’t an aberration unique to some quirk of California law, it’s a fact of life anyone thinking about dipping a toe into one of these cases in any state (including Florida) better factor into the cost-benefit analysis. A point emphasized by WSJ blogger Jay Adkisson in this blog post, in which he states:

The sad thing is that we keep seeing some incompetent planners falsely advise their clients to the effect of “go ahead and make a fraudulent transfer, because all the creditor can do is to unwind the transfer, and so you can be no worse off”. This statement is far from reality: Not only can a fraudulent transfer lead to a denial of discharge for a debtor or exception of a particular claim from discharge in bankruptcy, but in many states punitive damages can be awarded against debtors and transferees.

On this point, a recent article by Alan Gassman & Charlie Lawrence, “Imposing Punitive Damages on Fraudulent Transfers” in Steve Leimberg’s Asset Protection Planning Newsletter Issue #235 (January 15, 2014), provides an excellent state-by-state survey of the punitive damages in the fraudulent transfer context.

Now back to the case. Against the backdrop of the California debacle, debtor hires Florida lawyer to do what? You guessed it: asset protection planning.

A big difference I see between litigators and non-litigators is the amount of email traffic generated by your typical non-litigator. If you’re not used to the threat of having your emails disclosed in litigation, you’re going to write all sorts of things in your supposed “confidential” emails that could, at the very least, be embarrassing when read in retrospect. And how did the bankruptcy trustee end up getting a hold of these emails? The court entered an ex parte order authorizing a surprise raid of the debtor’s home, which resulted in her home computer getting swiped. Yeah, that’s the sort of thing that can happen when the gloves come off. Here are key facts disclosed in the Florida firm’s email traffic, as recounted in the linked-to order above:

9. The electronic communications apparently included emails between the Debtor, Greg Cutuli, and The [Firm] attorney, [attorney], purporting to relate to “offshore info” and “information on the WY LLC in=regards [sic] to asset protection …” [ECF 866–1 at ¶ 5; 866–2]. Other emails request a “description regarding the protections offered by =the [sic] Wyoming LLC that we are about to enter into” and state “I would like to discuss=it [sic] with our accountant and one of Kathy’s attorneys.” [ECF 866–3 at p. 6 of 15].

10. One email attachment describes the “benefits of the Wyoming Close Limited Liability Company,” including a discussion of the limitations that structure imposes on creditor’s rights and specifically the limited efficacy of charging orders issued against Wyoming LLCs. [ECF 866–2 at p. 7 of 15]. Another attachment states: “Asset Protection: It is difficult for a member’s creditor to reach the assets of the LLC. Under Wyoming law, the creditor of a member can only reach distributions made to the member, but the creditor cannot force the LLC to make such distributions.” [ECF 866–2 at p. 1 of 15; and 12 of 15].

11. The Trustee contends The [Firm] holds itself out as a law firm providing estate planning and asset protection services to its clients. [ECF 866–1 at ¶ 6; see also . . .], that the email communications between the Debtor, Greg Cutuli, and The [Firm] occurred during the same time period that Greg Cutuli and the Debtor were allegedly engaged in a “conspiracy to defraud creditors” and, therefore, the Trustee should be allowed to obtain discovery from The [Firm] to determine whether assets rightfully belonging to the estate were transferred in an effort to defraud the creditors of the estate. [ECF 865–2 at 2–23; 865–2 at 23; 865–3 at 1–5; 865–4 at 1–10].

The easy dig against the firm on the receiving end of all this attention is that, fairly or unfairly, the email traffic created arguably self-incriminating statements involving “asset protection planning” by the debtor. My critique if more basic. Why get yourself involved in this kind of case to begin with? Even if your emails were pristine, you’re still going to end up playing defense in someone else’s lawsuit . . . and doing a lot of work no one is probably paying you for. Putting aside the practice-management issues raised by this kind of work, the bankruptcy court’s privilege rulings are instructive for any kind of planning work you might do. If your planning work is going to end up playing center stage in a bankruptcy proceeding, assume all of your confidential attorney-client communications are going to come out. Why? Because once your client declares bankruptcy, she no longer owns the privilege . . . it now belongs to the trustee (i.e., the party now suing your client).

As the Court has already found in its August 5, 2013 Order: “the Debtor’s attorney-client privilege is held by the Trustee and has been waived.” [ECF 869]. See In re Smith, 24 B.R. 3, 4 (Bankr.S.D.Fla.1982); e.g., In re Williams, 152 B.R. 123, 124 (Bankr.N.D.Tex.1992) (transfer of right to pursue avoidance actions also effects transfer of evidentiary privileges); In re Hotels Nevada, LLC, 458 B.R. 560, 564 (Bankr.D.Nev.2011)(trustee is successor to debtor with respect to attorney-client privilege; turnover ordered regarding debtor and non-debtor materials from law firm).

But even if there’s some viable exception to this bankruptcy rule, if the judge’s already made up his mind your client is the bad guy, and your “asset protection” work is getting blamed for making everyone’s job way harder than it has to be, expect you’ll be on the receiving end of a crime-fraud exception ruling . . . no matter how innocent you may be, which is what happened in this case.

“[F]or the crime-fraud exception to apply, ‘the attorney need not himself be aware of the illegality involved; it is enough that the communication furthered, or was intended by the client to further, that illegality.’” In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir.1996). Here, the Trustee has demonstrated that the Debtor and Greg Cutuli attempted to defraud creditors by transferring and hiding assets at or before the time The [Firm] was consulted, and that they may very well have used the services of The [Firm] to further a scheme to defraud. . . . As such, the Court concludes that there is sufficient evidence already in the record to indicate that when the Debtor and Greg Cutuli sought advice from The [Firm] regarding “asset protection” and “off-shore accounts,” they were in the process of committing fraud, and subsequently committed fraudulent acts after consulting with The [Firm]. . . . Whether The [Firm] was aware of the reasons the Debtor and Greg Cutuli used their services is not relevant to the application of the crime-fraud exception and this Court makes no finding on that issue. The fact that The [Firm's] services were used during (and prior to) a scheme involving the commission of multiple acts of fraud related to the information obtained through said services is sufficient. Therefore, the Court overrules The [Firm's] objections to the subpoena under the crime-fraud exception to the attorney-client privilege.

WSJ blogger Jay Adkisson does a thorough job of dissecting this case in a post entitled Fraudulent Transfers Trigger Crime/Fraud Exception And $10 Million Punitive Damages In Cutuli. If you’re still dead set on doing asset protection work, you’ll want to subscribe to Jay’s blog and hope you never end up on the receiving end of one of his withering assessments of botched lawyering by folks who really should know better. For purposes of this blog post, here’s an excerpt from Jay’s blog post that goes to my point: asset protection planning = DANGER FOR LAWYERS:

Folks, I’m here to tell you: Whatever planners may think of asset protection planning as a legitimate area of practice, the Courts just don’t see it that way. Instead, the Court’s see asset protection not as a legitimate practice area, but instead as debtors engaged in planning to cheat their creditors — and it is mainly because of cases like this (which, again, do not involve anything like legitimate asset protection planning) why Courts usually harbor that impression.

Let me put it another way: What might sound like a good idea to help clients while in the comfortable confines of one’s conference room, might later sound like an utterly blatant scheme to cheat creditors in the courtroom. Very simply, judges want to see debtors pay their debts, and they get mad when debtors engage in schemes to keep from paying their debts. Superficial explanation that the debtor was engaged in “estate planning” or anything else, usually falls on deaf ears when it is obvious to the Court what is really going on.

2d DCA: Does F.S. 56.29 give a Florida court personal jurisdiction over a Kentucky trustee absent a basis for personal jurisdiction under Florida’s long-arm statute?

Posted in Creditors' Claims, Practice & Procedure

Jarboe Family and Friends Irrevocable Living Trust v. Spielman, — So.3d —-, 2014 WL 185215 (Fla. 2d DCA January 17, 2014)

If you’re a non-Florida trustee, a Florida court’s personal jurisdiction over you is never a given, in any context, and that includes proceedings supplementary under F.S. 56.29.

This case involved a Florida judgment creditor trying to sue a Kentucky trustee/trust in Florida. The Kentucky trustee moved to dismiss on jurisdictional grounds, tracking the procedures for contesting personal jurisdiction laid out by statute in F.S. 48.193 and by our supreme court in Venetian Salami Co. v. Parthenais, 554 So.2d 499, 502 (Fla.1989). Creditor argued this procedure was trumped by F.S. 56.29, which governs “proceedings supplementary” for the collection of unsatisfied judgments. Creditor won the argument at the trial-court level.

Spielman disagreed that Florida’s long-arm statute and Venetian Salami apply in proceedings supplementary. Spielman argued that the only allegations required to meet the jurisdictional pleading requirements were those setting forth a facially sufficient cause of action for proceedings supplementary under section 56.29, Florida Statutes (2011). Spielman asserted that the impleader complaint’s allegations that the Trust and the Trustee transferred property to delay, hinder, or defraud Spielman satisfied this requirement. Spielman alternatively asserted that Jarboe’s deposition refuted the factual allegations in the Trustee’s affidavit.

The trial court agreed with Spielman’s primary argument and entered an order denying the motion to dismiss.

Wrong answer says the 2d DCA. Here’s why:

As has been noted, long-arm jurisdiction is a separate species of jurisdiction from that which is dependent upon pleadings or other procedural happenings. See Judge Scott Stephens, Florida’s Third Species of Jurisdiction, 82 Fla. B.J. 10, 11 (Mar. 2008) (discussing the differences between subject-matter jurisdiction, in personam jurisdiction, and “procedural jurisdiction”). Indeed, at least two Florida courts have addressed the issue of in personam jurisdiction over nonresident third-party impleader defendants by applying Florida’s long-arm statute as set forth in Venetian Salami. See, e.g., Tabet v. Tabet, 644 So.2d 557, 559 (Fla. 3d DCA 1994); Neff v. Adler, 416 So.2d 1240, 1243–44 (Fla. 4th DCA 1982), superseded by statute on other grounds, Standard Prop. Inv. Trust, Inc. v. Luskin, 585 So.2d 1099 (Fla. 4th DCA 1991). Thus, the Trust and the Trustee correctly argue that the issue of in personam jurisdiction in this case must be determined in accordance with the procedures explained in Venetian Salami.

Lesson learned?

If you’re a non-Florida trustee, a Florida court’s personal jurisdiction over you is never a given, in any context, and that includes proceedings supplementary under F.S. 56.29. If you find yourself litigating this issue, you’ll want to make sure you comply with the traditional procedures for contesting long-arm jurisdiction, which I’ve previously written about in the probate context here. You’ll also want to make sure you factor in F.S. 736.0202, Florida’s brand new trust-specific long-arm statute, which was passed in 2013 and previously discussed here.

4th DCA: Does Rule 1.525′s 30-day deadline apply in adversary probate proceedings?

Posted in Compensation Disputes, Practice & Procedure

Stone v. Stone, — So.3d —-, 2014 WL 537547 (Fla. 4th DCA February 12, 2014)

Under Florida Probate Rule 5.025(d)(2), adversary probate proceedings, “as nearly as practicable, must be conducted similar to suits of a civil nature, including entry of defaults. The Florida Rules of Civil Procedure govern, except for rule 1.525.”

If, when and how Civ. Pro. Rule 1.525, the rule setting a 30-day post-judgment deadline for filing attorney’s fee motions in civil litigation, applies to contested probate, guardianship and trust proceedings, is an important question. The last thing any lawyer wants to do is blow a deadline for claiming fees on behalf of his client, which is what happened in a string of cases I wrote about a few years ago (see here, here, here).

The problem was that a rule designed to apply in the general commercial litigation context didn’t really work in the probate, guardianship and trust context, where fee petitions are appropriately filed all the time, not just after a final judgment is entered. To fix this glitch in 2011 legislative and rule changes were adopted eliminating Rule 1.525′s 30-day deadline in the adversary probate and guardianship context, and limiting Rule 1.525′s 30-day deadline to fee petitions filed in trust proceedings by anyone other than the trustee (e.g., a beneficiary suing the trustee for malfeasance). Click here for my write of that legislation.

Unfortunately, not everyone got the memo; in the linked-to case above the trial court denied a motion for fees in an adversary probate proceeding based on Rule 1.525′s 30-day deadline. Wrong answer says the 4th DCA:

Generally, in civil proceedings, “[a]ny party seeking a judgment taxing costs, attorneys’ fees, or both shall serve a motion no later than 30 days after filing of the judgment … which judgment or notice concludes the action as to that party.” Fla. R. Civ. P. 1.525. However, under Florida Probate Rule 5.025(d)(2), adversary probate proceedings, “as nearly as practicable, must be conducted similar to suits of a civil nature, including entry of defaults. The Florida Rules of Civil Procedure govern, except for rule 1.525.” This probate rule is applicable to the order on appeal in this case. In re Amendments to the Florida Probate Rules, 95 So.3d 114, 115 (Fla.2012). The inapplicability of rule 1.525 in adversary probate proceedings functions identically to the inapplicability of the rule in proceedings governed by the Florida Family Law Rules of Procedure. See Montello v. Montello, 961 So.2d 257, 258–59 (Fla.2007); Hollister v. Hollister, 965 So.2d 341, 349–50 (Fla. 2d DCA 2007); Smith v. Smith, 902 So.2d 859, 862–63 (Fla. 1st DCA 2005).

As such, the trial court erred in striking appellant’s motion for costs based on the motion being untimely served under the thirty-day rule of Florida Rule of Civil Procedure 1.525. We, therefore, reverse and remand for further proceedings on appellant’s motion for costs.

3d DCA: Does judge’s independent investigation of facts in guardianship proceeding = disqualification?

Posted in Contested Guardianship Proceedings, Ethics

In re Guardianship of O.A.M., — So.3d —-, 2013 WL 5927613 (Fla. 3d DCA November 06, 2013)

Guardianship proceedings involving minors can be especially challenging for all involved . . . including your judge. Here’s the main problem: unlike most civil cases, in guardianship proceedings the judge plays a dual role: he or she serves both as neutral arbiter and as the person ultimately responsible for protecting the ward’s best interests. In Florida the power and responsibility of a court exercising guardianship jurisdiction over minors is such that the court itself is considered to be the minor’s guardian. See Brown v. Ripley, 119 So.2d 712, 717 (Fla. 1st DCA 1960). Thus “the legal guardian of a minor is regarded as the agent of the court and of the state in the discharge of his duty as such.” Id. How trial judges balance their sometimes competing roles in guardianship proceedings is the subject of the linked-to opinion above.

Case Study:

A Miami probate judge was apparently concerned that the parents/guardians of a minor ward were using guardianship funds to pay for the child’s private school tuition. While these payments may seem benign to most of us (after all, the money’s being used for the child’s benefit), in a guardianship proceeding they raise red flags. Why? Because parents serving as guardians aren’t absolved of their legal responsibility to financially provide for their children. This point is codified in F.S. 744.397(3), which provides as follows:

If the ward is a minor and the ward’s parents are able to care for him or her and to support, maintain, and educate him or her, the guardian of the minor shall not so use his or her ward’s property unless directed or authorized to do so by the court.

In other words, you can’t use your child’s money to pay for normal child-rearing expenses; that’s a parent’s responsibility. That said, if the child/ward has special needs requiring specialized educational support, those costs may be paid for with guardianship funds . . . if approved of by a judge. See Valentine v. Kelner, 452 So.2d 965 (Fla. 3d DCA 1984).

Bottom line, the 3d DCA didn’t fault the judge for being concerned about the private-school payments, it’s how he went about addressing those concerns that lead to his disqualification. So what went wrong? Here’s how the 3d DCA summarized the key facts:

The McFaddens’ motion contains specific statements indicating that the trial judge interviewed, outside the presence of the parties, the principal of the school where the ward was registered to attend. The motion also alleges the trial judge directly obtained financial records from Chase Bank to investigate the guardianship account, without involving the parties. The McFaddens’ motion thus contains specific statements which, if true, indicate the trial judge engaged in an independent investigation of the facts in the case.

Judicial investigation = judicial disqualification:

Florida law is clear: you can’t be both investigator and judge. Once that line is crossed, a judge is subject to immediate disqualification. Here’s how the 3d DCA summarized the law on this point:

“A judge must not independently investigate facts in a case and must consider only the evidence presented.” Fla. Code Jud. Conduct, Canon 3B(7) cmt. A judge’s “neutrality is destroyed when the judge himself becomes part of the fact-gathering process.” Albert v. Rogers, 57 So.3d 233, 236 (Fla. 4th DCA 2011); see also Vining v. State, 827 So.2d 201, 210 (Fla.2002) (“The judge overstepped his boundaries by conducting an independent investigation….”); Wilson v. Armstrong, 686 So.2d 647, 648–49 (Fla. 1st DCA 1996) (holding that trial judge’s ex parte meeting with estate’s accountant constituted a departure from the essential requirements of law).

. . .

Thus, the McFaddens’ allegations, taken as true for purposes of this motion, support a reasonable fear that the judge could no longer serve impartially. The judge should have entered an order of disqualification.

For more on disqualification motions, you’ll want to read Judicial Ethics Bench Guide: Answers to frequently Asked questions.

A judge’s dual role in guardianship proceedings:

What’s most interesting about this case isn’t the disqualification motion itself; it’s the judge’s response to the motion. According to the 3d DCA:

The trial judge responded to the petition noting that “[i]n guardianship matters, there is no one protecting the ward against possible abuses [by the guardian], except the court.”

What I see happening here is a well-intentioned judge trying to balance the somewhat conflicting demands placed upon him in a guardianship proceeding, where he’s expected to serve both as neutral arbiter and as the person ultimately responsible for protecting the ward’s best interests. While sympathetic to his motives, the 3d DCA makes clear judges can’t exceed the clearly-defined boundaries they’re supposed to operate within (even in guardianship proceedings). If there’s any investigating to be done, judges need to use the tools available to them to get the job done the right way (such as appointing GAL’s); they can’t just do it themselves.

A trial judge . . . has methods to address . . . concerns [about possible abuses by a guardian] without engaging in a prohibited personal investigation of facts outside the record. The Florida Probate Rules, for example, authorize appointment of a guardian ad litem when the interests of the guardian are or may be adverse to those of the ward. While the trial court’s actions were undoubtedly motivated by a desire to protect the ward and might well be commendable in another context, those actions are inconsistent with the cold neutrality required of an impartial judge.