Florida Probate & Trust Litigation Blog : Florida Probate Litigation, Will Contest Lawyer & Attorney : Juan C. Antúnez : Serving Miami, Jacksonville, Tampa Saint Petersburg, Orlando, Fort Lauderdale

Lubee v. Adams, --- So.3d ----, 2012 WL 163911 (Fla. 2d DCA January 20, 2012)

Are you a "reasonably ascertainable" creditor or not? If the answer is YES, then under F.S. 733.710 you have up to 2 years after the decedent dies to file your claim against the estate. If the answer is NO, then under F.S. 733.702 you only have 3 months after the estate's "notice to creditors" is first published to file your claim. 3 months vs. 2 years. That's a big difference. 

This case is all about who has the burden of proving whether or not you're a "reasonably ascertainable" creditor.

Case Study:

Personal representatives have a duty under F.S. 733.2121 to search out the decedent's reasonably ascertainable creditors and personally serve them with a "notice to creditors." Once personally served, reasonably ascertainable creditors have 30 days to file their claims.

In this case Mr. Lubee, the creditor, wasn't identified by the personal representative as a reasonably ascertainable creditor of the estate, which means he was never served with a notice to creditors. Mr. Lubee saw things differently, arguing he was a reasonably ascertainable creditor, and as such he should have been personally served with a notice to creditors. Because he wasn't served with a notice to creditors, Mr. Lubee argued the 30-day post service deadline applicable to him (as a reasonably ascertainable creditor) was never triggered, which means he could file his claim any time within 2 years after the decedent's date of death (which he did).

Burden of Proof:

Mr. Lubee's argument works if you assume ALL creditors are reasonably ascertainable, and it's up to the estate to prove they're NOT. His argument fails if you assume NO creditor is reasonably ascertainable, unless proven otherwise. Unfortunately for Mr. Lubee, first the trial court, then the 2d DCA ruled creditors bear the burden of proof, so his claim failed.

According to the 2d DCA, because Mr. Lubee wasn't identified by the estate as a reasonably ascertainable creditor, he had two options: [1] file his claim within the 3-month post publication deadline generally applicable to all creditors; or [2] file for an extension of time under F.S. 733.702(3) within the 2-year window of F.S. 733.710, prove his status as a reasonably ascertainable creditor within the context of that proceeding, then subsequently file his creditor claim. He did neither, so his claim failed as a matter of law. By the way, this two-step process is the exact same formula previously adopted by the 1st DCA in Morgenthau v. Estate of Andzel, --- So.3d ----, 2009 WL 5151741 (Fla. 1st DCA Dec 31, 2009), which I wrote about here.

Bottom line, when in doubt, no one's a reasonably ascertainable creditor until a court says you are. Here's how the 2d DCA explained its ruling:

There is no dispute that Mr. Lubee did not file his claim in the probate proceeding within three months following the publication of notice to creditors and that he did not file a motion for extension of time or otherwise seek an extension. There is also no dispute that Mr. Lubee was not served with a copy of the notice to creditors pursuant to sections 733.702(1) and 733.2121(3)(a). However, Mr. Lubee contends that because he was a readily ascertainable creditor entitled to be served with a copy of the notice to creditors pursuant to those sections, he was only required to file his claim in the probate proceeding within thirty days after service of the notice on him or, at a maximum, within two years of the decedent's death. He argues that because he was never served with the notice to creditors, he timely filed his claim within the two-year window of section 733.710.

Because a notice to creditors was published on November 16, 2007, creditors not entitled to actual notice were required to file their claims on or before February 16, 2008. See § 733.702(1). Creditors who were served with the notice to creditors were required to file their claims within thirty days following service. See id. Because he was not served with a copy of the notice to creditors, Mr. Lubee was required to file his claim in the probate proceeding within the three-month window following publication. Alternatively, Mr. Lubee could seek an extension from the probate court pursuant to section 733.702(3) within the two-year window of section 733.710. See Morgenthau v. Estate of Andzel, 26 So.3d 628, 632 (Fla. 1st DCA 2009) [click here]; cf. Miller v. Estate of Baer, 837 So.2d 448, 449 (Fla. 4th DCA 2002) (affirming order enforcing claim against estate where creditor failed to file claim within three-month window of section 733.702(1) but did file motion for extension of time within two-year window of section 733.710). It is undisputed that he did neither. Mr. Lubee's filing of his claim in the probate proceeding within two years of the decedent's death did not amount to a request for an extension of time and did not otherwise comply with the requirements of section 733.702. Mr. Lubee's claim in the probate proceeding was untimely and therefore barred. As a result, the issue of whether or not Mr. Lubee was a readily ascertainable creditor was immaterial in the civil proceeding, and the trial court correctly granted partial summary judgment in favor of the personal representative. 

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Grisolia v. Pfeffer, --- So.3d ----, 2011 WL 5864806 (Fla. 3d DCA Nov 23, 2011)

The key to understanding this case is recognizing that one word: "homestead;" is used in three very different ways in Florida's constitution:

• Article X, §4(a) and (b) for creditor protection
• Article X, §4(c) for devise and descent
• Article VII, §6 for taxation

The same home can qualify as "homestead" under one constitutional homestead clause, while at the same time failing to qualify as "homestead" under another constitutional homestead clause. For example, for public policy reasons Florida's homestead tax exemption (Article VII, §6) is "strictly construed." In other words, when in doubt, courts must rule against homeowners claiming this tax benefit. By contrast, Florida's homestead creditor protection (Article X, §4(a) and (b)) is "liberally construed." When in doubt, courts must rule in favor of homeowners claiming this asset-protection benefit.

Courts get into trouble when they rely on a line of homestead case-law authority developed to address one facet of homestead law (e.g., taxes), to decide a case involving another facet of homestead law (e.g., creditor protection). That's what happened in the linked-to case above.

Case Study:

In the linked-to case above the decedent was a foreign national (Venezuelan) who moved to Florida in 2005 after his US-born son was almost kidnapped in Venezuela. In 2006 the decedent purchased an apartment in Florida, which he resided in with his family. In 2007 the decedent was loaned $500,000. In 2009 the decedent died intestate while still residing with his family in his Florida apartment. When the decedent's creditors tried to enforce their debt against his estate, his wife claimed the homestead creditor protection to shield the family's apartment from their claims.

A foreign national does not qualify for the homestead tax exemption unless he's a permanent US resident (i.e., Greencard holder), which the decedent wasn't. The trial court ruled against the family on the homestead creditor protection issue based in large part on the fact that the decedent never claimed, nor did he ever qualify for, the homestead tax exemption. Wrong answer, says the 3d DCA. Just because your "homestead" does not qualify for the tax exemption does not mean it fails to qualify for creditor protection.

In Florida, “courts have consistently held that the protections afforded by the ‘homestead exemption in article X, section 4 must be liberally construed.’“ Taylor v. Maness, 941 So.2d 559, 562 (Fla. 3d DCA 2006) (citation omitted). Furthermore, the homestead exemption jurisprudence of Florida courts “has long been guided by a policy favoring the liberal construction of the exemption: ‘Organic and statutory provisions relating to homestead exemptions should be liberally construed in the interest of the family home.’“ Taylor, 941 So.2d at 562 (citations omitted). Accordingly, the Florida homestead exemption from forced sale “is liberally construed for the benefit of those it was designed to protect.” Taylor, 941 So.2d at 562 (quoting Law v. Law, 738 So.2d 522, 524 (Fla. 4th DCA 1999)).

. . . . . .

Appellees cite to several bankruptcy cases where a debtor, because of his immigration status, could not formulate the requisite intent to make his property his permanent residence. These cases ignore that eligibility for the homestead exemption depends on the intent of the homesteader rather than that of the U.S. Citizenship and Immigration Services. See Cooke, 412 So.2d at 341.

. . . . . .

Other cases cited by Appellees are inapposite as they involve Florida's homestead exemption from taxation that is now set forth in article VII, section 6 of the Florida Constitution (“Tax Exemption”), rather than the homestead exemption from forced sale found in article X, section 4. For example, in Juarrero v. McNayr, 157 So.2d 79 (1963), the Florida Supreme Court held that a citizen and former resident of a foreign country, who is in the United States solely on the authority of a temporary visa, “has no assurance that he can continue to reside in good faith for any fixed period of time in this country ... [and, therefore] does not have the legal ability to determine for himself his future status and does not have the ability legally to convert a temporary residence into a permanent home.” Id. at 81. Likewise, in DeQuervain v. Desguin, 927 So.2d 232 (Fla. 2d DCA 2006), the court found that homeowners who held only temporary visas “could not form the requisite intent to become permanent residents for purposes of the [Tax Exemption].” Id. at 233. However, the Second District also clarified that “because the [Tax Exemption] provides relief from an ad valorem tax, we must construe the statute strictly against [the homeowners].” Id. (citing Capital City Country Club, Inc. v. Tucker, 613 So.2d 448, 452 (1993)). The strict construction applicable to the Tax Exemption stands in contrast to the liberal construction of the homestead exemption from forced sale at issue here. See Taylor, 941 So.2d at 562; Law, 738 So.2d at 524.

Similarly, at the evidentiary hearing the Appellees raised the fact that the Decedent had never claimed a Tax Exemption on the Property. They further argue on appeal that a person in the United States under a temporary visa cannot meet the requirement of permanent residence or home, and therefore, cannot claim the Tax Exemption. Fla. Admin Code R. 12D–7.007 (2002). We note that the portion of the Florida Administrative Code to which they cite applies to the Tax Exemption and not to the homestead exemption from forced sale at issue here. The probate court referenced in the order on appeal that “[i]n fact, the Decedent never claimed a [Tax Exemption] according to the Miami–Dade County Tax Rolls.” As we have previously stated, “[f]ailure to claim the [Tax Exemption] is not evidence that property is not, in fact, homestead.” Taylor, 941 So.2d at 563 (citing Pierrepoint v. Humphreys, 413 So.2d 140, 143 (Fla. 5th DCA 1982)). Clearly, “the homestead exemption from forced sale is different from the [Tax Exemption].” Taylor, 941 So.2d at 563 (citing S. Walls, Inc. v. Stilwell Corp., 810 So.2d 566, 569 (Fla. 5th DCA 2002)).

Under the specific facts of the this case, because the Decedent's American-born Son resided in the Property since its purchase, the Decedent and Widow had a visa which gave them the legal right to reside in Florida, and were actively pursuing permanent residence status prior to the Decedent's death, we find that the Decedent demonstrated the requisite intent to make the Property his family's permanent residence. Based upon the foregoing, we reverse the probate court's order denying the petition for declaration of homestead exemption. 

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Lauritsen v. Wallace, --- So.3d ----, 2011 WL 1195873 (Fla. 5th DCA Apr 01, 2011)

The general rule is that your heirs are last in line when it's time to distribute your estate. Before they get theirs, the costs of administering your estate (think PR fees, accounting and legal expenses), taxes, and creditor claims all have to be paid with assets of the estate. What's left over goes to your heirs.

For example, if your estate consists of $100,000 and the costs of administering your estate, taxes, and creditor claims all add up to $50,000, your heirs only get $50,000. Things get tricky when estates are insolvent. Assume again your estate has a value of $100,000, but the debts of your estate amount to $120,000. In that case your heirs get nothing and the estate's administration expenses, taxes and creditor claims are paid in the order of priority listed in F.S. 733.707.

Insolvent Estates: Case Study:

The linked-to case is an interesting example of the general principal that administrative expenses and creditor claims have priority over distributions to heirs. In this case the testator's son signed a promissory note agreeing to repay funds loaned to him by his dad. This promise of funds has value and is obviously an asset of dad's estate. Dad's will forgave son's debt. This is a common clause and usually isn't a problem. Unfortunately, in this case dad's estate was insolvent. The issue became whether the debt forgiveness clause in dad's will was enforceable. Here's how the PR teed up the issue for the probate court and how the court ruled:

The personal representative filed in the probate court a Motion to Determine Ownership of the Note and Status of Forgiveness under Decedent’s Will. The personal representative argued that the decedent’s one-half ownership of the note must be utilized to pay the estate’s debts, taxes, and expenses before the balance could be forgiven. The probate court ruled that the note was forgiven at the moment of the decedent’s death.

On appeal the 5th DCA reversed the probate court in a detailed opinion that does a great job of summarizing how Florida's Probate Code deals with insolvent estates. If you’re working with an insolvent estate, you'll want to read this opinion in its entirety. Here's an excerpt:

Several sections of the probate code support the conclusion that a devise cannot be elevated over administrative expenses and the rights of creditors. Section 731.201(10), Florida Statutes (2007), provides that “[a] devise is subject to charges for debts, expenses, and taxes[.]” Section 733.805(1) provides that “[f]unds or property designated by the will shall be used to pay debts, family allowance, exempt property, elective share charges, expenses of administration, and devises to the extent the funds or property is sufficient.” If no provision is made or the designated fund or property is insufficient, the statute sets forth a priority scheme on how devises abate. § 733.805, Fla. Stat. (2007). Section 733.707(1) provides that “[t]he personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order . . . .” The statute then identifies the eight classes of expenses and obligations and the order in which each is paid. The ruling by the lower court elevates the gift of forgiveness of an obligation to a superior status over the rights of legitimate creditors of the decedent, contrary to the priorities established in the Probate Code.

* * *

Therefore, we hold that a decedent can release a debt owed to the decedent through a testamentary devise only to the extent that the decedent’s estate is solvent to pay all debts and administrative costs of the estate.

Lesson learned?

Times are tough. Insolvent estates are now part of the landscape. If you're working with an insolvent estate, you need to make sure everything you do is guided by the payment priorities listed in F.S. 733.707 and the order of abatement listed in F.S. 733.805. If you're advising the PR, when in doubt, don't assume the risk of a wrong decision, do what the PR did in the linked-to case above: file a motion, serve it on all interested parties, and ask your probate judge for guidance.

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In re Miller, --- B.R. ----, 2010 WL 5184798 (Bkrtcy.S.D.Fla.2010)

Assume Husband "A" and "B" are both recent widowers. Husband "A" inherited $100,000 from his wife. Husband "B" was completely cut out of his wife's will, but after claiming an elective share of his wife's estate (30% of the elective estate), he too received $100,000 from his wife's estate.

Now assume Husband "A" and "B" both declare bankruptcy shortly after their respective wives pass away. Who's financially better off?

According to the linked-to bankruptcy court opinion, Husband B is clearly better off. Why? Because it's legal for Husband B to intentionally delay his elective-share election until it's too late for his creditors to go after these assets, while Husband A's inheritance is automatically exposed to his creditor claims. Is this good public policy? I have my doubts. But apparently it's the law. Here's how the bankruptcy court explained its ruling.

[1] Why Husband A's inheritance is automatically exposed to creditor claims in bankruptcy:

With limited exceptions, § 541 of the Bankruptcy Code provides that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Pursuant to § 541(a)(5), this includes property that the debtor “acquires or becomes entitled to acquire within 180 days” of the petition date “by bequest, devise, or inheritance.” 11 U.S.C. § 541(a)(5).

[2] Why Husband B may intentionally time his elective-share election to cut out his creditors:

Under Florida law, the right of election is a personal right of the surviving spouse. See Harmon v. Williams, 615 So.2d 681, 682 (Fla.1993). As such, the “right of election, itself, is not a property interest of the debtor, and thus, not property of the estate.” In re Brand, 251 B.R. 912, 916 (Bankr.S.D.Fla.2000). Moreover, although an elective share interest “would constitute property of the estate[,]” “an elective share interest does not exist until the statutory right of election is properly exercised.” Id. at 915-16; see also In re McCourt, 12 B.R. 587, 589 (Bankr.S.D.N.Y.1981) (“Until the debtor exercises his personal statutory right to the election, no rights in his deceased wife's property are ascribable to the debtor.”). ...............

Although the Trustee asserts that the Debtor intentionally delayed filing the Election to avoid the 180 day period under § 541(a)(5), a review of the record indicates that the Trustee never filed a motion seeking to require the Debtor to file the Election. Even if the Trustee had filed such a motion, the Trustee cites no authority indicating that the Court has the power to require a debtor to exercise a right of election. Relevant case law indicates that the Court has no such power. See McCourt, 12 B.R. at 589 (denying trustee's motion to force the debtor to exercise the right of election).

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Olmstead v. F.T.C., --- So.3d ----, 2010 WL 2518106 (Fla. Jun 24, 2010)

Limited liability companies or "LLCs" have long been touted as the ultimate entity for investors and business owners alike: combining the best asset protection qualities and tax benefits of corporations and partnerships into a single hybrid entity. One of the big asset-protection selling points for LLCs is that they're entitled to the same "charging order" creditor protection partnerships are entitled to.

This Florida Supreme Court case involved a $10 million judgment obtained by the FTC against the debtors for having "operated an advance-fee credit card scam." Assets of these debtors were frozen and placed in receivership. Among the assets placed in receivership were several single-member LLCs. To partially satisfy its judgment the FTC obtained an order compelling the debtors to endorse and surrender to the receiver 100% of their right, title, and interest in their LLCs.

The debtors cried foul, arguing that the most the FTC was entitled to under Florida's LLC Act was a charging order against their single-member LLCs. The case was appealed to the Eleventh Circuit, which in turn asked the Florida Supreme Court to rule on the charging-order issue. In what is sure to be a controversial opinion, the Florida Supreme Court ruled charging-order protection does NOT apply to single-member LLCs. Here's a key excerpt explaining the court's thinking:

Since the charging order remedy clearly does not authorize the transfer to a judgment creditor of all an LLC member's “right, title and interest” in an LLC, while section 56.061 clearly does authorize such a transfer, the answer to the question at issue in this case turns on whether the charging order provision in section 608.433(4) always displaces the remedy available under section 56.061. Specifically, we must decide whether section 608.433(4) establishes the exclusive judgment creditor's remedy-and thus displaces section 56.061-with respect to a judgment debtor's ownership interest in a single-member LLC.

As a preliminary matter, we recognize the uncontested point that the sole member in a single-member LLC may freely transfer the owner's entire interest in the LLC. This is accomplished through a simple assignment of the sole member's membership interest to the transferee. Since such an interest is freely and fully alienable by its owner, section 56.061 authorizes a judgment creditor with a judgment for an amount equaling or exceeding the value of the membership interest to levy on that interest and to obtain full title to it, including all the rights of membership-that is, unless the operation of section 56.061 has been limited by section 608.433(4).

Section 608.433 deals with the right of assignees or transferees to become members of an LLC. Section 608.433(1) states the basic rule that absent a contrary provision in the articles or operating agreement, “an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.” See also § 608.432(1)(a), Fla. Stat (2008). The provision in section 608.433(4) with respect to charging orders must be understood in the context of this basic rule.

The limitation on assignee rights in section 608.433(1) has no application to the transfer of rights in a single-member LLC. In such an entity, the set of “all members other than the member assigning the interest” is empty. Accordingly, an assignee of the membership interest of the sole member in a single-member LLC becomes a member-and takes the full right, title, and interest of the transferor-without the consent of anyone other than the transferor.

Section 608.433(4) recognizes the application of the rule regarding assignee rights stated in section 608.433(1) in the context of creditor rights. It provides a special means-i.e., a charging order-for a creditor to seek satisfaction when a debtor's membership interest is not freely transferable but is subject to the right of other LLC members to object to a transferee becoming a member and exercising the management rights attendant to membership status. See § 608.432(1), Fla. Stat. (2008) (setting forth general rule that an assignee “shall have no right to participate in the management of the business affairs of [an LLC]”).

Section 608.433(4)'s provision that a “judgment creditor has only the rights of an assignee of [an LLC] interest” simply acknowledges that a judgment creditor cannot defeat the rights of nondebtor members of an LLC to withhold consent to the transfer of management rights. The provision does not, however, support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor. See In re Albright, 291 B.R. 538, 540 (D.Colo.2003) (rejecting argument that bankruptcy trustee was only entitled to a charging order with respect to debtor's ownership interest in single-member LLC and holding that “[b]ecause there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate”); In re Modanlo, 412 B.R. 715, 727-31 (D.Md.2006) (following reasoning of Albright).

Our understanding of section 608.433(4) flows from the language of the subsection which limits the rights of a judgment creditor to the rights of an assignee but which does not expressly establish the charging order remedy as an exclusive remedy. The relevant question is not whether the purpose of the charging order provision-i.e., to authorize a special remedy designed to reach no further than the rights of the nondebtor members of the LLC will permit-provides a basis for implying an exception from the operation of that provision for single-member LLCs. Instead, the question is whether it is justified to infer that the LLC charging order mechanism is an exclusive remedy.

On its face, the charging order provision establishes a nonexclusive remedial mechanism. There is no express provision in the statutory text providing that the charging order remedy is the only remedy that can be utilized with respect to a judgment debtor's membership interest in an LLC. The operative language of section 608.433(4)-”the court may charge the [LLC] membership interest of the member with payment of the unsatisfied amount of the judgment with interest”-does not in any way suggest that the charging order is an exclusive remedy.

Did the Florida Supreme Court get this one right?

According to the dissent's lengthy opinion, they didn't. The dissent focused on a strict construction of Florida's LLC Act. However, if you step back and think about why partnerships are entitled to charging order protection in the first place, you have to admit the rationale doesn't seem to apply to single-member LLCs. Although this policy argument isn't explicitly stated in the Florida Supreme Court's majority opinion, I think it goes a long way towards explaining why they ruled the way they did.

For those of you interested in understanding the charging-order policy issue I think is lurking in the background of the Florida Supreme Court's ruling, STARTrightLLC.com is an excellent starting point. Below is an excerpt from that website explaining why charging-order protection makes sense in a multi-member LLC scenario, and why it doesn't make sense for single-member LLCs.

The charging order protects the company and the member’s investment if one of the members is sued in his or her personal life. . . . The original charging order philosophy protected guys A, B from having to accept D as an unwanted partner if C, the person they originally went into business with gets sued. They don’t want to have to deal with D. To prevent this unwanted member . . . the charging order is all D can get out of C’s membership . . . The charging order limits D. He must wait for A and B to decide to distribute money. No distributions = no money.

The Single Member Hitch: When a the member of a single member LLC is sued, there is no other member to protect from D. Two bankruptcy courts have used this flaw in the LLC protection to allow creditors of a business owner to completely take over his LLC and liquidate it for cash. The first case was in Colorado and the nation held its breath to see what would happen next. The next case was in Idaho and actually used the Colorado case to base its decision on. This means the trend is starting to move in the direction of denying charging order protection to single member LLCs.

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Baillargeon v. Sewell, --- So.3d ----, 2010 WL 1727842 (Fla. 2d DCA Apr 30, 2010)

As a probate lawyer, you're often the low man on the totem pole in cases involving large, complex matters. The firm representing the estate on the civil litigation side of the case could be (and often is) a large firm with hundreds of lawyers on the payroll, staffing your particular matter with a team of high-powered litigators. And then there's the probate lawyer. Often a sole or small-firm practitioner, usually working the case alone or (at most), with the help of a single associate and a paralegal.

David vs. Goliath

This case is a prime example of the disproportionate impact a good probate lawyer can have on the course of events. The estate was on the receiving end of a $150 million class action claim. I have no idea how much cost and delay is involved in defending against this type of claim in the United States District Court for the Middle District of Florida (which is where it was being litigated), but I'm sure it's huge. Undaunted, an alert probate lawyer spotted an opportunity to save the estate hundreds of thousands of dollars in legal defense fees by ending the case immediately in the probate court. Here's how he did it:

[1] Does Florida's Probate Code permit the filing of class action claims against a decedent's estate? 2d DCA says NO

Two creditors of the decedent filed a statement of claim in an estate administration proceeding on behalf of themselves and a class of persons similarly situated. The personal representative of the estate moved to strike the claim to the extent that it attempted to assert claims on behalf of persons other than the claimants. The probate judge disagreed, and let the class-action portion of the claim stand. On appeal the 2d DCA disagreed, ruling that Florida's Probate Code does NOT permit the filing of class action claims against a decedent's estate. Here's why:

In [In re Estate of Gay, 294 So.2d 668 (Fla. 4th DCA 1974)], the Fourth District held that the filing of a class claim was inconsistent with the requirements of section 733.16, Florida Statutes (1971). Id. at 670. Section 733.16 appeared in the former Florida Probate Law. The Fourth District also said that the filing of a class claim was in conflict with the public policy of this state favoring the speedy administration of decedents' estates. Id.

*     *     *     *     *

Despite the Code's comprehensive coverage of the administration of decedents' estates in general and creditors' claims in particular, it is silent on the subject of class claims. As we have already noted, the Fourth District's decision in Gay is the only reported authority in Florida on the subject of the filing of class claims in probate. The Gay case was decided under the Florida Probate Law in 1974, more than thirty-five years ago. Thus it is pertinent to note “that the legislature is presumed to know the judicial constructions of a law when enacting a new version of that law.” Brannon v. Tampa Tribune, 711 So.2d 97, 100 (Fla. 1st DCA 1998) (citing Collins Inv. Co. v. Metro. Dade County, 164 So.2d 806 (Fla.1964)). “Furthermore, the legislature is presumed to have adopted prior judicial constructions of a law unless a contrary intention is expressed in the new version.” Id. (citing Deltona Corp. v. Kipnis, 194 So.2d 295 (Fla. 2d DCA 1966)). Thus, in the absence of any reference to the filing of class claims in the Code either when it was enacted or in the multiple subsequent amendments to it, the legislature must be presumed to have adopted the Fourth District's holding in Gay that class claims may not be filed in probate. Accordingly, we conclude that any change in the probate claims process to allow the filing of class claims must come from the legislature instead of through a judicial construction of the Code by this court that would be at odds with the Fourth District's holding in Gay.

[2] If a lawsuit is pending against the decedent when he died, do you still need to file a separate creditor claim against his estate? 2d DCA says YES

When the decedent died, he was one of several defendants named in a class action that was then pending in the United States District Court for the Middle District of Florida. Randolph Sewell and Daphne Sewell (the Sewells) had filed the class action on May 30, 2007, on behalf of themselves and all others similarly situated against a number of entities and individuals, including the decedent. After letters of administration were issued to the personal representative, she was promptly substituted as a party defendant in the pending action. The Sewells then filed a first amended class action complaint specifically naming the personal representative as a defendant.

On these facts the probate judge ruled that the filing of the claim was unnecessary because a federal action asserting the class claim was pending against the decedent at the time of his death and because the personal representative of the estate was promptly substituted as a party defendant in the federal action.

Strike two for the probate judge. On appeal the 2d DCA reversed him on this issue as well, holding that the probate judge's ruling was based on old case law that no longer applied.

The circuit court's rationale for accepting the Sewells' argument that it was unnecessary to file a claim on behalf of the unidentified members of the class was as follows: “[T]he estate had notice ... the action was pending when the [Decedent] died and the [Personal Representative] has been joined in the federal class [action].” However, the circuit court's reliance on the decision in [In re Estate of Shaw, 340 So.2d 506 (Fla. 3d DCA 1976),] for this proposition was misplaced. In the Shaw case, the result was controlled by the former Florida Probate Law's section 733.16, the predecessor to current section 733.702.

*     *     *     *     *

[T]he exception for actions pending at the death of the decedent is no longer in effect, and Shaw and similar cases that applied the exception in section 733.16(1)(a) are no longer authoritative on this question. See Spohr v. Berryman, 589 So.2d 225, 228-29 (Fla.1991); Roberts v. Jassy, 436 So.2d 394, 395-96 (Fla. 2d DCA 1983); Am. & Foreign Ins. Co. v. Dimson, 645 So.2d 45, 47 (Fla. 4th DCA 1994); Lasater v. Leathers, 475 So.2d 1329, 1330 (Fla. 5th DCA 1985).

It follows that the filing of a claim on behalf of the unidentified members of the class was not made unnecessary by the pendency of the class action at the death of the decedent and the prompt substitution of the personal representative in the pending federal action. The circuit court erred in ruling to the contrary.

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Miller v. Kresser, --- So.3d ----, 2010 WL 1779899 (Fla. 4th DCA May 05, 2010)

Multigenerational spendthrift trusts - often referred to as "dynasty trusts" - are fast becoming the cornerstone of modern estate planning. This is not some esoteric issue of interest only to tax lawyers: it's big business. A 2005 study I wrote about here estimated that these trusts attracted over $100 Billion in new assets over a relatively short period of time.

The fact that spendthrift trusts hold vast amounts of wealth and that there's an ever growing number of them means lawyers of all stripes, be they divorce attorneys, bankruptcy attorneys, estate planners or probate litigators, will want to take notice of the 4th DCA's opinion linked-to above. Why? Because it's all about when and how a Florida court will let you crack one of these trusts open and yank out its assets.

4th DCA says trust agreement controls; bad facts irrelevant

A spendthrift trust works as an asset-protection shield because the trustee - not the beneficiary - controls the trust's assets. But what if a creditor proves conclusively that this is not in fact the case? What if regardless of what the trust agreement may say, the actual facts on the ground demonstrate that the beneficiary is exercising complete "dominion and control" over his trust? Under those "bad facts" maybe a creditor should be permitted to pierce a spendthrift trust's asset-protection shield? That, by the way, is one of the most common lines of attack against spendthrift trusts.

To my knowledge the linked-to opinion is the first Florida appellate decision - applying Florida's new trust code provisions governing spendthrift trusts - to state in no uncertain terms that bad facts do NOT matter; the only thing that matters are the words on the page of the trust agreement. If the trust agreement has a valid spendthrift clause, end of discussion, creditor loses; the level of control a beneficiary exerts over his trust is simply irrelevant as a matter of law.

Here's how the 4th DCA summarized the underlying facts and why the trial court allowed the creditor in this case to crack open the target spendthrift trust:

The trial court conducted a non-jury trial .  .  .  at which the relevant issue was whether the spendthrift provision in the James Trust could be invalidated or pierced and the trust's assets executed upon .  .  .  In a written final judgment, the trial court found that the spendthrift provision in the James Trust was valid at the time the trust was settled.

The trial court then set forth a detailed account of James's significant control over the James Trust and over Jerry, as trustee. The court found that Jerry had almost completely turned over management of the trust's day-to-day operations to James. James controlled all important decisions concerning the trust assets, including investment decisions. Jerry never independently investigated these decisions to determine whether they were in the best interest of the trust, and some of the decisions have turned out to be unwise. The trial court concluded that Jerry simply rubber-stamped James's decisions and “serve[d] as the legal veneer to disguise [James's] exclusive dominion and control of the Trust assets.”

Ultimately, the court held that James's exclusive dominion and control over the James Trust served to terminate the trust's spendthrift provision, allowing Kresser to reach all of the trust's assets to satisfy his judgment.

And here's why the 4th DCA said the trial court got it wrong:

While we agree that the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities to manage and distribute trust property, the law requires that the focus must be on the terms of the trust and not the actions of the trustee or beneficiary. In this case, the trust terms granted Jerry, not James, the sole and exclusive authority to make distributions to James. The trust did not give James any authority whatsoever to manage or distribute trust property.

*     *     *     *     *

To conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust-the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor's express intent, as set forth in the trust documents. It is the settlor's prerogative to choose the trustee she believes will best fulfill the conditions of the trust. In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties. We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary's control and the extent to which a creditor may reach trust assets. It is the legislature's function to carve out any exceptions to the protections afforded by discretionary and spendthrift trusts.

So what's it all mean?

First, if you're an estate planner, this case is good for your clients (and good for business): it underscores the rock solid asset-protection values of a Florida spendthrift trust. Second, if you're a litigator defending a spendthrift trust against attack - this case is pure gold! Why? Because it should dramatically reduce the level of uncertainty and expense inherent to litigating this type of case. Rather than having to go through a full blown trial on the purely subjective question of how much beneficiary "dominion and control" is too much; now all you have to do is point to the trust agreement. If it has a valid spendthrift clause, game over, your client wins.

Bonus material

And last but not least, thanks to the excellent work done by counsel on both sides of this case we now have an exhaustive summary of Florida law - both for and against - the "dominion and control" argument for piercing a spendthrift trust.

1. Appellant's Initial Brief
2. Intervenor Appellants' Initial Brief
3. Appellee's Answer Brief

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Kentucky and Florida estate planning lawyer/blogger C. Carter Ruml recently wrote an interesting summary of Robertson v. Deeb, 16 So.3d 936 (Fl. Dist. Ct. App. 2 Dist. 2009), a pro-creditor decision that pokes a hole in Florida's well-earned reputation as an asset-protection haven. The blog post is entitled Creditor Protection Denied for Florida Debtor’s Inherited IRA, and it's well worth reading in its entirety. Here's an excerpt:

KYEstates has been following issues of creditor protection for inherited IRAs closely (see here and here), and we haven’t hidden the fact that on this issue, we’re biased in favor of the debtor. Before today, our series was tied at Debtor 1, Creditor 1. With today’s report, the score regrettably changes to Debtor 1, Creditor 2. The bad news comes in the form of Robertson v. Deeb, 16 So.3d 936 (Fl. Dist. Ct. App. 2 Dist. 2009), a pro-creditor decision that illustrates the risks facing beneficiaries of inherited IRAs seeking creditor protection for their accounts.

*     *     *     *     *

In Robertson, the account holder (Robertson) was sued by Deeb (payee under a promissory note made by Robertson).  The creditor obtained a judgment and served a write of garnishment on RBC Wealth Management, custodian of the debtor’s inherited IRA.  The debtor filed a claim of exemption and argued that the IRA, which the debtor had inherited from his father, was exempt from garnishment under F.S. 222.21(2)(a). [For more on Florida asset protection, consult this KYEstates chart.]

Even though F.S. 222.21(2)(a) protects “money or other assets payable to an owner, a participant or a beneficiary” in a fund or account that is maintained as an IRA pursuant to a plan or governing instrument that is exempt from taxation under certain provisions of the Internal Revenue Code, the trial court found that this statutory protection does not extend to an inherited IRA, and denied the debtor’s claim of exemption.

The Second District Court of Appeals upheld the trial court, concluding that F.S. 222.21(2)(a) “does not apply to inherited IRAs because the plain language of that section references only the original ‘fund or account’ and the tax consequences of inherited IRAs render them completely separate funds or accounts.”

And while we're talking about asset-protection and inherited IRAs, Florida practitioners should take note of an excellent discussion addressing this precise issue in the May/June 2010 editition of the ABA's Probate and Property magazine. In a column entitled Retirement Benefits Planning Update, Detroit, MI estate planning attorney Harvey B. Wallace II discussed the Robertson v. Deeb case and possible "work around" planning options. Here's an excerpt:

The degree to which the creditors of a beneficiary of an inherited IRA have access to the IRA account in a nonbankruptcy context depends on the interpretation of state statutes, which, in many cases, seem on their face protective of inherited IRAs but, when interpreted by the courts, are not. The protective provisions of the BAPA that appear to exempt an inherited IRA from a beneficiary’s bankruptcy estate have yet to be subjected to extensive judicial scrutiny. If an account owner has concerns that the beneficiary or one of the beneficiaries who may inherit all or a portion of an IRA may have creditor problems, the use of a trusteed IRA that restricts post-death distributions and contains a spendthrift clause may, depending on the applicable state law and its interpretation, afford creditor protection. The naming of a properly drafted conduit trust or discretionary trust as the beneficiary of an inherited IRA invokes full protection of the state’s spendthrift law and provides the maximum possible protections from the creditors of a beneficiary of the trust.

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Grainger v. Wald, --- So.3d ----, 2010 WL 479862 (Fla. 1st DCA Feb 12, 2010)

The linked-to opinion is yet another example of yet another plaintiffs lawyer seeing his trial-court win go up in smoke because he blew a deadline in probate court. The last time I wrote about this problem was a med-mal case [click here]. This time around it was a personal injury case arising out of an automobile/ motorcycle accident.

Plaintiffs suing estates often fail to realize that they're really litigating their claims in two separate courts in front of two separate judges:

1. The trial court adjudicating their lawsuit (this is where the decedent's liability is established); and
2. The probate court administering the decedent's probate estate (this is where you go to collect on your judgment).

In the linked-to opinion above the plaintiff eventually prevailed in his lawsuit, but the judgment wasn't rendered until after the decedent's death. In order to collect on his judgment, plaintiff needed to file a creditor claim against the probate estate of the now deceased defendant. This is where things went south for the plaintiff (and a good probate lawyer working for the estate snatched victory from the jaws of defeat!!).

At some time during the course of the litigation plaintiff's personal injury attorney was served with a "creditors notice" in connection with the probate proceeding. The personal injury lawyer apparently ignored this notice, which ultimately resulted in his trial court win being forfeited (ouch!!).  Here are the key facts/dates as recounted by the 1st DCA:

Wald was involved in an automobile/motorcycle accident with the decedent and brought a personal injury lawsuit to recover damages. Wald eventually prevailed in his lawsuit, but the judgment was not rendered until after the decedent’s death. Some time after obtaining the judgment, Wald filed a claim against the probate estate. 

The personal representative argued she had served notice on Wald's attorney as required by Florida Probate Rule 5.041(b) (2009) on May 23, 2007, thus triggering the time constraints of section 733.702(1). Therefore, under the statute, Wald had until June 22, 2007, to file any claim he might have. Since Wald's claim was not filed until July 2, 2007, the personal representative argued it was untimely and forever barred.

So far so good for the estate. But then the probate judge did something the 1st DCA characterized as "bizarre": he declared the estate's creditor notice wasn't valid because plaintiff's personal injury attorney had been served instead instead of plaintiff's probate attorney. What?! Yeah, that's what the 1st DCA said too.

There are two reasons why the probate court erred in finding the time constraints of section 733.702(1) inapplicable.

[1] First, the Florida Probate Rules do not make any distinction based on the scope of an attorney's representation of a client. A personal representative would have no way of knowing such information. These descriptive labels, such as “probate” attorney or “personal injury” attorney do not appear in the Rule 5.041(b), which governs the service of pleadings and papers in probate actions. Instead, the Rule simply requires that if a creditor is represented by an attorney, service must be on the attorney and not on the creditor. The language of Rule 5.041(b) states that “when service is required or permitted to be made on an interested person represented by an attorney, service shall be made on the attorney unless service on the interested person is ordered by the court.” (emphasis added).

*     *     *

[2] Second, regardless of whether the attorney served was labeled the “probate” or the “personal injury” attorney, the record reflects that Wald had actual notice and that he received notice in time to file the claim. Wald received all process that was due. The record contains Wald's original statement of claim against the estate. Although the claim was not filed until July 2, 2007, Wald signed the claim on June 16, 2007-at least six days before the time for filing claims was to expire. “[D]ue process requires the personal representative to give notice by any means that is certain to ensure actual notice of the running of the non-claim period.” Estate of Ortolano, 766 So.2d 330, 332 (Fla. 4th DCA 2000) (emphasis added). Considering the date of Wald's signature, he had actual notice and sufficient time to file a claim within the 30-day statute of limitations. Therefore, any failure was not in the service of the notice, but in the untimely filing of the claim. Since there was no excuse for Wald's failure to file the claim in a timely manner, it should have been declared time barred under section 733.702(1).

 

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In re Estate of Harrison, Slip Copy, 2010 WL 503077 (Bankr.M.D.Fla. Jan 29, 2010)

An overarching theme of Florida’s probate code is the tension between basic due-process rights on the one hand and Florida’s strong public policy favoring the speedy administration of estates on the other. Florida’s 2-year non-claim statute [F.S. 733.710] epitomizes this tension because of its simplicity and utter disregard for equitable considerations. When it comes to unsecured creditors, after 2 years it's game over . . . period, no exceptions.

In the linked-to opinion the unsecured probate creditor -  UK insurance giant Lloyd's of London - cried foul when the debtor's son strategically waited two years and one day! to commence his father's probate proceeding . . . thereby automatically triggering application of Florida’s 2-year non-claim statute . . . thereby automatically barring all of his father's unsecured creditor claims, including Lloyd's. Lloyd's argued that the debtor's son - the designated personal representative under his father's will - had an affirmative duty to advise his father's creditors that they needed to open a probate proceeding in Florida and file a claim within two years of the debtor's date of death.

While a personal representative does have affirmative duties to estate creditors after he's appointed, those duties don't apply before he's appointed. This was the hole in Lloyd's argument, and why the estate won this one. Here's how the judge summarized the key legal issues:

As a matter of law, Randolph Harrison, as the beneficiary and named personal representative, had no affirmative or fiduciary duty before his appointment as personal representative. Florida Statute 733.601 is clear that a personal representative's duties commence upon appointment. Prior to his official appointment, Randolph Harrison had no affirmative duty as a fiduciary; he had no fiduciary relationship with the English Creditors; and he had no duty to notify them of the Florida legal structure or their opportunity to open a probate estate or file a claim. The only allegation against Randolph Harrison is that he kept his silence for two years and a day. The Court holds as a matter of law that that is not a breach of any duty. Additionally, his silence about Florida law is not fraud. There is no statutory or common law requirement to urge a creditor, who obviously knew about the death of its obligor and who apparently knew about assets in Florida, to open probate in Florida. .  .  .  It was incumbent upon the English Creditors to familiarize themselves with Florida law, open a probate and file a claim. For whatever reason, the English Creditors elected not to do so.

There was simply no fraud in Randolph Harrison waiting to open the Florida probate. There is absolutely no requirement under probate law that creditors of a decedent be paid before beneficiaries receive anything. In fact, the statutory scheme suggests the opposite. The whole substance of having a non-claims bar like Section 733.710 is to allow a beneficiary to receive assets free of creditor claims after the two-year period. For a beneficiary to take advantage of that legal structure is not fraud.

Lesson learned?

If you're going to try to run the 2-year non-claim statute clock on your creditors, don't even open the estate. Do nothing. Unless a creditor takes the extraordinary step of commencing a probate proceeding just to collect on his debt, the estate wins by default.

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Morgenthau v. Estate of Andzel, --- So.3d ----, 2009 WL 5151741 (Fla. 1st DCA Dec 31, 2009)

I recently wrote here about Florida's ultra-short deadlines for filing creditor claims against probate estates and how they can be unforgiving traps for the unwary. These deadlines are scary because they can fly by without a creditor ever being the wiser.

But, some of you may ask, what about an estate's duty under F.S. 733.2121 to give "reasonably ascertainable" creditors actual notice of the filing deadline? If I'm a reasonably ascertainable creditor and the estate didn't give me notice, do I get a free pass? NO says the 1st DCA in the linked-to case above.

In this case the holder of an unpaid promissory note filed a creditor claim against the debtor's probate estate over a year after the estate first published its notice to creditors in a local newspaper. Clearly the creditor had blown past the generally applicable 3-month claims-filing deadline under F.S. 733.702. The creditor argued he shouldn't be bound to this deadline because he was a reasonably ascertainable creditor and the estate hadn't complied with its duty under F.S. 733.2121 to give him actual notice of the filing deadline.

Sorry, says the 1st DCA. Unless a creditor asks for an extension to file his claim (and "insufficient notice of the claims period" is one of the grounds for getting an extension), he's out of luck. Here's why:

Here, appellant filed a statement of claim past the three month filing window. As such, according to section 733.702(1), the claim was untimely as appellant did not receive actual notice of the claim and was, thus, a creditor who fell in the three month filing window following publication. See also Miller v. Estate of Baer, 837 So.2d 448, 449 (Fla. 4th DCA 2002) (holding creditors who do not receive actual notice have until the close of the three month publication window to file a claim regardless of whether creditor asserts it was entitled to actual notice).

Further, appellant did not file a motion for extension of time to file the claim or otherwise seek an extension. All Florida cases since [May v. Illinois Nat. Ins. Co., 771 So.2d 1143 (Fla.2000)] dealing with the forgiveness of a timeliness issue as to a creditor's claim where the creditor asserts he or she was a reasonably ascertainable creditor subject to actual notice reach the issue through review of the creditor's request for an extension, not through creditor's filing of a statement of claim. Faerber v. D.G., 928 So.2d 517, 518 (Fla. 2d DCA 2006) (reversing a trial court's grant of creditor/appellee's motion for extension of time to file a claim where no evidence was considered prior to the grant); Simpson v. Estate of Simpson, 922 So.2d 1027 (Fla. 5th DCA 2006) (reviewing trial court's denial of appellant's motion for extension of time based on the allegation he was a readily ascertainable creditor who should have received actual notice of decedent's death); Longmire v. Estate of Ruffin, 909 So.2d 443 (Fla. 4th DCA 2005) (same); Strulowitz, 839 So.2d 876 (same); Miller, 837 So.2d at 448-50 (same).

While the Statement of Claim listed facts upon which a probate court could grant an extension, the Statement of Claim did not request an extension. Further, at no point in either the initial brief or the reply brief does appellant argue his Statement of Claim should be converted or modified to be read as a motion requesting an extension of time. The proper procedural course for untimely claims is the filing of an extension request prior to the filing of a statement of claim. § 733.702(1)-(3), Fla. Stat. (2007). Under the plain language of the statute, once appellant's claim fell outside the three month claim period, regardless of his arguments for delay, his claim could only be considered after the probate court's grant of an extension. Because appellant chose to file only a Statement of Claim and never requested an extension of time to file that claim, the probate court was bound by the relevant statutes to deny the claim. § 733.702(1)-(3), Fla. Stat. (2007).

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Mack v. Perri, --- So.3d ----, (Fla. 1st DCA Dec 22, 2009)

Plaintiffs suing estates often fail to realize that they're really litigating their claims in two separate courts in front of two separate judges:

1. The trial court adjudicating their lawsuit (this is where the estate's liability is established); and
2. The probate court administering the decedent's probate estate (this is where you go to collect if you win in the trial court).

What's scary about this dual-court approach is that it creates a huge trap for the unwary: you can spend years and a fortune in fees litigating claims against an estate in a trial court and never be the wiser to the fact that you've blown past one of the ultra-short limitations periods applicable in a probate court (733.702(1), 733.710(1)); which means no matter how spectacular your win might be at trial, you'll never be able to collect on your judgment in the probate court.

That's the trap the plaintiffs in the linked-to opinion apparently fell into. Here are the key dates/facts as summarized by the 1st DCA:

The decedent, George Watts, a physician, died on November 18, 2004. The first notice to creditors was published on May 14, 2005. On October 31, 2005, the Macks first filed their claims against the Estate based on alleged medical malpractice in connection with surgery Dr. Watts performed on Susan Mack's ankle. The Macks filed a malpractice action against the Estate on January 30, 2006. In February 2009, the Estate filed a petition in the probate court to limit the Macks' claim in the malpractice action to the proceeds of malpractice insurance, see section 733.702(4)(b), Florida Statutes (2005), and the Macks filed petitions seeking to strike the Estate's objections to their claims.

Wrapped up into that one short paragraph are three important takeaways for anyone involved in litigation against a Florida probate estate:

Lesson #1: Never, ever forget F.S. § 733.710(1): Florida's two-year non-claim statute:

In the linked-to case the estate waited until February 2009, almost five years after the decedent died, to spring its trap on the unsuspecting plaintiffs. By then the two-year non-claim period for the estate had clearly run making it impossible for the plaintiffs to get the extension needed to preserve their claim against the probate estate. Here's how the 1st DCA explained this point:

We agree with the trial court that the Macks' claims against the estate are barred by sections 733.702(1)(3), and 733.710(1), Florida Statutes (2005). The Macks' claims were filed more than three months from the date the notice to creditors was first published. See § 733.702(1). Further, the Macks did not file a request for an extension of time under section 733.702(3) until after the running of the two-year non-claim period in section 733.710(1). As the Supreme Court held in May v. Illinois National Insurance Company, 771 So.2d 1143, 1157 (Fla.2000), “section 733 .710 is a jurisdictional statute of nonclaim that automatically bars untimely claims and is not subject to waiver or extension in the probate proceeding.” The May court explained that this statute “represents a decision by the legislature that 2 years from the date of death is the outside time limit to which a decedent's estate in Florida should be exposed by claims on the decedent's assets.” Id. (quoting Comerica Bank & Trust, F.S.B. v. SDI Operating Partners, L.P., 673 So.2d 163, 167 (Fla. 4th DCA 1996)). Here, the Macks' claims were untimely filed under section 733.702(1). Although section 733.702(3) provides for an extension, the claim and motion for an extension must be filed before the operation of the two-year non-claim provision. May, 771 So.2d at 1157.

Lesson #2: Never say never: Florida's two-year non-claim statute doesn't bar ALL claims:

Even if you blow past the two-year mark for perfecting your claim against a probate estate, all may not be lost. In the linked-to case the estate recognized that even though the plaintiffs were barred by F.S. § 733.710(1) from asserting claims against the decedent's probate estate, the decedent's malpractice insurance was still fair game under F.S. § 733.702(4), which provides as follows:

(4) Nothing in this section affects or prevents:

(a) A proceeding to enforce any mortgage, security interest, or other lien on property of the decedent.

(b) To the limits of casualty insurance protection only, any proceeding to establish liability that is protected by the casualty insurance.

(c) The filing of a cross-claim or counterclaim against the estate in an action instituted by the estate; however, no recovery on a cross-claim or counterclaim shall exceed the estate's recovery in that action.

Lesson #3: The clock starts ticking as soon as the first notice to creditors is published:

Under F.S. § 733.702 creditors have three months after the notice of creditors is fist published to file their claims. But F.S. § 733.2121 says publication "shall be once a week for 2 consecutive weeks." So when does the "publication" clock start ticking? After the first or second week? The plaintiffs tried to salvage their claim by arguing for week two. Nice try, but no cigar says the 1st DCA:

We also reject the Macks' assertion that their claim was timely filed when measured from the date of publication of a second notice to creditors by the estate. The time period under section 733.702(1) runs from “the time of the first publication of the notice to creditors.” As the Supreme Court held in Estate of Williamson v. Murphy, 95 So.2d 244, 247 (Fla.1957), a second publication will be deemed “unnecessary surplusage” which has no “affect [on] the validity or effectiveness of the first notice published.”

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Copeland v. Buswell, --- So.3d ----, 2009 WL 2243701 (Fla. 2d DCA Jul 29, 2009)

Under Florida law the personal representative is the central figure in all things having to do with the probate estate. No matter how inconvenient that fact may be, you can't ignore the PR in the hopes of cutting a better deal for yourself. That's the basic take-away from this case.

In this case the estate's largest creditor (Tampa General Hospital claimed $492,224 in unpaid medical bills) tried to cut a better deal for itself by bypassing the PR and dealing directly with a third party that owed the estate money (a tortfeasor). Under the side deal the hospital got a bigger chunk of its claim paid ($300,000) and the tortfeasor cut its liability exposure to the estate by almost $200,000. Sounds clever. Everybody wins right? Wrong!

Why is the estate the big loser in this deal?

• First, by cutting out the PR the estate basically got nothing. Which means the PR had no funds with which to pay her own lawyers, or pay herself a PR's fee, or basically pay any other creditor whose claim had priority over the hospital's under Florida's probate code.
• Second, by cutting out the PR the estate was deprived of the full value of its claim. At the wrongful-death trial the judge ruled that the decedent had in fact incurred 100% of the $492,224 in unpaid medical bills being claimed by the hospital. In other words, the estate's damages claim would have been for the full amount, NOT the lower figure agreed to in the side deal.

The 2d DCA said no way to the deal, and unwound the whole thing by focusing on how it basically did an end run around the priority-of-payments scheme built into Florida's probate code:

Under section 733.707, Tampa General's claim for medical expenses would be designated as a class 4 claim to be paid after class 1, 2, or 3 claims. See § 733.707(1)(a)-(d). In this case, by virtue of [the side deal], Tampa General's class 4 claim for medical expenses improperly took precedence over class 1 claims for costs of administration and class 2 claims for funeral expenses, in contravention of the priorities established in section 733.707.

The majority's opinion does a good job of explaining the law, but they don't really comment how this deal was too cute by half. For that you need to read Judge Concurs' concurrence. Here's an excerpt:

[A]s the majority points out, once an estate is opened the decedent's creditors must settle any claims with the personal representative of the estate pursuant to Florida's probate rules and statutes. No creditor of an estate is entitled to enter into a sweetheart deal with any entity owing money to the estate that would circumvent the statutory priority of creditors set forth in section 733.707(1)(a). This prohibition on “side deals” is especially important in cases when apportionment issues among creditors could arise, such as when there are insufficient estate assets to pay all claims. Principles of equity, order, and decorum should rule the apportionment process, not insider knowledge and arbitrary favoritism.

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Zoldan v. Zohlman, --- So.3d ----, 2009 WL 1310995 (Fla. 3d DCA May 13, 2009)

In this case "husband" sued his second wife's estate on undue influence grounds trying to get out of a post-nuptial agreement he signed obligating him to leave a share of his $40 million estate to second wife's daughter. Husband died after filing his lawsuit, and his sons were substituted in as plaintiffs.

So by now the litigation is between two estates: husband's estate vs. wife's estate. But those are only legal titles, this fight is really between two sets of heirs: husband's sons from a prior marriage (representing his estate) vs. wife's daughter from a prior marriage (representing her estate). As the WSJ recently reported in The Right Steps, blended families are often a volatile mix (see also here), which may explain why the two estates battling it out in this case have by now gone through two full blown trials followed by two trips to the 3d DCA.

Wife's estate won the first round [click here]. Perhaps emboldened by this win, wife's estate then tried to make the best of its win by arguing that its share of husband's estate (25% of a $40 million family limited partnership) shouldn't be subject to the standard valuation discounts applicable to FLPs, but should instead be measured on a "fair value" basis (i.e., no discounts for lack of marketability or minority status) under F.S. 620.2114(1).  Nice try, but no cigar. This time around husband's side won:

Originally, the Estate disputed Ms. Zoldan's right to obtain anything other than what each of the three sons had inherited, i.e. an interest in the limited partnership. Eventually, however, the Estate took the position that if monetary damages were ordered, it was a “fair market valuation” that should be utilized in determining that award. The parties attached a dollar amount to each valuation method, concluding that the “fair market valuation” of the interest was $2,247,573, while the “fair valuation” of the interest was $6,450,937. Thus, by mutual agreement, the only question before the trial court was which valuation method should be applied.

.   .  .  .  .

While the partnership agreement does not permit a limited partner to withdraw and demand distribution from the partnership, Mr. Zohlman's sons, one of whom is the general partner with “sole and exclusive control of the Limited Partnership,” nevertheless agreed to distribute to Ms. Zoldan the “fair market value” of a one quarter interest of Mr. Zohlman's 99% limited partner interest in the partnership, i.e., the amount a full limited partner would receive if that partner took the interest and attempted to sell it on the open market. FN4 See Rothschild v. Kisling, 417 So.2d 798, 801 (Fla. 5th DCA 1982) (recognizing that fair market value is generally “what a willing buyer would pay a willing seller” for an interest). Such a distribution would be consistent with paragraph 12 .03 of the partnership agreement which provides that although “[n]o Partner shall be entitled to demand a distribution be made in partnership Property ... the General Partner may make or direct property distributions to be made, using the property's fair market value as of the time of the distribution[ ] as a basis for making the distribution[ ].”

It would also be consistent with that portion of the partnership agreement governing permitted sales of limited partnership interests, which obligates limited partners to establish the market value of their interests by obtaining a bona fide offer from a willing buyer in the marketplace:
. . . . .

Here, the stipulated fair market value of Ms. Zoldan's interest was put at $2,247,573. Based on the foregoing analysis, we find no error in the methodology used to make this determination.

We also reject the notion that there was no competent, substantial evidence to support the trial court's determination that Ms. Zoldan's interests should be valued using the fair market value method. The Estate presented the expert testimony of David Pratt, a seasoned trust and estate lawyer, who testified that fair market value is the valuation standard used when distributing trust assets and the assets of an estate. More specifically, Pratt testified that fair market value is the exclusive valuation method used for the purpose of determining distributions from a limited family partnership that is part of a trust or an estate.

Thus, we find no error in the valuation method used by the trial court. The promise made and broken was that Mr. Zohlman name Ms. Zoldan an heir equal to his three sons. Ms. Zoldan was offered and rejected an interest in the limited partnership which would have put her in the exact same position as the Zohlman brothers. Having rejected that offer, the Estate maintained that the measure of Ms. Zoldan's damages would be the “fair market value” of the interest she rejected. With no dispute as to the dollar amount attached to the use of a “fair market valuation,” with that method being identified in the partnership agreement itself, and with that valuation method being supported by expert testimony, we conclude that it was properly employed. Accordingly, we find the trial court's order was correct in its entirety, and affirm the order awarding Ms. Zoldan $2,247,573, plus pre-judgment interest.

Lesson learned?

Valuation issues involving FLPs are a BIG DEAL! to estate planners and probate lawyers alike. Florida trusts and estates lawyers will want to take note of this important valuation case. The 3d DCA's opinion is fine as far as it goes, but doesn't go into much detail explaining the losing side's "fair value" argument, for that you'll want to read Appellees' Answer Brief.

By the way, many of the issues raised in this opinion were the subject of an excellent Florida Bar Journal article by Rebecca C. Cavendish and Christopher W. Kammerer, as applied in the context of closely-held corporations: Determining the Fair Value of Minority Ownership Interests in Closely Held Corporations: Are Discounts for Lack of Control and Lack of Marketability Applicable?

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U.S. v. Guyton, Slip Copy, 2009 WL 1308431 (M.D.Fla. May 08, 2009)

The IRS is the "über" creditor of any probate estate. Why? Two reasons. First, the personal representative (PR) is personally liable for any of the decedent's unpaid taxes to the extent the PR pays any debts due by the decedent before paying the decedent's tax liability. 31 U.S.C. § 3713(b); IRS Manual § 5.5.1. There's nothing like personal liability to focus the mind. Second, the normal rules simply don't apply to the IRS. As the court ruled in the linked-to order, the IRS is NOT subject to the limitations periods applicable to all other creditors:

Turning to Defendant's final threshold argument, case law makes clear that the Government's claim is not subject to state statutes of limitation, including Florida Statute § 733.705(8), absent its own consent. See e.g., United States v. Summerlin, 310 U.S. 414 (1940); see also United States v. Kellum, 523 F.2d 1284, 1286 (5th Cir.1975).

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In re Estate of Woodward, --- So.2d ----, 2008 WL 942044 (Fla. 2d DCA Apr 09, 2008)

A basic rule under Florida's probate code is that specifically-devised property is inherited subject to any existing mortgages or other encumbrances unless the decedent's will specifically directs otherwise. Here's the governing rule:

733.803 Encumbered property; liability for payment.--The specific devisee of any encumbered property shall be entitled to have the encumbrance on devised property paid at the expense of the residue of the estate only when the will shows that intent. A general direction in the will to pay debts does not show that intent.

In the linked-to case the personal representative (PR) was managing several farms that were part of a single probate estate.  The estate-administration process stretched out for several years.  During that time the PR sold one of the farms and used the sales proceeds to pay off some debt, thererby satisfying a $241,805.81 mortgage on farm property that had been specifically devised to one of the heirs.  The decedent's will did NOT state that the specifically-devised property was to be distributed debt-free.  Oops!

One of the residuary beneficiaries cried foul, arguing that under F.S. 733.803 the PR should have set aside the sales proceeds for the residuary beneficiaries of the estate, rather than paying off debt on the specifically devised property.  The PR said this rule only applied if the debt was in place at the time of distribution, but didn't stop her from paying off debt encumbering specifically devised property during the course of the probate proceeding.  Wrong answer!

No matter how long the estate-administration process takes, you can't re-write the testator's will.  Which is effectively what the PR did in this case when she paid off the debt on the specifically devised property at the expense of the residuary estate. Here's how the 2d DCA explained the rule:

The trial court's rejection of Brian's objection to the satisfaction of the encumbrance is inconsistent with the governing provision of the Florida Probate Code. Section 733.803, Florida Statutes (2002), provides that “[t]he specific devisee of any encumbered property shall be entitled to have the encumbrance on devised property paid at the expense of the residue of the estate only when the will shows that intent ” and that “[a] general direction in the will to pay debts does not show that intent.” (Emphasis added.) This statute makes clear that Jay was to inherit his father's interests in the three encumbered farms free of debt only if the will or codicil specifically expressed the decedent's intent that Jay would inherit the interests free of debt. Neither the will nor the codicil shows the intent required by the statute. Cf. In re Estate of Sterner, 450 So.2d 1256, 1257 (Fla. 4th DCA 1984) (holding that section 773.803 required residue of estate to pay encumbrances on property where codicil leaving life tenancy in property to specific devisee specifically stated that life tenancy was to be “free of rent and of any encumbrance of any nature whatsoever, such as taxes, liens, pledges, etc., except utilities and telephone”). Although the will states that all the decedent's legal debts should be paid, the statute plainly provides that such a general direction for the payment of debts does not evidence an intent that encumbrances on devised properties be paid at the expense of the residuary estate.


We reject the personal representative's argument that section 733 .803 only applies to encumbrances that remain unsatisfied at the time of distribution and that she had unfettered discretion to pay debts of the estate during the period of administration. Such an interpretation is inconsistent with the design of section 733.803 to carry out the testator's intent with respect to the devise of encumbered property.

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In re Estate of Cummins, --- So.2d ----, 2008 WL 373414 (Fla. 3d DCA Feb 13, 2008)

Florida Probate Rule 5.401(d) requires a party objecting to a personal representative's petition for discharge or final accounting to serve notice of hearing on the objections within 90 days of the date the objection is filed.  In the linked-to case counsel for the objecting party blew this deadline due to secretarial oversight. 

My personal philosophy is to never excuse a mistake by blaming my secretary for a foul up; if something goes wrong I take the hit.  However, if it's my client that's being prejudiced by something a member of my staff messed up, that's a different story.  The issue in the linked-to case was whether secretarial oversight = excusable neglect, thus allowing the objecting party to have a hearing on its objections to the PR's final accounting.  The probate judge said NO, and was reversed when the 3d DCA said YES.

Florida Probate Rule 5.402(b) allows a probate judge to extend a deadline date in certain circumstances based on "excusable neglect." Florida Probate Rule 5.402(b) provides as follows:

(b) Enlargement. When an act is required or allowed to be done at or within a specified time by these rules, by order of court, or by notice given thereunder, for cause shown the court at any time in its discretion . . .


(2) on motion made and notice after the expiration of the specified period may permit the act to be done when failure to act was the result of excusable neglect. The court under this rule may not extend the time for serving a motion for rehearing or to enlarge any period of time governed by the Florida Rules of Appellate Procedure.

For future reference, I've excerpted below the operative facts and law as summarized by the 3d DCA in support of its ruling that secretarial oversight does = excusable neglect.

The Facts:

At the hearing on the abandonment of Objections, Cummins' counsel detailed the reasons for failing to comply with the ninety-day time period for filing the notice of hearing under Florida Probate Rule 5 .401(d). Counsel explained that the legal assistant responsible for procuring the hearing date was informed by the court that the presiding judge would not have a sufficient amount of time available for the hearing until September, 2007. In order to obtain an earlier hearing date, Cummins' counsel decided to utilize the services of a special master. The legal assistant attempted to schedule a hearing with the special master but was informed that the attorney for the personal representative was out of the office and that only the attorney himself could place a hearing on his calendar. Subsequently, the legal assistant instructed Cummins' counsel that she would follow-up on scheduling a hearing. However, without notice, the legal assistant ceased reporting for work in late June, 2007. On July 7, 2007, the individuals who were reassigned the legal assistant's tasks realized that the ninety-day period for sending notice had expired. Cummins' counsel attempted to obtain a hearing date, but because a full day was requested, the scheduling clerk could not immediately provide one. On July 17, 2007, a hearing date was set for August 29, 2007, at which time a notice of hearing was sent to the attorney for the personal representative. Additionally, throughout the course of the ninety days, Cummins' counsel stated that the attorney for the personal representative suggested that a “global settlement” would be forthcoming, thus rendering a hearing on the Objections unnecessary.

The Law: Secretarial Oversight = Excusable Neglect

The 3d DCA based its ruling reversing the probate judge on cases construing Civil Procedure Rule 1.090(d), which also contains an "excusable neglect" out for deadline extensions and is otherwise "almost identical" to the Probate Rule 5.042(b).  Here's how the 3d DCA framed its analysis:

The ninety-day time limit for filing a notice of hearing on the Objections is not jurisdictional. The standard of review applied to a trial court's analysis of excusable neglect is abuse of discretion. Boudot v. Boudot, 925 So.2d 409, 415 n. 2 (Fla. 5th DCA 2006) (citing Smith v. Smith, 902 So.2d 859, 861 (Fla. 1st DCA 2005)); State Dep't of Transp. v. Southtrust Bank, 886 So.2d 393, 396 (Fla. 1st DCA 2004) (citing Lyn v. Lyn, 884 So.2d 181, 185 (Fla. 2d DCA 2004)). A trial court is afforded discretion to consider objections for which a notice of hearing was not served within ninety days of the filing of said objections.


In Southtrust Bank, the trial court's finding of excusable neglect pursuant to Florida Rule of Civil Procedure 1.090(b) was affirmed because “the secretary's oversight is precisely the type of error found to constitute excusable neglect.” Southtrust Bank, 886 So.2d at 396.

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Fernandez-Fox v. Estate Of Lindsay, --- So.2d ----, 2008 WL 160920 (Fla. 5th DCA Jan 18, 2008)

This case is an example of what NOT to do.  When a creditor filed a claim against this estate the personal representative moved to strike the claim rather than simply objecting to it in accordance with F.S. 733.705(2).  This mistake cost the estate an easy opportunity to cut off liability cheaply and quickly.  Here's how the 5th DCA made this point:

[T]he Florida Probate Code requires an objection to be served according to specific requirements. These include filing within a specified time period, personal service on the claimant, and a statement notifying the claimant of the time period limiting claimant's right to assert an independent action. Fla. Prob. R. 5.496. In this case, the motion to strike never indicated that it was also an objection and, more importantly, the motion to strike did not contain a statement that the claimant was limited to a thirty day period to file an independent action. Under the rule, this is required for an objection. Thus, even assuming that the motion to strike could double as an objection, it failed to comply with the rules governing the manner for objecting to a claim.


An objection must comply with the statutory requirements of section 733.705 and Rule 5.496. Because the motion to strike did not meet the requirements for an objection, the trial court erred by treating the two as the same.

Lesson learned?

When it comes to creditor claims in probate proceedings sometimes substance trumps form [click here], and as this case shows . . .  sometimes it doesn't.  Failure to scrupulously follow the creditor-claim rules contained in F.S. 733.701-733.710 can cost you dearly.

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• 5th DCA: Wheeler v. Powers, --- So.2d ----, 2008 WL 160881 (Fla. 5th DCA Jan 18, 2008) (Standing to Revoke Probate)
• 5th DCA: Fernandez-Fox v. Estate Of Lindsay, --- So.2d ----, 2008 WL 160920 (Fla. 5th DCA Jan 18, 2008) (Deadlines to File Independent Actions)
• 2d DCA: In re Estate of McKibbin, --- So.2d ----, 2008 WL 161322 (Fla. 2d DCA Jan 18, 2008) (Powers of Attorney)

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Clients are often surprised to learn that, for the most part, inherited assets are received income tax free. In addition to being income tax free, the appreciation on capital assets received from a decedent is also forgiven. The tax mechanism that allows for the forgiveness of the appreciation is known as a “step-up” in basis. A step-up in basis allows the beneficiary to sell an asset received from a decedent income tax free.

Income in Respect of a Decedent (“IRD”)

The primary exception to the general step-up-in-basis rule is income in respect of a decedent (“IRD”). Common examples of IRD include pension, IRA and 401(k) distributions, certain annuity payments and the decedent’s final paycheck.  For a detailed explanation of IRD from a CPA's perspective, see Maximizing the Tax Deduction for Income in Respect of a Decedent.

IRD can also include post-death sales of the decedent's property if the sales contract was finalized prior to death.  This can be a very big deal.

For example,  assume Dad owned real property with a basis of $1,000 and a fair market value of $1,000,000 on the day he died.  Usually, this property would receive a step-up in basis to its date-of-death value.  So Son would inherit the property with a basis of $1,000,000.  If Son sells the property 1 day after Dad dies, he pays zero income tax on the sale.  However, if the real property was subject to a pre-death sales contract, and the sale closes 1 day after Dad dies, the gain would be considered IRD and Dad's estate would have to pay income tax on $999,000 in gain.  Assuming a 15% tax rate, the tax bite would be $149,850!

IRS Rules Gain from Post-Death Sale of Decedent's Real Property under Pre-Death Contract Wasn't IRD: "Economically material contingencies might have disrupted the sale prior to Decedent's death." 

Obviously, spotting IRD issues in a probate proceeding and knowing how to best manage them can save your client big bucks; and turn your average probate lawyer into the family hero.  In Private Letter Ruling 200744001, the IRS provides an excellent road map for understanding what IRD is and, most importantly, how to avoid paying income taxes on IRD if the pre-death contract is subject to "economically material contingencies that might have disrupted the sale prior to Decedent's death."  Remember that phrase, it's the key to everything that's going on in this private letter ruling.

IRS Private Letter Ruling 200744001:

Facts:

The information submitted states that Taxpayer, Decedent’s revocable trust, entered into a contract to sell a plot of real property on D1, with an intended closing date of D2. Before D2, however, a gas pipeline was discovered underneath the property, causing the parties to delay the sale until Taxpayer, the buyer and the pipeline’s operating company could resolve a number of issues. The parties needed to address matters such as providing for an easement for the pipeline company to enter onto the property as well as providing that the pipeline company would provide restitution for any damage to the property. Before the parties could resolve these issues, Decedent died on D3. The sale did not actually close until D4.

Law:

Section 691(a)(1) provides that the amount of all items of gross income in respect of a decedent (IRD) which are not properly includible in respect of the taxable period in which falls the date of the decedent's death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's es tate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the dec edent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Section 1.691(a)-1(b) of the Income Tax Regulations provides that the term “income in respect of decedent” refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing the decedent's taxable income for the taxable year ending with the date of the decedent's death or for a previous taxable year under the method of accounting employed by the decedent. Thus, the term includes income to which the decedent had a contingent claim at the time of the decedent's death.

Section 1014(a) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or ot herwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death.

Section 1014(b)(1) provides, in part, that for purposes of section 1014(a), property acquired by bequest, devise or inherit ance, or by the decedent's estate from the decedent shall be considered to have been acquired from or to have passed from the decedent.

In Rev. Rul. 78-32, 1978-1 C.B. 198, prior to death, a decedent had entered into a binding contract to sell real estate, had substantially completed all of the substantive prerequisites of consummation of the sale, and was unconditionally entitled to the proceeds of the sale at the time of death. The ruling holds that the gain realized from the sale of the real estate that was completed by the decedent's executor is income in respect of a decedent within the meaning of § 691(a).

In Taxpayer's case, important issues needed to be addressed before the sale of the property could be closed. The closing was delayed until D4 because of these issues. Taxpayer needed to attend to substantive as well as ministerial matters. The pipeline was not discovered until after the original contract was entered into; this created economically material contingencies that might have disrupted the sale prior to Decedent's death.

Ruling:

Based solely on the facts and representations submitted, we conclude that any gain realized from the sale of the property after Decedent's death does not constitute income in respect of a decedent within the meaning of § 691. We further conclude that basis of the property in Taxpayer's hands before the sale should be determined under § 1014(a).

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Estate of Jelke v. C.I.R., --- F.3d ----, 2007 WL 3378539 (11th Cir. Nov 15, 2007)

The best nugget of wisdom - and most entertaining quote - found in this opinion comes from Judge Carnes' dissent:

The death of a human being is profoundly important to the person who dies, but it matters not one whit to the laws of economics, which dictate the self-interest of the living.

At the end of the day, once you strip away all the extraneous drama inherent to most trusts-and-estates litigation, that's what it all boils down to: the laws of economics, dollars and cents, i.e., "show me the money."  Forget that bit of insight in the heat of a case and you're toast.

Now back to the scintillating world of estate-tax valuation law.

In this case the 11th Circuit reversed the Tax Court by holding that the proper valuation approach for estate tax purposes of stock interest owned by the decedent in a closely-held, investment holding company, was to apply a dollar-for-dollar reduction of the company's entire built-in capital gains tax liability.  The logic of this approach is best understood in terms of a concrete example, which the court provided at Footnote 25:

FN25. The Second Circuit used an example from tax treatise, Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 10.41 [4] n. 11 (Warren, Gorham & Lamont, 6th ed.1998), to illustrate that a hypothetical buyer and seller would allow a discount for built in capital gains tax:


In the example, A owns 100% of the stock of X corporation, which owns one asset, a machine with a value of $1,000, and a basis of $200. Bittker assumes a 25% tax rate and points out that if X sells the machine to Z for $1,000, X will pay tax of $200 on the $800 gain. Bittker adds that if Z buys the stock for $1,000 “on the mistaken theory that the stock is worth the value of the corporate assets,” Z will have lost $200 economically “because it paid too much for the stock, failing to account for the built-in tax liability (which can be viewed as the potential tax on disposition of the machine, or as the potential loss from lock of depreciation on $800 [of] basis that Z will not enjoy.”) Because of Z's loss, Bittker concludes, “Z will want to pay only $800 for the stock, in which even A will have effectively ‘paid’ the $200 built-in gains tax.”

Estate of Eisenberg, 155 F.3d at 58 n. 15.

Now that I've hit the tax issue, I want to come back to Judge Carnes' dissent.  He argues that the majority took the easy road when it overruled the Tax Court.  For Judge Carnes, taking the easy road is a much bigger SIN than calling a tax issue the wrong way.  Taking the easy road leads to the downfall of civilization!!  So saith Judge Carnes:

The tax code is nowhere near the center of my intellectual life, and generally I find estate tax law about as exciting as Hegel's metaphysical theory of the identity of opposites. There is, however, more involved in this case than just the estate tax issue presented, which is how to determine the fair market value of the decedent's distinctly minority interest in CCC, a closely held corporation whose assets consist primarily of marketable securities with a built-in capital gains tax liability.

The broader principles implicated by the majority opinion are timeless. They were discussed by Teddy Roosevelt at the close of the century before last:


I wish to preach not the doctrine of ignoble ease but the doctrine of the strenuous life; the life of toil and effort; of labor and strife; to preach that highest form of success which comes not to the man who desires mere easy peace but to the man who does not shrink from danger, from hardship, or from bitter toil, and who out of these wins the splendid ultimate triumph.

Vice President Theodore Roosevelt, The Strenuous Life, Address before the Hamilton Club in Chicago, Illinois (April 10, 1899), in The Penguin Book of Twentieth-Century Speeches 1 (Brian MacArthur ed., 1992). By adopting and extending the arbitrary assumption rule of least effort from Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir.2002), the majority gives in to the judicial equivalent of the doctrine of ignoble ease. To avoid the effort, labor, and toil that is required for a more accurate calculation of the estate tax due, the majority simply assumes a result that we all know is wrong. We can do better than that. The tax court did.

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In re Estate of Koshuba, --- So.2d ----, 2007 WL 2934936 (Fla. 2d DCA Oct 10, 2007)

Florida law doesn't cut creditors any slack when it comes to blowing limitations periods [click here, here for recent examples], but creditors do get some leeway when it comes to "how" they make it known to the world that the estate owes them money.  As long as the creditor files something in the probate proceeding with sufficient detail to put interested parties on notice of "the character and extent of his claim," that should be sufficient.

Petition for Administration as "Claim" Form:

In the linked-to case the creditor filed a petition for administration of the decedent's estate in an attempt to enforce a real estate sales contract.  Here's how the court described his petition:

On September 12, 2003, Mr. Koshuba signed a contract agreeing to sell real property to Mr. Zilewicz. Mr. Koshuba died on December 1, 2003, before the parties closed on the contract. In order to enforce his right to purchase the property under the agreement, Mr. Zilewicz filed a Petition for Administration of the estate of Mr. Koshuba on June 17, 2005. The petition alleged, in part:

[Mr. Zilewicz] has an interest in these proceedings because of an obligation between [Mr. Zilewicz] and decedent's estate. Said obligation consists of a purchase and sales agreement made by and between petitioner and decedent as evidenced by the Notice of Interest in Real Estate recorded in the Public Records of Sarasota County, Florida, under instrument number 2004099787. [Mr. Zilewicz] is willing to act as petitioner because the heirs have made no application to administer the estate.

The trial court appointed Robin Vasquez as personal representative of the estate. On September 16, 2005, Mr. Zilewicz filed an Amended Petition for Appointment of Guardian ad Litem to represent the interests of unidentified heirs. In this document, Mr. Zilewicz alleged: “Petitioner and the decedent entered into a sales and purchase agreement for the purchase of real property located in Sarasota County, Florida. A copy of said agreement is attached hereto as Exhibit A.” This document also lists the nature of assets in the estate as “Unimproved Real Property” and lists the approximate value at time of death as $7000.

Trial Court Says "No," 2d DCA Says "Yes":

The probate court effectively struck the creditor's claim because "no cause of action was timely filed by the purchaser in accordance with F.S. 733.702(1), F.S. 733.702(6) and F.S. 733.710.”  The 2d DCA reversed on two grounds: "Form" and "Timeliness."

Form:

Here's how the 2d DCA addressed the "form" issue, basing it ruling on the pivotal Florida Supreme Court opinion in May v. Illinois National Insurance Co., 771 So.2d 1143 (Fla.2000).

We agree with the Personal Representative's assertion on appeal that Mr. Zilewicz's written statements, made within his Petition for Administration and the Amended Petition for a Guardian ad Litem, were substantially sufficient to place interested persons on notice of his claim. The documents filed in the probate proceeding by Mr. Zilewicz are defective as to form, but they sufficiently state the character and extent of his claim.

Timeliness:

Here's how the 2d DCA addressed the "timeliness" issue, focusing on a key 2002 legislative change:

We further conclude that a claim by Mr. Zilewicz was timely filed in accordance with sections 733.702 and 733.710, Florida Statutes (2003). In May, 771 So.2d at 1150, the court held that section 733.702, Florida Statutes (1991), is a statute of limitations that operates as a bar to claims not “ ‘filed within the later of 3 months after the time of the first publication of the notice of administration or, as to any creditor required to be served with a copy of the notice of administration, 30 days after the date of service of such copy of the notice on the creditor.’ “ Section 733.702(1) has since been amended to substitute “on or before” for “within,” thus allowing claims to be filed before the notice of administration. Ch.2002-82, § 6, Laws of Fla. (eff. April 23, 2002). The amendment is pertinent to the instant case and renders the claim timely under section 733.702. Also, Mr. Zilewicz's claim would not be time barred by the two-year statute of nonclaim in section 733.710, which bars claims not filed within two years after a person's death.

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Failing to properly coordinate how a claim against an estate is administered in the probate proceeding with how the claim is reported to the IRS for estate-tax deduction purposes can be a multimillion dollar mistake (see here).

In order to get this process right certainty as to what the applicable tax rules are is key.  Which is why the latest action by the IRS on this front should be helpful.  As reported here by Joel A. Schoenmeyer in the Death and Taxes Blog, the IRS is proposing amendments to the regulations relating to the amount deductible from a decedent's gross estate for claims against the estate (see here). 

In its "background" explanation to the proposed rule amendment, the IRS cited the need for greater uniformity amongst the courts as the primary reason for the proposed rule change.  Here's an excerpt:

The amount an estate may deduct for claims against the estate has been a highly litigious issue. Unlike section 2031, section 2053(a) does not contain a specific directive to value a deductible claim at its date of death value. Section 2053, in fact, specifically contemplates expenses such as funeral and administration expenses, which are only determinable after the decedent's date of death. Although numerous courts have addressed section 2053(a)(3), there is little or no consistency among the conclusions of those courts with regard to the extent (if any) to which post-death events are to be considered in valuing such claims.


*  *  *  *  *

After carefully considering the numerous judicial decisions and the analysis and conclusion in each, the legislative history of section 2053 and its predecessors, and the various possible alternatives, and in order to further the goal of the effective and fair administration of the tax laws, the proposed regulations adopt rules based on the premise that an estate may deduct under section 2053(a)(3) only amounts actually paid in settlement of claims against the estate. If the resolution of a contested or contingent claim cannot be reached prior to the expiration of the period of limitations for claims for refund, the estate may file a protective claim for refund to preserve its right to claim a deduction under section 2053(a).

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Bush v. Webb, 2006 WL 2872522 (Fla. 1st DCA October 11, 2006)

An overarching theme of Florida’s probate code (and recurring point of discussion on this blog) is the tension between basic due-process rights on the one hand and Florida’s strong public policy favoring the speedy administration of estates on the other. In order to move things along as quickly as possible (with the least amount of litigation expense possible), Florida law provides extremely short windows of opportunities for litigants to file claims.  Florida’s 2-year non-claim statute (733.710(1)) epitomizes this stated public policy because of its simplicity and utter disregard for due process or equitable considerations. When it comes to creditors, after 2 years it's game over . . . period, no exceptions.

The issue litigated in this case was whether language in a will explicitly directing the personal representative to pay the decedent’s funeral expenses trumps Florida’s 2-year non-claim statute. The 1st DCA described the will-language in contention as follows:

The decedent died on February 16, 2002. In her will, she bequeathed all her property to appellant and directed that her “just debts, funeral and administration expenses be paid as soon after [her] death as may be practical . . .”

The personal representative in this case was the decedent’s sister. Apparently the decedent’s children paid mom's funeral expenses then waited over two years to file a claim against mom’s estate seeking reimbursement. The PR said NO, the trial court said YES, and the 1st DCA sided with the PR, changing the answer to NO again. Here’s how the 1st DCA described the reasoning underlying its decision to reverse the probate court’s ruling:

It is undisputed in this case that appellees filed their claims against the decedent's estate more than two years after her death. Pursuant to section 733.710(1), the claims were barred. Contrary to appellees' argument, the decedent's directive that her estate pay her funeral expenses did not excuse their statutory obligation to file their claims against the estate within two years of the decedent's death. See Marshall Lodge No. 39, A.F. & A.M. v. Woodson, 190 So. 749, 751 (Fla.1939) (“We do not think that the provision of the will directing the executors to pay all of the just debts of the testator had any effect upon the operation of the statute of non-claim.”). Were that not the case, each of the decedent's creditors could have simply relied on the will and filed claims against the estate long after her death, thereby forever subjecting the estate to uncertainty. Such a situation would conflict with the purpose behind section 733.710(1).

Lesson learned:

If you even suspect an estate may owe you money, when in doubt file a claim . . . and do it sooner rather than later.  An early claim can always be withdrawn, a late claim is gone forever.

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In re Estate of Cadgene, 2006 WL 2739334 (Fla. 2d DCA Sept 27, 2006)

Parties with an interest in a Florida estate that are unfamiliar with the inner workings of Florida's probate code proceed very much at their own risk.  In this case, New Jersey counsel for out-of-state creditors sought to enforce a settlement agreement the decedent had executed prior to his death.  The key sequence of events is as follows:

• Creditor filed a statement of claim against the estate tracking the format of the form approved by the Florida Bar.
• Personal representative of the estate filed an objection to the claim, which stated that the personal representative was objecting to only part of the claim.
• As stated by the 2d DCA, the "objection was served on McLean Boulevard and it contained language informing McLean Boulevard that it was limited to a period of thirty days from the service of the objection within which to bring an action on the claim as provided in section 733.705, Florida Statutes (2000). McLean Boulevard never filed an independent or declaratory action on the claim." .  .  .  OOPS!!

Because the creditor failed to file an independent action on his claim within the permitted 30-day statutory time period, as a matter of Florida law he forfeited 100% of his claim . . . even if the PR's objection was by its own terms only a partial objection.  The probate court granted the PR's motion to strike the entire claim, and the creditor appealed arguing that the PR objected to only part of his claim, and thus he should not be deemed to have forfeited the un-objected-to portion of his claim.  The 2d DCA rejected the creditor's arguments, stating as follows:

The only requirements for filing an objection to a statement of claim pursuant to the 2000 version of section 733.705(2) were (1) that the personal representative or other interested person must have informed the claimant that it had thirty days from the date of service of the objection within which to file an independent action on the claim and (2) that the objection must have been served upon the claimant. Here, the personal representative met both of the requirements of section 733.705(2). With the exception of a personal representative's statement of claim,[FN2] Florida does not utilize the concept of a “partial objection” to a statement of claim. This concept is recognized under the Uniform Probate Code that has been adopted in eighteen states but not in Florida.[FN3]

FN2. See § 733.705(3), Fla. Stat. (2000) (now § 733.705(4), Fla. Stat. (2006)).

FN3. The jurisdictions which have adopted the Uniform Probate Code are Alaska, Arizona, Colorado, Hawaii, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah, and Wisconsin. In re Estate of Kotowski, 704 N.W.2d 522, 526 n. 1 (Minn.2005). 

Lesson Learned:

Florida's probate code is purposely designed to stream-line the administration process whenever possible.  As such, the mechanism for dealing with contested creditor claims is extremely unforgiving to those who fail to comply with a deadline or otherwise fail to understand the unique procedural aspects of Florida probate proceedings.

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Estate of Gunderson v. School Dist. of Hillsborough County, 2006 WL 2612678 (Fla. 1st DCA Sept. 13, 2006)

Apparently the Hillsborough County School District wanted to get out of a $52,808 workers'-comp' settlement agreement in the worst way possible.  The decedent in this case signed the settlement agreement -- then died before signing the general release agreed to as part of the deal.  When the decedent's widow sought to enforce the settlement agreement, the School District told her to take a hike.  Widow lost this argument before the probate court!  (Just goes to show, nothing is ever certain in litigation . . . even if the legal issues are a slum dunk in your favor.)

Widow then appealed the probate court's order - and won on appeal.  The 1st DCA reversed the probate court's order and rejected the School Board's two arguments for non-enforcement.  The School Board had argued that the settlement agreement was unenforceable (1) because execution of the general release - by the decedent - was a condition to the formation of a contract between the parties, and (2) the settlement agreement was a personal services contract that could only be performed by the decedent - because only he could sign the general release.  The 1st DCA unequivocally rejected both of these arguments.  The following excerpts from the linked-to opinion reflect the 1st DCA's rationale on both counts:

In defense of its failure to perform the settlement agreement, the E/C asserts that the deceased's execution of the general release and voluntary resignation were either conditions precedent or conditions subsequent to the formation of a valid contract and, thus, the failure to execute the documents renders the settlement agreement non-binding. This argument is without merit. Provisions of a contract will only be considered conditions precedent or subsequent where the express wording of the disputed provision conditions formation of a contract and or performance of the contract on the completion of the conditions. [Citations omitted.]  No such wording exists in the disputed contractual provisions.

*     *     *     *     *

The general rule is that contracts for personal services contain an implied condition that such contracts dissolve at the time of the contractor's death. See CNA Int'l Reinsurance Co., Ltd. v. Phoenix, 678 So.2d 378, 380 (Fla. 1st DCA 1996). Restatement (Second) of Contracts § 262 defines a contract for “personal services” as a contract where the existence of a particular person is necessary for the performance of a duty. In addition, section 733.612(2), Florida Statutes (2004), authorizes a personal representative to “perform or compromise, or when proper, refuse to perform, the decedent's contracts····” Similarly, section 733.612(24), Florida Statutes (2004), authorizes a personal representative to “satisfy and settle claims.”  .  .  .  The duty of performance on the claimant's part was a duty which could statutorily be performed by his representative in the event of his death through the effectuation of the necessary documents. These were not duties which the claimant's death rendered impossible to perform.  .  .  .  More importantly, the death of a claimant following the execution of a settlement agreement will not affect the agreement's enforcement if the personal representative can show that a binding contract was reached. See Jacobson v. Ross Stores, 882 So.2d 431 (Fla. 1st DCA 2004).

[Emphasis added.]

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Simpson v. Estate of Simpson, __ So.2d __ (Fla. 5th DCA Feb 17, 2006)

In this case the personal representative of the estate knew that her nephew was claiming he was entitled to an ownership stake in a citrus business owned by the decedent. Nephew never received the notice-to-creditors mandated by F.S. § 733.701. Nephew filed a petition under F.S. § 733.702(3) seeking an extension of time to file his claim against the estate based on the estate's failure to provide the statutorily required creditors' notice.

The evidentiary hearing on Nephew's petition for extension of time did not end well for him. Unfortunately Lake County Probate Judge Mark J. Hill failed to distinguish between (1) a proceeding to determine Nephew's entitlement to an extension of time vs. (2) a proceeding to determine the validity of his claims. According to the Fifth DCA, the undisputed evidence presented at the hearing established that Nephew was a "reasonably ascertainable" creditor who was not given notice, and thus entitled to an extension of time to file his claim against the estate.

The undisputed evidence establishes that Mark's claim was not only reasonably ascertainable, it was known to Anita. Robert testified that shortly after Jim died, Anita said to him, "We've got to make sure Mark gets his stock." However, after Mark turned 21 on September 17, Anita changed her position, stating, "I can't do anything to get the stock to Mark for his 21st birthday because it's all tied up in the probate court, and we can't touch it." Then, on October 2, 2001, Robert wrote a letter to Anita asking her to give Mark the 10.5 shares of stock. Clearly, Anita had actual knowledge of Mark's potential claim.

Once the evidence established that Nephew was entitled to file his claim, the probate court should have stopped there and let the parties fully litigate Nephew's claim in a separate independent action. That's not what the probate court did. Which was reversible error according to the Fifth DCA:

Instead of ending its inquiry there, the probate court proceeded to determine the validity of Mark's claim. Under the applicable probate statutes, the merits of Mark's claim should have been determined in an independent action. In disputes over the validity of timely filed claims, section 733.705(4) requires the claimant to "bring an independent action upon the claim" if an objection to the claim is served. Section 733.705(5) contemplates the use of an independent action after the probate court permits the filing of an untimely claim. It states, "A claimant may bring an independent action or declaratory action upon a claim which was not timely filed pursuant to s. 733.702(1) only if the claimant has been granted an extension of time to file the claim pursuant to s. 733.702(3)." The term "independent action" requires the filing of a separate action upon a claim against the estate. In re Pridgeon's Estate, 349 So.2d 741 (Fla. 1st DCA 1977). This requirement allows pleadings and responses sufficient to set the issues before the court prior to hearing. In re Fornash's Estate, 372 So.2d 128, 129 (Fla. 2d DCA 1979).

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Faerber v. D.G., 2006 WL 287322 (Fla. 2d DCA Feb 08, 2006)

Probate proceedings take place before judges, not juries. As such the parties involved (including judges), may not always feel strict compliance with Florida's rules of evidence is a necessary precaution (although Florida Probate Rule 5.170 states explicitly that the rules of evidence in civil actions generally apply to probate proceedings). That point of view is usually harmless because many of the evidentiary rules designed to shelter juries from unfair inferences may not be necessary where, as in probate proceedings, the judge is also the fact finder.

But simply skipping the need for ANY evidence is NOT acceptable, a point made by the 2d DCA in this case when it reversed a ruling by Collier County Judge Hugh D. Hayes granting a petition made pursuant to F.S. § 733.702(3) seeking leave to file a late claim against the estate because the purported creditor had allegedly been provided with insufficient notice of the claims period. According to this newspaper article, the 2d DCA's ruling will result in the dismissal of a $10 million lawsuit against the estate.

A trial court's ruling on a petition for more time to file a claim against an estate is usually reversed only if the trial court has "abused its discretion." This is a tough burden to overcome, but, as the 2d DCA makes clear in the following excerpt from its opinion, a ruling based on NO evidence is an abuse of discretion and subject to reversal:

[A]s the trial court acknowledged in its order, neither party presented any evidence below. Although, at the hearing, counsel for D.G. made certain representations as to how the Decedent and his family knew D.G. and how the Decedent's family was aware of D.G.'s involvement in the criminal case against the Decedent, counsel for Appellants objected, noting that such representations did not amount to factual evidence. We agree. See Steinhardt v. Intercondominium Group, Inc., 771 So.2d 614 (Fla. 4th DCA 2000) (stating that facts in dispute must be proven absent stipulation and that representations of counsel are insufficient). Because there was no other evidence presented at the hearing, we can only conclude that the trial court erroneously based its ultimate conclusion that D.G. was a reasonably ascertainable creditor on the assertions of D.G.'s counsel. This was an abuse of discretion. See Allstate Floridian Ins. Co. v. Ronco Inventions, LLC, 890 So.2d 300, 304 (Fla. 2d DCA 2004) ("Reaching the legal conclusion that [a]ppellees had shown due diligence when there was no evidence presented upon which to make such a finding is clearly an abuse of discretion."). Accordingly, we reverse the trial court's order granting D.G.'s petition for extension of time to file a claim against the Estate.

Because D.G. scheduled the hearing on his motion, failed to present any evidence at that hearing to establish that he had received insufficient notice of the claims period, and did not try to remedy the error when it was pointed out by Appellants' counsel, on remand the trial court is instructed to enter an order denying D.G.'s petition. (Emphasis added.)

Ouch!

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Interim Healthcare of Northwest Florida, Inc. v. Estate of Ries, 2005 WL 2219224 (Fla. 4th DCA September 14, 2005) (Trial Court Affirmed)

Two public-policy priorities play themselves out every time a creditor seeks to satisfy its claim against a probate estate: (1) on the one hand, there is the public policy favoring expeditious and low-cost completion of the probate administration process; (2) on the other hand, a creditor's constitutionally protected due process rights must respected. As this case makes clear, procedural safety nets available to litigants in general civil litigation (think due process) do not always apply in the probate context. In general civil litigation Rule 1.540 of the Florida Rules of Civil Procedure provides for the "vacatur" of mistaken orders. As the creditor in this case learned, Rule 1.540 runs head on against the public policy favoring the expeditious and low-cost completion of probate proceedings. As such, as the Fourth District Court of Appeal makes clear in Footnote 1 to this opinion, Rule 1.540 simply does not apply in the probate context.

FN1. The Florida Probate Rules do not contain a provision for vacatur of orders--and this includes those striking claims as untimely--made final by the lapse of the time for appeal. The Rules of Civil Procedure no longer apply in probate except as specified in the probate rules. See Fla. Prob. R. 5.010. At one time a statute applied the civil rules to adversary proceedings in probate, but that statute was repealed in 2002. See Ch.2001-226, § 8, Laws of Fla. Thus, even though rule 1.540 might logically seem to support an attempt to vacate an earlier probate order made final by the lapse of the time for appeal, in this case that rule has no application. See In re Estate of Clibbon, 735 So.2d 487 (Fla. 4th DCA 1998).

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Scott v. Reyes, 2005 WL 2172231 (Fla. 2d DCA September 9, 2005) (Trial Court Affirmed)

A little-known "exception" to F.S. § 733.702, the statute of limitations applicable to creditor claims against an estate, is the so-called "trust exception" or "equitable title to specifically identifiable property exception." In this case the Second District Court of Appeal provided the following summary of just what the "trust exception" is and when it applies:

Considering the changes to prior law effected by the adoption of the Code and the new statutory language concerning the filing of claims, we summarized the current state of the law relative to the trust exception as follows:

[T]he "trust exception" or "equitable title to specifically identifiable property" exception to the requirements of the nonclaim statute, as those exceptions pertain to recovery of property from an estate, have effectively been limited to those situations where the decedent clearly held the property on behalf of the actual owner either by way of an express trust or some other clearly defined means. In other words, if a decedent asserted beneficial ownership of the property before his death, a claim to the property would be barred unless filed according to section 733.702. The reason being that the dispute as to ownership, creating the cause of action, arose before the decedent's death because the decedent, prior to his death, adversely claimed the property as his own. If, however, the decedent was merely in possession of the property but made no such assertion of ownership prior to his or her death, the assertion of ownership being made by the personal representative or heirs for the first time after the decedent's death would not require the filing of a claim.

In addition to an express trust, the Second District Court of Appeal provided the following additional "candidates" for when the "trust exception" might apply: "a trust imposed by statute . . ., a bailment, and a lease of personal property."

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Longmire v. Estate of Ruffin, 2005 WL 2016944 (Fla. 4th DCA August 24, 2005) (Trial Court Reversed)

This Fourth District Court of Appeals opinion should make clear once and for all that if a personal representative should reasonably expect that the estate will be sued by a particular party, F.S. § 733.2121(3)(a) requires that the personal representative treat that potential plaintiff like a creditor entitled to actual notice that the probate proceedings are pending. Although this case involved a personal injury cause of action, there is no reason to believe the applicable rule would be different with respect to any other type of cause of action. Lesson learned: if a personal representative wants to take full advantage of the liability shield created by F.S. § 733.702(1), potential plaintiffs must receive actual notice that the probate proceedings are pending.

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