Zlatkiss v. All America Team Concepts, LLC, — So.3d —-, 2013 WL 2359108 (Fla. 5th DCA May 31, 2013)

If a creditor’s going to successfully pierce a debtor’s corporate veil, it’s usually because the debtor operated his corporation (or LLC) as his “alter ego,” which means the debtor basically ignored the corporation’s separate legal status and treated its assets like his own personal piggy bank. Does this same line of attack apply to Florida spendthrift trusts? Apparently not.

According to the 4th DCA’s 2010 opinion in Miller v. Kresser, which I wrote about here, no matter how much control a beneficiary exercises over the assets of his trust, if the trust agreement’s spendthrift clause is properly drafted, the trust’s assets remain off limits to creditors. Here’s how the 4th DCA summed up the logic of its decision in Miller:

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.

If it’s basically impossible to pierce a spendthrift trust’s protective veil based on “the actions of the trustee or beneficiary” — no matter how much control the trust’s beneficiary asserts over his trust — what’s a creditor to do in this situation? First, learn from the mistake and do a better due-diligence job the next time a trust-fund baby shows up at your office asking for a loan. Second, find a law firm that will take a shot at the spendthrift trust on a contingency-fee basis (why throw good money after bad?)

Case Study: “Are spendthrift trusts constitutional?” YES

In the linked-to case above the plaintiffs, Robert Zlatkiss and Linda Zlatkiss, loaned Louis Steinmetz $350,000, which probably seemed like a good bet after he told them about his $6.9 million trust. But I’m guessing Steinmetz left out this important fact: it’s a spendthrift trust created for his benefit by his parents. In other words, but for the very limited exceptions listed in F.S. 736.0503 (none of which apply in this case), the trust is impenetrable to creditor attack.

When Steinmetz didn’t pay his loan (according to this attack site there are lots of people not getting paid by Steinmetz), his creditors hired Morgan & Morgan, Orlando’s biggest personal injury law firm, to go after Steinmetz’s multimillion dollar spendthrift trust (I assume this PI firm was hired to prosecute a trust case because they agreed to do it on a contingency-fee basis).

In light of the 4th DCA’s Miller opinion, the folks at Morgan & Morgan probably realized they weren’t going to get very far with some kind of alter-ego theory, so they went for the Hail Mary pass: challenge the spendthrift statute itself on constitutional grounds. Nice try, but no cigar. Creditors struck out both at the trial-court level and on appeal. So saith the 5th DCA:

Spendthrift provisions have long been recognized as valid in Florida and sections 736.0501–.0507 additionally provide for the enforcement of spendthrift trusts. Miller, 34 So.3d at 175; Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603 (Fla.1947).

Plaintiffs’ constitutional challenge to sections 736.0501–.0507 is premised on article I, section 21 of the Florida Constitution, which provides in its entirety that: “The courts shall be open to every person for redress of any injury, and justice shall be administered without sale, denial or delay.”

. . .

Plaintiffs contend that sections 736.0501–.0507 abolished a “common law” right “to execute a monetary judgment against any beneficial interest held by a debtor,” without providing a reasonable alternative or demonstrating an overpowering public necessity for the statute.

The glaring flaw in Plaintiffs’ argument is that the creditor-protection provisions of a properly drafted spendthrift trust were recognized as legally valid (and effective to protect trust assets against judgment or other creditors) at common law, long before the adoption of sections 736.0501–.0507. As such, these statutes cannot be considered under [Kluger v. White, 281 So.2d 1 (Fla.1973)] as a legislative act abolishing a common law right, but rather, recognizing one. See, e.g., Munn, 159 So.2d at 605 (citing Croom, 57 So. at 244). Additionally, as noted by the trial judge, Plaintiffs are confusing their right to bring a legal action with their means of collecting a judgment. Article I, section 21 guarantees access to courts, i.e., “the avoidance of significant impediments to the filing of nonfrivolous legal claims[.]” Spencer v. Fla. Dep’t. of Corr., 823 So.2d 752, 756 n. 6 (Fla.2002). It does not guarantee the ability to enforce a judgment.