Timmons v. Ingraham, — So.3d —-, 2010 WL 2217637 (Fla. 5th DCA Jun 04, 2010)

As reported here by the WSJ, “When it comes to blended families, estate planning can be a special kind of hell.” A corollary to that observation: blended families are always at risk for probate litigation. Yes, I said always! This case is an example of the type of probate litigation blended families can find themselves in and why these cases need to be treated like ticking time bombs both at the estate-planning phase and in the probate context.

Blended Family Red Flag: Stepmother as Beneficiary of Dad’s Marital Trust = Estate Planning Trouble:

In 1999 “Frank Sr.” died married to “Myrtle”. Frank Sr. had two adopted children from a prior marriage, and Myrtle had four children of her own, whom Frank Sr. had never adopted. Frank Sr’s will provided that at his death all assets would go in trust for Myrtle for life, and at her death everything would go to the couple’s six children in equal shares. Frank Sr’s will also gave Myrtle a “power of appointment” that could be exercised only in favor of his “descendants.” Simple plan; the sort of thing traditional families put in place every day and no one ever contests. But this was a blended family, which means things are never simple.

Fast forward to 2007: Stepmother Myrtle is now attempting to use her power of appointment to disinherit her stepchildren (Frank Sr’s two adopted children) in favor of her own four children. Think about these facts: we’re not talking about Myrtle’s personal assets here, this case is about Myrtle’s attempt to give 100% of her former husband’s estate to her children and 0% to Frank Sr’s children. Yeah, not exactly a pretty picture.

Legal Definition: Stepchildren ≠ Descendants

The technical issue at play in this case was whether the term “descendants” should be interpreted or “construed” to include Frank Jr’s stepchildren, thus allowing Myrtle to disinherit Frank Sr’s children. Myrtle won at the trial court level, but lost on appeal. Here’s how the 5th DCA explained its ruling:

In determining the intent of the settlor, a technical term used in a trust instrument should be accorded its legal definition, unless obviously used by the settlor in a different sense. Knauer v. Barnett, 360 So.2d 399, 406 (Fla.1978). “Lineal descendant” or “descendant” is defined to mean “a person in any generational level down the applicable individual’s descending line.” It includes children, grandchildren, or more remote descendants but excludes collateral heirs. § 731.201(9), Fla. Stat. (2007). Adopted children come within the definition of lineal descendants. Lewis v. Green, 389 So.2d 235, 241 (Fla. 5th DCA 1980).

The co-trustees acknowledge that step-children do not ordinarily fall within the definition of “lineal descendants,” but contend that by expressly expanding the definition of “children” to include his step-children for purposes of his will, Frank Sr. similarly intended to expand the definition of “lineal descendants” to include his step-children and their descendants.” We reject this argument.

While Frank Sr.’s will expressly provided for a different definition of the term “children” than its common or legal definition, no similar attempt was made to modify the common or legal definition of the term “lineal descendants.” The lack of an attempt to redefine “lineal descendant” reflects an intent to have the term interpreted in accordance with its legal definition. Furthermore, Frank Sr. used the term “lineal descendants” on only two other occasions in his will. In one paragraph, Frank Sr. bequested his personal property, in the event Myrtle predeceased him, “to my children who survive me, or if none of my children survive me, then to their lineal descendants, per stirpes.” In a different paragraph, Frank Sr. bequested certain shares of stock “to my son Frank Timmons, Jr., or his lineal descendants per stirpes.” Thus, in both of these instances, the term “lineal descendants” was used in a manner consistent with its legal definition. Finally, there is no language elsewhere in the will reflecting an intent on the part of Frank Sr. to grant Myrtle the power to disinherit his children in favor of her own children.

As previously observed, a technical term used in a trust instrument should be accorded its legal definition unless obviously used by the settlor in a different sense. Knauer. Here, we believe that Frank Sr.’s testamentary document did not reflect an intent (and certainly not an “obvious” one) to expand the definition of lineal descendants to include step-children. Therefore, Myrtle’s purported exercise of the limited power of appointment in favor of her natural children was invalid.

Lessons learned?

There’s an obvious practice pointer here for estate planners: terms such as “children” and “descendants” are so crucial, they need to be defined in every will or trust. And if you’re working with a blended family, it’s imperative that you do so. Below is the standard form of “family” definitional clause used at my firm. This is the very first clause of every will and trust we draft.

I am married to MARY DOE, who is referred to as “my wife” in this Will. My wife and I are both citizens of the United States. My wife has been previously married and has two children from that marriage, CHILD 1 and CHILD 2, whom I have not adopted. References to “my wife’s children” mean only her children named above. I have been previously married and have two children from that marriage, ADULT CHILD #1 and ADULT CHILD #2. References to “my children” mean only my children named above, as well as any other children of mine born or adopted after the execution of this Will; references to “my descendants” mean my children and their descendants.

If Frank Sr’s will had had this kind of clause, tailored to reflect his exact wishes, this litigation could have probably been avoided.

Will and trust construction disputes are one of the most common forms of estate litigation, and – not surprisingly – a recurring theme on this blog. If you unpack the 5th DCA’s opinion, you get a good example of how to argue a will-construction case. It’s a convincing mix of law and logic, and certainly worth holding on to for the next time you find yourself litigating a similar case.

[1] 5th DCA: When in doubt, technical terms must be used in accordance with their legal definitions.

In this case, Frank Sr’s will did NOT redefine the word “descendants”. Ergo: you have to apply the statutory definition (which includes adoptees, but excludes step-children).

[2] 5th DCA: When in doubt, terms should be used consistently within the same document.

In this case the word “descendants” was used 3 times in Frank Sr’s will. Once in the clause being litigated, then an additional 2 times in unrelated clauses. In the 2 uncontested clauses, the word descendants was used in accordance with its legal definition. Ergo: the legal definition of descendants should also apply to the contested clause as well.

[3] 5th DCA: Documents should be read in their entirety. When in doubt, terms should be used in a way that conforms with the rest of the estate plan.

In this case the 5th DCA noted: “[T]here is no language elsewhere in the will reflecting an intent on the part of Frank Sr. to grant Myrtle the power to disinherit his children in favor of her own children.” Ergo: the word descendants should NOT be construed in a way that disinherits Frank Sr’s children.

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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.

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

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.

Fernandez v. Guardianship of Fernandez, — So.3d —-, 2010 WL 2178831 (Fla. 3d DCA Jun 02, 2010)

Contested guardianship proceedings are bench trials, which means the same person is both your fact finder and lawgiver: the judge. As explained in When the Judge Is the Jury, there are real advantages to bench trials:

“And one of the biggest advantages over the traditional courtroom is that the lawyers get to ‘read the jury’ all through the case. And since the judge can—and often will—ask questions, you’re always aware of what’s on the jury’s mind,” said Standwell.”

I think most practicing lawyers have mixed feelings about questions from the bench. When the questions make clear the judge is leaning your way, you love ’em! When the opposite is true, you know it’s going to be a bad day. Love ’em or hate ’em, questions from the bench are a fact of life and explicitly authorized under F.S. 90.615.

But when does questioning from the bench go too far? The answer to that question depends in large part on the facts and circumstances of your particular case, so hard and fast rules are difficult to come by. But most of us know it when we see it . . . and so does the 3d DCA. Here are the facts the appellate court was confronted with in the linked-to contested guardianship case:

[The trial court] decided that the hearing would proceed more expeditiously if the trial court conducted the examination of witnesses instead of allowing counsel to do so. The trial court swore the witnesses and denied the daughter’s request to invoke the rule of exclusion of witnesses. The court called and questioned the witnesses, affording almost no opportunity for examination or cross-examination by the parties. There were no opening or closing statements.

According to the 3d DCA, this was too much. Questioning from the bench is proper, but if it’s done to the exclusion of everyone else in the room, the parties aren’t getting their fair day in court. Here’s how the 3d DCA put it:

Respectfully, this was not proper procedure. The Florida Probate Rules provide that in adversary proceedings, “the proceedings, as nearly as practicable, shall be conducted similar to suits of a civil nature and the Florida Rules of Civil Procedure shall govern….” Fla. Prob. R. 5.025(d)(2). See generally In re Guardianship of King, 862 So.2d 869, 870-71 (Fla. 2d DCA 2003); The Florida Bar, Litigation Under Florida Probate Code § 1.6 (7th ed.2009); 28 Fla. Jur.2d Guardian and Ward, § 35 (updated Feb. 2010). “The adjudicatory hearing must be conducted at the time and place specified in the notice of hearing and in a manner consistent with due process.” § 744.331(5)(a), Fla. Stat. (2008).

As this was an evidentiary hearing in a contested proceeding, the matter should have been tried as is customary in a bench trial. The parties should have been given an opportunity to make opening and closing statements. Each party should have been given an opportunity to present evidence, call and question witnesses, and cross-examine the other side’s witnesses. When the guardian ad litem gave her report, cross-examination by the parties should have been allowed.

At the start of the hearing, the daughter invoked the rule of exclusion of witnesses [under F.S. 90.616]. The trial court denied that request. The request should have been granted.

Lessons learned?

First: contested guardianship proceedings are treated like any other kind of bench trial under Florida law, and need to be adjudicated accordingly. The parties are entitled to all of the due-process rights any litigant is entitled to in a Florida court room, including at a bare minimum:

  1. The opportunity to make opening and closing statements.
  2. The opportunity to present evidence, call and question witnesses, and cross-examine the other side’s witnesses.
  3. The opportunity to cross examine the guardian ad litem.
  4. The exclusion of witnesses from the courtroom in accordance with F.S. 90.616.

Second: lawyers on the wrong end of an overactive judge have to object. To put it mildly, this kind of objection needs to be handled “delicately.” So what’s a lawyer to do? The Winter 2009 edition of the ABA’s Litigation magazine has an excellent article by Houston, Texas litigator Martin J. Siegel that speaks directly to this question. Entitled When Judges Want to Get in the Game: Lessons from Another Court, Mr. Siegel’s article is thoughtful, well written, and well researched. Here’s an excerpt:

“[L]awyers on the wrong end of the overactive judge have to object. As with questions from opposing counsel, failure to object to improper examination from the bench will waive the error. Ditto with remarks to the jury. On appeal, if no objection was made, review will be for plain error, and only those errors resulting in an unfair trial will merit reversal. Courts recognize that objecting to the judge’s questions and comments can be touchy and difficult, but still require counsel to give it a go. If the judge wishes to examine witnesses at any length, there is precedent for seeking a sidebar out of the hearing of the jury or a recess and asking the court to inform counsel of the desired line of questioning so that the examination will come from the lawyers and not carry the imprimatur of the court.

To the extent possible, lawyers should also make sure the objectionable conduct is fully on the record, even the little things that will add flavor to the appeal but may not always come through on the cold page, like the judge’s demeanor, tone, or volume. For example, in one case, the judge’s repeated pointing to the defendant’s lawyer in an effort to prompt him to object made it into the record because the plaintiff’s lawyer, finally exasperated with the court’s unusual theatrics, said, ‘Your Honor, I haven’t even finished my question, and you’re pointing to the defense counsel to object to my question.’ Nationwide Mutual, 174 F.3d at 808.”

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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:

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.

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.

Hill v. Davis, — So.3d —-, 2010 WL 1347314 (Fla. 1st DCA March 31, 2010)

In civil litigation you usually have years to file your complaint: most statue of limitations periods fall within a range of 2 to 6 years. Not surprisingly, most civil litigators assume the same rules apply to probate litigation. Big mistake! In probate litigation your statute of limitations period can be as little 30 days, with the norm being 3 months. These ultra-short limitations periods are unforgiving traps for the unwary and – not surprisingly – a recurring topic on this blog [click here, here].

Personal Representative Disqualification Motions:

In this case, the issue was whether the 3-month statute of limitations period contained in F.S. 733.212(3) applied to personal-representative disqualification motions. In contested probate proceedings the party serving as personal representative has significant advantages. So knowing when the window of opportunity closes to file a disqualification motion is very important.

According to the 3d DCA in Angelus v. Pass, 868 So.2d 571 (Fla. 3d DCA 2004), a case I wrote about here, the answer is NO, this 3-month statute of limitations period does NOT apply. In the linked-to case above, the 1st DCA comes to the opposite conclusion, explicitly rejecting the 3d DCA’s ruling in Angelus and certifying a conflict between the DCAs.

[W]e disagree with the sweeping holding in Angelus because it effectively renders part of section 733.212(3) meaningless. . . . The statute clearly states that interested persons such as appellant “must object to … the qualifications of the personal representative” within three months of the service of the notice of administration or such an objection is “forever barred.” A claim that a nonresident is not qualified to serve as a personal representative pursuant to section 733.304 is an objection to “the qualifications of the personal representative” and should be subject to the clear and unambiguous provisions of section 733.212(3). . . . Contrary to the Third District’s decision in Angelus, we find nothing in Florida Probate Rule 5.310 or sections 733.304 and 733.3101, Florida Statutes, which would preclude the application of the three-month statute of limitations period contained in section 733.212(3) to appellant’s claim that appellee was not qualified to serve as a nonresident personal representative pursuant to section 733.304 where the factual basis for the claim was known to appellant and could have been raised within the three-month period. This is not a situation where the factual basis for the claim of disqualification was concealed from appellant or arose after the three-month period had expired. Because appellant’s motions to disqualify appellee as personal representative were time barred under section 733.212(3), we affirm the trial court’s denial of the motions on that basis. We also certify conflict with Angelus.

Lesson learned?

If your client is contemplating a personal-representative disqualification motion, you have to assume the 3-month statute of limitations period contained in F.S. 733.212(3) applies (unless you’re in the 3d DCA). If your case is being litigated in a court that doesn’t fall under either the 1st DCA or the 3d DCA, you now have two different approaches you can argue depending on what side of the case you’re on.

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Steve L. Zimmerman of Zimmerman, Zimmerman & Miceli, P.A., in Pompano Beach, Florida, was on the winning side of Yawt v. Carlisle, — So.3d —-, 2010 WL 1879697 (Fla. 4th DCA May 12, 2010), a case I wrote about here involving when a new complaint has to be filed in on-going trust litigation.

I invited Steve to share some of the lessons he drew from this case with the rest of us and he kindly accepted.

[Q] What strategic decisions did you make in this case that were particularly outcome determinative at the trial-court level? On appeal?

[A] I became involved in this case only after a default and default final judgment had been entered against my clients, who had been proceeding pro se up to that point. The situation was very dismal, but the fact that the other side was seeking some new relief gave us a small “opening” that we hoped to exploit. It was quite clear that the attorneys, all seasoned probate practitioners, as well as the judge, perhaps out of habit, just sort of handled this trust case like it was a probate case, and thus misapprehended the effect of the default and the finality of the previous judgment. The only thing I had the opportunity to do at the lower court level was to go in an “make the record.” Sometimes this is a bit uncomfortable, particularly when you are dealing with very experienced and reputable probate attorney’s who you see in court every day, and the former chief judge of the circuit. But sometimes you just have to do it.

[Q] Would you have done anything differently in terms of framing the issues for your probate judge?

[A] I don’t think so. The appellate opinion made a point of mentioning that the appealable issue had been properly preserved.

[Q] From your perspective as probate litigator, do you think there’s anything that could have been done in terms of drafting the Land Trust at issue in this case or some other form of estate planning to avoid this litigation or at least mitigate its financial impact on the family?

[A] The appellate decision involved strictly the procedural issues. The substantive issues in this case remain to be determined. But the issues in this case will center upon what the duties of a trustee are, with respect to real property, once the beneficiaries are all adults and sui juris, and the trust purpose has been satisfied. Should the Trustee just execute the trust by conveying the property to the adult beneficiaries and then let them argue amongst themselves, or should the trustee sell the property and split up the proceeds? Obviously, some clearer drafting could have resolved these issues, but in this case, we don’t have that clarity.

[Q] Any final words of wisdom for probate lawyers of the world based on what you learned in this case?

[A] Trust cases are not probate cases. This is a double edged sword. Courts do not have continuing jurisdiction to supervise the administration of trusts like they do in probate cases – nor should they. With Trusts, you get in – get your ruling on a specific issue – and get out. One of the main reasons we use revocable living trusts is for probate avoidance. If your decedent wanted the court involved in his/her estate’s business he/she would not have made a living trust…

Yawt v. Carlisle, — So.3d —-, 2010 WL 1879697 (Fla. 4th DCA May 12, 2010)

In probate proceedings you don’t need to file a new complaint every time you want your probate judge to rule on some new issue. Why? Because probate is an in rem proceeding where the Florida Rules of Civil Procedure generally don’t apply. That’s NOT how it’s supposed to work in trust litigation. Subject to a few clearly-defined exceptions, F.S. 736.0201 says “proceedings concerning trusts shall be commenced by filing a complaint and shall be governed by the Florida Rules of Civil Procedure.”

Probate Custom vs. Trust Litigation

Here’s the problem: most trust litigation takes place before probate judges, and probate judges are – quite naturally – accustomed to playing by the rules that apply to probate proceedings, NOT the Florida Rules of Civil Procedure applicable to trust litigation. This clash between probate-court custom and the procedure governing trust litigation is at the heart of what went wrong in the linked-to case above.

In the linked-to case above the probate judge entered a final judgment approving the sale of trust property. After this final judgment was entered, the purchaser received the results of its environmental inspection and declined to close under the approved agreement. The trustee and potential purchaser negotiated and entered into a new contract, which significantly reduced the purchase price and extended the closing date. The trustee then sought court approval of the new agreement by filing an unsworn “Petition for Approval of Amended Contract.”

This approach could work in a probate proceeding, but NOT in trust litigation. Here’s how counsel for the objecting beneficiaries, Stephen Zimmerman, argued this point:

MR. ZIMMERMAN: … The current proceeding that’s before the Court right now was initiated by a motion in a case that’s already closed and then by only a couple of days notice without even a chance to respond. We’re not even having an evidentiary hearing, we’re just having attorneys argue about this, so it’s entirely inappropriate for the Court to dispose of this matter in a summary way like this without an evidentiary hearing, without a new case being filed, without a pleading.

THE COURT: What would be the purpose of an evidentiary hearing, what are we going to establish?

MR. ZIMMERMAN: Establish whether this is a fair price for this property. I mean, the Court is just relying upon attorneys coming in here and talking. We think this is not a fair price for this property….

New claim = New pleadings

Mr. Zimmerman was right, of course. No pleadings, no discovery, no evidence: that’s not the way to try a case. Unfortunately the probate judge didn’t see it his way and ruled against him. Wrong answer says the 4th DCA. Here’s why:

Appellants rely upon the provisions in Florida Rule of Civil Procedure 1.110(h) for their argument that appellees needed to file subsequent or supplemental pleadings for the relief they sought. This rule provides as follows:

When the nature of an action permits pleadings subsequent to final judgment and the jurisdiction of the court over the parties has not terminated, the initial pleading subsequent to final judgment shall be designated a supplemental complaint or petition. The action shall then proceed in the same manner and time as though the supplemental complaint or petition were the initial pleading in the action, including the issuance of any needed process. This subdivision shall not apply to proceedings that may be initiated by motion under these rules.

Fla. R. Civ. P. 1.110(h).

The Committee Note to this rule states, in pertinent part:

Subdivision (h) is added to cover a situation usually arising in divorce judgment modifications, supplementary declaratory relief actions, or trust supervision…. The last sentence exempts post judgment motions under rules 1.480(c), 1.530, and 1.540, and similar proceedings from its purview.

Fla. R. Civ. P. 1.110(h), Committee Note, 1971 Amendment.

Appellants argue that appellees failed to comply with this statute and that the trial court erred in granting relief based on their mere filing of a petition. They sufficiently preserved this issue for appeal, as they similarly argued below that the case was not procedurally ripe because appellees did not file a new pleading or afford them an opportunity for discovery and an evidentiary hearing.

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Because appellees have sought different relief than that originally pled, they were required to re-serve appellants in the same manner as they did originally and give them a new opportunity to respond …

An “insider’s” view:

For an insider’s view of this case, you’ll want to read this interview of one of the attorneys on the winning side of the case.

Hall v. Maal, — So.3d —-, 2010 WL 1212794 (Fla. 1st DCA March 30, 2010)

Just because someone says they were married to the decedent, doesn’t make it so. In contested probate proceedings you simply can’t take this fact for granted; the economic implications are too big. A surviving spouse has [1] the right to homestead property (at least a life estate in the decedent’s homestead residence), [2] a right to an elective share (30% of the decedent’s augmented elective estate), [3] a right to take as a pretermitted spouse (up to 100% of the estate under Florida’s laws of intestacy), [4] a right to a family allowance, [5] a right to exempt property, and [6] priority in preference in selecting a personal representative. In addition, as I recently wrote here, Florida courts have long held that a presumption of undue influence in a will contest “cannot arise in the case of a husband and wife” because the requirement of active procurement would almost always be present.

So how do you “test” the validity of a marriage?

The 1st DCA made clear in the linked-to case above that determining if a couple “acted” married is NOT the way to test a marriage’s legal validity. In this case the couple had a formal wedding ceremony, lived together, had children together, walked around telling anyone who would listen they were man and wife, executed a mortgage as husband and wife, and in all other respects “acted married,” but they never got around to getting a marriage license. So were they “legally” married? NO says the 1st DCA. Why? Because 741.211, Florida Statutes (2002) says common-law marriages aren’t valid in Florida. So if you don’t have a marriage license, you’re not married.

Acting Married

If there were ever two people who acted married, it was the couple in this case:

Ms. Hall and Dr. Maal were engaged to be married on March 2, 2002, at Old Christ Church in Pensacola. Leading up to their wedding date, they went through many of the familiar activities of those who intend to marry. They arranged for the church, engaged a minister, sent out invitations, arranged for flowers and a photographer, and attended pre-marital counseling. They attended at least two wedding showers. And, as some couples do, they started to work out a pre-nuptial agreement.

The week before the wedding, the couple was scheduled to go to the office of the county court clerk to get a marriage license. However, on that day, Dr. Maal called Ms. Hall at work and told her that they were not going to be able to get a marriage license because they had not agreed on the pre-nuptial agreement. Ms. Hall was understandably upset by this-all of the arrangements had been made and many of the guests were already in Pensacola for the ceremony. Dr. Maal persuaded her to go ahead with the ceremony, reassuring her that “everything will be alright.” On March 2, 2002, Dr. Maal and Ms. Hall participated in a full wedding ceremony performed by a minister at the church with numerous family members and friends present, complete with attendants, music, and flowers, and followed by a very nice reception. They did this knowing that they had not ever applied for nor received a marriage license.

In the years following the 2002 ceremony, two children were born of the relationship, Dr. Maal referred to Ms. Hall as his “wife,” and she referred to him as her “husband.” The mortgage on the parties’ home referred to them as “husband and wife.” Ms. Hall was referred to as “Mrs. Maal” in her workplace, although she had not legally changed her name. The parties continued to file separate tax returns.

A year after the “marriage” ceremony, the parties appeared before the clerk of the court and applied for and received a marriage license. However, the license was neither solemnized nor returned to the clerk of the court to be made part of the official records of the county.

No Marriage License = You’re NOT Married

These two may have walked, talked and looked married . . . but they weren’t. As explained by the 1st DCA, in the absence of a marriage license validly “solemnized” in accordance with Florida law: you’re NOT legally married.

Since 1967, when the Florida legislature abolished common law marriage, there has been only one method of producing a legally cognizable marriage in Florida. See generally §§ 741.01-.212, Fla. Stat. (2002). Persons desiring to be married are required to apply for a marriage license which can be issued by a county court judge or the clerk of the circuit court. See § 741.01, Fla. Stat. (2002). After issuance, a license is valid for 60 days within which time the marriage must be solemnized. See § 741.041, Fla. Stat. (2002). Marriage may be solemnized by ordained clergy, judges, clerks of court, or notaries public. See § 741.07, Fla. Stat. (2002). After solemnization, the officiant shall certify on the license that the marriage has been performed and deliver it, within 10 days, to the clerk or judge that issued it. See § 741.08, Fla. Stat. (2002). The county court judge and the clerk of the circuit court are required to keep a correct record of all licenses issued and of the licenses returned as certified by the officiant. See § 741.09, Fla. Stat. (2002). There are also provisions for proving up a marriage when the certificate is not completed on the marriage license, when the certified license is lost or when death or other cause prevents a certificate from being made. See § 741.10, Fla. Stat. (2002).

*     *     *     *     *

The parties were not in substantial compliance with Chapter 741. Whether substantial compliance exists is a fact-based inquiry. However, in order for there to be substantial compliance, there has to be some compliance. Some compliance would, at a minimum, entail the parties applying for and receiving a license.

*     *     *     *     *

To the extent that the dissent would hold that a marriage ceremony without a license, coupled with living together and “acting married,” results in a valid marriage, it would recreate a species of common-law marriage in violation of section 741.211, Florida Statutes (2002).

Hat tip to Eric Virgil

Coral Gables probate litigator extraordinaire Eric Virgil recently posted a summary of this case on the list service for the RPPTL section of the Dade County Bar Association. That’s how I became aware of it. Thanks Eric.

Listen to this post

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.

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

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.

Does a beneficiary’s “exclusive dominion and control” over his trust = no creditor protection? NO

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 or trustee is simply irrelevant as a matter of law.

But what about taxes?

By the way, while a beneficiary’s “exclusive dominion and control” over his trust or trustee may not matter for state-law creditor protection purposes (at least according to the 4th DCA), it could blow a trust’s intended tax planning, as illustrated by Securities and Exchange Commission v. Wyly, 56 F. Supp. 3d 394 (S.D.N.Y. 2014). In the Wyly case the court held that Sam Wyly and his brother Charles Wyly were deemed to own a series of foreign trusts because they retained control over their beneficial enjoyment, despite the presence of independent corporate trustees and the use of trust protectors who were not related or subordinate parties to the grantors. The result was that the trusts were treated as “grantor trusts” for income tax purposes, a disastrous result that ultimately forced the Wyly brothers into bankruptcy. For more on that case see here, here.

4th DCA says trust agreement controls; bad facts irrelevant

Now back to the case at hand. 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.

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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

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.

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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.