Resulting Trust: The Law Will Protect Your Assets From Your Spouse’s Creditor

Luxury Homes and Estates of Florida

In prior articles I have explained that assets owned by both husband and wife cannot be attached or sold to satisfy a creditor of only one spouse. Marital assets are protected in the State of Florida unless the creditor can show an obligation of both husband and wife.

Likewise, an asset solely owned by one spouse is not available to satisfy a creditor unless the same spouse is obligated to the creditor.

However, often when persons marry the husband or wife will give monies to their spouse to buy land or personal properties. If the spouse takes the title to the property in his own name, his judgment creditors may wrestle for control of the asset.

The creditor will argue that the new found property is owned by the debtor and available to satisfy the judgment.

However, in this circumstance the court recognizes that a resulting trust may be created by implication and deny the creditor a recovery.

The monies from the non-obligated spouse do not lose protection merely because an asset is purchased in trust. The fact that the debtor took the asset in his own name is conclusive. The court will determine where the monies came from to buy the asset (i.e., solely from the exempt spouse). Second, the court will examine the intent of the transaction. For example, if the wife gave the husband money to buy property and the husband purchased the property in his own name as a matter of convenience or as a representative of his spouse or family, the property will remain exempt from creditors.

A creditor enjoys the right to collect from assets owned by a debtor. In a resulting trust the asset was never owned by the debtor. Therefore, the asset is immune from collection activities.

The burden of establishing a resulting trust lies squarely on the shoulders of the spouse seeking to avoid collection.

The services of an attorney may be sought to safeguard the assets. However, when unsophisticated individuals engage in transactions the claims of a creditor may arise and ultimately require a trial to establish the parties’ intent respecting ownership of the asset.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

Shareholders Have Rights to Demand Corporate Financial Information

Luxury Homes and Estates of Florida

Minority shareholders of corporations are not powerless in their efforts to monitor the financial activities of the majority shareholders or the officers of the corporation. On the contrary, complete and full disclosure of financial activities of the corporation is mandated by the Florida Statutes. Any shareholder can demand pursuant to Florida Statute 607.1602(1) and (2) an inspection of records. The demand must be made in writing and sent to the corporation’s principal place of business. Once the demand is received the corporation must allow the inspection of the corporation’s financial records during normal business hours.

The type of information that must be provided are as follows:
(a) records of all minutes of any meeting of shareholders and board of directors;
(b) accounting records of the corporation, including salary and bonus payments made to personnel and all records of vendors paid by the corporation;
(c) complete disclosure of all lawsuits pending or previously filed against the corporation;
(d) complete reporting of advances or expenses paid to any director, officer or employee;
(e) disclosure of the corporation’s issuance of additional shares or promises to pay shares to any party; and
(f) copies of financial statements that are required to be delivered to the shareholders each year

Pursuant to the Florida Statutes, the shareholder may appoint an attorney or agent to inspect the records for him. Not only is inspection required but copying of the documents is also permitted at the request of the shareholder or his agent. The corporation may impose a reasonable charge for copy costs.
If the corporation refuses to comply with the request for inspection a lawsuit may be filed and the court will order the inspection pursuant to §607.1604. The court, in ordering the inspection, may require the corporation to pay reasonable attorneys fees and costs to enforce the shareholder rights.

The mandatory disclosure is a powerful tool to be utilized by a shareholder because it keeps the majority owners or officers of the corporation from freezing out a minority shareholder and engaging in inequitable conduct.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

Settlement Offers May Not Be Introduced At Trial As Evidence

Luxury Homes and Estates of Florida

The Florida Legislature and the Florida Evidence Code promote settlement of business disputes. In an effort to foster the settlement process the Florida Evidence Code specifically provides that settlement offers are inadmissible is subsequent litigation.₁

Despite this rule of evidence, I am routinely confronted with an opposing party’s effort to introduce settlement letters written between the parties discussing facts of a business dispute. The letter may have been written to posture or as a mea culpa in order to head off conflict. In either event, the letters sent prior to the commencement of litigation are privileged against disclosure in the courtroom. Rease v. Anheuser-Busch, 644 So.2d 1383, 1388 (Fla. 1st DCA 1994); Frank v. Ruwitch, 318 So.2d 188, 189 (Fla. 3rd DCA 1975). These rules are designed to encourage honest communication without fear of your own words being used against you.

Many attorneys argue that the language in a letter relating to the settlement offer should be stricken but admissions of fact should be introduced. This position is wrong. A letter containing a settlement offer is inadmissible in its entirety even though matters are discussed beyond the scope of the dispute claim. By way of example, in Benoit v. District, 463 So.2d 1260 (Fla.5th DCA 1985), the court reversed a judgment imposing liability on Benoit for a defective roof because a settlement letter was introduced as evidence. The roof had been constructed in 1977 pursuant to Benoit’s specifications. The owner of the building maintained that Benoit failed to warn users of its system not to combine its moisture barrier materials with asbestos because the asbestos would crack, thereby causing the roof to leak. Critical in the case was whether Benoit knew of the asbestos problem in 1977. As part of its case in chief, the owner placed into evidence a letter it received from Benoit dated February 25, 1982 which stated:

This letter is to confirm my phone conversation of this date with you…I pointed out the fact that my company does not recommend the use of asbestos felts on our tapered foam system and have published a statement to that effect. I am enclosing our application instructions dated 1976, wherein we state that asbestos felts are not acceptable over our system in that an organic felt or fiberglass membrane should be used.

The trial judge had simply blocked out the part of the letter pertaining to the settlement offer and admitted the remainder of the letter. The letter was exceedingly damaging to Benoit’s case because it established knowledge of a problem with asbestos before year 1977.

The Appellate Court overturned the jury verdict entered in favor of the owner. The Appellate Court stated that it was compelled to do so because the settlement letter should not have been admitted in evidence. The letter was written as an offer to settle and the court followed the rule and precluded the introduction of the letter as evidence.

It is recommended that before preparing any letter to compromise or settle a claim that the advice of an attorney should be sought.

₁Florida Statute 90.408: “Evidence of an offer to compromise a claim which was disputed as to validity or amount, as well as any relevant conduct or statements made in negotiations concerning a compromise, is inadmissible to prove liability or absence of liability for the claim or its value.”

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

CAN YOU AVOID A PERSONAL GUARANTY BY SIGNING AS AN OFFICER?

Luxury Homes and Estates of Florida

In my practice I am often given the task of collecting delinquent accounts. One of my first priorities is to review any credit application and personal guarantees signed by the debtor corporation and its officers. A common trick is that an officer signs the credit application on behalf of the corporation and then attempts to avoid liability under the personal guaranty by signing as a corporate representative.

In other words, a clear cut personal guaranty will be executed as follows “John Smith-President of XYZ”.

Such a maneuver by a creative debtor is not uncommon. However, the courts do not allow a corporate officer to escape personal liability merely by affixing his title to the signature block on the personal guaranty.

The courts review the document to determine whether or not the guaranty is unambiguous. If the guaranty states that the signer is “personally” liable or guarantees the debt no further interpretation of the document is permitted and the document is a guaranty as a matter of law.

Simply signing the signature block and inserting an officer’s title cannot defeat the purpose of the guaranty. See Central National Bank of Miami v. Muskat Corp. of America, Inc., 430 So.2d 957 (Fla. 3rd DCA 1983); Nelson v. Ameriquest Technologies, Inc., 739 So.2d 161 (Fla. 3rd DCA 1999); Sabin v. Lowe’s of Florida, Inc., 404 So.2d 772 (Fla 5th DCA 1981).

The courts enforce guarantees. To hold otherwise would merely have a corporation guaranteeing its own debt which renders the guaranty a nullity. The law is not a fool!

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

ELECTRONIC SIGNATURES HAVE THE SAME FORCE AND EFFECT AS WRITTEN SIGNATURES

Luxury Homes and Estates of Florida

In a paperless environment parties often execute contracts and submit governmental paperwork via the internet and other electronic media. Original signatures gave way to faxed signatures and now electronic signatures are an accepted method of execution. The “Government Paperwork Elimination Act” (“GPEA”) was signed into law on October 21, 1998. The GPEA requires federal agencies, by 2003, to allow individuals or entities that deal with the agencies the option to submit information or transact with the agency electronically. The GPEA specifically states that electronic records and their related electronic signatures are not to be denied legal effect, validity or enforceability merely because they are in electronic form. Florida followed suit. The Florida Electronic Signature Act of 1996 and Uniform Electronic Transfer Act (codified in Chapter 668, Florida Statutes) (collectively “Acts”) provide that unless otherwise provided by law, an electronic signature may be used to sign a writing and shall have the same force and effect as a written signature. The Acts further provide, similar to GPEA, that a record, signature, or a contract may not be denied legal effect or enforceability solely because the record, signature or contract is in electronic form. Note, however, that all parties involved in the transaction must agree to conduct the transaction by electronic means in order for the Acts to apply.

Florida government agencies are empowered to determine whether and to what extent they will send and accept electronic records and signatures. See Florida Statute 668.50(18)(a). Further, both the Florida Statutes and the Federal Statutes provide that the type of electronic signature required and the manner and format in which electronic records and signatures must be transmitted are to be determined on an agency-by-agency basis.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

CORPORATIONS: NOT A LICENSE TO STEAL

Luxury Homes and Estates of Florida

Florida, as well as other states created by statute, corporate entities to shield owners from personal liability in order to promote trade and commerce. Ordinarily a shareholder will not be responsible for the debts of a corporation absent a guaranty to the corporate creditor. However, in certain circumstances the courts will allow a creditor to pierce the corporate veil and recover against individual shareholders.

The Florida Supreme Court established that in order to pierce the corporate veil there must be a showing of “improper conduct”. *Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d, 1114, 1121 (Fla. 1984). It appears from Dania that the required showing is a two-step process: (1) alter ego, together with (2) some form of misconduct, which may be shown in a number of ways, including depletion of corporate assets for personal shareholder benefits or diversion of corporate property into the hands of shareholders.

The facts in Advertects involved shareholders who habitually operated numerous unsuccessful corporations; were the sole shareholders; and handled business affairs poorly. There the court refused to pierce the corporate veil because there was no showing that the shareholders improperly converted any of the corporate property to their own use or abused their positions. Thus, being a poor businessman and having a failed business does not subject one to personal liability. However, the facts in Walton v. Tomax Corp., 632 So.2d 178, 180 (Fla. 5th DCA 1994) achieved a different result. In that case, a fellow named Maguire was the manager of Tomax Corp. and his wife was the sole shareholder. A customer paid Tomax Corp. $20,000 as a deposit to construct a home. Maguire accepted deposit, never contacted the Plaintiff again, and a few months later filed for bankruptcy. The court found that the corporation could not pay its debts when the deposit was paid and that Maguire caused his company to make inappropriate distributions to himself and to his wife at the expense of corporate creditors. The court allowed an action to pierce the corporate veil and stated:

If a corporate officer who is in control of a corporation personally utilizes its assets for payment of personal obligations and generally treats the corporation as a sham, he can be liable on an alter ego theory.

The lessons in the cases are obvious. Establishing a corporation is not a license to steal. The corporate assets must be utilized for legitimate corporate purposes and not consumed or depleted for a shareholder’s personal gain.


*The Dania court relied, in part, on Advertects, Inc. v. Sawyer Industries, Inc.: “[Advertects] We rejected the proposition that a rule could be issued against individual stockholders to show cause why they should not be personally responsible for corporate debts absent a preliminary showing that the corporation is in actuality the alter ego of the stockholders and that it was organized or after organization was employed by the stockholders for fraudulent or misleading purposes, or in some fashion that the corporate property was converted assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not bona fidely established or, in general, the property belonging to the corporation can be traced into the hands of the stockholders.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.

USURY: THE PITFALLS OF CHARGING TOO MUCH INTEREST

Luxury Homes and Estates of Florida, April 2007

In the recent heated real estate environment, buyers went to great lengths to purchase property with the intent to flip same and make incredible profits. Often, the speculators were over extended and needed additional funds from friends and family members. Loans were secured with promises of quick and exorbitant returns.

Many times promissory notes were prepared by the individual without the aid of an attorney due to time constraints or merely to save money. A recent spat of these homespun promissory notes is now hitting the court system and with disastrous results to the lender.

Private lenders must be aware of Florida Statutes governing usury. Pursuant to Florida Statute 687.03, it is unlawful for a person to collect or attempt to collect interest on any obligation at a higher rate of interest than the equivalent of 18% per annum simple interest.

Pursuant to Florida Statute 687.04, any person who charged and collected usurious interest shall forfeit double the amount of interest paid.

In other words, not only are you not to collect usurious interest pursuant to the statute, as a penalty you will be required to pay double the amount of interest that you have received.

In the event that the lender seeks to enforce a promissory note that is usurious a defense or counterclaim may be received based on usury. The only amount of money that may be recovered is the actual principal sum loaned. *Further, the court may require that the principal be reduced by all interest paid pursuant to the statute.

*If the interest that you have charged exceeds 25% of the loan value you may be subject to enhanced penalties under Florida law.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.