Disclaimer Statute May Permit Judgment Debtors to Deliver Money to Friends or Family With Nothing to Creditors, But Not Always in Florida
If a Florida judgment debtor came to you with news that he or she inherited either nontestamentary assets or testamentary assets, and further told you that he or she had judgment liens against him or her that had been appropriately and properly recorded, could you tell the debtor that there was a method under the Florida statutes that may permit him or her to prevent the judgment creditor’s lien from attaching to such inheritances? The answer is: Maybe. An analysis of the applicable statutes and the common law interpretation of the statutory language shows that a debtor beneficiary can disclaim his or her interest in the asset which, in turn, precludes a judgment creditor from attaching the inherited asset or its proceeds. However, this is true only if the debtor is not “insolvent.”
This article will review Florida’s disclaimer statutes from various perspectives: how they relate to a Virginia Supreme Court case that allowed a debtor to avoid creditors through a disclaimer; how a creditor’s challenge to a debtor’s disclaimer based on fraud may or may not successfully resist creditor attack; how the financial condition of the disclaimant can affect the disclaimer, and how to determine the financial condition of the disclaimant; how courts’ interpretations of other statutes use of the term “insolvency” relate to the interpretation of Florida’s disclaimer statutes; and why uncertainty may exist on this issue.
In Virginia, Disclaimer Could Beat Creditors
The dollars involved in a disclaimer situation can be very significant in the context of large life insurance policies or other nontestamentary inheritances. The Supreme Court of Virginia, which considered a disclaimer statute similar to that in Florida,1 allowed Kathleen Willey to successfully disclaim her interest in life insurance proceeds and avoid creditor attack. Abbott v. Willey, 479 S.E.2d. 528 (Va. 1997).2
Willey’s disclaimer of her beneficial interest in the insurance proceeds relied upon Virginia Code3 §64.1-193. The Virginia statute’s pertinent language stated:
Unless otherwise provided in the nontestamentary instrument, the property or part thereof or interest therein disclaimed and any future interest which is to take effect in possession or enjoyment at or after the termination of the interest disclaimed shall be distributed as if the disclaimant had died before the effective date of the nontestamentary instrument. The disclaimer shall relate back for all purposes to the effective date of the instrument. (Emphasis added.)4
The Virginia Supreme Court determined that Ms. Willey, whose creditors were seeking payment of valid claims against her that predated the death of her husband, could effectively disclaim $350,845.92 of insurance proceeds on her deceased husband’s life. The court thus permitted the disclaimed proceeds to be paid to her children, who received the insurance proceeds free and clear of any interest of Ms. Willey’s creditors. The children were free to dispose of the money as they wished—even to support their mother.
The creditors attempted to characterize Ms. Willey’s disclaimer as a “transfer.”5 If the disclaimer were a transfer, the creditors argued, it was a fraudulent transfer as to them, and they could proceed against the proceeds held by her children.6 The creditors reasoned the children received a significant asset without delivering value to Ms. Willey, the transferor.7
The crux of the creditors’ argument was that Ms. Willey’s disclaimer was a voluntary act (or a “transfer”) done merely to avoid the creditors’ claims. This voluntary act was argued to be a “fraudulent conveyance” under the Virginia statute.8 Ms. Willey countered that her disclaimer was not a transfer. Instead, she contended that the admittedly voluntary act of disclaiming prevented the insurance proceeds from ever becoming an asset that she owned, in turn she could not transfer what she did not own.9 Ms. Willey’s argument flowed from an analysis of the language used in Virginia’s disclaimer statute. Ms. Willey asserted that, as of the decedent’s death, the Virginia disclaimer statute treated her as having predeceased the insured. Because the statute treated her as having predeceased her husband, Ms. Willey argued that the insurance proceeds were required to be paid to the decedent’s children as the secondary beneficiaries named by the decedent. Ms. Willey concluded that she could not participate in a fraudulent transfer because the statutory language provided that she never had a transferable right to the proceeds.10 In other words, her interest in the proceeds never “vested.”11 The Virginia Supreme Court agreed.
The creditors’ last argument relied primarily on the fact that Ms. Willey’s disclaimer appeared to be made with an obvious intent to evade creditor attack.12 The creditors also argued that Ms. Willey’s acts were so egregious that the court should equitably disallow her disclaimer, even if the plain language of the statute would permit it.13 This argument fell upon deaf ears. The Virginia Supreme Court reasoned that the legislature’s failure to include a provision for fraudulent transfers in Virginia Code §64.1-193 meant that a court was not free to create a “fraudulent transfer exception” to the plain statutory language.14
The court felt constrained to adhere to a strict interpretation of the unambiguous language of the disclaimer statute even though its interpretation reached an undesirable result (at least from the creditors’ point of view). Ms. Willey’s disclaimer of more than $350,000 of life insurance proceeds was her children’s windfall. The disclaimant’s intentions were obvious: avoid a creditor attack, while at the same time keeping the money in the family. Notwithstanding that Ms. Willey’s motives appeared less than admirable (again, from the creditors’ perspective), the court explained:
While in the construction of statutes, the constant endeavor of the courts is to ascertain and give effect to the intention of the legislature, that intention must be gathered from the words used, unless a literal construction would involve a manifest absurdity. Where the legislature has used words of a plain and definite import, the courts cannot put upon them a construction which amounts to holding the legislature did not mean what it has actually expressed.[Citing Barr v. Town & Country Properties, 240 Va. 292, 295, 396 S.E. 2d. 672, 674 (1990) (quoting Watkins v. Hall, 161 Va. 924, 930, 172 S.E. 445, 447 (1934)).] 15
The court clearly agreed with Ms. Willey’s argument that “as a result of such disclaimer, she acquired no interest in the insurance proceeds because the disclaimer related back16 to the effective date of the insurance policy.”17 (Emphasis added.) The court concluded, “Kathleen Willey’s disclaimer related back ‘for all purposes’ to the effective date of the insurance policy and, thus, she acquired no property interest which could be transferred.”18
Fraud and Disclaimers Under Nontestamentary Disclaimer Provision
The Florida statutory provisions regarding disclaimers of nontestamentary property, such as life insurance proceeds, are contained in F.S. §689.21.19 The Florida nontestamentary disclaimer statute more thoroughly addresses disclaimers than its now-repealed Virginia counterpart, and states in pertinent part:
Unless the grantor, or a donee of a power of appointment, has otherwise provided by a nontestamentary instrument with reference to the possibility of a disclaimer by the beneficiary, the interest disclaimed shall descend, be distributed, or otherwise be disposed of in the same manner as if the disclaimant had died immediately preceding the death or other event which causes her or him to become finally ascertained as a beneficiary and his or her interest to become finally ascertained as a beneficiary and his or her interest to become inadequately fixed both in quality and quantity, and, in any case, the disclaimer shall relate for all purposes to such date, whether filed before or after such death or other event. An interest in property disclaimed shall never vest20 in the disclaimant. (Emphasis added.)21
Consistent with ruling of the Virginia Supreme Court in Willey, fraud should probably not be a successful argument to set aside a Florida disclaimer. Like the Virginia provision at issue in the Willey case, disclaimed property in Florida never vests with the disclaimant. That conclusion prohibited the Willey court from creating a fraud exception in Willey to the disclaimer statute.22 A valid disclaimer cannot trigger the application of Florida’s fraudulent conveyance statutes. An analysis of what constitutes a fraudulent transfer under the Florida Fraudulent Transfer Statute, which is based the Uniform Fraudulent Transfer Statute, shows that the applicability of fraudulent transfer concepts requires an ownership23 interest in the asset alleged to have been fraudulently transferred.24
F.S. §726.101 illustrates the need for a transfer to involve property owned by the transferor. Section 726.102(12) defines transfer as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” (Emphasis added.)
F.S. §726.102(2) defines “asset” as “property of a debtor.”
In order to prevail under Florida’s fraudulent transfer statute, a creditor must establish that the “transfer” involved an “asset.” If the transferred item was not an “asset,” the transfer cannot logically be a voidable transfer.25
The disclaimer statute, §689.21, specifically provides that a disclaimed asset never vests in the name of the disclaimant. Because disclaimed property never vests in the disclaimant, a disclaimer of a beneficial interest does not involve a “transfer”26 of an asset or property.27 No fraudulent transfer occurs, as a result of a disclaimer, under Florida’s fraudulent conveyance statutes.
Moreover, the Virginia statute did not explicitly contain a fraudulent transfer exception. Like its Virginia counterpart, F.S. §689.21 neither includes the word “fraud” nor has an explicit exception for a fraudulent disclaimer. Florida should follow Willey in not creating a fraudulent transfer exception. The Florida Supreme Court has clearly stated that “when a statute is clear and unambiguous, courts will not look beyond the statute’s plain language for legislative intent or resort to rules of statutory construction to ascertain intent.” City of Miami Beach v. Galbut, 626 So. 2d 192, 193 (Fla. 1993); Holly v. Auld, 450 So. 2d 217, 219 (Fla. 1984); Lee County Electric Cooperative, Inc. v. Jacobs, 820 So. 2d 297 (Fla. 2002).
Financial Condition Affects Validity of Disclaimers
For solvent disclaimants, making a disclaimer under F.S. §679.21 should allow the Willey-like result to occur. Ms. Willey, who was admittedly insolvent at the time of her disclaimer, probably would not prevail in Florida, because Florida, unlike Virginia in 1997, has an insolvency exception in its disclaimer statute.
Financial information, not intent, determines whether the Florida disclaimer is permissible. A disclaimant must be concerned about his or her personal finances because F.S. §689.21(6) unambiguously states that a claimant who is insolvent cannot disclaim.28 The testamentary29 disclaimer statute—F.S. §731.801—also has an insolvency exception. Florida is one of the minority jurisdictions30 that statutorily prohibits insolvent debtors from disclaiming nontestamentary or testamentary gifts and devises. Florida clearly prohibits disclaimers by insolvent beneficiaries. Florida clearly omits any prohibitions about whether a fraudulent transfer can invalidate a disclaimer. And, as mentioned above, the concepts of Florida’s fraudulent conveyance statutes are not incorporated in Florida’s disclaimer statute.31
The problem then is not the issue of an insolvency prohibition. Instead, the problem is the enforcement of the prohibition. F.S. §§732.801 and 689.21 neither define the term “insolvent” nor provide who has the burden of proof to establish the disclaimant’s “insolvency.”32 No published decisions interpret the insolvency provisions under §689.21 or 732.801.
• What is “Insolvent”?
Some people equate solvency with collectability, i.e., the ability of a creditor to collect a debt owed by a debtor. In Florida, collectability is not synonymous with solvency. A Florida resident can be very wealthy, but immune from collection. Ownership of substantial creditor-exempt assets—such as homestead real estate,33 annuities,34 IRA accounts,35 disability payments,36 pension plans,37 or insurance policies38—does not mean that the debt is collectable. For the purposes of interpreting Florida’s insolvency exception to testamentary or non-testamentary disclaimers, the question becomes: Does the definition of “insolvent” require inclusion of exempt assets?
• Tax Court’s Interpretation of “Insolvent” May Assist
Federal law has touched thoroughly on this issue. For example, insolvency is defined in the Internal Revenue Code as follows:
[F]or purposes of this section [Code §108], the term “insolvent” means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.
26 U.S.C. §108(d)(3).
The Internal Revenue Code’s definition of “insolvent” hinges in large part on the fair market value of “assets.” The term “assets,” as used in IRC §108(d)(3), is not defined elsewhere in the Internal Revenue Code. Questions have therefore arisen as to whether the term “assets” means all assets, or merely nonexempt assets. Jurisprudence has evolved with different conclusions as to whether the term “assets” in IRC §108(d)(3) includes exempt assets.
Cole v. Commissioner, 42 B.T.A. 1110 (1940), first addressed this issue. The Cole court did not include exempt insurance assets in calculating the (in)solvency of the debtor. The Cole court concluded, “In determining the amount in which petitioner’s net assets were increased as result of the cancellation of petitioner’s indebtedness by his creditor, i.e., the amount of petitioner’s assets which ceased to be offset by claims of creditors, there should be, and has been, omitted from the value of petitioner’s assets the value of his equity in 10 life insurance policies.” Id. at 1113.
Applicable New York law prohibited creditors from reaching Mr. Cole’s insurance.39 The court therefore concluded that the state statutory law creditor-exempt insurance assets required that the insurance policies be excluded as “assets” for purposes of applying §108 of the Internal Revenue Code. Exclusion of the insurance made Cole insolvent. being insolvent, Cole avoided tax recognition for the forgiven debt. excluding exempt assets in determining whether a taxpayer was required to recognize income upon cancellation of indebtedness, the court’s ruling favored taxpayers at the expense of the Federal Treasury. After Cole, more taxpayers were definitionally “insolvent” under Code §108. When taxpayers are definitionally insolvent, they are not required to recognize income upon cancellation of indebtedness. Cole afforded people who held valuable exempt assets the opportunity to avoid recognition of income when a cancellation of indebtedness event occurred.
Times and laws change. The U.S. Tax Court now interprets the term “assets” as used in Code §108 to include exempt assets. In re Carlson, 116 T.C. No. 9 (2001). Because of the Tax Court’s decision in Carlson, taxpayers with significant exempt assets are “solvent” under Code §108—exposing them to a greater possibility of having to recognize income upon a cancellation of indebtedness—even though they may be “judgment proof” under state or other federal law.
• Bankruptcy Court Interpretation of “Insolvent” May Assist
Bankruptcy law also defines the term “insolvent.” The Bankruptcy Code defines “insolvent” as
(A) with reference to any entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of the entity’s property, at a fair valuation, exclusive of –
(ii) Property that may be exempted from property of the estate under §52240 [ of this title].
11 U.S.C. §101(32).
The Bankruptcy Code’s definition of “insolvency” conflicts with the definition under the Internal Revenue Code: The Bankruptcy Code excludes exempt assets when determining “insolvency.”
Each definition has a purpose. In the context of bankruptcy, increased potential for a debtor to be insolvent allows more successful litigation for the bankruptcy trustees.41 A common element for bankruptcy avoidance actions requires insolvency.42 In the context of the federal tax laws, however, a decreased potential for insolvency allows for more recognition of cancellation of indebtedness income.
• Contrasting Tax With Bankruptcy
The Carlson court determined that IRC §108(d) could have included the definition of “insolvency” requested by the petitioner (i.e., that used in the Bankruptcy Code). But, the court noted that Congress did not adopt the Bankruptcy Code’s definition of “insolvent.” The Carlson court concluded that Congress, which clearly is capable of enacting legislation which unambiguously excludes exempt assets when determining solvency,43 must have elected not to include such language in the Internal Revenue Code. The Carlson court ruled that Congressional omission of an “insolvency” clause (similar to that of Bankruptcy Code’s definition of insolvent) in the Internal Revenue Code was not inadvertent.44 The Carlson court found it obvious that Congress did not define of insolvency in Title 26 of the United States Statutes (Tax Code) as it is defined in Title 11 (Bankruptcy Code) so as to deliver a different result.45
• Florida is Without Definition
Because no courts have interpreted the term “insolvent” in the context of Florida’s disclaimer statutes, there is no guidance. The Florida Legislature must determine what it seeks with the disclaimer statute. It was explained above how the definition of “insolvency” in the Tax Code increased revenue by utilizing a definition which contradicted the Bankruptcy Code’s “insolvency.” It was also explained how the Bankruptcy Code definition of “insolvency” increased an estate’s avoidance actions. Each definition clearly produces a desired result for the relative code. If Florida’s goal is to protect creditors, exempt assets would not be included when calculating the disclaimant’s solvency. On the other hand, if Florida’s goal is anything other than to protect the creditors, then exempt assets should be included when calculating “insolvency” for disclaimers.
Without a Definition, There Is Litigation
Two courts interpreting the concept of “insolvency” in the context of two federal statutes have concluded that exempt assets are included (the Tax Code) or excluded (the Bankruptcy Code) when determining assets and insolvency. Without clear direction, without an explicit definition of “insolvent,” without an assignment of the burden of proof to show insolvency, and without any applicable case law, the term “insolvent” remains a matter for litigation under F.S. §§689.21 and 732.801.
• Florida Statutes May Assist
A resort to the Florida statutes other than the two disclaimer statutes for guidance in the definition of “insolvency” leads to the Florida Fraudulent Transfer Statute, F.S. Ch. 726. Although Ch. 726 may not apply to the disclaimer statute, its definition of “insolvency” may be persuasive. One court noted, “Section 726.103(1) lays down the insolvency rule—that a debtor is insolvent when the sum total of all his liabilities exceeds the fair value of all his assets. That is the only rule defining insolvency. ”(Emphasis added.)46
Section 726.103 defines “insolvency” as:
(1) A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation. (emphasis added)
(2) A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.
Section 726.103(1)’s definition clearly includes “assets” in the formula for definition of insolvent. But the statute clearly does not identify whether exempt assets are included in the “asset” formula. A failure either to specifically include or exclude exempt assets complicates the conundrum. In addition, a debtor’s insolvency under §726.103(1) is often difficult to prove, thereby persuading many creditors to resort to the presumption set forth in §726.103(2).47 That section does not require a definition of the term “assets,” instead, a creditor must only show that a debtor is not current on the payment of his or her debts. A wealthy Floridian, with significant exempt assets who chooses not to liquidate his exempt assets to pay his creditors, could be insolvent under §726.103(2). Section 726.103(2) also makes the burden of proof desirable to the creditor as the debtor must provide proof that he or she is paying debts as they become due.48 Under §726.103(2), the debtor is “presumed to be insolvent.” Ultimately, creditors will constantly refer to the Florida Fourth Circuit Court of Appeals, which has concluded that there can be a presumption of insolvency under §726.103,49 when utilizing §726.103(2).
Willey and the Solvent Florida Disclaimant
Absent insolvency, one may think that a Willey-like result will be uniformly achieved for the disclaimant. At the beginning of this article, the hypothetical identified a beneficiary disclaiming an interest in a testamentary or non-testamentary asset after judgment creditor’s liens had been properly perfected. If the result of the disclaimer results in payment of the disclaimed property to a family member, as done in Willey, and if that money is then delivered into a trust for the benefit of the family members (including the disclaimant, as occurred in Willey), it would appear that a strict adherence to the plain language of Florida’s disclaimer statute could lead to an absurd result, especially when the value of the disclaimant’s exempt assets exceeds the amount of his or her liabilities. A Florida court could disagree with the Virginia Supreme Court’s strict adherence to the statutory language. To avoid the result reached in Willey, the creditor would need to convince a court to rule that the plain language of §689.21 must succumb to attack if the application of the plain language leads to an untenable result. Achieving such a ruling is not an impossibility. The Florida Supreme Court has reasoned that “it is a basic tenet of statutory construction that statutes will not be interpreted so as to yield an absurd result. Dorsey v. State, 402 So. 2d 1178 (Fla. 1981); State v. Webb, 398 So. 2d 820 (Fla. 1981); Austin v. State ex rel. Christian, 310 So. 2d 289 (Fla. 1975).” Wollard v. Lloyd’s and Companies of Lloyd’s, 439 So. 2d 217, 218 (Fla. 1983). A would-be disclaimant, who sails clear of “fraudulent transfer” and “insolvency” issues, could still run aground if a creditor could convince a court that the result of the disclaimer was inequitable and prejudicial to others.
All disclaimer statutes are not alike. Florida has prohibited an insolvent beneficiary from disclaiming. However, there is no statutory definition or case law in Florida defining “insolvency.” Insolvency has been proven to be the focal point for other federal and state statutes. Federal income tax statutes require the inclusion of exempt assets when defining “insolvency,” while federal bankruptcy laws exclude exempt assets when defining “insolvency.” The best definition for “insolvency” in Florida is under §726.103, which mirrors the Uniform Fraudulent Transfer Act. But, it may be neither persuasive nor helpful. The Ch. 726 definition neither includes nor excludes exempt assets when measuring insolvency under §726.103(1). The solution for defining “insolvency” may be under §726.103(2) which ignores the term “asset” and instead requires a ledger review of the party’s debt payments as they become due. Because the burden of proof has been found to be on the debtor to disprove the presumption of insolvency under §726.103(2),50 the creditor may more easily prove insolvency under §726.103(2). This review may also be the easiest and most judicially convenient for handling the definitional issue of “insolvent.” At present, most solvent Floridians can disclaim inheritances. Insolvent Floridians cannot. The inequity of affording solvent parties disclaimer rights while denying those rights to insolvents may deliver constitutionally framed arguments for tomorrow. Until then, insolvent Floridians are compelled to abide by the Florida statutes and be told their disclaimer rights are nonexistent.
1 The Florida statutes have been so little reviewed by the courts that one court wrote: “The language in. this section [689.21] is substantially similar to the disclaimer of interests statute pertaining to wills and intestate succession in section 732.801, Florida Statutes. While there are no Florida cases interpreting either of these sections, a substantial number of jurisdictions have recognized that a disclaimer of a devise precludes an interest in the devise from ever vesting in a disclaimant because the disclaimant is treated as if he had died prior to the triggering event, i.e., the death of the testator. The following cases from other states illustrate the application of this legal concept.” (Emphasis added.) Young v. Dept. Admin., 524 So. 2d 1071 (Fla. 1st D.C.A. 1988).
2 However, as outlined below, Florida is less permissive in allowing debtors to disclaim inheritances.
3 This code section has been amended. This will be referred to as Virginia’s “Old Code,” while the newly legislated code will be referred to as the “New Code.”
4 Virginia’s Code §64.1-193.
5 Abbott v. Willey, 479 SE 2d 528, 529 (Va. 1997).
6 Under fraudulent transfer law, a fraudulent transfer action against the children could allow the remedy to be recovery the asset transferred.
7 Constructive fraud does not require intent to conceal, but rather focuses upon the transfer being given without value. The creditors were willing to argue actual fraud as well as constructive fraud.
8 Willey, 479 S.E. 2d at 529, (citing Code §55-80 and §55-81, Virginia)
9 Id. at 530.
10 Id. at 530.
11 The term “vest” is not included in the Virginia Code, new or old. But, that term is specifically used in Florida.
12 Willey, 479 S.E. 2d at 529-530.
13 Id. at 530. The claim further asserted unjust enrichment of the children which was summarily denied.
14 Id. at 530.
15 Id. at 530.
16 The Florida statute describes the effect of disclaimer to, A. . . relate for all purposes to such date [the hypothetical date of A. . . as if the disclaimant had died immediately preceding the death or other event which causes her or him to become finally ascertained as a beneficiary.].
17 Willey, 479 S.E. 2d at 530.
18 Id. at 530.
19 Disclaimers of testamentary devices are addressed in Fla. Stat. §732.801.
20 The concept of vesting was interpreted by the Virginia Supreme Court. In Florida, the concept is specific and unambiguously described in the statute.
21 Fla. Stat. §689.21(3)(a).
22 Willey, 479 S.E. 2d at 530.
23 Fla. Stat. §726.102(12) defines a transfer as disposal of an asset. §726.102(2) defines asset to be “[p]roperty of the debtor. . . . ” Hence a transfer requires disposal of an asset which is disposal of the debtor’s property. §726.102(10) defines property to mean “anything that may be the subject of ownership.” (Emphasis added.)
24 Fla. Stat. ch. 726.
25 Fla. Stat. ch. 726. More particularly, transfer is defined in 726.102(12) as: ‘“Transfer’” means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”
26 Fla. Stat. §726.102(13).
27 In Willey, the court followed this logic when it wrote, “[W]e conclude that once Kathleen Willey disclaimed her interest in the insurance proceeds, those proceeds were to be distributed.. . as if Kathleen Willey had died before the effective date of the insurance policy.. . the effective date of the insurance policy precedes the events that gave rise to the plaintiffs purported cause of action against the Defendants.” 479 S.E. 2d at 530.
28 That section specifically states, “The right to disclaim otherwise conferred by this section shall be barred if the beneficiary is insolvent.”
29 As defined in Black’s Law Dictionary (7th ed.), Testamentary means, “1. Of or relating to a will or testament.. . 2. Provided for or appointed by a will.”
30 Other known insolvent prohibitions are: Ala. Code 43-8-295 (1985); Mass. Gen. Laws. Ann. 191A 8 (West 1990); Minn. Stat. Ann. 525.532(6) (West Supp. 1991); N.J. Rev. Stat. Ann. 3B:9-9 (West 1990); and Wash. Rev. Code. Ann. 11.86.051 (Supp. 1991).
31 Interestingly, California has decided to prohibit an action against a beneficiary as provided by Cal. Prob. Code 283 (West Supp. 1991) Hence, you may be able to allege fraud, but cannot sue the transferee.
32 A helpful guide may be the Bankruptcy Statute §101(32) definition of insolvent:
“(32) ‘’insolvent’’ means –
“(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of –
“(I)property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and
“(ii) property that may be exempted from property of the estate under section 522 of this title.”
33 Fla. Const. art. X, §4.
34 Fla. Stat. §222.14.
35 Fla. Stat. §222.201 or 222.21.
36 Fla. Stat. §222.18.
37 Fla. Stat. §222.21.
38 Fla. Stat. §§222.13 and 222.14.
39 Similar to Fla. Stat. §222.13 or 222.14.
40 This section is entitled, “Exemptions” and lists the exemptions allowed.
41 The avoidance action of 11 U.S.C. §547 [preferential transfers] requires that the debtor be insolvent at the time of transfer and the action for avoidance of a constructively fraudulent transfer under 11 U.S.C. §548(s)(1)(B) [fraudulent transfer] requires that the debtor be insolvent after the transfer is made.
42 Without solvency, there cannot be preferential transfer actions and constructive fraud actions by trustees.
43 Carlson’s insolvency test was literally what the Bankruptcy Code permitted.
44 Section 101(26) of the Bankruptcy Code specifically excludes exempt property in the formula. Section 108 of the IRC unfortunately is not specific.
45 Carlson, 116 T.C. at 31. In fact, the Carlson court followed the expressio unius est exclusio alterius concept when concluding: “We conclude that the decision of Congress not to define the term ‘insolvent’ in section 108(d)(3) to exclude specifically such exempt asset in determining whether a debtor is insolvent for purposes of section 108 was intentional.”
The Carlson court’s footnote 13 then refers to Myron M. Sheinfeld’s comment to Congress at the hearings for HR 5043, 96th Cong. 1st Sess (1979) that, “the differing definitions of insolvent will, unless made consistent, cause substantial trouble and litigation.” Hearing in HR. 5043 before Subcommission on Select Revenue Measures of the House Commission on Ways and Means. Carlson, 116 T.C. at 32.
46 Levin v. Ethan Allen, Inc., 823 So. 2d 132 (Fla. 4th D.C.A. 2002).
47 Because §726.103(2) is not framed as an alternative to the insolvency rule in §726.103(1), its [§726.103(2)] only role is to ease the court into the ultimate determination on the question of solvency. Levin, 823 So. 2d at 134.
48 This is not as easy to prove as one may think. The Fourth Circuit Court of Appeals prevented summary judgment and wrote: “There is no authority to suggest that balance sheet solvency cannot be used to rebut the presumption of insolvency under section 726.103(2), thereby precluding summary judgment. Section 726.103(2) creates a rebuttable presumption of insolvency. Where failure to pay debts as they are due creates a presumption, such presumption may be logically rebutted by proof that the debtor is not insolvent. This may include proof that the sum of the debtor’s debts is not greater than all of the debtor’s assets or that other debts are being timely paid. When that occurs, summary judgment is precluded as issues of fact exist. See Levin v. Ethan Allen, Inc., 823 So. 2d 132 (Fla. 4th D.C.A. 2002) (recognizing that balance sheet test available to rebut insolvency presumption). Balsamo v. Gruppo Ceramiche Ricchetti, S.P.A., 862 So. 2d 812, 813 (Fla.4th D.C.A. 2003).”
49 “The Levins [the debtors], who had the burden of rebutting the statutory presumption of insolvency.. . ” (Emphasis added.) Levin, 823 So. 2d at 133.
50 Id. at 134.
Robert C. Meyer is a commercial litigator who primarily practices in the areas of bankruptcy, estate planning, and probate. He received his B.A. from Grinnell College and his J.D. and LL.M. in taxation from the University of Miami. Mr. Meyer is admitted to the U.S. District, Southern District and Middle District of Florida and to the 11th Circuit Court of Appeals.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Laird A. Lile, chair, and William P. Sklar and Richard R. Gans, editors.