Family Trust Set Up in Good Faith Shields Family Member from Creditor – IL Case Note

In Hickory Point Bank & Trust v. Natual Concepts, Inc., 2017 IL App (3d) 160260, the appeals court affirmed a trial court’s denial of a judgment creditor’s motion to impose a judicial lien and order the turnover of trust assets.

The corporate defendant defaulted on the loan that was guaranteed by corporate principals.

Plaintiff entered confessed judgments against the corporate and individual defendants.

Through post-judgment proceedings, plaintiff learned one of the individual defendants was trustee of an irrevocable family trust whose sole asset was four pieces of real estate formerly owned by the defendant’s father.

The document provided that upon death of defendants’ parents, the trust assets would be distributed 85% to defendant with the rest (15%) going to defendant’s three sons.

To satisfy its default judgment against defendant, plaintiff alternately moved to liquidate and turnover the trust assets and to impress a judicial lien against the trust property.

The trial court held that the trust was protected from judgment creditors under Code section 2-1403 (735 ILCS 5/2-1403) and denied the plaintiff’s motion. Plaintiff appealed.

The central issue was whether or not the trust was self-settled.  A “self-settled” trust is “a trust in which the settlor is also the person who is to receive the benefits from the trust, usually set up in an attempt to protect the trust assets from creditors.” Black’s Law Dictionary 1518 (7th ed. 2002).

Like most states, Illinois follows the general rule that a self-settled trust created for the settlor’s own benefit will not protect trust assets from the settlor’s creditors. See Rush University Medical Center v. Sessions, 2012 IL 112906, ¶ 20.

Code Section 2-1403 codifies the rule that protects trusts that are not self-settled.  This statute states:

“No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor.” 735 ILCS 5/2–1403 (West 2014).

Based on the plain statutory text, a creditor’s judgment cannot be satisfied by funds held in trust for a judgment debtor where (1) the trust was created in good faith and (2) a person other than the judgment debtor created the trust or the funds held in trust proceeded from someone other than the judgment debtor.

Here, there was evidence that the trust was formed in good faith.  It pre-dated by five years the date of the commercial loan and defendants’ default.  There was no evidence the trust was created to dodge creditors like the plaintiff.  The trust language stated it was designed for the care of Defendant’s elderly parents during their lifetimes.

The Court also deemed significant that Defendant was not the trust beneficiary. Again, the trust was set up to benefit Defendants’ parents and the trust was funded with the parents’ assets.  Because the trust assets originated from someone other than the defendant, the second prong of Section 2-1403 was satisfied.

Plaintiff’s alternative argument that the court should impress a judicial lien against defendant’s 85% trust interest also failed.  The law is clear that a creditor may not impose a lien on funds that are in the hands of a trustee.  But once those trust funds are distributed to a beneficiary, a creditor can access them. (¶¶ 26-27)

Since thse trust assets (the four real estate parcels) had not been distributed to defendants under the terms of the trust, defendant’s interest in the properties could not be liened by the plaintiff.

Afterwords:

A good example of a family trust shielding trust assets from the reach of a family member’s creditor.

Self-settled trusts (trusts where the settlor and beneficiary are the same person) are not exempt from creditor interference.  However, where the trust is created in good faith and funded with assets originating from someone other than a debtor, a creditor of that debtor will not be able to attach the trust assets until they “leave” the trust and are distributed to the debtor.

 

Hotel Titan Escapes Multi-Million Dollar Fla. Judgment Where No Joint Venture in Breach of Contract Case

In today’s featured case, the plaintiff construction firm contracted with a vacation resort operator in the Bahamas partly owned by a Marriott hotel subsidiary. When the resort  breached the contract, the plaintiff sued and won a $7.5M default judgment in a Bahamas court. When that judgment proved uncollectable, the plaintiff sued to enforce the judgment in Florida state court against Marriott – arguing it was responsible for the judgment since it was part of a joint venture that owned the resort company.  The jury ruled in favor of the plaintiff and against Marriott who then appealed.

Reversing the judgment, the Florida appeals court first noted that under Florida law, a joint venture is an association of persons or legal entities to carry out a single enterprise for profit.

In addition to proving the single enterprise for profit, the joint venture plaintiff must demonstrate (i) a community of interest in the performance of the common purpose, (ii) joint control or right to control the venture; (iii) a joint proprietary interest in the subject matter of the venture; (4) the right to share in the profits; and (5) a duty to share in any losses that may be sustained.

All elements must be established. If only one is absent, there’s no joint venture – even if the parties intended to form a joint venture from the outset.

The formation of a corporation almost always signals there is no joint venture. This is because joint ventures generally follow partnership law which follows a different set of rules than do corporations. So, by definition, corporate shareholders cannot be joint venturers by definition.

Otherwise, a plaintiff could “have it both ways” and claim that a given business entity was both a corporation and a joint venture. This would defeat the liability-limiting function of the corporate form.

A hallmark of joint control in a joint venture context is mutual agency: the ability of one joint venturer to bind another concerning the venture’s subject matter.  The reverse is also true: where one party cannot bind the other, there is no joint venture.

Here, none of the alleged joint venturers had legal authority to bind the others within the scope of the joint venture. The plaintiff failed to offer any evidence of joint control over either the subject of the venture or the other venturers’ conduct.

There was also no proof that one joint venture participant could bind the others. Since Marriott was only a minority shareholder in the resort enterprise, the court found it didn’t exercise enough control over the defaulted resort to subject it (Marriott) to liability for the resort’s breach of contract.

The court also ruled in Marriott’s favor on the plaintiff’s fraudulent inducement claim premised on Marriott’s failure to disclose the resort’s precarious economic status in order to  entice the plaintiff to contract with the resort.

Under Florida law, a fraud in the inducement claim predicated on a failure to disclose material information requires a plaintiff to prove a defendant had a duty to disclose information. A duty to disclose can be found (1) where there is a fiduciary duty among parties; or (2) where a party partially discloses certain facts such that he should have to divulge the rest of the related facts known to it.

Here, neither situation applied. Marriott owed no fiduciary duty to the plaintiff and didn’t transmit incomplete information to the plaintiff that could saddle the hotel chain with a duty to disclose.

Take-aways:

A big economic victory for Marriott. Clearly the plaintiff was trying to fasten liability to a deep-pocketed defendant several layers removed from the breaching party. The case shows how strictly some courts will scrutinize a joint venture claim. If there is no joint control or mutual agency, there is no joint venture. Period.

The case also solidifies business tort axiom that a fraudulent inducement by silence claim will only prevail if there is a duty to disclose – which almost always requires the finding of a fiduciary relationship. In situations like here, where there is a high-dollar contract between sophisticated commercial entities, it will usually be impossible to prove a fiduciary relationship.

Source: Marriott International, Inc. v. American Bridge Bahamas, Ltd., 2015 WL 8936529