Disclaimer statute may permit judgment debtors to deliver money to friends or family with nothing to creditors, but not always in Florida.

• Author: Meyer, Robert C.

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 Code (3) [section] 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 [section] 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 back (16) 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. [section] 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...