.png)
From a Virginia federal district court’s determination that a judgment for attorney’s fees had priority over Internal Revenue Service (IRS) tax liens, to the Centers for Medicare and Medicaid Services’ issuance of a final rule requiring disclosure of ownership information for nursing facilities and a new Texas law providing charging order protection for single-member limited liability companies (LLCs), we have recently seen significant developments in estate planning, elder law, and business law. To ensure that you stay abreast of these legal changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder law, and business law practice.
Estate Planning
Attorney Who Was Judgment Lien Creditor Under Treasury Regulation Had Priority Over IRS in Action to Recover Fees from Client’s Estate
Karl v. Rettig, No. 1:23-cv-00028-AJT-JFA (E.D. Va. Oct. 27, 2023)
Attorney John Karl filed suit in D.C. Superior Court for breach of contract against his former client, Linda Solomon, for failure to pay legal fees. On October 16, 2018, during the breach of contract litigation, Linda died. On March 14, 2019, the court entered a judgment of $747,951.76 in favor of John. An administrator was appointed for Linda’s estate on February 28, 2020. John filed a copy of the judgment in May 2019 and a post-judgment interest award in November 2021 in Fairfax Court Circuit Court, obtaining liens on all of Linda’s real property.
In 2020, the IRS assessed Linda’s 2016 and 2017 tax liabilities, obtaining liens on all of Linda’s property and rights to real or personal property under I.R.C. § 6321. On January 6, 2023, John filed an action in federal court to establish a priority for his judgment lien over the federal tax lien in the administration of the estate pursuant to I.R.C. § 6323(a).
In considering the parties’ cross-motions for summary judgment, the court noted that the parties agreed that John had obtained a judgment against Linda’s estate, but stated that the dispositive issue was whether his judgment was sufficient to qualify him as a judgment lien creditor with priority over the IRS under I.R.C. § 6323(a). That inquiry depended on whether and when John’s judgment was perfected under federal law, specifically under Treas. Reg. § 301.6323(h)-1(g). The court found that John had perfected his judgment lien for the purpose of becoming a judgment lien creditor under I.R.C. § 6323(a) as required in Treas. Reg. § 301.6323(h)-1(g) because of the following:
- It was undisputed that John had “obtained a valid judgment, in a court of record and of competent jurisdiction, for . . . a certain sum of money”
- John had established the identity of the lienor as himself, the property subject to the lien as the property of the estate, and the amount of the lien
- John recorded or docketed his judgment as required by Virginia law by filing his D.C. Superior Court judgment in the Fairfax County Circuit Court in May 2019 and by filing his award of postjudgment interest in November 2021
Karl v. Rettig, No. 1:23-cv-00028-AJT-JFA, at 5 (E.D. Va. Oct. 27, 2023).
Further, the court rejected the IRS’s argument that John could not obtain priority based on his judgment under Virginia law because Linda had died before he obtained it. The question before the court was not whether John was a judgment creditor under Virginia law but instead whether he was a judgment creditor under I.R.C. § 6323(a) as defined by Treas. Reg. § 301.6323(h)-1(g). The court found that the IRS’s attempt to incorporate additional requirements into the federal definition of judgment lien creditor was without merit.
In addition, the court found that the IRS improperly relied on the doctrine of custodia legis—the power of a court to take control over assets being litigated. The doctrine of custodia legis prohibits attachment of property if attachment would prevent the court from allocating the property for the purpose for which it was deposited. Further, under custodia legis, jurisdiction over the adjudication of the rights to property rests solely with the court. The court noted that the IRS’s lack of jurisdiction argument had been rejected in an earlier proceeding. In addition, the doctrine of custodia legis was inapplicable because John was neither attempting to attach, garnish, or seize property in the estate administrator’s custody nor was he challenging the estate administrator’s control over estate property within his custody.
The court also found that John was not required to have a court issue a writ of fieri facias to perfect his judgment lien as to personalty under Treas. Reg. § 301.6323(h)-1(g). John was only required to docket his judgment as specified under Virginia law for the purpose identified in Treas. Reg. § 301.6323(h)-1(g); there was no need to levy or seize personal property under Virginia law for the stated purpose and thus he was not required to do anything else to become a judgment lien creditor as to personal property under the regulation, including getting a Virginia court to issue a writ of fieri facias, regardless of whether that would be necessary to perfect his judgment lien as to personalty under Virginia law.
Because John satisfied the requirements of Treas. Reg. § 301.6323(h)-1(g), he had obtained priority over the IRS under I.R.C. § 6323(a) as to both personal and real property within Linda’s estate. The court granted John’s motion for partial summary judgment on that basis.
Takeaways: Attorneys seeking to enforce judgments against clients who have failed to pay their fees will be encouraged to know that if they take the steps necessary to qualify as a judgment lien creditor under Treas. Reg. § 301.6323(h)-1(g), their claim will have priority over IRS tax liens.
Divorcing Wife of Hedge Fund Billionaire Sues Estate Planning Firm for Conflict of Interest and Breach of Duty of Loyalty for Transfer of Assets to Wyoming Trust
John Overdeck cofounded the hedge fund Two Sigma in 2001, which is now worth $60 billion. John married Laura in 2002 without a prenuptial agreement. During their marriage, John’s personal wealth grew to $7.3 billion. The couple set up trusts in New Jersey to reduce federal estate and gift taxes and to benefit themselves and their three children. In 2018, Laura signed documents permitting decanting and transfers of billions of dollars from the New Jersey trust to an irrevocable Wyoming trust.
In 2022, Laura filed for divorce. After she initiated the divorce proceedings, Laura learned that under the terms of the Wyoming trust, she would no longer be deemed a beneficiary if she or John filed for divorce. In addition, under the trust, John had the power to disenfranchise their mutual children because he could determine and control how much the children could receive. Further, children he might have in the future could enlarge the class of beneficiaries.
On October 26, 2023, Laura filed a suit in New Jersey against attorney Hume R. Steyer and the law firm Seward & Kissel LLP alleging that she had suffered damage due to the loss of billions of dollars in marital assets as a result of the law firm’s breach of its fiduciary duty of loyalty to her and conflicts of interest. She asserted that, at the time the law firm provided her with the documents authorizing the decanting of marital assets from the New Jersey trust to the Wyoming trust, she still viewed the firm as being jointly engaged by her and John. In addition, Laura asserted that the law firm had not advised her of the negative consequences that executing the documents could have for her, including the impact on her marital rights in the event of divorce. Rather, she claimed that she was told only that the transfer of the assets to the Wyoming trust would minimize taxes.
Laura alleged that the law firm had been jointly engaged to represent her and John for estate planning and other matters, including the formation of a joint family office, a charitable family foundation, and Laura’s not-for-profit entity, from 2007 to May 2022. The firm had notified the couple that it could not represent either of them in discussions about a proposed postnuptial agreement in 2013. In addition, the law firm’s bills were paid from the couple’s joint accounts.
The law firm asserted in a May 2022 letter to Laura that its representation of her had ended in 2010.
Takeaways: This situation is an extreme example of the importance of engagement letters to clearly define the scope and details of the relationship and engagement and to establish expectations. Any change in an ongoing engagement should be documented in writing. Particularly in circumstances involving spouses, in circumstances in which there could be a conflict, it is prudent to send the spouses a letter explaining that you cannot represent them both or to notify one of them that you are not representing them to avoid any misunderstanding. Engagement letters will provide attorneys with some protection from malpractice claims. Further, in most jurisdictions, they are required by ethics rules in many circumstances.
For more information on this case, see Hank Tucker, Hedge Fund Billionaire John Overdeck’s Estranged Wife Sues Over Movement Of Trust Assets To Wyoming Before Her Divorce Filing, Forbes (Nov. 1, 2023).
Stepchild Has Standing to Assert Natural Parentage Heirship Under California Law
In re Estate of Martino, 314 Cal. Rptr. 3d 630 (Ct. App. 2023)
Nick Zambito was born in 1961 while his mother was married to his biological father. However, Nick and his mother lived with the decedent (who was not his biological father) for several years before Nick’s mother and the decedent married in 1966. The couple divorced in 1972. Despite the divorce, Nick remained close with the decedent and considered the decedent to be his true father. Nick remained in contact with the decedent during his military service and afterward. The decedent’s friends stated that the decedent referred to Nick as his son. Nevertheless, the decedent did not adopt Nick and died intestate.
After the decedent died, Nick filed a petition with the probate court to be deemed an heir of his estate; he amended his petition several times, first relying on Cal. Prob. Code § 6454 (Foster parent or stepparent) but ultimately relying upon natural parentage heirship under Cal. Prob. Code § 6453 (a) and (b) (Natural parents). The decedent’s biological children, Tracey and Joseph Martino, objected on the basis that Nick was not the decedent’s biological son. The probate court determined that the decedent was Nick’s natural parent under Cal. Prob. Code § 6540 (Persons entitled to allowance) and § 6453 for determining intestate succession based on clear and convincing evidence of the parent-child relationship between Nick and the decedent over 50 years.
On appeal, the California Court of Appeals agreed that, even though Nick was not the decedent’s biological child, he had standing to assert natural parentage heirship under Cal. Prob. Code § 6453(a). The court determined that Cal. Prob. Code § 6454 does not explicitly preclude other statutory methods for a stepchild to establish a right to heirship via intestate succession. Further, Cal. Prob. Code § 6453(a) states that, for purposes of intestate succession, “[a] natural parent and child relationship is established where that relationship is presumed and not rebutted pursuant to the Uniform Parentage Act [Cal. Fam. Code §§ 7600–7606].”
Because the intestacy provisions of the probate code explicitly incorporate the Uniform Parentage Act, a stepchild may establish a right to intestate succession by demonstrating natural parentage under Cal. Fam. Code § 7611(d), which creates a presumption of natural parentage if “[t]he presumed parent receives the child into their home and openly holds out the child as their natural child.” Cal. Fam. Code § 7601 states as follows: “‘Natural parent’ as used in this code means a nonadoptive parent established under this part, whether biologically related to the child or not.”
The court determined that it must, “where reasonably possible,” harmonize Cal. Prob. Code § 6453 and § 6454, construing them to give “force and effect to all of their provisions.” Estate of Martino, 314 Cal. Rptr. 3d 630, 639 (Ct. App. 2023). After an extensive analysis, the court found that each of the two statutes “can be given effect in the specific circumstances they apply without rendering the other a nullity.” Neither of the statutes contained conflicting provisions that would permit intestate succession by a stepchild when the other would forbid it. Therefore, the court ruled that Nick had standing to pursue heirship under Cal. Prob. Code § 6453(a) and Cal. Fam. Code § 7611(d).
Takeaways: In most states, a stepchild is not an intestate heir of their stepparent unless the stepparent adopts the stepchild. California is one of a few states that has laws allowing stepchildren to be heirs under specific circumstances set forth by statute. Although the Martino court found that Nick did have standing to pursue natural parentage heirship due to his parent-child relationship with the decedent, the case nonetheless provides an example of the expense and angst that stems from a failure to create an estate plan.
Modification of Pour-Over Will to Explicitly Disinherit Beneficiary Deemed to Amend Trust Document
IMO Amelia Noel Living Trust and Estate of America Noel, C.A. No. 2020-1107-SEM, 2022 WL 3681269 (Del. Ch. 2022), aff’d, 293 A.3d 1000 (Del. S. Ct. Mar. 9, 2023)
Amelia Noel executed a will and trust in 2018. The 2018 will appointed a personal representative who was directed to distribute her estate to the 2018 trust. The trust specified that the personal representative would also be the successor trustee of the 2018 trust, which specified that her residuary trust estate should be distributed outright to her four children, per stirpes. The 2018 trust stated that it could be modified by a signed writing.
In 2019, Amelia hired an estate planning attorney to change her estate plan, explaining that she wanted to disinherit her daughter Ivette. The attorney’s notes from the meeting indicated that Amelia wanted to draft a new will to disinherit Ivette, but that her other documents should stay the same. However, notes from the meeting also indicated she wanted to disinherit Ivette from “will, trusts, etc. anything she may be entitled to.” A follow-up communication between Amelia and the law firm specified that the firm had been retained to “draft/edit” her will. Amelia provided her attorney with the 2018 will but did not provide the attorney with the 2018 trust document. When the attorney asked Amelia if she understood that Ivette would receive nothing if the will was amended to disinherit her, Amelia unequivocally responded that she wanted to do so. Therefore, the attorney amended the will to explicitly state that Amelia “intentionally omitted and disinherited” Ivette from receiving any benefit from the will. The 2018 trust was never amended before Amelia’s death in 2020.
Due to the conflict between Amelia’s 2019 will (disinheriting Ivette) and the 2018 trust (which called for distribution among all of her children, including Ivette), the personal representative of Amelia’s estate (who was also the successor trustee) brought an action seeking either declaratory relief that the 2019 will had amended the 2018 trust to disinherit Ivette or reformation of the trust to match Ivette’s disinheritance specified in the 2019 will.
The Court of Chancery determined that the undisputed facts showed that Amelia had, in the 2019 will, “expressly and unequivocally” disinherited Ivette from receiving any benefit under the will. In considering the 2019 will and the 2018 trust together, the court found that, to give effect to Amelia’s testamentary intent expressed in her will, the 2019 will amended the 2018 trust. Because the terms of the 2018 trust permitted Amelia to amend the trust—provided that any amendment was in writing—and the 2019 will was in writing, the new will met the requirements for amendment of the 2018 trust. Although Amelia did not expressly state that she was exercising her right to amend the 2018 trust, “the disinheritance in the 2019 will would be meaningless unless it exercised the power to amend the 2018 Trust.” IMO Amelia Noel Living Trust and Estate of America Noel, C.A. No. 2020-1107-SEM, 2022 WL 3681269, at *5 (Del. Ch. 2022), aff’d, 293 A.3d 1000 (Del. S. Ct. Mar. 9, 2023). Accordingly, the court entered a declaratory judgment that the 2019 will had amended the 2018 trust to disinherit Ivette. The Delaware Supreme Court affirmed.
Takeaways: In a conflict between distribution provisions in a pour-over will and a receiving trust, it may be difficult to determine which document controls. In certain cases, updating a pour-over will may be sufficient to override the distribution terms of the receiving trust. When a client requests an estate planning attorney to amend an estate planning document drafted by another attorney, the new attorney should request copies of all of their clients’ estate planning documents to ensure the modification of one document does not create a conflict or inconsistency with other documents.
Elder Law and Special Needs Law
Centers for Medicare and Medicaid Services Issues Final Rule Requiring Disclosure of Nursing Facility Ownership Information
Medicare and Medicaid Programs; Disclosures of Ownership and Additional Disclosable Parties Information for Skilled Nursing Facilities and Nursing Facilities; Medicare Providers’ and Suppliers’ Disclosure of Private Equity Companies and Real Estate Investment Trusts, 42 C.F.R. §§ 424, 455 (Nov. 17, 2023)
In November 2023, the Centers for Medicare and Medicaid Services (CMS) issued a final rule to implement portions of section 6101(a) of the Affordable Care Act requiring the disclosure of certain ownership, managerial, and other information regarding Medicare skilled nursing facilities and Medicaid nursing facilities. The rule indicated that the large number of for-profit nursing facilities and reports of declining quality of nursing care under private ownership resulted in the need for greater transparency regarding the ownership and operators of nursing facilities. The additional transparency regarding the owners and operators of these nursing facilities is intended to assist regulators in holding nursing facilities accountable and increasing competition between nursing facilities by enabling consumers to make informed decisions when choosing a nursing facility, thereby spurring improvement in the quality of care.
Under the final rule, Medicaid nursing facilities and Medicare skilled nursing facilities (to the extent that they are not already reporting it) must provide the following information to CMS:
- The name, title, and period of service of each member of the facility’s governing body
- The name, title, and period of service of each person or entity who is an officer, director, member, partner, trustee, or managing employee of the facility
- Each person or entity who is an additional disclosable party of the facility (for example, those that exercise operational, financial, or managerial control over the facility)
- The organizational structure of each additional disclosable party of the facility and a description of the relationship of each such additional disclosable party to the facility and to one another
Takeaways: The data required to be reported under the rule will be publicly reported within one year of the publication of the final rule. The CMS has not determined whether it will use its Care Compare website, data.cms.gov, or another website to disseminate the information. However, in the final rule, the CMS expressed its intention to provide it “(1) via an accessible, navigable, and searchable website that users can understand; and (2) in a manner that enables users to search for trends, relationships, and connections in nursing homes’ ownership structures.”
Capitation Payments Not Available in Minnesota Estate Recovery
In re Estate of Ecklund, No. A23-0210, 2023 WL 8009402 (Minn. Ct. App. Nov. 20, 2023)
Joanne Ecklund was enrolled in Minnesota’s medical assistance program—its implementation of Medicaid—and received benefits through her managed-care organization (MCO), Medica. The medical assistance program made capitation payments, which are payments the state makes that anticipate the cost of covered services based on recent price and utilization data, to Medica during Joanne’s lifetime.
Under Minn. Stat. § 256B.15, upon the death of a person who received medical assistance, “the amount paid for medical assistance . . . shall be filed as a claim against the estate of the person.” Such claims “shall include only” specified amounts, including “the amount of medical assistance rendered to recipients 55 years of age or older that consisted of nursing facility services, home and community-based services, and related hospital and prescription drug services.” Minn. Stat. § 256B.15(2)(a).
After Joanne’s death, the county filed a claim seeking to recover $66,052.62 for the capitation payments it made on her behalf. The personal representative of Joanne’s estate, Jerry Ecklund, opposed the claim on the basis that Minn. Stat. § 256B.15(2)(a) limited the scope of estate recovery claims and did not include capitation payments. Jerry asserted that the statute permitted estate recovery only for the amount that Medica paid to providers for services actually provided to Joanne. The county argued that because “medical assistance” was defined as “payment of part or all of the cost of care and services identified [as covered services] in section 256B.0625, the capitation payments were included within the definition. The district court limited the county’s recovery to amounts paid for services actually provided to Joanne, denying its claim for the capitation payments.
The county appealed. The court rejected its argument, however, ruling that the term “capitation” was “conspicuously absent” not only from § 256B.15(2)(a), the claim limitation provision, but from the estate recovery statute as a whole; in contrast, the legislature used the term repeatedly in other medical assistance statutes. Further, the court determined that “medical assistance” refers to the payment of a covered service, a concept that is distinct from a capitation payment, which “enables and even requires an MCO to pay the cost of covered services, but it is not itself the cost of covered services or payment of that cost.” Id. at *3. The court determined that in § 256B.15(2)(a), the phrase “rendered to recipients” meant that an estate recovery claim is limited to the amount paid for long-term care services that were actually provided to the medical assistance recipient.
Takeaways: Practitioners have a duty to zealously advocate on behalf of their clients’ interests. In far too many cases, particularly those involving estate recovery, attorneys are unwilling to properly defend and assert defenses relevant to the issue. The Eklund case is an example of good advocacy. The state was required to stay within the bounds of its statutory authority—but only after being demanded and adjudicated to do so.
Business Law
Second Circuit Court of Appeals Enforces Mandatory Arbitration Provision in Online Contract
Edmundson v. Klarna, Inc., 85 F.4th 695 (2nd Cir. Nov. 3, 2023)
Klarna is an online service enabling consumers to purchase products and partially pay for them later in installments with no interest or fees. The first installment is paid when the customer checks out, but the later installments are automatically deducted from the customer’s checking account. Najah Edmundson used Klarna to make several purchases on different dates and was presented with hyperlinks showing Klarna’s service terms, privacy policy, and “Pay Later in 4 Agreement.” The service terms included a mandatory arbitration provision and a provision prohibiting class actions that were incorporated by reference into the Pay Later in 4 Agreement.
Najah incurred $70 in overdraft fees because Klarna’s deductions from her checking account left her with insufficient funds to satisfy the deductions. She sought to bring a class action lawsuit against Klarna on the basis that it had claimed that its service was free and it had failed to disclose that users’ banks might impose overdraft fees in the event their accounts lacked sufficient funds to cover the amounts deducted by Klarna.
Klarna moved to compel arbitration, arguing that Najah had unambiguously assented to its terms of service by continuing with the transaction. However, the district court denied its motion on the basis that none of its interfaces had provided reasonably conspicuous notice of its terms and that the court could not infer that Najah had unambiguously assented to the terms.
The Second Circuit Court of Appeals reversed. The court stated that notice of Klarna’s terms of service, including the arbitration provision, were reasonably clear and conspicuous such that a reasonable internet or smartphone user—i.e., one who is “not a complete stranger to computers or smartphones, having some familiarity with how to navigate to a website or download an app”—would be on inquiry notice of them. Edmundson v. Klarna, Inc., 85 F.4th 695, 704 (2nd Cir. Nov. 3, 2023). In addition, Najah objectively and unambiguously manifested assent to Klarna’s terms of service (and arbitration provision) through conduct that a reasonable person would understand to constitute assent, i.e., by selecting “Confirm and continue” to finalize her purchase using Klarna’s service after receiving notice of its service terms. Therefore, the court determined that Najah had agreed to arbitrate her claims against Klarna as a matter of law.
Takeaways: As the Edmundson court discussed, the manifestation of mutual assent necessary to form a contract looks different for contracts that are formed online. Consumers frequently proceed through a transaction without examining the fine print in an unnegotiated contract. Nevertheless, even in the absence of actual knowledge of an online contract’s terms, the consumer will be bound if the contractual terms are presented in a clear and conspicuous manner, such that the consumer was put on inquiry notice of the terms, and the consumer manifested consent to the terms by completing the transaction.
Texas Provides Charging Order Protection to Single-Member LLCs
2314, 2023-2024 Leg., 88th Sess. (Tex. 2023)
Effective September 1, 2023, Texas’s statute providing charging order protection to LLCs was amended to apply to single-member LLCs as well as multi-member LLCs. Therefore, the exclusive remedy available to judgment creditors of the owner of a single-member LLC is a charging order providing the creditor with a lien against the owner’s distributions from the LLC.
Takeaways: A charging order, which is issued by the court, distributes income or profits to the creditor that would otherwise be paid to the debtor-member. The creditor cannot directly attach the assets of the LLC. The charging order permits the creditor to receive only payments made from the member’s distributional interest, protecting the owners’ management and voting rights. All states provide charging order protection for multi-member LLCs, although it is not the exclusive remedy in all states. Texas has now joined Wyoming, Nevada, Delaware, South Dakota, and Alaska in providing substantial asset protection to single-member LLCs by making the charging order the exclusive remedy of the sole member’s judgment creditors.
New York Enacts New Employment Laws
4516, 2023-2024 Reg. Sess. (N.Y. 2023); Assemb. B. 6040, 2023-2024 Reg. Sess. (N.Y. 2023); N.Y. City Ord. Int. No. 209-A
New York Governor Kathy Hochul recently signed two bills providing protections for employees or freelance workers:
Senate Bill 4516: On November 17, 2023, Governor Hochul signed a bill amending N.Y. General Obligations Law § 5-336 to prohibit settlement agreements involving discrimination, sexual harassment, or retaliation claims from containing nondisclosure agreements that prevent the disclosure of the “underlying facts and circumstances” to the claim. The law applies to employees, independent contractors, and job applicants. The new law is effective immediately.
Assembly Bill 6040: On November 22, 2023, Governor Hochul signed a bill called the Freelance Isn’t Free Act that provides protections for independent contractors providing services worth more than $800. The law requires the hiring party to document engagements with freelance workers in a written contract containing certain terms, including itemization of the services the worker will provide and the date when the hiring party must pay the worker or how that date will be determined. The new law becomes effective on May 20, 2024.
On May 26, 2023, New York City Mayor Eric Adams signed Int. No. 209-A, which prohibits employers from discriminating against employees or job applicants on the basis of their height or weight. The new ordinance took effect on November 22, 2023.
Takeaways: Employers and hiring parties should adapt their form agreements, policies, and procedures to comply with the new laws.
