In 2002, Fidelity National Financial Inc. was awarded a judgment of $13.5 million against Colin and Hedy Friedman (the Friedmans) and Farid Meshkatai and Anita Kramer Meshkatai (the Meshkatais). Fidelity was able to collect only a nominal amount from the judgment debtors despite serving more than 10 levy and garnishment orders on judgment debtors’ bank accounts and businesses.
In 2006, Fidelity filed an action against the debtors alleging RICO violations, fraudulent conveyances, and conspiracy to defraud creditors, and later amended their complaint to seek to set aside spendthrift provisions in trusts, and adding the trustees as defendants. Following trial, the jury returned a verdict in favor of the defendants on all RICO claims, the fraudulent transfer claims and fraudulent concealment claims, the conspiracy to commit fraudulent transfer claim, and the common law and statutory conspiracy to commit fraudulent concealment claims.
The issue of whether to set aside and invalidate the spendthrift provisions of all of the defendants’ trusts based on alleged excessive control over disbursement of trust assets was tried to the court. After extensive findings of fact regarding the nine trusts for the benefit of the various defendants, applying Arizona, California, and Jersey Channel Islands law, the court found that for each of the trusts the spendthrift provisions were valid and enforceable and rejected Fidelity’s argument that the judgment debtor’s excessive control mandated that the spendthrift provisions be set aside.
The court examined Arizona and California law governing spendthrift trusts, and found that where none of the trusts were self-settled or had a sole beneficiary serving also as the sole trustee, Fidelity failed to demonstrate that the beneficiaries of the defendant trusts exercised excessive control over the trust’s assets. The court rejected the argument that the judgment debtors had created a legal fiction of trustee control, and found that the trust terms and the trustee’s testimony demonstrated that the trustees had control over the assets.
The court noted that neither California nor Arizona law: (1) prohibit a trustee from delegating certain investment and management functions to a beneficiary or spouse of a beneficiary; (2) prohibit the beneficiary of a spendthrift trust from serving as the trust's protector; or (3) prohibit a friend or relative of a beneficiary from being the trustee of a spendthrift trust.
The court held that the following factors must be taken into account to determine whether there is excessive control: (1) whether the trust was self-settled; (2) whether the beneficiary acted as trustee; (3) whether the beneficiary had the ability to terminate or amend the trust; and (4) whether the beneficiary had “unfettered access” to the trust funds. Based on an examination of these facts, the court held that Fidelity failed to meet its burden of proving “excessive control.”
Similarly, the court found that Fidelity had failed to demonstrate “excessive control” over the trust governed by the Jersey Channel Islands law. Accordingly, the court affirmed the enforceability of the spendthrift provisions in each of the trusts.