As an asset protection planning attorney who practices in Michigan and Ohio, I am well aware that this area of the law is very fluid. Recent cases remind us that the law changes from time to time and that there are frequent exceptions to the general rules.
In the world of commercial finance, it is not unusual to encounter a lender who automatically seeks the guaranty of the applicant's spouse. If a default subsequently ensues, the lender will pursue the guarantor spouse for payment of the principal obligor's debt. Typically the paperwork is in order and the lender's form of guaranty is quite thorough. What possible defense can be raised by the guarantor spouse to avoid liability?
In the world of asset protection planning there are times when it is advantageous to hold a personal residence in a limited liability company. Generally, such a situation would be applicable where there is a client who wishes to protect a valuable asset from future unknown creditors, the conveyance to the LLC is not a fraudulent transfer, the desire to obtain creditor protection trumps the loss of any property tax benefit otherwise available to a principal residence, and the client accepts certain complexities that go along with the transaction. For example, the client will need to enter into a lease with the LLC upon arms length terms in order to avoid the LLC being deemed the alter ego of the client which would likely nullify any creditor protection benefits.
Asset Protection Lawyers Too Frequently and Unnecessarily Refuse Representation of Clients with Existing Claims
As an asset protection planning attorney with many years of experience, I am frequently asked to speak at seminars on the topic. In these lectures, I spend a fair amount of time discussing ethical issues and the risks to the lawyer of representing debtors desperate to protect assets from their creditors' claims. In my experience, many of these clients arrive at a first meeting with very strong ideas of what they would want to do ..... occasionally this involves either making fraudulent transfers or hiding assets. In those instances where the client's initial intent is to violate the Fraudulent Transfer Act or engage in other fraudulent or illegal activity, the lawyer is correct to be concerned that he or she will somehow run afoul of ethical or legal boundaries. As a result, a number of lawyers who claim to be asset protection lawyers flatly refuse to accept such engagements. I believe this is a poor decision for at least two reasons; namely, it deprives the potential client of much needed representation at a very vulnerable time and it is completely unnecessary because a well-schooled asset protection lawyer should know the boundaries and be comfortable as to what can and cannot be done.
Today, with the proliferation of books, articles and seminars focused on asset protection planning, there is scarcely a lawyer about who does not know that limited liability companies have some built in asset protection planning features. Even to the uninitiated, there is a vague understanding of creditors not being able to seize a member's interest and some awareness of the charging order remedy.
Those of us who practice in the asset protection planning and tax arenas are already familiar with the Craft case where the Supreme Court determined that a delinquent taxpayer's entireties interest constitutes an interest in property to which the Federal tax lien applied irrespective of Michigan law to the contrary. This decision led to the forced sale of the property even though one of the tenants by the entireties had no tax liability. Notwithstanding Craft, there remained some limited comfort that a District Court may exercise reasoned discretion to deny an IRS motion to sell entireties property in order to protect the interests of innocent third parties.
Any practicing attorney engaged in asset protection planning is advised to read the latest decision in the Evseroff saga, U.S. v. Evseroff, No. 00-CV-06029 (E.D.N.Y., April 30, 2012). It is useful because it analyzes in some depth a variety of issues germane to the asset protection attorney. Evseroff is essentially a collection case. The U.S. Government is seeking to collect from a trust created by Jacob Evseroff some $700,000 of unpaid taxes. In finding that the assets of the trust can be seized by the Government to pay Jacob's taxes, the court addresses in considerable depth (i) fraudulent transfer law and the legal distinction between actual and constructive fraud, (ii) the concept of solvency in the context of a fraudulent transfer analysis, (iii) factors that demonstrate intent to hinder, delay or defraud creditors, (iv) burden of proof issues and (v) alter ego and nominee theories. The case is certainly instructive on what not to do.
This blog generally contains serious reviews of various asset protection topics, including recent developments in the laws of Michigan and other states that are applicable to asset protection and strategies that debtors might consider to shield assets from their creditors. However, every once in awhile I will come upon an unusual, and in this case, a deeply disturbing story, which has little practical effect but which is very telling about the lengths people will go in order to protect their assets. Enter John Goodman, founder of the International Polo Club of Palm Beach.
An extraordinary decision by the Michigan Court of Appeals should place asset protection planning at the forefront on the minds of all individuals who have outstanding nonrecourse guarantees of commercial loans. As a result of the decision handed down by the Court in the case of Wells Fargo Bank v. Cherryland Mall Limited Partnership, David Schostak and Schostak Brothers & Co. (December 27, 2011), real estate investors/developers employing nonrecourse commercial mortgage-backed securities ("CMBS") loans now find themselves personally liable for any deficiency if the loan defaults. You are undoubtedly wondering: if these are nonrecourse loans how can the loan guarantors become liable for the unpaid debt?
Clients frequently seek advice as to whether they can disclaim an inheritance in order to avoid the inherited property being reached by their creditors. The issue faced by the asset protection planner is whether a disclaimer, made with the intent to hinder, delay or defraud creditors, can be viewed as a fraudulent transfer.
I recently began settlement and workout negotiations with a bank for a client where the debt on a piece of commercial real estate is $4million and the current value is $2million. The client was referred to me by another attorney who was aware of my asset protection planning experience and wanted to learn if there was still time to implement any asset protection planning in order to minimize the client's exposure to the bank. The client is married, and the specific nature of his situation enabled me to position his assets in a way that makes them unreachable by the bank. After this initial phase of the client's planning, I was asked to conduct the settlement and workout negotiations. As it turned out, the asset protection planning, as the initial phase in the process, provided my client with very valuable leverage in our negotiations with the bank. Despite the bank pressuring my client to access funds which the bank could not reach, with the objective of my client using those funds to pay a discounted lump sum settlement, we were able to negotiate a much steeper discount because of the structure we had implemented for the client.
The Bloggers are having a heyday. The first case to test Section 548(e) of the Bankruptcy Code, In re Thomas William Mortensen, was decided in an Alaskan Bankruptcy court on May 26, 2011. The court held that Mr. Mortensen's transfer to an Alaskan asset protection trust in 2005, while Mr. Mortensen was solvent, which occurred within the statutory 10 year period prior to the filing of his bankruptcy petition, was made with actual intent to hinder, delay or defraud his future creditors. The Judge concluded that a settlor's expressed intention to protect assets placed into a self-settled trust from a beneficiary's potential future creditors can be evidence of an intent to defraud. On this basis he allowed Mortensen's creditors to reach the assets of the trust. Commentators are weighing in on the effect of this decision on Domestic Asset Protection Trusts. Some are predicting that the decision may be the death warrant for this planning strategy. This author believes that the decision should have only a minor effect on the continued use of DAPT's.
When clients come to see me for asset protection planning, it is clear that the client has preconceived notions about offshore trusts that are integral to some type of abusive tax shelters or other nefarious activity. This is not surprising. The media recently reported about a man from Niagara Falls, NY who was sentenced to 36 months in prison for selling and promoting an abusive tax shelter scheme that involved offshore trusts and domestic trusts. It is stories like this one that confuse many clients and give them unnecessary concerns about what asset protection planning is all about. As I always tell my clients, the asset protection planning we do for our clients is not designed to shelter income or avoid the payment of income taxes; instead it utilizes legitimate structures with the simple goal of helping these clients legally position their assets in a way which makes them less vulnerable to creditors.
I have previously discussed in several blogs the powerful asset protection benefits of the current Michigan law which provides that a charging order is the exclusive remedy for judgment creditors of LLC members, even in cases where the LLC has only one member. In 2011, the Florida Legislature amended the Florida LLC Act and enacted legislation intended to address concerns over the Olmstead case, in which a judgment creditor was allowed to execute against a Member's interest in a single member LLC. So the simple question is this: Does the new Florida law provide the same protections as those offered in Michigan?
An article on the front page of the August 22, 2011, Wall Street Journal describes the government's expanding rights to seize a person's assets. The article is replete with examples of how innocent parties are destroyed if they are simply in the wrong place at the wrong time. Some 400 federal statutes empower the government to take assets from convicted criminals as well as people never charged with a crime.