Articles Posted in Fraudulent Transfers

Mr. Wilhite was convicted of mail fraud and aiding and abetting in violation of federal law. He was also a delinquent taxpayer with an outstanding federal income tax liability and, at the time of certain alleged fraudulent transfers, he was being investigated for the federal crimes he ultimately pled to. During the time period Mr. Wilhite would be considered a “debtor” under Colorado’s UFTA, his wife, Mrs. Wilhite, formed several companies establishing herself as sole owner while Mr. Wilhite was the person essentially controlling and operating the companies.

This case is instructive on so many levels. Every asset protection lawyer should read both the District Court decision and the 10th Circuit’s appellate decision for elucidation of multiple concepts of particular relevance to asset protection community. For example, when a debtor and debtor’s spouse come into your office for the initial meeting, it is not unusual for the debtor to suggest that because of debtor’s outstanding liabilities the debtor’s spouse should form a new company owned 100% by the non-debtor spouse but which will be run by debtor spouse in debtor’s capacity as an employee. Indeed, this brilliant strategy is then shortly followed by the suggestion that the debtor spouse be paid a very modest salary to minimize the amount that could be garnished by the debtor’s creditors.

The Wilhite case addresses the non-debtor spouse’s ownership of a limited liability company run predominantly by the debtor. After analyzing the facts, the District Court determined that Mrs. Wilhite was acting as Mr. Wilhite’s nominee and Mr. Wilhite owned an equitable interest in the company. Interestingly, the conclusion was not as easy to reach as it might first seem because Mrs. Wilhite was not only the owner of record but also performed meaningful services for the company. Nonetheless, when weighing all of the facts including extensive testimony by the company’s employees, it was clear that Mr. Wilhite was viewed as the owner and decision-maker.

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Michigan enacted the Qualified Dispositions in Trust Act (the “Act”) effective March 8, 2017 becoming the 17th state to enact asset protection trust legislation. A more general description of the Act was provided in an earlier blog. The purpose of this blog is to point out how the drafters of this legislation very deliberately included provisions geared to blocking creditors’ access to assets held in a Michigan Asset Protection Trust (hereafter “MAPT”). Continue Reading

A 2016 Supreme Court case, Husky International v. Ritz, holds that if a debtor makes a fraudulent transfer, even if several years prior to filing the petition, any debt related to such fraudulent transfer will be nondischargeable. Section 523(a)(2)(A) of the Bankruptcy Code denies a debtor’s discharge of any debt obtained by false pretenses, false representations or actual fraud. There had been a split among the Circuits over whether “actual fraud” (e.g., a fraudulent transfer) required that a false representation be made to the creditor before a discharge would be denied. The Court in Husky concludes that as an exception to discharge, it is not necessary for the debtor to have incurred the debt based on a deception or fraud perpetrated on the creditor; instead, a fraudulent transfer involving no contact with the creditor is sufficient to give rise to the exception. Continue Reading

For those of us attorneys who have devoted substantial time to and assisted clients with asset protection planning over the years it is welcome news that Michigan has adopted the Qualified Dispositions in Trust Act, effective February 5, 2017. Continue Reading

Asset protection planning attorneys need to be vigilant that strategies they are recommending do not violate the Michigan Fraudulent Transfer Act (“Act”). In Bentley Terrace Dillard Family Trust v. Schlussel, the Michigan Court of Appeals provided and detailed and well-reasoned opinion and concluded that a debtor lawyer’s transfer of assets to his wife for the ostensible purpose of paying ordinary household expenses was a fraudulent transfer.
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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.
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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.
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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.
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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.
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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.
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