Recent Developments in Asset Protection Law - June 2011

Gun Bo, LLC v. Cork, 2011 WL 2119030 (Ariz.App. Div. 1, Unreported, May 19, 2011).

In this Opinion, the Arizona court issues a Writ of Garnishment to a Family Limited Partnership owned by a Cook Islands Trust (a very common planning structure back in the 1990s and still used by some planners today), which seems to have the effect of intercepting $2.8 million of the debtor's money. This Opinion demonstrates that creditors can be very creative and think "outside the box" too!

Note that there is a lot of discussion regarding the application of alter ego theory to the Cook Islands Trust, but in the end the court doesn't resolve the issue.

Fannie Mae v. Heather Apts. LP, ___ N.W.2d ____, 2011 WL 2175807 (Minn.App., June 6, 2011).

For those of you who have claimed that "revocable living trusts provide no asset protection", here is the contrary proof. The Debtor got into financial trouble, set up a Cook Islands Trust and sent all of his money overseas (interestingly, there is little discussion about this). When the Debtor's father died, the Creditor obtained an order from the trial court that basically intercepted the payments from the (now, irrevocable post-death) revocable living trust and applied those payments to the judgment.

In this Opinion, the Minnesota Court of Appeals reverses and holds that the Creditor was not entitled to the order intercepting the payments, based on the spendthrift clause of the trust, since the payments in a spendthrift trust prior to being distributed are "inviolate".

But note that this is a very state-specific holding based on Minnesota post-judgment collection law and other states may provide other remedies that this form of court order that would successfully intercept the moneys paid to a beneficiary, or the creditor could get a receiver appointed for the debtor that would serve the same purpose.

Don't take those spendthrift clauses in living trusts too lightly -- they work!

In re Mathusa, ___ B.R. ____, 2011 WL 1134680 (Bkrtcy.M.D.Fla., Mar. 28, 2011).

Personally, I think that exemptions die with the debtor, in line with the purpose of creditor exemptions which is to allow the creditor some minimum means of existence (which does not include leaving inheritances to heirs). Most courts that have considered this issue have held that the exemption dies with the debtor. But a few cases, including now In re Mathusa, are bucking the trend and hold that the exemption for IRAs does not die with the debtor but protects the assets as they are passed down to heirs.

Note that all of these are bankruptcy court decisions, so we'll probably have to have the Court of Appeals sort it all out. I'm still betting that the exemption dies with the debtor, but we'll see.

Rahall v. Comm'r, T.C. Memo. 2011-101, 2011 WL 1848540 (U.S.Tax Ct., May 16, 2011).

"Nah, they'll never find it, so why report it?"

The Opinion does not identify of the "planner" for this mess, and I use the term "planner" very loosely.

Who wants to bet with me that the wife turned this idiot in about as quickly as she discovered that he had picked up a mistress through an escort service and was using his undisclosed offshore accounts to shower her with gifts? And I guess we'll see whether the next we read about this case will be in a criminal proceeding for tax evasion.

U.S. v. Becker, 2011 WL 1699782 (D.Kan., Slip Copy, May 4, 2011).

A very interesting opinion where a couple's transfer of assets to charities and offshore to avoid forfeiture proceedings resulted in a new indictment and new charges of conspiracy, wire fraud, false statement and perjury -- and incarceration pending trial as a flight risk.

If you are curious, the original indictment that lead to the forfeiture was for bank fraud, i.e., Scott Becker as president of a bank in Kansas caused loans to be made to companies in which he had interests in violation of the federal banking laws.

But now, by trying to hide assets after the first indictment was issued, Scott Becker has now caused his wife Brenda to be indicted too.

Because of the long sentences for mail and wire fraud, they could be going away for a long time.

Regions Bank v. Stewart, 2011 WL 1827453 (S.D.Ala., May 10, 2011).

This is a simple, otherwise garden-variety charging order case where the creditor sought to charge the membership interests of the debtor in three LLCs, except that the Court goes on to rule that the LLCs themselves are neither entitle to notice of the application or a right to be heard.

In other words, the entity is not a proper party in a charging order case -- only the creditor and the debtor whose interests in the entity are to be charged.

The salient passage:

Defendant has urged that this Application be denied because the LLC's have not been notified of the Application or given any opportunity to respond. Stewart further argued that granting the Application would "make Regions Bank a participating member of each LLC" (Doc. 65, ¶ 2). Defendant references no legal authorities for these arguments, however.

The Court finds that the Application should be GRANTED (Doc. 63) as federal law and state law both allow it. With regard to Stewart's arguments, the Court notes that the LLC's have been put on notice in that all have a member with, at least, a fifty percent interest in the company. Furthermore, Defendant's argument that granting the application would make Regions Bank a participating member of each LLC is unsupported in that the law, and this Court, will only allow Plaintiff to step into Stewart's shoes as "an assignee of financial rights."

Fudali v. Pivotal Corp., 2011 WL 1576611 (D.D.C., Slip Copy, April 26, 2011).

Very interesting opinion wherein the Court is asked to appoint a receiver for a Canadian corporation that was a non-party to the original lawsuit but is alleged to be the alter ego successor corporation to the debtor, and the Court struggles with whether it can even assert jurisdiction over the Canadian entity.

In re Old Carco LLC, ___ B.R. ____, 2011 WL 1833244 (Bkrtcy.S.D.N.Y., May 12, 2011).

In this case, Daimler successfully fights off allegations that it stripped Chrysler of assets and fraudulently transferred assets as part of the Chrysler restructuring. Many very interesting aspects of fraudulent transfer are discussed in this wide ranging opinion.

Straightshot Communications, Inc. . Telekenex, Inc., 2011 WL 1770930 (W.D.Wash., Slip Copy, May 9, 2011).

In creditor-debtor litigation, some of the hottest disputes do not involve the debtor at all but are instead between senior and junior lienholders or unsecured creditors. Here, a senior lienholder foreclosed on its lien and had to face allegations that the foreclosure was a fraudulent transfer.

United Communications Corp. v. U.S. Bronco Services, Inc., 2011 WL 2160477 (S.D.Ohio, Slip Copy, June 1, 2011).

This is an Opinion based on complex facts where a U.S. District Court rejects the Magistrate Judge's lengthy report (which is rare) recommending a finding of summary judgment and finds factual issues that preclude summary judgment on a question of whether transfers by a debtor to one creditor for antecedent debt constitutes a fraudulent transfer under Ohio law as to other creditors.

Those of you who are fraudulent transfer junkies will probably like this opinion while it will probably leave the rest of you with a headache as the court weeds through the nuances of fraudulent transfer law and antecedent debt.

Kaye v. Lone Star Fund V (U.S.), LP, ___ F.Supp.2d ____, 2011 WL 1548967 (N.D.Tex., April 26, 2011)

Opinion at http://goo.gl/2MMzj

This is a highly technical opinion on the subject of fraudulent transfers and a distressed corporate organization, but includes some very insightful comment about such topics as undercapitalization, reasonably equivalent value, and transfers to insiders which are subsidiaries of the parent corporation.

Esse v. Empire Energy III, Ltd., 333 S.W.3d 166 (Tex.App. Dist. 1, Nov. 23, 2010).

Lots of juicy issues in this case involving minority shareholders who claimed they were cheated, which could be a casebook example of fraudulent transfer law in Texas.

Quinn v. Elite Custom Transporters & Motorcoaches LLC, 2011 WL 1869391 (D.Minn., Slip Copy, May 16, 2011).

Can Business Goodwill Be Fraudulently Transferred? Yes, says this Opinion, which also considers successor corporation liability.

In re Pearlman, ___ B.R. ____, 2011 WL 1783842 (Bkrtcy.M.D.Fla., May 10, 2011).

This decisions addresses two issues: (1) When can a bankruptcy court consolidate two similar and related debtor companies, and (2) How is a claim for "wrongful payor" fraudulent transfer treated?

The latter concept involves a transfer by Debtor A to pay the creditors of Debtor B, which is a constructive fraudulent transfer in the sense that Debtor A did not receive any value for paying the creditors of Debtor B.

In the end, the court avoids the issue by consolidating the two companies, much to the dismay of unsecured creditors who were hoping that assets would reappear when the "wrong payor" transactions were reversed.

In re Heller Ehrmann LLP, 2011 WL 1539796 (Bkrtcy.N.D.Cal., Slip Copy, April 22, 2011).

So, a law firm goes BK then the individuals lawyers take all the future work and complete the client tasks and keep the money? No problem? Not quite.

Here, the Trustee got creative and brought adversary actions against the former attorneys for fraudulent transfers . . . and won!

This is an excellent opinion on "what really constitutes the debtor's estate in bankruptcy".

Western Hay Co. v. Lauren Financial Investments, Ltd., ___ So.3d _____, 2011 WL 2028913 (Fla.App. 3 Dist., May 4, 2011).

In this case, the creditor received bank records that indicated that the debtor had transferred moneys, but did not determine that the transfer was a fraudulent transfer until some time later when it took a deposition. The Florida appellate court ruled that the 1-year Statute of Limitations for fraudulent transfers under the FUFTA started to run when the creditor first learned of the existence of the transaction, not the later date when the creditor learned that the transfer was fraudulent.

It is very important to note that there is a split among the states as to how this supposedly "Uniform" provision is to be interpreted, so don't presume that this holding will ipso facto apply in other states.

Additionally, there is a lengthy and eloquent dissent which is well worth reading, and which might pique the interest of the Florida Supreme Court enough to take up the issue (though I am guessing that due to Florida's pro-debtor bent that the result will be the same if it does).

In any event, this opinion and the dissent combine for a great read on the 1-year "discovery" limitation period for fraudulent transfers.

In re Pace, 2011 WL 1870054 (Bkrtcy.W.D.Tex., Slip Copy, May 16, 2011).

This is a case where an attorney tried to help is financially-distress buddy out, but got caught in a fraudulent transfer and in breach of his fiduciary duties (which will doubtless not sit well with the State Bar of Texas).

An additional point considered in this Opinion is whether exemplary damages can be awarded in Texas for a fraudulent transfer, and the Court decides this issue in the affirmative but declines to award them for lack of "clear and convincing evidence".

This last point should be a lesson for many who practice in the area of asset protection and have heard -- quite falsely -- that if the Court finds a fraudulent transfer the only thing the Court can do is to unwind the transfer: That is completely false, and to the contrary the Court has a wide range of remedies against fraudulent transfers including exemplary damages in many states.

In re Route 70 & Mass., LLC, 2011 WL 1883856 (Bkrtcy.D.N.J., Unpublished, May 17, 2011).

This case involves the relatively new and quickly developing doctrine of "Collapsing Fraudulent Transfers" which basically says that where the Court is confronted with multiple complex transactions it can basically render them down into a single transaction for purposes of testing for fraudulent transfers -- tax planners out there will recognized this as the "Step Transaction" rule as now applied to fraudulent transfers.

Here, the Court seems to impose a new element which does not usually exist in fraudulent transfer law which is that the creditor must prove that the transferee was complicit in the transfers, i.e., the transferee knew that the transfer was in defraud of creditors.

We recently seen several cases like this, and arguably they are wrongly decided for the reason that fraudulent transfer law does not usually test the transferee's intent, but instead gives the transferee the ability to prove the "Good Faith Defense", which could then lead to a set-off for whatever consideration the good faith transferee paid for the asset fraudulently transferred.

In re Maui Indus. Loan & Fin. Co., 2011 WL 1870289 (Bkrtcy.D.Ha, May 16, 2011).

This Opinion addresses the so-called "innocent investor" issue, which involves an investor in a Ponzi scheme who gets back their money early, before the scheme collapses.

So, let's say that an investor puts in $1,000,000 and gets back $1,040,000 as happened in this case? Does the investor get to keep the entire $1,040,000 or just the $1,000,000? In fact, the investor gets to keep NOTHING as it is all a fraudulent transfer by the Ponzi scheme operator.

Read this Opinion to see the nearly impossible hill that a Ponzi scheme investor must climb to avoid a Trustee's timely fraudulent transfer claim.

In re Lancelot Investors Fund LP, 2011 WL 2160855 (Bkrtcy.N.D.Ill., Slip Copy, May 31, 2011).

Although the Opinion isn't clear, this case apparently involves payments made by a Ponzi scheme operator to his captive insurance company for "premiums" for dubious insurance, which was credit-risk insurance in case Costco and Wal-Mart financially failed. When the Ponzi scheme collapsed, the Trustee brought an action to recover the premiums on the basis that they were a fraudulent transfer.

After a lengthy analysis, the Court decides that there are issues of fact present and refuses to grant summary judgment for the creditor.

U.S. v. Colon-Ledee, 2011 WL 1743237 (D.Puerto Rico, May 6, 2011).

This opinion points out two things:

(1) If you conceal money from the bankruptcy trustee, it is a "continuing offense" such that the Statute of Limitations never begins to run; and

(2) It is really stupid to try to hide $75,000 in a bankruptcy proceeding when the penalty is a felony conviction for bankruptcy fraud.

In re Lockwood Auto Group, Inc., ___ B.R. ____, 2011 WL 1597956 (Bkrtcy.W.D.Pa., April 28, 2011).

This case involves a debtor who obtained a loan, used the loan proceeds to purchase CDs from the Transferee (a bank), and then used the CDs as collateral for more loans. When the debtor when into bankruptcy, the Trustee sought to get back the money that was transferred to the bank/Transferee under a fraudulent transfer theory.

The Court held that the Trustee failed to prove that the purchase of the CDs was any fraudulent transfer, and further that the bank/Transferee had a valid "good faith defense" to the fraudulent transfer claim. The Court further refused to equitably subordinate the bank/Transferees liens on the CDs to those held by other creditors.

In re Taneja, 2011 WL 1587736 (Bkrtcy.E.D.Va., April 26, 2011).

The opinion in this case holds that a fraudulent transfer action brought under Virginia law fails because the Trustee did not allege that the Transferee had any notice of the Debtor's fraudulent intent in transferring the asset.

FWIW, my offhand feeling is that this Opinion is wrong because the UFTA, instead of requiring that the Transferee be proved complicit (which is quite difficult), gives a Transferee the opportunity to prove the "good faith defense" and thus get an offset by any value transferred to the debtor.

So we'll keep an eye on this opinion and see if it is appealed.