Recent Developments in Asset Protection Law - July 2011

Herbert Richter Metall Waren-Apparatebau GMBH v. GIB Services, LLC, 2011 WL 2517232 (E.D.Va., Slip Copy, June 4, 2011).

Trademarks have always been an important corporate asset, but these days they can be much more so when they are also internet domain names that attract and direct customers to websites where products are sold. Thus, it follows that a business in distress or in a dispute will naturally try to protect this intellectual property from potential creditors and adverse claimants.

Such were the events in the instant cybersquatting case that primarily involved the trademark "igrip" and related webnames. This and similar trademarks were owned by a German company that was well known under this name for making cell phone holders and like accessories.

The primary debtor, Global Intellectual Brands LLC, sold the German company's cell phone holders but later defaulted on its financial obligations to the German company, whereupon the German company sued Global Intellectual Brands LLC. So far, so bland.

But here is where it gets interesting. The owner of Global Intellectual Brands LLC then created a new company called GIB Services LLC, and transferred all of the intellectual property rights including the domain names to the new company.

Why somebody couldn't come up with at least a different-sounding name is not explained, but this is a common occurrence in fraudulent transfer cases. Since a fraudulent transfer analysis is really the Court looking behind the curtains to see "What really happened here?" maybe having a name that leaves the unmistakable impression that the new company is just a continuation of the old company isn't such a hot idea.

Thus, the German company brought a fraudulent transfer action against the new company as transferee of the intellectual property. Because of the timing of the transfer and the fact that the new company paid nothing for the domain names, it was an easy decision for the Court to determine that the transfers violated the California Uniform Fraudulent Transfer Act.

You can study the Uniform Fraudulent Transfer a lot and come away mostly confused. But one unmistakable truism is that if a debtor is faced with a claim and makes a transfer without receiving "reasonably equivalent value" (the precise UFTA phrase) in return, it is almost certain that the transfer will be deemed a fraudulent transfer.

The remedy fashioned by the Court was -- uniquely but quite appropriately -- an injunction that prohibited the new company from making any claim to the trademarks or domain names such that they were effectively made easily available for the German company to reclaim.

As a caveat, this opinion was in the form of a Recommendation by a U.S. Magistrate Judge, and at the time of this writing had not been approved or adopted by the District Court.

So how do businesses properly protect intellectual property, including domain names? Usually, the best way is for a new company to be formed that exists only to hold and license intellectual property back to the operating business, and which is referred to by planners as an "Intellectual Property Holding Company" or "IPCO" for those who like acronyms.

It is important that the IPCO not be owned by whatever entity is operating the business, since that business is subject to claims, and if it goes into distress then the shares of the IPCO are just another asset available to creditors. Rather, the IPCO should be held outside the sphere of the operating business, such as by the parent holding company, or by an irrevocable trust in the case of a privately-owned business.

But mere structuring is not enough, and the transaction must be "real" in every sense of that word in order to gain the respect of the Court. Therefore, there must be licensing agreements, valuations of the intellectual property and its lease value, and royalties actually charged and paid. Real transactions are respected; sham transactions are not.

Like most things in asset protection planning, the key is to start early before any dark clouds appear on the horizon. In other words, the transfer of the intellectual should be made before any potential claims arise, or else the transfer to the IPCO may be set aside or dealt with as in the Recommendation above.

Which is to say that asset protection planning to be effective must be pre-claim planning, and those who wait for claims to arise before taking action will be doing so on that thin and cracking ice over that river of laws known as fraudulent transfers.

This is not, of course, to say that a proper office of asset protection is to shield those who are engaged in trademark violations or cybersquatting, etc., for it is not. Rather, the purpose of asset protection for such intellectual property is to properly and separately remove those value assets from a business which might itself someday generate liabilities and find itself in distress.

You can read the full recommendation at http://goo.gl/W8OhR

In re Equipment Acquisition Resources, Inc., ___ B.R. ____, 2011 WL 2469686 (Bkrtcy.N.D.Ill., June 22, 2011).

For a debtor to overpay taxes and thus use the IRS as a temporary safe repository for funds is a debtor's tactic that is probably as old as the IRS itself. Who is going to sue the IRS for a fraudulent transfer, right?

This case has a slightly different twist, because certain corporate insiders who were looting the corporation caused the debtor corporation (an S-corporation) to overpay its taxes with the idea that they would then be able to file individual returns and recoup the money.

But when the debtor corporation filed for reorganization, it sued the IRS to get the overpayments back and this case ensued. The main argument of the IRS was that is protected from such lawsuits by sovereign immunity, but the Court rejected that argument and required the IRS to repay over $800,000 to the debtor corporation.

While these are strange facts, this Opinion has a more direct application for ordinary debtors who try to overpay the IRS as a temporary repository for funds and to hide them from creditors, since this Opinion demonstrates that a creditor can indeed successfully sue the IRS to get at those funds on fraudulent transfer grounds.

Well worth reading.

Full Opinion at http://goo.gl/bA3Eb

In re Tri-Valley Distributing, Inc., 2011 WL 2442046 (Bkrtcy.D.Utah, Slip Copy, June 16, 2011).

This case involves a complex series of mostly pre-petition loans involving a chain of gas stations and their associated properties, and ultimately a stock sale by the owners. When one creditor attempts to reorder the loans on fraudulent transfer grounds, the Court finds that reasonably equivalent value was present and that the transferees could assert the good faith defense. Lots of juicy issues in this factually very complex scenario that ultimately turns on basic fraudulent transfer law.

Full Opinion at http://goo.gl/E6IkA

Diamond Heights Village Assoc., Inc. v. Financial Freedom Senior Funding Corp., ___ Cal.Rptr.3d ____, 2011 WL 2187454 (Cal.App.D1, June 7, 2011).

Debtors took a reverse mortgage against their condo, and then failed to pay their Association dues. The Association sued, and unsuccessfully claimed that its claim for dues had priority over the reverse mortgage, and further that the reverse mortgage was a fraudulent transfer.

The Opinion is good fodder for the notion that sometimes a bona fide reverse mortgage is a good way to get equity out of real property, and that there is not much that a creditor can do about it.

Link: http://lnkd.in/vzTPcB

In re Global Outreach, S.A., 2011 WL 2294168 (D.N.J., June 6, 2011).

When property deals start to go bad, the natural inclination of everybody involved is to start trying to move their own chips off the table and put as much distance as possible between those chips and the bad deal -- including making multiple transfers to try to distance the assets and hope that somewhere a transferee is found to be an "innocent transferee" such that the chips stay protected.

Such is the case with this Costa Rica development deal gone bad, but the bankruptcy court uses its very long arm to reach to a subsequent transferee and grab assets.

Full Opinion at http://goo.gl/2t54x

In re Dorsey, 2011 WL 2313158 (Bkrtcy.M.D.Ala., Slip Copy, June 8, 2011).

Keep this Opinion handy for the client who says, "Why can't I just transfer everything to my spouse before I file bankruptcy?" Here, the debtor did precisely that and blew up in spectacular fashion with the transfers being avoided, and the debtor's discharge denied so that he gets no "clean start". This Opinion is also a primer for not making false statements to the Trustee or creditors.

Full Opinion at http://goo.gl/8kfAi

In re Barry, ___ B.R. ____, 2011 WL 2277641 (1st Cir.BAP (Mass.), June 9, 2011).

Here, Husband and Wife debtors gave four mortgages -- three to their lawyers to secure payment of legal fees -- on their personal residence while the Husband was a defendant in an arbitration proceeding. After the arbitration went against them, debtors filed for bankruptcy.

The First Circuit BAP held that Husband's discharge was denied because he acted with the intent to cheat the creditor in the arbitration, but reversed the denial of discharge as to Wife since she was not a defendant in the arbitration proceeding.

Reviewing the chronology of the mortgages, the Court stated:

This chronicle demonstrates not only that the proverbial "wolf was at the door," but also that Mr. Barry knew he was there. See In re Lang, 246 B.R. at 470 ("When a debtor, with the 'wolf at the door,' chooses to make sizable transfers of nonexempt property ..., the debtor had better have a story to tell, and tell it better, than the debtor here.").

Applying the First Circuit's indicia of improper intent articulated in In re Marrama, supra, there is ample evidence to support the bankruptcy court's finding that Mr. Barry intended to hinder or delay Warchol's collection of her claim. A review of the record within the framework of the seven Marrama indicia shows that: (1) the Barrys granted all of the Mortgages to entities with whom they had either an existing business or attorney/client relationship; (2) the Barrys granted all of the Mortgages when they were insolvent; and (3) the Mortgages cumulatively consumed all but $26,686.08 of equity that would otherwise have been available to satisfy Warchol's $234,599.03 claim.

ink to Opinion at http://goo.gl/SoLTn

Phillips, Spallas & Angstadt, LLP v. Fotouhi, 2011 WL 2552667 (Cal.App. 1 Dist., Unpublished, June 28, 2011).

Most states have statutes or common law that says something like, "If a court enters an order, then it can also order whatever else is necessary is effectuate that order." In California, it is CCP 187, which is routinely used for successor corporation liability.

Here, the creditor tied the California charging order procedure to CCP 187 to both hit a partnership with a charging order and also apply the charging order to a successor corporation to the partnership.

Read how it works in this case by the creditor law firm against a partner who left the firm and allegedly stole a couple of major clients and took some associates with him, which associates then became his partner in his new law partnership.

Full Opinion at http://goo.gl/AxyMn

Matter of Hoff, ___ F.3d ____, 2011 WL 2342522 (5th Cir. (Tex.), June 15, 2011).

Here, the Grandmother of the Beneficiary created the Trust and made a contribution of $100 but then the Mother/Trustee later contributed $70,000 over a period of time. Who is the true "Settlor"?

But more importantly, the Trust gave the Beneficiary certain rights of withdrawal at specific ages, and the Court held that to the extent these rights have vested, they are part of the Beneficiary's bankruptcy estate even if the Beneficiary has not actually withdrawn the money.

Reading this Opinion should give you some juicy ideas about how to tighten up your trust documents.

Full Opinion at http://goo.gl/c7TTc

SEC v. Smart, 2011 WL 2297659 (D.Utah, June 8, 2011).

To attempt to recoup investors' money from this brazen Ponzi scheme, the SEC sought and was awarded a disgorgement order from the Court. Such an order allows the SEC to blow through most asset protection plans quickly, since the SEC can take the position that the money was never the debtor's money in the first place, but rather investors' money, and thus avoid disputes about fraudulent transfer, beneficial interest, charging orders, etc., etc.

Not that planners should be helping securities fraud artists in the first place -- IMHO, anybody who helps somebody like this guy should end up in prison with them.

Full Opinion at http://goo.gl/FXZ2c