Posted on July 26, 2010 by Jonathan Alper

Longer U.S. Statute Of Limitations May Apply To Some Fraudulent Transfers In Offshore Jurisdictions

Some people use offshore trusts or LLCs for asset protection because offshore jurisdictions have shorter statutes of limitations for fraudulent conveyance claims. For instance, if a U.S. debtor uses non-exempt cash to purchase a parcel of real estate in a foreign country or fund a foreign trust a creditor has a limited time to attack the property purchase as a fraudulent transfer. Under the law in most states, including Florida, the creditor has four years to bring a fraudulent transfer action. In many foreign countries the creditor has only one or two years to challenge a fraudulent transfer. Most asset protection planners and clients assume that a creditor’s challenge to a fraudulent transfer to a foreign trust or LLC, or the transfer of a foreign property, limits their creditors to the shorter statute of limitations of the offshore jurisdiction where the property or trust is located.

In the course of researching an unrelated  foreign property issue I came across a federal appellate court case which suggests that the longer U.S. statute of limitations can apply to a fraudulent transfer by a U.S. debtor involving foreign assets or entities. In this bankruptcy case a U.S. debtor transferred real property he owned in the Bahamas to another U.S. resident who was not a debtor for no consideration. The debtor filed bankruptcy, and the trustee attacked the transfer seeking to recapture the property into the debtor’s bankruptcy estate. The bankruptcy estate includes assets in all countries. The debtor’s transfer was after the Bahamian statute of limitations but within the U.S. statute of limitations.The debtor argued that the Bahamian time limit applied because the property was located in the Bahamas.

The federal appeals court held in 2006 that the longer U.S. statute of limitations was applicable to the property transfer because the transfer was between two U.S. parties. The statute of limitations applicable to the trustee’s action was where the transfer took place, in the U.S., rather than where the property was situated despite the general rule that law applicable to real property is the jurisdiction where the property is located. 440 F. 3d 145

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Posted on July 23, 2010 by Jonathan Alper

Can Single Member LLC Owning S-Corp Stock Be Converted To An Asset-Protected Limited Partnership?

Many single member LLCs have been established to own stock in subchapter S corporations as part of asset protection planning. Before the LLC became the most popular business entity attorneys and accountants typically advised clients to operate a business as a sub-S corporation. As the asset protection benefits of the LLC became better known, the sub-s owner wanted to change his business ownership from a corporation to an LLC. The problem was that there are often tax problems, and also legal restrictions in some professional businesses, associated with converting an s-corp to an LLC.

The solution was to set us a single member LLC and transfer the s-corp shares to the single member LLC. This plan provided better asset protection subject to uncertainty about application of asset protection benefits to a single member LLC. Now that the Olmstead decision has undermined the asset protection benefits of multi-member as well as single member Florida LLCs, people with s-corp shares in a single member LLC are looking for asset protection solutions.

A well-known tax attorney from south Florida asked me whether I thought it possible to create a limited partnership which could elect to be taxes as an s-corporation and then transfer s-corporation stock from an existing LLC to the newly formed partnership. IRS rules prohibit S-corp shares from being owned by an entity taxed as a partnership, but a partnership electing taxation as an s-corp could possibly own the s-corp shares that were previously assigned to a single member LLC for asset protection.

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Posted on July 21, 2010 by Jonathan Alper

Articles Discuss Short Sale Procedures And New Fannie Mae/FHA Policies Toward Strategic Mortgage Foreclosures

Two articles in the news this week are interesting for people trying to get out of  mortgages.on upside down real estate.  The first article published online on marketwatch.com addressed people's frustration with the long time it takes to get short sales approved.  The article stated that lenders require extensive time in short sale applications to, among other things, verify property value and make sure that proposed short sale is between unrelated, arms-length parties.

The second article in July 19, 2010,USA Today reported that Fannie Mae and FHA were trying to crack down on mortgage defaults by people who financially could afford the mortgage payments- the so-called "strategic defaults." The article did not say that these agencies were now actively pursuing deficiency judgments, as many people publically speculated would happen, but the article did report that Fannie Mae and FHA would be denying new mortgages for many years to anyone who strategically defaulted on  a prior mortgage insured by these agencies. The article stated that Congress was about to pass legislation that barred future FHA mortgages to people who were foreclosed when they had the ability to pay.

In my opinion, these policies are reasonable but difficult to apply fairly in the future when someone who previously went through foreclosure applies for a mortgage on a new home. The underwriter will have to investigate the applicant's financial situation many years ago when the foreclosure took place. It may be hard for the applicant to prove financial hardship years after documents may have been lost or destroyed. Most of my clients who consider mortgage defaults accept that future mortgage applications will be difficult. They are more concerned about their current financial difficulty and prospective deficiency claims. I do not think that threats of future financing problems will deter many people considering strategic defaults.

 

 

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Posted on July 16, 2010 by Jonathan Alper

How Money Is Invested Within A Nevis LLC Account

Over the years I have recommended Nevis limited liability companies to many asset protection clients. Most people who have formed a Nevis LLC has asked about how and where his money will be invested within the LLC entity. I do not get involved in the transfer of assets to offshore LLCs or the financial management of LLCs assets, yet I have learned through experiences of many clients and discussions with their chosen LLC managers how assets are maintained and invested within a Nevis LLC. .

Asset management within a Nevis LLC is similar to discretionary financial accounts offered by most U.S. financial institution. A discretionary account is when you, the client, appoints a financial entity to invest your money on your behalf. The financial manager makes all decisions about what to buy and sell subject to your stated objectives. If you appoint a financial company as offshore manager of your Nevis LLC the management company and its employees do not actually manage the LLC assets. Instead, the LLC manager hires a financial institution outside the U.S. in a discretionary capacity. Offshore money management firms used by my own clients include BNP Parabas (France) and Clariden Leu bank and RBS Coutts (Swiss). Fees charged by the offshore financial managers are similar to fees charged in the U.S.

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Posted on July 8, 2010 by Jonathan Alper

Offshore Managers And Trustees Are Refusing Appointments From People With Existing Or Imminent Judgments

Setting up an offshore trust or a limited liability company involves hiring a trustee or LLC manager in a foreign jurisdiction. The offshore entity works well only if the debtor owner/beneficiary irrevocably gives the offshore manager control over the LLC and investment of LLC assets. Many people who anticipate using an offshore entity as part of their asset protection plan are initially reluctant to turn over complete control to an offshore management company. These people have named themselves as manager initially, and they plan to resign and turn over control to an offshore manager only if and when a creditor has gotten a civil judgment as is actively trying to collect the judgment.

Delaying appointment of an offshore trustee/manager until the creditor is "at the door" is not going to work in most cases. An offshore manager told me recently that his company is refusing appointment by U.S. debtors against whom a judgment has been, is about to be, entered. The offshore company does not want an appointment that is going to involve themselves in collection litigation from the beginning. Although the offshore manager will loyally defend collection actions against long-term clients, they do not find it profitable to be used only as a crises solution. Additionally, offshore managers are using more sophisticated methods for their due diligence investigation of prospective customers and are requiring the customer to submit in advance social security numbers and tax returns to assist in the investigation.

If you plan to use offshore LLCs, offshore corporations, or offshore limited liability companies in an asset protection plan be prepared to choose and appoint an offshore manager/trustee from the beginning. If you are fearful of relinquishing management authority over your entity then you should stick with simpler domestic asset protection tools.

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Posted on July 3, 2010 by Jonathan Alper

Future Interest In Residence Protected From Current Creditors And Bankruptcy Trustee

Can a debtor protect a future legal interest in his primary residence under Florida homestead laws? In this bankruptcy case a debtor’s mother owned a property where the mother and the debtor resided with the debtor’s spouse and children. The mother executed a deed transferring title to the debtor reserving a life estate to the mother. (A "life estate" means the mother owns and controls the property and as long as she is alive). The debtor’s mother was old with a short life expectancy.

The debtor filed Chapter 7 bankruptcy and claimed his future legal interest in his mother’s house as an exempt homestead asset. The trustee objected to the debtor’s exemption because the debtor’s interest in the property was only a future "remainder interest" (meaning the debtor has no vested ownership until the mother dies). The trustee wanted to take and sell the debtor’s interest in the house which would vest upon his mother’s death in the reasonably near future.

The court said that the debtor’s future ownership rights was protected under Florida’s homestead laws. The court pointed out that the debtor occupied the home with his family as a family residence, and that the debtor contributed financially to the repairs and upgrades to the house. The court held that the debtor’s present right of possession is sufficient to qualify the house as an exempt homestead. In re: Williams Case No. 3:09-586.

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Posted on June 27, 2010 by Jonathan Alper

Florida Surpreme Court Eliminates Asset Protection Benefit Of Single-Member Florida LLC (And Maybe All LLCs)

On June 24, 2010, I wrote a brief post announcing the Florida Supreme Court’s holding in the Olmstead v. Federal Trade Commission case, issued June 24, 2010,  wherein the Court held that judgment creditors are not limited to the charging lien as their only tool to attack a debtor’s interest in a single member LLC. Creditors have other remedies available to them including, without limitation, levy and sale proceedings under Florida Statute 56.061. The ruling, at a minimum, denies single member LLCs the same asset protection benefits as multi member LLCs.

The court’s ruling is based on two features of Florida’s LLC statutes. First, cites Section 608.433(1) to show why a charging lien is the appropriate collection tool against a debtor who owns a membership interest in a multi-member LLC. That statute states the basic rule absent contrary provisions in the LLC operating agreement that an assignee (creditors are assignees) of a membership interest may become a member only if all other members so consent. If a judgment creditor were to levy on a multimember interest the creditor could not take over the debtor’s interest and could exercise no management powers without the consent of the non-debtor members. This provision, the court said, is irrelevant in a single-member LLC because that member’s creditor takes the full title and powers of the debtor member upon levy without the consent of anyone other than the debtor.

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Posted on June 25, 2010 by Jonathan Alper

Bankruptcy Court Denies Wage Exemption By Self-Employed Business Owner

Exempting wages from garnishment under Florida’s head of household exemption is difficult for self-employed debtors. Business owners of sub-S corporations typically compensate themselves as employees and as owners. The owner pays himself salary as well as profit distributions. Self-employed business owners limit salary in order to minimize employment taxation, and instead, pay themselves mostly through profit distributions. This compensation arrangement raises issues when the self-employed owner tries to exempt his salary under Florida Statute 222.11 which exempts earnings paid to debtors who are head of household.

Many years ago, in the mid-90s, some bankruptcy courts denied the earnings exemption to self-employed business owners on the grounds that they did not pay themselves in a manner consistent with an employer-employee relationship. The issue just recently was addressed by a bankruptcy court in Florida’s middled district. (In re McDermott, 425 R.R. 848). At issue was an exemption of the debtor’s money in a self-described wage account funded with money received from the debtor’s wholly owned business.

The bankruptcy court denied this debtor an exemption for money in a bank account which the debtor had claimed as exempt wages. The court said the debtor’s compensation history and practice was inconsistent with that of an arms-length employee and employer relationship. The record showed significant variation in the timing and amount of the debtor’s claimed wages. The debtor substantially increased his wages in the months leading up to his bankruptcy in an apparent effort to exempt the money in a wage account. The pre-bankruptcy wages were almost twice the amount he received total in the prior two years. The debtor had complete control over distributions from his business and had no written employment agreement with his corporation.

The court held that, "A debtor who owns and runs his own business, without an arms-lenght employment agreement, and who has almost complete control and discretion over the timing and amount of his own compensation cannot rely on Section 222 (wage exemption statute) to exempt the funds."

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Posted on June 24, 2010 by Jonathan Alper

Florida Supreme Court Issues Single Member LLC Ruling: Finds Creditors Not Limited To Charging Lien Remedy Against A Single Member LLC

The Florida Supreme Court held today that Florida's LLC laws do not provide asset protection to a single-member limited liability company. The ruling was 3-2 with a strong and lengthly dissent.

The Court concluded,

"Section 608.433(4) does not displace the creditor's remedy available under Secion 56.061 with repsect to a debtor's ownership interest in a single-member LLC. Answering the rephrased certified question in the affirmative, we hold that a court may order a judgment debtor to surrender all right, title, and interest in the debtor's single-member LLC to satisfy an outstanding judgment"

I have not read the complete opinion, and I'll comment further after having done so.

 

 

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Posted on June 20, 2010 by Jonathan Alper

Nevis Law Permits Registration Of Existing Florida LLC: Can Avoid Costs Of Asset Transfers

Many of my clients have used Nevis limited liability companies as part of an asset protection plan. One of my recent asset protection clients wanted to put several different rental homes in a newly formed Nevis LLC. The properties are currently titled in the name of one of several Florida limited liability companies. The client believes that the properties are better protected from creditors if they are owned by an LLC formed under Nevis law.

The client was concerned about Florida documentary stamps. Each property has a mortgage, and Florida requires doc stamps based on the mortgage balance when this client deeds the property deeds a property from the Florida LLC to a Nevis LLC.

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