Posted on January 31, 2012 by Jonathan Alper

Temporary Restraining Order Freeze Against Persons Assisting Suspected Fraudulent Transfer

 A creditor cannot levy upon or freeze your assets until the creditor obtains a civil judgment against you. The creditor cannot go after your assets just because he has filed a lawsuit and you are defending the suit. That is the general rule. However, as pointed out in an article in Forbes Magazine online, written by attorney Jay Adkisson, some courts will permit creditors to freeze assets to stop potential fraudulent transfers. 

 
In this case, a creditor had already obtained a large civil judgment. The creditor alleged that the debtor was engaged in fraudulently transferring assets to avoid collection through companies controlled by the debtor’s family member. The court issued a temporary restraining order to freeze the assets of the entities allegedly assisting the fraudulent transfers. 
 
The case illustrates that courts will act probatively to stop possible fraudulent transfers pending the outcome of fraudulent transfer lawsuits.  Faulkner v. Kornman, 2011 WL 3503098


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Posted on November 4, 2011 by Jonathan Alper

Deposit Into Entireties Accounts Of Profit Distributions: Is this Fraudulent Conversion?dividually Owned Company

Physician and attorney practices through corporations or LLCs can be owned only by licensed professionals. Therefore, the professional cannot own his business in most cases jointly with his spouse who is not also licensed in the same profession. Profit distributions from the professional practice are paid to the professional spouse who owns the business. These distributions are non-exempt money in the hands of the professional.

Most professionals and their  spouse maintain joint financial accounts in order to achieve tenants by entireties protection of their personal money from potential creditors or claims against the professional related to his professional practice. When the professional deposits non-exempt distributions from his business in to his joint personal account the professional is depositing non-exempt money into an exempt entireties account. Is this deposit a fraudulent conversion of a non-exempt asset to an exempt account?

Most courts do not consider this common practice to be a fraudulent conversion. Fraudulent transfer law considers the context of debtors’ transfers. In cases where the debtor has established a practice of depositing profit distributions in to a joint account during a long-term marriage, continuation of the practice does not become fraudulent just because a judgment is entered. The answer is different if the debtor changed his personal financial arrangements when a claim arose or moved money secretly.

Fraudulent transfers and conversions depend on circumstantial evidence of the debtor’s intent. Maintaining financial arrangements established long before a legal problem arose, by itself, is usually not evidence of intent to evade creditor collection.

 

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Posted on October 4, 2011 by Jonathan Alper

Taking Money From Your Failing Business

Many people seeking asset protection of their personal assets are self-employed and support themselves with salary and distributions from their own business Many of these self-employed individuals have concluded that their business cannot survive and are resigned to winding down and closing their business.  The owner is concerned about personal liability because he and or his spouse personally guaranteed business debt.

A very common question is whether the business owner can pay himself from the business even though his business will not be able to pay his creditors. I have seen recently several court cases dealing with debtors who paid themselves salary and distributions from a failing business. In my opinion the general answer is one of common sense.

A business owner may pay himself a reasonable salary for operating his business even though his business is in financial difficulty and may not pay business debts. The salary must be reasonable and comparable what the business would pay an unrelated employee for the same work. You cannot increase salary to deplete the business bank account prior closing the business and defaulting on  business debt.  The business owner should consider decreasing his personal compensation as business revenues decline to show good faith toward his creditors..

Unfortunately, many business owners give into the impulse to grab all the money they can for themselves before the business closes. I find that some times the motive is greed, and some times the motive is financial survival after the business revenue flow stops. Whatever the explanation, if you drain money from your insolvent business you may cause recipients of the money to become defendants in fraudulent transfer lawsuits and you may jeopardize your ability to discharge personal debts in bankruptcy should bankruptcy become necessary.

 

Here are few examples of things not to do fi your business is in financial trouble. All examples come from my own client’s proposals or actual activities. You cannot drain business dollars to pay back loans you made to start the business (improper preference); you cannot use business assets to pay inflated salary or other compensation to family members as employees or consultants (fraudulent transfer); you cannot use business funds to make gifts to children or large retirement contributions because you had always done so in the good years (fraudulent transfer to insiders); and you cannot cash checks from the business accounts and stuff the cash under the mattress( there are bank records and creditors are not that dumb).

Basically, be fair to both yourself and business creditors.  Don’t use your position as business owner to drain business funds into your own account or your family’s accounts.
 
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Posted on June 30, 2011 by Jonathan Alper

Fraudlent Transfers: Defending Transfers Of Non-Exempt Assets To LLC/Partnership As Fair Trade For Valuable LLC/Partnership Interests

One of most important indicators of a fraudulent transfer is the receipt of value as consideration for the transfer. If a debtor transfers title to a person or entity and receives nothing in return the transfer is susceptible to fraudulent transfer allegation, but if the debtor receives consideration reasonable equivalent value the transfer appears more as a “fair trade” rather than an attempt to evade a creditor.

Some people have  suggested to me  that a debtor’s receipt of fair value defense  applies to a debtor’s transfer of non-exempt money or property from the debtor’s name to an LLC or partnership owned by the debtor. They contend that a debtor’s transfers to an LLC or partnership is not a fraudulent transfer when the debtor receives LLC or partnership interest in exchange for the conveyances to the LLC or partnership.  The LLC/partnership interest is a fair trade for the assets conveyed.

If one accepts this argument, then it would be very difficult for a creditor to reverse almost any transfer from a debtor to the same debtor’s multi-member LLC or partnership because the debtor will show that he received an asset (the interest) comparable in value to the asset he transferred out of his own name. A creditor would be left with only a charging lien against the LLC or partnership interest even thought the creditor could have levied or foreclosed the non-exempt asset when it was titled in the debtor’s name.

 

People transfer non-exempt assets to LLCs or partnerships for a variety of reasons. Some reasons have nothing to do with asset protection such as capitalizing a new business venture. But, many debtor’s facing legal problems  transfer non-exempt assets to LLCs or partnerships because it is harder for creditors to attack the assets owned by the LLC/partnership than it is to execute on the same assets in the debtor’s name. In my opinion, the argument that a debtor receives LLC/partnership of interest of reasonably equivalent value does not hide or excuse the debtor’s intent to avoid collection by transferring title to the non-exempt assets.

The issue was examined in a 2007 bankruptcy case. The debtor used non-exempt cash to repay a loan from the debtor’s cash value life insurance policy. The trustee argued that the repayment was a fraudulent transfer. The debtor argued that he received value for repayment of the life insurance loan because repayment was required to maintain a death benefit. The court said that although the debtor received value from repaying the loan the receipt of value does not exonerate the transfer from fraudulent transfers, and the court said that a number of courts have found fraudulent transfers despite the debtor’s receipt of value. The court reversed the loan repayment as a fraudulent transfer.

All fraudulent transfer analysis depend upon the unique facts of the particular case. However, the bankruptcy decision, and cases cited therein, suggests that a creditor can overturn a debtor’s transfer of non-exempt money to an LLC/partnership as a fraudulent transfer if the facts otherwise show intent to defraud creditors regardless of the debtor’s receipt of valuable LLC/partnership interests. In re Kelly 2007 WL 2492732
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Posted on December 2, 2010 by Jonathan Alper

Fraudulent Transfer From Debtor Company To Newly Formed Entity In Same Business

Asset protection clients often deal with judgments against both themselves individually and their closely held business. Many of my clients believe that they can deal with their businesses’ liability and potential judgment by closing or bankrupting their business. When I asked them how they plan to make a living after they close their business the response is something like, “I’ll just start a new business doing the same kind of work.” Not exactly. I’ve written before on this blog that when the debtor’s new business is nothing more than a name change or a successor business that uses the goodwill and other assets of the debtor business the creditor can levy upon the new business as the continuation or alter-ego of the debtor business.

I am addressing this problem again because I read recently a post on this subject dated September 29, 2010, t on The Sale of Business Law Blog. The blog discusses a court decision where the judge found that a newly formed business was liable for the debts of a closed debtor business where the new business, among other things, took the former business’ employees and customers and operated in the same physical location.

In most instances the only way to be sure a new business is protected from the debts of a former business is to file Chapter 7 bankruptcy for the former business. Any assets of the old business, including goodwill, would be part of the bankruptcy estate so that there should be no assets to transfer to a successor venture.
 

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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 May 4, 2010 by Jonathan Alper

Husband Transfers Car Title To Wife In Satisfaction Of Wife's Lien On The Car: Is This A Fraudulent Transfer?

Husband tells me his automobile is protected from creditors because his wife has a recorded lien on the title. The story is that when this man bought the car in February, 2005, he put this wife’s name on the title as a lien holder. He states he cannot recall how much, if any, money his wife loaned him from her separate funds to finance the purchase, and he has no record of periodic loan payments to his wife. This year, after this same man was sued, he man transferred the car title to his wife as a "repayment of her loan and in satisfaction of the lien", so he says.

Is this a fraudulent loan, and is the transfer of the car title to the wife a fraudulent conveyance? Probably. The creditor would have to show that the original lien and loan was fraudulent to creditors in order to invalidate the transfer of title in satisfaction of the lien. The creditor’s problem is that the original loan and lien are five years old and took place the statute of limitations for fraudulent transfers. If the original loan is not invalid then the debtor may be able to defend a fraudulent transfer attack on the conveyance of title this year to his wife. This debtor would be in better position if he had just left title in his name subject to the five year old lien.

I asked this man if he had spoken with his CPA about the tax treatment of his title transfer in 2010. The wife’s forgiveness of her loan and lien may result in 1099 income to the husband. I’m not sure if the wife can take a corresponding investment loss because I don’t know if the wife’s transaction qualifies as a business investment. Interesting question for the couple’s accountant.

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Posted on March 15, 2010 by Jonathan Alper

Federal Court Order Distinguishing Fraudulent Transfers From Common Law Fraud

People often confuse a fraudulent transfer in asset protection or bankruptcy law with the crime of fraud or common law civil fraud. Common law fraud or criminal fraud are types of "evil fraud." This type of fraud involves intentional deceit or cheating of innocent victims. The fraud involves intent to harm and the victim suffers damages. The judicial remedy is incarceration in the case of criminal fraud and damages in the case of civil common law fraud.

Fraudulent transfers or fraudulent conversions to evade or avoid creditors are reversible because there are Florida statutes which give courts the authority to undo such transfers or conversions and put the property back in the hands of the debtor where it is subject to creditor levy. Fraudulent transfer actions are creditor remedies; they are part of the creditor’s array of tools used to collect judgments. A court may not award a creditor any additional damages for a debtor’s fraudulent transfers or conversions. Certainly, no one ever went to jail for making a fraudulent transfer to protect assets from creditors.

Many attorneys confuse civil/criminal fraud, the "evil fraud", with reversible fraudulent transfers. Some judges confuse the two concepts. An attorney I know sent me an order issued by a federal district court judge which clearly distinguishes fraudulent transfers from common law fraud. This order is not precedent. Nevertheless, readers may find the analysis and cases cited within to be helpful in arguing this issue in their own cases.

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