Florida Asset Protection Blog

Protection of FEMA Grants and Claims

I recently was asked during a consultation whether FEMA grants made to hurricane victims are exempt from creditor garnishment. I doubt there is any court decision on this issue inasmuch as this year’s weather is so unique and FEMA grants are made to areas designated as major disaster areas.

My guess is that if FEMA money is applied to repair your primary residence the use of the money could not be attacked as a fraudulent conveyance since it would represent money applied to exempt homestead. The more interesting issue is whether a creditor could garnish a debtor’s claim or application to FEMA or money awarded by FEMA before the debtor receives the money. I think that, technically, FEMA applications and grants are not exempt from garnishment. However, a court would likely be sympathetic to most debtors who suffered major damage to their home , and courts would probably try to find a way to exempt the claims. For example, FEMA applications and grants made to spouses jointly would be exempt form the creditors of just one spouse as tenants by entireties property.

If a debtor is expecting a FEMA grant which might be garnished by an aggressive creditor, one solution is to borrow repair funds from a bank and pledge the FEMA claim or grant as part of the security for the repair loan. The bank’s security interest in the FEMA money would protect that grant or loan proceeds from any creditor. When FEMA is ready to pay the claim, it would pay directly to the bank who is the debtor’s assignee of the claim.

Debts Owed To Federal Agencies

Defending collection of civil judgments is the goals of asset protection planning. In most cases, debtors are defending assets from judgments obtained in state court civil proceedings. Asset protection becomes more difficult when the creditor is a federal government agency who obtains a civil judgment in federal court. One reason is that the government agency can obtain from the federal court an order that the debtor show cause why the judgment cannot be paid immediately. If the debtor fails to pay after the court order the debtor may be held in contempt of court. Contempt citations subject the debtor to possible incarceration until some payment is made. Although a debtor cannot be held in a “debtor’s prison” to force full payment, the contempt remedy may be used as a powerful collection threat. Contempt orders frequently require some partial payment according to the debtor’s income level and available assets to avoid imprisonment.

Gambling Debts Can Be Discharged in Bankruptcy

A debtor who borrows money on credit cards in order to gamble the money may still discharge these credit card debts in bankruptcy according to the court decision in In re Rembert, 141 F. 3d 277. The fact that a debtor takes available cash, or borrows money, and then proceeds to lose the money at the gambling table is not by itself indicative of fraudulent intent. The court decisions stated, "The fact that Rembert later admitted that it probably was not reasonable to believe that she would win enough money to repay the Appellants does not indicate a subjective intent not to repay her debts in this case. Accordingly, under the totality of the circumstances, we conclude that the bankruptcy court clearly erred in determining that Rembert possessed the necessary fraudulent intent for purposes of § 523(a)(2)(A). We thus agree with the district court's findings that at the time Rembert incurred the debts at issue she intended to repay them and believed that she would have the means to do so from her gambling winnings. Accordingly, the district court properly reversed the judgment of the bankruptcy court.

According to this decision, debtors subject to a judgement may attempt to pay the judgement by gambling their available liquid assets or even borrowing more money to wager.

90 Days

I have received several calls asking whether someone who moves to Florida has to reside here for 90 days before they can take advantage of Florida residency and the Florida homestead exemption. The 90 day time requirement pertains to bankruptcy only. You must be domiciled in Florida for at least 90 days before you can file bankruptcy in Florida. Residency for all other purposes is immediately when you move into your new Florida residence and do other acts which indicate your intent to stay in Florida permanently. There is no 90 day waiting period for becoming a Florida resident for all purposes other than for filing bankruptcy

LLC Fails To Protect Owner Against Negligence

A limited liability company does not provide blanket protection against personal liability. According to a recent decision by Florida’s Second District Court of Appeals the managing member of a LLC can be held personal liability for negligent actions without a piercing of the corporate veil. Estate of Canavan v. National Healthcare Corp, 2004 Fla. App. LEXIS 10998 (Fla. 2d DCA, July 23, 2004)

This case involved a negligence action brought against an LLC who owned a nursing home and the LLC’s sole member and manager who operating and managed the nursing home. The plaintiff alleged that the owner was personally negligent for approving the home’s budget, that the functioned as sole member of the nursing home governing body, that he ignored complaints of residents made to him personally, and that his mismanagement caused medical problems and damages to the residents. The owner argued that he could not be held personally liable since the nursing home was owned by the LLC.

The appellate court held that personal negligent is tortious conduct which is not shielded from personal liability, hence it was not necessary to pierce the corporate veil in order to make the alleged individual tortfeasor/member as a party defendant. The case is a reminder that LLC protection is not absolute. A LLC member or manager can be held personally liability for his or her own personal negligence or other tortious conduct while acting on the LLC’s behalf.

Proceeds Received From Exempt Assets

I received an inquiry from an out-of-state business person who wants to establish Florida residency to protect himself from anticipated litigation. The question is whether proceeds received from payout by annuities, death benefits of life insurance, or sale of a homestead remain protected after being deposited in his bank account. The answer is different depending on the exempt asset and the language of the Florida statute that exempts the particular asset. Annuity proceeds are expressly exempt under the language of F.S. Proceeds from the sale of a homestead remain protected in the owner’s bank accounts if they are traceable and if the owner can show the proceeds are reasonably earmarked for the purchase of a replacement homestead pursuant to court decisions. There is no protection afforded by statutes or by court decisions to proceeds received by a life insurance beneficiary. Death benefits may be attacked by the creditors of the insurance beneficiary after they are paid by the insurance company.

Using Receivership to Collect Judgement

One of the biggest asset protection mistakes is underestimating the skill, intelligence, and resolve of creditors and their attorneys. My representation of a current Florida client provides a good example of creditor creativity. My client had a judgment entered against him personally and his defunct corporation in Dallas, Texas where the corporation was doing business. The debtor/ client at all times was a Florida resident. The creditor attorney recorded the judgment in Houston, Texas and applied for a receivership over the insolvent company and the debtor. Florida has not law permitting receiverships over people. But, Texas Civil Practice and Remedies Code Section 31.002 expressly permits a creditor to put an individual in receivership, and as I found out, courts in Houston, particularly, create personal receiverships quickly upon the request of any creditor. As a result, the creditor now has appointed a receiver over the person of the debtor. A receiver is an officer of the court who takes over whatever rights and powers the debtor has. The receiver is likely to come to Florida and try to order the debtor to turn over all of his property to the Texas court.

This tactic raises several novel legal issues: For example, does the Texas receiver would have any powers within the State of Florida, or does he have to request appointment of a Florida ancillary receiver ?; can the Texas receiver as officer of Texas court apply exemption law of Texas to Florida debtor? ; can the Texas receiver compel Florida debtor to appear in Texas court proceeding initiated by the receiver?. These and other unique legal issues may be addressed in this case which may test the effectiveness of a creative collection strategy by a creditor attorney