Florida Asset Protection Blog

Delaware Series LLC Bookkeeping Requirements

The Delaware Series LLC is becoming a popular legal tool for asset protection. Delaware Statute 18-215 states that limited liability company may establish or provide for one or more designated series of members, managers, or interest each having separate rights, powers or duties with respect to specified property or LLC obligations. If the LLC operating agreement provides for more than one series then the debts and liabilities with respect to a particular series shall be enforceable against the assets of that particular series and not against the assets of any other series. Each series may have a different business purpose. The liability wall created by the statute theoretically permits an owner of multiple businesses or the owner of several real estate parcels to isolate each in a particular series so that liability with respect to on business or property does not contaminate other assets owned by the same businessman or investor.

There is a danger that the businessman forgets or ignores an important requirement of the Delaware Series LLC statute. That is, the statute mandates that each series maintain in separate and distinct records and there must be separate financial accounting for each series. If money of different series are commingled, or if books and records are consolidated or confused, a creditor has a good argument that the Delaware Series LLC does not provide an asset protection wall because the debtor has failed to follow express requirements of the statute. Therefore, those people who make the Delaware Series LLC part of their asset protection plan must make sure that their bookkeeper and CPA is aware and follows the separate accounting requirements of Delaware law.

Liability of Personal Representative in Probate

A personal representative (PR) of a probate estate is liable to creditors or beneficiaries if the PR wrongfully distributes money or applies probate estate property to his personal use. The misuse of probate estate funds is known as “defalcation” which is similar to fraud. One way in which defalcation is different from fraud is that fraud requires showing of fraudulent intent whereas a PR can be liable for defalcation without intent where the misappropriation of estate property was the result of negligence. Good faith is no defense to defalcation

Asset protection in the face of defalcation is more difficult than protection against civil judgments. Liability is not limited to imposition of a civil judgment. In the first place, a probate judge can hold the PR in contempt of court if he does not return funds dissipated in defalcation. Failure to return the funds could result in incarceration for civil contempt. Secondly, the PR cannot discharge liability for defalcation in a Chapter 7 bankruptcy pursuant to Section 523 (a)(4) of the Bankruptcy Code. That section prohibits discharge of debts incurred as a result of fraud or defalcation.

However, Chapter 13 bankruptcy may offer protection for the PR found to have misappropriated probate property. The so-called “super discharge” in Chapter 13 does not exclude liability described in Section 523(a)(4) of the Bankruptcy Code. Therefore, a PR could gain protection in a Chapter 13 plan that provides for repayment over many years of a fraction of amounts which the PR lost from a probate estate.

Wage Garnishment Where Dependents Reside Outside Florida

The Florida Statutes protect from garnishment wages of a person who is head of household. The amount of wages protected is unlimited. A person is head of household if he provides more than 50% of the support of another person. The public policy of this statute is to protect dependents of the family’s biggest wage earner. If wage garnishment were permitted against the person who supports a spouse or children, the theory goes, then the State of Florida and its taxpayers would be responsible to support the dependents of the debtor whose wages were subject to garnishment.

A new client presented the issue of whether the statutory protection against wage garnishment, designed to relieve Florida taxpayers of supporting debtor’s dependents, applies where the dependent (in this case, the wife) was a permanent resident of another state. The question was whether both the wage earner debtor and the dependent both have to be Florida residents. When the dependent is a resident of a different state, the policy behind the statute would not apply.

I know of no case directly on this point. My opinion is that wage garnishment protection applies as long as the debtor is a Florida resident. The statute makes no reference to the residency of dependents and has no requirement that the dependents physically reside with the debtor. Attorney Alan Gassman, a very smart asset protection attorney in Tampa, holds the same opinion about this issue which means that it is probably correct.

Offshore Planning Disaster- Initial News Report

The most recent Blog post discussed an actual disaster of several debtors’ offshore asset protection plans. All of these debtors had placed money in different offshore accounts all of which were under the management and control of the same attorney in Costa Rica, whose name is Mario Quintana. Mr. Quintana, apparently, was well respected in his community and a local political leader. Today, these clients find themselves without access to their money after the attorney they trusted with their wealth was found dead by suicide last Wednesday. Whether Mr. Quintana killed himself because he had stolen money from his clients’ accounts is unknown. The story illustrates the risk of using offshore asset protection. Whether the party in control of offshore funds is an attorney or even a financial institution there is a substantial risk involved in maintaining offshore financial accounts.

The following is the initial newspaper report of Mr. Quintana’s suicide from the Tico Times newspaper in Costa Rica.

Political Party Founder
Takes His Own Life
By Steven J. Barry
Tico Times Staff
sbarry@ticotimes.net

Mario Quintana, one of the founding members of the Social Christian Unity Party (PUSC), which is now in the spotlight for corruption investigations into some of its most prominent members, took his own life Wednesday around 5 p.m. with a .357 Magnum, according to the Judicial Investigation Police (OIJ).

OIJ spokeswoman Margarita Morales said Quintana, 58, wrote a note before firing a round into his right temple, but the note was “ambiguous” and did not outline the exact reasons for his suicide.

She said Quintana's family members described him as “sad” and “depressed” in recent days, but never thought him to be suicidal.

Morales said Quintana was not being investigated in connection with the corruption scandals linked to former Presidents Miguel Ángel Rodríguez (1998-2002) and Rafael Ángel Calderón (1990-94), both members of the ruling PUSC party.

Quintana, though he never served in public office, was the political party's president from 1990-92.

Neither PUSC president Lorena Vásquez nor party secretary Jorge Eduardo Sánchez could be reached for comment by press time.

Offshore Disaster !

Two asset protection clients hired me after they had already established offshore corporations. These offshore corporations were located in Central America, and they were headed by a well-established and respected foreign attorney in the jurisdiction. The foreign attorney opened bank accounts for each of the clients’ corporations, and the clients transferred large sums of money to these accounts. In order to keep themselves out of control of the offshore corporations, the clients agreed to have the attorney named as signatory on the bank accounts. Only the offshore attorney could access the accounts. Therefore, in theory a U.S. judge could not force the client to withdraw money from the account because the client did not have the legal right to access the account.

This arrangement was working satisfactorily for all clients for an extended period of time. If money was needed, an appropriate request was transmitted through unidentified third parties to the foreign attorney, and the attorney would promptly wire funds.

This week the clients were informed that the foreign attorney in charge of their accounts committed suicide. The clients find themselves without access to their money and with no assurance money is still in their accounts.

Hopefully, the story will not have an unhappy ending, and funds will be located. However, I know of two clients who are not sleeping well this weekend.

Offshore planning seems attractive in theory, but you better have good reason to trust people you put in control of your money.

Delaware IRA

The Wall Street Journal published an article today, October 13, 2004, about a “new type of individual retirement account” referred to as a “Delaware IRA.” The Delaware IRA is reported to be a creation of two Wilmington, Del trust companies. The IRA s operate financial like regular IRAs but the IRA documents treat them as trusts including “spendthrift provisions” which are used in trust documents to protection the interest of trust beneficiaries from their creditors. The article points out that these Delaware IRAs have not been tested in any court, and it states that the U.S. Supreme Court will during the current term take up the issue of whether IRAs are generally protected under federal bankruptcy law.

All of this is interesting, but it is not relevant for Florida residents. In Florida, IRAs are protected from creditors judgments and are exempt in bankruptcy filings under specific Florida statutes. A few other states, such as Texas and New York, have similar blanket protection of IRAs. Therefore, if a financial professional approaches you about creating a Delaware IRA because of its supposed superior asset protection I recommend that you decline the offer if you are a resident of Florida. The Delaware IRA could only increase the exposure of your current IRA to future creditor problems.

Homestead Protection of Multi-Family Investment Building

A caller asked me if he could qualify for homestead protection if he bought a four unit building, lived in one unit, and rented out the other three. One principal under Florida case law is that the rental of a room in a homestead property will not disqualify the homestead protection. On the other hand, there is precedent that a property used primarily for commercial purposes may lose homestead protection. The hypothetical presented by the caller has no clear answer in Florida case law. I believe the answer would turn on evidence of the owner’s primary purpose. If the building were purchased primarily as a principal residence then homestead should apply. However, if the property were clearly an investment vehicle there is a risk, but not a certainty, that homestead protection could be denied. The purpose of homestead protection from creditors is not to provide a loophole to protect investment properties by occupancy of a small part of the property. The purpose, rather, is to protect the family home. A better tactic of combining residency and investment would be to buy several acres of property from which parts could be subdivided and sold off. In this example, the owner would not be sharing residency simultaneously with unrelated families, and the situation comports more with the intent of homestead protection.

Delaware Series LLC

I spoke with a California attorney today about her client’s interest in a Delaware Series LLC. The client was a real estate investor with over 25 different rental properties. The attorney asked whether a Delaware Series LLC was an effective asset protection solution for this client. She indicated that California law makes the charging lien the exclusive remedy for a creditor to attack a debtor’s interest in a limited liability company.

A Delaware Series LLC is a special type of limited liability company established in Delaware pursuant to specific Delaware statutes. The distinguishing feature of this type of LLC is that a single LLC can be comprised of two or more “series.” The series are similar to subsidiary entities. Each series can own distinct assets. In theory, liability of one series does not affect assets in any separate series or the Series LLC as a whole. In the case of the California client, the client could create a single Delaware Series LLC and register the LLC to do business in California with a California registered agent. Thereafter, each of the 25 different real properties could be owned by a separate series. If any one property generated a lawsuit or liability, only the one parcel of real estate owned by that particular series would be at risk.

No Florida court, or California court for that matter, has considered whether the divisions between different series in a Delaware Series LLC will be respected for creditor protection purposes. In theory, Florida and any other state should recognize the separate series created pursuant to Delaware law, and liabilities of any one series should be contained within that series and jeopardize only assets titled in the name of that particular series. However, until the Delaware Series LLC has been examined and tested in a creditor protection court case in a state other than Delaware (and in Florida, in particular) the Delaware Series LLC’s asset protection is not as strong as that of other plans and entities which are battle tested.