Florida Asset Protection Blog

Don't Believe Your Own Baloney

My website includes a list of common asset protection mistakes- no mistake is bigger than underestimating creditors and their attorneys. Clients and many professionals are too quick to trust their wealth to the theoretical protections promised by various asset protection tools. Professional planners often suggest plans including various asset protection trusts or limited liability companies because on paper these tools protect against creditor collections. No asset protection tool offers perfect protection in the real world, and planners underestimate the creditors’ ability mount arguments against their asset protection devices. Skilled creditor attorneys look for and often find small cracks in asset protections plans which undo the most sophisticated and expensive planning tools. Because most judges tend to be sympathetic to people owed money and less generous to debtors trying to evade debts even a small mistake or technical deficiency in asset protection planning can lead to judicial destruction. Debtors should not believe planners who tell them that a complicated and expensive planning device offers sure protection. Instead, debtors and planners should learn to think like a creditor. They should spend energy trying to figure out how they might attack their own plan focusing more on the weaknesses of asset protection tools rather than their theoretical benefits. My experience taught me that successful asset protection requires that debtors and planners not believe their own baloney.

Another Florida Court Strengthens Homestead Protection

Florida’s Third District Court of Appeals has upheld Florida’s homestead protection against creditors in Conseco Services v. Cuneo. The Third District Court opinion also clarified some issues and questions raised about the Supreme Court’s important homestead decision in Havoco v. Hill, 790. So 2d 1018.

Conseco Services obtained a civil judgment in Indiana against the Cuneos for their failure to repay a large loan, and after judgment Cunseco filed a proceedings supplementary alleging that the Cuneos transferred assets to other family members to hinder, delay and defraud their creditors. Subsquent to the judgment and the fraudulent conveyance complaint the Cuneos liquidated $8 million in investment securities and took out a $2.45 mortgage on a second home in Connecticut. The invested $10.2 million in a home in Florida which they proceeded to declare as a Florida homestead. Conseco filed an action in Florida attempting to put a lien on the Florida homestead.

The Third District Court of Appeals held that the Cuneos’ Florida homestead was protected against Conseco’s collection actions. The Court pointed out that none of the funds used to purchase the homestead was funds obtained from Conseco, and therefore, based on Havoco v. Hill, Conseco failed to meet the threshold for imposing an equitable lien on the home.

This decision substantiates several common asset protection techniques employed by debtors moving to Florida to escape judgments in other states. First, the Cuneos invested in a Florida home after a judgment was entered and after the creditor first alleged fraudulent conveyances pertaining to other transactions. Second, the Cuneos successfully stripped equity from another property, in Connecticut, and sheltered the loan proceeds in a Florida homestead. Third, the Court found that regardless of the Cuneos’ blatant and unapologetic strategy to avoid paying their debts by injecting funds from various non-exempt assets in a Florida homestead, there is no basis for an equitable lien on the homestead when the funds protected were not obtained by fraud or egregious conduct directly from the complaining creditor.

posted by Jonthan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Conspiracy To Opporutnity Shift As A Fraudulent Conveyance

I read a report in Leimberg Information Services about a Missouri Court of Appeals case which held that a debtor and other parties can be held liable for civil conspiracy in a fraudulent transfer when they create new entities through which the debtor conducts future business. The case essentially finds that opportunity shifting is a form of fraudulent conveyance. When a creditor obtains a judgment against a business and its principal owner the individual businessman often starts a new company to conduct the same business and gives ownership of the new business to his spouse or other family member so that neither the new corporation nor the owners are subject to the prior judgment. The Missouri court found this technique of creditor avoidance, although not a traditional form of transfer, nevertheless could be undone as a form of fraudulent conveyance. To date, no Florida case has reached the same result. The Missouri court also found the debtor and his wife were both liable for damages on the theory of civil conspiracy for their efforts to set up successor businesses operated by the debtor. Leimberg’s article says that the case is evidence that, “civil conspiracy is the creditor’s new super-weapon against planning meant to render a debtor judgment-proof.” While this observation may be generally true throughout the county, Florida courts have held uniformly that the fraudulent conveyance statutes do not support claims against third parties for civil conspiracy or any other basis of liability.

New Bankruptcy Law: Chill

I have been receiving several email questions about the new bankruptcy law. One person complained because the new information was not yet incorporated on my website. This law is more complex than it seems. It raises many issues that will take years to resolve through court decisions. I am planning to attend a seminar on the bill soon, and will probably attend several more this year. There is no benefit to a fast analysis six months before the bill's effective date. Some people want to be the first to publish information about the bill as if being first to deliver the news is of some benefit. What is most important is to understand and process the law's changes in a thoughtful manner. People who rush to change asset protection plans may be making hasty mistakes. Keep in mind, as previously stated on this blog, the new bankruptcy law does not change Florida's homestead law or asset exemptions in state court proceedings. The changes are important only if a debtor files bankruptcy.

Is Bankruptcy Preferred Forum to Defend Civil Fraud?

An attorney called me this week to discuss a prospective bankruptcy client. The client was being sued in state court by numerous people who alleged they were fraudulently billed for chiropractic services. The client could no longer afford attorneys fees involved in these multiple suits. The attorney suggested that a chapter 7 bankruptcy would focus all the fraud allegations into a bankruptcy court setting. He suggested that the bankruptcy would effectively consolidate the civil suits, provide faster resolution, and possible give the client a more sympathetic forum. The question was whether bankruptcy is a preferred forum to defend civil fraud.

Bankruptcy may be used as a forum to defend fraud allegations in some circumstances. The debtor must be willing to relinquish all non-exempt property to the bankruptcy estate. Defendants with significant non-exempt assets might fare better by asset protection planning and defending lawsuits outside of bankruptcy. The defendant in this case would probably get a faster resolution of the issues in bankruptcy. Bankruptcy litigation tends to be more focused on arriving at a fast determination in order to close the estate as soon as possible for the benefit of creditors, and is less bogged down in procedures. Whether the defendant would get a more sympathetic hearing in bankruptcy is uncertain. Bankruptcy courts are sympathetic to honest debtors whose financial distress is a result of external factors. Debtors who seem to be abusing the system or who have intentionally harmed others are generally treated no better in bankruptcy than in state court. This particular defendant has yet to decide if he wants to commit to bankruptcy and forfeit some non-exempt assets in process of focusing his several civil fraud complaints.

posted by Jonthan Alper, asset protection and bankruptcy attorney, Orlando, Florida

LLC Protection in Bankruptcy

I have commented previously that limited liability companies probably do would not have asset protection benefit in a bankruptcy proceeding. My reasoning was that the LLC protects assets by virtue of the limited creditor remedy of a charging lien provided in Florida statutes, but that in bankruptcy the trustee would claim that he is not limited by the state’s creditor procedures and has title to all of the debtor’s interest in a LLC. A bankruptcy court decision earlier this year in Arizona analyzed a trustee’s rights to a debtors membership interest. The case was In re Ehmann decided January 13, 2005.

The bankruptcy judge explained that when a debtor’s interest in an LLC or partnership is in the nature of an executory contract that the Chapter 7 trustee is limited by rights of creditors provided in state statutes. An executory contract is a legal relationship where both the member and the LLC have reciprocal obligations. When the LLC member has no material duties to perform in consideration for his economic membership interest the court said that the Trustee’s rights are not limited by the state’s charging lien remedies so that the membership interest is included in the bankruptcy estate. An example given of an executory relationship between an LLC and its debtor/member is when the member is obligated to make capital contributions. Based on this one bankruptcy court analysis an LLC operating agreement that makes the members liable for capital contributions would more likely be deemed an executory contract and might be protected in a member’s Chapter 7 bankruptcy. The debtor would have a better case if the manager did in fact require members’ capital contributions. I am not aware of any decisions on this issue by a Florida bankruptcy court.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Debtors' Experience Hiding Cash

Most of my asset protection clients have significant cash warehoused in a bank account or a brokerage money market account. Many clients are often afraid that future creditors will garnish their bank accounts without notice. Often, I am asked if there is something they can do to protect cash accounts from surprise garnishment. I have been unable to offer anything better than the stock answer to “put the cash in the mattress.” This past week I met some new clients who seemed skilled in finding places to store cash where it could not be found or garnished by their creditors. I will relay their experiences and recommendations to others without my endorsement or guarantee.

These clients stated that they withdrew cash from their bank accounts and used the cash to purchase a variety of store gift cards or gift checks. They said that major chains such as Walmart and Target will sell unlimited number of prepaid store cards in $2,500 denominations. The clients used these cards to buy all their food and other living necessities. They said the stores do not require identification when purchasing or using the cards. These clients also used American Express gift checks which they indicated are available for purchase in larger denominations. Rather the buy their own gift checks, these people give their cash to their friends, have their friends buy the Amex gift checks, and the friends then give them the gift checks which can be used as cash to purchase items and are protected against loss.

These seem like novel and effective ways to store cash equivalents which cannot be garnished by surprise. Obviously, a debtor would have to disclose these store cards and gift checks if they are required to testify under oath during a creditor's asset discovery. If anyone wants to share their experiences with cash equivalents or propose other solutions, please comment to this post.

Posted by Jonthan Alper, Esq., asset protection and bankruptcy attorney, Orlando, Florida

Definition of "Insolvency" for Fraudulent Conveyance

The May edition of the Florida Bar Journal contains an article Mr. Robert Meyer about whether a disclaimer for estate planning purposes can be set aside as a fraudulent conveyance against creditors of an heir or trust beneficiary. The article includes an interesting discussion of the meaning of insolvency for purposes of fraudulent conveyance allegations.

One of the most important badges of fraud for purposes of assessing a fraudulent conveyance is the debtor’s insolvency, or solvency, before and after the conveyance in question. The article points out that Florida statutes and other laws do not clearly define solvency or show how to measure solvency. The principle issue is whether assessment of solvency includes in the debtor’s assets those assets that are exempt from creditors such as homestead property, annuities, and retirement funds. Computation of solvency under Bankruptcy law excludes exempt assets; the tax code definition includes exempt assets. Florida Statute 726.103, the article points out, states that, “a debtor is insolvent if the some of the debtor’s debts is greater than all of the debtor’s assets” or secondly, the debtor is generally not paying his debts when due. The first part of the Statute’s definition does not specify whether exempt assets are considered, and therefore, the second test of debt payment becomes most important.

In any event, additional court rulings would help better define test of solvency for Florida asset protection law.

posted by: Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Dealing With Collection Agencies

Many clients asked me how they can deal with consumer creditors such as credit card companies when they are delinquent in payments. I had a new client this week who seemed to be very successful in getting creditors to stop calling and in negotiating favorable settlements for delinquent credit card debts. They settled several debts for less than 50% of the balance, and they had eliminated most collection agency harassment. I asked them why they had been successful and where they learned their tactics. The clients said they read a book called “How to Settle Your Debts” which they found and purchased on Amazon.com. They said the book clearly explained how consumers can best deal with collection agencies and how to negotiate favorable settlements which included elimination of adverse reports to credit agencies. I found the book on Amazon for $15.00. It’s a new book having been published in September 2004. ; I have not read the book, but based on these clients’ experience, many people could benefit from whatever advice the book offers.

Fears of Involuntary Bankruptcy

Involuntary bankruptcy has become one of the biggest concerns of my clients since the Senate passed the new bankruptcy law. Involuntary bankruptcy will be a more important planning issue when the Bankruptcy Reform Act is effective, but in most cases, people are overly worried about this contingency. The new bankruptcy law creates a disparity between asset protection in state courts and in bankruptcy court with the latter becoming a much more creditor friendly environment because the new bankruptcy law strips away many protections otherwise available in state court. What most people do not understand is that it is difficult for any creditor to force a debtor into involuntary bankruptcy.

Although the Bankruptcy Code says that one creditor can file a petition for involuntary bankruptcy against debtors with less than 12 creditors, and in the case of debtors with over 12 creditors any three can file the petition, it is difficult for a creditor to get a court to grant the petition and force someone into bankruptcy court. For example, only creditors with final judgments which are not being appealed are eligible to join in a petition. That a debtor is not paying one or two creditors does not warrant involuntary bankruptcy; the petitioners must show that the debtor is generally not paying creditors. Florida courts have repeatedly refused to grant involuntary bankruptcy when the petition is being used by a creditor as a collection tool and where the creditor has adequate state court remedies. Aggressive creditors that cajole two other creditors to sponsor an involuntary petition are denied where the petition is obviously being used as one creditor’s collection weapon. Most court opinions refer to involuntary bankruptcy as an extreme remedy, and petitions typically granted where they would serve a bankruptcy purpose such as ensuring fairness among a large group of creditors or prevented a debtor from dissipating assets. Most importantly, if a creditor files a petition for involuntary bankruptcy, and the petition is denied for any reason, the creditor liable for the debtor’s costs and attorneys fees and may be liable for additional monetary sanctions.

Involuntary bankruptcy will be a more important part of Florida asset protection planning, but people who do not fully understand the intricate issues of involuntary bankruptcy will not plan appropriately for this contingency.