Florida Asset Protection Blog

Defendants Can Be Subject To Pre-Judgment Asset Freezes

I've written many time about clients who underestimate their creditors zeal and underestimate the ability of courts to freeze assets during litigation. Most people incorrectly believe that courts can do nothing more in civil cases than issue money judgements, and that creditors have the task of finding and seizing non-exempt assets. Most people also understand that courts can freeze assets though injunctions and temporary restraining orders to stop debtors from transferring their assets after money judgments are entered which give creditors an interest in debtors property.

Recently, I learned of a civil case in federal court where the federal judge took more drastic action to the dismay of the defendant. The court and plaintiff were frustrated by repeated delays on the part of the defendant and his litigation attorney to comply with plaintiff's discovery orders. The court sanctioned the defendant by dismissing his pleadings and entering a default for an amount to be determined later. Even though no amount of damages had been determined and no final judgment against defendant entered, the court ordered the defendant and his controlled business entities not to transfer any assets. This order is not directed to any specific property, but is a restraint on the persons from taking any action to transfer any asset.

This example shows that debtors can be subject to court orders freezing their assets before the final adjudication of a civil case. The court does not have to know about the debtors assets or where the assets are located. Any transfer of any asset wherever located would subject the defendant to finding of civil contempt. Asset protection planning that relies on placing assets in other states or countries beyond court jurisdiction will not work well against this type of asset freeze so long as the defendant has some control over the asset and the defendant is within the court's jurisdiction. Some lessons from this case are (1) that people must complete asset protection planning early and prior to litigation, (2) don't underestimate the power of creditors or the powers of judges determined to grant relief to creditors, and (3) all else being equal, asset protection plans are less effective to the extent the debtor has control over assets or their disposition.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Are Fraudulent Transfers A Crime ?

Clients often tell me of their frustrated attempts to get competent asset protection advice from attorneys who work in large law firms. Attorneys in traditional, “tall building” firms take a dim view of asset protection planning. As an example, a colleague attended last week a seminar on Florida asset protection taught by an attorney in one of Florida’s silk stocking law firms. The instructor taught that any transfer or conversion of assets that is later found to be a fraudulent transfer in violation of Florida’s fraudulent transfer statutes constitutes criminal fraud. Accordingly, any attorney who assists or advises a client to make a transfer of property subsequently reversed by a court as a fraudulent conveyance is engaged in assisting the commission of a crime. Such attorney, according to the instructor, is not only unethical but may himself be subject to civil remedies and criminal prosecution.

The problem with this opinion expressed authoritatively to other lawyers at a teaching seminar is that the view is unsupported by Florida law and has been rejected essentially by Florida courts. There is not statute that deems a fraudulent conveyance to be a criminal violation or punishable by fines or incarceration. The Florida Supreme Court and lower appellate courts have thus far consistently found that the fraudulent conveyance statutes are creditor recovery remedies only and they impose no additional civil liability on the debtor or any third party who assists the debtor. Some Florida judges have expressed contrary views in dissent opinions, and other state courts have reached contrary conclusions based on their own state’s laws. Florida law, however, is based not on minority views or foreign law, but rather on the decisions by the majority including the Supreme Court.

I find many attorneys in large, traditional law firms who share the opinion that asset protection planning involving property transfers intended to shield assets from creditors is wrongful, unethical, and even criminal. I think the objection expressed by some attorneys is in fact based on their moral objections to asset protection rather than on rational legal analysis. Many people feel that asset protection is immoral to the extent it avoids paying people to whom debtors are both legally and morally obligated. I have never tried to convince other attorneys to change their moral views. People who morally oppose asset protection should not provide legal advice in this area and should refer clients with questions to other attorneys who are both qualified and comfortable providing such legal services. It is dishonest to translate personal moral objections to asset protection, or any other areas of law, in to condemnations of asset protection based on non-existent criminal statutes or misrepresentations of prior court decisions.

I expect some readers disagree.

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

Annuities Owned By Business Entities

A Florida resident owns an LLC with in turn owns real estate. The LLC sells the real estate and receives substantial case proceeds. The owner wants to purchase an annuity with some of the sales proceeds because of the investment features and because he heard annuities are protected from creditors. The LLC owner would be the annuitant and beneficiary. Does it make any difference if the LLC distributes the sales proceeds to the owner who in turn buys the annuity versus having the LLC buying the annuity directly and naming the owner as the beneficiary. Lets look at the applicable statute.

Florida Statute 222.14 protects the proceeds of annuities issued to citizens or residents of Floirda against execution by a creditor of the annuity beneficiary. If the LLC purchases the annuity the annuity would not have been issued to a citizen or resident of Florida. The LLC owner’s beneficial interest in the annuity and its proceeds may not be protected by the statute if the annuity is being issued to the LLC. It appears that the LLC’s transfer of ownership of the annuity to the individual would resolve the issue because the statute make no reference to “ownership” of the annuity, only to whom the annuity was issued. Many annuities are issued to IRAs as part of retirement planning, and I have not heard anyone challenge their exempt status. However, IRA’s are essentially self-settled trusts for the benefit of the taxpayer and for tax purposes at least do not have a legal identity independent of their owners.

I don’t know if there are any court decisions addressing this issue. I think it is safer to have annuities issued to persons rather than their business entities.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Protection of Business Domain Names

Some types of personal property have little value to anyone except a debtor, but the property is extremely valuable to the debtor. Although the same property has little market value in the hands of a creditor, the creditor may still seek to levy on this unique personal property in order to pressure the debtor to pay all or part of a judgment.

An example I recently experienced was a client who ran a sales business primarily though the internet. The business had no inventory, and all sales were paid in advance so the business had no receivables. The business’s most valuable asset was the domain name of its website. If a creditor levied on the domain name the creditor could close the website and business would grind to a stop. Even though the website domain had little market value in the creditor’s hand it could be a primary target of collection efforts.

I suggested that this business sell the domain name to a related business entity and then lease the domain from the third party entity. In order to help deflect allegations of fraudulent conveyance I suggested that there be a purchase of the domain name for fair market value. An appraisal of the domain name would be helpful to establish an arms length sales price. Because the lease interest in the domain would also be an asset subject to levy, the lease should contain provisions that make it unattractive for creditors. In this type of web based business a the domain name is similar to the importance of an office building owned by a traditional business. These types of assets should not be titled in the name of operating companies that could incur future liabilities.

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

Municipal Annexation of Prior Homestead

Homesteads are protected on lots up to ½ acre in size within a municipality and up to 160 acres in a county outside any municipality. If your large homestead lot in a county is subsequently incorporated within an expanding municipality your homestead status is “grandfathered” and the homestead over ½ acre remains protected after annexation by the municipality.

A client posed the following question about annexation. He lived in a house situated on a lot over ½ acre in the county. Then, he got married an moved into a new home with his spouse, but he did not sell the old house. He and his spouse filed for a homestead tax exemption. A few years later upon getting a divorce he sold the marital home and moved back to his first house. During the time he was living with his wife a nearby city annexed his lot. The question is whether his homestead status on a lot larger than ½ acre now located in a municipality is grandfathered since he owned and lived on the property prior to annexation.

I do not think the annexed lot is protected homestead because it was not homestead at the time of annexation. A Florida resident cannot have two homesteads at the same time. When this person moved into a marital home he legally abandoned his residence and occupied a new homestead with his spouse. When the city annexed his property this person owned the property but it did not have homestead status at time of annexation, and therefore, the grandfather provision should not apply. Ownership without concurrent homestead status is not protected by the Florida Constitution and the grandfathering provision of Florida law. Homestead protection was denied in a similar fact situation by a Florida court in the case of Manda v. Sinclair.

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

Homestead Protection Denied For Rented Duplex

I had previously written a post about homestead protection of a duplex where one half is owner occupied and the other unit is rented. The issue is whether the constitutional homestead protection includes a rental unit attached to the dwelling where the two units cannot be subdivided. The prior post cited precedent that the constitution protects dwellings and businesses located on the same property outside a municipality but that homestead properties within a municipality are limited to the actual dwelling unit. Other cases have protected dwellings and attached units used for business where the property could not be subdivided.

A recent bankruptcy decision in the Middle District of Florida dealt with the claimed exemption of a debtor’s duplex situated within a municipality . The two units are not legally divisible. The bankruptcy court denied homestead protection of the duplex. The court pointed out prior to 1968 the Florida Constitution protected the residence and business house of the owner, but a 1968 amendment deleted the reference to “business house.” Although a minority of prior bankruptcy decisions protected the entire duplex where the units were not divisible the majority of prior bankruptcy cases denied homestead protection to rental units attached to the residence. The court recognized that this ruling may force the debtor to lose the house and speculated that the Florida Legislature may not have contemplated this unfortunate result when drafting and enacting the 1968 amendment to the Constitution. Nevertheless, the court found that denial of homestead protection of that part of the property rented for income is mandated by the law.

There ruling may have been different if the debtor’s duplex was located outside a municipality because, as stated above, courts have previously protected businesses on homesteads located in the county. Secondly, all the cases cited by the bankruptcy court were prior bankruptcy decisions, and state courts may reach a different conclusion when homestead protection of duplexes is considered outside of the bankruptcy context. This was a tough case to decide, and in my humble opinion, the decision was technically correct because the duplex was within a municipality. (Memorandum Opinion, In re: Angela D. Bornstein)

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

Creditor's Receivership Of Family Partnership

A creditors rights to collect money from a partnership interest or LLC interest are limited by statute to a charging lien against distributions to the partner/member. A client explained that one of his creditors has asked a court to appoint a receiver over his family limited partnership for the purposes of collecting partnership assets and enforcing a charging lien against the client’s partnership interest. The family partnership was formed outside of Florida and the motion for receivership is being litigated in the foreign state where the partnership is formed. The foreign state in question has charging lien remedies similar to Florida laws.

I am not aware of any Florida case which has considered a creditor’s rights to have a receiver appointed over an LLC or partnership owned by a debtor. To the extent the purpose of the receivership is to assist the creditor’s collection efforts the receivership may constitute a collection remedy beyond the permitted charging lien remedy. On the other hand, the creditor might get a receiver appointed if he could show that the partnership is distributing all its assets in the face of an immanent charging lien or that the partnership has disparate assets which the general partner is unwilling to either disclose or assemble.

Another important issue is the receiver’s compensation. Normally, receivers are compensated from assets of property under their receivership. A receiver over a partnership or LLC could eat up the partnership/LLC assets by paying himself fees. The expenses of the receivership would pressure the debtor to settle the debts. A debtor would want a court to impose the expenses of receivership in the creditor who is asking for the receiver arguing that receivership fees at the behest of the creditor amounts to an attack on partnership assets in excess of the limited charging lien remedies provided by statutes.

In this particular instance the Florida resident had chosen to establish asset protection entities in foreign jurisdictions because he thought the foreign states offered better legal protections. Now, the Florida debtor must defend the receivership action outside of Florida, and he must hire a separate law firm in the foreign state to handle legal matters in that state. In fact, Florida’s protection of partnership interest and LLC interest is second to none. Florida’s protections were enhanced by a recently revised partnership statute.

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

Benefits of Nevada Corporations

From time to time, and most recently this week, a new asset protection client has previously established LLCs, corporations, or other entities in the State of Nevada. I asked the most recent person why he decided to pay significantly more money to set up an LLC in Nevada. corporation. He said that under Nevada law corporations may issue “bearer shares” whose ownership is established by physical possession. In theory, the client explained, just before a creditor asked under oath about his ownership of investment the stockholder can give the shares to someone else and truthfully testify that he owns no share of stock in any Nevada company because he has relinquished physical possession of the share certificates. This argument sounds better than it would work in the real world.

The problem is that the creditor protection of Nevada bearer shares works only if the creditor asks only if the debtor currently owns any corporate stock. In real life creditors can ask as many other questions as they want in an effort to locate assets subject to execution. For example, a creditor can ask if the debtor has owned any stock in the past years, and if so, what happened to the shares. A debtor must produce income tax returns. Tax returns include taxable income or losses from corporations and other investments. A creditor may ask about the current location and possession of any shares of stock which correspond to taxable income. A diligent creditor attorney will likely find out about any “bearer shares” a debtor owned previously and the current location of such shares. Giving possession of bearer shares to another person without fair consideration will likely be discovered and reversed as a fraudulent conveyance. I have never found any advantage for a Florida resident to establish corporations or LLCs in Nevada or any other state unless the Florida resident owns property or does business in the other state.

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