Florida Asset Protection Blog

Protecting Consideration Received From Partner For Sale of Common Stock In Small Business

A man told me he is liable on several business loans and lines of credit. He is afraid that the bank may either call the loans or demand substantial principal reductions which he cannot afford to pay in today’s economy. He personally guaranteed all the business loans. The man owns 50% of the common stock in a profitable corporation. The corporation pays him a small salary and profit distributions. If a bank sues on any of his bank loans and gets a judgment against him the bank could then levy on the stock in his corporation. The non-debtor partner would be in business with the debtor's creditors. The man suggested selling his stock to his partner in consideration for a small cash down payment and a promissory note in order to get the stock out of his name. He intends to invest the cash in his homestead. His plan will not work as intended because the judgment creditor could garnish the note payable by the partner and demand payments from the partner.

A better solution would be to sell his stock to his business partner with different terms. First, he and partner should have the stock appraised by a business valuation expert. He can sell his stock to an "insider" provided he document the sale was made at reasonably equivalent value (not the same as fair market value). One option would be for the partner to form a new LLC and fund the LLC with the partner’s own money. The partner’s LLC would then contract with the debtor to buy his stock. Instead of paying with a promissory note the purchaser might give the debtor cash and membership interests in the new LLC, or some form of option to buy the LLC interests. LLC shares are better protected than common stock shares. Or, the LLC could provide consideration by hiring the debtor after the sale with a consulting or employment agreement for continued work on the company’s behalf. Salary paid by the LLC to the debtor would be exempt from the seller’s creditors if he is head of household (in this case, he supports his wife). The partner has a legitimate interest in purchasing the stock at below fair market value and structure the sale so that the non-debtor partner is not entangled in the debtor’s litigation. The debtor’s use of all cash received to reduce his homestead mortgage should be protected.

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

Liability Traps Under Florida Trust Code: Serving As Trustee of Family Trust Has Risks

Many people in Florida serve as trustees of family trusts where the beneficiaries are other family members and their respective children. Serving without compensation as a trustee for other family members at the bequest of a family trustmaker is not a problem as long as all family members get along. However, when disagreement and dissension arises within the family the job of trustee is a liability trap. Disgruntled family members, sometimes motivated by their spouses, ma

y be able to sue family trustees for failure to comply with trustee duties set forth in Florida’s trust laws.

Florida enacted a revised trust code in 2007 which increased duties for trustees of all Florida trust. Each trustee is required to provide all beneficiaries of every trust an annual accounting. The beneficiary does not have to request the accounting; the trustee is required to compile and deliver annual accountings whether requested or not. Beneficiaries may waive their right to an accounting provided the waiver is given in writing to the trustee. A trustee who fails to provide an annual report, or fails to perform other trustee duties, is liable for breach of trust under Florida Statute 736.1001 (1). Any beneficiary can sue a trustee for failure to provide an accounting or for other breach of duties under the trust code. If a beneficiary brings a legal action for breach of trust the court is required to award costs and attorneys fees.

Transferring Real Estate To Friendly Buyers In Today's Depressed Market

The real estate collapse has increased the need for asset protection, and in one way, it has made easier some asset protection tools. Many real estate owners seeking to protect unencumbered properties from potential lawsuits from their mortgage lenders ask whether they can transfer title of the free and clear properties to business associates, friends, or even to family members. Transfers of title without fair consideration are subject to reversal as fraudulent conveyances up to four years after the transfer is made. Transfers for reasonably equivalent value are usually protected from allegations of fraudulent transfers. Owners can sell or transfer their properties to anyone as long as the conveyance is in consideration for receipt of reasonable equivalent value. Reasonably equivalent value may or may not be the same as fair market value; some bankruptcy courts have upheld sales at 20 to 30 percent less than fair market value as a transfer for "reasonably equivalent value."

In a depressed real estate market less money need change hands to substantiate a conveyance when market values, and reasonably equivalent values, are depressed Real estate appraisers have told me that the market is almost completely illiquid and that as a result the practical value of many formally valuable properties is close to zero; real estate cannot be sold or financed. People who want to move properties to closely related buyers may be able to sell the properties in consideration for very little money and defend that transfer against fraudulent conveyance allegations in today’s market environment.

People considering a sale to a friendly buyer should always get the property appraised prior to the sale. The sale contract should have a price within the range of appraised value. Money must actually change hands. The more formal the contract and the closing the easier it will be to later defend the transaction. Some people ask if they can sell property for reasonably equivalent value in the form of a promissory note. This is not a good idea because a creditor of the seller can garnish the note payments and enforce the terms of the note against the buyer.

An owner who transfers title to valued property for reasonably equivalent value must be prepared to explain what happened to the money received. Large amounts of money don’t simply disappear, so it is not credible for the former owner to testify under oath that he simply spent the money. The creditor is entitled to see bank statements tracing the proceeds in to the debtor’s financial accounts and subsequently out of the same accounts. However, asset protection of money is generally easier than the protection of real property.

Real estate owners interested in asset protection planning  should use today’s depressed market values to facilitate some real estate transfers as part of an overall asset protection plan.

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

Mortgage Deficiency: Strategy For The Defense

I have previously written that some comsumer protection attorneys have told me that there are many ways to successfully defend a mortgage lender's actions for a mortgage deficiency judgment. The complexity of the modern mortgage lending has made mortgage deficiency suits and the underlying foreclosures more complex for many lenders and thereby easier to defend by skilled attorneys. Last Sunday's N.Y. Times had an article about how one borrower defended a mortgage foreclosure and was able to get the mortgage company to agree to a workable settlement. Link: Fair Game - How One Borrower Beat the Foreclosure Machine - NYTimes.com.

A borrower can demand that a bank suing for foreclosure or a deficiency produce the original note and any assignment of the note to the company that purchased the mortgage. As most people know, the majority of mortgages in recent years were sold and resold to large institutional investors here and overseas. The Times article stated:

"In the seemingly long-ago era when banks held on to the mortgage loans they made, this was a straightforward matter. But today, amid the freewheeling packaging of mortgage loans into securities that are sold off to investors, it’s much less clear who controls the note — all of which promises to cause banks enormous legal and financial headaches as foreclosures mount.

The added twist is that some judges are taking the borrowers’ side in foreclosure disputes, precisely because of murkiness surrounding notes."

There are many other defense strategies available to consumer attorneys defending bank foreclosures. Often, investing some money with the right attorney can help change the balance of power in the foreclosure suit and convince the lender to enter into a fair settlement which allows people to remain in their homes. At least a good defense buys time in your home.

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

Deficiency Judgment More Likely From Second Mortgage

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.

I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally. I think the risk of personal liability is significantly higher when there are more than one mortgage obligations. It is also more likely that a second mortgage lender who does not foreclose can wait up to five years to bring suit on the underlying note after the first mortgage lender’s foreclosure action is complete.

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

Liability For Real Estate Taxes After Foreclosure

If you plan to walk away from a house and let your mortgage lender foreclose, do you continue to pay property taxes? This is a question often asked by homeowners who own property worth less than the mortgage balance. People are concerned that they will remain personally liable for unpaid property taxes after the bank foreclosure.

The general legal rule is that taxes on real property are assessed only against the property itself and not the owner. Taxes on personal property are the owner’s personal liability. Practically, if a property owner does not pay real estate taxes the government’s remedy is to put a lien on the property and sell the tax certificate at public auction. The purchaser of the tax certificate at the tax auction pays the unpaid property taxes to purchase the certificate so that there is no longer any liability owed to the government. If a mortgage company takes back the property at foreclosure sale its title is subject to real estate tax liability. When the mortgage lender subsequently sells the property the purchaser of the property must pay all outstanding tax liability in order to get clear title.

For these reasons, I do not think a homeowner is personally liable to pay real estate taxes, and other attorneys have expressed similar views. I recommend to clients that they do not pay real estate taxes once they make the decision to permit their lender to foreclose. A lender offering a deed in lieu of foreclosure could demand that all taxes be paid as part of the negotiation.

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

Homestead Accounts At Banks

A client sold his homestead and wanted to protect the money in a “homestead account” until he was able to find and purchase a new home. He called me to complain that his bank did not know how to open a “homestead account” and he wanted to know how to protect the sales proceeds. A “homestead account” is a term created through several court decisions; it does not refer to a particular variety of financial account. In the financial world, there is no such animal called a homestead account. Essentially, a homestead account is a personal bank account which is funded exclusively with proceeds from the sale of a Florida homestead. To open a “homestead account” one can open a regular personal bank account which holds homestead sale proceeds and no other money. The bank probably will let you add the words “homestead account” to the account title or description. However, if you ask a bank about a homestead account, rather than a normal personal account, the bank officer probably will not understand what you are talking about.

Deficiency Judgments From Attorney's Perspective

Another attorney weighs in on the issue of mortgage deficiency judgements. An attorney friend of mine who does substantial real estate litigation told me of his recent conversation with an attorney from the Law Offices of Marshall C. Watson. The Watson law firm is one of the biggest foreclosure firms in Florida. www.marshallwatson.com. Their client list includes the biggest banks and mortgage lenders, and the lawyers practice at the center of the real estate and mortgage recession. The Watson attorney stated that his firm has received no requests from its many clients to pursue deficiency judgments after mortgage foreclosure. In this attorney’s opinion, a change in policy to go after personal liability for mortgage foreclosures is not on his clients’ radar screens. Some cementers to this Blog have expressed the opinion that lender policy will eventually change to pursue or assign deficiency liability. We will see.

Defending Mortgage Foreclosure

There are so many foreclosures and so few attorneys who know how to defend on behalf of the homeowner. I have referred many clients facing foreclosure to an Orlando real estate and commercial litigation attorney named David Cohen. David has had good success defending foreclosures, which often results in giving his clients extra time to remain in their homes while they attempt to resolve the foreclosure case. David recently gave me an overview of his tactics and results fighting foreclosure suits on behalf of clients, many people who were either unable to make payments or who were faced with negative equity.

David Cohen explained that a foreclosure action is procedural in nature and that the bank is required to prove its claim. Often the banks' attorneys are so overwhelmed it takes them months to address any defenses raised. Most homeowners do not answer foreclosure complaints, and foreclosure judgments are entered after default. Default foreclosure judgments are easy for the mortgage lender to process quickly. Filing an answer or raising defenses requires the lender to turn the file over to legal staff for more involved litigation. In many cases, a defense attorney can find technical defects in the foreclosure suit or the original loan documents, some of which can even defeat the lender’s lawsuit. It is not uncommon for a well defended case to take more than six months and often as long as nine months after the complaint is filed and the homeowner is served with a summons to reach a conclusion. Often during this period, the banks are willing to negotiate a resolution to the case, which resolution may involve an agreement to waive any claim to a deficiency judgment.

Legal fees associated with foreclosure defense usually range between $1,500 and $3,500 over a four to nine month period. As the defense costs are generally substantially less than what a homeowner was paying as a monthly housing expense, it is usually a good decision to hire an attorney to defend a foreclosure action rather than allowing the bank to take a default.

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

Curing A Late-Filed Subchapter S Election

Asset protection planning often involves forming new corporations or LLCs taxed as Subchapter S entities for income tax purposes. The general rule is that the taxpayer has a limited amount of time to file an S election after forming the corporation or LLC and obtaining a tax identification number. If the taxpayer misses the deadline he cannot qualify for the intended status as an S corporation. I discussed this issue with a prominent Orlando CPA named John Papa recently located in a new office suite in Longwood, Florida. Mr. Papa told me of a relatively new Revenue Procedure which liberalizes the rules for qualification as an S corporation by allowing delinquent corporations to salvage an S election. This rule applies to corporations and to LLCs that elect corporate taxation.

Mr. Papa educated me about Rev. Proc. 2007-62 which allows eligible small business corporation to request relief from a late S corporation election by filing Form 2553 with the S corporation’s first income tax returns. The procedure is in lie of getting a letter ruling ordinarily used to obtain relief fro late elections. Accordingly, no user fee is required. Rev Proc. 2007-62 to correct late filed S election has certain requirements. The requirements include a reasonable cause for failure to make a timely election, no prior annual 1120S tax returns having been filed without the S election, and the request for late election must be filed no later than six months after the original due date of the Form 1120S for the year the election was first intended.

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