Wednesday, April 30, 2014

The Strongest Asset Protection Laws in the US

By Mark Nestmann

Asset protection used to be easy. If you got in trouble, you’d just move to Florida, buy some property there, and then declare bankruptcy.

In the 1980s, Marvin Warner, former US ambassador to Switzerland, football team owner, and horse lover, was
a poster child for this strategy. A savvy and politically connected entrepreneur, Marvin was implicated in a financial scandal that led to the collapse of his Ohio-based Home State Savings Bank. Taxpayers ultimately picked up the tab for a cool $144 million.
Marvin wound up paying $4.5 million in his bankruptcy settlement and spent a couple of years in prison. But he was able to protect a substantial part of his wealth, thanks to Florida law. He sold his horse farm in Ohio and bought another one in Florida for $2.2 million. As a Florida resident, he also invested $3 million in annuities. In Ohio, creditors would have been able to grab all but $5,000 of these assets. In Florida, they couldn’t take any of it.

Over the next 20 years, a steady stream of lawyers, doctors, financiers, and real estate developers followed in Marvin’s footsteps. They all used Florida’s generous bankruptcy exemptions to protect their assets.

Lawyer and former baseball commissioner Bowie Kuhn was an example. After creditors seized his vacation house on Long Island, he bought a million-dollar mansion in Florida.

Unfortunately, for more recent bankruptcies, this strategy no longer works. In 2005, Congress amended the US bankruptcy laws to restrict the type of planning that Marvin and Bowie used so successfully. Florida still has some of the strongest asset protection laws in the US, but bankruptcies are heard in federal courts. And while many Florida debtor protections still apply, the federal bankruptcy system is much friendlier to creditors.

You can probably figure out what happened after 2005. Creditors started forcing more Florida debtors into “involuntary bankruptcy.” It’s still not a common procedure, because the procedural hurdles are daunting. But if you’re really a deadbeat, even in Florida, a creditor can probably force you into bankruptcy and seize at least some of your exempt assets.
Are Happy Days for Debtors Here Again?

What if you manage to stay out of bankruptcy? In that case, if you’re named in a judgment, all the generous Florida exemptions apply. What’s more, thanks to two March 2014 decisions in Florida’s Fourth Circuit Court of Appeals, you don’t even need to hand over any of your assets – as long as they’re outside Florida.

In the first decision, the court declared that it didn’t have jurisdiction to force a Florida man on the wrong side of a $29 million judgment to turn over stock in companies organized in the Bahamas, the Netherlands, Jordan, the Isle of Man, and the Dominican Republic.

The court came to this conclusion based on what it called “policy considerations and the lack of controlling case law.” It was especially concerned about the practical implications of permitting Florida courts to issue turnover orders for assets located outside the state. After all, creditors outside Florida might have claims against the same assets.

This is a valid concern, but for decades, courts in Florida – and other states – have routinely issued (and enforced) “turnover orders” that require you to sell assets you control to satisfy a judgment. That includes assets held outside the state in which you reside.

The second debtor-friendly decision followed a few days later. Here, the Court of Appeals ruled that Florida courts have no authority to appoint a “receiver” over an out-of-state corporation. (A receiver is a person appointed by a court to manage the affairs of a bankrupt business or person or to oversee property in litigation.) The property in question was an apartment complex in Ohio. And under Ohio law, a non-resident can’t be a receiver over an Ohio corporation.

Don’t Hop the Train Just Yet!

There’s no question that the outcome of these decisions makes asset protection planning in Florida easier than ever. Just keep all your non-exempt assets outside Florida. Form a few companies in the Caribbean, hand the share certificates to your lawyer in Switzerland, and be on your way.

This might make Florida look like Nirvana for deadbeats. And I’ve already seen a couple of asset protection “experts” make that exact point. But is it, really? Creditors can still force Florida debtors into involuntary bankruptcy. And federal bankruptcy courts won’t hesitate to enforce turnover orders with fines and, in some cases, even imprison non-compliant debtors for civil contempt.

And if that doesn’t work, keep in mind that these two decisions are likely to be appealed to the Florida Supreme Court. Ultimately, they may not stand.

If you live in Florida, or another state with generous creditor exemptions, don’t be complacent. A determined creditor will eventually force you to turn over whatever non-exempt assets you have the power to give it.

If you’re seriously concerned about asset protection, do it right! There’s nothing wrong with taking advantage of state exemptions, but make certain that you and your legal advisors understand the interplay in your state between those exemptions and federal bankruptcy laws. Don’t count on hopping the Orange Blossom Special after you’re named in a judgment.

Mark Nestman writes the Nestmann Notes.

1 comment:

  1. "the federal bankruptcy system is much friendlier to creditors.