Asset protection for Bernie (cont'd), and the fraudulent conveyance rule.

October 25, 2012, by

TE BLOG. House Construction. 10.2012. iStock_000004421180XSmall[1].jpgWe're back to the meeting of CPA Lars, lawyer Duncan, and real estate developer Bernie, on asset protection for Bernie and his wife Liza. Duncan has just wrapped up the insurance discussion by calling for overall review by a good broker. Duncan will move now to the subject of fraudulent conveyances, the second in what he indicated were 6-8 topics for today that are supposed to take a couple hours. He's good at taking charge of agendas and meetings. Then Duncan will write a letter, then the three will meet again to start applying the ideas to Bernie's situation.

The insurance discussion had gone quickly, about ten minutes. Even though he finds the subject interesting, Lars is doing an over/under thing in his mind about the length of the meeting, and making marks on it indecipherable to others. Duncan offers a recent local case that went to the State Supreme Court, to give the basic notion of fraudulent conveyances: Thompson v. Hanson. The plaintiffs had a judgment for about $70,000 against a development company. Seemingly unfortunate for the plaintiffs, the company was insolvent (had no net value) by the time the judgment was obtained, partly because it had distributed some of its remaining real estate to the individual owner of the company. The plaintiffs then sued the owner on the notion he had received a fraudulent conveyance from the company, and won in Superior Court and the Court of Appeals, but then the owner appealed the case to the Supreme Court.


The Supreme Court gave a nice simple explanation of the rule: "In general, a fraudulent transfer occurs where one entity transfers an asset to another entity, with the effect of placing the asset out of the reach of a creditor, with either the intent to delay or hinder the creditor or with the effect of insolvency on the part of the transferring entity." This paraphrase pretty much doomed the defendant company. It and its owner had argued that intent to delay or hinder was a necessary element of a fraudulent conveyance (and absent here). The Court found otherwise; it was sufficient that the transfer made the development company insolvent, and it wasn't necessary to prove intent to hinder. The plaintiff could then recover against the company owner who had received assets from it.

Duncan mentions a similar concept he calls "thin capitalization." Even though doing business in a company offers limited liability to its owners, there can be a "piercing of the corporate veil" (Duncan's words) if the company doesn't keep enough assets or insurance to address claims generated by its work. The point of all this to Bernie is, don't think the asset protection solution is to just shift assets around cleverly to frustrate claimants.

Two topics and 25 minutes into the meeting. Duncan's on target for up to eight and 120.