Asset protection planning’s a high risk practice area that many estate planners “dabble” in. In my opinion, that’s a big mistake. Why? Because this kind of work is a minefield of potential liability for lawyers, no matter how careful you think you are or how lawful your planning advice may be. But the money’s good, right? Probably not. No matter how good the fees may seem (especially when compared to traditional estate planning), properly weighed, I believe asset protection planning is a classic example of lawyers taking on “uncompensated risk” (a term used in finance that we always tell our fiduciary clients is a big no-no). Even if only 1 asset-protection case in 100 blows up on you, this is no way to run a law practice.
Viewed in retrospect by an unsympathetic judge who has lost all patience with your deadbeat client, your ostensibly legitimate legal advice might all of a sudden morph into a scheme (nothing good ever comes of a “scheme”) to defraud creditors . . . and you, as lawyer (not your client), all of a sudden become the target of some judge’s scornful attention (and maybe a malpractice claim to boot). And you can’t chalk this kind of risk up to rookie mistakes either. All three cases discussed below involve experienced practitioners, two of which are partners at large firms. These aren’t “rogue” solo’s desperately trying to stay afloat by taking whatever client falls through the door. These are seasoned pro’s. And yet, they’ve all been drawn into the kind of position no one wants to be as counsel: playing defense in someone else’s lawsuit.
CASE NO. 1:
James Grieff v. [lawyer/firm], Circuit Court, Miami-Dade County, FL (Case No. 13-21888-CA).
Apparently there’s a good bit of support for using spousal agreements for asset protection planning (click here, here). Well, what might seem like solid, perfectly legitimate legal advice in the cozy confines of your office when Mr. and Mrs. debtor walk through the door with a tale of woe and ask you to please help them fend off evil creditor’s ill-gotten judgment (or threatened judgment), can end up looking entirely different when the you-know-what hits the fan and all of a sudden you find yourself on the receiving end of decidedly unflattering headlines, like: Client who lost $6M to pin-up ex-wife sues lawyer for advising him to put money in wife’s name, which appeared in the ABA Journal. Here’s an excerpt:
Facing a $2 million clawback suit by the bankruptcy trustee in the Bernard Madoff case, an Atlanta entrepreneur says, he sought advice from the New York office of [firm].
They referred him to asset protection specialist [lawyer] in the firm’s Miami, Fla., office, alleges now-former client James Greiff in a recent malpractice suit, and, following [lawyer's] advice, he transferred some $6 million in assets to his wife via a postnuptial agreement. Three months later she filed for divorce, and at that point, contends Greiff in the Miami-Dade Circuit Court suit, the [firm] special counsel abandoned him and began representing his wife, reports the Daily Business Review (sub. req.). . . .
Although Greiff tried to invalidate the postnuptial agreement, claiming it was a sham, a divorce court in Florida upheld it in 2012, the article recounts. He is now reportedly penniless and living with his mother.
[Lawyer] declined comment but his law firm called the suit meritless and said it intends to mount a vigorous defense.
Assume everything defendant asset-protection lawyer did in this case was perfectly legal and he at all times acted in the best interest of his client. It doesn’t matter! The risk of this outcome was always present, and even if lawyer wins the malpractice suit, he still loses: no one’s paying him to engage in the litigation he now finds himself the target of (a cost that will likely dwarf his fees in this case by many multiples), nor will any of the publications reporting on the case run eye-catching headlines when the malpractice claim is ultimately resolved (even if lawyer wins across the board).
CASE NO. 2:
Sardis v. Frankel, 978 N.Y.S.2d 135 (N.Y.A.D. 1 Dept. January 07, 2014)
We all know that Florida’s homestead laws are asset-protection nirvana. Not only is a Floridian’s homestead property bullet proof from prospective creditor claims, our supreme court’s held it’s also immune to fraudulent-transfer claims by existing creditors (see here). And that’s not the only asset-protection goody we have. For example, if you’re a Florida estate planner you can’t turn a corner without someone telling you how great multi-member LLC’s are for “charging order” asset-protection planning, especially after our LLC statute was beefed up post the Olmstead decision (see here). Our supreme court’s also made clear that asset-protection lawyers can’t be sued for aiding and abetting a fraudulent transfer if all the lawyer did was give advice (see here). This all sounds great in the abstract. In the real world of litigation, none of it matters if you look like the guy hired by the bad guys to hide assets.
Bottom line, it doesn’t matter how legally sound your planning advice might be, if it doesn’t pass the smell test, expect your judge to tell you so, and expect your appellate panel (staffed by judges who never go to our estate planning conferences) to uphold your trial-judge’s presumably less-than-flattering assessment of your work in a published opinion. Then, some reporter or blogger (the world’s full of them) writes about the appellate opinion and all of a sudden a case that’s costing you money turns into bad PR as well.
In this case a well regarded national firm is at the center of a decidedly unsympathetic appellate decision involving asset protection planning based on black-letter Florida law. Here are the key facts, as recounted by the NY appellate court in the linked-to case above:
During the time Sofia Frankel was employed as a broker for Goldman Sachs & Co., plaintiffs entrusted her with some $19 million to invest on their behalf, and they remained her clients when she later left Goldman to join Lehman Brothers, Inc. By 2004, however, plaintiffs alleged that they had sustained more than $9.6 million in losses as a result of Sofia’s fraudulent churning of their account. They commenced arbitration proceedings before the Financial Industry Regulatory Authority (FINRA) in May of that year, naming Sofia and Lehman Brothers as respondents. On October 30, 2008, some two weeks before Lehman filed for bankruptcy protection, an arbitration panel rendered an award in the amount of $2.5 million, holding Sofia and Lehman jointly and severally liable for plaintiffs’ losses. This Court affirmed Supreme Court’s confirmation of the award, expressly rejecting Sofia’s contention that the arbitrators had improperly imposed joint and several liability . . .
So what does debtor do after she’s been nailed by a $2.5 million judgment? What else, she hires a lawyer to get her out of the mess she’s created for herself. Again, below are the facts as recounted by the NY appellate court in the linked-to case above. Note what’s going on in Florida: standard defensive planning involving basic Florida homestead and LLC charging-order law. Note also there’s yet another case pending in Miami involving the subject Florida homestead property (think: yet more litigation no one’s paying attorney for).
Within days after the October 2008 award was issued, Sofia met with [attorney], a partner at the firm of [firm], to engage the firm’s services. [Firm's] attorney time records for November 2008 describe a conversation of November 7 “with Sofia and Michael re: asset protection plan,” followed two days later by a conversation “with Michael Frankel re: asset protection planning.” The various items under consideration included the “sale/transfer of N.Y. condos,” “homestead waiver issues,” the “option of filing claim in bankruptcy court to obtain indemnification for arbitration award” and “efforts to identify insurance coverage or indemnification for arbitration award.” . . . The asset protection plan was put into action in early 2009.
In January, Sofia withdrew $3,296,431.51 from her Fidelity account, depleting its value to $16,371.88. That same month, she paid $2.9 million in cash for another beachfront condominium apartment in Miami Beach, title to which is unencumbered and held solely in her name. This property, also claimed by Sofia as a homestead, is the subject of another action pending in Miami–Dade County, Florida.
At some time before August 25, 2009, Sofia’s sole interest in Applied Medicals LLC was relinquished when Michael became a 10% member of the company. Florida law provides that a court may “order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment” (Olmstead v. Federal Trade Commn., 44 So.3d 76, 78 [Fla. 2010]), but limits the court to issuing a “charging order” against a debtor’s ownership interest in a multi-member limited liability company (id. at 79).
No matter how defensible this planning may be as a matter of law, if it doesn’t look good to your trial judge or appellate panel, it’s probably not going to work. And guess who gets blamed for “devising” this scheme? The lawyer:
It is apparent that Sofia’s conveyance of the subject Manhattan condominium apartment to her son was but one of a series of transactions undertaken as part of an “asset protection plan” devised with the assistance of counsel immediately after the arbitration award was rendered against her. The emptying of a brokerage account, the purchase of Florida real estate claimed as a homestead and the transfer of the subject apartment held in fee simple demonstrate not merely a series of transactions coincidental to estate planning, as her affidavit intimates, but a concerted effort to place her assets beyond the reach of impending judgment creditors. Finally, the addition of Michael as a member of Applied Medicals LLC, of which Sofia was formerly the sole member, precludes plaintiffs from obtaining an order from a Florida court directing the surrender of her entire interest in the company to satisfy the award against her. Notably, defendants do not contend that Sofia acted in good faith, and the record before us affords no basis for such finding.
CASE NO. 3:
In re Cutuli, 2013 WL 5236711 (Bkrtcy.S.D.Fla. September 16, 2013)
Things went really bad for this debtor in California, where she resided prior to moving to Florida and declaring bankruptcy. In California, all of the debtor’s asset-protection planning not only didn’t work, it actually made things far worse: the California court entered judgment for compensatory damages for fraudulent transfers of almost $2.8 million, plus another $1.8 million in attorney’s fees, and $227,032 in interest — for a total of $4.8 million. The California court then tacked on an additional $10 million in punitive damages! See Judge orders couple to pay $14.8 million in alleged financial fraud. By the way, the risk of punitive damages in a fraudulent transfer case isn’t an aberration unique to some quirk of California law, it’s a fact of life anyone thinking about dipping a toe into one of these cases in any state (including Florida) better factor into the cost-benefit analysis. A point emphasized by WSJ blogger Jay Adkisson in this blog post, in which he states:
The sad thing is that we keep seeing some incompetent planners falsely advise their clients to the effect of “go ahead and make a fraudulent transfer, because all the creditor can do is to unwind the transfer, and so you can be no worse off”. This statement is far from reality: Not only can a fraudulent transfer lead to a denial of discharge for a debtor or exception of a particular claim from discharge in bankruptcy, but in many states punitive damages can be awarded against debtors and transferees.
On this point, a recent article by Alan Gassman & Charlie Lawrence, “Imposing Punitive Damages on Fraudulent Transfers” in Steve Leimberg’s Asset Protection Planning Newsletter Issue #235 (January 15, 2014), provides an excellent state-by-state survey of the punitive damages in the fraudulent transfer context.
Now back to the case. Against the backdrop of the California debacle, debtor hires Florida lawyer to do what? You guessed it: asset protection planning.
A big difference I see between litigators and non-litigators is the amount of email traffic generated by your typical non-litigator. If you’re not used to the threat of having your emails disclosed in litigation, you’re going to write all sorts of things in your supposed “confidential” emails that could, at the very least, be embarrassing when read in retrospect. And how did the bankruptcy trustee end up getting a hold of these emails? The court entered an ex parte order authorizing a surprise raid of the debtor’s home, which resulted in her home computer getting swiped. Yeah, that’s the sort of thing that can happen when the gloves come off. Here are key facts disclosed in the Florida firm’s email traffic, as recounted in the linked-to order above:
9. The electronic communications apparently included emails between the Debtor, Greg Cutuli, and The [Firm] attorney, [attorney], purporting to relate to “offshore info” and “information on the WY LLC in=regards [sic] to asset protection …” [ECF 866–1 at ¶ 5; 866–2]. Other emails request a “description regarding the protections offered by =the [sic] Wyoming LLC that we are about to enter into” and state “I would like to discuss=it [sic] with our accountant and one of Kathy’s attorneys.” [ECF 866–3 at p. 6 of 15].
10. One email attachment describes the “benefits of the Wyoming Close Limited Liability Company,” including a discussion of the limitations that structure imposes on creditor’s rights and specifically the limited efficacy of charging orders issued against Wyoming LLCs. [ECF 866–2 at p. 7 of 15]. Another attachment states: “Asset Protection: It is difficult for a member’s creditor to reach the assets of the LLC. Under Wyoming law, the creditor of a member can only reach distributions made to the member, but the creditor cannot force the LLC to make such distributions.” [ECF 866–2 at p. 1 of 15; and 12 of 15].
11. The Trustee contends The [Firm] holds itself out as a law firm providing estate planning and asset protection services to its clients. [ECF 866–1 at ¶ 6; see also . . .], that the email communications between the Debtor, Greg Cutuli, and The [Firm] occurred during the same time period that Greg Cutuli and the Debtor were allegedly engaged in a “conspiracy to defraud creditors” and, therefore, the Trustee should be allowed to obtain discovery from The [Firm] to determine whether assets rightfully belonging to the estate were transferred in an effort to defraud the creditors of the estate. [ECF 865–2 at 2–23; 865–2 at 23; 865–3 at 1–5; 865–4 at 1–10].
The easy dig against the firm on the receiving end of all this attention is that, fairly or unfairly, the email traffic created arguably self-incriminating statements involving “asset protection planning” by the debtor. My critique if more basic. Why get yourself involved in this kind of case to begin with? Even if your emails were pristine, you’re still going to end up playing defense in someone else’s lawsuit . . . and doing a lot of work no one is probably paying you for. Putting aside the practice-management issues raised by this kind of work, the bankruptcy court’s privilege rulings are instructive for any kind of planning work you might do. If your planning work is going to end up playing center stage in a bankruptcy proceeding, assume all of your confidential attorney-client communications are going to come out. Why? Because once your client declares bankruptcy, she no longer owns the privilege . . . it now belongs to the trustee (i.e., the party now suing your client).
As the Court has already found in its August 5, 2013 Order: “the Debtor’s attorney-client privilege is held by the Trustee and has been waived.” [ECF 869]. See In re Smith, 24 B.R. 3, 4 (Bankr.S.D.Fla.1982); e.g., In re Williams, 152 B.R. 123, 124 (Bankr.N.D.Tex.1992) (transfer of right to pursue avoidance actions also effects transfer of evidentiary privileges); In re Hotels Nevada, LLC, 458 B.R. 560, 564 (Bankr.D.Nev.2011)(trustee is successor to debtor with respect to attorney-client privilege; turnover ordered regarding debtor and non-debtor materials from law firm).
But even if there’s some viable exception to this bankruptcy rule, if the judge’s already made up his mind your client is the bad guy, and your “asset protection” work is getting blamed for making everyone’s job way harder than it has to be, expect you’ll be on the receiving end of a crime-fraud exception ruling . . . no matter how innocent you may be, which is what happened in this case.
“[F]or the crime-fraud exception to apply, ‘the attorney need not himself be aware of the illegality involved; it is enough that the communication furthered, or was intended by the client to further, that illegality.’” In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir.1996). Here, the Trustee has demonstrated that the Debtor and Greg Cutuli attempted to defraud creditors by transferring and hiding assets at or before the time The [Firm] was consulted, and that they may very well have used the services of The [Firm] to further a scheme to defraud. . . . As such, the Court concludes that there is sufficient evidence already in the record to indicate that when the Debtor and Greg Cutuli sought advice from The [Firm] regarding “asset protection” and “off-shore accounts,” they were in the process of committing fraud, and subsequently committed fraudulent acts after consulting with The [Firm]. . . . Whether The [Firm] was aware of the reasons the Debtor and Greg Cutuli used their services is not relevant to the application of the crime-fraud exception and this Court makes no finding on that issue. The fact that The [Firm's] services were used during (and prior to) a scheme involving the commission of multiple acts of fraud related to the information obtained through said services is sufficient. Therefore, the Court overrules The [Firm's] objections to the subpoena under the crime-fraud exception to the attorney-client privilege.
WSJ blogger Jay Adkisson does a thorough job of dissecting this case in a post entitled Fraudulent Transfers Trigger Crime/Fraud Exception And $10 Million Punitive Damages In Cutuli. If you’re still dead set on doing asset protection work, you’ll want to subscribe to Jay’s blog and hope you never end up on the receiving end of one of his withering assessments of botched lawyering by folks who really should know better. For purposes of this blog post, here’s an excerpt from Jay’s blog post that goes to my point: asset protection planning = DANGER FOR LAWYERS:
Folks, I’m here to tell you: Whatever planners may think of asset protection planning as a legitimate area of practice, the Courts just don’t see it that way. Instead, the Court’s see asset protection not as a legitimate practice area, but instead as debtors engaged in planning to cheat their creditors — and it is mainly because of cases like this (which, again, do not involve anything like legitimate asset protection planning) why Courts usually harbor that impression.
Let me put it another way: What might sound like a good idea to help clients while in the comfortable confines of one’s conference room, might later sound like an utterly blatant scheme to cheat creditors in the courtroom. Very simply, judges want to see debtors pay their debts, and they get mad when debtors engage in schemes to keep from paying their debts. Superficial explanation that the debtor was engaged in “estate planning” or anything else, usually falls on deaf ears when it is obvious to the Court what is really going on.