Posts Tagged ‘cases’
Written by Lee McCullough
Monday, 19 July 2010 17:30
88 Comments
Monday, 19 July 2010 17:30
88 Comments
In this case, a father created a limited partnership under Oklahoma law in 1994. The father deeded 200 acres and a house to the limited partnership. As the trustee of a trust, the father retained the one percent general partnership interest and he gave the 99% limited partnership interest to his daughter. The daughter and her husband lived in the house and paid the expenses as if it were owned by them personally. The daughter and her husband filed for bankruptcy in 2004.
The debtors argued that the only remedy available to the trustee under Oklahoma law was a charging order, but this argument failed because bankruptcy laws allow the bankruptcy trustee to “step into the shoes of the debtor” and exercise “whatever rights the limited partner had under the partnership agreement.” The bankruptcy trustee cited In re Ehmann 2005 WL 78921 (Bankr.D.Ariz 01/13/2005) which allowed a bankruptcy trustee to avoid restrictions imposed by state law charging order statutes if a partnership agreement is not an executory contract. Because the partnership agreement included a “Texas style buyout provision,” the bankruptcy trustee was able to force the general partner to buy or sell at a fixed price and the bankruptcy trustee was able to liquidate the partnership for the benefit of the creditors.
From this case, we learn the following:
(1) Partnership agreements and LLC operating agreements should be carefully designed to ensure that they constitute executory contracts and that there are no provisions which would allow for a forced liquidation,
(2) Personal use assets should not be held by business entities (except for valid lease arrangements),
(3) Entities should be structured for valid business purposes,
(4) If possible, entities should include legitimate partners other than the debtors (and unrelated to the debtors if possible).
Written by Lee McCullough
Wednesday, 14 July 2010 17:27
92 Comments
Wednesday, 14 July 2010 17:27
92 Comments
In this case, several individuals perpetrated a credit card scam through several corporate entities. In response to this crime, the FTC sued them and the corporate entities for unfair and deceptive trade practices. The assets of the defendants were frozen and placed into receivership. Among the assets placed in receivership were several single-member Florida LLCs. The FTC obtained an order compelling the defendants to endorse and surrender all of their right, title and interest in the LLCs.
The court’s reasoning was that because the Florida LLC charging order statute does not expressly provide that a charging order is the exclusive remedy (whereas the Florida general and limited partnership statutes do provide that a charging order is the exclusive remedy), the LLC charging order is not the exclusive remedy and a creditor may levy on the LLC interest.
Some states allow foreclosure of an LLC interest, others provide that a charging order is the exclusive remedy of a creditor, and others (like Florida) are silent on the issue.
This case is making waves throughout the country because all those states which are silent on the issue may end up with a similar interpretation. To make matters worse, the court seemed to indicate that the holding in this case may also apply to multi-member LLCs in addition to single-member LLCs.
From this case we learn the following: (1) Some states provide much better asset protection than others for LLCs and limited partnerships. In those states which mention a charging order as one remedy but remain silent as to whether it is the sole remedy, it is possible that a creditor will be able to foreclose or levy on the interest. (2) As we have learned from previous cases, including In re Albright, 291 B.R. 538, 540 (D. Colo. 2003), you cannot rely on a single member LLC to provide charging order protection. This does NOT mean that a single member LLC cannot provide asset protection to the members against the inside liabilities of the LLC, it only means that it cannot be relied on to protect the assets of an LLC from the outside liabilities of a member.
Written by Lee McCullough
Tuesday, 13 July 2010 17:23
489 Comments
Tuesday, 13 July 2010 17:23
489 Comments
In April of 2004, a mother created a spendthrift trust for the benefit of her son and transferred several valuable properties to the trust. She named another son as the trustee of the trust and gave him discretion to distribute the entire corpus to the beneficiary at any time. On June 21, 2007, a plaintiff obtained a judgment against the beneficiary for over $1,000,000. The plaintiff was unable to collect anything from the beneficiary, so he sued the brother who was the trustee of the trust claiming that the trust was invalid because the beneficiary had exerted significant control over the trust and substantial influence over his brother the trustee.
The trial court found that the beneficiary had transferred over $168,000 from the trust to his own law practice. The beneficiary had treated these as loans and but the trustee was unaware that they were loans and had no copy of the promissory notes. The trial court found that the beneficiary seemed to exercise all authority over the important decisions relating to the trust, including investment decisions, and the beneficiary kept possession and control of the trust checkbook. When the beneficiary requested that his brother form an LLC and execute a note and mortgage for $1,400,000, the brother did so without any investigation or independent analysis. The trial court found that the trustee had limited knowledge of the trust assets and was merely a puppet of the beneficiary who “rubber-stamped” the decisions of the beneficiary.
Although the trial court determined that the spendthrift provision was valid when created, they found that the spendthrift provision and discretionary aspects of the trust were invalid because of the degree of control that the beneficiary exercised over the trust and his brother the trustee. For these reasons, the trial court held that the trust could be pierced to satisfy the plaintiff’s judgment.
The Florida 4th District Court of Appeals overturned the ruling of the trial court and upheld the creditor protection provided by this discretionary spendthrift trust. The appellate court found that even though “the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities . . . the law requires that the focus must be on the terms of the trust . . . and the trust did not give [the beneficiary] any authority whatsoever to manage or distribute trust property.”
This case shows that the good old-fashioned asset protection provided by a spendthrift trust continues to be upheld by the courts, even in many cases where the trust is grossly mismanaged. The asset protection provided by a trust can be strengthened by appointing an independent trustee and by ensuring that the trustee understands and fulfills the responsibilities of the trustee. Spendthrift protection is even greater when the trust is designed as a discretionary trust, and when the trust is supported by a state statute that provides that a beneficial interest is not a property right and that the discretion of a trustee is "absolute."