ASSET PROTECTION PLANNING HAS SUFFERED A SIGNIFICANT SETBACK CREATING A MEANINGFUL OPPORTUNITY FOR CREDITORS
A recent decision and opinion by Bankruptcy Judge Robert A. Mark of the US Bankruptcy Court for the Southern District of Florida has created a potential nightmare and morass for those who seek to use asset protection vehicles as part of an overall estate plan or independently, and, at the same time, has created a new opportunity for creditors seeking to recover unpaid debts.
Traditionally, bankruptcy trustees have the power and authority to avoid fraudulent transfers, subject to applicable statutes of limitation. Thus, if transfers are made significantly prior to a bankruptcy filing so that the statute of limitations has expired, the trustee or creditors in the bankruptcy case cannot attempt to claw back the assets transferred.
The Bankruptcy Code provides for a two-year statute of limitations for trustees in the pursuit of fraudulent transfers. However, the Bankruptcy Code also allows trustees to utilize state statutes for fraudulent transfer that may be more liberal. Since most states have adopted the Uniform Fraudulent Transfer Act which contains a four year statute of limitations, in most instances trustees have been limited to the pursuit of transfers that occurred within four years.
Judge Mark’s ruling holds that since the Internal Revenue Code contains a 10 year statute of limitations for the avoidance of fraudulent transfers, if the IRS is a creditor in a particular debtor’s case, which happens a significant amount of time, the bankruptcy trustee can utilize the IRS’ 10 year statute of limitations and pursue fraudulent transfers within 10 years of their occurrence.
This is extremely significant because individuals connected with businesses, individual guarantors, individuals that have a high net worth and others utilize asset protection vehicles as part of overall estate plans (legitimately or otherwise). Once the statute of limitations has expired, these individuals and any businesses and their financial professionals and attorneys breathe aside a sigh of relief in thinking that the transfers are immune from pursuit by bankruptcy trustees.
Since Judge Mark’s decision is based upon settled legal principles which have been logically extended, there is every reason to believe that this decision will be adopted by bankruptcy judges and appellate courts throughout the country.
The significance of this ruling is further accentuated by the fact that bankruptcy trustees may now review transfers that occurred more than four years prior to the bankruptcy filing but less than 10 years before the filing and turn upside down the complacency of the individuals, businesses, financial professionals and attorneys that had relied on the expiration of the four-year statute of limitations.
This also means that creditors, heretofore precluded from recovering on their debts in a bankruptcy proceeding because of the passage of time from the date of the transfer of assets, may want to now consider joining together to file an involuntary petition in bankruptcy against individuals and businesses that have attempted to shield assets by transfers that may be subject to being set aside, so that he trustee appointed in the bankruptcy case can investigate and pursue fraudulent transfers. Under the Bankruptcy Code and the Uniform Fraudulent Transfer Act, there does not need to be actual fraud, as the transfer of assets for less than fair consideration (such as a transfer to a spouse, a child, a relative or to a trust) when the transferor is insolvent or is rendered insolvent, can be set aside as being constructively fraudulent.