An Update on Asset Protection Cases Where Lawyers Overstepped Their Boundaries

“An Update on Asset Protection Cases Where Lawyers Overstep Their Boundaries,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Doug Stanley, ACTEC Fellow from St. Louis, Missouri. When do lawyers cross the line and are held responsible? Today, you’ll be hearing from ACTEC Fellow George Karibjanian of Boca Raton, Florida. Welcome, George.

Doug, thanks so much. So, I am going to discuss a summary of two cases on which I recently reported at the ACTEC National Meeting’s Asset Protection Committee. And both of them seemed to involve lawyers who possibly overstep their bounds in giving asset protection advice. So, the first case is a follow-up of a major case that occurred a couple of years ago, which is Kruse v. Repp, which is out of the District Court in Iowa. And in Kruse v. Repp, the fascinating issue is that it’s not just voidable transaction charges brought up or voidable transaction violations, I should say, but rather, the court and the prosecution went after the attorney for a violation of Federal RICO civil action, which I’d never seen before, which are a few reported cases.

Liability in Kruse Case: Exposure to Civil RICO

In summary, a vehicular accident traumatized and seriously injured the plaintiff. At the time, the defendant was willing, “Oh, I’ll pay all of your expenses, not a problem.” As the case came closer to trial, the defendant had a change of heart and sought estate planning advice. When that advice didn’t seem to go well, the attorney sought out a second counsel, who billed himself as an “Asset Protection” lawyer. What happened after that, according to the facts in the case, are that assets were placed into limited liability companies (LLC) to shield them from the claims of the plaintiff, but also asset values and asset titles were misrepresented with respect to loan financing, as there was apparently some type of agreement with someone at the lending institution, where they would manipulate the loan documents and give the bank first-priority status with respect to recorded loans. As this case wound its way through, a RICO action was brought. And basically, this opinion, which was just for summary judgment, on March 20th, 2020 went for 34 pages and provides a phenomenal outline for how you would bring a civil RICO action. And there are issues about the conspiracy and whether the lawyer actually planned this and did this exist beyond the particular incident. So, what had happened in the 2020 opinion was the District Court went through everything and held: “Yes, we have enough to override. It’s not going to be a summary judgment based on the facts.” Which, in any summary judgment, you assume that the facts alleged are true and it would have been brought for further judicial development. Well, the defendants tried another attack.

They tried to say, basically it was a rehearing, but it wasn’t. And, once again this matter was denied, and the matter would have proceeded to court. The interesting thing about the most recent opinion, in 2021, which was issued on June 15, 2021, is the defendants tried to say that the conduct by the attorney was justified, that the advice the attorney gave to the defendant was that the defendant had the privilege and right to dispose of his assets as he saw fit, so long as he did not destroy or diminish the assets. The court rejects that entirely and that, pretty much, in a much longer opinion, was the only new information that we saw. This case was settled soon thereafter, so there will be no more opinions or writings on this case from the court.

Uniform Fraudulent Transfers ACTEC,  Uniform Voidable Transactions Act

What’s interesting to note, is that it seems like a very open and shut case. In states that have adopted the Uniform Fraudulent Transfers Act or the Uniform Voidable Transactions Act, section iv is the important section. That is, was there evidence of: “to hinder, delay, or defraud any past, present, or future credit?” And keep in mind, when we discuss asset protection techniques, we are discussing techniques to preclude against future unknown creditors. Any sound asset attorney who practices in asset protection knows you cannot avoid a past or present creditor. Not going to happen. That’s what happened in this opinion, and that is why the court decided there could be no summary judgment. I mentioned also there were two articles subsequently published since this opinion which people may wish to read. One is by California/Nevada attorney Jay Atkinson, that’s on Forbes.com, November 21, 2021. And then there’s an article in Estate Planning Journal, by Roger McEwen, Sean Schlesinger, and Timothy O’Sullivan, “The Estate Planning to Protect Assets from Creditors Dancing on the Line Between Legitimacy and Fraud,” and the cite on that is 49 Estate Planning Journal, February 2022.

Criminal Liability

The second case I discussed was Inray Younge, Y-O-U-N-G-E. This case was issued by the Central District in the State of California Bankruptcy Court. And to make a very long story short, the attorney representing a client who was in the throes of bankruptcy, the attorney’s paralegal, who also happened to be the attorney’s wife, participated in the transfer of property on which was being subjected to a foreclosure sale. With about 10 days before the foreclosure sale was to occur, the defendant transferred title to himself and the paralegal/wife of the attorney. Seems like an open and shut case, but I raised this case, and I discussed this at the Asset Protection Meeting because in many states like California, there’s not just civil liability, it’s not just the Fraudulent Transfer or Voidable Transactions Act on which concern must be raised. Attorneys and perpetrators themselves may be subject to criminal liability.

Professional and Misdemeanor Liabilities

Now in California, there is a statute in the California Penal Code, that would hold an attorney responsible if there is an effort to hinder, delay, or defraud. I raise this issue (California Business and Professions Code 6128 (A)) “Every attorney is guilty of a misdemeanor who is either: guilty of any deceit or collusion, or consents to any deceit or conclusion, with intent to deceive the court or any party.” So right away, if you’re participating in a transaction that would violate the California Uniform Voidable Transactions Act, you could be subject to liability under Business and Professions code 6128. Not only that, California Penal Code 531 is the general statute for misdemeanor liability, which opens with, “Every person who is a party to any fraudulent conveyance of any lands, tenements and hereditaments, goods or chattels, etc. with intent to deceive and defraud creditors, or to defeat, hinder, or delay creditors or others of their just debts.” Stop right there. Hinder, delay, or defeat? Very much like hinder, delay, or defraud.

Furthermore, you have California Penal Code 154, “every debtor who fraudulently removes his or her property or effects out of this state, or who fraudulently sells, conveys, assigns, or conceals his or her property with intent to defraud, hinder, or delay…” Sounds very familiar, doesn’t it? “is punishable by imprisonment in the county jail, not exceeding one year, or by fine, not exceeding $1,000.” So, the bottom line is this opinion did not get into the criminal aspect, but I raised it to everyone that they must pay attention.

Asset Protection: Precluding Future Unknown Creditors

Look, if we’re going to counsel, there are many valid reasons for doing asset protection, but you cannot approach that line. You cannot cross that line. That is the stigma that most practitioners face when they raise asset protection issues. In my prior talks about the Voidable Transactions Act, I overemphasize that we are looking only to preclude future unknown creditors. Period. That is the lesson every attorney has to learn, and that’s what I stressed to the committee.

Thank you, George, for alerting attorneys about this information when they give asset protection advice.

You may also be interested in:

• What Estate Planners Need to Know About the Uniform Voidable Transactions Act
• Voidable Transfers in Self-Settled Spendthrift Trusts
• An Analysis of Wyoming Asset Protection Provisions

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