This is a summary of important findings from recent asset protection cases:
1. In re Baldwin, 593 F.3d 1155 (10th Cir Ct. App. 2010). Bankruptcy trustee can avoid restrictions imposed by state law charging order statutes if a partnership agreement is not an executory contract. Also see In re Ehmann 2005 WL 78921 (Bankr.D.Ariz. 01/13/2005) which had similar facts and a similar holding.
From these cases we learn the following: (1) Partnership agreements and LLC operating agreements should be carefully designed to ensure that they constitute executory contracts, (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).
2. Shaun Olmstead vs. Federal Trade Commission, No. SC08-1009, June 24, 2010. The Supreme Court of Florida held that Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member limited liability company to satisfy an outstanding judgment. A charging order is not the sole remedy authorized by law.
From this case we learn the following: (1) Some states provide much better asset protection than others for LLCs and limited partnerships. Many states, including Florida, mention a charging order as one remedy but remain silent as to whether it is the sole remedy of a creditor. This case shows that this language is insufficient to ensure “charging order protection.” (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.
3. Miller v. Kresser, 2010 Fla. App Lexis 6152 (Fla. 4th DCA 2010); Wachovia Bank, NA v. Levin, 419 B.R. 297 (E.D.N.C. 2009) and In re: Coumbe, 304 B.R. 378 (2004). From these cases we learn that the good old fashioned asset protection provided by a spendthrift trust continues to be upheld by the courts. This protection is even greater when the trust is designed as a discretionary trust (see Wilson v. U.S., 140 B.R. 400 (N.D. Tex. 1992). Once again, this protection is even greater when 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.”
4. Sweeney, Cohn, Stahl & Vaccaro v. Kane, No. 2002-04052 (N.Y. App.Div. 03/08/2004). A New York resident attempted to protect a residence by placing it in a Florida corporation whose shares were owned as tenants by the entirety under Florida law. The Supreme Court of the State of New York- Appellate Division, found that Florida law applied because the state of incorporation has the greatest interest in determining whether the corporate veil may be pierced. The court allowed the creditor to attach the residence under a theory of “reverse-veil piercing.”
This case affirms the fact that the internal affairs of a corporation, including a potential piercing of the corporate veil, are governed by the laws of the state where the corporation is filed, regardless of the fact that the plaintiffs, the defendants, and the cause of action in the case, were all located in another state. The case also reminds us not to put personal use assets in a corporate entity without a lease or other business purpose to justify such an arrangement.