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Sunday, May 09, 2010

ANOTHER CHINK IN THE ASSET PROTECTION ARMOR?

A recent federal case involving Florida's creditor protection law is generating a significant amount of commentary and criticism. While this case involves Florida creditor protections, the larger question of federal interests overriding state creditor protections has relevancy in all states.

In SEC v. Solow, 2010 WL 303959 (S.D. Fla 2010), a federal court imposed a contempt order on Mr. Solow. Mr. Solow was the subject of a significant disgorgement order by the SEC. Prior to the imposition of the order, but clearly in contemplation of SEC and other sanctions, Mr. Solow engaged in various structuring transactions to move assets beyond the reach of creditors, including mortgage and transfers of Florida property owned jointly with his spouse and an offshore trust.

There is little doubt that such transactions were undertaken by Mr. Solow with the purpose of using creditor protection laws to move assets beyond the reach of the SEC. However, Mr. Solow made the argument that he should not be held in contempt for undertaking such actions, because the SEC could not reach the value of the jointly held residence under Florida law even before he undertook any of his transfers since the assets were protected as property held as joint tenants by the entirety. Generally speaking, property held by a husband and wife as joint tenants by the entirety cannot be reached by the creditor of one spouse alone.

The overarching question arising from this case is whether the SEC, and indeed other federal agencies, have the ability to override state creditor exemptions, in  the same plenary fashion that the IRS has. There is plenty of language in the opinion to suggest that a federal court has the equitable power to so override state exemptions, at least in favor of the SEC. However, there are a number of facts and circumstances involved in this case that make it unclear whether such a general rule can be extracted. As I see it, some of these are as follows:

-This case involves whether a contempt order should be imposed on Mr. Solow. It does not address the question whether the SEC can get its hands on the assets themselves which are now presently controlled by Mrs. Solow and/or an offshore trust. Therefore, while the case may be precedent for the ability of the court to put Mr. Solow behind bars, it is questionable whether the case is precedent for the ability of the federal agency to actually reach the assets in satisfaction of its disgorgement order.

-The case involves a "disgorgement order." The opinion notes that a disgorgement order is something different from a creditor judgment. Therefore, perhaps, the holding of the case is limited to disgorgement order situations.

-The case involves the SEC. It is unknown whether the law and theory of the opinion can be extended to other federal agencies, but of course one could expect those other agencies to try.

-The case involves transfers conducted after Mr. Solow was in hot water. The court cites heavily to its "equitable" powers in exercising its contempt powers. An asserted principle of asset protection is that transfers undertaken before a creditor shows up on the scene are entitled to significantly more respect under state creditor protection laws than transfers undertaken to provide specific protection against a known creditor. This principle is typically applied pursuant to the concept of "fraudulent conveyance." Thus, the precedential value of the opinion may be limited to egregious transfers of assets undertaken in regard to a known creditor, and may not apply towards general transfers undertaken well in advance of any creditor problems.

-Interestingly, the case makes no reference to the Supremacy Clause of the US Constitution. Presumably, such a clause would impact greatly on any actual attempt to collect assets that are otherwise protected under state law by a federal agency. Its absence here is not problematic because this again, is not a recovery of assets case but a contempt case.

To the dismay of the asset protection bar, these type of cases with bad facts often encourage courts to find a way to reach the right result. What ends up happening, however, is that case law that arises in such egregious cases ends up becoming the law for everyone, including persons not engaging in such egregious conduct. The creation of such exceptions to statutory and common law creditor protections tips the balance in favor of creditors and sacrifices the policy protections Inc. in the statutory and common law protections.

SEC v. Solow, 2010 WL 303959 (S.D. Fla 2010)

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