Before we discuss when not to do asset protection, we should examine when asset protection planning is safe. As long as the asset protection does not involve fraud or blatant illegal acts (such as hiding assets offshore without filing the required reports with the U.S. government), it is safe to do asset protection while the creditor seas are calm and the debtor is not insolvent as defined by §2 of the UFTA. In doing so, even flawed asset protection programs may have a fighting chance of holding up when challenged.

Once creditor threat has arisen, asset protection may still be done, although our available options are now somewhat diminished. Nonetheless, the U.S. Supreme Court case Grupo Mexican v. Alliance Bond Fund states, “[we] follow the well-established general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor’s use of the property.” Another court even noted that an attorney who represents a client under creditor attack should “protect [the client] from the claims of creditors, to the fullest permissible extent.” This obviously gives us some wiggle room, and an attorney may even have an obligation to recommend asset protection for his client in certain situations, however the key phrase is we must do our planning “to the fullest permissible extent”. This means planning while under creditor duress should only be done while fully considering the UFTA. Furthermore, there are several pitfalls (as discussed below) that should be avoided at all costs.

This brings us finally to circumstances where asset protection should not be done. Planning done in these instances can not only cause a program to fail, but could result in additional fines and penalties against the debtor, the planner, and possibly professional discipline against the debtor’s attorney. Such circumstances can be broken down into four categories:

1. Planning against a creditor who has a direct interest in the property;

2. Planning against a post-judgment creditor;

3. Planning that involves dishonesty, misrepresentation, or committing a fraud against the court; and

4. Planning that is a blatant and egregious fraudulent transfer under the UFTA.

Almost without exception, planning should not be done to protect an asset that a creditor has a direct interest in. Doing so could give rise to a civil conspiracy claim if two or more individuals are involved (which is almost always the case, since protecting assets typically involves a transferor and transferee.) For example, in Miller v. Lomax, an estate’s executor (Mr. Lomax) conspired with the decedent’s children to transfer assets out of the reach of the estate’s beneficiaries. Because this was done to cheat the beneficiaries of an asset they had a specific right to, the court noted that the defendant was guilty of civil conspiracy as well as committing fraudulent transfers. This stands in stark contrast to planning done to protect assets from a litigant who is not a secured creditor, and who does not have a claim to any specific property of the debtor. In another case, Lane v. Sharp Packaging System, Inc., the Wisconsin Supreme Court held an attorney liable for conspiring to transfer assets out of the reach of his client’s former employee. Although the employee had a contractual right to a stock option purchase as a part of his employment agreement, the attorney advised his client to gradually transfer assets out of the company so as to make the purchase impossible. This was of course not only a fraudulent transfer of assets the employee had a direct interest in, but a breach of contract and a bad faith act by the company’s board of directors. A third example an Arizona court of appeals case, McElhanon v. Hing. In this case, an attorney conspired with his clients (who were two of three stockholders of a corporation, of which each stockholder held a one-third interest) to render their corporate stock worthless via a bankruptcy proceeding, which essentially defrauded the third stockholder of his interest in the company. The court found both the attorney and his clients guilty of civil conspiracy.

The second instance where asset protection planning should not be implemented is after a creditor obtains a judgment, except when the debtor arranges to pay the creditor and only does general planning, or planning to protect against other threats that have not yet been reduced to judgment. Again we quote from Grupo Mexican v. Alliance Bond Fund, which states that “before judgment (or its equivalent) an unsecured creditor has no rights at law or in equity in the property of his debtor.” This of course means that once a creditor has a judgment, then s/he does have rights to property of the debtor, and an attempt to thwart those rights will be viewed in a much harsher light than if asset protection was done pre-judgment, wherein “the debtor has full dominion over his property; he may convert one species of property into another, and he may alienate to a purchase.” Instances of post-judgment planning gone sour include Morganroth v. Delorean (where sanctions were imposed on both the debtors and their attorneys for attempting to evade a post-judgment claim of another law firm’s legal fees), Fischer v. Brancato (where an orthopedic surgeon diverted his income post-judgment to his wife’s corporation, and was thus held liable on civil conspiracy as well as fraudulent transfer rulings), and Professional Collection Consultants Inc. v. Griffis (which found the defendant guilty of civil conspiracy and committing several fraudulent transfers post-judgment via a series of title transfers, encumbrances via deeds of trust, and foreclosure sales of various real properties).

The third “don’t” of asset protection does not involve a circumstance, but rather involves a type of asset protection planning. In a nutshell, no type of asset protection should be done if it involves the necessity of lying, misrepresenting facts, or committing a fraud upon the court. This is far different from dual-purpose asset protection (which is asset protection that has an estate, business, tax, or retirement planning objective in addition to asset protection), or asset protection that benefits from attorney/client privilege. This is asset protection that essentially involves perjury or the equivalent. Such activities may be dealt with harshly by the courts. For example, in In re Complaint as to Conduct of Verden L. Hockett, an attorney was sanctioned for having his clients transfer assets to their spouses via expedited divorce proceedings. These divorce proceedings required the spouses to lie under oath as to the purpose for the divorce, which essentially meant they committed a fraud upon the court. In In re Depamphilis,69 153 A.2d 680 (N.J. 07/31/1959), an attorney was sanctioned for advising his clients to transfer cash to their uncle, purportedly to pay a pre-existing debt that in actuality did not exist. This of course involved misrepresentations under oath as to the nature and validity of the transfer. (Ironically, after the transfer was set aside as fraudulent, the sanctions arose when the attorney’s client sued him for malpractice, meaning the sanction arose from an action brought by the very client he was trying to protect.) The fact of the matter is, a good asset protection plan does not require one to commit perjury or deceive a creditor. It also never relies exclusively on secrecy, and the privacy aspects of the planning are only used to prevent or discourage litigation. In other words, solid planning is always done so that, if required in order to comply with a discovery request or debtor’s exam, the entire plan and all transfers are fully disclosed to the court. If the planning is solid, then the assets should remain outside a creditor’s grasp even if the mechanics of the plan are fully exposed.

Finally, although rare, particularly blatant violations of the UFTA (that do not otherwise involve one of the three foregoing “don’ts”) can lead to sanctions above and beyond setting aside a fraudulent transfer and paying the plaintiff ’s attorneys fees for doing so. Such instances historically have always involved transfers done without consideration while the debtor was insolvent, and there are often harsher sanctions against attorneys who are well-versed in the law and therefore, in the courts eyes, should have known better. In In the Matter of Breen, a Florida attorney was disbarred for trying to protect his assets by filing four bogus liens against his property, and transferring assets to his friend (again, without receiving consideration in exchange for the transfer.)

In light of the above, some clients may be hesitant to do asset protection of any type once a creditor threat has materialized. This would be a grave mistake, as failing to do so at this point could cause them to lose their entire life savings — everything they have worked so hard their entire life to accumulate. Except when a debt has been reduced to judgment, or when doing asset protection would involve defrauding a creditor of their direct rights to property, it is not a question of whether to do asset protection so much as it is how to do asset protection. Because of the complexity of fraudulent transfer law (both under the UFTA, associated case law, and the variations of the UFCA and UFTA between states), a competent, experienced, and skilled planner should be engaged, especially when creditor attack is imminent. Asset protection is like brain surgery: it is not a “do it yourself ” endeavor.