The Achilles Heel to Domestic Asset Protection Laws?

June 21, 2017

Jay Adkisson recently highlighted the Nevada case of Transfirst Group, Inc. v. Magliarditi, 2017 WL 2294288 (D. Nev., May 25, 2017), in which fraudulent transfers (i.e., transfers of assets made to frustrate a creditor) were the subject of an injunction to prevent the debtor from moving assets beyond the creditor’s reach. The creditor took the position that certain entities (LLC, corporation, partnership, trust) were merely alter egos of the debtor, and therefore those entities were also subject to the claims that the creditor held against the debtor.

The debtor defended against these allegations, including the argument that in Nevada, the exclusive remedy for a creditor against an LLC is to obtain a “charging order” (which would mean that the creditor gets nothing unless and until the debtor-friendly manager of the LLC decides to make a distribution of LLC assets to the debtor). The court however was of the opinion that an alter ego position could be maintained against an LLC in the right circumstances where treating an LLC as an alter ego achieves justice.

The debtor also argued that the alter ego classification cannot apply to trusts because trusts are not entities (instead, they are arrangements between a settlor/trust-maker and a trustee). The court however suggested that most likely, Nevada law would apply alter ego treatment to a trust when, again, justice requires it.

Bottom line, the US courts of equity many times apply the law in a way that the court finds to be equitable to bring about the right result. This fact has been one of the reasons persons seek alternative vehicles in which they can set aside assets that can then enjoy sanctuary from the possibility of a financial attack someday. The only vehicles that may be immune from the US courts’ view of what they may deem to be equitable are those entities that are created in foreign jurisdictions that have long-standing law and policy that hold supreme the right to insulate assets from non-foreseen financial travesties.

Nevertheless, even such foreign entities should never be used as a recipient of fraudulent transfers. Some may still have a concern though that a transfer that is made without any intent to frustrate or hinder a creditor may still be scrutinized by a US judge or jury who is more sympathetic to the creditor’s plight. For those who have that concern, the use of foreign entities offers an attractive added level of comfort that substantial protections are in place.

By Edward D. Brown, Esq., LLM. CPA

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