The 9th Circuit Court of Appeals issued an unpublished opinion dated September 8, 2017, in a case called In re Ellison in which the Court issued a warning that consulting with an asset protection attorney can be evidence that a debtor’s actions were taken to hinder or delay creditors. The case involves a man named Joseph Ellison who while facing the possibility of a large award for damages against him made several transfers of assets that the court found to be done to hinder or delay his creditors.
Ellison was terminated by JP Morgan. The parties became involved in an arbitration in which JP Morgan asked the arbitration panel to award it $750,000 for a loan made to Ellison that he had not repaid. In January of 2014 Ellison met with an asset protection attorney, but terminated the representation after the first meeting.
On June 3, 2014, the arbitration panel found that Joseph Ellison owed JP Morgan $790,000. Ellison took the following actions:
- In May of 2014 he transferred $18,000 to his wife’s law firm bank account.
- Shortly after June 3, 2014, he transferred $51,000 to his wife’s law firm account and $121,000 to a corporation owned 100% by Ellison. He later shot himself in the foot by testifying that he transferred the money to protect his family and prevent his creditors from getting it.
- Less than a week after the negative arbitration award Ellison paid his lenders that held first and second liens on his home $41,000 and $11,000, respectively. Again he shot himself in the other foot by testifying that he made the prepayments to protect his family and prevent his creditors from getting the money.
- Shortly thereafter Ellison made four transfers of money to his wife’s law firm bank account. The largest transfer was $17,000.
On July 29, 2014, Joseph Ellison did something attorney Jay Adkisson describes as follows:
“Ellison did one of the worst things that a debtor who has made transfers in defeat of his creditors can do: He filed for bankruptcy”
The reason it was a big mistake for Ellison to file for bankruptcy is because Bankruptcy Code § 727(a)(2)(A) says that a debtor cannot be discharged from debts if:
“the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition”
The bankruptcy court refused to discharge Ellison’s debts and he appealed to the 9th Circuit Court of Appeals. The 9th Circuit found that Ellison’s transfers listed above violated Bankruptcy Code § 727(a)(2)(A) and it affirmed the bankruptcy court’s decision.
The 9th Circuit’s non-published opinion contains some troubling language about the significance of a debtor in bankruptcy who consulted with an asset protection attorney before transferring assets. The court said:
“Debtor argues that the bankruptcy court erred by relying on his meeting with attorney Woods as evidence of his intent, because the meeting preceded any of the critical transfers, and any intent he had at the time of that meeting was vitiated before he made those transfers.
But recall, bankruptcy courts may rely on a debtor’s course of conduct, or other circumstantial evidence, to infer intent to hinder or delay a creditor. * * * Here, the bankruptcy court was not relying on Debtor’s intent in meeting with Woods alone as sufficient to support a finding of his intent to hinder or delay a creditor. Rather, it found that the timing of Debtor’s meeting with Woods, together with Debtor’s knowledge and planning in doing so, was ‘additional evidence’ that supported a finding of Debtor’s intent to hinder or delay a creditor, particularly in prepaying his home loan lenders. In sum, the bankruptcy court appropriately relied on Debtor’s intent in meeting with Woods as circumstantial evidence to supports its finding of Debtor’s intent at the time he made the transfers to his creditors.” Emphasis added.
In his article on this case attorney Jay Adkisson states the following lesson about filing for bankruptcy:
“Another lesson here is . . . that voluntarily diving into bankruptcy is usually the single-worst decision that a person who has engaged in questionable transfers can do. Yes, post-judgment proceedings in state court can be quite painful and ultimately successful for creditors. But declaring bankruptcy is not just going from the frying pan into the fryer, but if somebody has made questionable transfers . . . it is like dousing oneself with gasoline and then jumping into the fire. The difference is one between the possibility of being seriously burned to the probability of being fried to a crisp. No court has the powers of a bankruptcy court to squeeze the last drop of blood from a recalcitrant debtor . . . .
Bottom line is that if you want to protect assets, you must take appropriate action such as forming an LLC and transferring assets to the LLC or to third party BEFORE a claim arises. Actions taken after a claim arises frequently are found to be fraudulent transfers done to hinder, delay, or defraud a creditor.
P.S. A claim does not arise when a lawsuit is filed. Here are some common examples of when a claim arises against you.
- The moment you cause a traffic accident that harms people or property.
- When you sign promissory note, contract or personal guaranty.