Blog – Iacone Law, P.A. Sat, 17 Feb 2018 21:26:20 +0000 en-US hourly 1 Blog – Iacone Law, P.A. 32 32 91699721 Event: Legal Structures for Small Businesses Sat, 17 Feb 2018 21:26:20 +0000 Read More ...]]> legal structures

This past week I had the pleasure of presenting on Legal Structures for Small Businesses for a Spanish speaking audience.  The event was organized by Prospera, a non-profit that provides bilingual assistance to hispanic entreprenuers trying to establish or expand their business, and hosted by Cambridge Innovation Center, a hip coworking facility with beautiful conference rooms.  Our conference room in particular had a nice view of the Miami skyline and was super comfortable.

In attendance we had current and future business owners.  I made it a point to emphasize that as entrepreneurs, learning how to protect what you earn, or will earn, including any contributions or investments into the company, must be taken into account at all stages of operation.  After all, the business is the operative word in small business owner, and protecting the former from liability will make operations much more stress free for the latter.  After laying down this foundation, I delved into the theory behind limited liability, touched briefly on the differences between the LLC and corporation, and concluded by showing actual examples of structures I have implemented for my clients, with a focus on the limited liability company.  Isolating risk and reducing liability by using the appropriate legal structures were themes of my presentation, among other things.

Here is the outline, translated into English:

  • Structures
  • Partnership
  • Business Entities
  • Limited Liability
  • LLC or Corporation?
  • Ownership
  • Operating Companies
  • Holding Companies
  • Real Estate
  • Tips

If you would like to see the Powerpoint presentation I used or learn more about what I talked about, please navigate over to my Spanish blog, Boletín Protección de Activos, or contact me by phone or e-mail.

LLCs as Creatures of Contract: Don’t Overestimate this Legal Fiction Wed, 16 Aug 2017 22:54:14 +0000 Read More ...]]> creatures of contract

Edward Thurlow, 1st Baron Thurlow

I recently sat down with a nonprofit to discuss the asset protection tenets of LLCs, among other things, and was particularly intrigued by where our conversation headed.  It was a smart group, to boot, so I took them on a ride all the way back to what LLCs are in their most primitive form: creatures of contract.

LLCs exist by virtue of state statutory schemes.  In Florida, the Revised Limited Liability Company Act (the “Act”) requires the filing of articles of organization with the Department of State in order to form the LLC.  The articles of organization is really just a contract between the parties, or owners, of the LLC and the State of Florida; it is this contract by which the LLC is born.  After birth, the parties have broad discretion in determining the character and purpose of their LLC, and have the option of further defining the rights and obligations of its members through an operating agreement, the latter of which is also a contract.

In essence, then, the structure and foundation of the LLC is based upon a nexus of contracts between different parties.  To that effect, LLCs basically have all the same legal rights and responsibilities as natural persons (human beings), and as such have the power to sue or be sued, incur liabilities, and enter into agreements, powers of which are defined in the Act or in the company operating agreement.  So while the LLC is technically not a person in the traditional sense of the word, the law has imposed upon it a legal fiction which states that despite being a creature of contract, the LLC is nonetheless treated as a person separate and distinct from its owners.

But this legal fiction is not to be overestimated.  Edward Thurlow, 1st Baron Thurlow, (pictured above) who was former Lord Chancellor of Great Britain, alluded to exactly this well over a century ago:

Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?

I will for now lay outside the fact that Thurlow was referring to corporations, and not limited liability companies, as the courts in the current era have (wrongfully, in my opinion) used well-developed corporate law theories to better interpret modern LLC law.  Moreover, Thurlow was speaking to the pointlessness of holding corporations criminally liable — they have no conscience and therefore cannot really be punished — although for purposes of this article his quote lends credence to the fact that while LLCs are people in one context, the extent to which they are people in other contexts is limited.

For example, LLCs are incapable of determining when the boiler on a rental property needs repair.  Likewise, LLCs are incapable of fixing that boiler before it explodes and injures its tenants.      Consequently, it is the human beings behind the veil of the LLC that make those determinations and repairs; after all, LLCs do not have a mind in which to think nor fingers in which to hold a hammer.

And it is this shortcoming which creditors use to their advantage to make the argument that the owners of the LLC, and not the LLC itself, are de facto personally liable to the creditor.  This is because in certain cases, as in the example cited above, it is impossible for the LLC to have done anything wrong — it is the human being who maintains the boiler, not the LLC, and therefore it is the human being who is negligent, not the LLC.  The fact that the LLC has the power to hold title and contract with tenants, just like real people, is irrelevant.

So the next time you hear that an LLC will shield you from the claims of your creditors, I suggest you heed the advice of Edward Thurlow, 1st Baron Thurlow, and spend some time analyzing the extent to which your LLC, despite being a person under the law, will really have your back when you need it.

The LLC Is No Magic Carpet | Personal Liability Mon, 16 Jan 2017 22:26:24 +0000 Read More ...]]> I’m consulted quite frequently on the efficacy of using an LLC to protect oneself from personal liability.  I find that most people, including prospective clients and their advisors, believe the LLC to be the magic carpet that will carry them far, far away from personal liability should potential litigation start to appear on the horizon.  Well, magic is rarely a defense, and throwing your liability-prone asset into the arms of the LLC may not get you very far.

This myth is promulgated by a loose understanding of the liability protection offered by the LLC.  The LLC is certainly a behemoth of an entity that acts as a barrier between the liability-prone asset and the individual, such that claims arising from the asset are cocooned inside the LLC, thus avoiding the problem of personal liability for the individual.  However, rental property presents an interesting set of problems for the efficacy of the liability shield, problems that are too often misunderstood.

By way of example, let us look at one very common scenario where the LLC will not protect you:

Negligence and Maintenance of Rental Property

LLCs cannot hold a hammer.  LLCs do not know when the rental property is in disrepair.  LLCs are not capable of fixing anything.  LLCs do not know anything.

When something needs to be fixed, quite evidently, it is not the LLC that does it but rather (in most cases) the owner of the LLC.  Will the LLC protect you from personal liability then?  Let us explore the issue through the following hypothetical:


You put your rental property in an LLC because your accountant said it will limit your liability.  After renting it out, the tenant calls you because one of the screws holding the railing on the stairs popped out.  You visit the property the same day and make the determination that the other seven screws will still hold it securely in place, as it has done in the past, and the tenant agrees.  The handrail buckles when the tenant uses it and the tenant breaks her leg; she can never walk the same again.

The tenant consults with one of the many personal injury lawyers in town who agrees to accept her case on contingency.  The lawyer files suit against the LLC, as owner of the property, the latter of which is worth $200,000.00, and also names you personally as a defendant.  You read the complaint and come to find out that the tenant is suing you personally under the doctrine of negligence for failure to fix the handrail.  Your attempts at defending prove futile as your negligence has nothing to do with the LLC’s ownership of the property.  The jury ultimately finds that a reasonable person, in the same situation as you, would have fixed the railing.  Judgment for the plaintiff in the amount of $100,000.00.

To make things worse, you mortgaged the house for $180,000, meaning there is only $20,000 in equity left.  The plaintiff then recovers the remaining $80,000 from you personally, at best, or the entire $100,000 jointly and severally, at worse.  In this case, the LLC proved useless at protecting you from personal liability, and will continue to do so for as long you make (or don’t make) repairs to the property.

In theory, most people understand the LLC to work like this:

property in llc

Here, the owner (on the left) owns the LLC which owns the house which is rented to the tenant, with the circle representing the protective arms of the LLC that hugs in liabilities.  And this is where most people’s understanding of liability protection stops.  As explained in the hypothetical, allegations of negligence actually sidestep LLC liability protection in these types of cases because it is you that is negligent (you fixed the railing), and not the LLC (incapable of fixing the railing), as represented in this illustration:

llc personal liability

Moral of the Story

Be wary of any advice that has a just-put-your-property-in-an-LLC kind of approach.  There are many factors at play and a full discussion of your particular situation and risk tolerance, etc., is crucial to understanding the implications of the LLC approach, nearly all of which is based on tenets of the law.  In addition, liability insurance and the use of management companies should certainly form part of the discussion, as well as your observance of corporate formalities, but for now suffice it to say that the LLC, alone, is no magic carpet.


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PACC Event: Commentary on the Panama Papers Sun, 28 Aug 2016 19:51:21 +0000 Read More ...]]> I happily accepted an invitation by the Panamanian American Chamber of Commerce to briefly speak on the Panama Papers at their last networking event.  The event, appropriately entitled “Commentary on the Panama Papers,” was sponsored by the Carolina Ale House and Ron Abuelo.  There were many points of discussion, all of which I crammed into a fifteen minute conversation, but all in all I thought my comments were well received.

In fact, I was very much delighted to see the huge amount of interest everyone had in the topic and relished the opportunity to clarify Panama’s well-documented stance on international transparency and correct the misleading nature of the Panama Papers themselves, amongst other points.  For a glimpse into my own thoughts on the Panama Papers, read this article.

Below are some pictures of yours truly:

commentary on the panama papers

PACC Event

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Lawsuit Abuse in Florida Tue, 16 Aug 2016 22:18:02 +0000 Read More ...]]> Lawsuit abuse is reason for worry.  A survey conducted by the National Federation of Independent Business (NFIB), in conjunction with Sick of Lawsuits, found that 92 percent of small business owners in Florida believe that lawsuit abuse is stunting their growth.  According to NFIB’s Florida Chapter, “Lawsuit abuse is turning Florida’s business climate into a climate of fear for small business owners.”

asset protectionNow, 92 percent is a staggering number, but who doesn’t think lawsuit abuse is a problem?  The answer is obvious.  Most interesting, though, are the additional findings, and what follows is a discussion of these statistics under the purview of asset protection planning:

  • 80 percent of small business owners are concerned that their business could be the target of a lawsuit.
  • 37 percent have already been sued.
  • 53 percent have been threatened with a lawsuit in the past.
  • 26 percent have had to cancel plans to expand their workforce due to concerns about a potential lawsuit.

Note that here we are dealing with lawsuits and not solely lawsuit abuse, although it isn’t clear if these statistics distinguish meritless claims from non-meritless claims, or if lawsuits, as the survey might suggest, just means any lawsuit, abusive or warranted.  In any event, it does not matter for our purposes, so back to regularly scheduled programming.

Business owners have every right to be worried.  Lawsuits, especially lawsuit abuse, can paralyze commercial activity, thwart business development, threaten bankruptcy, and, as the survey reveals, “halt plans to expand, hire workers or offer new products.”  Moreover, the consequences of litigation or potential litigation are magnified when the business itself is the primary source of income for the small business owner.

America’s litigious society, especially when combined with the prevalence of contingency based litigation and the mindset of the personal injury attorney, can be very costly to the business owner, even if the threat of litigation never materializes.  This is why asset protection planning is so important.

Asset protection will give you peace of mind by placing your assets beyond the reach of your future potential creditors.  And this placing can be literal or metaphorical, depending on your risk tolerance, line of work, and other factors, a discussion of which goes beyond the four corners of this article.   All in all, a properly drafted asset protection structure will help you reduce risk, isolate any liabilities and, as a consequence thereto, promote settlement, frustrate the mindset of the plaintiffs’ lawyer and, at best, avoid litigation altogether.

In other words, asset protection is a type of risk management, but only so when done prophylactically.  If you find yourself worrying about lawsuit abuse, or better said being abused by a lawsuit, arming yourself with asset protection can be your sword and shield.

Hat tip: @SFBJNews

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The Mind of a Personal Injury Attorney Sat, 06 Aug 2016 22:55:02 +0000 Read More ...]]> personal injury Someone near and dear to me was involved in an accident.  Nothing life threatening, thank goodness, but severe enough for her neighbor to recommend an “excellent attorney.”  As an aside, I do wonder which statement came first: that, or hopefully, “how are you feeling?”

Anyway, welcome to America’s litigious society.  I was asked to attend the initial consultation, you know, because I am an attorney and my nearest and dearest insisted I go — no problem.  It is this conversation from which I’ll now relate.

First, hands down to the personal injury attorney; he definitely knew his stuff.  After going through his colloquy of pre-trial procedures and primer on insurance companies, I got the feeling that starring down the barrel of his gun, the gun of which took the form of litigation, would give even the most deep-pocketed and prepared individual cause for concern.  Luckily, this individual had insurance.  But how does this relate to Asset Protection?

Tip #1: Get insurance.  In most cases, insurance shifts the burden to pay from the individual to the insurance company.  In other words, in pre-litigation and in the eyes of the personal injury attorney, the litigation gun is nearly always pointed at the most wealthy, quickest paying person involved: the insurance company.  But insurance does have its policy limits, in addition to the plethora of exceptions for coverage, and if the personal injury attorney feels he can get a money judgment against the individual, too, then you may find the hyperbolic gun pointed back at you.

The key word here is feel.  As the personal injury attorney explained during the consultation I attended, what is not covered by insurance may be recovered from the individual driver.  Remember, though, that personal injury attorneys usually work these cases on a contingency basis, only earning their portion of fees upon successful recovery by the plaintiff.

Therefore, in the mind of a personal injury attorney, the individual must have money upon which to collect to make filing a lawsuit against them worth it.  If no money, well, there can be no meaningful recovery.  As eloquently explained during the consultation, you don’t want to be left with a judgment that’s not worth the paper it’s printed on.”

The Economic Analysis 

The personal injury attorney will thus engage in an economic analysis of the case.  One such analysis is as follows:

  1. Will the amount of hours spent on the case justify the recovery?
  2. If, in fact, there is a recovery, will it be possible to collect?

To sum things up, the personal injury attorney stated that an asset search of the individual driver would be necessary to avoid the quandary of the uncollectible judgment.  And in general, personal injury attorneys usually do conduct such assets searches, exploring business records and even, if so deserving, contracting the services of a private investigator.

Goals of Asset Protection

Asset protection planning will frustrate the personal injury attorney’s economic analysis of the case.

Legitimate asset protection, therefore, the latter of which can take many forms, will make recovery more difficult to achieve.  Consequently, this will have the effect of driving up the number of hours the attorney will have to spend on the case, thus increasing the likelihood that time spent will not justify the recovery (remember, attorneys work these cases on contingency).

The personal injury attorney will also be reluctant to entertain a case where collection is futile.  A good case against the defendant, meaning one that would translate into a quick settlement or surefire judgment, or one where the hours spent would most certainly justify the amount of recovery, doesn’t always mean there is a good case for collection.  After all, no attorney wants to be left with a worthless judgment that is all but impossible to collect on.

Thus, properly drafted asset protection plans frustrate the personal injury attorney’s economic analysis by leading them to the unenviable conclusion that winning will only amount to a pyrrhic victory.  Asset searches, too, may reveal attachable assets cooped up in asset protection structures that are difficult to dismantle, nipping the personal injury case in the bud before it even starts.

When done correctly, then, asset protection planning can promote settlement on terms favorable to the defendant or even avoid the case in its entirety.  Understanding the mind of the personal injury attorney should provide some insight into how this process works.

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Common Types of Creditors Fri, 03 Jun 2016 15:54:04 +0000 Read More ...]]> The United States is an extremely litigious society with result-oriented judges and juries frequently ruling in favor of the creditor plaintiff.  The judgments have the potential to bankrupt both businesses and individuals, the litigation is costly and winning may only amount to a pyrrhic victory.  Therefore, limiting your liability through asset protection planning greatly reduces your personal and business exposure to the many risks associated with living in the United States.  The following is a sample of the different types of creditors likely to be on the other side of the lawsuit:

Tort creditors

CreditorA tort is defined as an act that injures someone in some way, be it economic or physical injury.  This is usually the source of immense liability and has the potential to bankrupt individuals and halt business operations.  In addition, lawsuits are getting more creative and juries are awarding damages for the most trivial of things.  Whether frivolous lawsuits or not, the fact remains that record numbers of claims are filed each year.  In fact, the amount of tort lawsuits filed in this country, together with its high figure damage awards, has sparked calls for tort reform, aimed at reducing the ability of victims to bring a lawsuit and capping awards at damages.  This goes to show you how easy it is to get sued.

Contract Creditors

These creditors result from the non-performance of a promise, obligation or duty arising out of a contract.  In other words, breaching a contract can result in a swath of damages, including consequential, compensatory or reliance damages.  Likewise, defaulting on a loan can trigger an acceleration clause, thus prompting the bank to call for its entire amount.  Failing to pay a financial obligation or perform under a contract is not always purposeful.  Conditions and circumstances as they are, such as a decline in business operations, can lead to breaches and defaults.  Having contracts properly drafted and protecting your business assets through a wealth preservation plan will greatly help in these situations.

“Family” Creditors

Unfortunately, your family can be a major source of liability.  For example, getting a divorce can lead to the equal distribution of your assets, regardless of whether the other spouse actually owned them.  In fact, assets that were owned previous to the marriage can be converted, unbeknownst to you, into assets of the marriage, meaning the other spouse would have a claim against it (or at least an argument for a portion of its value) during the divorce proceedings.  Moreover, the actions of dependents, like children, may lead to liability for the parents.  Your business and personal assets can certainly be subject to claims should a family member, or the actions of a family member, lead to liability.

Internal Creditors

Internal creditors are those that come from within a business.  For example, a business may own investment property or have employees.  Both are liability producing assets that have the potential to put your financial future in jeopardy should problems arise.  Thus, separating your liability producing assets from your non-liability producing assets can help avoid disputes — or the fallout from disputes — arising from the internal operations of the company.

Self-dealing Creditors

These types of creditors are those that deal with the company as if it were their personal bank account.  In other words, directors and officers that self-deal with the company will put both business and personal assets at risk.  Self dealing can include commingling business and personal funds, paying personal expenses with the business’s operating account, or taking certain actions in official capacity that benefit you in a personal capacity. Thus, this will have the effect of converting a personal creditor into both personal and business creditor.

Governmental Creditors

Failing to pay annual fees and observe business formalities can lead to administrative dissolution by the state. In more severe circumstances, your company may be dissolved by the courts.  Dissolution involves winding-up the business and paying off your debts.  However, depending on the business entity, if the debts are not fully paid for, the creditors will look to you personally to satisfy the business’s obligations.  In other cases, failing to file an annual report will lead to administrative dissolution.  It is important to note that once your company is dissolved, your liability protection will dissolve as well.

The above types of creditors, by no means an exclusive list, should serve to show you the ways in which your business and personal assets can become the products of a lawsuit.  Remember, proper asset protecting planning is best done as preventive planning, and the longer you wait the more your options start to wither away.

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Arizona Charging Order Subject to Garnishment Limit Wed, 25 May 2016 05:16:48 +0000 Read More ...]]> The plaintiff successfully sued the defendant in Arizona.  The judgment required the defendant to pay restitution to the plaintiff by way of $300 minimum monthly payments.  This amount later increased to $750 and lo the defendant could no longer afford it.  The plaintiff then sought a charging order against the defendant’s limited liability company (LLC) which the court granted.

Arizona Law: Charging Order and Garnishment

Charging Order Under Arizona law, “[A] court of competent jurisdiction may charge the member’s interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest.”  A.R.S § 29-655(A).  (internal quotations omitted.)  In other words, a charging order acts as a lien against the judgment debtor’s economic interest in the LLC.  It gives the judgment creditor the right to receive any distributions that would otherwise go to the LLC owner/member.

And this is exactly what the plaintiff sought.  In rebuttal, the defendant argued that the plaintiff’s lien on profits, i.e. the charging order, should be limited to no more than 25% of his disposable earnings as Arizona’s garnishment statutes preclude the charging of 100% of his economic interest.  The court agreed: “The fact that a charging order is entered, however, does not derive any member of the benefit of any exemption laws applicable to his interest in the limited liability company.  A.R.S. § 29-655(B).  Arizona law limits garnishment to 25 percent of a garnishee’s disposable earnings.”  A.R.S. § 33-1131(B).

Because the distributions made from the LLC to the defendant constituted disposable earnings, or compensation for personal services, the court held that the 25% limitation applied to the charging order.  To put this into perspective, charging orders are usually for the entire amount of the distribution, less they be subject to an exemption against collection.

Charging Order Subject to Garnishment Limit in Florida?

Florida law provides for the charging order remedy as follows:

On application to a court of competent jurisdiction by a judgment creditor of a member or a transferee, the court may enter a charging order against the transferable interest of the member or transferee for payment of the unsatisfied amount of the judgment with interest. Except as provided in subsection (5), a charging order constitutes a lien upon a judgment debtor’s transferable interest and requires the limited liability company to pay over to the judgment creditor a distribution that would otherwise be paid to the judgment debtor.

Fla. Stat. § 605.0503(1).

This is near identical to Arizona’s charging order statute (and pretty much most other statutes in the country).  Florida’s limited liability company act also states that “[the] chapter does not deprive a member or transferee of the benefit of any exemption law applicable to the transferable interest of the member or transferee.”  Fla. Stat. § 605.0503(2).

Charging Order

Regarding garnishment, then, exemptions may apply.  Generally, the disposable earnings of the head of a family which exceed $750 a week cannot be garnished unless the garnishee agrees to it in writing.  Fla. Stat. § 222.11(b). In addition, the disposable earnings of someone other than the head of a family cannot be attached or garnished in an amount to exceed 25% of the garnishee’s disposable earnings, as per the Consumer Credit Protection Act.  Fla. Stat. § 222.11(c).

Thus, in Florida, it may be that if the judgment debtor of the LLC can prove that his income or distributions from the LLC are in fact disposable earnings, or compensation for personal services, the defendant may be successful in limiting the effect of the charging order to 25% of the earnings.  Either way, though, and as an aside, garnishment cannot be used as a collection method to satisfy a judgment from a member’s interest in or distributions of a limited liability company.  The charging order, as per Fla. Stat. § 605.0503(3), is the sole and exclusive remedy by which a judgment creditor may satisfy the judgment, except in the case of the single-member LLC (SMLLC).

Nonetheless, if the facts are in the defendant’s favor, it is likely that a judge would allow the use of the garnishment limit of 25% to weaken the effect of the charging order.  After all, the debtor/member cannot be deprived of his right to claim the benefit of any exemptions, and garnishment is most certainly subject to exemptions.

A Note About Single Member LLCs in Florida

In Florida, only multi-member LLCs enjoy the charging order exclusive remedy.  Single-member LLCs are not so fortunate

If a judgment creditor of a member or member’s transferee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of the limited liability company or the transferee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale.

Fla. Stat. § 605.0503(4).

In English, this means that a creditor of a single member LLC can skip the charging order and foreclose on the debtor’s LLC membership interest, gaining both economic and management rights in the company.  In essence, the creditor becomes a member with full management rights and, for example, can choose to dissolve the LLC, empty its bank accounts and sell any of its assets to satisfy the judgment.

On the contrary, the Arizona LLC statute simply states that a charging order is the sole and exclusive remedy of an LLC without differentiating between multi-member and single-member LLCs.  Note, though, that this ambiguity in the Arizona statute makes it uncertain as to whether or not a judge would uphold the charging order exclusive remedy for a single-member LLC in Arizona; this ambiguity is absent in Florida’s LLC act.

Thus, if you own a single-member LLC in Florida, a creditor is likely to foreclose your entire LLC interest, irrespective of whether or not your earnings from the company constitute disposable earnings, and exercise its newly acquired management rights in ways that prejudice your best interest.

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Will The Court Uphold Your Homestead Exemption? Sun, 01 May 2016 18:25:40 +0000 Read More ...]]> Homestead ExemptionFlorida’s constitutionally mandated homestead exemption is the holy grail of exemption planning.  Its purpose is to protect the sanctity of the home by providing a shelter for the owner and his family immune from the money judgments of creditors.  In other words, the homestead is exempt from forced sale in all but three limited exceptions: (1) taxes; (2) contracts to repair, improve or purchase the property; and (3) obligations owed to those who perform labor on the realty.

Naturally, then, the homestead has been the bane of creditors and a source of frustration for the judicial system.  Cunning debtors, in an attempt to circumvent a forthcoming or current court ordered obligation to pay, are quick to convert any nonexempt assets available for satisfaction of the judgment into exempt assets unavailable for execution; the homestead is the asset of choice.

Thus, unless you’re a creditor that falls into one of the exceptions listed above, or the legislature decides to amend the constitution (they didn’t when the issue came up), defeating the claims of your creditors vis-à-vis the homestead is constitutionally permissible, however loathe that may seem.  It’s not as simple as it sounds, though, and while anyone in theory can claim homestead, the minutia involved in whether or not your claim will hold up in court on a creditor’s objection is worthy of analysis.

Intent to Hinder, Delay or Defraud the Creditor

It’s natural to panic when you get sued or at the least start to worry when a potential creditor appears on the horizon.  When such a situation arises, many people foolishly believe they can outsmart the creditor by transferring their assets outside of the creditor’s reach, e.g to a spouse or trust in the United States, and effectively prevent the creditor from collecting; this is a fraudulent transfer.  See Fla. Stat. §726.105.  Another situation involves the same person converting a nonexempt asset into an exempt asset, e.g. cash to an annuity, again thinking it will work in their favor; this is a fraudulent asset conversion.  See Fla. Stat. §222.30. 

These types of transfers do not work as the statutes allow the creditor to both sue the debtor who transferred or converted an otherwise attachable asset and to recover it as well.  The strength of the creditor’s claim, of course, depends on timing: Did you make the transfer during the pendency of litigation?  After the judgment?  Or many, many years before any present or future creditor appeared?  Thus, if sued under a fraudulent transfer or fraudulent conversion theory, coupled with the timing of your transfer (which goes to intent), the creditor may have available a plethora of remedies that they could use to unwind or dismantle the transfer, even up to suing the recipient itself, all under the guise that the debtor engaged in fraudulent conveyance with the intent to hinder, delay or defraud the creditor.

But the focus of this article is homestead.  Query: Where the debtor acquires the homestead using nonexempt assets with the specific intent to hinder, delay or defraud a creditor, in direct violation of Florida’s fraudulent transfer and fraudulent conversion laws, will the homestead protection still apply and thus be exempt from forced sale by the creditor?  Absolutely, per the Supreme Court of Florida.

The Power Of The Homestead Exemption: Intent Does Not Matter

The seminal case on the topic decided by the Supreme Court of Florida is Havoco of America, Ltd., v. Hill.  There, the creditor obtained a $15,000,000 judgment against the debtor on December 19, 1990, and the judgment became enforceable shortly thereafter.  On December 30, 1990, a mere eleven days after the judgment was entered, the debtor, from Tennessee, purchased a homestead in Florida intending to make the property his retirement home.  The creditor objected, on grounds that the debtor purchased the Florida home with the sole intention to defraud the creditor, and as such the debtor should not receive the benefit of the constitutionally mandated homestead exemption.

The Supreme Court, faced with the question of whether or not the debtor should enjoy Florida’s homestead exemption, held quite concisely as follows:  “The transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors is not one of the three exceptions to the homestead exemption provided in article X, section 4.”  The Court reasoned that despite the debtor’s egregious conduct and clear attempt to skirt the judgment, the Court is powerless to depart from the plain language of the Florida constitution:

There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person. (emphasis supplied.)

Art. X. Section 4.

In other words, because the creditor in Havoco was not the type envisioned by the constitution to be excepted from the homestead exemption, the creditor could not force the sale of his homestead property, despite the debtor’s obvious and successful attempt to hinder, delay or defraud the creditor.

The Court also noted that legislative enactments, such as Florida’s fraudulent transfer and fraudulent conversion statutes, cannot alter the express or implied provisions of the constitution.  Consequently, Florida’s statutory fraudulent transfer and fraudulent conversion laws do not apply because “homestead arises solely under the Florida Constitution and, therefore, supersedes any attempt by the legislature to deprive the debtor of the ability to exempt his or her homestead through general legislation.”

So, if you get sued just move to Florida, right?  Not exactly.  While Florida’s homestead exemption is generous to debtors and hostile to creditors, a body of case law has developed in equity, or fairness, that speaks to the injustice of allowing the homestead exemption in certain cases.  As a result, it can be said that the Florida Supreme Court actually engrafted a fourth exception to the exemption on forced sale.

Funds Used To Purchase Homestead Traced To Fraud

That’s right.  Florida’s homestead exemption is not absolute — although it is near-absolute — and the particular facts surrounding the issue presented may lead a court to deny the homestead exemption outright or allow for the imposition of an equitable lien.  Florida case law is sparse on the subject of equitable liens and homestead, although as stated in Havoco, “the imposition of an equitable lien in circumstances suggesting the use of fraud in the acquisition of the homestead [is] not a remedy of recent vintage.”

In 1925, a debtor employee embezzled funds from his company and used those funds to make improvements to his homestead.  The Supreme Court of Florida rejected the debtor’s argument against the imposition of an equitable lien, noting that the debtor was a fiduciary who used his position of trust in the company to steal the funds.  As such, “the debtor cannot enjoy tortiously acquired property by claiming it as a part of his homestead exemptions.”  The Court allowed the equitable lien.  Jones v. Carpenter, 90 Fla. 407, 106 So. 127 (1925).

In another case, the debtor forged a mortgage instrument and used the proceeds to pay down another mortgage on his homestead.  The Florida Supreme Court, correctly recognizing that the funds invested in the homestead were sourced to the fraudulent mortgage, allowed the creditor to obtain a lien on the property.  The Court reasoned that when equity, or fairness in the law, is in issue, the courts have “not hesitated to permit equitable liens to be imposed on homestead beyond the literal language” contained in the Florida Constitution.”  Palm Beach Savings & Loan Ass’n v. Fishbein, 619 So.2d 267,270 (Fla.1993).

These cases laid the foundation for the following rule, dubbed the “equitable lien” test: an equitable lien may be imposed on the homestead if (1) the funds used to purchase, repair or improve the property are (2) derived from fraudulent activity or egregious conduct. In re Gosman, 362 BR 549, 553-554 (Bkrtcy. S.D.Fla. 2007).  Thus, when the funds used to purchase the homestead really belong to someone else, or were illicit from the beginning, equity becomes an issue and the person objecting to the exemption may have a right to an interest in the property.  Failing that, though, the Florida Supreme Court is clear: specific intent to hinder, delay, or defraud your creditor by purchasing a homestead is not sufficient in itself to force its sale.

Judgment Recorded Before Claim Homestead

Recording a certified copy of the judgment in the official records of the county where the property is located establishes a judgment lien against real property.  Fla. Stat. §55.10.  Thus, if a judgment lien is recorded before the debtor claims homestead, the creditor may be able to obtain a levy pursuant to Florida Law.  In other words, as stated in Wechsler v. Carrington, “as a result, preexisting liens are excepted from Florida’s homestead exception.”  214 F. Supp.2d 1348, 1352 (S.D. Fla. 2002).

The clever debtor would just move to a different county where the creditor has yet to record their judgment.  However, clever debtors and ambitious creditors are not mutually exclusive.  To that extent, the creditor can also record the judgment anywhere they think you may own property in the future.


Florida’s homestead exemption is hailed as one of the most solid in the country.  Its constitutionally mandated limitless exemption is liberally construed in favor of the debtor, not the creditor.  Without allegations of fraud or egregious conduct, coupled with a questionable source of funds used to acquire the homestead to begin with, not even the debtor’s admitted intent to defraud the creditor is sufficient to subvert the homestead protection.

However, this is assuming that you even have homestead to begin with.  Although self-executing, if the requirements for homestead aren’t met, then quite obviously you can’t claim the exemption.  In addition, the bankruptcy code trumps Florida’s homestead pursuant to the Supremacy Clause of the U.S. Constitution.  If forced into an involuntary bankruptcy proceeding, for example, the homestead exemption (at the time of this writing) is capped at $160,375 if you bought the residence within 1,215 days before filing; there are exceptions to this too, however.

It should also go without saying that successfully exempting your homestead in Florida from forced sale does not make the judgment disappear.  In fact, you’ll still be liable for the full amount owed and if you try and shield otherwise attachable assets by means other than a homestead, you can find yourself sued again under a fraudulent conveyance theory.  Florida’s homestead is a powerful tool, no doubt about it.  If not used correctly, though, don’t expect the courts to have your back.

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The Panama Papers: What You Don’t Know Wed, 20 Apr 2016 18:40:23 +0000 Read More ...]]> Panama Papers

The Panama Papers:

A trove of documents leaked from a Panamanian law firm brought the offshore world right to your doorstep.  The published files — 11.5 million of them — exposed the secret financial dealings of some prominent figures and revealed webs of corruption, money laundering and fraud.

According to The Economist, the documents show “the offshore holdings of 140 politicians and officials, including 12 current and former presidents, monarchs and prime ministers.”  In addition, it is alleged that the ill-gotten wealth acquired from transacting with “rogue states, terrorists or drug barons” was hidden behind anonymous corporations with fake directors or shareholders (“nominees”).  Close associates to Vladimir Putin are claimed to have shuffled billions offshore and the Prime Minister of Iceland has already resigned.

This came as a shock to the international community and naturally all eyes turned to Panama; hence, the Panama Papers.  Journalists and pundits alike took to the offensive and criticized Panama for its friendly tax policies and lax financial secrecy laws that facilitate tax evasion and money laundering.  In fact, OECD Secretary-General Angel Gurría recently stated that “the ‘Panama Papers’ revelations have shone the light on Panama’s culture and practice of secrecy.”

And this is what the media has focused on.  But is Panama really to blame?

Panama’s Commitment to International Transparency

The Panama Papers left in its wake a Panama striving to save its reputation.  Panamanian Finance Minister Dulcidio De La Guardia affirmed that Panama is “working very closely with the OECD” and has pledged to accelerate talks on financial transparency and compliance.  De la Guardia also noted that just last year at the United Nations Panama promised to adhere to global requirements.  In fact, he continued, “the international community should recognize what Panama has done in the last 18 months.”  In reality, though, Panama should be recognized for how far it has come since the dark days of the eighties.

Panama has made great strides since the days of Noriega and his “narco-kleptocracy” — in the words of John Kerry — that turned this tiny Central American nation into a hotbed for money laundering and drug trafficking.  Just recently, the Financial Action Task Force (FATF), an inter-governmental body charged with setting the standard on combatting money laundering, removed Panama from its “gray list”:

The FATF welcomes Panama’s significant progress in improving its [anti-money laundering] regime and notes that Panama has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2014.

In fact, a 2015 U.S. State Department Report on money laundering and financial crimes commended Panama on its efforts.  The report concluded that Panama’s current action plan will improve its legal and regulatory frameworks in the fight against money laundering and create a more transparent financial network.  A few years earlier, the Organization for Economic Co-operation and Development (OECD), removed Panama from its own “gray list” for substantially implementing international standards on the exchange of tax information.  In addition, Panama has signed numerous bilateral Tax Information Exchange Agreements (TIEA), including with the United States, and has largely distanced itself from its 1980s image.

As part of its commitment, Panama abolished bearer shares, or shares that conceal beneficial ownership, and demanded that all such shares issued previous to the law be handed over to an authorized custodian.  The purpose, of course, was to assist the authorities in prosecuting tax evasion and money laundering cases against the beneficial owners of Panama’s anonymous corporations.

Clearly, Panama has pleased the international community and is making due on its commitment to combat money laundering and tax evasion.  The Panama Papers have created a skewed perception of this and have sparked questions about the efficacy of the laws in place — the same laws hailed as steps in the right direction.  That is why the advent of the Panama Papers raises an important question:  Is Panama really to blame?  Let’s look at two very important people involved in the offshore world: banks and law firms.

The Banks

Panama Banking Sector

Panama Banking Sector

Opening a bank account in Panama is actually quite difficult for foreigners.  The application process can last from two weeks to one month and banks are under no obligation to accept you as a client.  Applications are quite commonly over thirty pages and lawyers are frequently used to help navigate the process.  A personal interview is almost always required and banks are obligated to keep records on the ultimate beneficial owners (the real owners) of the company.

In fact, Panama created a Superintendency of Banks to “oversee the preservation of the soundness and efficiency of the banking system…in order to maintain and strengthen international financial integration.”  Law 2 of 2008 drives home the Superintendents mission.  For example, all banks are subject to inspection and supervision by the Superintendent and must confirm that they abide by the proper legal and regulatory framework established to prevent money laundering.  Banks must also establish policies and procedures that will allow them to know and identify the client (KYC laws).

The KYC laws are actually quite onerous.  For that reason, I only offer for purposes of this article select provisions of Law 23 of April 2015, in part aptly named, “Adopting Measures for the Prevention of Money Laundering.”  Law 23 echoes Panama’s principal banking law — Law 2 of 2008 — and establishes the basic requirements for due diligence on natural and legal persons (people and companies, respectively).

The banks must establish a financial profile of the client (or the real owner) upon opening the account and take reasonable measures to ascertain the source of funds.  When the client is a company, the identity of all officers, directors, legal representatives, registered agents and authorized signatures must all be verified.  In other words, whether the client is a corporation or human being, the real and actual owner must be identified.  If not, well, the bank is required to cease business operations upon “persisting doubt” of the persons’ identity.  High ranking public officials, including their associates, are more harshly scrutinized.  In addition to ascertaining the client’s identity, the banks are required to “know the nature of the business of the customer” and, in a Patriot Act kind of way, continuously monitor the business relationship with a special focus on any transaction over $10,000.00.

Banks, though, will never know the client as well as the lawyers do.  In fact, hiring a lawyer is usually the first step in the process as opening an offshore account involves a labyrinth of documents best suited to be handled by an attorney.  Thus, verifying the identity of the client actually begins with the lawyers – the onus is on them.

The Lawyers

Panama Bar Association

Panama Bar Association

As alluded to previously, the first line of defense in the global war against money laundering and tax evasion is the lawyers.  On the one hand, clients are much more likely to be transparent with their lawyer than with their banker.  On the other hand, the attorney-client privilege facilitates this trust and protects — by law — certain confidences of the client.

Lawyers, then, find themselves in the unique position of having access to highly personal and even incriminating information.  Consequently, they are much more adept at ascertaining the true identity of the client.  This is why the lawyer is such an important player in the prevention of money laundering and tax evasion

Lawyers in Panama, like the United States, must uphold the rule of law and practice in accordance with the Code of Professional Responsibility.  Ethics violations are pursued by the Panama Bar Association and discipline is administered by the country’s Supreme Court.  Lawyers are also subject to the same due diligence and KYC requirements imposed on banks as detailed in Law 23 of April 2015 (talked about above).  Unlike banks, though, lawyers and law firms are subject to more rigorous KYC obligations.

Generally, Law 2 of February 2011, “which regulates the measures to know the client for registered agents of juridical entities,” requires lawyers to do just that: know-your-client.  The registered agents, of whom can only be lawyers or law firms, must take appropriate actions to identify the client or beneficial owner in order to prevent “crimes related to money laundering, financing of terrorism, and any other illegal activity.”   In addition, the registered agents are also bound by any international treaties or agreements ratified by Panama.

Specifically, the law goes into great detail on what constitutes acceptable measures of compliance, and for those reasons what follows is a select bunch: The lawyers (as registered agents) must identify their client with documents, data or information obtained from reliable and independent sources.  If the client is acting on behalf of a third party, or is a corporation itself, all measures must be taken to identify both the third party and the client, including, but not limited to: (1) bank and commercial references; (2) copies of passports or national identification; (3) and copies of the latter for all shareholders of the client — if a corporation — when direct or indirect ownership is at least 25% of the capital.  If bearer shares are involved, the registered agent must ascertain the real identifies of those who hold the stock certificates.  The information and documents obtained must be kept up-to-date and any changes in ownership of the company would require the registered agents to know the new owners.

Until the client has been sufficiently identified, it is impermissible to render services as a registered agent/lawyer — save certain exceptions — before due diligence has been completed.  Policies must be established, as with the banks, and certain employees trained on proper KYC implementation and record keeping.  As always, competent authorities, such as the Attorney General, may request information regarding the client and demand any document or data used by the attorney in compliance with the Law.

The list goes on.


There is no doubt that financial institutions and lawyers are key players in the fight against money laundering and tax evasion.  As discussed, Panama has the proper legal and regulatory framework in place to ensure compliance with internationally accepted standards on transparency.  In this regard, Panama’s anti-money laundering and tax evasion laws are actually a lot stronger than many others in the world.  Let’s add some proportion to this and take a brief look at the United States:

During the seventies and eighties, Delaware capitalized on the heyday of globalization by advertising its services as a pioneer in offshore secrecy incorporations.  Despite marginally cleaning up its act, the United States is still known as the largest tax haven in the world.  The Tax Justice Network, a group committed to raising awareness on tax evasion and financial transparency, does not look favorably upon the United States.  In its 2015 Financial Secrecy Index, which ranks countries based on their secrecy and scale of offshore financial activities, the United States placed 3rd, only losing to Switzerland and Hong Kong.  Panama, however, comfortably sits in 13th place, far below the United States, and countries like Germany and Japan — surprisingly — are considered far more “secret” than Panama.

Yet, the Panama Papers paint a gloomy picture of the offshore world in Panama.  On the contrary, the Panamanian system is not the financial getaway car of the crooks and cronies.  Panama has made a concerted effort to combat financial crimes on the international, national and local level, and has the mechanisms in place to prevent it.  It is the banks and lawyers, though, who are charged with following through — again, the onus is on them.  Lawyers are humans, however, and some may find that ethics and the rule of law impede their own self-serving interests.

And this is what the fallout from the Panama Papers should focus on.  Instead, quite obviously influenced by sensationalism, the Panama Papers seek to question the integrity of the entire country by the actions of only one law firm.  In reality, Panama’s culture and practice of secrecy have nothing to do with the situation.  One law firm’s alleged culture and practice of flouting the law have everything to do with the situation.

Is Panama really to blame?

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