Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors
During 2013, we have seen the growth of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals. This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. As investors seek to blame others for investment losses, they are now suing fund managers and investment advisors personally, in addition to the fund itself or the advisor’s employer. In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but a phenomenon that we are seeing in increasing numbers.
In addition, government investigation and prosecution of financial firms adds a further challenge for investment advisors and financial professionals. In 2013, the Government investigated and prosecuted JPMorgan/Chase, SAC Capital, Bank of America and others. Individual professionals can be investigated and charged, in addition to the firm or fund itself. A finding of wrongdoing, or criminal charges, could form the basis of a civil suit by investors against the investment advisor or money manager.
While in the past, hedge fund managers and investment advisors could take comfort in the indemnification offered by their funds or investment houses, these days, adequate indemnification is far from certain. For one thing, indemnification would not occur in case of negligence or activity determined to run afoul of law, or even activity deemed to be contrary to internal fund or investment house policy.
In addition, indemnification is “after-the-fact”; it seeks reimbursement after you have already lost your assets. Proper asset protection is pre-emptive; it is designed to discourage lawsuits in the first place and to protect your assets from future claimants. It eliminates the need for indemnification or, at the least, may significantly reduce the amount of indemnification needed.
Proper asset protection strategies offer financial professionals piece of mind and provide the protection their hard-earned assets need to withstand the inevitable attacks by investors looking to blame someone else for their investment losses.
Labor and Wage (FLSA) Lawsuits are the Latest Threat to Business Owners, Who Respond by Protecting Assets
We have, for many years, counseled professionals in high liability fields (e.g., medicine, finance, real estate) on how to protect their assets from future litigation and creditor threats. We have also observed how new threats of litigation arise, and how to properly guide a new class of clients on protection from such new threats. Over the last few years, we have witnessed a new target of litigation: owners of small businesses such as restaurants and construction companies, who employ unskilled labor. Their employees are now incentivized and encouraged to sue the business owners for alleged violations of the federal Fair Labor Standards Act (FLSA) and parallel state laws. Aggressive lawyers entice groups of workers to file lawsuits on a contingency basis – – no cost to workers at all; the lawyer will receive one-third of the award if they win, nothing if they lose. Many millions of dollars have been awarded by courts for failure to pay overtime and properly collect and distribute tips. Such judgments also often include heavy punitive damages. Business owners are the latest class of litigation targets who must proactively protect their assets from such potential lawsuits and other challenges.
We advise business owners from restaurateurs to construction contractors on how to protect their assets. The asset protection acts as a preventative, discouraging the plaintiffs from proceeding with litigation and providing our clients with tremendous leverage to force a settlement on favorable terms.
It should also be noted that the Department of Labor’s Wage and Hour Division has added 250 new field investigators to examine businesses for noncompliance on wage and hour labor issues.
Note also that a new New York law, the Wage Theft Prevention Act (WTPA), took effect on January 1, 2012 and imposes additional requirements on employers.
In 2013, we represented the owner of a major construction company who was a defendant in an FLSA lawsuit brought by a group of former employees. We protected all of his personal and business assets by transferring them to a network of family limited partnerships (FLPs) as part of a comprehensive estate plan. Although he lost the FLSA case and had a $4 million judgment entered against him, the FLPs provided sufficient leverage to force a negotiated settlement for significantly less than half of the judgment.
Doctors: Protect Your Assets Because Insurance Fees Are Getting Higher
Medical practitioners should be aware of recent developments which mandate proper asset protection.
In March of 2009, former New York State Governor Patterson and the NY legislature agreed to remove the limitations on legal fees for medical malpractice attorneys. The result is larger legal fee awards for plaintiff lawyers who target doctors, hospitals and other medical professionals. Insurance companies pay bigger legal fee awards, which causes medical malpractice insurance rates to rise, yet again.
Plaintiffs already have an incentive to sue a doctor: doctors are perceived as wealthy deep pockets. Moreover, plaintiffs often believe that a doctor’s insurance company will offer some money in settlement to make the case go away. Now, after the legislative change removing limitations on legal fee awards, plaintiffs’ attorneys have even greater incentives to sue doctors.
Doctors must take steps to protect themselves from these lawsuits.
Domestic asset protection (for example, a family limited partnership) will, if done properly, be 100% effective against all future claims, and should serve to discourage future lawsuits. Tax compliant offshore asset protection will absolutely protect assets against all claims.
Asset protection is designed to give defendants (including doctors and any other professional in a high-liability industry) leverage to force a favorable settlement within the parameters of their malpractice coverage. One caveat: it is imperative that physicians protect themselves before the commencement of a lawsuit.
Asset Protection for Landlords, Property Owners and Real Estate Investors
Landlords continue to face substantial increases in liability exposure as a result of a 2008 New York Court of Appeals decision, Sanatass v. Consolidated Investing Co., which expanded the scope of the “scaffold law”. Now, property owners are absolutely liable for elevation-related injuries (those involving the use of ladders, scaffolding, hoists, etc.) on their property. The case held that a property owner was liable even when the contractor was hired by a tenant in direct violation of a lease provision prohibiting the tenant from altering the premises without the property owner’s permission. Most importantly, this liability is absolute; i.e., the owner is liable even if, as in this case, the owner did nothing wrong!
This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges from slips and falls, lead paint, mold, asbestos, fiberglass, Chinese drywall and other lawsuits. In addition, the current recession, the decline in property values and the increase in vacancy rates create an increased risk of lawsuits from lenders, regulators and unhappy investors. Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take proactive steps to protect their assets.
Effective asset protection will discourage lawsuits and offer security against future claims. It will also allow landlords, doctors and other professionals to reduce the amount of liability insurance they must carry to normal, affordable levels.
Protecting Assets From Divorce: New Law Requires Anticipatory Planning
In New York, under a 2009 court rule and a parallel new state law, a couple’s assets are automatically frozen upon the filing or receipt of a summons in a matrimonial action. In 2010, New York State passed “no fault” divorce law. This new regime necessitates advanced asset protection planning if divorce is contemplated.
In the past, if one spouse wanted to protect assets from impending divorce, he or she could do so, provided he or she had not already received a Restraining Order from a court. Under the new law, as soon as one spouse files an action for divorce, marital assets are automatically frozen. The new rule restraining asset transfers is binding on a plaintiff immediately when the summons is filed, and on a defendant upon receipt of service of the summons. Thus, persons facing the threat of divorce must plan ahead. The bottom line: Don’t wait for a divorce; if the marriage is shaky, protect your assets well in advance.
Limited Liability Company (LLC) Weakness
We note the recent court rulings that question the efficacy of LLCs for asset protection purposes, especially single-member LLCs, which are treated as disregarded entities. If you have an LLC, you should give thought to whether you are sufficiently protected. Other entities and asset protection structures may offer better asset protection than LLCs. Contact us for assistance.
Domestic Asset Protection Trusts
In 2013, Ohio became the latest U.S. state to pass legislation offering domestic asset protection trusts (DAPTs). The Ohio Asset Management Modernization Act (Legacy Trust Act) follows states such as Nevada, Alaska and others which theoretically allow for an asset protection trust to be established domestically rather than moving assets offshore to a jurisdiction such as Liechtenstein, Antigua, Belize, etc.
However, we continue to question the effectiveness of a DAPT. The “Full Faith and Credit” clause of the U.S. Constitution requires a state court to recognize and enforce a judgment from a second state court. Thus, according to the U.S. Constitution, Ohio would be obligated to enforce a judgment from a New York court that a transfer of assets to an Ohio trust was a fraudulent conveyance upon the creditors of the trust grantor. To date, we have established a DAPT for a client who lived within a state that allowed for a DAPT, for property also located within the state. For most clients, however, we question the effectiveness of DAPT legislation.