Under the law, the Madoff trustee has two years to file lawsuits in order to collect more funds for the bankruptcy estate. That two years expires in a matter of days, which is why the Madoff trustee has commenced so many litigations within the last few days, including lawsuits against UBS, HSBC and JP Morgan. Also on the trustee’s radar: Madoff investors who have received monies, whether returns of their principal investment, or distributions from the Madoff funds. Both types of payments from Madoff to the investors are reachable under the “clawback” power of the trustee. Even if the investor has lost money in the Madoff Ponzi scheme, any payments or distributions received from Madoff are still vulnerable to clawback!
Is the Madoff victim thus powerless against the reach of the trustee? Should a Madoff victim who has already lost money now sit back and allow the trustee to take away whatever payments the victim may have received?
We wrote the following in 2009, and it still applies today:
For those people who received distributions from Madoff, the key approach is to convert any funds received into exempt assets, i.e., exempt from the “clawback” reach of the trustee. A 401(k) is one exempt asset, and I’ve recently read one asset protection attorney counsel that Madoff distributions be placed in a 401(k) to avoid the clawback reach of the trustee. The problem with that strategy is that extraordinary contributions to a qualified plan can be clawed back as fraudulent conveyances. To illustrate, if a person has been making annual $10,000 contributions to her 401(k), and suddenly now deposits $100,000, the new large deposit might be challenged by the trustee as made with specific intent to hinder the trustee from reaching those assets. Unless the investor could show some supervening legitimate purpose for the extraordinary deposit, the trustee would likely be successful in clawing it back. Additionally, contributions to 401(k)s and other qualified plans usually have annual limits that are too small to offer any significant protection to a Madoff investor.
Alternatively, funds received from Madoff might be used to purchase annuity policies or life insurance policies, which are exempt assets in many states. Although this strategy is still vulnerable to a fraudulent conveyance claim by the trustee, the investor may defend his action as legitimate financial or estate planning, thus presenting a possible supervening legitimate purpose. The question becomes: who the judge believes. Thus, even this strategy offers no guaranty that the funds in the policy would be exempt from clawback by the trustee.
One extreme strategy would be to take the funds, buy a house in Florida and use it as a primary residence. Florida law allows an unlimited “homestead” exemption, whereby one’s primary residence is immune from the reach of a creditor. OJ Simpson availed himself of this exemption after losing the civil lawsuit brought by his victim’s family. He moved to Florida and bought a mansion, which was exempt from attachment by his civil creditors. In comparison, New York’s homestead law only exempts an owner’s first $50,000 of equity in a primary residence. (NY CPLR §5206(a)).
A more reasonable and equally effective strategy would be to purchase a foreign annuity or life insurance policy. As noted above, such policies are normally exempt, but are vulnerable to a fraudulent conveyance claim. However, if the policy is issued by a foreign company, and assets are wired offshore to that company, those assets would be outside the jurisdiction of the U.S. court system, and beyond the reach of the trustee. If the assets are held in a secure foreign jurisdiction, one with strong local asset protection laws, the clawback will be thwarted. Favorable laws in such a jurisdiction would include non recognition of foreign (i.e., U.S.) court judgments and orders, anti duress provisions and a short statute of limitations period in which to bring a challenge. Of course, this strategy should only be employed with the assistance of a qualified attorney, one with proper experience with the foreign jurisdiction. Irrespective of the asset protection benefits of such an offshore strategy, compliance with U.S. tax laws, i.e., proper disclosure to the IRS and payment of taxes due on foreign income, must always be followed.
Please contact us to discuss asset protection strategies.