Sara Lawrence was a popular and well-respected member of the New England social scene. Tall, statuesque and elegant, she was on the invitation list of every important charitable event in the Boston area and, indeed, often on the organizing committee. Sara’s passion was horses, and she maintained several large, well-manicured stables and equestrian centers in rural Connecticut, where she raised and boarded thoroughbred horses, taught riding and jumping to the local gentry, and gave free rides and lessons to local underprivileged and disabled children.
Sara employed Luke as a groom and stable-hand at one of the equestrian centers. Luke had a young daughter who had a chronic debilitating illness which required frequent treatment at a hospital in Boston. Luke had little money and no car. The frequent medical trips from rural Connecticut to Boston by train and several buses were expensive and physically taxing on Luke’s daughter. Sara felt sorry for them and decided to buy Luke a used car. Sara took title to the car in her name, intending to deduct a little bit from Luke’s wages each week until the car was paid off, at which time she would transfer the title to Luke.
It takes little imagination to guess what happened next. The first night he had the car keys, Cool Hand Luke drove to a local bar, got drunk and on the way home crashed head-on into a car full of teenagers coming home from a basketball game. One teenager was killed, two others suffered permanent injuries.
Luke and Sara were co-defendants in the ensuing lawsuit; Luke as driver and Sara as owner of the car. Luke had no assets, so the plaintiffs paid little attention to him. Sara was insured and her insurance company “offered the policy;” that is, it offered to pay the full amount of the policy’s liability coverage – $1,000,000 to each of the three victims in settlement. The plaintiffs, however, targeted Sara, the wealthy socialite, and her assets. They rejected the insurer’s settlement offer and continued their lawsuit against Sara, demanding $5,000,000 in damages for each of them.
Sara retained us, and we developed a three-stage strategy to protect her assets. First, Sara transferred her various real estate holdings (home, vacation home and three equestrian centers) to family limited partnerships. Each property was transferred by deed to a separate partnership in order to prevent future liabilities arising from one property from affecting the other properties. Relevant state law specified that assets held in a limited partnership are not the assets of the individual partners and may not be attached by a personal creditor of an individual partner. Once title passed to the family limited partnerships, Sara’s properties would be protected from her future judgment creditors. However, as general partner of each of the partnerships, Sara would continue to maintain exclusive control over the assets of the partnerships – her properties. The partnerships also had an additional benefit: estate planning. Over time, Sara could reduce her taxable estate by making gifts of limited (non-voting) partnership shares to her bother, sister, nieces and nephews, while always maintaining control over the partnership assets as general partner. Most importantly, this estate planning aspect would give Sara a strong defense of “other valid purpose” in the event the plaintiffs might claim “fraudulent conveyance” – that Sara transferred her properties to the family limited partnerships with specific intent to hinder the plaintiffs from taking those properties, once the plaintiffs won a judgment. To further support her estate planning purpose, we also prepared related estate planning documents for Sara – a family trust, last will and testament, and living will.
Second, Sara cashed in her stocks, bonds and other liquid assets and transferred the proceeds to an asset protection trust registered in Belize. Upon our advice, she chose Belize because of its strong asset protection statutes, its refusal to recognize US civil judgments, its political democracy and economic stability.
Third, Sara stripped the equity out of the real estate owned by her family limited partnerships. She took mortgages on each property at the maximum available amount and transferred the mortgage proceeds to her Belize trust. At her request, the trustee (a Belizean professional trust company, bonded, insured, licensed and government regulated) hired Credit Suisse Private Bankers as investment managers over the substantial trust assets. Credit Suisse invested the assets in lucrative European investments not generally available in the US, which covered the mortgage interest. This also gave Sara an “other valid purpose” defense for the trust, in the event of a fraudulent conveyance claim: financial planning – the ability to invest in lucrative foreign investments that are generally not available to US persons.
When this strategy was completed, Sara had no attachable assets, although she continued to control all of her real estate holdings and continued to receive cash distributions from her Belize trust.
After several months, Sara’s attorney requested a settlement conference with the plaintiff’s attorneys (who were on a 33% contingency retainer; i.e., they received no hourly fees, but would receive 33% of whatever they might collect from Sara if they win or settle the case). At the conference, Sara’s attorney politely (and ruefully) stated that Sara had no attachable assets against which to collect a negligence judgment. He explained that all real estate was owned by statutorily protected family limited partnerships and all money was owned by a foreign trust registered in a jurisdiction that would not recognize their US judgment.
Plaintiff’s attorneys angrily threatened to bring a fraudulent conveyance lawsuit against Sara, both in the US to undo the family limited partnerships and in Belize to undo the trust.
Sara’s attorney smiled and calmly pointed out that:
1. The negligence case might take several years; after that, the fraudulent conveyance case in the US might take another few years. Plaintiffs might win but, on the other hand, they might lose. Sara had a defense of “other valid purpose” – estate planning, which has often been recognized by courts in rejecting fraudulent conveyance claims. In any event, even if plaintiffs won a fraudulent conveyance claim and foreclosed on Sara’s properties, they would have to pay off the banks’s mortgages, which exceeded the likely proceeds of a foreclosure sale. Nothing would be left for plaintiffs or their attorneys.
2. Under Belize law, plaintiffs had no standing to bring a claim based on a US judgment. They would first have to re-litigate the negligence action in Belize, using Belizean lawyers who are prohibited from contingency retainers; they must be paid hourly and in advance. In the unlikely event the plaintiffs win such a negligence action in Belize, only then could they bring a Belize fraudulent conveyance action against the trust. But by then, the fraudulent conveyance case would be barred by Belize’s short statute of limitations. Additionally, Belize courts would not recognize US civil judgments, and the Belize trustees would refuse to return trust assets to the US.
Sara’s attorney quietly suggested that the plaintiffs’ attorneys might want to reconsider the insurance company’s earlier offer of settlement. Three Million Dollars now was better than Zero Dollars later, and 33% of Three Million Dollars now was better for the attorneys than 33% of Zero Dollars later. He closed his briefcase, politely excused himself and left.
One month later, plaintiffs accepted the insurance company’s offer and released Sara from all further liability. Sara mounted her favorite horse and rode off into the sunset.