Resisting Fraudulent Transfer Temptations — Family Businesses

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Resisting temptation (photo by Marilyn Swanson)

By: Donald L. Swanson

About a decade ago, I have an appointment scheduled in my office with two brothers. I’m excited, because they are the principals of a major family business in our region. I’m aware that their business is facing economic headwinds and am assuming they want my counsel on managing their business difficulties.

Our meeting begins with a discussion of the business headwinds. But disappointment sets in when I come to understand that, (i) they want help personally, not for the business, and (ii) they want help on something I must advise against.

Proposed Transfer

Each brother owns his house jointly with his wife and wants to transfer his 50% interest into his wife’s name, so that she owns the house alone.

When I ask, “Why?” Each answers, “For estate planning purposes.”

“What are your wives paying for the transfer?” I ask. “Nothing beyond love and affection,” comes the answer.

“Don’t Do This”

I advise them against doing this. “For starters,” I explain, “the estate planning reason isn’t sufficient.“

I can see they aren’t buying what I’m selling. So I forge ahead.

“Here’s why”:

  • Your business is in financial peril;
  • You’ve personally guaranteed millions of dollars of business debts;
  • Your wives have no personal liability for those debts;
  • You will keep on living in the transferred house;
  • You aren’t planning to tell your creditors about the transfer;
  • Love and affection is not adequate consideration, as against unpaid creditors; and
  • A transfer between spouses for inadequate consideration is presumptively fraudulent in Nebraska.

In other words, avoiding this transfer will probably be an easy task for creditors.

The brothers are clearly offended by my explanation.

Positive Reasons

So I try a positive approach.  I suggest they don’t need a transfer to protect their homes because:

  • a wife’s 50% ownership interest is not subject to a husband’s debts;
  • a $60,000 homestead exemption protects equity in husband’s 50% share; and
  • any additional equity can be acquired by wife out in the open (and probably at a discount) when faced with pressure from creditors.

They don’t like this answer any better.

Negative Explanations

So, I take a negative approach.  I advise that such a transfer could cost them, personally, a bankruptcy discharge under 11 U.S.C § 727(a)(2).

Moreover, I explain, every dispute with creditors, after the transfer comes to light, begins with some variation of this accusation:

–“He’s already demonstrated a willingness to defraud creditors.”

I explain how I’ve defended against that accusation—and how it’s a terrible place to be.

Then, they leave my office in a huff.  They’re clearly unhappy. And I never see them again.

A Common Problem

All this is a common problem for attorneys representing family businesses. Transferring assets away seems, to owners/guarantors of a family business, such an easy and common sense thing to do.

Conclusion

One of my hard-knocks rules for representing family business debtors is this:

Convincing debtors to resist fraudulent transfer temptations is one of the more-difficult things I must do in trying to protect family businesses and their owners.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

 

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