Asset protection attorneys are concerned about a new Florida case which increases the Statute of Limitation on certain asset protection-motivated transfers from 4 years to 20 years.
Here is what happened in Biel Reo, LLC v. Barefoot Cottages Development Co., LLC, a 2014 case decided by the 1st District Court of Appeal.
Real estate developers Curtis Gwin and Ray Shoults, personally guaranteed a Bank loan that was made to their development company. Soon after their company defaulted in 2008 on the loan, each set up and transferred millions of dollars to their respective irrevocable family trust- Gwin Family Irrevocable Trust and the Shoults Family Irrevocable Trust. The wives served as trustee of their respective trust and each couple as tenants by the entireties were the beneficiaries of their respective trust.
After the Bank obtained a judgment against Gwin and Shoults, the Bank assigned the judgment to Biel Rio, LLC which attempted to satisfy the judgment by a procedure known as “proceedings supplementary”.
Mrs. Gwin and Mrs. Shoults as trustees of their respective trusts were named parties because they were allegedly transferees of a fraudulent transfer. The trial court granted Summary Judgment to the debtors because the Statute of Limitations on fraudulent transfers- generally 4 years- had expired.
The appellate court reversed the decision and held that under proceedings supplementary, the Statute of Limitations would not expire until the judgment became void- which could be as long as 20 years. The court held that proceedings supplementary can be initiated so long as the judgment was valid and unsatisfied.
In proceedings supplementary, a judgment creditor may go after assets held by the debtor, assets of the debtor held by a third party, or seek to void a transfer of assets from the debtor to a person with intent to hinder, delay or defraud a creditor. The latter case is known as a fraudulent transfer. This creditor remedy allows the judgment holder to reverse or undo the transfer so as to capture the assets that would otherwise have been vulnerable. This procedure is often used to challenge an allegedly fraudulent transfer.
In essence, the Court held that the specific Statute of Limitations for fraudulent conveyances-usually 4 years- is overridden by proceedings supplementary- which keeps the Statute of Limitations open as long as the unsatisfied judgment is still valid- up to 20 years.
Although not discussed in this case, the same line of reasoning could be applied to fraudulent asset conversions. Similar to a fraudulent transfer, a purchase of exempt assets (e.g., annuities), by a debtor could be set aside as a fraudulent asset conversion- and the resulting asset that would otherwise be exempt becomes vulnerable.
Some commentators have suggested that the debtors in Biel Reo should have filed Bankruptcy which does not have proceedings supplementary. While this IS technically correct, Bankruptcy has its risks.
Under the circumstances that Mr. Gwin and Mr. Shoults were facing, we believe a far better strategy for them would have be to take advantage of the liberal Florida homestead exemption which could have allowed them to purchase real property up to ¼ of a square mile outside of a municipality. The courts have held that a purchase of a homestead-even while being sued- is not a fraudulent asset conversion.