As you may or may not be aware, Florida is notorious among bankruptcy analysts because OJ Simpson bought a house there in the hopes of shielding his assets from the civil suit over the murder. Florida is one of the few states with what is known as an "unlimited homestead exemption". All states permit you to shield your primary residence from creditors in bankruptcy (though not from a mortgagor, as discussed in my previous post). As long as you keep making any payments on loans secured by the house, you can keep it. However, most states cap the value of the home you can thus shield. Not Florida. So OJ's strategy was, as far as we can tell:
1) Buy enormous house worth zillions of dollars and move into it
2) Wait until civil suit is over
3) Declare bankruptcy
4) Sell house for a zillion dollars; thumb nose at justice.
This probably wouldn't have any consequences, if he had not been so damn famous--though of course, many argue that if he had not been so famous, his primary residence at the time of the civil suit would have been the pokey. At any rate, his case so outraged Congress that at the time of the 2005 bankruptcy reform, they wrote in provisions designed to prevent people from using Florida's ridiculously generous homestead provisions to shield assets from civil judgements. You now cannot discharge debts incurred by court judgement from a willfully malicious action, and it's a lot harder to convert outside assets to protected Florida homesteads:
The legislation places limits on those who purchase new expensive homes within two years of filing bankruptcy, imposes a 40 month waiting period before those who relocate to a new state can avail themselves of the new state's homestead exemption, and finally, creates a 10 year reachback period to attack homesteads acquired to defraud creditors. Thus, whereas prior law permitted O.J. Simpson and WorldCom's Scott Sullivan to purchase mansions in Florida while leaving their creditors holding the bag, the bankruptcy reform legislation closes the most notorious homestead exemption loopholes.The TaxProf post offers more details:
The new 2005 bankruptcy amendments may be an impediment to the Fulds' strategy. In the first place, Ms. Fuld might not be able to use Florida's homestead exemptions in bankruptcy. Under the 2005 amendments to the Bankruptcy Code, a debtor can only use a particular state's exemptions if the debtor has been continuously domiciled in the state for the 730 days immediately preceding bankruptcy. If the debtor was not domiciled in any one state continuously during the 730 day period, then the debtor would be eligible to use the exemptions from the one state in which the debtor was longest domiciled for the 180 day period preceding the 730 day period. 11 U.S.C. § 522(b)(3)(A). The upshot is that Ms. Fuld might not be able to use the Florida exemptions at all if she has been domiciled in New York rather than Florida during the relevant time periods.
In addition, even if Ms. Fuld was sufficiently domiciled in Florida to be eligible to use the Florida exemptions in bankruptcy, Section 522(p) of the Bankruptcy Code limits any increase in the value of an exemption acquired during the 1215 day period preceding bankruptcy to $136,875. If Ms. Fuld's bankruptcy is filed within 1215 days of the transfer, it appears her homestead would be limited to $7,136,875, allowing the trustee to sell the homestead to realize the additional $6,863,125 in value for creditors (assuming the mansion is really worth $14 million).
So it would seem that Ms. Fuld would have to live in Florida for the 730 days preceding bankruptcy and would have to avoid bankruptcy for more than 1215 days after the transfer, in order to get the full benefit of the Florida homestead exemption in bankruptcy.
However, this all assumes that Ms. Fuld ends up in bankruptcy. The Fulds may be trying to shield Ms. Fuld's new interest outside of bankruptcy under Florida law. The Fulds may be expecting judgments against Mr. Fuld and not Ms. Fuld. To get at Ms. Fuld's property if she is not personally liable on any judgment, they would have to bring a fraudulent transfer action to avoid Mr. Fuld's gift transfer of the half interest in the mansion. There is an interesting question whether this gift transfer could be avoided under Florida law.
It seems amazing to me that this is even possible--it's so clearly a fraudulent conveyance designed to let the Fulds live well no matter what the court decides they owe their shareholders. But Florida courts have been notoriously reluctant to change the system. No matter what you think about the 2005 bankruptcy reform, it made this abuse a lot harder to get away with.
Why is this "clearly a fraudulent conveyance"? How much is Mr. Fuld personally liable for? What are his assets? No one could possibly know the answer to the first question, and Ms. McArdle certainly doesn't know the answer to the second question, so I don't know how she can be so confident.
And most of the quoted TaxProf discussion is not on point. Bankruptcy law has nothing to do with it. No one has suggested that Ms. Fuld is liable to any Lehman creditors or shareholders, so there is no reason for her to be in bankruptcy now or ever. Unlike O.J. Simpson, the Fulds did not buy their Florida house in anticipation of judgments against Mr. Fuld, they bought it some time ago because, you know, rich people commonly buy second houses in Florida.
y81:
I think that what Megan is referring to is not the purchase of the house but transferring the title to Mrs. Fuld to avoid execution of any judgments against Mr. Fuld on the house.
Unless there's something we don't know about the Fulds' marriage, the clear purpose of the INTERSPOUSAL transfer is to shield the value of the house from potential judgment creditors. And under most states' laws (I don't know about Florida), that would constitute a fraudulent transfer.
Maybe they could get some tips from these crooks .
Dilan Esper, I don't think shielding assets from POTENTIAL creditors makes a transfer fraudulent. In fact, historically, many successful businessmen have arranged for family assets to be held by their wives, in order to shield those assets in case the business ceases to be successful.
The transfer by Mr. Fuld is fraudulent only if it renders him insolvent. We can't know that until we know the amount of his liabilities as of this date. Unfortunately, many of those liabilities are not liquidated at present (many are not even asserted), so there is no way to know if the transfer is fraudulent. So there is no justification for Ms. McArdle's statement that the transfer is "clearly" fraudulent.
In fact, executives are not, generally, liable for the debts of their corporations, despite what the Matt Yglesiases of the world would wish. Anyone who wishes to recover from Mr. Fuld personally will have a tough case to build, most likely under the securities laws. I don't, at present, recall any Drexel executives filing for bankruptcy, though I may have forgotten.
In fact, executives are not, generally, liable for the debts of their corporations, despite what the Matt Yglesiases of the world would wish.
Executives may be personally liable for any violations of the Securities Act and Securities Exchange Act.
Now that OJ's actually going to jail (for Las Vegas), couldn't maybe we put Fuld in the adjoining cell?
I hope you don't practice law in this area (because if you do, I'm about to get a public smack down), but my understanding of the law is different than yours. If a surgeon learns he left a sponge inside his patient, that patient is no longer merely a "potential" creditor. The doctor knows and can identify a specific patient that was harmed by the doctor's negligence. Any transfer of property for less than full and adequate consideration that is designed to defeat that patient's probable claims (most likely) is subject to the fraudulent conveyance rules. The patient's claims don't have to be reduced to a court judgment before the fraudulent conveyance rules apply. On the other hand, if the doctor does not know of any patient that he may have wronged (and he just has the vague uneasiness that comes from knowing that doctors are sometimes sued), these rules may not apply.
In this case, Fuld knows of a whole bunch of people who might have a future claim on his assets. Those claims haven't been reduced to a judgment, yet, but they most likely will be. This class of people are not potential creditors. They are probable creditors. The distinction is an important one.
All states permit you to shield your primary residence from creditors in bankruptcy (though not from a mortgagor, as discussed in my previous post...
Isn't the term you want here "mortgagee?"
David Walser, I agree with you. Anyone who has a current claim against Fuld, say a Lehman shareholder who is able to state a claim under the federal securities laws, is a creditor for purposes of evaluating whether Fuld's transfer is fraudulent. But we don't know whether there are any such creditors, or the amount of their claims, so we don't know if the conveyance is fraudulent. That was my objection to Ms. McArdle's statement.
Dilan Esper seemed to me to be misstating the law. If Fuld had decided when he became CEO that, hey, this is risky job, I'm transferring all my assets to my wife, that would not be fraudulent, even though done with the intent of defeating people with claims that arose after the date of the transfer.
All of You are correct and wrong at the same time. If Fuld does not go into bankruptcy voluntarily or involuntarily then a transfer to blatantly defraud creditors is irrelevant under Florida Law. The constitution of Florida provides for unlimited homestead and has been tried and tested for over a 100 years. The Fuld's home is safe in Florida, unless someone puts Fuld into Bankruptcy involuntarily.
I think we can pretty much guarantee at this point that Fuld will be sued. We don't know that he'll lose, but at this point he is clearly conveying the property to his wife in an attempt to evade any settlement that does result from a known liability.
The real issue here is Jail and everyone has missed the ball. If anyone saw his congressional hearings, one would ask that a Man who has stolen millions would have hired good council. the idea that they let him get up there and let them throw apples at him is unbelievable. Fuld will go to jail for simply misleading investors while taking money in pay that was tied to performance. it’s a real simple case. If I were advising Fuld, I will tell him to make a deal now while he can. He will do 5 years and get out without ruining his life with a 24 year sentence.
All of You are correct and wrong at the same time. If Fuld does not go into bankruptcy voluntarily or involuntarily then a transfer to blatantly defraud creditors is irrelevant under Florida Law. The constitution of Florida provides for unlimited homestead and has been tried and tested for over a 100 years. The Fuld's home is safe in Florida, unless someone puts Fuld into Bankruptcy involuntarily.
The Supremacy Clause means that Florida's constitution is irrelevant where Congress has overridden it.
And as far as I know, the Florida Constitution says nothing about fraudulent transfers-- that is handled by state statutory and common law.
Thus, this is no longer a case about protecting Florida's homestead exemption. It is a case about whether the Fulds transferred property for inadequate consideration in order to made Mr. Fuld judgment proof. And I assume Florida law looks askance at that just like every other state.
Actually this is not Accurate. Havoco V. Hill specifically says that as it relates to a Fraudulent transfer it does not matter. Only in Bankruptcy can this be Challenged.
All I know is when the CIVIL UNREST starts I'm putting his address on my front lawn..........along with all these other clowns