When reviewing the documents that other planners use in their asset protection plans, it’s always interesting to see long clauses and other things aimed at doing this if the client goes bankrupt or goes bankrupt. increase. In most cases, these provisions attempt to sell a client of ownership of an entity when a significant creditor appears. A typical phrase looks like this:
“If Joe goes bankrupt, or if Joe’s proceedings in bankruptcy are initiated, Joe’s interests in ABCLLC shall terminate immediately.”
In drafting, there are planners who seem to spend a lot of time creating them towards what they consider most of these provisions to be much longer and perfect. I haven’t just seen these clauses run over a page or more a few times. If the client gets into trouble, this clause is supposed to help protect the assets involved from creditors. But do these terms really work?
The first thing to understand is that these provisions are explicitly invalidated by the bankruptcy law itself and usually do not work in bankruptcy.In that forum, these clauses are known as: IpsoFacto clause And it is dealt with by 11USC §365 (e) (1).
“(1) Notwithstanding the execution contract or the unexpired lease, or the provisions of applicable law, the debtor’s execution contract or the unexpired lease may not be terminated or modified, such contract or The rights or obligations under the lease may not be terminated, or may be modified at any time after the start of the case solely because of the terms of the contract or lease subject to: (A) Any time prior to the termination of the case. Bankruptcy or financial condition of the debtor in. (B) Initiation of a lawsuit under this title, or (C) Appointment or ownership of a trustee or pre-initiator of a lawsuit under this title. “
There are some statutory exceptions to §365 (e) (2), but their application is very limited and will be discussed in this article. Importantly, it is prohibited to terminate or modify a contact (and “execution contract” only) or an unexpired lease simply because the debtor went bankrupt or went bankrupt (A) and (B). It is a clause.
In the most common bankruptcy usage of personal bankruptcy, these provisions prohibit the termination of a mortgage, rental contract, or car lease because the debtor has declared bankruptcy. However, they can also play a role in asset protection planning.
For example, suppose the debtor is a member of a limited liability company. The LLC operating agreement provides that if a member goes bankrupt or goes bankrupt, the member will be sold from the profits of that membership. In most cases, §365 (e) (1) will prohibit other members from expelling the debtor from the LLC if the debtor goes bankrupt or goes bankrupt (voluntarily or involuntarily). Works for.
It should be noted here that even if a party other than the debtor (such as another member of a fictitious LLC) has a contractual right to sell the debtor of the asset, it is not the debtor. These parties will be despised and will be subject to subsequent financial sanctions, as the mere attempt by the parties to do so is likely to be considered a violation of the bankruptcy court’s automatic stay. Therefore, we recommend that you take great care when attempting to take advantage of such provisions.
Other than bankruptcy, creditor remedies are usually described in the Uniform Voidable Transaction Act (UVTA) or other fraudulent transfer laws. Creditor objections are most often based on the intent test in §5 (a). There are only two factors to this: (1) the debtor went bankrupt at the time of the transfer, and (b) the transfer was not reasonably equivalent. ..
The first factor is easily met, as such provisions do not begin until the debtor goes bankrupt or goes bankrupt. The second factor may be more satisfying for creditors, especially if the debtor simply sells the asset. More difficult for creditors is when there is an asset buyout, depending on whether it rises to a reasonably equivalent level of value, but in reality most creditors are particularly close. Even if you don’t have cash from the buyout. The value of the asset.
Therefore, it is in this non-bankruptcy situation that the Ipso Facto clause may work if it is cleverly drafted, but in reality, despite its often complex nature, some of them are in fact. Does not work for. The problem is that the planner focuses on getting nothing for the creditor. This is more likely to lead to failure than giving to creditors. Something This is less than the value of the asset, but creditors may be willing to accept it and simply move on.
Of course, this is also a typical flaw in many common asset protection plans.